10-Q 1 c155-20130930x10q.htm 10-Q 1972f92980bb436

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

 

FORM 10-Q

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended September 30, 2013

 

Commission File Number: 001-32968

 

______HAMPTON ROADS BANKSHARES, INC._____

(Exact name of registrant as specified in its charter)

 

 

 

Virginia

54-2053718

(State or other jurisdiction of incorporation or organization)

(I.R.S. Employer Identification No.)

 

 

 

 

641 Lynnhaven Parkway, Virginia Beach, VA

23452

(Address of principal executive offices)

(Zip Code)

 

(757) 217-1000

(Registrant’s telephone number, including area code)

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes x  No o 

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  

Yes x  No o 

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See definition of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.  (Check one):

 

 

 

 

 

 

 

Large accelerated filer o

 

Accelerated filer o

Non-accelerated filer o

 

Smaller reporting company x

(Do not check if a smaller reporting company)

 

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  

Yes o  No x 

 

The number of shares outstanding of the issuer’s common stock as of October 31,  2013 was 170,263,264 shares, par value $0.01.

 

 

 

 


 

 

 

 

 

 

 

 

 

 

TABLE OF CONTENTS

 

 

 

PART I – FINANCIAL INFORMATION

 

 

 

 

 

ITEM 1 – FINANCIAL STATEMENTS

 

Page

 

 

 

Consolidated Balance Sheets

 

3

 

 

 

September 30, 2013

 

 

December 31, 2012

 

 

 

 

 

Consolidated Statements of Operations

 

4

 

 

 

Three and nine months ended September 30, 2013 and 2012

 

 

 

 

 

Consolidated Statements of Comprehensive Income (Loss)

 

5

 

 

 

Three and nine months ended September 30, 2013 and 2012

 

 

 

 

 

Consolidated Statement of Changes in Shareholders’ Equity

 

6

 

 

 

Nine months ended September 30, 2013

 

 

 

 

 

Consolidated Statements of Cash Flows

 

7

 

 

 

Nine months ended September 30, 2013 and 2012

 

 

 

 

 

Notes to Consolidated Financial Statements

 

8

 

 

 

ITEM 2 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION

 

38

 

 

 

ITEM 3 – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

44

 

 

 

ITEM 4 – CONTROLS AND PROCEDURES

 

44

 

 

 

PART II – OTHER INFORMATION

 

 

 

 

 

ITEM 1 – LEGAL PROCEEDINGS

 

44

 

 

 

ITEM 1A – RISK FACTORS

 

44

 

 

 

ITEM 2 – UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

44

 

 

 

ITEM 3 – DEFAULTS UPON SENIOR SECURITIES

 

44

 

 

 

ITEM 4 – MINE SAFETY DISCLOSURES

 

44

 

 

 

ITEM 5 – OTHER INFORMATION

 

44

 

 

 

ITEM 6 – EXHIBITS

 

44

 

 

 

SIGNATURES

 

44

 

 

 

 

2


 

HAMPTON ROADS BANKSHARES, INC.

PART I.  FINANCIAL INFORMATION

Item 1.  Financial Statements

CONSOLIDATED BALANCE SHEETS

 

 

 

 

 

 

 

 

 

 

 

(in thousands, except share data)

 

 

 

 

 

 

(unaudited)

 

 

September 30, 2013

 

 

December 31, 2012

Assets:

 

 

 

 

 

 

Cash and due from banks

 

$

16,251 

 

$

16,761 

Interest-bearing deposits in other banks

 

 

662 

 

 

656 

Overnight funds sold and due from Federal Reserve Bank

 

 

109,396 

 

 

83,800 

Investment securities available for sale, at fair value

 

 

295,626 

 

 

276,455 

Restricted equity securities, at cost

 

 

17,234 

 

 

18,066 

 

 

 

 

 

 

 

Loans held for sale

 

 

29,633 

 

 

84,068 

 

 

 

 

 

 

 

Loans

 

 

1,370,728 

 

 

1,432,275 

Allowance for loan losses

 

 

(37,701)

 

 

(48,382)

Net loans

 

 

1,333,027 

 

 

1,383,893 

Premises and equipment, net

 

 

69,634 

 

 

78,657 

Interest receivable

 

 

4,862 

 

 

5,077 

Other real estate owned and repossessed assets,

 

 

 

 

 

 

net of valuation allowance

 

 

39,196 

 

 

32,215 

Intangible assets, net

 

 

1,585 

 

 

2,410 

Bank-owned life insurance

 

 

56,216 

 

 

53,199 

Other assets

 

 

12,098 

 

 

18,835 

Totals assets

 

$

1,985,420 

 

$

2,054,092 

Liabilities and Shareholders' Equity:

 

 

 

 

 

 

Deposits:

 

 

 

 

 

 

Noninterest-bearing demand

 

$

277,731 

 

$

263,266 

Interest-bearing:

 

 

 

 

 

 

Demand

 

 

569,608 

 

 

519,799 

Savings

 

 

66,297 

 

 

59,876 

Time deposits:

 

 

 

 

 

 

Less than $100

 

 

336,753 

 

 

393,580 

$100 or more

 

 

309,010 

 

 

381,253 

Total deposits

 

 

1,559,399 

 

 

1,617,774 

Federal Home Loan Bank borrowings

 

 

194,399 

 

 

195,060 

Other borrowings

 

 

28,882 

 

 

38,556 

Interest payable

 

 

5,670 

 

 

4,882 

Other liabilities

 

 

12,075 

 

 

10,651 

Total liabilities

 

 

1,800,425 

 

 

1,866,923 

Commitments and contingencies

 

 

 

 

 

 

Shareholders' equity:

 

 

 

 

 

 

Preferred stock, 1,000,000 shares authorized; none issued

 

 

 

 

 

 

and outstanding

 

 

 -

 

 

 -

Common stock, $0.01 par value; 1,000,000,000 shares

 

 

 

 

 

 

authorized; 170,263,264 and 170,265,150 shares issued

 

 

 

 

 

 

and outstanding on September 30, 2013 and  December 31, 2012,

 

 

 

 

 

 

respectively

 

 

1,703 

 

 

1,703 

Capital surplus

 

 

587,088 

 

 

586,347 

Retained deficit

 

 

(405,415)

 

 

(408,940)

Accumulated other comprehensive income, net of tax

 

 

1,109 

 

 

6,837 

Total shareholders' equity before non-controlling interest

 

 

184,485 

 

 

185,947 

Non-controlling interest

 

 

510 

 

 

1,222 

Total shareholders' equity

 

 

184,995 

 

 

187,169 

Total liabilities and shareholders' equity

 

$

1,985,420 

 

$

2,054,092 

See accompanying notes to the unaudited consolidated financial statements.

 

 

 

3


 

HAMPTON ROADS BANKSHARES, INC.

PART I.  FINANCIAL INFORMATION

Item 1.  Financial Statements

CONSOLIDATED STATEMENTS OF OPERATIONS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(in thousands, except share and per share data)

 

 

Three Months Ended

 

 

Nine Months Ended

(unaudited)

 

 

September 30, 2013

 

 

September 30, 2012

 

 

September 30, 2013

 

 

September 30, 2012

Interest Income:

 

 

 

 

 

 

 

 

 

 

 

 

Loans, including fees

 

$

17,122 

 

$

17,904 

 

$

52,482 

 

$

56,026 

Investment securities

 

 

1,831 

 

 

1,986 

 

 

5,485 

 

 

5,992 

Overnight funds sold and due from FRB

 

 

70 

 

 

43 

 

 

175 

 

 

189 

Interest-bearing deposits in other banks

 

 

 

 

 -

 

 

 

 

Total interest income

 

 

19,024 

 

 

19,933 

 

 

58,143 

 

 

62,208 

Interest Expense:

 

 

 

 

 

 

 

 

 

 

 

 

Deposits:

 

 

 

 

 

 

 

 

 

 

 

 

Demand

 

 

523 

 

 

549 

 

 

1,590 

 

 

1,499 

Savings

 

 

 

 

19 

 

 

28 

 

 

61 

Time deposits:

 

 

 

 

 

 

 

 

 

 

 

 

Less than $100

 

 

851 

 

 

1,168 

 

 

2,772 

 

 

4,145 

$100 or more

 

 

837 

 

 

1,187 

 

 

2,780 

 

 

4,210 

Interest on deposits

 

 

2,220 

 

 

2,923 

 

 

7,170 

 

 

9,915 

Federal Home Loan Bank borrowings

 

 

477 

 

 

562 

 

 

1,442 

 

 

1,728 

Other borrowings

 

 

527 

 

 

611 

 

 

1,706 

 

 

1,830 

Total interest expense

 

 

3,224 

 

 

4,096 

 

 

10,318 

 

 

13,473 

Net interest income

 

 

15,800 

 

 

15,837 

 

 

47,825 

 

 

48,735 

Provision for loan losses

 

 

 -

 

 

2,476 

 

 

1,000 

 

 

14,124 

Net interest income after provision for loan losses

 

 

15,800 

 

 

13,361 

 

 

46,825 

 

 

34,611 

Noninterest Income:

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage banking revenue

 

 

3,139 

 

 

5,186 

 

 

13,353 

 

 

12,299 

Service charges on deposit accounts

 

 

1,264 

 

 

1,276 

 

 

3,781 

 

 

3,883 

Income from bank-owned life insurance

 

 

2,210 

 

 

399 

 

 

3,017 

 

 

1,261 

Gain (loss) on sale of premises and equipment

 

 

243 

 

 

 -

 

 

123 

 

 

(47)

Impairment of premises and equipment

 

 

 -

 

 

 -

 

 

(2,825)

 

 

 -

Losses on other real estate owned and repossessed assets

 

 

(378)

 

 

(6,445)

 

 

(2,056)

 

 

(14,357)

Gain on sale of investment securities available for sale

 

 

 

 

 

 

 

 

 

 

 

 

(includes $0, $218, $763, and $479 accumulated other

 

 

 

 

 

 

 

 

 

 

 

 

comprehensive income reclassifications for unrealized

 

 

 

 

 

 

 

 

 

 

 

 

net gains on available-for-sale securities as of three

 

 

 

 

 

 

 

 

 

 

 

 

months ended September 30, 2013 and 2012 and nine

 

 

 

 

 

 

 

 

 

 

 

 

months ended September 30, 2013 and 2012,

 

 

 

 

 

 

 

 

 

 

 

 

respectively)

 

 

 -

 

 

218 

 

 

763 

 

 

479 

Visa check card income

 

 

649 

 

 

624 

 

 

1,907 

 

 

1,782 

Other

 

 

775 

 

 

942 

 

 

2,851 

 

 

2,001 

Total noninterest income

 

 

7,902 

 

 

2,200 

 

 

20,914 

 

 

7,301 

Noninterest Expense:

 

 

 

 

 

 

 

 

 

 

 

 

Salaries and employee benefits

 

 

9,946 

 

 

10,117 

 

 

31,853 

 

 

28,973 

Occupancy

 

 

2,772 

 

 

1,928 

 

 

7,091 

 

 

5,483 

FDIC insurance

 

 

927 

 

 

1,129 

 

 

2,823 

 

 

3,530 

Professional and consultant fees

 

 

1,693 

 

 

1,514 

 

 

4,225 

 

 

4,852 

Data processing

 

 

1,097 

 

 

970 

 

 

3,023 

 

 

2,986 

Problem loan and repossessed asset costs

 

 

723 

 

 

1,245 

 

 

1,733 

 

 

2,761 

Equipment

 

 

386 

 

 

667 

 

 

1,341 

 

 

2,101 

Other

 

 

3,246 

 

 

2,824 

 

 

10,326 

 

 

8,386 

Total noninterest expense

 

 

20,790 

 

 

20,394 

 

 

62,415 

 

 

59,072 

Income (loss) before provision for income taxes

 

 

2,912 

 

 

(4,833)

 

 

5,324 

 

 

(17,160)

Provision for income taxes

 

 

22 

 

 

 -

 

 

157 

 

 

 -

Net income (loss)

 

 

2,890 

 

 

(4,833)

 

 

5,167 

 

 

(17,160)

Net income attributable to non-controlling interest

 

 

86 

 

 

1,088 

 

 

1,642 

 

 

2,333 

Net income (loss) attributable to

 

 

 

 

 

 

 

 

 

 

 

 

Hampton Roads Bankshares, Inc.

 

$

2,804 

 

$

(5,921)

 

$

3,525 

 

$

(19,493)

Per Share:

 

 

 

 

 

 

 

 

 

 

 

 

Cash dividends declared

 

$

 -

 

$

 -

 

$

 -

 

$

 -

Basic income (loss)

 

$

0.02 

 

$

(0.05)

 

$

0.02 

 

$

(0.32)

Diluted income (loss)

 

$

0.02 

 

$

(0.05)

 

$

0.02 

 

$

(0.32)

See accompanying notes to the unaudited consolidated financial statements.

 

 

 

 

 

4


 

 

HAMPTON ROADS BANKSHARES, INC.

PART I.  FINANCIAL INFORMATION

Item 1.  Financial Statements

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(in thousands)

 

Three Months Ended

 

Nine Months Ended

(unaudited)

 

September 30, 2013

 

September 30, 2012

 

September 30, 2013

 

September 30, 2012

Net income (loss)

 

 

 

$

2,890 

 

 

 

$

(4,833)

 

 

 

$

5,167 

 

 

$

(17,160)

Other comprehensive income (loss),

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Change in unrealized gain (loss)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

on securities available for sale

 

81 

 

 

 

 

555 

 

 

 

 

(4,965)

 

 

 

 

2,403 

 

 

Reclassification adjustment for

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

securities gain included in

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

net income (loss)

 

 -

 

 

 

 

(218)

 

 

 

 

(763)

 

 

 

 

(479)

 

 

Other comprehensive income (loss),

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

net of tax

 

 

 

 

81 

 

 

 

 

337 

 

 

 

 

(5,728)

 

 

 

1,924 

Comprehensive income (loss)

 

 

 

 

2,971 

 

 

 

 

(4,496)

 

 

 

 

(561)

 

 

 

(15,236)

Comprehensive income attributable

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

to non-controlling interest

 

 

 

 

86 

 

 

 

 

1,088 

 

 

 

 

1,642 

 

 

 

2,333 

Comprehensive income (loss) attributable

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

to Hampton Roads Bankshares, Inc.

 

 

 

$

2,885 

 

 

 

$

(5,584)

 

 

 

$

(2,203)

 

 

$

(17,569)

See accompanying notes to the unaudited consolidated financial statements.

 

 

 

 

5


 

 

HAMPTON ROADS BANKSHARES, INC.

PART I.  FINANCIAL INFORMATION

Item 1.  Financial Statements

CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other

 

 

Non-

 

 

Total

(in thousands, except share data)

 

Common Stock

 

 

Capital

 

 

Retained

 

 

Comprehensive

 

 

controlling

 

 

Shareholders'

(unaudited)

 

Shares

 

 

Amount

 

 

Surplus

 

 

Deficit

 

 

Income (Loss)

 

 

Interest

 

 

Equity

Balance at December 31, 2012

 

170,265,150 

 

$

1,703 

 

$

586,347 

 

$

(408,940)

 

$

6,837 

 

$

1,222 

 

$

187,169 

Net income

 

 -

 

 

 -

 

 

 -

 

 

3,525 

 

 

 -

 

 

1,642 

 

 

5,167 

Other comprehensive loss

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

(5,728)

 

 

 -

 

 

(5,728)

Stock-based compensation expense

 

 -

 

 

 -

 

 

744 

 

 

 -

 

 

 -

 

 

 -

 

 

744 

Common stock surrendered

 

(1,886)

 

 

 -

 

 

(3)

 

 

 -

 

 

 -

 

 

 -

 

 

(3)

Distributed non-controlling interest

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

(2,354)

 

 

(2,354)

Balance at September 30, 2013

 

170,263,264 

 

$

1,703 

 

$

587,088 

 

$

(405,415)

 

$

1,109 

 

$

510 

 

$

184,995 

See accompanying notes to the unaudited consolidated financial statements.

 

 

 

 

 

 

6


 

HAMPTON ROADS BANKSHARES, INC.

PART I.  FINANCIAL INFORMATION

Item 1.  Financial Statements

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

 

 

 

 

 

 

 

 

 

 

(in thousands)

 

 

Nine Months Ended

(unaudited)

 

 

September 30, 2013

 

 

September 30, 2012

Operating Activities:

 

 

 

 

 

 

Net income (loss)

 

$

5,167 

 

$

(17,160)

Adjustments to reconcile net income (loss)

 

 

 

 

 

 

to net cash provided by operating activities:

 

 

 

 

 

 

Depreciation and amortization

 

 

2,604 

 

 

3,082 

Amortization of intangible assets and fair value adjustments

 

 

923 

 

 

1,149 

Provision for loan losses

 

 

1,000 

 

 

14,124 

Proceeds from mortgage loans held for sale

 

 

548,237 

 

 

443,936 

Originations of mortgage loans held for sale

 

 

(493,802)

 

 

(441,125)

Stock-based compensation expense

 

 

744 

 

 

34 

Net amortization of premiums and accretion of discounts on

 

 

 

 

 

 

investment securities available for sale

 

 

2,210 

 

 

2,950 

Income from bank-owned life insurance

 

 

(3,017)

 

 

(1,261)

Gain (loss) on sale of premises and equipment

 

 

(123)

 

 

47 

Impairment of premises and equipment

 

 

2,825 

 

 

 -

Losses on other real estate owned and repossessed assets

 

 

2,056 

 

 

14,357 

Gain on sale of investment securities available for sale

 

 

(763)

 

 

(479)

Changes in:

 

 

 

 

 

 

Interest receivable

 

 

215 

 

 

740 

Other assets

 

 

6,737 

 

 

454 

Interest payable

 

 

788 

 

 

839 

Other liabilities

 

 

1,424 

 

 

(3,092)

Net cash provided by operating activities

 

 

77,225 

 

 

18,595 

Investing Activities:

 

 

 

 

 

 

Proceeds from maturities and calls of investment

 

 

 

 

 

 

securities available for sale

 

 

47,941 

 

 

61,946 

Proceeds from sale of investment securities available for sale

 

 

27,349 

 

 

55,690 

Purchase of investment securities available for sale

 

 

(101,636)

 

 

(127,048)

Purchase of restricted equity securities

 

 

(87)

 

 

(1,168)

Purchase of premises and equipment

 

 

(1,252)

 

 

(1,804)

Net decrease in loans

 

 

32,945 

 

 

32,406 

Proceeds from sale of restricted equity securities

 

 

919 

 

 

3,456 

Proceeds from sale of other real estate owned and repossessed assets, net

 

 

10,747 

 

 

25,065 

Proceeds from sale of premises and equipment

 

 

1,714 

 

 

7,542 

Net cash provided by investing activities

 

 

18,640 

 

 

56,085 

Financing Activities:

 

 

 

 

 

 

Net decrease in deposits

 

 

(58,369)

 

 

(166,939)

Repayments of Federal Home Loan Bank borrowings

 

 

(10,050)

 

 

(50)

Distributed non-controlling interest

 

 

(2,354)

 

 

(1,475)

Issuance of common shares, net

 

 

 -

 

 

90,969 

Net cash used in financing activities

 

 

(70,773)

 

 

(77,495)

Increase (decrease) in cash and cash equivalents

 

 

25,092 

 

 

(2,815)

Cash and cash equivalents at beginning of period

 

 

101,217 

 

 

138,067 

Cash and cash equivalents at end of period

 

$

126,309 

 

$

135,252 

Supplemental cash flow information:

 

 

 

 

 

 

Cash paid for interest

 

$

9,530 

 

$

12,634 

Cash paid for (refunded from) income taxes

 

 

(5,080)

 

 

265 

Supplemental non-cash information:

 

 

 

 

 

 

Change in unrealized gain (loss) on securities available for sale

 

 

(5,728)

 

 

1,924 

Transfers from other real estate owned and repossessed assets to loans

 

 

5,230 

 

 

 -

Transfers from loans to other real estate owned and repossessed assets

 

 

25,014 

 

 

19,870 

Transfers from premises and equipment to other real estate owned

 

 

 

 

 

 

and repossessed assets

 

 

3,352 

 

 

 -

See accompanying notes to the unaudited consolidated financial statements.

 

 

 

 

7


 

 

HAMPTON ROADS BANKSHARES, INC.

PART I.  FINANCIAL INFORMATION

Item 1.  Notes to Consolidated Financial Statements

 

NOTE A – BASIS OF PRESENTATION

 

The accompanying unaudited consolidated financial statements of Hampton Roads Bankshares, Inc. (the “Company,” “we,” “us,” or “our”) have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial reporting and with the instructions to Form 10-Q.  Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements.  In the opinion of management, the financial statements reflect all adjustments (consisting of a normal recurring nature) considered necessary for a fair presentation.  The results of operations for the nine months ended September 30, 2013 are not necessarily indicative of the results to be expected for the full year.  For further information, refer to the consolidated financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2012 (“2012 Form 10-K”). 

 

Use of Estimates in the Preparation of Financial Statements

 

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenue and expenses during the reporting periods.  Actual results could differ from those estimates.  Material estimates that are particularly susceptible to significant change include the determination of the allowance for loan losses, valuation of other real estate owned, determination of fair value for financial instruments, and tax assets, liabilities, and expense.

 

Recent Accounting Pronouncements

 

In July 2013, the FASB issued ASU 2013-11, Income Taxes,  Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists, that requires an unrecognized tax benefit, or a portion of an unrecognized tax benefit, to be presented, with some exceptions, in the financial statements as a reduction to a deferred tax asset for a net operating loss forward, a similar tax loss, or a tax credit carryforward.  This amendment is effective for fiscal years and interim periods within those years beginning after December 15, 2013.  Early adoption is permitted.  The adoption of the new guidance is not expected to have a material impact on the Company’s consolidated financial statements.

 

In February 2013, the FASB issued ASU 2013-02, Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income that improves the reporting of reclassifications out of accumulated other comprehensive income by requiring an entity to report the effect of significant reclassifications out of accumulated other comprehensive income on the respective line items in net income if the amount being reclassified is required under GAAP to be reclassified in its entirety to net income or for those amounts that are not required under GAAP to be reclassified in their entirety to net income in the same reporting period, an entity is required to cross-reference other disclosures required under GAAP that provide additional detail about those amounts.  This amendment is to be applied prospectively for reporting periods beginning after December 15, 2012.  The adoption of the new guidance resulted in additional disclosures within the Company’s consolidated financial statements. 

 

On January 31, 2013, the FASB issued ASU 2013-01, Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities that clarifies the intended scope of the disclosures required by ASU 2011-11, Disclosures About Offsetting Assets and Liabilities that facilitates comparison between GAAP and International Financial Reporting Standards by requiring companies to provide enhanced disclosures for financial instruments and derivative instruments to enable users to evaluate the effect or potential effect of netting arrangements.  This amendment is to be applied retrospectively for annual reporting periods beginning on or after January 1, 2013 and interim periods within those annual periods.  The adoption of the new guidance did not have a material impact on the Company’s consolidated financial statements.

 

 

8


 

HAMPTON ROADS BANKSHARES, INC.

PART I.  FINANCIAL INFORMATION

Item 1.  Notes to Consolidated Financial Statements

 

NOTE B – REGULATORY MATTERS

 

Effective June 17, 2010, the Company and its banking subsidiary, Bank of Hampton Roads (“BOHR”), entered into a written agreement (herein called the “Written Agreement”) with the Federal Reserve Bank of Richmond (“FRB”) and the Bureau of Financial Institutions of the Virginia State Corporation Commission (“Bureau of Financial Institutions”).  The Company’s other banking subsidiary, Shore Bank (“Shore”), is not a party to the Written Agreement.

 

Written Agreement

 

Under the terms of the Written Agreement, BOHR agreed to develop and submit for approval, within the time periods specified, plans to (a) strengthen board oversight of management and BOHR’s operations, (b) strengthen credit risk management policies, (c) improve BOHR’s position with respect to loans, relationships, or other assets in excess of $2.5 million that are now, or may in the future become, past due more than 90 days, are on BOHR’s problem loan list, or adversely classified in any report of examination of BOHR, (d) review and revise, as appropriate, current policy and maintain sound processes for determining, documenting, and recording an adequate allowance for loan losses, (e) improve management of BOHR’s liquidity position and funds management policies, (f) provide contingency planning that accounts for adverse scenarios and identifies and quantifies available sources of liquidity for each scenario, (g) reduce BOHR’s reliance on brokered deposits, and (h) improve BOHR’s earnings and overall condition.

 

In addition, BOHR has agreed that it will (a) not extend, renew, or restructure any credit that has been criticized by the FRB or the Bureau of Financial Institutions absent prior board of directors approval in accordance with the restrictions in the Written Agreement, (b) eliminate all assets or portions of assets classified as “loss,” and therefore, charge-off all assets classified as “loss” in a federal or state report of examination, unless otherwise approved by the FRB, (c) comply with legal and regulatory limitations on indemnification payments and severance payments, and (d) appoint a committee to monitor compliance with the terms of the Written Agreement.

 

The Company also agreed that it will (a) not make any other form of payment representing a reduction in BOHR’s capital or make any distributions of interest, principal, or other sums on subordinated debentures or trust preferred securities absent prior regulatory approval, (b) take all necessary steps to correct certain technical violations of law and regulation cited by the FRB, (c) comply with legal and regulatory limitations on indemnification payments and severance payments, and (d) appoint a committee to monitor compliance with the terms of the Written Agreement.

 

Under the terms of the Written Agreement, both the Company and BOHR agreed to submit capital plans to maintain sufficient capital at the Company, on a consolidated basis, and to refrain from declaring or paying dividends absent prior regulatory approval.

 

To date, the Company has complied with the actions required by the FRB and the Bureau of Financial Institutions under the terms of the Written Agreement; additionally, BOHR has materially complied with the actions required by the FRB and the Bureau of Financial Institutions under the terms of the Written Agreement.  The Risk Committee has been appointed to oversee the Company’s compliance with the terms of the Written Agreement and has met quarterly to review compliance.  Written plans have been submitted and implemented for strengthening board oversight, strengthening credit risk management practices, improving liquidity, reducing the reliance on brokered deposits, improving capital, and curing the technical violations of laws and regulations.  The Company also submitted and implemented written policies and procedures for maintaining an adequate allowance for loan losses and its plans for all other real estate owned and nonaccrual and delinquent loans in excess of $2.5 million.  Additionally, the Company instituted the required review process for all classified loans.  The Company charged off the assets identified as loss from the previous examination.  As of September 30, 2013, the Company exceeded the regulatory capital minimums and BOHR and Shore were both considered “well capitalized” under the risk-based capital standards.  The FRB modified its interpretation of the Written Agreement and now takes the position that it prohibits BOHR from accepting new brokered deposits.  Based on prior guidance, BOHR accepted new brokered deposits after it became well capitalized, which technically did not comply with the Written Agreement under the FRB’s modified interpretation.    We do not believe the new interpretation or our earlier actions will have any material adverse effect on the Company or our liquidity, expenses, or financial condition.

 

9

 


 

HAMPTON ROADS BANKSHARES, INC.

PART I.  FINANCIAL INFORMATION

Item 1.  Notes to Consolidated Financial Statements

 

NOTE C – CORRECTION OF IMMATERIAL ERROR

 

Following the purchase of Gateway Financial Holdings, Inc. (“Gateway”) on December 31, 2008, the Company began amortizing a purchase accounting adjustment related to the acquired amounts of Trust Preferred Securities (“TRUPs”) on a straight-line method basis.  The Company identified this error beginning in 2012 and began amortizing the remaining purchase accounting adjustment using the effective-interest method, which is the preferred method under GAAP if the effect of using a different method would be material to the financial statements.  Accordingly, the use of the straight-line method in years prior to 2012 resulted in an immaterial overstatement of the Company’s net loss from operations and borrowings related to the TRUPs. 

 

Management evaluated the materiality of this error quantitatively and qualitatively and has concluded that it was not material to any prior period annual and quarterly financial statements.  However, because the adjustment to correct the error in 2013 would have had a material effect on the 2013 financial statements, the correction is reflected retroactively within the December 31, 2012 consolidated balance sheet of this Form 10-Q and the Company intends to revise its financial statements for certain annual periods through subsequent periodic filings.  For quarters prior to September 30, 2013, the Company’s financial statements have not been revised as the net amount of the error was insignificant.  The following table (in thousands) sets forth the effect this correction had on the Company’s prior period reported financial statements. 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2009

 

2010

 

2011

 

 

As

 

 

 

 

As

 

As

 

 

 

 

As

 

As

 

 

 

 

As

Statement of

 

Reported

 

Adjustment

 

Adjusted

 

Reported

 

Adjustment

 

Adjusted

 

Reported

 

Adjustment

 

Adjusted

Operations

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

$

44,294 

 

$

(361)

 

$

4,399 

 

$

46,240 

 

$

(1,017)

 

$

45,223 

 

$

29,324 

 

$

(1,068)

 

$

28,256 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

 

(201,450)

 

 

361 

 

 

(201,089)

 

 

(210,356)

 

 

1,017 

 

 

(209,339)

 

 

(98,002)

 

 

1,068 

 

 

(96,934)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance Sheet

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other borrowings

 

 

49,254 

 

 

(361)

 

 

48,893 

 

 

49,853 

 

 

(1,017)

 

 

48,836 

 

 

40,617 

 

 

(1,068)

 

 

39,549 

Net effect in

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

shareholders' equity

 

 

125,013 

 

 

361 

 

 

125,374 

 

 

190,795 

 

 

1,017 

 

 

191,812 

 

 

113,668 

 

 

1,068 

 

 

114,736 

 

 

 

NOTE D  EARNINGS PER SHARE

 

The following table (in thousands except share data) shows the basic and diluted earnings (loss) per share calculations for the three and nine months ended September 30, 2013 and 2012. 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

September 30, 2013

 

September 30, 2012

 

September 30, 2013

 

September 30, 2012

Net income (loss) attributable to

 

 

 

 

 

 

 

 

 

 

 

Hampton Roads Bankshares, Inc.

$

2,804 

 

$

(5,921)

 

$

3,525 

 

$

(19,493)

Shares:

 

 

 

 

 

 

 

 

 

 

 

Weighted average number

 

 

 

 

 

 

 

 

 

 

 

of common shares outstanding

 

170,388,263 

 

 

108,785,717 

 

 

170,389,513 

 

 

60,349,261 

Dilutive stock awards and warrants

 

2,067,958 

 

 

 -

 

 

2,025,830 

 

 

 -

Diluted weighted average number of

 

 

 

 

 

 

 

 

 

 

 

common shares outstanding

 

172,456,221 

 

 

108,785,717 

 

 

172,415,343 

 

 

60,349,261 

Basic income (loss) per share

$

0.02 

 

$

(0.05)

 

$

0.02 

 

$

(0.32)

Diluted income (loss) per share

$

0.02 

 

$

(0.05)

 

$

0.02 

 

$

(0.32)

 

10

 


 

HAMPTON ROADS BANKSHARES, INC.

PART I.  FINANCIAL INFORMATION

Item 1.  Notes to Consolidated Financial Statements

 

The Company issued a ten-year warrant to purchase 757,643 common shares at an exercise price of $0.70 per share.  These shares were not included in the computation of diluted earnings per share as the effect was anti-dilutive for the three and nine month periods ended September 30, 2012 as presented in the table above.  Additionally, for the three and nine month periods ended September 30, 2013 and 2012, the number of anti-dilutive awards excluded from the diluted earnings per share calculation was 26 thousand and 28 thousand shares, respectively, consisting of out-of-the-money stock options. 

 

 

NOTE E – INVESTMENT SECURITIES

 

The amortized cost, gross unrealized gains and losses, and fair values of investment securities available for sale (in thousands) at September 30, 2013 and December 31, 2012 were as follows.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2013

 

 

 

 

 

Gross

 

Gross

 

 

 

 

 

 

 

 

Unrealized

 

Unrealized

 

 

 

 

 

Amortized Cost

 

Gains

 

Losses

 

Fair Value

U.S. agency securities

 

$

26,285 

 

$

634 

 

$

221 

 

$

26,698 

State and municipal securities

 

 

526 

 

 

27 

 

 

 -

 

 

553 

Corporate bonds

 

 

17,249 

 

 

263 

 

 

 

 

17,507 

Mortgage-backed securities - agency

 

 

201,371 

 

 

3,090 

 

 

2,626 

 

 

201,835 

Mortgage-backed securities - non-agency

 

 

4,871 

 

 

30 

 

 

31 

 

 

4,870 

Asset-backed securities

 

 

43,828 

 

 

110 

 

 

268 

 

 

43,670 

Equity securities

 

 

387 

 

 

106 

 

 

 -

 

 

493 

Total investment securities available for sale

 

$

294,517 

 

$

4,260 

 

$

3,151 

 

$

295,626 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2012

 

 

 

 

 

Gross

 

Gross

 

 

 

 

 

 

 

 

Unrealized

 

Unrealized

 

 

 

 

 

Amortized Cost

 

Gains

 

Losses

 

Fair Value

U.S. agency securities

 

$

31,522 

 

$

1,477 

 

$

11 

 

$

32,988 

State and municipal securities

 

 

527 

 

 

104 

 

 

 -

 

 

631 

Corporate bonds

 

 

2,864 

 

 

89 

 

 

 -

 

 

2,953 

Mortgage-backed securities - agency

 

 

202,024 

 

 

5,431 

 

 

261 

 

 

207,194 

Mortgage-backed securities - non-agency

 

 

30,703 

 

 

432 

 

 

485 

 

 

30,650 

Asset-backed securities

 

 

1,458 

 

 

44 

 

 

 -

 

 

1,502 

Equity securities

 

 

520 

 

 

44 

 

 

27 

 

 

537 

Total investment securities available for sale

 

$

269,618 

 

$

7,621 

 

$

784 

 

$

276,455 

 

11

 


 

HAMPTON ROADS BANKSHARES, INC.

PART I.  FINANCIAL INFORMATION

Item 1.  Notes to Consolidated Financial Statements

 

Unrealized losses

 

The following tables reflect the fair values and gross unrealized losses (in thousands) aggregated by investment category and length of time that the individual securities have been in a continuous unrealized loss position at September 30, 2013 and December 31, 2012.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2013

 

 

 

Less than 12 Months

 

 

12 Months or More

 

 

Total

 

 

 

 

 

Unrealized

 

 

 

 

Unrealized

 

 

 

 

Unrealized

 

 

 

Fair Value

 

Loss

 

 

Fair Value

 

Loss

 

 

Fair Value

 

Loss

U.S. agency securities

 

$

9,345 

 

$

221 

 

$

 -

 

$

 -

 

$

9,345 

 

$

221 

Corporate bonds

 

 

4,110 

 

 

 

 

 -

 

 

 -

 

 

4,110 

 

 

Mortgage-backed securities - agency

 

 

82,792 

 

 

2,548 

 

 

1,550 

 

 

78 

 

 

84,342 

 

 

2,626 

Mortgage-backed securities - non-agency

 

 

2,302 

 

 

31 

 

 

 -

 

 

 -

 

 

2,302 

 

 

31 

Asset-backed securities

 

 

27,722 

 

 

268 

 

 

 -

 

 

 -

 

 

27,722 

 

 

268 

 

 

$

126,271 

 

$

3,073 

 

$

1,550 

 

$

78 

 

$

127,821 

 

$

3,151 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2012

 

 

 

Less than 12 Months

 

 

12 Months or More

 

 

Total

 

 

 

 

 

Unrealized

 

 

 

 

Unrealized

 

 

 

 

Unrealized

 

 

 

Fair Value

 

Loss

 

 

Fair Value

 

Loss

 

 

Fair Value

 

Loss

U.S. agency securities

 

$

3,989 

 

$

11 

 

$

 -

 

$

 -

 

$

3,989 

 

$

11 

Mortgage-backed securities - agency

 

 

16,957 

 

 

261 

 

 

 -

 

 

 -

 

 

16,957 

 

 

261 

Mortgage-backed securities - non-agency

 

 

13,149 

 

 

485 

 

 

 -

 

 

 -

 

 

13,149 

 

 

485 

Equity securities

 

 

66 

 

 

12 

 

 

40 

 

 

15 

 

 

106 

 

 

27 

 

 

$

34,161 

 

$

769 

 

$

40 

 

$

15 

 

$

34,201 

 

$

784 

 

 

Debt securities with unrealized losses totaling $3.2 million at September 30, 2013 included four U.S. agency securities, three corporate bonds,  37 mortgage-backed securities – agency, seven mortgage-backed securities – non-agency, and 15 asset-backed securities compared with unrealized losses totaling $757 thousand at December 31, 2012, which included two U.S. agency securities and 19 mortgage-backed securities.  The severity and duration of this unrealized loss will fluctuate with interest rates in the economy.

 

At September 30, 2013,  no equity securities experienced an unrealized loss compared with five equity securities with an unrealized loss of $27 thousand at December 31, 2012.

 

Other-than-temporary impairment (“OTTI”)

 

During the first nine months of 2013 and 2012, no securities were determined to be other-than-temporarily impaired and no impairment losses were recognized through noninterest income.   No additional amount was included in accumulated other comprehensive income in the equity section of the balance sheet for other-than-temporarily impaired securities as of September 30, 2013 or 2012

 

Management evaluates securities for OTTI at least on a quarterly basis and more frequently when economic or market conditions warrant such an evaluation.  In determining OTTI, management considers many factors including (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, (3) whether the market decline was affected by microeconomic conditions, and (4) whether the Company has the intent to sell the security or it is more likely than not that it will be required to sell the security before its anticipated recovery.  The assessment of whether an other-than-temporary decline exists involves a high degree of subjectivity and judgment and is based on information available to management at a point in time.

 

12

 


 

HAMPTON ROADS BANKSHARES, INC.

PART I.  FINANCIAL INFORMATION

Item 1.  Notes to Consolidated Financial Statements

 

When OTTI occurs, the amount of OTTI recognized in earnings depends on whether an entity intends to sell the security or it is more likely than not that it will be required to sell the security before recovery of its amortized cost basis, less any current period credit loss.  If an entity intends to sell or it is more likely than not that it will be required to sell the security before recovery of its amortized cost basis less any current period credit loss, the OTTI shall be recognized in earnings equal to the entire difference between the investment’s amortized cost basis and its fair value at the balance sheet date.  If an entity does not intend to sell the security and it is not more likely than not that the entity will be required to sell the security before recovery of its amortized cost basis less any current period loss, the OTTI shall be separated into the amount representing the credit loss and the amount related to all other factors.  The amount of the total OTTI related to the credit loss is determined based on the present value of cash flows expected to be collected and is recognized in earnings.  The amount of the total OTTI related to other factors is recognized in comprehensive income net of applicable taxes.  The previous amortized cost basis less the OTTI recognized in earnings becomes the new amortized cost basis of the investment.

 

During 2013, none of the Company’s investment securities were determined to be other-than-temporarily impaired.

 

Maturities of investment securities

 

The amortized cost and fair value by contractual maturity of investment securities available for sale (in thousands) that are not determined to be other-than-temporarily impaired at September 30, 2013 and December 31, 2012 are shown below.  Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.  Mortgage-backed and asset-backed securities, which are not due at a single maturity date, and equity securities, which do not have contractual maturities, are shown separately.

 

 

 

 

 

 

 

 

 

 

 

September 30, 2013

 

 

 

Amortized Cost

 

 

Fair Value

Due in one year or less

 

$

 -

 

$

 -

Due after one year but less than five years

 

 

13,203 

 

 

13,428 

Due after five years but less than ten years

 

 

13,341 

 

 

13,507 

Due after ten years

 

 

17,516 

 

 

17,823 

Mortgage-backed securities - agency

 

 

201,371 

 

 

201,835 

Mortgage-backed securities - non-agency

 

 

4,871 

 

 

4,870 

Asset-backed securities

 

 

43,828 

 

 

43,670 

Equity securities

 

 

387 

 

 

493 

Total available-for-sale securities

 

$

294,517 

 

$

295,626 

 

 

 

 

 

 

 

 

 

 

December 31, 2012

 

 

 

Amortized Cost

 

 

Fair Value

Due in one year or less

 

$

998 

 

$

1,024 

Due after one year but less than five years

 

 

5,196 

 

 

5,359 

Due after five years but less than ten years

 

 

9,372 

 

 

9,759 

Due after ten years

 

 

19,347 

 

 

20,430 

Mortgage-backed securities - agency

 

 

202,024 

 

 

207,194 

Mortgage-backed securities - non-agency

 

 

30,703 

 

 

30,650 

Asset-backed securities

 

 

1,458 

 

 

1,502 

Equity securities

 

 

520 

 

 

537 

Total available-for-sale securities

 

$

269,618 

 

$

276,455 

 

 

 

 

 

 

 

 

 

13

 


 

HAMPTON ROADS BANKSHARES, INC.

PART I.  FINANCIAL INFORMATION

Item 1.  Notes to Consolidated Financial Statements

 

Federal Home Loan Bank (“FHLB”)

 

The Company’s investment in FHLB stock totaled $11.2 million at September 30, 2013.  FHLB stock is generally viewed as a long-term investment and as a restricted investment security because it is required to be held in order to access FHLB advances (i.e. borrowings).  It is carried at cost as there is not an active market or exchange for the stock other than the FHLB or member institutions.  Therefore, when evaluating FHLB stock for impairment, its value is based on ultimate recoverability of the par value rather than by recognizing temporary declines in value.  The Company does not consider this investment to be other-than-temporarily impaired at September 30, 2013, and no impairment has been recognized.

 

Federal Reserve Bank (“FRB”) and Other Restricted Stock

 

The Company’s investment in FRB and other restricted stock totaled $6.1 million at September 30, 2013.  FRB stock comprises the majority of this amount and is generally viewed as a long-term investment and as a restricted investment security.  It is carried at cost as there is not an active market or exchange for the stock other than the FRB or member institutions.

 

 

NOTE F  – LOANS AND ALLOWANCE FOR LOAN LOSSES

 

The Company grants commercial and industrial, real estate, and installment loans to customers throughout its lending areas.  Although the Company has a diversified loan portfolio, a substantial portion of the Company’s debtors’ abilities to honor their contracts is dependent upon the economic environment of the lending area.  The major segments of loans (in thousands) as of September 30, 2013 and December 31, 2012 are summarized as follows.

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2013

 

 

December 31, 2012

Commercial and Industrial

 

$

218,504 

 

$

267,080 

Construction

 

 

171,683 

 

 

206,391 

Real estate - commercial mortgage

 

 

569,325 

 

 

530,042 

Real estate - residential mortgage

 

 

356,998 

 

 

372,591 

Installment loans

 

 

55,759 

 

 

56,302 

Deferred loan fees and related costs

 

 

(1,541)

 

 

(131)

Total loans

 

$

1,370,728 

 

$

1,432,275 

 

Allowance for Loan Losses

 

A rollforward of the activity (in thousands) within the allowance for loan losses by loan type and recorded investment in loans for the three and nine months ended September 30, 2013 and 2012 is as follows.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30, 2013

 

 

 

 

 

 

 

 

Real Estate -

 

 

 

 

 

 

 

 

 

 

 

Commercial and Industrial

 

Construction

 

Commercial Mortgage

 

Residential Mortgage

 

Installment

 

Unallocated

 

Total

Allowance for loan losses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning balance

 

$

3,430 

 

$

11,223 

 

$

8,100 

 

$

8,670 

 

$

701 

 

$

6,110 

 

$

38,234 

  Charge-offs

 

 

(920)

 

 

(218)

 

 

(14)

 

 

(1,244)

 

 

(47)

 

 

 -

 

 

(2,443)

  Recoveries

 

 

260 

 

 

682 

 

 

269 

 

 

674 

 

 

25 

 

 

 -

 

 

1,910 

  Provision

 

 

(91)

 

 

(575)

 

 

2,409 

 

 

(625)

 

 

(67)

 

 

(1,051)

 

 

 -

Ending balance

 

$

2,679 

 

$

11,112 

 

$

10,764 

 

$

7,475 

 

$

612 

 

$

5,059 

 

$

37,701 

 

 

14

 


 

HAMPTON ROADS BANKSHARES, INC.

PART I.  FINANCIAL INFORMATION

Item 1.  Notes to Consolidated Financial Statements

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30, 2012

 

 

 

 

 

 

 

 

Real Estate -

 

 

 

 

 

 

 

 

 

 

 

Commercial and Industrial

 

Construction

 

Commercial Mortgage

 

Residential Mortgage

 

Installment

 

Unallocated

 

Total

Allowance for loan losses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning balance

 

$

11,450 

 

$

16,494 

 

$

14,457 

 

$

10,924 

 

$

850 

 

$

8,732 

 

$

62,907 

  Charge-offs

 

 

(4,040)

 

 

(2,310)

 

 

(4,304)

 

 

(2,467)

 

 

(160)

 

 

 -

 

 

(13,281)

  Recoveries

 

 

569 

 

 

1,280 

 

 

206 

 

 

204 

 

 

83 

 

 

 -

 

 

2,342 

  Provision

 

 

981 

 

 

(591)

 

 

2,140 

 

 

1,810 

 

 

295 

 

 

(2,159)

 

 

2,476 

Ending balance

 

$

8,960 

 

$

14,873 

 

$

12,499 

 

$

10,471 

 

$

1,068 

 

$

6,573 

 

$

54,444 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30, 2013

 

 

 

 

 

 

 

 

Real Estate -

 

 

 

 

 

 

 

 

 

 

 

Commercial and Industrial

 

Construction

 

Commercial Mortgage

 

Residential Mortgage

 

Installment

 

Unallocated

 

Total

Allowance for loan losses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning balance

 

$

6,253 

 

$

15,728 

 

$

9,862 

 

$

9,953 

 

$

887 

 

$

5,699 

 

$

48,382 

  Charge-offs

 

 

(5,373)

 

 

(3,886)

 

 

(767)

 

 

(6,649)

 

 

(291)

 

 

 -

 

 

(16,966)

  Recoveries

 

 

1,349 

 

 

1,415 

 

 

676 

 

 

1,687 

 

 

158 

 

 

 -

 

 

5,285 

  Provision

 

 

450 

 

 

(2,145)

 

 

993 

 

 

2,484 

 

 

(142)

 

 

(640)

 

 

1,000 

Ending balance

 

$

2,679 

 

$

11,112 

 

$

10,764 

 

$

7,475 

 

$

612 

 

$

5,059 

 

$

37,701 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance:  attributable to

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

loans individually evaluated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

for impairment

 

$

581 

 

$

4,024 

 

$

4,548 

 

$

2,390 

 

$

88 

 

 

 

 

$

11,631 

Recorded investment:  loans

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

individually evaluated for

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

impairment

 

$

4,675 

 

$

14,067 

 

$

30,603 

 

$

20,468 

 

$

310 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance:  attributable to

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

loans collectively evaluated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

for impairment

 

$

2,098 

 

$

7,088 

 

$

6,216 

 

$

5,085 

 

$

524 

 

$

5,059 

 

$

26,070 

Recorded investment:  loans

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

collectively evaluated for

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

impairment

 

$

213,829 

 

$

157,616 

 

$

538,722 

 

$

336,530 

 

$

55,449 

 

 

 

 

 

 

 

 

 

15

 


 

HAMPTON ROADS BANKSHARES, INC.

PART I.  FINANCIAL INFORMATION

Item 1.  Notes to Consolidated Financial Statements

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30, 2012

 

 

 

 

 

 

 

 

Real Estate -

 

 

 

 

 

 

 

 

 

 

 

Commercial and Industrial

 

Construction

 

Commercial Mortgage

 

Residential Mortgage

 

Installment

 

Unallocated

 

Total

Allowance for loan losses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning balance

 

$

13,605 

 

$

24,826 

 

$

17,101 

 

$

12,060 

 

$

2,067 

 

$

5,288 

 

$

74,947 

  Charge-offs

 

 

(15,505)

 

 

(9,498)

 

 

(7,810)

 

 

(7,692)

 

 

(428)

 

 

 -

 

 

(40,933)

  Recoveries

 

 

1,048 

 

 

2,773 

 

 

1,556 

 

 

755 

 

 

174 

 

 

 -

 

 

6,306 

  Provision

 

 

9,812 

 

 

(3,228)

 

 

1,652 

 

 

5,348 

 

 

(745)

 

 

1,285 

 

 

14,124 

Ending balance

 

$

8,960 

 

$

14,873 

 

$

12,499 

 

$

10,471 

 

$

1,068 

 

$

6,573 

 

$

54,444 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance:  attributable to

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

loans individually evaluated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

for impairment

 

$

4,609 

 

$

4,628 

 

$

5,812 

 

$

4,503 

 

$

228 

 

 

 

 

$

19,780 

Recorded investment:  loans

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

individually evaluated for

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

impairment

 

$

28,277 

 

$

38,679 

 

$

57,082 

 

$

39,295 

 

$

554 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance:  attributable to

 

   

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

loans collectively evaluated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

for impairment

 

$

4,351 

 

$

10,245 

 

$

6,687 

 

$

5,968 

 

$

840 

 

$

6,573 

 

$

34,664 

Recorded investment:  loans

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

collectively evaluated for

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

impairment

 

$

218,848 

 

$

194,515 

 

$

475,802 

 

$

340,263 

 

$

23,748 

 

 

 

 

 

 

 

Impaired Loans

 

Total impaired loans were $70.1 million and $141.0 million at September 30, 2013 and December 31, 2012, respectivelyCollateral dependent impaired loans, which are measured at the fair value of the underlying collateral less costs to sell, were $70.0 million and $134.5 million at September 30, 2013 and December 31, 2012, respectively.

 

Impaired loans for which no specific allowance is provided totaled $42.9 million and $84.8 million at September 30, 2013 and December 31, 2012, respectively.  Loans written down to their estimated fair value of collateral less the costs to sell account for $16.4 million and $54.0 million of the impaired loans for which no allowance has been provided as of September 30, 2013 and December 31, 2012, respectively, and the weighted average age of appraisals for these loans is 0.44 years at September 30, 2013The remaining impaired loans for which no allowance is provided are expected to be fully covered by the fair value of the collateral, and therefore, no additional loss is expected on these loans.    

 

16

 


 

HAMPTON ROADS BANKSHARES, INC.

PART I.  FINANCIAL INFORMATION

Item 1.  Notes to Consolidated Financial Statements

 

The following charts show recorded investment, unpaid balance, and related allowance of impaired loans (in thousands) by major segment and class as of September 30, 2013 and December 31, 2012.  Certain amounts within the real estate – residential mortgage segment in the prior period have been reclassified between classes due to the improper description assigned to these loans.  These reclassifications did not have a material impact on our allowance for loan losses in any period presented.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

September 30, 2013

 

September 30, 2013

 

September 30, 2013

 

 

Recorded Investment

 

Unpaid Principal Balance

 

Related Allowance

 

Average Recorded Investment

 

Interest Income Recognized

 

Average Recorded Investment

 

Interest Income Recognized

 

 

Investment

 

Balance

 

Allowance

 

Investment

 

Recognized

 

Investment

 

Recognized

With no related

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

allowance recorded:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial & Industrial

 

$

3,148 

 

$

5,130 

 

$

 -

 

$

5,360 

 

$

 

$

5,475 

 

$

Construction

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1-4 family residential

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

construction

 

 

417 

 

 

417 

 

 

 -

 

 

420 

 

 

 -

 

 

420 

 

 

 -

Commercial construction

 

 

7,623 

 

 

11,056 

 

 

 -

 

 

10,248 

 

 

 -

 

 

10,304 

 

 

Real estate

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial Mortgage

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Owner occupied

 

 

14,542 

 

 

15,707 

 

 

 -

 

 

16,057 

 

 

83 

 

 

16,260 

 

 

187 

Non-owner occupied

 

 

3,274 

 

 

12,755 

 

 

 -

 

 

12,838 

 

 

 

 

12,854 

 

 

22 

Residential Mortgage

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Secured by 1-4 family

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1st lien

 

 

11,851 

 

 

14,481 

 

 

 -

 

 

14,194 

 

 

27 

 

 

14,762 

 

 

82 

Junior lien

 

 

1,912 

 

 

3,495 

 

 

 -

 

 

3,689 

 

 

 

 

3,698 

 

 

Installment

 

 

115 

 

 

327 

 

 

 -

 

 

328 

 

 

 -

 

 

328 

 

 

 -

 

 

$

42,882 

 

$

63,368 

 

$

 -

 

$

63,134 

 

$

119 

 

$

64,101 

 

$

302 

With an allowance recorded:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial & Industrial

 

$

1,527 

 

$

1,527 

 

$

581 

 

$

2,441 

 

$

 -

 

$

2,490 

 

$

Construction

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1-4 family residential

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

construction

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

Commercial construction

 

 

6,027 

 

 

7,413 

 

 

4,024 

 

 

6,901 

 

 

 

 

6,910 

 

 

11 

Real estate

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial Mortgage

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Owner occupied

 

 

8,549 

 

 

8,619 

 

 

1,907 

 

 

8,601 

 

 

58 

 

 

8,641 

 

 

168 

Non-owner occupied

 

 

4,238 

 

 

4,260 

 

 

2,641 

 

 

4,278 

 

 

 

 

5,783 

 

 

28 

Residential Mortgage

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Secured by 1-4 family

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1st lien

 

 

5,071 

 

 

5,071 

 

 

1,314 

 

 

5,084 

 

 

45 

 

 

5,100 

 

 

94 

Junior lien

 

 

1,634 

 

 

1,634 

 

 

1,076 

 

 

1,643 

 

 

 

 

1,648 

 

 

16 

Installment

 

 

195 

 

 

195 

 

 

88 

 

 

195 

 

 

 

 

168 

 

 

 

 

$

27,241 

 

$

28,719 

 

$

11,631 

 

$

29,143 

 

$

123 

 

$

30,740 

 

$

328 

Total:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial & Industrial

 

$

4,675 

 

$

6,657 

 

$

581 

 

$

7,801 

 

$

 

$

7,965 

 

$

13 

Construction

 

 

14,067 

 

 

18,886 

 

 

4,024 

 

 

17,569 

 

 

 

 

17,634 

 

 

12 

Real estate -

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial mortgage

 

 

30,603 

 

 

41,341 

 

 

4,548 

 

 

41,774 

 

 

157 

 

 

43,538 

 

 

405 

Residential mortgage

 

 

20,468 

 

 

24,681 

 

 

2,390 

 

 

24,610 

 

 

79 

 

 

25,208 

 

 

196 

Installment

 

 

310 

 

 

522 

 

 

88 

 

 

523 

 

 

 

 

496 

 

 

Total

 

$

70,123 

 

$

92,087 

 

$

11,631 

 

$

92,277 

 

$

242 

 

$

94,841 

 

$

630 

 

 

17

 


 

HAMPTON ROADS BANKSHARES, INC.

PART I.  FINANCIAL INFORMATION

Item 1.  Notes to Consolidated Financial Statements

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

December 31, 2012

 

September 30, 2012

 

September 30, 2012

 

 

Recorded Investment

 

Unpaid Principal Balance

 

Related Allowance

 

Average Recorded Investment

 

Interest Income Recognized

 

Average Recorded Investment

 

Interest Income Recognized

 

 

Investment

 

Balance

 

Allowance

 

Investment

 

Recognized

 

Investment

 

Recognized

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

With no related

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

allowance recorded:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial & Industrial

 

$

20,388 

 

$

28,576 

 

$

 -

 

$

12,656 

 

 

 

$

18,166 

 

$

29 

Construction

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1-4 family residential

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

construction

 

 

2,328 

 

 

2,925 

 

 

 -

 

 

2,461 

 

 

 -

 

 

2,586 

 

 

 -

Commercial construction

 

 

17,739 

 

 

42,591 

 

 

 -

 

 

20,226 

 

 

117 

 

 

23,543 

 

 

119 

Real estate

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial Mortgage

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Owner occupied

 

 

21,277 

 

 

26,246 

 

 

 -

 

 

20,917 

 

 

19 

 

 

24,561 

 

 

195 

Non-owner occupied

 

 

7,639 

 

 

17,426 

 

 

 -

 

 

9,073 

 

 

(66)

 

 

7,056 

 

 

119 

Residential Mortgage

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Secured by 1-4 family

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1st lien

 

 

10,818 

 

 

13,746 

 

 

 -

 

 

11,084 

 

 

(51)

 

 

15,260 

 

 

23 

Junior lien

 

 

4,354 

 

 

7,817 

 

 

 -

 

 

4,129 

 

 

 

 

6,274 

 

 

Installment

 

 

220 

 

 

469 

 

 

 -

 

 

223 

 

 

 

 

201 

 

 

 

 

$

84,763 

 

$

139,796 

 

$

 -

 

$

80,769 

 

$

22 

 

$

97,647 

 

$

492 

With an allowance recorded:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial & Industrial

 

$

3,097 

 

$

3,103 

 

$

2,005 

 

$

14,824 

 

 

34 

 

$

10,633 

 

$

36 

Construction

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1-4 family residential

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

construction

 

 

 -

 

 

 -

 

 

 -

 

 

3,649 

 

 

(94)

 

 

391 

 

 

 -

Commercial construction

 

 

14,697 

 

 

16,418 

 

 

5,318 

 

 

21,397 

 

 

(64)

 

 

14,278 

 

 

178 

Real estate

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial Mortgage

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Owner occupied

 

 

13,961 

 

 

13,998 

 

 

2,417 

 

 

20,761 

 

 

152 

 

 

19,718 

 

 

310 

Non-owner occupied

 

 

6,497 

 

 

6,497 

 

 

776 

 

 

6,340 

 

 

155 

 

 

6,921 

 

 

155 

Residential Mortgage

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Secured by 1-4 family

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1st lien

 

 

14,918 

 

 

15,127 

 

 

2,964 

 

 

19,822 

 

 

174 

 

 

16,521 

 

 

570 

Junior lien

 

 

2,838 

 

 

2,854 

 

 

1,148 

 

 

4,216 

 

 

 

 

2,056 

 

 

18 

Installment

 

 

216 

 

 

217 

 

 

155 

 

 

262 

 

 

 

 

352 

 

 

 

 

$

56,224 

 

$

58,214 

 

$

14,783 

 

$

91,271 

 

$

367 

 

$

70,870 

 

$

1,271 

Total:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial & Industrial

 

$

23,485 

 

$

31,679 

 

$

2,005 

 

$

27,480 

 

$

35 

 

$

28,799 

 

$

65 

Construction

 

 

34,764 

 

 

61,934 

 

 

5,318 

 

 

47,733 

 

 

(41)

 

 

40,798 

 

 

297 

Real estate -

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial mortgage

 

 

49,374 

 

 

64,167 

 

 

3,193 

 

 

57,091 

 

 

260 

 

 

58,256 

 

 

779 

Residential mortgage

 

 

32,928 

 

 

39,544 

 

 

4,112 

 

 

39,251 

 

 

130 

 

 

40,111 

 

 

614 

Installment

 

 

436 

 

 

686 

 

 

155 

 

 

485 

 

 

 

 

553 

 

 

Total

 

$

140,987 

 

$

198,010 

 

$

14,783 

 

$

172,040 

 

$

389 

 

$

168,517 

 

$

1,763 

 

18

 


 

HAMPTON ROADS BANKSHARES, INC.

PART I.  FINANCIAL INFORMATION

Item 1.  Notes to Consolidated Financial Statements

 

Non-performing Assets

 

Non-performing assets consist of loans 90 days past due and still accruing interest, nonaccrual loans, and other real estate owned and repossessed assets.  Total non-performing assets were $87.1 million or 4% of total assets at September 30, 2013 compared with $130.7 million or 6% of total assets at December 31, 2012.  Non-performing assets (in thousands) as of September 30, 2013 and December 31, 2012 were as follows.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2013

 

December 31, 2012

Loans 90 days past due and still accruing interest

 

 $

320 

 

 $

1,024 

Nonaccrual loans, including nonaccrual impaired loans

 

 

47,604 

 

 

97,411 

Other real estate owned and repossessed assets

 

 

39,196 

 

 

32,215 

Non-performing assets

 

$

87,120 

 

$

130,650 

 

 

 

 

 

 

 

Nonaccrual and Past Due Loans

 

A reconciliation of non-performing loans to impaired loans (in thousands) for the periods ended September 30, 2013 and December 31, 2012 is as follows.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2013

 

December 31, 2012

Loans 90 days past due and still accruing interest

 

$

320 

 

$

1,024 

Nonaccrual loans, including nonaccrual impaired loans

 

 

47,604 

 

 

97,411 

Total non-performing loans

 

 

47,924 

 

 

98,435 

TDRs on accrual

 

 

17,775 

 

 

16,945 

Impaired loans on accrual

 

 

4,424 

 

 

25,607 

Total impaired loans

 

$

70,123 

 

$

140,987 

 

Nonaccrual loans were $47.6 million at September 30, 2013 compared to $97.4 million at December 31, 2012.  If income on nonaccrual loans had been recorded under original terms, $2.0 million and $5.7 million of additional interest income would have been recorded for the nine months ended September 30, 2013 and 2012, respectively.  The following table provides a rollforward of nonaccrual loans (in thousands) for the nine months ended September 30, 2013

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Real Estate

 

 

 

 

 

 

 

 

Commercial & Industrial

 

Construction

 

Commercial Mortgage

 

Residential Mortgage

 

Installment

 

Total

Balance at December 31, 2012

 

$

22,413 

 

$

28,505 

 

$

25,032 

 

$

21,206 

 

$

255 

 

$

97,411 

Transfers in

 

 

1,404 

 

 

8,177 

 

 

10,013 

 

 

6,812 

 

 

116 

 

 

26,522 

Transfers to OREO

 

 

(8,405)

 

 

(3,111)

 

 

(3,366)

 

 

(5,807)

 

 

(3)

 

 

(20,692)

Charge-offs

 

 

(4,919)

 

 

(3,638)

 

 

(804)

 

 

(5,553)

 

 

(114)

 

 

(15,028)

Payments

 

 

(7,196)

 

 

(15,018)

 

 

(7,983)

 

 

(2,698)

 

 

(33)

 

 

(32,928)

Return to accrual

 

 

(8)

 

 

(1,632)

 

 

(5,357)

 

 

(670)

 

 

(14)

 

 

(7,681)

Loan type reclassification

 

 

1,310 

 

 

336 

 

 

(1,646)

 

 

 -

 

 

 -

 

 

 -

Balance at September 30, 2013

 

$

4,599 

 

$

13,619 

 

$

15,889 

 

$

13,290 

 

$

207 

 

$

47,604 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

19

 


 

HAMPTON ROADS BANKSHARES, INC.

PART I.  FINANCIAL INFORMATION

Item 1.  Notes to Consolidated Financial Statements

 

Age Analysis of Past Due Loans

 

An age analysis of past due loans (in thousands) as of September 30, 2013 and December 31, 2012 is as follows.    

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2013

 

 

30-59 Days Past Due

 

60-89 Days Past Due

 

90 Days or More Past Due

 

Total Past Due

 

Current

 

Total Loans

 

90 Days or More Past Due and Accruing

Commercial & Industrial

 

$

547 

 

$

128 

 

$

4,599 

 

$

5,274 

 

$

213,230 

 

$

218,504 

 

$

 -

Construction

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1-4 family residential construction

 

 

 -

 

 

 -

 

 

417 

 

 

417 

 

 

19,466 

 

 

19,883 

 

 

 -

Commercial construction

 

 

2,542 

 

 

 -

 

 

13,202 

 

 

15,744 

 

 

136,056 

 

 

151,800 

 

 

 -

Real estate

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial Mortgage

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Owner occupied

 

 

230 

 

 

 -

 

 

9,362 

 

 

9,592 

 

 

266,911 

 

 

276,503 

 

 

 -

Non-owner occupied

 

 

44 

 

 

 -

 

 

6,527 

 

 

6,571 

 

 

286,251 

 

 

292,822 

 

 

 -

Residential Mortgage

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Secured by 1-4 family, 1st lien

 

 

555 

 

 

 -

 

 

10,945 

 

 

11,500 

 

 

213,327 

 

 

224,827 

 

 

320 

Secured by 1-4 family, junior lien

 

 

455 

 

 

 -

 

 

2,665 

 

 

3,120 

 

 

129,051 

 

 

132,171 

 

 

 -

Installment

 

 

 

 

 -

 

 

207 

 

 

214 

 

 

55,545 

 

 

55,759 

 

 

 -

Deferred loan fees and related costs

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

(1,541)

 

 

(1,541)

 

 

 -

Total

 

$

4,380 

 

$

128 

 

$

47,924 

 

$

52,432 

 

$

1,318,296 

 

$

1,370,728 

 

$

320 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2012

 

 

30-59 Days Past Due

 

60-89 Days Past Due

 

90 Days or More Past Due

 

Total Past Due

 

Current

 

Total Loans

 

90 Days or More Past Due and Accruing

Commercial & Industrial

 

$

402 

 

$

141 

 

$

23,436 

 

$

23,979 

 

$

243,101 

 

$

267,080 

 

$

1,024 

Construction

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1-4 family residential construction

 

 

 -

 

 

 -

 

 

2,328 

 

 

2,328 

 

 

15,181 

 

 

17,509 

 

 

 -

Commercial construction

 

 

973 

 

 

780 

 

 

26,177 

 

 

27,930 

 

 

160,952 

 

 

188,882 

 

 

 -

Real estate

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial Mortgage

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Owner occupied

 

 

1,882 

 

 

87 

 

 

19,920 

 

 

21,889 

 

 

269,863 

 

 

291,752 

 

 

 -

Non-owner occupied

 

 

50 

 

 

 -

 

 

5,112 

 

 

5,162 

 

 

233,128 

 

 

238,290 

 

 

 -

Residential Mortgage

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Secured by 1-4 family, 1st lien

 

 

3,098 

 

 

3,394 

 

 

15,918 

 

 

22,410 

 

 

202,641 

 

 

225,051 

 

 

 -

Secured by 1-4 family, junior lien

 

 

527 

 

 

421 

 

 

5,289 

 

 

6,237 

 

 

141,303 

 

 

147,540 

 

 

 -

Installment

 

 

 

 

11 

 

 

255 

 

 

269 

 

 

56,033 

 

 

56,302 

 

 

 -

Deferred loan fees and related costs

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

(131)

 

 

(131)

 

 

 -

Total

 

$

6,935 

 

$

4,834 

 

$

98,435 

 

$

110,204 

 

$

1,322,071 

 

$

1,432,275 

 

$

1,024 

 

20

 


 

HAMPTON ROADS BANKSHARES, INC.

PART I.  FINANCIAL INFORMATION

Item 1.  Notes to Consolidated Financial Statements

 

Credit Quality

 

The following tables provide information (in thousands) on September 30, 2013 and December 31, 2012 about the credit quality of the loan portfolio using the Company’s internal rating system as an indicator. 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2013

 

 

Pass

 

Special Mention

 

Substandard

 

Nonaccrual Loans

 

Total

Commercial & Industrial

 

$

196,275 

 

$

12,965 

 

$

4,665 

 

$

4,599 

 

$

218,504 

Construction

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1-4 family residential construction

 

 

18,165 

 

 

57 

 

 

1,244 

 

 

417 

 

 

19,883 

Commercial construction

 

 

86,123 

 

 

43,880 

 

 

8,595 

 

 

13,202 

 

 

151,800 

Real estate

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial Mortgage

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Owner occupied

 

 

214,454 

 

 

45,117 

 

 

7,570 

 

 

9,362 

 

 

276,503 

Non-owner occupied

 

 

246,752 

 

 

28,856 

 

 

10,687 

 

 

6,527 

 

 

292,822 

Residential Mortgage

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Secured by 1-4 family, 1st lien

 

 

168,493 

 

 

31,371 

 

 

14,338 

 

 

10,625 

 

 

224,827 

Secured by 1-4 family, junior lien

 

 

120,904 

 

 

6,810 

 

 

1,792 

 

 

2,665 

 

 

132,171 

Installment

 

 

51,465 

 

 

3,743 

 

 

344 

 

 

207 

 

 

55,759 

Deferred loan fees and related costs

 

 

(1,541)

 

 

 -

 

 

 -

 

 

 -

 

 

(1,541)

Total

 

$

1,101,090 

 

$

172,799 

 

$

49,235 

 

$

47,604 

 

$

1,370,728 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2012

 

 

Pass

 

Special Mention

 

Substandard

 

Nonaccrual Loans

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial & Industrial

 

$

228,441 

 

$

8,560 

 

$

7,667 

 

$

22,412 

 

$

267,080 

Construction

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1-4 family residential construction

 

 

12,613 

 

 

1,294 

 

 

1,274 

 

 

2,328 

 

 

17,509 

Commercial construction

 

 

98,084 

 

 

25,513 

 

 

39,108 

 

 

26,177 

 

 

188,882 

Real estate

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial Mortgage

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Owner occupied

 

 

212,589 

 

 

39,003 

 

 

20,240 

 

 

19,920 

 

 

291,752 

Non-owner occupied

 

 

181,728 

 

 

39,622 

 

 

11,828 

 

 

5,112 

 

 

238,290 

Residential Mortgage

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Secured by 1-4 family, 1st lien

 

 

167,068 

 

 

22,433 

 

 

19,632 

 

 

15,918 

 

 

225,051 

Secured by 1-4 family, junior lien

 

 

132,248 

 

 

5,656 

 

 

4,347 

 

 

5,289 

 

 

147,540 

Installment

 

 

49,975 

 

 

1,202 

 

 

4,870 

 

 

255 

 

 

56,302 

Deferred loan fees and related costs

 

 

(131)

 

 

 -

 

 

 -

 

 

 -

 

 

(131)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

1,082,615 

 

$

143,283 

 

$

108,966 

 

$

97,411 

 

$

1,432,275 

 

21

 


 

HAMPTON ROADS BANKSHARES, INC.

PART I.  FINANCIAL INFORMATION

Item 1.  Notes to Consolidated Financial Statements

 

Modifications

 

Loans meeting the criteria to be classified as Troubled Debt Restructurings (“TDRs”) are included in impaired loans.   As of September 30, 2013 and December 31, 2012, loans classified as TDRs were $31.2 million and $34.7 million, respectively.  The following table shows the loans (in thousands) classified by management as TDRs at September 30, 2013 and December 31, 2012.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2013

 

December 31, 2012

Troubled Debt Restructurings

 

Number of Contracts

 

Recorded Investment

 

Number of Contracts

 

Recorded Investment

Commercial & Industrial

 

 

 2

 

$

884 

 

 

 6

 

$

982 

Construction

 

 

 

 

 

 

 

 

 

 

 

 

1-4 family residential construction

 

 

 -

 

 

 -

 

 

 1

 

 

1,582 

Commercial construction

 

 

12

 

 

5,588 

 

 

16

 

 

8,711 

Real estate

 

 

 

 

 

 

 

 

 

 

 

 

Commercial Mortgage

 

 

 

 

 

 

 

 

 

 

 

 

Owner occupied

 

 

13

 

 

15,219 

 

 

12

 

 

11,118 

Non-owner occupied

 

 

 2

 

 

1,388 

 

 

 4

 

 

7,001 

Residential Mortgage

 

 

 

 

 

 

 

 

 

 

 

 

Secured by 1-4 family, 1st lien

 

 

28

 

 

7,822 

 

 

24

 

 

5,093 

Secured by 1-4 family, junior lien

 

 

 5

 

 

340 

 

 

 1

 

 

181 

Installment

 

 

 1

 

 

 

 

 -

 

 

 -

Total

 

 

63

 

$

31,245 

 

 

64

 

$

34,668 

 

 

 

 

 

 

 

 

 

 

 

 

 

Of total TDRs, $18.4 million was accruing and $12.8 million was nonaccruing at September 30, 2013 and $16.9 million was accruing and $17.7 million was nonaccruing at December 31, 2012Loans that are on nonaccrual status at the time of the restructuring generally remain on nonaccrual status for approximately six months before management considers whether such loans may return to accrual status.  TDRs in nonaccrual status are returned to accrual status after a period of performance under which the borrower demonstrates the ability and willingness to repay the loan in accordance with the modified terms.   There were no nonaccrual TDRs that were returned to accrual status during the nine months ended September 30, 2013 and $546 thousand were returned to accrual status during the year ended December 31, 2012.  The following table shows a rollforward of accruing and nonaccruing TDRs (in thousands) for the nine months ended September 30, 2013

 

 

 

 

 

 

 

 

 

 

 

 

 

Accruing

 

Non Accruing

 

Total

Balance at December 31, 2012

 

$

16,945 

 

$

17,723 

 

$

34,668 

Charge-offs

 

 

 -

 

 

(490)

 

 

(490)

Payments

 

 

(250)

 

 

(9,089)

 

 

(9,339)

New TDR designation

 

 

7,722 

 

 

3,760 

 

 

11,482 

Release TDR designation

 

 

(5,076)

 

 

 -

 

 

(5,076)

Transfer

 

 

(884)

 

 

884 

 

 

 -

Balance at September 30, 2013

 

$

18,457 

 

$

12,788 

 

$

31,245 

 

The allowance for loan losses allocated to TDRs was $4.6 million and $1.7 million at September 30, 2013 and December 31, 2012.  The total of TDRs charged off were $490 thousand during the nine months ended September 30, 2013 and $4.0 million during the year ended December 31, 2012

 

At a minimum, TDRs are reported as such during the calendar year in which the restructuring or modification takes place.  In subsequent years, TDRs may be removed from this disclosure classification if the loan did not involve a below market rate concession and the loan is not deemed to be impaired based on the terms specified in the restructuring agreement.  The Company had one loan totaling $5.1 million that was removed from TDR status during the first nine months of 2013.    

22

 


 

HAMPTON ROADS BANKSHARES, INC.

PART I.  FINANCIAL INFORMATION

Item 1.  Notes to Consolidated Financial Statements

 

The following tables show a summary of the primary reason and pre- and post-modification outstanding recorded investment (in thousands, except number of contracts) for loan modifications that were classified as TDRs during the three and nine month periods ended September 30, 2013 and 2012.  These tables include modifications made to existing TDRs as well as new modifications that are considered TDRs for the periods presentedTDRs made with a  below market rate that also include a modification of loan structure are included under rate change. 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Three Months Ended  September 30, 2013

 

 

Rate

 

Structure

Troubled Debt Restructurings

 

Number of Contracts

 

Pre-Modification Outstanding Recorded Investment

 

Post-Modification Outstanding Recorded Investment

 

Number of Contracts

 

Pre-Modification Outstanding Recorded Investment

 

Post-Modification Outstanding Recorded Investment

Commercial & Industrial

 

 

 -

 

$

 -

 

$

 -

 

 

 -

 

$

 -

 

$

 -

Construction

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1-4 family residential construction

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

Commercial construction

 

 

 -

 

 

 -

 

 

 -

 

 

 3

 

 

3,241 

 

 

3,241 

Real estate

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial Mortgage

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Owner occupied

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

Non-owner occupied

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

Residential Mortgage

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Secured by 1-4 family, 1st lien

 

 

 -

 

 

 -

 

 

 -

 

 

 4

 

 

472 

 

 

472 

Secured by 1-4 family, junior lien

 

 

 -

 

 

 -

 

 

 -

 

 

 2

 

 

108 

 

 

108 

Installment

 

 

 -

 

 

 -

 

 

 -

 

 

 1

 

 

 

 

Total

 

 

 -

 

$

 -

 

$

 -

 

 

10

 

$

3,825 

 

$

3,825 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Three Months Ended September 30, 2012

 

 

Rate

 

Structure

Troubled Debt Restructurings

 

Number of Contracts

 

Pre-Modification Outstanding Recorded Investment

 

Post-Modification Outstanding Recorded Investment

 

Number of Contracts

 

Pre-Modification Outstanding Recorded Investment

 

Post-Modification Outstanding Recorded Investment

Commercial & Industrial

 

 

 

$

897 

 

$

897 

 

 

 -

 

$

 -

 

$

 -

Construction

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1-4 family residential construction

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

Commercial construction

 

 

 

 

334 

 

 

186 

 

 

 -

 

 

 -

 

 

 -

Real estate

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial Mortgage

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Owner occupied

 

 

 

 

551 

 

 

551 

 

 

 -

 

 

 -

 

 

 -

Non-owner occupied

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

Residential Mortgage

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Secured by 1-4 family, 1st lien

 

 

 

 

400 

 

 

316 

 

 

 -

 

 

 -

 

 

 -

Secured by 1-4 family, junior lien

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

Installment

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

Total

 

 

 

$

2,182 

 

$

1,950 

 

 

 -

 

$

 -

 

$

 -

 

 

23

 


 

HAMPTON ROADS BANKSHARES, INC.

PART I.  FINANCIAL INFORMATION

Item 1.  Notes to Consolidated Financial Statements

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Nine Months Ended  September 30, 2013

 

 

Rate

 

Structure

Troubled Debt Restructurings

 

Number of Contracts

 

Pre-Modification Outstanding Recorded Investment

 

Post-Modification Outstanding Recorded Investment

 

Number of Contracts

 

Pre-Modification Outstanding Recorded Investment

 

Post-Modification Outstanding Recorded Investment

Commercial & Industrial

 

 

 -

 

$

 -

 

$

 -

 

 

 -

 

$

 -

 

$

 -

Construction

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1-4 family residential construction

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

Commercial construction

 

 

 -

 

 

 -

 

 

 -

 

 

 3

 

 

3,241 

 

 

3,241 

Real estate

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial Mortgage

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Owner occupied

 

 

 -

 

 

 -

 

 

 -

 

 

 2

 

 

4,721 

 

 

4,721 

Non-owner occupied

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

Residential Mortgage

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Secured by 1-4 family, 1st lien

 

 

 

 

2,010 

 

 

2,004 

 

 

 5

 

 

1,347 

 

 

1,347 

Secured by 1-4 family, junior lien

 

 

 -

 

 

 -

 

 

 -

 

 

 4

 

 

159 

 

 

159 

Installment

 

 

 -

 

 

 -

 

 

 -

 

 

 1

 

 

 

 

Total

 

 

 

$

2,010 

 

$

2,004 

 

 

15

 

$

9,472 

 

$

9,472 

 

Included in the above table are five loans totaling $5.6 million that met the criteria to be classified as a TDR during first quarter 2013 and were not previously disclosed in this table. 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Nine Months Ended September 30, 2012

 

 

Rate

 

Structure

Troubled Debt Restructurings

 

Number of Contracts

 

Pre-Modification Outstanding Recorded Investment

 

Post-Modification Outstanding Recorded Investment

 

Number of Contracts

 

Pre-Modification Outstanding Recorded Investment

 

Post-Modification Outstanding Recorded Investment

Commercial & Industrial

 

 

 

$

897 

 

$

897 

 

 

 -

 

$

 -

 

$

 -

Construction

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1-4 family residential construction

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

Commercial construction

 

 

 

 

724 

 

 

576 

 

 

 

 

1,350 

 

 

1,350 

Real estate

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial Mortgage

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Owner occupied

 

 

 

 

7,142 

 

 

5,784 

 

 

 -

 

 

 -

 

 

 -

Non-owner occupied

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

Residential Mortgage

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Secured by 1-4 family, 1st lien

 

 

 

 

400 

 

 

316 

 

 

 

 

868 

 

 

868 

Secured by 1-4 family, junior lien

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

Installment

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

Total

 

 

 

$

9,163 

 

$

7,573 

 

 

 

$

2,218 

 

$

2,218 

 

 

24

 


 

HAMPTON ROADS BANKSHARES, INC.

PART I.  FINANCIAL INFORMATION

Item 1.  Notes to Consolidated Financial Statements

 

 

For the three and nine months ended September 30, 2013 and 2012, the Company had no loans modified as TDRs within the previous twelve months and for which there was a payment default and subsequent movement of the TDR to nonaccrual status during the period. 

 

 

 

 

Loans that are considered TDRs are considered specifically impaired and the primary consideration for measurement of impairment is the present value of the expected cash flows.  However, given the prevalence of real estate secured loans in the Company’s portfolio of troubled assets, the majority of the Company’s TDR loans are ultimately considered collateral-dependent.  Impairments are, therefore, calculated based upon the fair value of the underlying collateral and observable market prices for the sale of the respective notes are not considered as a basis for impairment for any of the Company’s loans.  To determine fair value, the Company utilizes a proprietary database of its own historical property appraisals in conjunction with external data and applies a relevant discount derived from analysis of appraisals of similar property type, vintage, and geographic location. 

 

The Company does not participate in any government or company sponsored TDR programs and holds no corresponding assets.  Rather, loans are individually modified in situations where the Company believes it will minimize the probability of losses to the Company.  Additionally, the Company had no commitments to lend additional funds to debtors owing receivables whose terms have been modified in TDRs at September 30, 2013 and December 31, 2012.

 

 

NOTE G – PREMISES, EQUIPMENT, AND LEASES

 

During the first quarter of 2013, the Company incurred a $2.8 million charge as a result of a decision to consolidate certain branches.  This consolidation also resulted in an additional $3.4 million decrease in premises and equipment from transferring branch buildings and land to other real estate owned.  Premises and equipment (in thousands) at September 30, 2013 and December 31, 2012 are summarized as follows. 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2013

 

December 31, 2012

Land

 

$

24,260 

 

$

26,823 

Buildings and improvements

 

 

48,845 

 

 

54,846 

Leasehold improvements

 

 

1,458 

 

 

2,187 

Equipment, furniture, and fixtures

 

 

14,526 

 

 

16,535 

Construction in progress

 

 

445 

 

 

245 

 

 

 

89,534 

 

 

100,636 

Less accumulated depreciation and amortization

 

 

(19,900)

 

 

(21,979)

Premises and equipment, net

 

$

69,634 

 

$

78,657 

 

 

 

NOTE H – OTHER REAL ESTATE OWNED AND REPOSSESSED ASSETS

 

The following table shows a rollforward of other real estate owned and repossessed assets (in thousands) for the nine months ended September 30, 2013.

 

 

 

 

 

 

Balance at December 31, 2012

 

$

32,215 

Additions

 

 

25,014 

Sales

 

 

(15,977)

Gain on sales

 

 

369 

Provision for losses

 

 

(2,425)

Balance at September 30, 2013

 

$

39,196 

25

 


 

HAMPTON ROADS BANKSHARES, INC.

PART I.  FINANCIAL INFORMATION

Item 1.  Notes to Consolidated Financial Statements

 

 

Other real estate owned and repossessed assets are presented net of an allowance for losses.  An analysis of the allowance for losses (in thousands) on these assets as of and for the nine months ended September 30, 2013 and 2012 is as follows.

 

 

 

 

 

 

 

 

 

 

September 30, 2013

 

September 30, 2012

Balance at beginning of year

 

$

19,100 

 

$

20,022 

Provision for losses

 

 

2,425 

 

 

7,262 

Charge-offs

 

 

(7,951)

 

 

(8,995)

Balance at end of period

 

$

13,574 

 

$

18,289 

 

Expenses (in thousands) applicable to other real estate owned and repossessed assets for the three and nine months ended September 30, 2013 and 2012 include the following.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the three months ended

 

For the nine months ended

 

 

 

September 30, 2013

 

September 30, 2012

 

 

September 30, 2013

 

September 30, 2012

(Gains) losses on sale of

 

 

 

 

 

 

 

 

 

 

 

 

other real estate owned

 

$

(370)

 

$

3,751 

 

$

(369)

 

$

7,095 

Provision for losses

 

 

748 

 

 

2,694 

 

 

2,425 

 

 

7,262 

Operating expenses

 

 

694 

 

 

1,115 

 

 

1,329 

 

 

2,222 

Total

 

$

1,072 

 

$

7,560 

 

$

3,385 

 

$

16,579 

 

 

 

NOTE I - STOCK-BASED COMPENSATION

 

On October 4, 2011, the Company’s shareholders approved the 2011 Omnibus Incentive Plan (the “Plan”), which succeeded the Company’s 2006 Stock Incentive Plan and provided for the grant of up to 2,750,000 shares of our common stock, par value $0.01 per share (“Common Stock”), as awards to employees of the Company and its related entities, members of the Board of Directors of the Company, and members of the board of directors of any of the Company’s related entities.  On June 25, 2012, the Company’s shareholders approved an amendment to the Plan that increased the number of shares reserved for issuance under the Plan to 13,675,000 of which 11,879,477 remain to be granted as of September 30, 2013

 

Stock Options

 

Outstanding stock options consist of grants made to the Company’s directors and employees under stock compensation plans that have been approved by the Company’s shareholders.  All outstanding options have original terms that range from five to ten years and are either fully vested and exercisable at the date of grant or vest ratably over three to ten years.  No options were granted during the nine months ended September 30, 2013 or 2012.  A summary of the Company’s stock option activity and related information for the nine months ended September 30, 2013 is as follows.

 

 

 

 

 

 

 

 

 

 

Options Outstanding

 

Weighted Average Exercise Price

 

Average Intrinsic Value

Balance at December 31, 2012

26,658 

 

$

376.76 

 

$

 -

Expired

(660)

 

 

178.24 

 

 

 -

Balance at September 30, 2013

25,998 

 

$

381.81 

 

$

 -

 

 

 

 

 

 

 

 

Options exercisable at September 30, 2013

25,651 

 

$

382.83 

 

$

 -

 

26

 


 

HAMPTON ROADS BANKSHARES, INC.

PART I.  FINANCIAL INFORMATION

Item 1.  Notes to Consolidated Financial Statements

 

Restricted Stock Units

 

The Company has granted restricted stock units to certain directors and employees as part of incentive programs.  The restricted stock units are settled in Company Common Stock and will generally vest over one year or in certain instances, the later of two years from the date of the grant; the date the Company is no longer subject to the executive compensation and corporate governance requirements of Section 111(b) of the Emergency Economic and Stabilization Act of 2008, as amended; or the date the Company is no longer subject to the Written Agreement.  Grants of these awards were valued based on the closing price on the day of grant.  Compensation expense for outstanding restricted stock units is recognized ratably over the vesting periods of the awardsThe RSUs are not eligible to receive dividends or dividend equivalence until the RSUs are settled in Company Common Stock.  At that time, the participant will be entitled to all the same rights as a shareholder of the Company. 

 

A summary of the Company’s restricted stock unit activity and related information for the nine months ended September 30, 2013 is as follows.

 

 

 

 

 

 

 

 

 

Weighted-Average

 

Number of Units

 

Grant Date Fair Value

Balance at December 31, 2012

1,207,939 

 

$

1.12 

Granted

652,317 

 

 

1.46 

Forfeited

(189,732)

 

 

1.12 

Balance at September 30, 2013

1,670,524 

 

$

1.25 

 

As of September 30, 2013, there was $1.5 million of total unrecognized compensation cost related to restricted stock units.  That cost is expected to be recognized over a weighted-average period of 1.2 years.  There were no restricted stock units that vested during the nine months ended September 30, 2013

 

Compensation cost relating to share-based transactions is accounted for in the consolidated financial statements based on the fair value of the share-based award.  Stock-based compensation expense (in thousands) recognized in the consolidated statements of operations for the nine months ended September 30, 2013 and 2012  was as follows.

 

 

 

 

 

 

 

 

September 30,

 

2013

 

2012

Expense recognized:

 

 

 

 

 

 Related to stock options

$

24 

 

$

 Related to restricted stock units

 

720 

 

 

30 

 Related tax benefit

 

 -

 

 

 -

 

 

 

 

NOTE J – BUSINESS SEGMENT REPORTING

 

The Company defines its operating segments by product and geography.  The Company has two community banks, BOHR and Shore, which provide loan and deposit services through branches located in Virginia, North Carolina, and Maryland.  In addition to its banking operations, the Company has two additional reportable segments:  Mortgage and Other.  

 

The accounting policies of the reportable segments are the same as those described in the summary of significant accounting policies in the 2012 Form 10-K.  Segment profit and loss is measured by net income prior to corporate overhead allocation.  Intersegment transactions are recorded at cost and eliminated as part of the consolidation process.  Because of the interrelationships between the segments, the information is not indicative of how the segments would perform if they operated as independent entities. 

 

27

 


 

HAMPTON ROADS BANKSHARES, INC.

PART I.  FINANCIAL INFORMATION

Item 1.  Notes to Consolidated Financial Statements

 

The following tables show certain financial information (in thousands) for the three and nine months ended September 30, 2013 and 2012 and as of September 30, 2013 and December 31, 2012 for each segment and in total. 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

Elimination

 

BOHR

 

Shore

 

Mortgage

 

Other

Total Assets at September 30, 2013

 

$

1,985,420 

 

$

(78,386)

 

$

1,661,998 

 

$

339,694 

 

$

43,340 

 

$

18,774 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Assets at December 31, 2012

 

$

2,054,092 

 

$

(125,465)

 

$

1,750,997 

 

$

312,764 

 

$

93,856 

 

$

21,940 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2013

 

Total

 

Elimination

 

BOHR

 

Shore

 

Mortgage

 

Other

Net interest income (loss)

 

$

15,800 

 

$

 -

 

$

13,114 

 

$

2,907 

 

$

263 

 

$

(484)

Provision for loan losses

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

Net interest income (loss) after

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

provision for loan losses

 

 

15,800 

 

 

 -

 

 

13,114 

 

 

2,907 

 

 

263 

 

 

(484)

Noninterest income

 

 

7,902 

 

 

(53)

 

 

4,309 

 

 

476 

 

 

3,139 

 

 

31 

Noninterest expense

 

 

20,790 

 

 

(53)

 

 

13,813 

 

 

2,864 

 

 

3,217 

 

 

949 

Income (loss) before provision

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

for income taxes

 

 

2,912 

 

 

 -

 

 

3,610 

 

 

519 

 

 

185 

 

 

(1,402)

Provision for income taxes

 

 

22 

 

 

 -

 

 

(120)

 

 

10 

 

 

130 

 

 

Net income (loss)

 

 

2,890 

 

 

 -

 

 

3,730 

 

 

509 

 

 

55 

 

 

(1,404)

Net income attributable

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

to non-controlling interest

 

 

86 

 

 

 -

 

 

 -

 

 

 -

 

 

86 

 

 

 -

Net income (loss) attributable

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

to Hampton Roads Bankshares, Inc.

 

$

2,804 

 

$

 -

 

$

3,730 

 

$

509 

 

$

(31)

 

$

(1,404)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2012

 

Total

 

Elimination

 

BOHR

 

Shore

 

Mortgage

 

Other

Net interest income (loss)

 

$

15,837 

 

$

 -

 

$

13,391 

 

$

2,819 

 

$

101 

 

$

(474)

Provision for loan losses

 

 

2,476 

 

 

 -

 

 

2,455 

 

 

21 

 

 

 -

 

 

 -

Net interest income (loss) after

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

provision for loan losses

 

 

13,361 

 

 

 -

 

 

10,936 

 

 

2,798 

 

 

101 

 

 

(474)

Noninterest income

 

 

2,200 

 

 

(61)

 

 

(3,067)

 

 

102 

 

 

5,186 

 

 

40 

Noninterest expense

 

 

20,394 

 

 

(61)

 

 

15,301 

 

 

2,019 

 

 

3,094 

 

 

41 

Income (loss) before provision

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

for income taxes

 

 

(4,833)

 

 

 -

 

 

(7,432)

 

 

881 

 

 

2,193 

 

 

(475)

Provision for income taxes

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

Net income (loss)

 

 

(4,833)

 

 

 -

 

 

(7,432)

 

 

881 

 

 

2,193 

 

 

(475)

Net income attributable

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

to non-controlling interest

 

 

1,088 

 

 

 -

 

 

 -

 

 

 -

 

 

1,088 

 

 

 -

Net income (loss) attributable

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

to Hampton Roads Bankshares, Inc.

 

$

(5,921)

 

$

 -

 

$

(7,432)

 

$

881 

 

$

1,105 

 

$

(475)

 

 

28

 


 

HAMPTON ROADS BANKSHARES, INC.

PART I.  FINANCIAL INFORMATION

Item 1.  Notes to Consolidated Financial Statements

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2013

 

Total

 

Elimination

 

BOHR

 

Shore

 

Mortgage

 

Other

Net interest income (loss)

 

$

47,825 

 

$

 -

 

$

39,857 

 

$

8,775 

 

$

610 

 

$

(1,417)

Provision for loan losses

 

 

1,000 

 

 

 -

 

 

500 

 

 

500 

 

 

 -

 

 

 -

Net interest income (loss) after

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

provision for loan losses

 

 

46,825 

 

 

 -

 

 

39,357 

 

 

8,275 

 

 

610 

 

 

(1,417)

Noninterest income

 

 

20,914 

 

 

(178)

 

 

6,250 

 

 

986 

 

 

13,353 

 

 

503 

Noninterest expense

 

 

62,415 

 

 

(178)

 

 

41,130 

 

 

8,500 

 

 

10,614 

 

 

2,349 

Income (loss) before provision

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

for income taxes

 

 

5,324 

 

 

 -

 

 

4,477 

 

 

761 

 

 

3,349 

 

 

(3,263)

Provision for income taxes

 

 

157 

 

 

 -

 

 

 -

 

 

20 

 

 

130 

 

 

Net income (loss)

 

 

5,167 

 

 

 -

 

 

4,477 

 

 

741 

 

 

3,219 

 

 

(3,270)

Net income attributable

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

to non-controlling interest

 

 

1,642 

 

 

 -

 

 

 -

 

 

 -

 

 

1,642 

 

 

 -

Net income (loss) attributable

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

to Hampton Roads Bankshares, Inc.

 

$

3,525 

 

$

 -

 

$

4,477 

 

$

741 

 

$

1,577 

 

$

(3,270)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2012

 

Total

 

Elimination

 

BOHR

 

Shore

 

Mortgage

 

Other

Net interest income (loss)

 

$

48,735 

 

$

 -

 

$

41,554 

 

$

8,207 

 

$

383 

 

$

(1,409)

Provision for loan losses

 

 

14,124 

 

 

 -

 

 

13,975 

 

 

149 

 

 

 -

 

 

 -

Net interest income (loss) after

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

provision for loan losses

 

 

34,611 

 

 

 -

 

 

27,579 

 

 

8,058 

 

 

383 

 

 

(1,409)

Noninterest income

 

 

7,301 

 

 

(186)

 

 

(5,652)

 

 

467 

 

 

12,299 

 

 

373 

Noninterest expense

 

 

59,072 

 

 

(186)

 

 

44,310 

 

 

6,406 

 

 

7,978 

 

 

564 

Income (loss) before provision

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

for income taxes

 

 

(17,160)

 

 

 -

 

 

(22,383)

 

 

2,119 

 

 

4,704 

 

 

(1,600)

Provision for income taxes

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

Net income (loss)

 

 

(17,160)

 

 

 -

 

 

(22,383)

 

 

2,119 

 

 

4,704 

 

 

(1,600)

Net income attributable

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

to non-controlling interest

 

 

2,333 

 

 

 -

 

 

 -

 

 

 -

 

 

2,333 

 

 

 -

Net income (loss) attributable

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

to Hampton Roads Bankshares, Inc.

 

$

(19,493)

 

$

 -

 

$

(22,383)

 

$

2,119 

 

$

2,371 

 

$

(1,600)

 

 

 

 

 

 

NOTE KDERIVATIVE FINANCIAL INSTRUMENTS

 

Derivatives are financial instruments whose value is based on one or more underlying assets.  The Company originates mortgage loans for sale into the secondary market on both a best efforts and a mandatory delivery basis.  In connection with the underwriting process, the Company enters into commitments to lock-in the interest rate of the loan with the borrower prior to funding (“interest rate lock commitments”).  Generally, such interest rate lock commitments are for periods less than 60 days.  These interest rate lock commitments are considered derivatives.  The Company manages its exposure to changes in fair value associated with these interest rate lock commitments by entering into simultaneous agreements to sell the residential loans to third party investors shortly after their origination and funding.  At September 30, 2013 and December 31, 2012, the Company had loans held for sale of $29.6 million and $84.1 million, respectively. 

 

29

 


 

HAMPTON ROADS BANKSHARES, INC.

PART I.  FINANCIAL INFORMATION

Item 1.  Notes to Consolidated Financial Statements

 

Under the contractual relationship using the best efforts method, the Company is obligated to sell the loans only if the loans close.  As a result of the terms of these contractual relationships, the Company is not exposed to losses nor will it realize gains related to its rate-lock commitments due to subsequent changes in interest rates.  At September 30, 2013 and December 31, 2012, the Company had rate-lock commitments to originate residential mortgage loans (unfunded par amount of loans) on a best efforts basis in the amounts of $45.7 million and $94.5 million, respectively. 

 

Beginning in September 2012, the Company began selling some of its residential mortgage loan production on a mandatory delivery basis and using derivative instruments to manage the resulting interest rate risk.  These derivatives are entered into as balance sheet risk management instruments, and therefore, are not designated as an accounting hedge.  Under the mandatory delivery approach, residential mortgage loans held for sale and commitments to borrowers to originate loans at agreed upon interest rates expose the Company to changes in market rates and conditions subsequent to the interest rate lock commitment until the loans are delivered to the investor.  The Company uses mortgage-based derivatives such as forward delivery commitments and To-Be-Announced securities in order to mitigate this market risk.  For the nine months ended September 30, 2013, the Company recorded a loss of $88 thousand related to mandatory delivery derivatives which was included in the decrease in the carrying value of the underlying loans and interest rate lock commitments totaling $325 thousand.  For the nine months ended September 30, 2012, the Company recorded a loss totaling $102 thousand related to mandatory delivery derivatives which was offset by an increase in the carrying value of the underlying loans and interest rate lock commitments totaling $175 thousand.  Gains and losses on the Company’s derivative instruments are included within mortgage banking revenue on the Consolidated Statement of Operations. 

 

Additionally, the Company uses interest rate swaps to manage its interest rate risk.  Derivative contracts are executed between the Company and certain commercial loan customers with offsetting positions to dealers under a back-to-back swap program enabling the commercial loan customers to effectively exchange variable-rate interest payments under their existing obligations for fixed-rate interest payments.  For the period ended September 30, 2013, the Company recorded a gain totaling $514 thousand related to trading income on the interest rate swaps included in the back-to-back swap program that was included within other noninterest income on the Consolidated Statement of Operations.  There was no activity related to these interest rate swaps in 2012. 

 

NOTE LBRANCH CONSOLIDATION

On March 27, 2013, the Company announced the consolidation of seven BOHR and Shore branch locations, six owned and one leased, into nearby branches.  This required an impairment analysis to be performed.  In connection with the analysis, five of the branch locations were determined to have carrying amounts that exceeded fair value at March 31, 2013.  Accordingly, the related carrying amounts of these branches were reduced to estimated fair value (less costs to sell) and the Company recorded an impairment charge totaling $2.8 million during the quarter ended March 31, 2013.  Management estimated the fair value of the branches by utilizing various market-based valuation techniques, including estimates from unrelated brokers, existing purchase offers from unrelated parties, and appraisals available as of the measurement date.  Approximately $3.4 million related to the remaining carrying values of the branch related assets was transferred into other real estate owned in accordance with relevant accounting guidance and are measured at fair value on a nonrecurring basis.

 

NOTE  M – FAIR VALUE MEASUREMENTS

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.  The Company classifies financial assets and liabilities measured at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value.  Valuation methodologies for the fair value hierarchy are as follows.

 

Level 1 Quoted prices in active markets for identical assets or liabilities.  Level 1 assets and liabilities include debt and equity securities and derivative contracts that are traded in an active exchange market, as well as certain Treasury securities that are highly liquid and are actively traded in over-the-counter markets.

 

30

 


 

HAMPTON ROADS BANKSHARES, INC.

PART I.  FINANCIAL INFORMATION

Item 1.  Notes to Consolidated Financial Statements

 

Level 2 Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.  Level 2 assets and liabilities include debt securities with quoted prices that are traded less frequently than exchange-traded instruments and derivative contracts whose values are determined using a pricing model with inputs that are observable in the market or can be derived principally from or corroborated by observable market data. 

 

Level 3 Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.  Level 3 assets and liabilities include financial instruments whose values are determined using pricing models, discounted cash flow methodologies, or similar techniques as well as instruments for which the determination of fair value requires significant management judgment or estimation. 

 

A financial instrument’s categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. 

 

Recurring Basis

 

The Company measures or monitors certain of its assets and liabilities on a fair value basis.  Fair value is used on a recurring basis for those assets and liabilities for which an election was made as well as for certain assets and liabilities for which fair value is the primary basis of accounting. 

 

The following tables reflect the fair value (in thousands) of assets measured and recognized at fair value on a recurring basis in the consolidated balance sheets at September 30, 2013 and December 31, 2012.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair Value Measurements at Reporting Date Using

Assets

 

September 30, 2013

 

Level 1

 

Level 2

 

Level 3

Investment securities available for sale

 

 

 

 

 

 

 

 

 

 

 

 

U.S. agency securities

 

$

26,698 

 

$

 -

 

$

26,698 

 

$

 -

State and municipal securities

 

 

553 

 

 

 -

 

 

553 

 

 

 -

Corporate bonds

 

 

17,507 

 

 

 -

 

 

17,507 

 

 

 -

Mortgage-backed securities - agency

 

 

201,835 

 

 

 -

 

 

201,835 

 

 

 -

Mortgage-backed securities -

 

 

 

 

 

 

 

 

 

 

 

 

non-agency

 

 

4,870 

 

 

 -

 

 

4,870 

 

 

 -

Asset-backed securities

 

 

43,670 

 

 

 -

 

 

43,670 

 

 

 -

Equity securities

 

 

493 

 

 

204 

 

 

 -

 

 

289 

Total investment securities

 

 

 

 

 

 

 

 

 

 

 

 

available for sale

 

 

295,626 

 

 

204 

 

 

295,133 

 

 

289 

Derivative loan commitments

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate lock commitments

 

 

864 

 

 

 -

 

 

 -

 

 

864 

Mandatory delivery commitments

 

 

144 

 

 

 -

 

 

 -

 

 

144 

Total derivative loan commitments

 

 

1,008 

 

 

 -

 

 

 -

 

 

1,008 

Interest rate swaps

 

 

452 

 

 

 -

 

 

452 

 

 

 -

Total assets

 

$

297,086 

 

$

204 

 

$

295,585 

 

$

1,297 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate swaps

 

$

452 

 

$

 -

 

$

452 

 

$

 -

Total liabilities

 

$

452 

 

$

 -

 

$

452 

 

$

 -

31

 


 

HAMPTON ROADS BANKSHARES, INC.

PART I.  FINANCIAL INFORMATION

Item 1.  Notes to Consolidated Financial Statements

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair Value Measurements at Reporting Date Using

Assets

 

December 31, 2012

 

Level 1

 

Level 2

 

Level 3

Investment securities available for sale

 

 

 

 

 

 

 

 

 

 

 

 

U.S. agency securities

 

$

32,988 

 

$

 -

 

$

32,988 

 

$

 -

State and municipal securities

 

 

631 

 

 

 -

 

 

631 

 

 

 -

Corporate bonds

 

 

2,953 

 

 

 -

 

 

2,953 

 

 

 -

Mortgage-backed securities - agency

 

 

207,194 

 

 

 -

 

 

207,194 

 

 

 -

Mortgage-backed securities -

 

 

 

 

 

 

 

 

 

 

 

 

non-agency

 

 

30,650 

 

 

 -

 

 

30,650 

 

 

 -

Asset-backed securities

 

 

1,502 

 

 

 -

 

 

1,502 

 

 

 -

Equity securities

 

 

537 

 

 

248 

 

 

 -

 

 

289 

Total investment securities

 

 

 

 

 

 

 

 

 

 

 

 

available for sale

 

 

276,455 

 

 

248 

 

 

275,918 

 

 

289 

Derivative loan commitments

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate lock commitments

 

 

1,571 

 

 

 -

 

 

 -

 

 

1,571 

Mandatory delivery commitments

 

 

469 

 

 

 -

 

 

 -

 

 

469 

Total derivative loan commitments

 

 

2,040 

 

 

 -

 

 

 -

 

 

2,040 

Total

 

$

278,495 

 

$

248 

 

$

275,918 

 

$

2,329 

 

The following table shows a rollforward of recurring fair value measurements categorized with Level 3 of the fair value hierarchy (in thousands) for the nine months ended September 30, 2013 and 2012.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Activity in Level 3

 

Activity in Level 3

 

 

Fair Value Measurements

 

Fair Value Measurements

 

 

Nine Months Ended September 30, 2013

 

Nine Months Ended September 30, 2012

 

 

Investment

 

 

 

Investment

 

 

 

 

Securities

 

Derivative Loan

 

Securities

 

Derivative Loan

Description

 

Available for Sale

 

Commitments

 

Available for Sale

 

Commitments

Beginning of period balance

 

$

289 

 

$

2,040 

 

$

1,110 

 

$

549 

Unrealized gains included in:

 

 

 

 

 

 

 

 

 

 

 

 

Earnings

 

 

 -

 

 

 -

 

 

220 

 

 

 -

Other comprehensive income

 

 

 -

 

 

 -

 

 

 -

 

 

 -

Purchases

 

 

 -

 

 

 -

 

 

 -

 

 

 -

Sales

 

 

 -

 

 

 -

 

 

(1,096)

 

 

 -

Issuances

 

 

 -

 

 

 -

 

 

 -

 

 

1,128 

Settlements

 

 

 -

 

 

(1,032)

 

 

 -

 

 

 -

Transfers in

 

 

 -

 

 

 -

 

 

 -

 

 

 -

Transfers out

 

 

 -

 

 

 -

 

 

 -

 

 

 -

End of period balance

 

$

289 

 

$

1,008 

 

$

234 

 

$

1,677 

 

 

The Company’s policy is to recognize transfers between levels of the fair value hierarchy on the date of the event or change in circumstances that caused the transfer. 

 

32

 


 

HAMPTON ROADS BANKSHARES, INC.

PART I.  FINANCIAL INFORMATION

Item 1.  Notes to Consolidated Financial Statements

 

The following describes the valuation techniques used to measure fair value for our assets and liabilities that are measured on a recurring basis.

 

Investment Securities Available for Sale.  Where quoted prices are available in an active market, securities are classified within Level 1 of the valuation hierarchy.  Level 1 securities would include highly liquid government bonds, mortgage products, and exchange traded equities.  If quoted market prices are not available, then fair values are estimated by using pricing models or quoted prices of securities with similar characteristics.  Level 2 securities would include U.S. agency securities, mortgage-backed securities, obligations of states and political subdivisions, and certain corporate, asset-backed, and other securities valued using third party quoted prices in markets that are not active.  In certain cases where there is limited activity or less transparency around inputs to the valuation, securities are classified within Level 3 of the valuation hierarchy. 

 

Derivative Loan CommitmentsThe Company originates mortgage loans for sale into the secondary market on both a best efforts and a mandatory delivery basis.  Under the best efforts basis, the Company enters into commitments to originate mortgage loans whereby the interest rate is fixed prior to funding.  These commitments, in which the Company intends to sell in the secondary market, are considered freestanding derivatives.  Under the mandatory delivery basis, mortgage loans held for sale and commitments to borrowers to originate loans at agreed upon interest rates expose the Company to changes in market rates and conditions subsequent to the interest rate lock commitment.  The fair values of interest rate lock and mandatory delivery commitments, which are related to mortgage loan commitments and are categorized as Level 3, are based on quoted prices adjusted for commitments that the Company does not expect to fund.

Interest Rate Swaps.  The Company uses observable inputs to determine fair value of its interest rate swaps.  The valuation of these instruments is determined using widely accepted valuation techniques that are based on discounted cash flow analysis using the expected cash flows of each derivative over the contractual terms of the derivatives, including the period to maturity and market-based interest rate curves.  For the period ended September 30, 2013, the fair values of the interest rate swaps were determined using a market standard methodology of netting the discounted future fixed cash receipts and the discounted expected variable cash payments.  The variable cash payments were based on an expectation of future interest rates (forward curves) derived from observable market interest rate curves.  Accordingly, the Company categorizes these financial instruments within Level 2 of the fair value hierarchy.

Nonrecurring Basis

 

Certain assets, specifically collateral dependent impaired loans and other real estate owned and repossessed assets, are measured at fair value on a nonrecurring basis; that is, the instruments are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances (for example, when there is evidence of impairment).    The adjustments are based on appraisals of underlying collateral or other observable market prices when current appraisals or observable market prices are available.  Where we do not have a current appraisal, an existing appraisal or other valuation would be utilized after discounting it to reflect current market conditions, and, as such, may include significant management assumptions and input with respect to the determination of fair value.  The average age of appraisals of collateral dependent impaired loans was 0.78 years as of September 30, 2013.  Management periodically reviews the discounts in the matrix as compared to valuations from updated appraisals and modifies the discounts accordingly should updated appraisals reflect valuations significantly different than those derived utilizing the matrix.  To date, management believes the appraisal discount matrix has resulted in appropriate adjustments to existing appraisals thereby providing management with reasonable valuations for the collateral underlying the loan portfolio, however, while appraisals are indicators of fair value, the amount realized upon sale of these assets could be significantly different. 

 

33

 


 

HAMPTON ROADS BANKSHARES, INC.

PART I.  FINANCIAL INFORMATION

Item 1.  Notes to Consolidated Financial Statements

 

The following tables reflect the fair value (in thousands) of assets measured and recognized at fair value on a nonrecurring basis in the consolidated balance sheets at September 30, 2013 and December 31, 2012

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair Value Measurements

 

 

Assets Measured

 

at September 30, 2013 Using

Description

 

at Fair Value

 

Level 1

 

Level 2

 

Level 3

Impaired loans

 

$

32,044 

 

$

 -

 

$

 -

 

$

32,044 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other real estate owned and repossessed

 

 

39,196 

 

 

 -

 

 

 -

 

 

39,196 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair Value Measurements

 

 

Assets Measured

 

at December 31, 2012 Using

Description

 

at Fair Value

 

Level 1

 

Level 2

 

Level 3

Impaired loans

 

$

95,426 

 

$

 -

 

$

 -

 

$

95,426 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other real estate owned and repossessed

 

 

32,215 

 

 

 -

 

 

 -

 

 

32,215 

 

 

The following describes the valuation techniques used to measure fair value for our nonfinancial assets classified as nonrecurring.

 

Impaired Loans.  Impaired loans are measured at the present value of their expected future cash flows by discounting those cash flows at the loan’s effective interest rate or at the loan’s observable market price.  The difference between this discounted amount and the loan balance is recorded as an allowance for loan losses.  For collateral dependent impaired loans, impairment is measured based upon the fair value of the underlying collateral.  The Company reduces the carrying value of the loan to the estimated fair value of the collateral less estimated selling costs through a charge-off to the allowance for loan losses.  The majority of the Company’s impaired loans are considered collateral dependent.

 

Other Real Estate Owned and Repossessed Assets.  The adjustments to other real estate owned and repossessed assets are based primarily on appraisals of the real estate or other observable market prices.  Our policy is that fair values for these assets are based on current appraisals.  In most cases, we maintain current appraisals for these items.  Where we do not have a current appraisal, an existing appraisal would be utilized after discounting it to reflect changes in market conditions from the date of the existing appraisal, and, as such, may include significant management assumptions and input with respect to the determination of fair value. 

 

34

 


 

HAMPTON ROADS BANKSHARES, INC.

PART I.  FINANCIAL INFORMATION

Item 1.  Notes to Consolidated Financial Statements

 

Significant Unobservable Inputs

 

The following table presents the ranges (in thousands) of significant unobservable inputs used to value the Company’s material level 3 financial instruments; these ranges represent the significant unobservable inputs that were used in the valuation of each type of financial instrument. 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Range of

Level 3

 

 

Fair Value

 

Significant Unobservable Inputs

 

Significant Unobservable

Financial Instruments

 

 

at September 30, 2013

 

by Valuation Technique

 

Inputs as of September 30, 2013

Derivative loan commitments

 

$

1,008 

 

Pull through rate

 

75%

 

 

 

 

 

Percentage of loans that will

 

 

 

 

 

 

 

ultimately close

 

 

 

 

 

 

 

 

 

 

Impaired loans

 

 

32,044 

 

Appraised value

 

0 - 23%

 

 

 

 

 

Discounts to reflect current market

 

 

 

 

 

 

 

conditions, ultimate collectability,

 

 

 

 

 

 

 

and estimated costs to sell

 

 

 

 

 

 

 

 

 

 

Other real estate owned

 

 

39,196 

 

Appraised value

 

0 - 54%

 

 

 

 

 

Discounts to reflect current market

 

 

 

 

 

 

 

conditions, abbreviated holding

 

 

 

 

 

 

 

period, and estimated costs to sell

 

 

 

Other Fair Value Measurements

 

Additionally, accounting standards require the disclosure of the estimated fair value of financial instruments that are not recorded at fair value.  For the financial instruments that the Company does not record at fair value, estimates of fair value are made at a point in time based on relevant market data and information about the financial instrument.  No readily available market exists for a significant portion of the Company’s financial instruments.  Fair value estimates for these instruments are based on current economic conditions, interest rate risk characteristics, and other factors.  Many of these estimates involve uncertainties and matters of significant judgment and cannot be determined with precision.  Therefore, the calculated fair value estimates in many instances cannot be substantiated by comparison to independent markets and, in many cases, may not be realizable in a current sale of the instrument.  In addition, changes in assumptions could significantly affect these fair value estimates.  The following methods and assumptions were used by the Company in estimating fair value for its financial instruments.

 

(a)

Cash and Cash Equivalents

Cash and cash equivalents include cash and due from banks, interest-bearing deposits in other banks, and overnight funds sold and due from FRB.  The carrying amount approximates fair value.

 

(b)

Investment Securities Available for Sale

Fair values are based on published market prices where available.  If quoted market prices are not available, then fair values are estimated by using pricing models, quoted prices of securities with similar characteristics, or discounted cash flow.  Investment securities available for sale are carried at their aggregate fair value.

 

(c)

Restricted Equity Securities

These investments are carried at cost.  The carrying amount approximates fair value.

 

(d)

Loans Held for Sale

The carrying value of loans held for sale is a reasonable estimate of fair value since loans held for sale are expected to be sold within a short period.

35

 


 

HAMPTON ROADS BANKSHARES, INC.

PART I.  FINANCIAL INFORMATION

Item 1.  Notes to Consolidated Financial Statements

 

(e)

Loans

To determine the fair values of loans other than those listed as nonaccrual, we use discounted cash flow analyses.  In these analyses, we use discount rates that are similar to the interest rates and terms currently being offered to borrowers of similar terms and credit quality.  For nonaccrual loans, we use a variety of techniques to measure fair value, such as using the current appraised value of the collateral, discounting the contractual cash flows, and analyzing market data that we may adjust due to the specific characteristics of the loan or collateral. 

 

(f)

Interest Receivable and Interest Payable

The carrying amount approximates fair value.

 

(g)

Bank-Owned Life Insurance

The carrying amount approximates fair value.

 

(h)

Deposits

The fair values disclosed for transaction deposits such as demand and savings accounts are equal to the amount payable on demand at the reporting date or their carrying values.  The carrying amounts of variable-rate, fixed-term money market accounts and certificates of deposit approximate their fair values at the reporting date.  Fair values for fixed-rate certificates of deposit are estimated using a discounted cash flow calculation that applies market interest rates on comparable instruments to a schedule of aggregated expected monthly maturities on time deposits.

 

(i)

Borrowings

The fair value of borrowings is estimated using discounted cash flow analyses based on the rates currently offered for borrowings of similar remaining maturities and collateral requirements.  These include FHLB borrowings and other borrowings.

 

(j)

Commitments to Extend Credit and Standby Letters of Credit

The only amounts recorded for commitments to extend credit and standby letters of credit are the deferred fees arising from these unrecognized financial instruments.  These deferred fees are not deemed significant at September 30, 2013 and December 31, 2012, and as such, the related fair values have not been estimated.

 

The carrying amounts and fair values (in thousands) of those financial instruments that are not recorded at fair value at September 30, 2013 and December 31, 2012 were as follows.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2013

 

 

 

 

 

 

 

 

Fair Value Measurements

 

 

Carrying

 

 

 

 

at Reporting Date Using

 

 

Amount

 

Fair Value

 

Level 1

 

Level 2

 

Level 3

Financial Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  Loans, net (1)

 

$

1,333,027 

 

$

1,356,329 

 

$

 -

 

$

 -

 

$

1,356,329 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Financial Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  Deposits

 

 

1,559,399 

 

 

1,556,974 

 

 

 -

 

 

1,556,974 

 

 

 -

  FHLB borrowings

 

 

194,399 

 

 

194,287 

 

 

 -

 

 

194,287 

 

 

 -

  Other borrowings

 

 

28,882 

 

 

28,882 

 

 

 -

 

 

28,882 

 

 

 -

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2012

 

 

 

 

 

 

 

 

Fair Value Measurements

 

 

Carrying

 

 

 

 

at Reporting Date Using

 

 

Amount

 

Fair Value

 

Level 1

 

Level 2

 

Level 3

Financial Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans, net (1)

 

$

1,383,893 

 

$

1,411,831 

 

$

 -

 

$

 -

 

$

1,411,831 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Financial Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposits

 

 

1,617,774 

 

 

1,650,145 

 

 

 -

 

 

1,650,145 

 

 

 -

FHLB borrowings

 

 

195,060 

 

 

195,108 

 

 

 -

 

 

195,108 

 

 

 -

Other borrowings

 

 

41,002 

 

 

41,472 

 

 

 -

 

 

41,472 

 

 

 -

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1) Carrying amount and fair value includes impaired loans.  Carrying amount is net of the allowance for loan losses.

36

 


 

HAMPTON ROADS BANKSHARES, INC.

PART I.  FINANCIAL INFORMATION

Item 1.  Notes to Consolidated Financial Statements

 

 

 

 

 

 

NOTE N – CONTINGENCIES

 

In the ordinary course of operations, the Company may become a party to legal proceedings.  Based upon information currently available, management believes that such legal proceedings, in the aggregate, will not have a material adverse effect on our business, financial condition, results of operations, or cash flows.

 

 

 

 

37

 


 

 

HAMPTON ROADS BANKSHARES, INC.

PART I.  FINANCIAL INFORMATION

Item 2.  Management’s Discussion and Analysis of Results of Operations and Financial Condition

 

Forward-Looking Statements

 

This Form 10-Q contains “forward-looking statements” within the meaning of the U.S. Private Securities Litigation Reform Act of 1995.  When or if used in this quarterly report or any Securities and Exchange Commission (“SEC”) filings, other public or shareholder communications, or in oral statements made with the approval of an authorized executive officer, the words or phrases “anticipate,” “would be,” “will allow,” “intends to,” “will likely result,” “are expected to,” “will continue,” “is anticipated,” “is estimated,” “is projected,” or similar expressions are intended to identify “forward-looking statements.”

 

For a discussion of the risks, uncertainties, and assumptions that could affect our future events, developments, or results, you should carefully review the risk factors summarized below and the more detailed discussion in the “Risk Factors” section of this report.  Our risks include, without limitation, the following:

 

·

Our success is largely dependent on retaining key management team members;

·

We are not paying dividends on our Common Stock and currently are prevented from doing so.  The failure to resume paying dividends on our Common Stock may adversely affect the market price of our Common Stock;

·

We incurred significant losses in 2010, 2011, and 2012.  While we returned to profitability in the first nine months of 2013, we can make no assurances that we will continue to be profitable throughout the remainder of the year.  An inability to improve our profitability could adversely affect our operations and our capital levels;

·

Our mortgage banking earnings are cyclical and sensitive to the level of interest rates, changes in economic conditions, decreased economic activity, and slowdowns in the housing market, any of which could adversely impact our results of operations;

·

The formal investigation by the SEC may result in penalties, sanctions, or a restatement of our previously issued financial statements;

·

Economic, market, or operational developments may negatively impact our ability to maintain required capital levels or otherwise negatively impact our financial condition;

·

Virginia law and the provisions of our Articles of Incorporation and Bylaws could deter or prevent takeover attempts by a potential purchaser of our Common Stock that would be willing to pay you a premium for your shares of our Common Stock;

·

Our ability to maintain adequate sources of funding and liquidity may be negatively impacted by the economic environment which may, among other things, impact our ability to resume the payment of dividends or satisfy our obligations;

·

Our future success is dependent on our ability to compete effectively in the highly competitive banking industry; 

·

Sales, or the perception that sales could occur, of large amounts of our Common Stock by our institutional investors may affect our stock price;

·

The concentration of our loan portfolio continues to be in real estate – commercial mortgage, equity line lending, and construction, which may expose us to greater risk of loss;

·

If the value of real estate in the markets we serve were to decline materially, the value of our other real estate owned could decline or a significant portion of our loan portfolio could become under-collateralized, which could have a material adverse effect on our loan losses, results of operations, and financial condition;

·

We have had large numbers of problem loans.  Although problem loans have declined significantly, there is no assurance that they will continue to do so;

·

The determination of the appropriate balance of our allowance for loan losses is merely an estimate of the inherent risk of loss in our existing loan portfolio and may prove to be incorrect.  If such estimate is proven to be materially incorrect and we are required to increase our allowance for loan losses, our results of operations, financial condition, and the market price of our Common Stock could be materially adversely affected;

·

Our profitability will be jeopardized if we are unable to successfully manage interest rate risk;

·

We may face increasing deposit-pricing pressures, which may, among other things, reduce our profitability;

·

We face a variety of threats from technology-based frauds and scams;

·

Our operations and customers might be affected by the occurrence of a natural disaster or other catastrophic event in our market area;

38


 

HAMPTON ROADS BANKSHARES, INC.

PART I.  FINANCIAL INFORMATION

Item 2.  Management’s Discussion and Analysis of Results of Operations and Financial Condition

 

·

The Company and BOHR have entered into a Written Agreement with the FRB and the Bureau of Financial Institutions that subjects the Company and BOHR to significant restrictions and requires us to designate a significant amount of our resources to complying with the agreement, and it may have a material adverse effect on our operations and the value of our Common Stock;

·

The Company received a grand jury subpoena from the United States Department of Justice, Criminal Division.  Although the Company has been advised that it is not a target or a subject of the investigation at this time and we do not believe we will become a target or a subject of the investigation, there can be no assurances as to the timing or eventual outcome of the related investigation;

·

Our business, financial condition, and results of operations are highly regulated and could be adversely affected by new or changed regulations and by the manner in which such regulations are applied by regulatory authorities;

·

Banking regulators have broad enforcement power, but regulations are meant to protect depositors and not investors; 

·

The fiscal, monetary, and regulatory policies of the Federal Government and its agencies could have a material adverse effect on our results of operations;

·

Government legislation and regulation may adversely affect our business, financial condition, and results of operations; and

·

The soundness of other financial institutions could adversely affect us.

 

Our forward-looking statements could be incorrect in light of these risks, uncertainties, and assumptions.  The future events, developments, or results described in this report could turn out to be materially different.  We have no obligation to publicly update or revise our forward-looking statements after the date of this report and you should not expect us to do so.

 

Critical Accounting Policies

 

GAAP is complex and requires management to apply significant judgment to various accounting, reporting, and disclosure matters. Management must use assumptions, judgments, and estimates when applying these principles where precise measurements are not possible or practical.  These policies are critical because they are highly dependent upon subjective or complex assumptions, judgments, and estimates.  Our assumptions, judgments, and estimates may be incorrect and changes in such assumptions, judgments, and estimates may have a significant impact on the consolidated financial statements and the accompanying notes. Actual results, in fact, could differ materially from those estimates.  We consider our policies on allowance for loan losses, the valuation of deferred taxes, the valuation of other real estate owned, and the estimated fair value of financial instruments to be critical accounting policies.  Refer to our 2012 Form 10-K for further discussion of these policies. 

 

Material Trends and Uncertainties

 

Currently, the U.S. economy is slowly recovering from one of its longest and most severe economic recessions in recent history.  Continued improvements in general economic conditions and credit performance of the Company’s loan portfolio coupled with cost savings initiatives and performance from our mortgage subsidiary resulted in $3.5 million in net income attributable to Hampton Roads Bankshares, Inc. for the nine months ended September 30, 2013.  While the pace of economic growth remains slow and regulatory and legislative friction continues to hamper the recovery, we expect to be profitable for the full year 2013, although such profitability is not assured. 

 

During 2012 and the first nine months of 2013, problem loans were reduced significantly from previous levels.  As a result of this improvement and continued declines in the loan portfolio due to pay-downs and charge-offs, our provision for loan losses during the nine months ended September 30, 2013 was $1.0 million compared to $14.1 million in the same period in 2012.  The increasing moderation of defaults from better asset quality and stabilized and improved collateral values has resulted in fewer impaired loans and a reduction in specific impairments.  Higher historical charge-offs taken in prior years are now rolling off of the weighted loss calculations we use to determine the reserves that are based, in part, on these historical loss trends.  We expect that the provision for loan losses will continue to be favorably impacted by these trends in addition to overall improvement in asset quality.  Additionally, during the first nine months of 2013, losses on other real estate owned and repossessed assets decreased $12.3 million compared to the first nine months of 2012.  During the third quarter, the performance of our mortgage banking subsidiary was negatively impacted as interest rates, which have been at historic lows for several years resulting in a high volume of mortgage loan refinancing activity, rose.  This negative impact may continue as interest rates rise to

39

 


 

HAMPTON ROADS BANKSHARES, INC.

PART I.  FINANCIAL INFORMATION

Item 2.  Management’s Discussion and Analysis of Results of Operations and Financial Condition

 

more typical levels.  Additionally, during the third quarter, income from bank-owned life insurance increased $1.8 million due to a life insurance benefit from a death of a former executive.

 

For further discussion of the material trends and uncertainties that may affect our results and financial condition, refer to the risk factors contained in this report.

 

Overview

 

Throughout the first nine months of 2013,  economic conditions in the markets in which our borrowers operate continued their slow recovery and the levels of loan delinquencies and rates of default continued to improve.  The Company reported net income for the nine month period ended September 30, 2013 primarily resulting from improved general economic conditions and credit performance of the Company’s loan portfolio coupled with cost savings initiatives and performance from our mortgage subsidiary, partially offset by an increase in salaries and employee benefit expense and an impairment of premises and equipment related to branch closures during the first quarter of 2013As of September 30, 2013, the Company exceeded the regulatory capital minimums and BOHR and Shore were considered “well capitalized” under the risk-based capital standards.

 

The following is a summary of our financial condition as of September 30, 2013 and our financial performance for the three and nine months then ended.

 

·

Income from bank-owned life insurance increased $1.8 million during the third quarter of 2013 to $2.2 million and $3.0 million for the first three and nine months of 2013 compared to $399 thousand and $1.3 million for the comparative period 2012.  The increase was due to a life insurance benefit from a death of a former executive.

 

·

Assets were $2.0 billion at September 30, 2013.  Total assets decreased by $68.7 million or 3% from $2.1 billion at December 31, 2012.  The decrease in assets was primarily associated with a $54.4 million or 65% decrease in loans held for sale and a $61.5 million or 4% decrease in gross loans,  partially offset by a $25.6 million or 31% increase in overnight funds sold and due from FRB and a $19.1 million or 7% increase in investment securities available for sale.

 

·

Investment securities available for sale increased $19.1 million to $295.6 million during the first nine months of 2013 from $276.5 million at December 31, 2012.  The increase primarily resulted from the addition of $34.5 million of asset-backed securities to our portfolio, partially offset by the sales and settlements of our mortgage-backed securities and the decrease in net unrealized gains in our portfolio.  During the nine months ended September 30, 2013, the Company sold securities generating a gain of $763 thousand.  Those dispositions, in conjunction with a general increase in interest rates during the quarter, contributed to a decrease in the net unrealized gains in our portfolio.

 

·

Gross loans decreased by $61.5 million or 4% during the nine months ended September 30, 2013, primarily through reductions in non-performing loans.  The majority of the recent loan demand within our markets has come from the real estate - commercial mortgage category.  

 

·

Impaired loans decreased by $70.9 million during the nine months ended September 30, 2013 from $141.0 million at December 31, 2012.  The majority of the decrease is due to charge-offs and resolutions, coupled with payoffs received in the general course of business in the overall portfolio, including an $18.8 million decrease in impaired commercial and industrial loans, a $20.7 million decrease in impaired construction loans, a $18.8 million decrease in impaired real estate-commercial mortgage loans, and a $12.5 million decrease in impaired real estate-residential mortgage loans.

 

·

Allowance for loan losses at September 30, 2013 decreased 22% to $37.7 million from $48.4 million at December 31, 2012 as net charge-offs exceeded additional provisions for loan losses.  Both the absolute and relative levels of non-performing loans, particularly newly identified problem credits, decreased during the nine months ended September 30, 2013.    

 

40

 


 

HAMPTON ROADS BANKSHARES, INC.

PART I.  FINANCIAL INFORMATION

Item 2.  Management’s Discussion and Analysis of Results of Operations and Financial Condition

 

·

Deposits decreased $58.4 million or 4%  from December 31, 2012 as a result of decreases of $56.8 million in time deposits under $100 thousand and $72.2 million in time deposits over $100 thousand, partially offset by increases of $14.5 million in noninterest-bearing demand deposits, $49.8 million in interest-bearing demand deposits, and $6.4 million in interest-bearing savings depositsDecline in time deposits is a result of the Company’s efforts to improve both the average cost and mix of funds.  This decline is not associated with the Company’s limitation for accepting new brokered deposits as required by the Written Agreement.

 

·

Net income attributable to Hampton Roads Bankshares, Inc. for the three and nine months ended September 30, 2013 was $2.8 million and $3.5 million, respectively, as compared with net loss attributable to Hampton Roads Bankshares, Inc. of $5.9 million and $19.5 million for the three and nine months, respectively, ended September 30, 2012.  Net income for the nine months ended September 30, 2013 was primarily attributable to improved general economic conditions and credit performance of the Company’s loan portfolio coupled with cost savings initiatives and performance from our mortgage subsidiary, partially offset by an impairment of premises and equipment related to branch closures.     

 

·

Net interest income decreased $37 thousand and $910 thousand to $15.8 million and $47.8 million for the three and nine months, respectively, ended September 30, 2013 as compared to the same periods in 2012.  The decrease was due primarily to the decreases in average interest-earning assets and a reduction in cost of funds.  Net interest margin increased 7-basis and 6-basis points to 3.42% and 3.44% for the three and nine month periods, respectively, ended September 30, 2013 from 3.35% and 3.38%  for the same periods in September 30, 2012.

 

·

We had $1.0 million in provision for loan losses for the nine months ended September 30, 2013 compared to $14.1 million for the same period in 2012.  The increasing moderation of defaults from better asset quality and stabilized and improved collateral values has resulted in fewer impaired loans and a reduction in specific impairments.  Additionally, larger historical charge-offs taken in prior quarters are now rolling off of the weighted loss calculations we use to determine the reserves that are based on these historical loss trends.

 

·

Noninterest income for the three and nine months ended September 30, 2013 was $7.9 million and $20.9 million, respectively, a 259% and 186% increase over the comparative periods in 2012.  This was largely due to a decline in losses on other real estate owned and repossessed assets.  Mortgage revenue decreased during the third quarter of 2013 compared to the same period in 2012 due to declines in both origination volume and margin.  For the nine months ended September 30, 2013, mortgage revenue remained comparable to the corresponding period in 2012.  

 

·

Noninterest expense was $20.8 million and $62.4 million for the three and nine months ended September 30, 2013, which was an increase of $396 thousand and $3.3 million over the comparable periods for 2012, due to higher expenses related to salary and employee benefits and occupancy, partially offset by a decrease in problem loan and repossessed asset costs.

 

·

Our effective tax rate was 2.95% for the nine months ended September 30, 2013 compared to 0% for the comparable period in 2012.  These taxes related to state income taxes owed.  These rates differ from the statutory rate due primarily to the valuation allowance against the Company’s deferred tax assets.  Refer to our Form 10-K for additional information relating to deferred tax assets. 

 

 

41

 


 

HAMPTON ROADS BANKSHARES, INC.

PART I.  FINANCIAL INFORMATION

Item 2.  Management’s Discussion and Analysis of Results of Operations and Financial Condition

 

Analysis of Results of Operations

 

Net Interest Income and Net Interest MarginNet interest income, a major component of our earnings, is the difference between the income generated by interest-earning assets and the cost of interest-bearing liabilities.  Net interest margin, which is calculated by expressing net interest income as a percentage of average interest-earning assets, is an indicator of effectiveness in generating income from earning assets.  Net interest income and net interest margin may be significantly impacted by the market interest rates (rate); the mix, duration, and volume of interest-earning assets and interest-bearing liabilities (volume); changes in the yields earned and rates paid; and the level of noninterest-bearing liabilities available to support interest-earning assets.  Our management team strives to maximize net interest income through prudent balance sheet administration and by maintaining appropriate risk levels as determined by our Asset / Liability Committee (“ALCO”) and the Board of Directors. 

 

Net interest income for the three and nine months ended September 30, 2013 was $15.8 million and $47.8 million, a decrease of $37 thousand and $910 thousand, respectively, for the same periods ended September 30, 2012.  The decrease in net interest income for the nine months ended September 30, 2013 was due to decreases in average interest-earning assets and the yields received on these assets, partially offset by an increase in net interest margin, which benefited from a lower cost of funding due to re-pricing of deposits and a change in the composition of interest-bearing liabilitiesNet interest margin, as calculated using our new method that now includes the impact of nonaccrual loans, increased to 3.42%  and 3.44% for the three and nine months ended September 30, 2013 from 3.35% and 3.38% at September 30, 2012

 

Interest-earning assets consist predominantly of loans, investment securities, and overnight funds sold and due from FRB.  Interest income on loans, including fees, decreased $3.5 million to $52.5 million for the nine months ended September 30, 2013 compared to the same period during 2012.  This decrease was a result of a $39.6 million decrease in average loan balance as well as the 18-basis point decrease in average yield during the nine months ended September 30, 2013 compared to the same time period during 2012.  During the three months ended September 30, 2013, interest income on loans, including fees decreased $782 thousand to $17.1 million compared to the same period during 2012.  Interest income on investment securities decreased $507 thousand to $5.5 million for the nine months ended September 30, 2013 compared to the same period during 2012.  This decrease was due to a $18.4 million decrease in average investment securities as well as a 7-basis point decrease in average yield during the nine months ended September 30, 2013 compared to the same time period during 2012.  Interest income on investment securities decreased $155 thousand to $1.8 million for the three months ended September 30, 2013 compared to the same period during 2012.  Interest income on overnight funds sold and due from FRB increased $27 thousand and $14 thousand to $70 thousand and $175 thousand for the three and nine months, respectively, ended September 30, 2013 compared to the same periods during 2012

 

Interest-bearing liabilities consist of deposit accounts and borrowings.  Interest expense on deposits decreased $703 thousand and $2.7 million to $2.2 million and $7.2 million for the three and nine months, respectively, ended September 30, 2013 compared to the same periods during 2012.  This decrease resulted from a  $156.3 million decrease in average interest-bearing deposits and a 17-basis point decrease in the average interest rate paid on interest-bearing deposits for the nine months ended September 30, 2013 compared to the nine months ended September 30, 2012.  A reduction in the average rate paid on time deposits to 1.06% for the first nine months of 2013 from 1.25% for the first nine months of 2012 contributed significantly toward the decrease in overall deposit rates.  Our average rate on savings deposits decreased to 0.05% and 0.06% during the three and nine months ended September 30, 2013 from 0.12% and 0.13% during the three and nine months ended September 30, 2012.  Interest expense on borrowings, which consisted of FHLB borrowings and other borrowings, decreased $169 thousand and $410 thousand to $1.0 million and $3.1 million for the three and nine months, respectively, ended September 30, 2013 compared to the same period during 2012

 

42

 


 

HAMPTON ROADS BANKSHARES, INC.

PART I.  FINANCIAL INFORMATION

Item 2.  Management’s Discussion and Analysis of Results of Operations and Financial Condition

 

The table (in thousands, except percentages) below expresses the average interest-earning assets and average interest-bearing liabilities, the average yields earned on such assets and rates paid on such liabilities, the net interest margin, and the variance in interest income and expense caused by differences in average balances and rates for the three and nine months ended September 30, 2013 and 2012

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

Three Months Ended

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2013

 

 

 

September 30, 2012

 

 

 

2013 Compared to 2012

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest

 

 

 

 

 

 

 

 

 

 

 

 

Interest

 

 

Average

 

 

 

 

 

 

Interest

 

 

Average

 

 

 

Income/

 

 

Variance

 

 

 

Average

 

 

Income/

 

 

Yield/

 

 

 

Average

 

 

Income/

 

 

Yield/

 

 

 

Expense

 

 

Attributable to

 

 

 

Balance

 

 

Expense

 

 

Rate

 

 

 

Balance

 

 

Expense

 

 

Rate

 

 

 

Variance

 

 

Rate

 

 

Volume

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-earning assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans

 

$

1,415,402 

 

$

17,122 

 

 

4.80 

%

 

$

1,469,121 

 

$

17,904 

 

 

4.83 

%

 

$

(782)

 

$

(127)

 

$

(655)

Investment securities

 

 

299,411 

 

 

1,831 

 

 

2.43 

 

 

 

322,306 

 

 

1,986 

 

 

2.44 

 

 

 

(155)

 

 

(14)

 

 

(141)

Overnight funds sold

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

and due from FRB

 

 

119,747 

 

 

70 

 

 

0.23 

 

 

 

85,853 

 

 

43 

 

 

0.20 

 

 

 

27 

 

 

10 

 

 

17 

Interest-bearing deposits

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

in other banks

 

 

651 

 

 

 

 

0.20 

 

 

 

793 

 

 

 -

 

 

0.23 

 

 

 

 

 

 

 

 -

Total interest-earning assets

 

 

1,835,211 

 

 

19,024 

 

 

4.11 

 

 

 

1,878,073 

 

 

19,933 

 

 

4.21 

 

 

 

(909)

 

 

(130)

 

 

(779)

Noninterest-earning assets

 

 

160,262 

 

 

 

 

 

 

 

 

 

176,307 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total assets

 

$

1,995,473 

 

 

 

 

 

 

 

 

$

2,054,380 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities and Shareholders' Equity:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-bearing liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-bearing demand deposits

 

$

576,064 

 

$

523 

 

 

0.36 

%

 

$

534,234 

 

$

549 

 

 

0.41 

%

 

$

(26)

 

$

(70)

 

$

44 

Savings deposits

 

 

67,397 

 

 

 

 

0.05 

 

 

 

61,056 

 

 

19 

 

 

0.12 

 

 

 

(10)

 

 

(11)

 

 

Time deposits

 

 

655,694 

 

 

1,688 

 

 

1.02 

 

 

 

807,792 

 

 

2,355 

 

 

1.16 

 

 

 

(667)

 

 

(223)

 

 

(444)

Total interest-bearing deposits

 

 

1,299,155 

 

 

2,220 

 

 

0.68 

 

 

 

1,403,082 

 

 

2,923 

 

 

0.83 

 

 

 

(703)

 

 

(304)

 

 

(399)

Borrowings

 

 

226,666 

 

 

1,004 

 

 

1.76 

 

 

 

233,792 

 

 

1,173 

 

 

2.00 

 

 

 

(169)

 

 

(134)

 

 

(35)

Total interest-bearing liabilities

 

 

1,525,821 

 

 

3,224 

 

 

0.84 

 

 

 

1,636,874 

 

 

4,096 

 

 

1.00 

 

 

 

(872)

 

 

(438)

 

 

(434)

Noninterest-bearing liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Demand deposits

 

 

270,626 

 

 

 

 

 

 

 

 

 

248,890 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other liabilities

 

 

17,483 

 

 

 

 

 

 

 

 

 

17,151 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total noninterest-bearing liabilities

 

 

288,109 

 

 

 

 

 

 

 

 

 

266,041 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total liabilities

 

 

1,813,930 

 

 

 

 

 

 

 

 

 

1,902,915 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shareholders' equity

 

 

181,543 

 

 

 

 

 

 

 

 

 

151,465 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

and shareholders' equity

 

$

1,995,473 

 

 

 

 

 

 

 

 

$

2,054,380 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest income

 

 

 

 

$

15,800 

 

 

 

 

 

 

 

 

$

15,837 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest spread

 

 

 

 

 

 

 

 

3.27 

%

 

 

 

 

 

 

 

 

3.21 

%

 

 

 

 

 

 

 

 

 

Net interest margin

 

 

 

 

 

 

 

 

3.42 

%

 

 

 

 

 

 

 

 

3.33 

%

 

 

 

 

 

 

 

 

 

 

43

 


 

HAMPTON ROADS BANKSHARES, INC.

PART I.  FINANCIAL INFORMATION

Item 2.  Management’s Discussion and Analysis of Results of Operations and Financial Condition

 

 

Interest income from loans included fees of $326 thousand for the three months ended September 30, 2013 and $229 thousand for the three months ended September 30, 2012.  Average nonaccrual loans of $53.5 million and $113.5 million were included in average loans for September 30, 2013 and 2012, respectively.  The change in interest due to both rate and volume has been allocated to variance attributable to rate and variance attributable to volume in proportion to the relationship for the absolute amount of change in each.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended

 

 

 

Nine Months Ended

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2013

 

 

 

September 30, 2012

 

 

 

2013 Compared to 2012

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest

 

 

 

 

 

 

 

 

 

 

 

 

Interest

 

 

Average

 

 

 

 

 

 

Interest

 

 

Average

 

 

 

Income/

 

 

Variance

 

 

 

Average

 

 

Income/

 

 

Yield/

 

 

 

Average

 

 

Income/

 

 

Yield/

 

 

 

Expense

 

 

Attributable to

 

 

 

Balance

 

 

Expense

 

 

Rate

 

 

 

Balance

 

 

Expense

 

 

Rate

 

 

 

Variance

 

 

Rate

 

 

Volume

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-earning assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans

 

$

1,455,903 

 

$

52,482 

 

 

4.82 

%

 

$

1,495,460 

 

$

56,026 

 

 

5.00 

%

 

$

(3,544)

 

$

(2,062)

 

$

(1,482)

Investment securities

 

 

300,470 

 

 

5,485 

 

 

2.44 

 

 

 

318,853 

 

 

5,992 

 

 

2.51 

 

 

 

(507)

 

 

(162)

 

 

(345)

Overnight funds sold

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

and due from FRB

 

 

104,295 

 

 

175 

 

 

0.22 

 

 

 

113,574 

 

 

189 

 

 

0.22 

 

 

 

(14)

 

 

 

 

(15)

Interest-bearing deposits

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

in other banks

 

 

808 

 

 

 

 

0.12 

 

 

 

912 

 

 

 

 

0.20 

 

 

 

 -

 

 

 -

 

 

 -

Total interest-earning assets

 

 

1,861,476 

 

 

58,143 

 

 

4.18 

 

 

 

1,928,799 

 

 

62,208 

 

 

4.31 

 

 

 

(4,065)

 

 

(2,223)

 

 

(1,842)

Noninterest-earning assets

 

 

156,490 

 

 

 

 

 

 

 

 

 

171,217 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total assets

 

$

2,017,966 

 

 

 

 

 

 

 

 

$

2,100,016 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities and Shareholders' Equity:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-bearing liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-bearing demand deposits

 

$

564,927 

 

$

1,590 

 

 

0.38 

%

 

$

532,617 

 

$

1,499 

 

 

0.38 

%

 

$

91 

 

$

(1)

 

$

92 

Savings deposits

 

 

65,242 

 

 

28 

 

 

0.06 

 

 

 

61,992 

 

 

61 

 

 

0.13 

 

 

 

(33)

 

 

(36)

 

 

Time deposits

 

 

701,787 

 

 

5,552 

 

 

1.06 

 

 

 

893,632 

 

 

8,355 

 

 

1.25 

 

 

 

(2,803)

 

 

(1,009)

 

 

(1,794)

Total interest-bearing deposits

 

 

1,331,956 

 

 

7,170 

 

 

0.72 

 

 

 

1,488,241 

 

 

9,915 

 

 

0.89 

 

 

 

(2,745)

 

 

(1,046)

 

 

(1,699)

Borrowings

 

 

231,195 

 

 

3,148 

 

 

1.82 

 

 

 

233,925 

 

 

3,558 

 

 

2.03 

 

 

 

(410)

 

 

(369)

 

 

(41)

Total interest-bearing liabilities

 

 

1,563,151 

 

 

10,318 

 

 

0.88 

 

 

 

1,722,166 

 

 

13,473 

 

 

1.05 

 

 

 

(3,155)

 

 

(1,415)

 

 

(1,740)

Noninterest-bearing liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Demand deposits

 

 

252,870 

 

 

 

 

 

 

 

 

 

234,191 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other liabilities

 

 

16,146 

 

 

 

 

 

 

 

 

 

18,514 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total noninterest-bearing liabilities

 

 

269,016 

 

 

 

 

 

 

 

 

 

252,705 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total liabilities

 

 

1,832,167 

 

 

 

 

 

 

 

 

 

1,974,871 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shareholders' equity

 

 

185,799 

 

 

 

 

 

 

 

 

 

125,145 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

and shareholders' equity

 

$

2,017,966 

 

 

 

 

 

 

 

 

$

2,100,016 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest income

 

 

 

 

$

47,825 

 

 

 

 

 

 

 

 

$

48,735 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest spread

 

 

 

 

 

 

 

 

3.30 

%

 

 

 

 

 

 

 

 

3.26 

%

 

 

 

 

 

 

 

 

 

Net interest margin

 

 

 

 

 

 

 

 

3.44 

%

 

 

 

 

 

 

 

 

3.38 

%

 

 

 

 

 

 

 

 

 

 

Interest income from loans included fees of $1.5 million for the nine months ended September 30, 2013 and $666 thousand September 30, 2012.  Average nonaccrual loans of $70.4 million and $127.5 million were included in average loans for September 30, 2013 and 2012, respectively.  The change in interest due to both rate and volume has been allocated to variance attributable to rate and variance attributable to volume in proportion to the relationship for the absolute amount of change in each.

44

 


 

HAMPTON ROADS BANKSHARES, INC.

PART I.  FINANCIAL INFORMATION

Item 2.  Management’s Discussion and Analysis of Results of Operations and Financial Condition

 

Our method for calculating net interest margin has been adjusted.  In prior years, we excluded nonaccrual loans from our calculation.  We now include nonaccrual loans in the calculation, and prior periods amounts have been adjusted retroactively to reflect this method.  A reconciliation of the methods is below for the three and nine months ended September 30, 2013 and 2012.

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

September 30, 2013

 

September 30, 2012

 

September 30, 2013

 

September 30, 2012

Net interest margin,

 

 

 

 

 

 

 

 

excluding nonaccrual loans

 

3.52% 

 

3.56% 

 

3.57% 

 

3.61% 

Impact of excluding

 

 

 

 

 

 

 

 

nonaccrual loans

 

(0.10%)

 

(0.23%)

 

(0.13%)

 

(0.23%)

Net interest margin

 

 

 

 

 

 

 

 

including nonaccrual loans

 

3.42% 

 

3.33% 

 

3.44% 

 

3.38% 

 

 

 

 

 

 

 

 

 

 

Noninterest IncomeFor the three months ended September 30, 2013, total noninterest income was $7.9 million, an increase of $5.7 million as compared to $2.2 million for comparative 2012.  For the nine months ended September 30, 2013, total noninterest income was $20.9 million, an increase of $13.6 million as compared to $7.3 million for the nine months ended September 30, 2012.  Noninterest income comprised 26% and 11% of total revenue for the first nine months of 2013 and 2012, respectively.  We define total revenue as the sum of interest income and non-interest income.  The following table provides a summary of noninterest income (in thousands) for the three and nine months ended September 30, 2013 and 2012

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

September 30,

 

 

September 30,

 

 

 

2013

 

 

2012

 

 

2013

 

 

2012

Mortgage banking revenue

 

$

3,139 

 

$

5,186 

 

$

13,353 

 

$

12,299 

Service charges on deposit accounts

 

 

1,264 

 

 

1,276 

 

 

3,781 

 

 

3,883 

Income from bank-owned life insurance

 

 

2,210 

 

 

399 

 

 

3,017 

 

 

1,261 

Gain (loss) on sale of premises and equipment

 

 

243 

 

 

 -

 

 

123 

 

 

(47)

Impairment of premises and equipment (branch closures)

 

 

 -

 

 

 -

 

 

(2,825)

 

 

 -

Losses on other real estate owned and repossessed assets

 

 

(378)

 

 

(6,445)

 

 

(2,056)

 

 

(14,357)

Gain on sale of investment securities

 

 

 -

 

 

218 

 

 

763 

 

 

479 

Visa check card income

 

 

649 

 

 

624 

 

 

1,907 

 

 

1,782 

Other

 

 

775 

 

 

942 

 

 

2,851 

 

 

2,001 

Total noninterest income

 

$

7,902 

 

$

2,200 

 

$

20,914 

 

$

7,301 

 

Mortgage banking revenue decreased to $3.1 million in the three month period ended September 30, 2013 compared to $5.2 million for comparative period in 2012 due to rising interest rates and a decrease in volume.  During the nine month period ended September 30, 2013, there was an increase in mortgage banking revenue to $13.4 million compared to $12.3 million in the prior year period due to a 23% increase in loans sold for the nine month period ended September 30, 2013 due in part to the low interest rate environment that continued to exist for much of the first nine months of 2013.  Service charges on deposit accounts decreased $12 thousand and $102 thousand for the three and nine months, respectively, ended September 30, 2013 compared to $1.3 million and $3.9 million for the same periods in 2012.  Income from bank-owned life insurance increased $1.8 million during the third quarter of 2013 to $2.2 million and $3.0 million for the first three and nine months of 2013 compared to $399 thousand and $1.3 million for the comparative period 2012.  The increase was due to a life insurance benefit from a death of a former executive.  During the first quarter of 2013, we had impairment of premises and equipment of $2.8 million as a result of consolidating certain branches, which resulted in the write-down of these branches to fair value.  We had no such impairments during the comparative period 2012 or subsequent to the first quarter of 2013.  Losses on other real estate owned and repossessed assets totaled $378 thousand and $2.1 million during the three and nine months, respectively, ended September 30, 2013.  During the same periods in 2012, losses on other real estate owned and repossessed assets were $6.4 million and $14.4 million.  The lower losses in 2013 are due to an overall stabilized or improved real estate market. 

45

 


 

HAMPTON ROADS BANKSHARES, INC.

PART I.  FINANCIAL INFORMATION

Item 2.  Management’s Discussion and Analysis of Results of Operations and Financial Condition

 

 

Noninterest Expense.    Noninterest expense represents our operating and overhead expenses.    Total noninterest expense was $20.8 million for the three months ended September 30, 2013 compared to $20.4 million for the three months ended September 30, 2012 and $62.4 million for the nine months ended September 30, 2013 compared to $59.1 million for the nine months ended September 30, 2012.  The efficiency ratio, calculated by dividing noninterest expense by the sum of net interest income and noninterest income excluding securities gains and impairment of premises and equipment was 88% for the first nine months of 2013 compared to 106% for the first nine months of 2012 and 88% and 114% for the three months ended September 30, 2013 and 2012, respectively.  The following table provides a summary of total noninterest expense (in thousands) for the three and nine months ended September 30, 2013 and 2012.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

September 30,

 

 

September 30,

 

 

 

2013

 

 

2012

 

 

2013

 

 

2012

Salaries and employee benefits

 

$

9,946 

 

$

10,117 

 

$

31,853 

 

$

28,973 

Occupancy

 

 

2,772 

 

 

1,928 

 

 

7,091 

 

 

5,483 

FDIC insurance

 

 

927 

 

 

1,129 

 

 

2,823 

 

 

3,530 

Professional and consultant fees

 

 

1,693 

 

 

1,514 

 

 

4,225 

 

 

4,852 

Data processing

 

 

1,097 

 

 

970 

 

 

3,023 

 

 

2,986 

Problem loan and repossessed asset costs

 

 

723 

 

 

1,245 

 

 

1,733 

 

 

2,761 

Equipment

 

 

386 

 

 

667 

 

 

1,341 

 

 

2,101 

Other

 

 

3,246 

 

 

2,824 

 

 

10,326 

 

 

8,386 

Total noninterest expense

 

$

20,790 

 

$

20,394 

 

$

62,415 

 

$

59,072 

 

Salaries and employee benefits expense decreased $171 thousand and increased $2.9 million in the three and nine months, respectively, ended September 30, 2013 to $9.9 million and $31.9 million.  The increase for the nine month period is a direct result of increased commissions associated with mortgage volumes, a cost of living pay adjustment for personnel, and the accrual of incentive compensation and restricted stock unit grants.  Occupancy expense increased $844 thousand and $1.6 million for the first three and nine months, respectively, of 2013 compared to the same period in 2012 due to accelerated amortization of leasehold improvements at a closed branch and the fair value measurement of the Dominion Tower lease in connection with the move of our headquarters from Dominion Tower to its current location.  FDIC insurance was $927 thousand and $2.8 million for the three and nine months, respectively, ended September 30, 2013 as compared with $1.1 million and  $3.5 million for the same periods in 2012.  Professional and consultant fees were $1.7 million and $4.2 million for the three and nine months, respectively, ended September 30, 2013 compared to $1.5 million and $4.9 million for comparative 2012. These fees increased during the three months ended September 30, 2013 primarily due to an increase in consultant expense;  while these fees decreased during the nine month period primarily due to lower legal fees related to loan collection activities.  Problem loan and repossessed asset costs decreased $522 thousand to $723 thousand for the three months ended September 30, 2013 compared to the same period during 2012 and decreased $1.0 million to $1.7 million for the nine months ended September 30, 2013 compared to the same period during 2012.  This decrease is consistent with the improvement in our overall loan quality.  For the three and nine months, respectively, ended September 30, 2013, equipment expense was $386 thousand and $1.3 million compared to $667 thousand and $2.1 million for the same periods in 2012.  These improvements were due to cost cutting initiatives and our smaller branch network.  The increase in other noninterest expense for the three and nine months ended September 30, 2013 was primarily due to stock-based compensation costs for restricted stock unit grants made to directors in the fourth quarter of 2012 and a separate grant that occurred in July of 2013.  The increase was also partially attributable to advertising expense of $301 thousand and $823 thousand for the three and nine months, respectively, ended September 30, 2013 compared to $130 thousand and $400 thousand for the same periods in 2012.  The increase reflects the Company’s efforts to better promote its business services and products.  The remainder of the increase in other noninterest expenses for the year was due to other general operating costs, such as appraisal fees and online banking.

 

46

 


 

HAMPTON ROADS BANKSHARES, INC.

PART I.  FINANCIAL INFORMATION

Item 2.  Management’s Discussion and Analysis of Results of Operations and Financial Condition

 

Income Tax Provision.    The Company had $157 thousand in income tax expense for the first nine months of 2013 and no income tax expense for the same period in 2012.  Management assesses the realizability of the deferred tax asset on a quarterly basis, considering both positive and negative evidence in determining whether it is more likely than not that some portion or all of the net deferred tax asset including its net operating loss carryforward would be realized.  A valuation allowance for the entire net deferred tax asset has been established.  Section 382 limitations related to the Company’s recapitalization during the quarter ended September 30, 2010 add further uncertainty as to the realizability of the deferred tax assets in future periods.

 

Analysis of Financial Condition

 

Cash and Cash EquivalentsCash and cash equivalents includes cash and due from banks, interest-bearing deposits in other banks, and overnight funds sold and due from FRB.  Cash and cash equivalents are used for daily cash management purposes, management of short-term interest rate opportunities, and liquidity.  Cash and cash equivalents as of September 30, 2013 were $126.3 million compared to $101.2 million at December 31, 2012 and consisted mainly of deposits with the FRB.  Because the Company generated significant deposits in prior years and raised additional capital through the issuance of Common Stock, it is in a liquid position.  In the future, the Company expects to continue to utilize its cash on hand and cash equivalents to support loan origination activity. 

 

Securities. Our investment portfolio at September 30, 2013 consisted primarily of available-for-sale U.S. agency, mortgage-backed, and asset-backed securities.  Our available-for-sale securities are reported at fair value and are used primarily for liquidity, pledging, earnings, and asset/liability management purposes and are reviewed quarterly for possible impairment. 

 

Loan Portfolio.  As a holding company of two community banks, we have a primary objective of meeting the business and consumer credit needs within our markets where standards of profitability, client relationships, and credit quality can be met.  Our loan portfolio is comprised of commercial and industrial, construction, real estate-commercial mortgage, real estate-residential mortgage, and installment loans.  Lending decisions are based upon an evaluation of the financial strength and credit history of the borrower and the quality and value of the collateral securing the loan. 

 

Overall our loan trends during the first nine months of 2013 have been influenced by decreased demand for loans in nearly all our loan categories with the exception of real estate – commercial mortgage loans.  Commercial and industrial loans decreased 18% to $218.5 million at September 30, 2013 compared with $267.1 million at December 31, 2012.  Construction loans decreased 17% to $171.7 million at September 30, 2013 as compared to $206.4 million at December 31, 2012, thus reducing the concentration of construction loans to 13% of the total loan portfolio at September 30, 2013.  Real estate - commercial mortgages increased 7% to $569.3 million at September 30, 2013 compared to $530.0 million at December 31, 2012, increasing the concentration of real estate - commercial mortgages to 42% of the total loan portfolio.  Real estate - residential mortgages decreased 4% to $357.0 million at September 30, 2013 as compared with $372.6 million at December 31, 2012.  Installment loans decreased 1% to  $55.8 million at September 30, 2013 as compared with $56.3 million at December 31, 2012

 

In addition to the forementioned weaker demand for credit, the contraction seen in loans stems from the continued resolution of problem loans.  Origination volumes were offset by principal pay-downs and scheduled amortization in the portfolio.  In the future, our continued focus will be on managing the entire loan portfolio through the current challenging economic conditions.  Additionally, our prudent business practices and internal guidelines and underwriting standards will continue to be followed in making lending decisions in order to continue to effectively manage our exposure to loan losses. 

 

Allowance for Loan Losses. The allowance for loan losses decreased in the first nine months of 2013, both in dollars and as a percentage of total loans as credit trends in the loan portfolio showed improvement.  The allowance consists of specific, general, and unallocated components.  The specific component relates to loans that are determined to be impaired and, therefore, are individually evaluated for impairment.  As noted in the table below, specific loan allocations decreased to $11.6 million at September 30, 2013 from $14.8 million at December 31, 2012,  primarily due to the continued resolution of problem loans and a slowing rate of additional loan defaults.  The decrease is commensurate with the significant decrease in impaired loans over the same time period to $70.1 million at September 30, 2013 from $141.0 million at December 31, 2012.  The general or pooled component relates to groups of

47

 


 

HAMPTON ROADS BANKSHARES, INC.

PART I.  FINANCIAL INFORMATION

Item 2.  Management’s Discussion and Analysis of Results of Operations and Financial Condition

 

homogeneous loans not designated for a specific allowance that are collectively evaluated for impairment.  As a result of decreases in the size of the overall loan portfolio and improving trends in charge-offs and credit quality, the pooled component decreased by $6.9 million to $21.0 million at September 30, 2013 from $27.9 million at December 31, 2012.  An unallocated component is maintained to cover uncertainties that could affect management’s estimate of probable losses.  The unallocated portion of the loan loss allowance decreased $640 thousand to $5.1 million at September 30, 2013 from $5.7 million at December 31, 2012 due to a combination of a decrease in the loan portfolio, improved risk-grading accuracy, and improved macroeconomic factors. 

 

The following table provides a breakdown (in thousands, except for percentages) of the allowance for loan losses and other related information at September 30, 2013 and December 31, 2012.

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2013

 

 

 

December 31, 2012

 

Allowance for loan losses:

 

 

 

 

 

 

 

 

Specific component

 

$

11,631 

 

 

$

14,783 

 

Pooled component

 

 

21,011 

 

 

 

27,900 

 

Unallocated component

 

 

5,059 

 

 

 

5,699 

 

Total

 

$

37,701 

 

 

$

48,382 

 

Impaired loans

 

$

70,123 

 

 

$

140,987 

 

Non-impaired loans

 

 

1,300,605 

 

 

 

1,291,288 

 

Total loans

 

$

1,370,728 

 

 

$

1,432,275 

 

 

 

 

 

 

 

 

 

 

Specific component as % of

 

 

 

 

 

 

 

 

impaired loans

 

 

16.59 

%

 

 

10.49 

%

Pooled component as % of

 

 

 

 

 

 

 

 

non-impaired loans

 

 

1.62 

%

 

 

2.16 

%

 

 

 

 

 

 

 

 

 

Allowance as % of loans

 

 

2.75 

%

 

 

3.38 

%

Allowance as % of nonaccrual loans

 

 

79.20 

%

 

 

49.67 

%

 

Notwithstanding these allocations, the entire allowance for loan losses is available to absorb charge-offs in any loan category.  Net charge-offs were $11.7 million for the nine months ended September 30, 2013 as compared with $34.6 million for the nine months ended September 30, 2012.  Net charge-offs in the construction category account for $2.5 million or 21% of these net charge-offs in the first nine months of 2013 and $6.7 million or 19% in the first nine months of 2012.  Construction loans, particularly land acquisition and development, tend to be riskier than other categories, and we have been steadily decreasing our exposure to this type of loan.  Net commercial and industrial charge-offs were $4.0 million for the nine months ended September 30, 2013.  Net charge-offs were $91 thousand for real estate - commercial mortgage, $5.0 million for real estate - residential mortgage, and $133 thousand for installment loans for the nine months ended September 30, 2013.  

 

48

 


 

HAMPTON ROADS BANKSHARES, INC.

PART I.  FINANCIAL INFORMATION

Item 2.  Management’s Discussion and Analysis of Results of Operations and Financial Condition

 

The following ratios are among those used by management in assessing the adequacy of the allowance for loan losses at September 30, 2013 and December 31, 2012.

 

 

 

 

 

 

 

 

September 30, 2013

 

December 31, 2012

Non-performing loans for which full loss has been charged off to total loans

 

1.20%

 

3.90%

 

 

 

 

 

Non-performing loans for which full loss has been charged off to non-performing loans

 

34.58%

 

55.42%

 

 

 

 

 

Charge off rate for non-performing loans for which the full loss has been charged off

 

55.44%

 

50.19%

 

 

 

 

 

Coverage ratio net of non-performing loans for which the full loss has been charged off

 

121.07%

 

111.41%

 

 

 

 

 

Total allowance divided by total loans less non-performing loans for which the full loss has been charged off

 

2.78%

 

3.64%

 

 

 

 

 

Allowance for individually impaired loans divided by impaired loans for which an allowance has been provided

 

42.70%

 

26.29%

 

There was an increase in the coverage ratio net of non-performing loans for which the full loss has been charged off to 121.07% at September 30, 2013 from 111.41% at December 31, 2012 due to the relative decrease in non-performing loans less balances with full loss charged off outpacing the decline of the allowance for loan losses.    

 

Management believes the allowance for loan losses as of September 30, 2013 is adequate to absorb losses inherent in the portfolio and is directionally consistent with the change in the quality of our loan portfolio.  However, the allowance is subject to regulatory examinations and determination as to adequacy, which may take into account such factors as the methodology used to calculate the allowance and the size of the allowance in comparison to peer banks identified by regulatory agencies.  Such agencies may require us to recognize additions to the allowance for loan losses on their judgments about information available at the time of the examinations.

 

Deposits.    Total brokered deposits were $51.3 million or 3% of deposits at September 30, 2013, which was a decrease of $12.1 million from the total brokered deposits of $63.4 million at December 31, 2012While BOHR qualifies as “well capitalized” at September 30, 2013, it may not accept new brokered deposits but may continue to rollover existing brokered deposits according to FRB’s interpretation of the Written Agreement.  Shore is not a party to the Written Agreement, and therefore, not subject to any such restrictions.  Interest-bearing demand deposits included $7.7 million in brokered money market funds at September 30, 2013, which was $1.7 million lower than the $9.4 million balance of brokered money market funds outstanding at December 31, 2012Brokered CDs were $43.6 million at September 30, 2013 compared to $54.0 million at December 31, 2012.

 

The Company continues to focus on core deposit growth as its primary source of funding.  Core deposits typically are non-brokered and consist of noninterest-bearing demand accounts, interest-bearing checking accounts, money market accounts, savings accounts, and time deposits of less than $100 thousand.  Core deposits increased $26.0 million to $1.2 billion and were 77% of total deposits at September 30, 2013 compared to 73% of total deposits at December 31, 2012

 

Borrowings.  We use short-term and long-term borrowings from various sources including the FRB discount window, FHLB, reverse repurchase agreements, and trust preferred securities.  We manage the level of our borrowings to ensure that we have adequate sources of liquidity.  Refer to our 2012 Form 10-K for further discussion about our borrowings.

 

49

 


 

HAMPTON ROADS BANKSHARES, INC.

PART I.  FINANCIAL INFORMATION

Item 2.  Management’s Discussion and Analysis of Results of Operations and Financial Condition

 

Liquidity Management.  Liquidity represents an institution’s ability to meet present and future financial obligations through either the sale or maturity of existing assets or the acquisition of additional funds through liability management.  We continued to maintain a strong liquidity position during the first nine months of 2013.  Cash and cash equivalents were $126.3 million and available-for-sale investment securities were $295.6 million as of September 30, 2013.  At September 30, 2013,  BOHR and Shore (together, the Banks”) had credit lines in the amount of $240.3 million at the FHLB with advances of $194.4 million currently utilized.  At December 31, 2012, the Banks had credit lines in the amount of $223.1 million at the FHLB with advances of $195.1 million utilized.  These lines may be utilized for short- and/or long-term borrowing.  At September 30, 2013 and December 31, 2012, all our FHLB borrowings were long-term.  We also possess additional sources of liquidity through a variety of borrowing arrangements.  The Banks also maintain federal funds lines with two regional banking institutions and through the FRB Discount Window.  These available lines totaled approximately $38.6 million and $40.9 million at September 30, 2013 and December 31, 2012, respectively; these lines were not utilized for borrowing purposes at September 30, 2013 or December 31, 2012

 

Capital Resources.    Total shareholders’ equity decreased $2.2 million to $185.0 million at September 30, 2013 compared to $187.2 million at December 31, 2012, primarily due to a decrease in the net unrealized gains on our available-for-sale securities.    The Company and the Banks are subject to regulatory capital requirements that measure capital relative to risk-weighted assets and off-balance sheet financial instruments.  Failure to meet minimum capital requirements can cause certain mandatory and discretionary actions by regulators that, if undertaken, could have a material effect on our consolidated financial statements.  Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Banks must meet specific capital guidelines that involve quantitative and qualitative measures to ensure capital adequacy.  Tier I capital is comprised of shareholders’ equity and trust preferred securities, net of unrealized gains or losses on available-for-sale securities and intangible assets, while total risk-based capital adds certain debt instruments and qualifying allowances for loan losses.  As of September 30, 2013, our consolidated regulatory capital ratios were Tier 1 Leverage Ratio of 10.57%, Tier 1 Risk-Based Capital Ratio of 13.54%, and Total Risk-Based Capital Ratio of 14.80%.  As of September 30, 2013, the Company exceeded the regulatory capital minimums, and BOHR and Shore were considered “well capitalized” under the risk-based capital standards.  Their Tier 1 Leverage Ratio, Tier 1 Risk-Based Capital Ratio, and Total Risk-Based Capital Ratio were as follows:  9.31%, 11.86%, and 13.12%, respectively, for BOHR and 10.15%, 14.02%, and 15.26%, respectively, for Shore. 

 

Contractual Obligations. We have contractual obligations to make future payments on debt and lease agreements.  Additionally, in the normal course of business, we enter into contractual arrangements whereby we commit to future purchases of products and services from unaffiliated parties.  Our contractual obligations consist of time deposits, borrowings, and operating lease obligations. 

 

In the third quarter of 2013, the Company ceased using its former headquarters in Dominion Tower and finalized plans to sublease a portion of the second floor of the facility.  In conjunction with this event, the Company recognized a $1.0 million contract termination liability, net of estimated sublease rentals, for costs that will continue to be incurred. 

 

Off-Balance Sheet Arrangements.  We are a party to financial instruments with off-balance sheet risk in the normal course of business to meet our customers’ financing needs.  For more information on our off-balance sheet arrangements, refer to Note 13, Financial Instruments with Off-Balance-Sheet Risk, of the Notes to the Consolidated Financial Statements contained in the 2012 Form 10-K.

50

 


 

HAMPTON ROADS BANKSHARES, INC.

PART I.  FINANCIAL INFORMATION

Item 2.  Management’s Discussion and Analysis of Results of Operations and Financial Condition

 

Use of Non-GAAP Financial Measures

 

The ratios “shareholders’ equity before non-controlling interest-tangible,” “shareholders’ equity-tangible (average),” “return on average equity-tangible,” and “book value per share-tangible” are non-GAAP financial measures.  The Company believes these measurements are useful in our press releases and other correspondence for investors, regulators, management, and others to evaluate capital adequacy and to compare against other financial institutions.  The Company calculates book value per share based on shareholders’ equity attributable to Hampton Roads Bankshares, Inc., excluding non-controlling interest.  The following is a reconciliation (dollars in thousands, except per share data) of these non-GAAP financial measures with financial measures defined by GAAP.

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended

 

Twelve Months Ended

 

 

 

September 30, 2013

 

 

December 31, 2012

Shareholders' equity before

 

 

 

 

 

 

non-controlling interest

 

$

184,485 

 

$

185,947 

Less:  intangible assets

 

 

1,585 

 

 

2,410 

Shareholders' equity before

 

 

 

 

 

 

non-controlling interest - tangible

 

$

182,900 

 

$

183,537 

 

 

 

 

 

 

 

Shareholders' equity before

 

 

 

 

 

 

non-controlling interest (average)

 

$

182,584 

 

$

139,311 

Less:  intangible assets (average)

 

 

1,930 

 

 

3,065 

Shareholders' equity before

 

 

 

 

 

 

non-controlling interest (average)

 

$

180,654 

 

$

136,246 

 

 

 

 

 

 

 

Return on average equity

 

 

2.58% 

 

 

(17.94%)

Impact of excluding intangible assets

 

 

0.03% 

 

 

(0.40%)

Return on average equity - tangible

 

 

2.61% 

 

 

(18.34%)

 

 

 

 

 

 

 

Book value per share

 

$

1.08 

 

$

1.09 

Impact of excluding intangible assets

 

 

(0.01)

 

 

(0.01)

Book value per share - tangible

 

$

1.07 

 

$

1.08 

 

 

 

 

 

51

 


 

 

HAMPTON ROADS BANKSHARES, INC.

PART I.  FINANCIAL INFORMATION

Item 3.  Quantitative and Qualitative Disclosures About Market Risk

Market risk is the potential of loss arising from adverse changes in interest rates and prices.  We are exposed to market risk as a consequence of the normal course of conducting our business activities.  Management considers interest rate risk to be a significant market risk for the Company.  Fluctuations in interest rates will impact both the level of interest income and interest expense and the market value of the Company’s interest earning assets and interest bearing liabilities. 

 

The primary goal of our asset/liability management strategy is to optimize net interest income while limiting exposure to fluctuations caused by changes in the interest rate environment.  Our ability to manage our interest rate risk depends generally on our ability to match the maturities and re-pricing characteristics of our assets and liabilities while taking into account the separate goals of maintaining asset quality and liquidity and achieving the desired level of net interest income.

 

Our management, guided by the ALCO, determines the overall magnitude of interest sensitivity risk and then formulates policies governing asset generation and pricing, funding sources and pricing, and off-balance sheet commitments.  These decisions are based on management’s expectations regarding future interest rate movements, the state of the national and regional economy, and other financial and business risk factors.

 

The primary method that we use to quantify and manage interest rate risk is simulation analysis, which is used to model net interest income from assets and liabilities over a specified time period under various interest rate scenarios and balance sheet structures.  This analysis measures the sensitivity of net interest income over a relatively short time horizon.  Key assumptions in the simulation analysis relate to the behavior of interest rates and spreads, the changes in product balances, and the behavior of loan and deposit customers in different rate environments.

 

The expected effect (dollars in thousands) on net interest income for the twelve months following September 30, 2013 and December 31, 2012 due to an immediate change in interest rates is shown below.  These estimates are dependent on material assumptions, such as those previously discussed.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2013

 

December 31, 2012

 

 

Change in Net Interest Income

 

Change in Net Interest Income

 

 

Amount

 

%

 

Amount

 

%

Change in Interest Rates:

 

 

 

 

 

 

 

 

 

 

 

 

+200 basis points

 

$

(1,033)

 

 

(1.69)%

 

$

1,305 

 

 

2.05%

+100 basis points

 

 

(639)

 

 

(1.05)%

 

 

498 

 

 

0.78%

-100 basis points

 

 

(1,130)

 

 

(1.85)%

 

 

(2,481)

 

 

(3.90)%

-200 basis points

 

 

N/A

 

 

N/A

 

 

N/A

 

 

N/A

 

As of September 30, 2013, we projected a decrease in net interest income in both increasing and decreasing interest rate environments.  We projected an increase in net interest income in increasing and a decrease in net interest income in decreasing rate environments at December 31, 2012

 

It should be noted, however, that the simulation analysis is based upon equivalent changes in interest rates for all categories of assets and liabilities.  In normal operating conditions, interest rate changes rarely occur in such a uniform manner.  Many factors affect the timing and magnitude of interest rate changes on financial instruments.  In addition, management may deploy strategies that offset some of the impact of changes in interest rates.  Consequently, variations should be expected from the projections resulting from the controlled conditions of the simulation analysis.    Management maintains a simulation model where it is assumed that interest rate changes occur gradually, that rate increases for interest-bearing liabilities lag behind the rate increases of interest-earning assets, and that the level of deposit rate increases will be less than the level of rate increases for interest-earning assets.

 

 

 

52


 

 

HAMPTON ROADS BANKSHARES, INC.

PART I.   FINANCIAL INFORMATION

Item 4.  Controls and Procedures

 

As of September 30, 2013, the Company’s management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the Company’s disclosure controls and procedures as of the end of the period covered by this report.  Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures as of the end of the period covered by this report were designed and functioning effectively to provide assurance that the information required to be disclosed by the Company in reports filed under the Securities Exchange Act of 1934, as amended, is (i) recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms and (ii) accumulated and communicated to our management,  including the Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding disclosure. 

 

In addition, no change in its internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) occurred during the nine months ended September 30, 2013 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

 

 

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HAMPTON ROADS BANKSHARES, INC.

PART II.   OTHER INFORMATION

ITEM 1 – LEGAL PROCEEDINGS

 

In the ordinary course of operations, the Company may become a party to legal proceedings.  Based upon information currently available, management believes that such legal proceedings, in the aggregate, will not have a material adverse effect on our business, financial condition, or results of operations except as provided below.

 

In April 2011, the SEC informed the Company that it is conducting a formal investigation related to certain accounting matters.  For a further discussion of this matter, see “Risk Factors – Risks Relating to our Business -- The formal investigation by the SEC may result in penalties, sanctions, or a restatement of our previously issued financial statements.”

 

On November 2, 2010, the Company received a grand jury subpoena from the United States Department of Justice, Criminal Division.  For a discussion of this matter, see “Risk Factors – Risks Relating to our Business -- The Company received a grand jury subpoena from the United States Department of Justice, Criminal Division.  Although the Company has been advised that it is not a target or a subject of the investigation at this time and we do not believe we will become a target or a subject of the investigation, there can be no assurances as to the timing or the eventual outcome of the related investigation.”

 

ITEM 1A – RISK FACTORS

 

For information regarding factors that could affect the Company’s results of operations, financial condition, or liquidity, see the risk factors discussed in the Company’s 2012 Form 10-K.  Except as and to the extent disclosed below, there have been no material changes to the risk factors as previously disclosed in the 2012 Form 10-K.

 

Risks Relating to our Business

 

Our success is largely dependent on retaining key management team members.

 

We are a customer-focused and relationship-driven organization. Future growth is expected to be driven in large part by the relationships maintained with customers. While we have assembled an experienced and talented senior management team, maintaining this team, while at the same time developing other managers in order that management succession can be achieved, is not assured. The loss of key employees could have a material adverse effect on our business and may result in lower revenues or reduced earnings.

 

Stephen P. Theobald, the Company’s Executive Vice President and Chief Financial Officer, left the Company effective March 31, 2013 to accept a CFO position with another financial services firm.  The Company named Thomas B. Dix III as successor.

 

Lorelle L. Fritsch, the Company’s Chief Accounting Officer, left the Company, effective September 10, 2013.  The Company named Myra Maglalang-Langston as successor.     

 

We are not paying dividends on our Common Stock and currently are prevented from doing so.  The failure to resume paying dividends on our Common Stock may adversely affect the market price of our Common Stock.

 

We paid cash dividends on our Common Stock prior to the third quarter of 2009.  During the third quarter of 2009, we suspended dividend payments.  We are prevented by our regulators from paying dividends until our financial position improves.  In addition, the retained deficit of BOHR, our principal banking subsidiary, is approximately $470.0 million as of September 30, 2013.  Absent permission from the Virginia State Corporation Commission, BOHR may pay dividends to us only to the extent of positive accumulated retained earnings.  It is unlikely in the foreseeable future that we would be able to pay dividends if BOHR cannot pay dividends to us.  Although we can seek to obtain a waiver of this prohibition, our regulators may choose not to grant such a waiver, and we would not expect to be granted a waiver or be released from this obligation until our financial performance and retained earnings improve significantly.  As a result, there is no assurance if or when we will be able to resume paying cash dividends. 

 

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HAMPTON ROADS BANKSHARES, INC.

PART II.   OTHER INFORMATION

 

In addition, all dividends are declared and paid at the discretion of our Board of Directors and are dependent upon our liquidity, financial condition, results of operations, regulatory capital requirements, and such other factors as our Board of Directors may deem relevant.  The ability of our banking subsidiaries to pay dividends to us is also limited by obligations to maintain sufficient capital and by other general restrictions on dividends that are applicable to our banking subsidiaries.  If we do not satisfy these regulatory requirements, we are unable to pay dividends on our Common Stock. 

 

We incurred significant losses in 2010, 2011, and 2012.  While we returned to profitability in the first nine months of 2013, we can make no assurances that we will continue to be profitable throughout the remainder of the year.  An inability to improve our profitability could adversely affect our operations and our capital levels.  

 

Throughout 2010, 2011, 2012 and the first nine months of 2013, our loan customers continued to operate in an economically stressed environment.  While broader economic conditions have begun to gradually improve, economic conditions in the markets in which we operate remain somewhat constrained and the levels of loan delinquencies and defaults that we experienced continue to be higher than historical levels and our net interest income did not grow significantly.

 

Net income attributable to Hampton Roads Bankshares, Inc. for the nine months ended September 30, 2013 was $3.5 million compared to a net loss attributable to Hampton Roads Bankshares, Inc. of $19.5 million for the nine months ended September 30, 2012. The net income for the nine months ended September 30, 2013 was primarily attributable to improved general economic conditions and credit performance of the Company’s loan portfolio coupled with cost savings initiatives and performance from our mortgage subsidiary, partially offset by an impairment of premises and equipment related to branch closures.  Mortgage banking earnings are dependent upon the direction and level of mortgage interest rates and are, therefore, subject to high volatility during periods of changing rates.

Our mortgage banking earnings are cyclical and sensitive to the level of interest rates, changes in economic conditions, decreased economic activity, and slowdowns in the housing market, any of which could adversely impact our results of operations.

Our mortgage banking earnings are dependent upon our ability to originate loans and sell them to investors. Loan production levels are sensitive to changes in the level of interest rates and changes in economic conditions. A significant portion of recent increases in our mortgage banking earnings is due to the recent historically low interest rate environment that resulted in a high volume of mortgage loan refinancing activity.  When the interest rate environment returns to more typical levels, mortgage loan refinancing activity may be significantly reduced. Loan production levels may also suffer if we experience a slowdown in the local housing market or tightening credit conditions. Any sustained period of decreased activity caused by fewer refinancing transactions, higher interest rates, housing price pressure or loan underwriting restrictions would adversely affect our mortgage originations and, consequently, could significantly reduce our income from mortgage banking activities. As a result, these conditions would also adversely affect our results of operations.

 

The formal investigation by the SEC may result in penalties, sanctions, or a restatement of our previously issued financial statements. 

 

The SEC’s Division of Enforcement (the “Division”) has been conducting a formal investigation into the Company’s deferred tax asset valuation allowances, provision and allowance for loan losses, and other matters contained in its annual and quarterly reports for years 2008 through 2010.  The Company has fully cooperated with the Division, intends to continue to do so, and believes its provisions and allowances will be determined to be appropriate. However, the formal investigation continues.  We cannot predict the timing or eventual outcome of this investigation. The investigation could result in material penalties, sanctions, or a restatement of our previously issued consolidated financial statements and may require significant time and attention from our management.

 

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PART II.   OTHER INFORMATION

 

Economic, market, or operational developments may negatively impact our ability to maintain required capital levels or otherwise negatively impact our financial condition.

 

At September 30, 2013, BOHR and Shore were classified as “well capitalized” for regulatory capital purposes.  However, impairments to our loan or securities portfolio, declines in our earnings or a combination of these or other factors could change our capital position in a relatively short period of time.  BOHR is currently restricted from accepting new brokered deposits.  As a result, our brokered deposit levels will decrease if our existing brokered deposits mature and do not rollover.  If we are not able to attract new deposits, our ability to fund our loan portfolio may be adversely affected.  In addition, if we are unable to maintain our “well-capitalized” status, we will be required to pay higher insurance premiums to the FDIC, which will reduce our earnings.

 

Virginia law and the provisions of our Articles of Incorporation and Bylaws could deter or prevent takeover attempts by a potential purchaser of our Common Stock that would be willing to pay you a premium for your shares of our Common Stock.

 

Our Articles of Incorporation, as well as the Company’s Bylaws (the “Bylaws”), contain provisions that may be deemed to have the effect of discouraging or delaying uninvited attempts by third parties to gain control of the Company. These provisions include the ability of our board to set the price, term, and rights of, and to issue, one or more series of our preferred stock. Our Articles of Incorporation and Bylaws do not provide for the ability of stockholders to call special meetings.

 

Similarly, the Virginia Stock Corporation Act contains provisions designed to protect Virginia corporations and employees from the adverse effects of hostile corporate takeovers. These provisions reduce the possibility that a third party could affect a change in control without the support of our incumbent directors. These provisions may also strengthen the position of current management by restricting the ability of shareholders to change the composition of the board, to affect its policies generally, and to benefit from actions that are opposed by the current board.

 

Our ability to maintain adequate sources of funding and liquidity may be negatively impacted by the economic environment which may, among other things, impact our ability to resume the payment of dividends or satisfy our obligations.

 

The management of liquidity risk is critical to our business and to our ability to service our customer base.  Our access to funding sources in amounts adequate to finance our activities on terms which are acceptable to us could be impaired by factors that affect us specifically or the financial services industry or economy in general.  In managing our balance sheet, a primary source of funding is customer deposits. Our ability to continue to attract these deposits and other funding sources is subject to variability based upon a number of factors including volume and volatility in the securities markets and the relative interest rates that we are prepared to pay for these liabilities. Further, BOHR is prohibited from accepting new brokered deposits until it is no longer subject to the Written Agreement with the FRB.  Our potential inability to maintain adequate sources of funding may, among other things, impact our ability to resume the payment of dividends or satisfy our obligations.

 

An inability to raise funds through deposits, borrowings, the sale of investments or loans, the issuance of equity and debt securities, and other sources could have a substantial negative effect on our liquidity. Factors that could detrimentally impact our access to liquidity sources include operating losses; rising levels of non-performing assets; a decrease in the level of our business activity as a result of a downturn in the markets in which our loans or deposits are concentrated or as a result of a loss of confidence in us by our customers, lenders, and/or investors; or adverse regulatory action against us.  Our ability to borrow could also be impaired by factors that are not specific to us, such as a disruption in the financial markets or negative views and expectations about the prospects for the financial industry.

 

The availability and level of deposits and other funding sources, including borrowings and the issuance of equity and debt securities, is highly dependent upon the perception of the liquidity and creditworthiness of the financial institution, and such perception can change quickly in response to market conditions or circumstances unique to a particular company. Concerns about our financial condition or concerns about our credit exposure to other persons could adversely impact our sources of liquidity, financial position, regulatory capital ratios, results of operations, and our business prospects.

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HAMPTON ROADS BANKSHARES, INC.

PART II.   OTHER INFORMATION

 

Our future success is dependent on our ability to compete effectively in the highly competitive banking industry.

 

We face vigorous competition from other banks and other financial institutions, including savings and loan associations, savings banks, finance companies, and credit unions for deposits, loans, and other financial services that serve our market area.  A number of these banks and other financial institutions are significantly larger than we are and have substantially greater access to capital and other resources, as well as larger lending limits and branch systems, and offer a wider array of banking services. Many of our non-bank competitors are not subject to the same extensive regulations that govern us. As a result, these non-bank competitors have advantages over us in providing certain services. While we believe we compete effectively with these other financial institutions serving our primary markets, we may face a competitive disadvantage to larger institutions. If we have to raise interest rates paid on deposits or lower interest rates charged on loans to compete effectively, our net interest margin and income could be negatively affected. Failure to compete effectively to attract new, or to retain existing, clients may reduce or limit our margins and our market share and may adversely affect our results of operations, financial condition, growth, and the market price of our Common Stock.

 

Sales, or the perception that sales could occur, of large amounts of our Common Stock by our institutional investors may affect our stock price.

 

The market price of our Common Stock could drop if our existing shareholders decide to sell their shares.  As of September 30, 2013, Carlyle, Anchorage, and CapGen owned 24.90%, 24.90%, and 29.97%, respectively, of the outstanding shares of our Common Stock.  Pursuant to the various definitive investment agreements that we have entered into with these shareholders, the Company has an effective registration statement covering the resale of shares of our Common Stock by each of the shareholders listed above.  These shareholders could utilize this registration statement by reselling the shares of our Common Stock they currently hold.  If any of these shareholders sell large amounts of our Common Stock, or other investors perceive such sales to be imminent, the market price of our Common Stock could drop significantly.

 

The concentration of our loan portfolio continues to be in real estate – commercial mortgage,  equity line lending, and construction, which may expose us to greater risk of loss.

 

Our business strategy centers, in part, on offering real estate - commercial mortgage and equity line loans secured by real estate in order to generate interest income.  These types of loans generally have higher yields and shorter maturities, and therefore, involve a greater degree of risk than traditional one-to-four family residential mortgage loans.  At September 30, 2013,  real estate - commercial mortgage and equity line lending totaled $694.1 million, which represented 51% of total loans.  Such loans increase our credit risk profile relative to other financial institutions that have lower concentrations of real estate - commercial mortgage and equity line loans.

 

Loans secured by real estate - commercial mortgage properties are generally for larger amounts than one-to-four family residential mortgage loans.  Payments on loans secured by these properties generally are dependent on the income produced by the underlying properties which, in turn, depends on the successful operation and management of the properties.  Accordingly, repayment of these loans is subject to adverse conditions in the real estate market or the local economy.  While we seek to minimize these risks in a variety of ways, there can be no assurance that these measures will protect against credit-related losses.

 

Equity line lending allows a customer to access an amount up to their line of credit for the term specified in their agreement.  At the expiration of the term of an equity line, a customer may have the entire principal balance outstanding as opposed to a one-to-four family residential mortgage loan where the principal is disbursed entirely at closing and amortizes throughout the term of the loan.  We cannot predict when and to what extent our customers will access their equity lines.  While we seek to minimize this risk in a variety of ways, including attempting to employ conservative underwriting criteria, there can be no assurance that these measures will protect against credit-related losses.

 

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PART II.   OTHER INFORMATION

 

Our loan portfolio contains loans used to finance construction and land development.  Construction financing typically involves a higher degree of credit risk than financing on improved, owner-occupied real estate.  Risk of loss on a construction loan is largely dependent upon the accuracy of the initial estimate of the property’s value at completion of construction, the marketability of the property, and the bid price and estimated cost (including interest) of construction.  If the estimate of construction costs proves to be inaccurate, we may be required to advance funds beyond the amount originally committed to permit completion of the project.  If the estimate of the value proves to be inaccurate, we may be confronted, at or prior to the maturity of the loan, with a project whose value is insufficient to assure full repayment.  When lending to builders, the cost of construction breakdown is provided by the builder, as well as supported by the appraisal.  Although our underwriting criteria were designed to evaluate and minimize the risks of each construction loan, there can be no guarantee that these practices will have safeguarded against material delinquencies and losses to our operations.

 

At September 30, 2013, we had loans of $171.6 million or 13% of total loans outstanding to finance construction and land development.  Construction and land development loans are dependent on the successful completion of the projects they finance, however, in many cases such construction and development projects in our primary market areas are not being completed in a timely manner, if at all.  A portion of our residential and real estate - commercial mortgage lending is secured by vacant or unimproved land.  Loans secured by vacant or unimproved land are generally more risky than loans secured by improved property for one-to-four family residential mortgage loans. Since vacant or unimproved land is generally held by the borrower for investment purposes or future use, payments on loans secured by vacant or unimproved land will typically rank lower in priority to the borrower than a loan the borrower may have on their primary residence or business.  These loans are susceptible to adverse conditions in the real estate market and local economy.

 

If the value of real estate in the markets we serve were to decline materially, the value of our other real estate owned could decline or a significant portion of our loan portfolio could become under-collateralized, which could have a material adverse effect on our loan losses, results of operations, and financial condition.

 

With approximately three-fourths of our loans concentrated in the regions of Hampton Roads, Richmond, the Eastern Shore of Virginia, and the Triangle region of North Carolina, a decline in local economic conditions could adversely affect the value of the real estate collateral securing our loans.  A decline in property values could diminish our ability to recover on defaulted loans by selling the real estate collateral, making it more likely that we would suffer additional losses on defaulted loans and/or foreclosed properties by requiring additions to our allowance for loan losses through increased provisions for loan losses.  Also a decline in local economic conditions may have a greater effect on our earnings and capital than on the earnings and capital of financial institutions whose real estate portfolios are more geographically diverse.  The local economies where the Company does business are heavily reliant on military spending and may be adversely impacted by significant cuts to such spending that might result from recent Congressional budgetary enactments.  Real estate values are affected by various factors in addition to local economic conditions, including, among other things, changes in general or regional economic conditions, government rules or policies, and natural disasters.  While our policy is to obtain updated appraisals on a periodic basis, there are no assurances that we may be able to realize the amount indicated in the appraisal upon disposition of the underlying property.

 

We have had large numbers of problem loans.  Although problem loans have declined significantly, there is no assurance that they will continue to do so.

 

Our non-performing assets as a percentage of total assets decreased to 4.39% at September 30, 2013 from 6.36% at December 31, 2012.  On September 30, 2013, less than 1% of our loans was 30 to 89 days delinquent and treated as performing assets.  The administration of non-performing loans is an important function in attempting to mitigate any future losses related to our non-performing assets. 

 

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HAMPTON ROADS BANKSHARES, INC.

PART II.   OTHER INFORMATION

 

The determination of the appropriate balance of our allowance for loan losses is merely an estimate of the inherent risk of loss in our existing loan portfolio and may prove to be incorrect.  If such estimate is proven to be materially incorrect and we are required to increase our allowance for loan losses, our results of operations, financial condition, and the market price of our Common Stock could be materially adversely affected. 

We maintain an allowance for loan losses, which is a reserve established through a provision for loan losses charged to our expenses that represents management’s best estimate of probable losses within our existing portfolio of loans.  Our allowance for loan losses was $37.7 million at September 30, 2013, which represented 2.75% of our total loans, as compared to $48.4 million, or 3.38% of total loans, at December 31, 2012.  The level of the allowance reflects management’s estimates and judgments as to specific credit risks, evaluation of industry concentrations, loan loss experience, current loan portfolio quality, present economic, political, and regulatory conditions, and incurred but unidentified losses inherent in the current loan portfolio.  For further discussion on the impact continued weak economic conditions have on the collateral underlying our loan portfolio, see “If the value of real estate in the markets we serve were to decline materially, the value of our other real estate owned could decline or a significant portion of our loan portfolio could become under-collateralized, which could have a material adverse effect on our loan losses, results of operations, and financial condition.”

 

The determination of the appropriate level of the allowance for loan losses inherently involves a high degree of subjectivity and requires management to make significant estimates of current credit risks and future trends, all of which may undergo material changes.  In addition, regulatory agencies, as an integral part of their examination process, periodically review the estimated losses of loans.  Such agencies may require us to recognize additional losses based on their judgments about information available to them at the time of their examination.  Furthermore, certain proposed changes to GAAP, if implemented as proposed, may require us to increase our estimate for losses embedded in our loan portfolio, resulting in an adverse impact to our results of operations and level of regulatory capital.  Accordingly, the allowance for loan losses may not be adequate to cover loan losses or significant increases to the allowance for loan losses may be required in the future if economic conditions should worsen.  Any such increases in the allowance for loan losses may have a material adverse effect on our results of operations, financial condition, and the market price of our Common Stock.

 

Our profitability will be jeopardized if we are unable to successfully manage interest rate risk.

 

Our profitability depends in substantial part upon the spread between the interest rates earned on investments and loans and the interest rates paid on deposits and other interest-bearing liabilities. These rates are normally in line with general market rates and rise and fall based on management’s view of our needs. Changes in interest rates will affect our operating performance and financial condition in diverse ways including the pricing of securities, loans and deposits, and the volume of loan originations in our mortgage banking business, and could result in decreases to our earnings. Our net interest income will be adversely affected if market interest rates change so that the interest we pay on deposits and borrowings increases faster than the interest we earn on loans and investments. This could, in turn, have a material adverse affect on the market price of our Common Stock.

 

We may face increasing deposit-pricing pressures, which may, among other things, reduce our profitability.

 

Deposit pricing pressures may result from competition as well as changes to the interest rate environment. Under current conditions, pricing pressures also may arise from depositors who demand premium interest rates from what they perceive to be a troubled financial institution. There is intense competition for deposits. The competition has had an impact on interest rates paid to attract deposits as well as fees charged on deposit products. In addition to the competitive pressures from other depository institutions, we face heightened competition from non-depository financial products such as securities and other alternative investments.

 

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PART II.   OTHER INFORMATION

 

Furthermore, technology and other market changes have made it more convenient for bank customers to transfer funds for investing purposes. Bank customers also have greater access to deposit vehicles that facilitate spreading deposit balances among different depository institutions to maximize FDIC insurance coverage. In addition to competitive forces, we also are at risk from market forces as they affect interest rates. It is not uncommon when interest rates transition from a low interest rate environment to a rising rate environment for deposit and other funding costs to rise in advance of yields on earning assets. In order to keep deposits required for funding purposes, it may be necessary to raise deposit rates without commensurate increases in asset pricing in the short term. Finally, we may see interest rate pricing pressure from depositors concerned about our financial condition and levels of non-performing assets.

 

We face a variety of threats from technology- based frauds and scams.

 

Financial institutions are a prime target of criminal activities through various channels of information technology. We attempt to mitigate risk from such activities through policies, procedures, and preventative and detective measures. In addition, we maintain insurance coverage designed to provide a level of financial protection to our business. However, risks posed by business interruption, fraud losses, business recovery expenses, and other potential losses or expenses that may be experienced from a significant event are not readily predictable and, therefore, could have an impact on our results of operations.

 

Our operations and customers might be affected by the occurrence of a natural disaster or other catastrophic event in our market area.

 

Because a substantial portion of our loans are with customers and businesses located in the central and coastal portions of Virginia, North Carolina, and Maryland, catastrophic events, including natural disasters such as hurricanes which have historically struck the east coast of the United States with some regularity or terrorist attacks, could disrupt our operations. Any of these natural disasters or other catastrophic events could have a negative impact on our financial centers and customer base as well as collateral values and the strength of our loan portfolio. Any natural disaster or catastrophic event affecting us could have a material adverse impact on our operations and the market price of our Common Stock.

 

The Company and BOHR have entered into a Written Agreement with the FRB and the Bureau of Financial Institutions that subjects the Company and BOHR to significant restrictions and requires us to designate a significant amount of our resources to complying with the agreement, and it may have a material adverse effect on our operations and the value of our Common Stock.

 

Effective June 17, 2010, the Company and BOHR entered into the Written Agreement with the FRB and the Bureau of Financial Institutions.  Shore is not a party to the Written Agreement.  Under the terms of the Written Agreement, BOHR has agreed to develop and submit for approval within the time periods specified in the Written Agreement written plans to:

 

·

strengthen board oversight of management and BOHR’s operations;

·

strengthen credit risk management policies;

·

improve BOHR’s position with respect to loans, relationships, or other assets in excess of $2.5 million that are now or in the future may become past due more than 90 days, are on BOHR’s problem loan list, or adversely classified in any report of examination of BOHR;

·

review and revise, as appropriate, current policy and maintain sound processes for determining, documenting, and recording an adequate allowance for loan losses;

·

improve management of BOHR’s liquidity position and funds management policies;

·

provide contingency planning that accounts for adverse scenarios and identifies and quantifies available sources of liquidity for each scenario;

·

reduce BOHR’s reliance on brokered deposits; and

·

improve BOHR’s earnings and overall condition.

 

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HAMPTON ROADS BANKSHARES, INC.

PART II.   OTHER INFORMATION

 

In addition, BOHR has agreed that it will:

 

·

not extend, renew, or restructure any credit that has been criticized by the FRB or Bureau of Financial Institutions absent prior Board of Directors approval in accordance with the restrictions in the Written Agreement;

·

eliminate all assets or portions of assets classified as “loss,” and thereafter, charge-off all assets classified as “loss” in a federal or state report of examination, unless otherwise approved by the FRB;

·

only accept brokered deposits that are rolled over or renewed;

·

comply with legal and regulatory limitations on indemnification payments and severance payments; and

·

appoint a committee to monitor compliance with the terms of the Written Agreement. 

 

In addition, the Company has agreed that it will:

 

·

not make any other form of payment representing a reduction in BOHR’s capital or make any distributions of interest, principal, or other sums on subordinated debentures or trust preferred securities absent prior regulatory approval;

·

take all necessary steps to correct certain technical violations of law and regulation cited by the FRB;

·

refrain from guaranteeing any debt without the prior written approval of the FRB and the Bureau of Financial Institutions; and

·

refrain from purchasing or redeeming any shares of its stock without the prior written consent of the FRB or the Bureau of Financial Institutions.

 

Under the terms of the Written Agreement, the Company and BOHR have submitted capital plans to maintain sufficient capital at the Company on a consolidated basis and at BOHR on a stand-alone basis and to refrain from declaring or paying dividends absent prior regulatory approval. 

 

To date, the Company has complied with the actions required by the FRB and the Bureau of Financial Institutions under the terms of the Written Agreement; additionally, BOHR has materially complied with the actions required by the FRB and the Bureau of Financial Institutions under the terms of the Written Agreement.  The Risk Committee has been appointed to oversee the Company’s compliance with the terms of the Written Agreement and has met quarterly to review compliance.  Written plans have been submitted and implemented for strengthening board oversight, strengthening credit risk management practices, improving liquidity, reducing the reliance on brokered deposits, improving capital, and curing the technical violations of laws and regulations.  The Company also submitted and implemented written policies and procedures for maintaining an adequate allowance for loan losses and its plans for all foreclosed real estate and nonaccrual and delinquent loans in excess of $2.5 million.  Additionally, the Company instituted the required review process for all classified loans.  The Company charged off the assets identified as loss from the previous examination.  As of September 30, 2013, the Company exceeded the regulatory capital minimums and BOHR and Shore were both considered “well capitalized” under the risk-based capital standards.  The FRB recently modified its interpretation of our Written Agreement and now takes the position that it prohibits BOHR from accepting new brokered deposits.  Based on prior guidance, BOHR accepted new brokered deposits after it became well capitalized, which technically did not comply with the Written Agreement under the FRB’s modified interpretation.    We do not believe the new interpretation or our earlier actions will have any material adverse effect on the Company or our liquidity, expenses, or financial condition.

 

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HAMPTON ROADS BANKSHARES, INC.

PART II.   OTHER INFORMATION

 

The Company received a grand jury subpoena from the United States Department of Justice, Criminal Division (“DOJ”).  Although the Company has been advised that it is not a target or a subject of the investigation at this time and we do not believe we will become a target or a subject of the investigation, there can be no assurances as to the timing or eventual outcome of the related investigation. 

 

On November 2, 2010, the Company received from the DOJ a grand jury subpoena to produce information principally relating to the merger of GFH into the Company on December 31, 2008 and to loans made by GFH and its wholly owned subsidiary, Gateway, before GFH’s merger with the Company. The DOJ has informed the Company that it is not a target or a subject of the investigation at this time, and we are fully cooperating.  Although we do not believe this matter will have a material adverse affect on the Company, we can give you no assurances as to the timing or eventual outcome of this investigation.  The Company is not aware of any recent developments in this matter and has not been notified of any developments in over a year.  The Company has not had contact with the DOJ related to the grand jury subpoena since April 2011.

 

Risks Relating to Market, Legislative, and Regulatory Events

 

Our business, financial condition, and results of operations are highly regulated and could be adversely affected by new or changed regulations and by the manner in which such regulations are applied by regulatory authorities.

 

Current economic conditions, particularly in the financial markets, have resulted in government regulatory agencies placing increased focus and scrutiny on the financial services industry.  The U.S. Government has intervened on an unprecedented scale, responding to what has been commonly referred to as the financial crisis.  In addition to participating in the TARP CPP, the U.S. Government has taken steps that include enhancing the liquidity support available to financial institutions, establishing a commercial paper funding facility, temporarily guaranteeing money market funds and certain types of debt issuances, and increasing insured deposits.  These programs subject us and other financial institutions that have participated in these programs to additional restrictions, oversight and/or costs that may have an impact on our business, financial condition, results of operations, and the price of our Common Stock.

 

Compliance with such regulation and scrutiny may significantly increase our costs, impede the efficiency of our internal business processes, require us to increase our regulatory capital, and limit our ability to pursue business opportunities in an efficient manner.  We also may be required to pay significantly higher FDIC premiums because market developments have significantly depleted the insurance fund of the FDIC and reduced the ratio of reserves to insured deposits.  The increased costs associated with anticipated regulatory and political scrutiny could adversely impact our results of operations.

 

New proposals for legislation continue to be introduced in the U.S. Congress that could further substantially increase regulation of the financial services industry.  Federal and state regulatory agencies also frequently adopt changes to their regulations and/or change the manner in which existing regulations are applied.  We cannot predict whether any pending or future legislation will be adopted or the substance and impact of any such new legislation on us.  Additional regulation could affect us in a substantial way and could have an adverse effect on our business, financial condition, and results of operations.

 

Banking regulators have broad enforcement power, but regulations are meant to protect depositors and not investors.

 

We are subject to supervision by several governmental regulatory agencies.  The regulators’ interpretation and application of relevant regulations, are beyond our control, may change rapidly and unpredictably, and can be expected to influence our earnings and growth.  In addition, if we do not comply with regulations that are applicable to us, we could be subject to regulatory penalties, which could have an adverse effect on our business, financial condition, and results of operations.  We have also entered into a Written Agreement with the FRB and Bureau of Financial Institutions.  For a discussion regarding risks related to the Written Agreement, see “The Company and BOHR have entered into a Written Agreement with the FRB and the Bureau of Financial Institutions that subjects the Company and BOHR to significant restrictions and requires us to designate a significant amount of our resources to complying with the agreement,  and it may have a material adverse effect on our operations and the value of our Common Stock.”  

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HAMPTON ROADS BANKSHARES, INC.

PART II.   OTHER INFORMATION

 

All such government regulations may limit our growth and the return to our investors by restricting activities such as the payment of dividends, mergers with, or acquisitions by, other institutions, investments, loans and interest rates, interest rates paid on deposits, the use of brokered deposits, and the creation of financial centers.  Although these regulations impose costs on us, they are intended to protect depositors.  The regulations to which we are subject may not always be in the best interests of investors. 

 

The fiscal, monetary, and regulatory policies of the Federal Government and its agencies could have a material adverse effect on our results of operations.

 

The Board of Governors of the Federal Reserve System regulates the supply of money and credit in the United States.  Its policies determine, in large part, the cost of funds for lending and investing and the return earned on those loans and investments, both of which affect our net interest margin.  It also can materially decrease the value of financial assets we hold, such as debt securities.  Its policies also can adversely affect borrowers, potentially increasing the risk that they may fail to repay their loans. 

 

In addition, as a public company we are subject to securities laws and standards imposed by the Sarbanes-Oxley Act. Because we are a relatively small company, the costs of compliance are disproportionate compared with much larger organizations.  Continued growth of legal and regulatory compliance mandates could adversely affect our expenses, future results of operations, and the market price of our Common Stock.  In addition, the government and regulatory authorities have the power to impose rules or other requirements, including requirements that we are unable to anticipate, that could have an adverse impact on our results of operations and the market price of our Common Stock. 

 

Government legislation and regulation may adversely affect our business, financial condition, and results of operations.

 

On July 21, 2010, President Obama signed the Dodd-Frank Act into law. The Dodd-Frank Act makes extensive changes to the laws regulating financial services firms and requires significant rule-making. In addition, the law mandates multiple studies, which could result in additional legislative or regulatory action.  The Dodd-Frank Act has and will continue to have a broad impact on the financial services industry, including significant regulatory and compliance changes designed to improve supervision and oversight of and strengthen safety and soundness for the financial services sector.  Many of the provisions of the Dodd-Frank Act have begun to be or will be implemented over the next few years and will be subject to further rulemaking and the discretion of applicable regulatory bodies.  Because the ultimate impact of the Dodd-Frank Act will depend on future regulatory rulemaking and interpretation, we cannot predict the full effect of this legislation on our business, financial condition, or results of operations.  

 

Although management does not expect the Dodd-Frank Act to have a material adverse effect on the Company, it is not possible to predict at this time all the effects the Dodd-Frank Act will have on the Company and the rest of our industry.  It is possible that the Company’s interest expense could increase and deposit insurance premiums could change and steps may need to be taken to increase qualifying capital.

 

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HAMPTON ROADS BANKSHARES, INC.

PART II.   OTHER INFORMATION

 

On June 6, 2012, the federal bank regulatory agencies issued a series of proposed rules to revise the risk-based and leverage capital requirements and the method for calculating risk-weighted assets to make them consistent with the agreements that were reached by the Basel Committee in Basel III.  These federal bank regulatory agencies approved final rules on July 2, 2013.  The rules apply to all depository institutions, top-tier bank holding companies with total consolidated assets of $500.0 million or more, and top-tier savings and loan holding companies (“banking organizations”). Although the final rules contain significant revisions from the proposed rules intended to provide relief to community banks, such as BOHR and Shore, many of the Basel III rules will apply to these institutions.  Among other things, the rules establish a new common equity Tier 1 minimum capital requirement and a higher minimum Tier 1 capital requirement, changes the treatment of unrealized gains and losses on available-for-sale securities in the calculation of regulatory capital, and assigns higher risk weightings (150%) to exposures that are more than 90 days past due or are on nonaccrual status and certain commercial real estate facilities that finance the acquisition, development, or construction of real property. The rules also limit a banking organization’s capital distributions and certain discretionary bonus payments if the banking organization does not hold a “capital conservation buffer” consisting of a specified amount of common equity Tier 1 capital in addition to the amount necessary to meet its minimum risk-based capital requirements. For community banking organizations, the rules will be phased in beginning in 2015 and 2016.  The Company is diligently assessing the impact of this rulemaking on our capital and the amount of capital required to support our business, which could adversely affect our results of operations and financial condition. 

 

The soundness of other financial institutions could adversely affect us.

Our ability to engage in routine funding transactions could be adversely affected by the actions and commercial soundness of other financial institutions.  Financial services institutions are interrelated as a result of trading, clearing, counterparty, or other relationships.  As a result, defaults by, or even rumors or questions about, one or more financial services institutions, or the financial services industry, generally, have led to market-wide liquidity problems and could lead to losses or defaults by us or by other institutions.  Many of these transactions expose us to credit risk in the event of default of our counterparty or client.  In addition, our credit risk may be exacerbated when the collateral held by us cannot be liquidated at prices sufficient to recover the full amount of the financial instrument exposure due to us.  There is no assurance that any such losses would not materially and adversely affect our results of operations and the value of, or market for, our Common Stock.

 

ITEM 2 – UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

The Company announced an open ended program on August 13, 2003, by which management was authorized to repurchase an unlimited number of shares of the Company’s Common Stock in the open market and through privately negotiated transactions.  There were no share repurchase transactions conducted during the third quarter of 2013.

 

ITEM 3 – DEFAULTS UPON SENIOR SECURITIES

 

None.

 

ITEM 4 – MINE SAFETY DISCLOSURES

 

None.

 

ITEM 5 - OTHER INFORMATION

 

None.

 

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HAMPTON ROADS BANKSHARES, INC.

PART II.   OTHER INFORMATION

 

ITEM 6  – EXHIBITS

 

31.1The Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer.*

 

31.2The Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer.*

 

32.1Statement of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350.*

 

101The following materials from the Hampton Roads Bankshares, Inc. Quarterly Report on Form 10-Q for the quarter ended September 30, 2013 formatted in eXtensible Business Reporting Language: (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Operations, (iii) Consolidated Statements of Comprehensive Income (Loss), (iv) Consolidated Statement of Changes in Shareholders’ Equity, (v) Consolidated Statements of Cash Flows, and (vi) Notes to Consolidated Financial Statements.*

 

 

*Filed herewith

 

 

 

 

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SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

 

 

 

 

HAMPTON ROADS BANKSHARES, INC.

 

(Registrant)

 

 

 

 

DATE:  November 8, 2013

/s/ Thomas B. Dix III___________________ 

 

Thomas B. Dix III

 

Chief Financial Officer

 

 

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