0001143155-15-000024.txt : 20150806 0001143155-15-000024.hdr.sgml : 20150806 20150806161210 ACCESSION NUMBER: 0001143155-15-000024 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 10 CONFORMED PERIOD OF REPORT: 20150630 FILED AS OF DATE: 20150806 DATE AS OF CHANGE: 20150806 FILER: COMPANY DATA: COMPANY CONFORMED NAME: HAMPTON ROADS BANKSHARES INC CENTRAL INDEX KEY: 0001143155 STANDARD INDUSTRIAL CLASSIFICATION: NATIONAL COMMERCIAL BANKS [6021] IRS NUMBER: 542053718 STATE OF INCORPORATION: VA FISCAL YEAR END: 0327 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-32968 FILM NUMBER: 151033263 BUSINESS ADDRESS: STREET 1: 641 LYNNHAVEN PARKWAY CITY: VIRGINIA BEACH STATE: VA ZIP: 23452 BUSINESS PHONE: 757-217-1000 MAIL ADDRESS: STREET 1: 641 LYNNHAVEN PARKWAY CITY: VIRGINIA BEACH STATE: VA ZIP: 23452 10-Q 1 a2015063010q.htm 10-Q 2015.06.30.10Q
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 June 30, 2015

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, Virginia
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 ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes x No ¨

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 the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.  (Check one):
Large accelerated filer        ¨    Accelerated filer        ¨
Non-accelerated filer        ¨    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 Act).
Yes ¨ No x
 
The number of shares outstanding of the issuer's Common Stock as of July 31, 2015 was 170,705,537 shares, par value $0.01 per share.
 



HAMPTON ROADS BANKSHARES, INC.

Table of Contents
PART I
FINANCIAL INFORMATION
 
 
 
 
ITEM 1
FINANCIAL STATEMENTS
 
 
 
 
 
Consolidated Balance Sheets
 
June 30, 2015
 
 
December 31, 2014
 
 
 
 
 
Consolidated Statements of Operations
 
Three and six months ended June 30, 2015 and 2014
 
 
 
 
 
Consolidated Statements of Comprehensive Income
 
Three and six months ended June 30, 2015 and 2014
 
 
 
 
 
Consolidated Statement of Changes in Shareholders' Equity
 
Six months ended June 30, 2015
 
 
 
 
 
Consolidated Statements of Cash Flows
 
Six months ended June 30, 2015 and 2014
 
 
 
 
 
Notes to Consolidated Financial Statements
 
 
 
ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
 
AND RESULTS OF OPERATIONS
 
 
 
 
ITEM 3
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
 
 
ITEM 4
CONTROLS AND PROCEDURES
 
 
 
PART II
OTHER INFORMATION
 
 
 
 
ITEM 1
LEGAL PROCEEDINGS
 
 
 
ITEM 1A
RISK FACTORS
 
 
 
ITEM 2
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
 
 
 
ITEM 3
DEFAULTS UPON SENIOR SECURITIES
 
 
 
ITEM 4
MINE SAFETY DISCLOSURES
 
 
 
ITEM 5
OTHER INFORMATION
 
 
 
ITEM 6
EXHIBITS
 
 
 
 
SIGNATURES
 
 
 
 
EXHIBIT INDEX

2

HAMPTON ROADS BANKSHARES, INC
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS




CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
 
 
 
(unaudited)
June 30, 2015
 
December 31, 2014
Assets:
 
 
 
Cash and due from banks
$
17,630

 
$
16,684

Interest-bearing deposits in other banks
1,195

 
1,349

Overnight funds sold and due from Federal Reserve Bank
45,969

 
85,586

Investment securities available for sale, at fair value
210,187

 
302,221

Restricted equity securities, at cost
11,539

 
15,827

Loans held for sale
65,374

 
22,092

Loans
1,529,024

 
1,422,935

Allowance for loan losses
(27,736
)
 
(27,050
)
Net loans
1,501,288

 
1,395,885

Premises and equipment, net
62,511

 
63,519

Interest receivable
4,115

 
4,503

Other real estate owned and repossessed assets,
 
 
 
net of valuation allowance
13,112

 
21,721

Intangible assets, net
545

 
842

Bank-owned life insurance
50,190

 
49,536

Other assets
7,648

 
8,841

Totals assets
$
1,991,303

 
$
1,988,606

Liabilities and Shareholders' Equity:
 
 
 
Deposits:
 
 
 
Noninterest-bearing demand
$
317,281

 
$
266,921

Interest-bearing:
 
 
 
Demand
619,129

 
621,066

Savings
58,557

 
56,221

Time deposits:
 
 
 
Less than $100
346,363

 
342,794

$100 or more
333,133

 
294,346

Total deposits
1,674,463

 
1,581,348

Federal Home Loan Bank borrowings
67,546

 
165,847

Other borrowings
29,451

 
29,224

Interest payable
563

 
560

Other liabilities
15,682

 
14,130

Total liabilities
1,787,705

 
1,791,109

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; 170,697,216 and 170,572,217 shares issued
 
 
 
and outstanding on June 30, 2015 and December 31, 2014,
 
 
 
respectively
1,707

 
1,706

Capital surplus
589,908

 
588,692

Accumulated deficit
(391,474
)
 
(395,535
)
Accumulated other comprehensive income, net of tax
2,594

 
2,134

Total shareholders' equity before non-controlling interest
202,735

 
196,997

Non-controlling interest
863

 
500

Total shareholders' equity
203,598

 
197,497

Total liabilities and shareholders' equity
$
1,991,303

 
$
1,988,606

See accompanying notes to 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
 
Six Months Ended
(unaudited)
June 30, 2015
 
June 30, 2014
 
June 30, 2015
 
June 30, 2014
Interest Income:
 
 
 
 
 
 
 
Loans, including fees
$
17,452

 
$
15,584

 
$
33,612

 
$
31,276

Investment securities
1,555

 
2,299

 
3,297

 
4,533

Overnight funds sold and due from FRB
40

 
51

 
99

 
83

Total interest income
19,047

 
17,934

 
37,008

 
35,892

Interest Expense:
 

 
 

 
 

 
 

Deposits:
 

 
 

 
 

 
 

Demand
670

 
658

 
1,344

 
1,281

Savings
13

 
8

 
23

 
16

Time deposits:
 

 
 

 
 

 
 

Less than $100
943

 
810

 
1,853

 
1,581

$100 or more
1,007

 
779

 
1,941

 
1,516

Interest on deposits
2,633

 
2,255

 
5,161

 
4,394

Federal Home Loan Bank borrowings
251

 
405

 
574

 
828

Other borrowings
424

 
237

 
842

 
678

Total interest expense
3,308

 
2,897

 
6,577

 
5,900

Net interest income
15,739

 
15,037

 
30,431

 
29,992

Provision for loan losses

 

 
600

 
100

Net interest income
 
 
 

 
 
 
 

after provision for loan losses
15,739

 
15,037

 
29,831

 
29,892

Noninterest Income:
 

 
 

 
 

 
 

Mortgage banking revenue
5,500

 
3,144

 
9,722

 
4,954

Service charges on deposit accounts
1,298

 
1,195

 
2,440

 
2,354

Income from bank-owned life insurance
305

 
329

 
655

 
3,545

Gain on sale of investment securities available for sale (includes $126, $118, $238 and $185 accumulated other comprehensive income reclassifications for unrealized net gains on available for sale securities during the three months ended June 30, 2015 and 2014 and the six months ended June 30, 2015 and 2014, respectively)
126

 
118

 
238

 
185

Loss on sale of premises and equipment

 
(18
)
 
(14
)
 
(31
)
Gain (loss) on sale of other real estate owned and repossessed assets
(56
)
 
(77
)
 
20

 
144

Impairment of other real estate owned and repossessed assets
(331
)
 
(1,090
)
 
(1,265
)
 
(1,426
)
Visa check card income
676

 
654

 
1,317

 
1,247

Other
506

 
1,266

 
1,364

 
1,851

Total noninterest income
8,024

 
5,521

 
14,477

 
12,823

Noninterest Expense:
 

 
 

 
 

 
 

Salaries and employee benefits
11,249

 
9,109

 
21,916

 
18,676

Professional and consultant fees
1,459

 
1,922

 
2,267

 
3,150

Occupancy
1,626

 
1,501

 
3,255

 
3,221

FDIC insurance
399

 
253

 
1,023

 
1,154

Data processing
1,606

 
1,019

 
3,037

 
2,166

Problem loan and repossessed asset costs
492

 
375

 
612

 
807

Equipment
335

 
391

 
685

 
764

Directors' and regional board fees
293

 
543

 
594

 
930

Advertising and marketing
445

 
349

 
705

 
603

Other
2,570

 
2,250

 
5,016

 
4,757

Total noninterest expense
20,474

 
17,712

 
39,110

 
36,228

Income before provision for income taxes
3,289

 
2,846

 
5,198

 
6,487

Provision for income taxes
35

 
37

 
75

 
45

Net income
3,254

 
2,809

 
5,123

 
6,442

Net income attributable to non-controlling interest
528

 
333

 
1,062

 
107

Net income attributable to
 

 
 

 
 

 
 

Hampton Roads Bankshares, Inc.
$
2,726

 
$
2,476

 
$
4,061

 
$
6,335

Per Share:
 

 
 

 
 

 
 

Basic income
$
0.02

 
$
0.01

 
$
0.02

 
$
0.04

Diluted income
$
0.02

 
$
0.01

 
$
0.02

 
$
0.04

See accompanying notes to consolidated financial statements.

4

HAMPTON ROADS BANKSHARES, INC
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS


CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)
Three Months Ended
 
Six Months Ended
(unaudited)
June 30, 2015
 
June 30, 2014
 
June 30, 2015
 
June 30, 2014
Net income
 

 
$
3,254

 
 

 
$
2,809

 
 

 
$
5,123

 
 

 
$
6,442

Other comprehensive income (loss),
 

 
 
 
 

 
 
 
 

 
 
 
 

 
 
net of tax
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Change in unrealized gain (loss)
 

 
 
 
 

 
 
 
 

 
 
 
 

 
 
on securities available for sale
$
(1,218
)
 
 
 
$
2,366

 
 
 
$
698

 
 
 
$
4,428

 
 
Reclassification adjustment for
 

 
 
 
 

 
 
 
 

 
 
 
 

 
 
securities gains included in
 

 
 
 
 

 
 
 
 

 
 
 
 

 
 
net income
(126
)
 
 
 
(118
)
 
 
 
(238
)
 
 
 
(185
)
 
 
Other comprehensive income (loss),
 

 
 
 
 

 
 
 
 

 
 
 
 

 
 
net of tax
 

 
(1,344
)
 
 

 
2,248

 
 

 
460

 
 

 
4,243

Comprehensive income
 

 
1,910

 
 

 
5,057

 
 

 
5,583

 
 

 
10,685

Comprehensive income
 

 
 
 
 

 
 
 
 

 
 
 
 

 
 
attributable to non-controlling interest
 

 
528

 
 

 
333

 
 

 
1,062

 
 

 
107

Comprehensive income
 

 
 
 
 

 
 
 
 

 
 
 
 

 
 
attributable to
 

 
 
 
 

 
 
 
 

 
 
 
 

 
 
Hampton Roads Bankshares, Inc.
 

 
$
1,382

 
 

 
$
4,724

 
 

 
$
4,521

 
 

 
$
10,578

See accompanying notes to consolidated financial statements.

5

HAMPTON ROADS BANKSHARES, INC
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS


CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Accumulated
 
 
 
 
 
 
 
 
 
 
 
 
 
Other
 
Non-
 
Total
(in thousands, except share data)
Common Stock
 
Capital
 
Accumulated
 
Comprehensive
 
controlling
 
Shareholders'
(unaudited)
Shares
 
Amount
 
Surplus
 
Deficit
 
Income
 
Interest
 
Equity
Balance at December 31, 2014
170,572,217

 
$
1,706

 
$
588,692

 
$
(395,535
)
 
$
2,134

 
$
500

 
$
197,497

Net income

 

 

 
4,061

 

 
1,062

 
5,123

Other comprehensive income

 

 

 

 
460

 

 
460

Share-based compensation expense

 

 
1,216

 

 

 

 
1,216

Net settlement of restricted stock units
124,999

 
1

 

 

 

 

 
1

Distributed non-controlling interest

 

 

 

 

 
(699
)
 
(699
)
Balance at June 30, 2015
170,697,216

 
$
1,707

 
$
589,908

 
$
(391,474
)
 
$
2,594

 
$
863

 
$
203,598

See accompanying notes to consolidated financial statements.

6

HAMPTON ROADS BANKSHARES, INC
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS


CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Six Months Ended
(unaudited)
June 30, 2015
June 30, 2014
Operating Activities:
 

 

Net income
$
5,123

$
6,442

Adjustments to reconcile net income to net cash used in operating activities:
 

 

Depreciation and amortization
1,594

1,641

Amortization of intangible assets and fair value adjustments
223

(84
)
Provision for loan losses
600

100

Proceeds from mortgage loans held for sale
324,368

199,263

Originations of mortgage loans held for sale
(367,650
)
(204,715
)
Share-based compensation expense
1,217

329

Net amortization of premiums and accretion of discounts on investment securities available for sale
1,257

998

Income from bank-owned life insurance
(655
)
(3,545
)
Gain on sale of investment securities available for sale
(238
)
(185
)
Loss on sale of premises and equipment
14

31

Gain on sale of other real estate owned and repossessed assets
(20
)
(144
)
Impairment of other real estate owned and repossessed assets
1,265

1,426

Changes in:
 

 

Interest receivable
388

408

Other assets
2,603

(771
)
Interest payable
3

(5,544
)
Other liabilities
1,552

(528
)
Net cash used in operating activities
(28,356
)
(4,878
)
Investing Activities:
 

 

Proceeds from maturities and calls of investment securities available for sale
16,617

17,018

Proceeds from sale of investment securities available for sale
82,694

103,594

Purchase of investment securities available for sale
(7,836
)
(138,469
)
Proceeds from sale of restricted equity securities
5,839

1,524

Purchase of restricted equity securities
(1,551
)
(240
)
Proceeds from sale of premises and equipment
26

718

Purchase of premises and equipment
(626
)
(896
)
Net (increase) decrease in loans
(107,220
)
10,802

Proceeds from bank-owned life insurance death benefit

5,059

Proceeds from sale of other real estate owned and repossessed assets, net
7,171

13,827

Net cash provided by (used in) investing activities
(4,886
)
12,937

Financing Activities:
 

 

Net increase (decrease) in deposits
93,115

38,194

Repayments of Federal Home Loan Bank borrowings
(98,000
)
(17,517
)
Settlement of restricted stock units
1

(19
)
Distributed non-controlling interest
(699
)
(44
)
Net cash provided by (used in) financing activities
(5,583
)
20,614

Increase (decrease) in cash and cash equivalents
(38,825
)
28,673

Cash and cash equivalents at beginning of period
103,619

62,301

Cash and cash equivalents at end of period
$
64,794

$
90,974

Supplemental cash flow information:
 

 

Cash paid for interest
$
6,120

$
11,444

Cash paid for income taxes
4


Supplemental non-cash information:
 



Change in unrealized gain on securities available for sale
$
460

$
4,243

Transfer from other real estate owned and repossessed assets to loans
594

941

Transfer from other real estate owned and repossessed assets to other assets
1,410


Transfer from loans to other real estate owned and repossessed assets
1,811

1,804

See accompanying notes to 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 six months ended June 30, 2015 are not necessarily indicative of the results to be expected for the full year. The Company has two banking subsidiaries, Bank of Hampton Roads (“BOHR”) and Shore Bank (“Shore”, collectively the “Banks”), which constitute substantially all of the Company’s assets and operations. 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, 2014 (“2014 Form 10-K”).

Use of Estimates in the Preparation of Financial Statements

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

Recent Accounting Pronouncements

In January 2014, the FASB issued ASU 2014-04, Receivables - Troubled Debt Restructurings by Creditors (Subtopic 310-40): Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon a Foreclosure, which clarifies when banks and similar institutions (creditors) should reclassify mortgage loans collateralized by residential real estate properties from the loan portfolio to other real estate owned (OREO). The ASU defines when an in-substance repossession or foreclosure has occurred and when a creditor is considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan. This ASU allows for prospective or modified retrospective application. The effective date for public business entities is for annual periods, and interim periods within those annual periods, beginning after December 15, 2014. Early adoption is permitted. The adoption of the new guidance did not have a material impact on the Company’s consolidated financial statements.

During the second quarter of 2014, ASU 2014-09, Revenue from Contracts with Customers (“new revenue standard”), was issued. ASU 2014-09 represents a comprehensive reform of many of the revenue recognition requirements in GAAP. The ASU creates a new topic within the Accounting Standards Codification (“ASC”), Topic 606, Revenue from Contracts with Customers. The new revenue standard will supersede the current revenue recognition requirements in Topic 605, Revenue Recognition, and supersedes or amends much of the industry-specific revenue recognition guidance found throughout the ASC. The core principle of the new revenue standard is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods and services. The ASU creates a five-step process for achieving that core principle: (1) identifying the contract with the customer, (2) identifying the performance obligations in the contract, (3) determining the transaction price, (4) allocating the transaction price to the performance obligations, and (5) recognizing revenue when an entity has completed the performance obligations. The ASU also requires additional disclosures that allow users of the financial statements to understand the nature, timing, and uncertainty of revenue and cash flows resulting from contracts with customers. The guidance in the ASU is effective for the Company on January 1, 2017. The new revenue standard permits the use of retrospective or cumulative effect transition methods. It appears that a majority of the Company’s contracts with customers (i.e., financial instruments) do not fall within the scope of the new revenue standard. Therefore, the Company does not expect the ASU to have a material impact on the Company’s reported financial results.




8

HAMPTON ROADS BANKSHARES, INC
PART I. FINANCIAL INFORMATION
ITEM 1. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE B - Earnings Per Share
 
The following table shows the basic and diluted earnings per share calculations for the three and six months ended June 30, 2015 and 2014
 
 
 
 
 
 
 
(in thousands, except share and per share data)
Three Months Ended
 
Six Months Ended
(unaudited)
June 30, 2015
 
June 30, 2014
 
June 30, 2015
 
June 30, 2014
Net income attributable to
 
 
 
 
 
 
 
Hampton Roads Bankshares, Inc.
$
2,726

 
$
2,476

 
$
4,061

 
$
6,335

Shares:
 
 
 
 
 
 
 
Weighted average number
 
 
 
 
 
 
 
of common shares outstanding
171,505,172

 
170,443,468

 
171,447,138

 
170,725,817

Dilutive stock awards and warrants
1,170,106

 
1,284,234

 
1,095,593

 
1,279,762

Diluted weighted average number of
 
 
 
 
 
 
 
common shares outstanding
172,675,278

 
171,727,702

 
172,542,731

 
172,005,579

Basic income per share
$
0.02

 
$
0.01

 
$
0.02

 
$
0.04

Diluted income per share
$
0.02

 
$
0.01

 
$
0.02

 
$
0.04

 

9

HAMPTON ROADS BANKSHARES, INC
PART I. FINANCIAL INFORMATION
ITEM 1. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE C - Investment Securities
 
The amortized cost, gross unrealized gains and losses, and fair values of investment securities available for sale at June 30, 2015 and December 31, 2014 were as follows.
 
 
June 30, 2015
 
 
 
Gross
 
Gross
 
 
 
Amortized
 
Unrealized
 
Unrealized
 
Fair
(in thousands)
Cost
 
Gains
 
Losses
 
Value
U.S. agency securities
$
14,973

 
$
581

 
$

 
$
15,554

Corporate bonds
11,998

 

 
701

 
11,297

Mortgage-backed securities -
 
 
 
 
 
 
 
Agency
155,878

 
2,411

 
194

 
158,095

Asset-backed securities
23,774

 
95

 
125

 
23,744

Equity securities
970

 
527

 

 
1,497

Total investment securities
 
 
 
 
 
 
 
available for sale
$
207,593

 
$
3,614

 
$
1,020

 
$
210,187


 
December 31, 2014
 
 
 
Gross
 
Gross
 
 
 
Amortized
 
Unrealized
 
Unrealized
 
Fair
(in thousands)
Cost
 
Gains
 
Losses
 
Value
U.S. agency securities
$
17,042

 
$
611

 
$

 
$
17,653

Corporate bonds
15,080

 
23

 
543

 
14,560

Mortgage-backed securities -
 
 
 
 
 
 
 
Agency
212,650

 
2,991

 
213

 
215,428

Asset-backed securities
54,345

 

 
1,148

 
53,197

Equity securities
970

 
422

 
9

 
1,383

Total investment securities
 
 
 
 
 
 
 
available for sale
$
300,087

 
$
4,047

 
$
1,913

 
$
302,221


Unrealized losses
 
The following tables reflect the fair values and gross unrealized losses aggregated by investment category and length of time that the individual securities have been in a continuous unrealized loss position at June 30, 2015 and December 31, 2014.
 
 
June 30, 2015
(in thousands)
Less than 12 Months
 
12 Months or More
 
Total
 
 
 
Unrealized
 
 
 
Unrealized
 
 
 
Unrealized
Description of Securities
Fair Value
 
Loss
 
Fair Value
 
Loss
 
Fair Value
 
Loss
Corporate bonds
$
3,755

 
$
245

 
$
7,542

 
$
456

 
$
11,297

 
$
701

Mortgage-backed securities -
 
 
 
 
 
 
 
 
 
 
 
Agency
11,587

 
144

 
1,619

 
50

 
13,206

 
194

Asset-backed securities
3,971

 
10

 
5,825

 
115

 
9,796

 
125

 
$
19,313

 
$
399

 
$
14,986

 
$
621

 
$
34,299

 
$
1,020

 

10

HAMPTON ROADS BANKSHARES, INC
PART I. FINANCIAL INFORMATION
ITEM 1. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 
December 31, 2014
(in thousands)
Less than 12 Months
 
12 Months or More
 
Total
 
 
 
Unrealized
 
 
 
Unrealized
 
 
 
Unrealized
Description of Securities
Fair Value
 
Loss
 
Fair Value
 
Loss
 
Fair Value
 
Loss
Corporate bonds
11,462

 
542


2,517


1


13,979


543

Mortgage-backed securities -
 
 
 
 
 
 
 
 
 
 
 
Agency
17,881

 
77

 
7,895

 
136

 
25,776

 
213

Asset-backed securities
34,896

 
570

 
15,379

 
578

 
50,275

 
1,148

Equity securities
181

 
9

 

 

 
181

 
9

 
$
64,420


$
1,198

 
$
25,791

 
$
715

 
$
90,211

 
$
1,913

 
Debt securities with unrealized losses totaling $1.0 million at June 30, 2015 included four corporate securities, eleven mortgage-backed agency securities, and three asset-backed securities, compared with unrealized losses totaling $1.9 million at December 31, 2014, which included five corporate securities, twelve mortgage-backed agency securities, and eighteen asset-backed securities. In instances where an unrealized loss did occur, there was no indication of an adverse change in credit on any of the underlying securities in the tables above. Management believes no individual unrealized loss represented an other-than-temporary impairment as of those dates. The Company does not intend to sell, and it is not more likely than not that the Company will be required to sell, the securities before the recovery of their amortized cost basis, which may be at maturity.
 
At June 30, 2015, none of the equity securities experienced unrealized losses compared with one of the equity securities which experienced an unrealized loss totaling $9 thousand at December 31, 2014. The Company’s unrealized losses on equity securities were caused by what management deems to be transitory fluctuations in market valuation.

Other-than-temporary impairment (“OTTI”)
 
During the six months ended June 30, 2015 and 2014, none of the investment securities available for sale were determined to be other-than-temporarily impaired; therefore, no losses were recognized through noninterest income.
 
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 macroeconomic 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 the information available to management at a point in time.
 
When OTTI occurs, the amount of the OTTI recognized in earnings depends on whether an entity intends to sell the security or it is more likely than not 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 other 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.
 
Maturities of investment securities
 
The amortized cost and fair value by contractual maturity of investment securities available for sale that are not determined to be other-than-temporarily impaired at June 30, 2015 and December 31, 2014 are shown below. 
 

11

HAMPTON ROADS BANKSHARES, INC
PART I. FINANCIAL INFORMATION
ITEM 1. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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. 
 
 
June 30, 2015
 
December 31, 2014
 
Amortized
 
 
 
Amortized
 
 
(in thousands)
Cost
 
Fair Value
 
Cost
 
Fair Value
Due in one year or less
$
646

 
$
649

 
$
970

 
$
982

Due after one year
 
 
 
 
 
 
 
but less than five years
2,320

 
2,380

 
5,670

 
5,726

Due after five years
 
 
 
 
 
 
 
but less than ten years
12,865

 
12,250

 
13,228

 
12,806

Due after ten years
11,140

 
11,572

 
12,254

 
12,699

Mortgage-backed securities -
 
 
 
 
 
 
 
Agency
155,878

 
158,095

 
212,650

 
215,428

Asset-backed securities
23,774

 
23,744

 
54,345

 
53,197

Equity securities
970

 
1,497

 
970

 
1,383

Total available for sale securities
$
207,593

 
$
210,187

 
$
300,087

 
$
302,221


Federal Home Loan Bank (“FHLB”)
 
The Company’s investment in FHLB stock totaled $4.7 million at June 30, 2015 and $9.2 million at December 31, 2014.  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 no 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 June 30, 2015 and December 31, 2014, 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 $6.8 million at June 30, 2015 and $6.6 million at December 31, 2014.  FRB stock comprises the majority of this amount and is generally viewed as a long-term investment and as a restricted investment security as it is required to be held to effect membership in the Federal Reserve System.  It is carried at cost as there is not an active market or exchange for the stock other than the FRB or member institutions.  The Company does not consider these investments to be other-than-temporarily impaired at June 30, 2015 and December 31, 2014, except for one restricted equity security, which was determined to be other-than-temporarily impaired at December 31, 2014 for which a $10 thousand impairment was recorded in 2014. No impairment has been recognized for any of the other restricted equity securities, including the investment in FRB.


12

HAMPTON ROADS BANKSHARES, INC
PART I. FINANCIAL INFORMATION
ITEM 1. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE D - Loans and Allowance for Loan Losses
 
The Company offers a full range of commercial, real estate, and consumer loans described in further detail below.  Our loan portfolio is comprised of the following categories:  commercial and industrial, construction, real estate-commercial mortgage, real estate-residential mortgage, and installment.  Our primary lending objective is to meet business and consumer needs in our market areas while maintaining our standards of profitability and credit quality and enhancing client relationships.  All lending decisions are based upon a thorough evaluation of the financial strength and credit history of the borrower and the quality and value of the collateral securing the loan.  With few exceptions, personal guarantees are required on all loans.
 
During 2012 and 2013, the Company purchased several portfolios of loans secured by boats totaling $55.7 million that are classified as installment loans. In May 2014, Shore launched Shore Premier Finance ("SPF"), a specialty finance unit that specializes in marine financing for U.S. Coast Guard documented vessels to customers throughout the United States. Through direct marine loan originations, as well as purchases of existing portfolios of marine loans, the Company's intention is to significantly grow the installment loan portion of its loan portfolio. During the first quarter of 2015, SPF arranged a $104.7 million marine loan portfolio purchase, of which $75.3 million were classified as installment loans and $29.4 million were commercial floor plan loans classified as commercial and industrial.

The total of our loans by segment at June 30, 2015 and December 31, 2014 are as follows.
 
(in thousands)
June 30, 2015
 
December 31, 2014
Commercial and Industrial
$
243,023

 
$
219,029

Construction
144,827

 
136,955

Real estate - commercial mortgage
637,124

 
639,163

Real estate - residential mortgage
350,086

 
354,017

Installment
154,396

 
74,821

Deferred loan fees and related costs
(432
)
 
(1,050
)
Total loans
$
1,529,024

 
$
1,422,935

 
Allowance for Loan Losses

A rollforward of the activity within the allowance for loan losses by loan type and recorded investment in loans for the three and six months ended June 30, 2015 and 2014 is as follows.

 
Three Months Ended June 30, 2015
 
 
 
 
 
Real Estate
 
 
 
 
 
 
 
Commercial
 
 
 
Commercial
 
Residential
 
 
 
 
 
 
(in thousands)
and Industrial
 
Construction
 
Mortgage
 
Mortgage
 
Installment
 
Unallocated
 
Total
Allowance for loan losses:
 
 
 
 
 
 
 
 
 
 
 
 
 
Beginning balance
$
4,490

 
$
5,228

 
$
7,607

 
$
6,689

 
$
1,064

 
$
3,099

 
$
28,177

Charge-offs
(185
)
 
(433
)
 
(166
)
 
(373
)
 
(89
)
 

 
(1,246
)
Recoveries
277

 
60

 
177

 
285

 
6

 

 
805

Provision
2,007

 
(574
)
 
(1,178
)
 
(731
)
 
(193
)
 
669

 

Ending balance
$
6,589

 
$
4,281

 
$
6,440

 
$
5,870

 
$
788

 
$
3,768

 
$
27,736



13

HAMPTON ROADS BANKSHARES, INC
PART I. FINANCIAL INFORMATION
ITEM 1. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 
Three Months Ended June 30, 2014
 
 
 
 
 
Real Estate
 
 
 
 
 
 
 
Commercial
 
 
 
Commercial
 
Residential
 
 
 
 
 
 
(in thousands)
and Industrial
 
Construction
 
Mortgage
 
Mortgage
 
Installment
 
Unallocated
 
Total
Allowance for loan losses:
 
 
 
 
 
 
 
 
 
 
 
 
 
Beginning balance
$
2,956

 
$
6,471

 
$
8,007

 
$
8,463

 
$
1,470

 
$
3,893

 
$
31,260

Charge-offs
(1,028
)
 
(2,604
)
 
(578
)
 
(1,755
)
 
(445
)
 

 
(6,410
)
Recoveries
173

 
619

 
51

 
307

 
62

 

 
1,212

Provision
(573
)
 
(502
)
 
172

 
119

 
473

 
311

 

Ending balance
$
1,528

 
$
3,984

 
$
7,652

 
$
7,134

 
$
1,560

 
$
4,204

 
$
26,062




 
Six Months Ended June 30, 2015
 
 
 
 
 
Real Estate
 
 
 
 
 
 
 
Commercial
 
 
 
Commercial
 
Residential
 
 
 
 
 
 
(in thousands)
and Industrial
 
Construction
 
Mortgage
 
Mortgage
 
Installment
 
Unallocated
 
Total
Allowance for loan losses:
 
 
 
 
 
 
 
 
 
 
 
 
 
Beginning balance
$
4,605

 
$
4,342

 
$
6,854

 
$
7,142

 
$
979

 
$
3,128

 
$
27,050

Charge-offs
(369
)
 
(464
)
 
(266
)
 
(470
)
 
(128
)
 

 
(1,697
)
Recoveries
640

 
491

 
234

 
382

 
36

 

 
1,783

Provision
1,713

 
(88
)
 
(382
)
 
(1,184
)
 
(99
)
 
640

 
600

Ending balance
$
6,589

 
$
4,281

 
$
6,440

 
$
5,870

 
$
788

 
$
3,768

 
$
27,736

Ending balance:  attributable to
 
 
 
 
 
 
 
 
 
 
 
 
 
loans individually evaluated
 
 
 
 
 
 
 
 
 
 
 
 
 
for impairment
$
2,845

 
$
1,662

 
$
351

 
$
1,576

 
$
2

 
 
 
$
6,436

Recorded investment: loans
 
 
 
 
 
 
 
 
 
 
 
 
 
individually evaluated for
 
 
 
 
 
 
 
 
 
 
 
 
 
impairment
$
8,026

 
$
24,021

 
$
26,071

 
$
12,475

 
$
69

 
 
 
 
Ending balance:  attributable to
 
 
 
 
 
 
 
 
 
 
 
 
 
loans collectively evaluated
 
 
 
 
 
 
 
 
 
 
 
 
 
for impairment
$
3,744

 
$
2,619

 
$
6,089

 
$
4,294

 
$
786

 
$
3,768

 
$
21,300

Recorded investment: loans
 
 
 
 
 
 
 
 
 
 
 
 
 
collectively evaluated for
 
 
 
 
 
 
 
 
 
 
 
 
 
impairment
$
234,997

 
$
120,806

 
$
611,053

 
$
337,611

 
$
154,327

 
 
 
 



14

HAMPTON ROADS BANKSHARES, INC
PART I. FINANCIAL INFORMATION
ITEM 1. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 
Six Months Ended June 30, 2014
 
 
 
 
 
Real Estate
 
 
 
 
 
 
 
Commercial
 
 
 
Commercial
 
Residential
 
 
 
 
 
 
(in thousands)
and Industrial
 
Construction
 
Mortgage
 
Mortgage
 
Installment
 
Unallocated
 
Total
Allowance for loan losses:
 
 
 
 
 
 
 
 
 
 
 
 
 
Beginning balance
$
2,404

 
$
9,807

 
$
10,135

 
$
7,914

 
$
521

 
$
4,250

 
$
35,031

Charge-offs
(1,160
)
 
(5,428
)
 
(2,208
)
 
(2,256
)
 
(525
)
 

 
(11,577
)
Recoveries
270

 
1,283

 
268

 
557

 
130

 

 
2,508

Provision
14

 
(1,678
)
 
(543
)
 
919

 
1,434

 
(46
)
 
100

Ending balance
$
1,528

 
$
3,984

 
$
7,652

 
$
7,134

 
$
1,560

 
$
4,204

 
$
26,062

Ending balance:  attributable to
 
 
 
 
 
 
 
 
 
 
 
 
 
loans individually evaluated
 
 
 
 
 
 
 
 
 
 
 
 
 
for impairment
$
219

 
$
1,038

 
$
2,482

 
$
2,864

 
$
206

 
 
 
$
6,809

Recorded investment: loans
 
 
 
 
 
 
 
 
 
 
 
 
 
individually evaluated for
 
 
 
 
 
 
 
 
 
 
 
 
 
impairment
$
2,366

 
$
7,669

 
$
30,614

 
$
20,150

 
$
374

 
 
 
 
Ending balance:  attributable to
 
 
 
 
 
 
 
 
 
 
 
 
 
loans collectively evaluated
 
 
 
 
 
 
 
 
 
 
 
 
 
for impairment
$
1,309

 
$
2,946

 
$
5,170

 
$
4,270

 
$
1,354

 
$
4,204

 
$
19,253

Recorded investment: loans
 
 
 
 
 
 
 
 
 
 
 
 
 
collectively evaluated for
 
 
 
 
 
 
 
 
 
 
 
 
 
impairment
$
195,744

 
$
130,414

 
$
598,150

 
$
327,630

 
$
51,787

 
 
 
 

Management believes the allowance for loan losses as of June 30, 2015 is adequate to absorb losses inherent in the 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 based on their judgments about information available at the time of the examinations.
 
Impaired Loans
 
Total impaired loans were $70.7 million and $48.9 million at June 30, 2015, and December 31, 2014, respectively.  The Company continues to resolve its troubled loans through charge-offs, curtailments, pay offs, and returns of loans to performing status. Collateral dependent impaired loans were $65.2 million and $43.3 million at June 30, 2015, and December 31, 2014, respectively, and are measured at the fair value of the underlying collateral less costs to sell. Impaired loans for which no allowance is provided totaled $30.3 million and $29.1 million at June 30, 2015, and December 31, 2014, respectively.  Loans written down to their estimated fair value of collateral less the costs to sell account for $6.9 million and $7.6 million of the impaired loans for which no allowance has been provided as of June 30, 2015, and December 31, 2014, respectively. The weighted average age of appraisals for collateral dependent loans is 0.55 and 0.56 years at June 30, 2015 and December 31, 2014, respectively.  The 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 loss is expected on these loans.

The following charts show recorded investment, unpaid balance, and related allowance, as of June 30, 2015 and December 31, 2014, as well as average investment and interest recognized for the three and six months ended June 30, 2015 and 2014, for impaired loans by major segment and class.

15

HAMPTON ROADS BANKSHARES, INC
PART I. FINANCIAL INFORMATION
ITEM 1. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 
June 30, 2015
 
Three Months Ended 
 June 30, 2015
 
Six Months Ended 
 June 30, 2015
 
Recorded
 
Unpaid
 
Related
 
Average
 
Interest
 
Average
 
Interest
(in thousands)
Investment
 
Balance
 
Allowance
 
Investment
 
Recognized
 
Investment
 
Recognized
With no related
 
 
 
 
 
 
 
 
 
 
 
 
 
allowance recorded:
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial & Industrial
$
2,047

 
$
2,826

 
$

 
$
2,107

 
$
2

 
$
2,128

 
$
4

Construction
 
 
 
 
 
 
 
 
 
 
 
 
 
1-4 family residential
 
 
 
 
 
 
 
 
 
 
 
 
 
construction

 

 

 

 

 

 

Commercial construction
2,405

 
3,926

 

 
2,624

 
15

 
2,735

 
31

Real estate
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial Mortgage
 
 
 
 
 
 
 
 
 
 
 
 
 
Owner occupied
12,525

 
12,726

 

 
12,886

 
74

 
12,919

 
148

Non-owner occupied
7,332

 
11,340

 

 
8,486

 
38

 
8,510

 
77

Residential Mortgage
 
 
 
 
 
 
 
 
 
 
 
 
 
Secured by 1-4 family
 
 
 
 
 
 
 
 
 
 
 
 
 
1st lien
4,835

 
5,547