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EX-31.2 - EXHIBIT 31.2 - Xenith Bankshares, Inc.exhibit3121.htm
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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 March 31, 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 April 30, 2015 was 170,697,216 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
 
March 31, 2015
 
 
December 31, 2014
 
 
 
 
 
Consolidated Statements of Operations
 
Three months ended March 31, 2015 and 2014
 
 
 
 
 
Consolidated Statements of Comprehensive Income
 
Three months ended March 31, 2015 and 2014
 
 
 
 
 
Consolidated Statement of Changes in Shareholders' Equity
 
Three months ended March 31, 2015
 
 
 
 
 
Consolidated Statements of Cash Flows
 
Three months ended March 31, 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)
March 31, 2015
 
December 31, 2014
Assets:
 
 
 
Cash and due from banks
$
16,259

 
$
16,684

Interest-bearing deposits in other banks
1,984

 
1,349

Overnight funds sold and due from Federal Reserve Bank
81,151

 
85,586

Investment securities available for sale, at fair value
234,535

 
302,221

Restricted equity securities, at cost
13,902

 
15,827

Loans held for sale
55,519

 
22,092

Loans
1,534,881

 
1,422,935

Allowance for loan losses
(28,177
)
 
(27,050
)
Net loans
1,506,704

 
1,395,885

Premises and equipment, net
62,839

 
63,519

Interest receivable
4,209

 
4,503

Other real estate owned and repossessed assets,
 
 
 
net of valuation allowance
17,884

 
21,721

Intangible assets, net
693

 
842

Bank-owned life insurance
49,885

 
49,536

Other assets
10,177

 
8,841

Totals assets
$
2,055,741

 
$
1,988,606

Liabilities and Shareholders' Equity:
 
 
 
Deposits:
 
 
 
Noninterest-bearing demand
$
292,044

 
$
266,921

Interest-bearing:
 
 
 
Demand
633,034

 
621,066

Savings
59,814

 
56,221

Time deposits:
 
 
 
Less than $100
351,077

 
342,794

$100 or more
347,449

 
294,346

Total deposits
1,683,418

 
1,581,348

Federal Home Loan Bank borrowings
125,664

 
165,847

Other borrowings
29,337

 
29,224

Interest payable
582

 
560

Other liabilities
15,170

 
14,130

Total liabilities
1,854,171

 
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 March 31, 2015 and December 31, 2014,
 
 
 
respectively
1,707

 
1,706

Capital surplus
589,264

 
588,692

Accumulated deficit
(394,200
)
 
(395,535
)
Accumulated other comprehensive income (loss), net of tax
3,938

 
2,134

Total shareholders' equity before non-controlling interest
200,709

 
196,997

Non-controlling interest
861

 
500

Total shareholders' equity
201,570

 
197,497

Total liabilities and shareholders' equity
$
2,055,741

 
$
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
(unaudited)
March 31, 2015
 
March 31, 2014
Interest Income:
 
 
 
Loans, including fees
$
16,159

 
$
15,692

Investment securities
1,742

 
2,234

Overnight funds sold and due from FRB
59

 
32

Total interest income
17,960

 
17,958

Interest Expense:
 

 
 

Deposits:
 

 
 

Demand
674

 
623

Savings
10

 
8

Time deposits:
 

 
 

Less than $100
909

 
772

$100 or more
934

 
737

Interest on deposits
2,527

 
2,140

Federal Home Loan Bank borrowings
324

 
422

Other borrowings
418

 
441

Total interest expense
3,269

 
3,003

Net interest income
14,691

 
14,955

Provision for loan losses
600

 
100

Net interest income
 
 
 

after provision for loan losses
14,091

 
14,855

Noninterest Income:
 

 
 

Mortgage banking revenue
4,223

 
1,811

Service charges on deposit accounts
1,142

 
1,159

Income from bank-owned life insurance
349

 
3,216

Gain on sale of investment securities available for sale (includes $112 and $67 accumulated other comprehensive income reclassifications for unrealized net gains on available for sale securities during the three months ended March 31, 2015, and March 31, 2014, respectively)
112

 
67

Loss on sale of premises and equipment
(14
)
 
(13
)
Gain on sale of other real estate owned and repossessed assets
76

 
221

Other than temporary impairment of other real estate owned and repossessed assets
(934
)
 
(336
)
Visa check card income
641

 
593

Other
858

 
584

Total noninterest income
6,453

 
7,302

Noninterest Expense:
 

 
 

Salaries and employee benefits
10,667

 
9,567

Professional and consultant fees
808

 
1,228

Occupancy
1,629

 
1,719

FDIC insurance
624

 
901

Data processing
1,431

 
1,147

Problem loan and repossessed asset costs
120

 
433

Equipment
350

 
373

Directors' and regional board fees
302

 
387

Advertising and marketing
260

 
254

Other
2,444

 
2,508

Total noninterest expense
18,635

 
18,517

Income before provision for income taxes
1,909

 
3,640

Provision for income taxes
40

 
7

Net income
1,869

 
3,633

Net income (loss) attributable to non-controlling interest
534

 
(226
)
Net income attributable to
 

 
 

Hampton Roads Bankshares, Inc.
$
1,335

 
$
3,859

Per Share:
 

 
 

Cash dividends declared
$

 
$

Basic income
$
0.01

 
$
0.02

Diluted income
$
0.01

 
$
0.02

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
(unaudited)
March 31, 2015
 
March 31, 2014
Net income
 

 
$
1,869

 
 

 
$
3,633

Other comprehensive income,
 

 
 
 
 

 
 
net of tax
 
 
 
 
 
 
 
Change in unrealized gain
 

 
 
 
 

 
 
on securities available for sale
$
1,916

 
 
 
$
2,062

 
 
Reclassification adjustment for
 

 
 
 
 

 
 
securities gain included in
 

 
 
 
 

 
 
net income
(112
)
 
 
 
(67
)
 
 
Other comprehensive income,
 

 
 
 
 

 
 
net of tax
 

 
1,804

 
 

 
1,995

Comprehensive income
 

 
3,673

 
 

 
5,628

Comprehensive income (loss) attributable
 

 
 
 
 

 
 
to non-controlling interest
 

 
534

 
 

 
(226
)
Comprehensive income
 

 
 
 
 

 
 
attributable to
 

 
 
 
 

 
 
Hampton Roads Bankshares, Inc.
 

 
$
3,139

 
 

 
$
5,854

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 (Loss)
 
Interest
 
Equity
Balance at December 31, 2014
170,572,217

 
$
1,706

 
$
588,692

 
$
(395,535
)
 
$
2,134

 
$
500

 
$
197,497

Net income

 

 

 
1,335

 

 
534

 
1,869

Other comprehensive income

 

 

 

 
1,804

 

 
1,804

Share-based compensation expense

 

 
572

 

 

 

 
572

Net settlement of restricted stock units
124,999

 
1

 

 

 

 

 
1

Distributed non-controlling interest

 

 

 

 

 
(173
)
 
(173
)
Balance at March 31, 2015
170,697,216

 
$
1,707

 
$
589,264

 
$
(394,200
)
 
$
3,938

 
$
861

 
$
201,570

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)
Three Months Ended
(unaudited)
March 31, 2015
March 31, 2014
Operating Activities:
 

 

Net income
$
1,869

$
3,633

Adjustments to reconcile net income to net cash provided by (used in) operating activities:
 

 

Depreciation and amortization
801

833

Amortization of intangible assets and fair value adjustments
79

46

Provision for loan losses
600

100

Proceeds from mortgage loans held for sale
130,729

86,389

Originations of mortgage loans held for sale
(164,156
)
(81,846
)
Share-based compensation expense
572

362

Net amortization of premiums and accretion of discounts on investment securities available for sale
355

526

Income from bank-owned life insurance
(349
)
(3,216
)
Gain on sale of investment securities available for sale
(112
)
(67
)
Loss on sale of premises and equipment
14

13

Gain on sale of other real estate owned and repossessed assets
(76
)
(221
)
Other-than-temporary impairment of other real estate owned and repossessed assets
934

336

Changes in:
 

 

Interest receivable
294

244

Other assets
(1,336
)
(2,146
)
Interest payable
22

316

Other liabilities
1,040

(388
)
Net cash provided by (used in) operating activities
(28,720
)
4,914

Investing Activities:
 

 

Proceeds from maturities and calls of investment securities available for sale
8,069

8,405

Proceeds from sale of investment securities available for sale
61,178

16,526

Purchase of investment securities available for sale

(16,285
)
Proceeds from sale of restricted equity securities
2,121

962

Purchase of restricted equity securities
(196
)
(25
)
Proceeds from sale of premises and equipment
5

70

Purchase of premises and equipment
(140
)
(332
)
Net (increase) decrease in loans
(111,623
)
30,993

Proceeds from bank-owned life insurance death benefit

2,226

Proceeds from sale of other real estate owned and repossessed assets, net
3,183

8,855

Net cash provided by (used in) investing activities
(37,403
)
51,395

Financing Activities:
 

 

Net increase (decrease) in deposits
102,070

(5,417
)
Repayments of Federal Home Loan Bank borrowings
(40,000
)
(5,017
)
Settlement of restricted stock units
1


Distributed non-controlling interest
(173
)
(44
)
Net cash provided by (used in) financing activities
61,898

(10,478
)
Increase (decrease) in cash and cash equivalents
(4,225
)
45,831

Cash and cash equivalents at beginning of period
103,619

62,301

Cash and cash equivalents at end of period
$
99,394

$
108,132

Supplemental cash flow information:
 

 

Cash paid for interest
$
3,001

$
2,687

Cash paid for income taxes
3


Supplemental non-cash information:
 

 
Change in unrealized gain (loss) on securities available for sale
$
1,804

$
1,995

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

901

Transfer from loans to other real estate owned and repossessed assets
798

825

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 three months ended March 31, 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 tax assets, liabilities, and expenses

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 - Regulatory Matters
 
Termination of a Material Definitive Agreement
On February 9, 2015, the Company received notice that the memorandum of understanding, which was effective March 27, 2014 (the “MOU”), by and among the Company, BOHR, the Federal Reserve Bank of Richmond ("FRB") and the Bureau of Financial Institutions of the Virginia State Corporation Commission (“Bureau of Financial Institutions”) was terminated effective February 5, 2015.

Under the MOU that was terminated, the Company and BOHR had agreed that they would obtain prior written approval of the FRB and the Bureau of Financial Institutions before, (i) either the Company or BOHR declared or paid dividends of any kind; (ii) the Company made any payments on its trust preferred securities; (iii) the Company incurred or guaranteed any debt; or (iv) the Company purchased or redeemed any shares of its stock. In addition, the MOU had instituted certain reporting requirements and addressed ongoing regulatory requirements.

NOTE C - Earnings Per Share
 
The following table shows the basic and diluted earnings per share calculations for the three months ended March 31, 2015 and 2014. 
 
 
 
(in thousands, except share and per share data)
Three Months Ended
(unaudited)
March 31, 2015
 
March 31, 2014
Net income attributable to
 
 
 
Hampton Roads Bankshares, Inc.
$
1,335

 
$
3,859

Shares:
 
 
 
Weighted average number
 
 
 
of common shares outstanding
170,948,437

 
170,477,548

Dilutive stock awards and warrants
1,263,347

 
751,215

Diluted weighted average number of
 
 
 
common shares outstanding
172,211,784

 
171,228,763

Basic income per share
$
0.01

 
$
0.02

Diluted income per share
$
0.01

 
$
0.02

 
NOTE D - Investment Securities
 
The amortized cost, gross unrealized gains and losses, and fair values of investment securities available for sale at March 31, 2015 and December 31, 2014 were as follows.
 
 
March 31, 2015
 
 
 
Gross
 
Gross
 
 
 
Amortized
 
Unrealized
 
Unrealized
 
Fair
(in thousands)
Cost
 
Gains
 
Losses
 
Value
U.S. agency securities
$
15,786

 
$
718

 
$

 
$
16,504

Corporate bonds
12,001

 

 
472

 
11,529

Mortgage-backed securities -
 
 
 
 
 
 
 
Agency
178,072

 
3,671

 
62

 
181,681

Asset-backed securities
23,768

 
22

 
403

 
23,387

Equity securities
970

 
464

 

 
1,434

Total investment securities
 
 
 
 
 
 
 
available for sale
$
230,597

 
$
4,875

 
$
937

 
$
234,535



9

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

 
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 March 31, 2015 and December 31, 2014.
 
 
March 31, 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
$
11,529

 
$
472

 
$

 
$

 
$
11,529

 
$
472

Mortgage-backed securities -
 
 
 
 
 
 
 
 
 
 
 
Agency
3,534

 
37

 
1,706

 
25

 
5,240

 
62

Asset-backed securities
14,942

 
158

 
5,693

 
245

 
20,635

 
403

 
$
30,005

 
$
667

 
$
7,399

 
$
270

 
$
37,404

 
$
937

 
 
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 $937 thousand at March 31, 2015 included four corporate securities, five mortgage-backed agency securities, and eight 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 March 31, 2015, none of the equity securities experienced unrealized losses compared with one of the equity securities 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.

10

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

Other-than-temporary impairment (“OTTI”)
 
During the three months ended March 31, 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 March 31, 2015 and December 31, 2014 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. 
 
 
March 31, 2015
 
December 31, 2014
 
Amortized
 
 
 
Amortized
 
 
(in thousands)
Cost
 
Fair Value
 
Cost
 
Fair Value
Due in one year or less
$
647

 
$
653

 
$
970

 
$
982

Due after one year
 
 
 
 
 
 
 
but less than five years
2,323

 
2,388

 
5,670

 
5,726

Due after five years
 
 
 
 
 
 
 
but less than ten years
13,057

 
12,682

 
13,228

 
12,806

Due after ten years
11,760

 
12,310

 
12,254

 
12,699

Mortgage-backed securities -
 
 
 
 
 
 
 
Agency
178,072

 
181,681

 
212,650

 
215,428

Asset-backed securities
23,768

 
23,387

 
54,345

 
53,197

Equity securities
970

 
1,434

 
970

 
1,383

Total available for sale securities
$
230,597

 
$
234,535

 
$
300,087

 
$
302,221

 





11

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 $7.2 million at March 31, 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 March 31, 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 $6.7 million at March 31, 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 March 31, 2015 and December 31, 2014, except for one restricted equity security, which was determined to be other-than-temporarily impaired at December 31, 2014 with $10 thousand impairment recorded in 2014. No impairment has been recognized for any of the other restricted equity securities, including the investment in FRB.

NOTE E - 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. In fact, during the first quarter of 2015, SPF arranged a $104.8 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 March 31, 2015 and December 31, 2014 are as follows.
 
(in thousands)
March 31, 2015
 
December 31, 2014
Commercial and Industrial
$
252,244

 
$
219,029

Construction
142,489

 
136,955

Real estate - commercial mortgage
635,761

 
639,163

Real estate - residential mortgage
351,717

 
354,017

Installment
153,174

 
74,821

Deferred loan fees and related costs
(504
)
 
(1,050
)
Total loans
$
1,534,881

 
$
1,422,935

 






12

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

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 months ended March 31, 2015 and 2014 is as follows.
 
March 31, 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
(185
)
 
(31
)
 
(100
)
 
(96
)
 
(38
)
 
 
 
(450
)
Recoveries
363

 
430

 
57

 
97

 
30

 
 
 
977

Provision
(293
)
 
487

 
796

 
(454
)
 
93

 
(29
)
 
600

Ending balance
$
4,490

 
$
5,228

 
$
7,607

 
$
6,689

 
$
1,064

 
$
3,099

 
$
28,177

Ending balance:  attributable to
 
 
 
 
 
 
 
 
 
 
 
 
 
loans individually evaluated
 
 
 
 
 
 
 
 
 
 
 
 
 
for impairment
$
227

 
$
1,318

 
$
551

 
$
1,984

 
$
47

 
 
 
$
4,127

Recorded investment: loans
 
 
 
 
 
 
 
 
 
 
 
 
 
individually evaluated for
 
 
 
 
 
 
 
 
 
 
 
 
 
impairment
$
1,535

 
$
10,795

 
$
22,029

 
$
15,174

 
$
114

 
 
 
 
Ending balance:  attributable to
 
 
 
 
 
 
 
 
 
 
 
 
 
loans collectively evaluated
 
 
 
 
 
 
 
 
 
 
 
 
 
for impairment
$
4,263

 
$
3,910

 
$
7,056

 
$
4,705

 
$
1,017

 
$
3,099

 
$
24,050

Recorded investment: loans
 
 
 
 
 
 
 
 
 
 
 
 
 
collectively evaluated for
 
 
 
 
 
 
 
 
 
 
 
 
 
impairment
$
250,709

 
$
131,694

 
$
613,732

 
$
336,543

 
$
153,060

 
 
 
 


13

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

 
March 31, 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
(132
)
 
(2,824
)
 
(1,630
)
 
(501
)
 
(80
)
 

 
(5,167
)
Recoveries
97

 
664

 
217

 
250

 
68

 

 
1,296

Provision
587

 
(1,176
)
 
(715
)
 
800

 
961

 
(357
)
 
100

Ending balance
$
2,956

 
$
6,471

 
$
8,007

 
$
8,463

 
$
1,470

 
$
3,893

 
$
31,260

Ending balance:  attributable to
 
 
 
 
 
 
 
 
 
 
 
 
 
loans individually evaluated
 
 
 
 
 
 
 
 
 
 
 
 
 
for impairment
$
1,364

 
$
3,108

 
$
2,979

 
$
3,753

 
$
507

 
 
 
$
11,711

Recorded investment: loans
 
 
 
 
 
 
 
 
 
 
 
 
 
individually evaluated for
 
 
 
 
 
 
 
 
 
 
 
 
 
impairment
$
3,567

 
$
11,454

 
$
30,561

 
$
24,052

 
$
1,256

 
 
 
 
Ending balance:  attributable to
 
 
 
 
 
 
 
 
 
 
 
 
 
loans collectively evaluated
 
 
 
 
 
 
 
 
 
 
 
 
 
for impairment
$
1,592

 
$
3,363

 
$
5,028

 
$
4,710

 
$
963

 
$
3,893

 
$
19,549

Recorded investment: loans
 
 
 
 
 
 
 
 
 
 
 
 
 
collectively evaluated for
 
 
 
 
 
 
 
 
 
 
 
 
 
impairment
$
202,563

 
$
137,613

 
$
557,919

 
$
331,022

 
$
51,183

 
 
 
 

Management believes the allowance for loan losses as of March 31, 2015 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 based on their judgments about information available at the time of the examinations.
 
Impaired Loans
 
Total impaired loans were $49.6 million and $48.9 million at March 31, 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 $44.1 million and $43.3 million at March 31, 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 $29.6 million and $29.1 million at March 31, 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 March 31, 2015, and December 31, 2014, respectively. The weighted average age of appraisals for collateral dependent loans is 0.41 and 0.56 years at March 31, 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 March 31, 2015 and December 31, 2014, as well as average investment and interest recognized for the three months ended March 31, 2015 and 2014, for impaired loans by major segment and class.

14

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

 
March 31, 2015
 
Three Months Ended March 31, 2015
 
Recorded
 
Unpaid
 
Related
 
Average
 
Interest
(in thousands)
Investment
 
Balance
 
Allowance
 
Investment
 
Recognized
With no related
 
 
 
 
 
 
 
 
 
allowance recorded:
 
 
 
 
 
 
 
 
 
Commercial & Industrial
$
1,256

 
$
2,055

 
$

 
$
1,344

 
$
2

Construction
 
 
 
 
 
 
 
 
 
1-4 family residential
 
 
 
 
 
 
 
 
 
construction

 

 

 

 

Commercial construction
4,365

 
5,638

 

 
4,630

 
16

Real estate
 
 
 
 
 
 
 
 
 
Commercial Mortgage
 
 
 
 
 
 
 
 
 
Owner occupied
12,378

 
12,577

 

 
12,737

 
74

Non-owner occupied
3,956

 
8,635

 

 
5,208

 
4

Residential Mortgage
 
 
 
 
 
 
 
 
 
Secured by 1-4 family
 
 
 
 
 
 
 
 
 
1st lien
6,344

 
6,912

 

 
6,866

 
15

Junior lien
1,244

 
1,917

 

 
1,495

 
1

Installment
10

 
31

 

 
14

 

 
$
29,553

 
$
37,765

 
$

 
$
32,294

 
$
112

With an allowance recorded:
 
 
 
 
 
 
 
 
 
Commercial & Industrial
$
279

 
$
279

 
$
227

 
$
311

 
$

Construction
 
 
 
 
 
 
 
 
 
1-4 family residential
 
 
 
 
 
 
 
 
 
construction

 

 

 

 

Commercial construction
6,430

 
7,304

 
1,318

 
6,598

 
50

Real estate
 
 
 
 
 
 
 
 
 
Commercial Mortgage
 
 
 
 
 
 
 
 
 
Owner occupied
5,695

 
5,833

 
551

 
5,774

 
47

Non-owner occupied

 

 

 

 

Residential Mortgage
 
 
 
 
 
 
 
 
 
Secured by 1-4 family
 
 
 
 
 
 
 
 
 
1st lien
5,771

 
5,789

 
1,312

 
5,813

 
43

Junior lien
1,815

 
1,815

 
672

 
1,853

 
11

Installment
104

 
104

 
47

 
104

 

 
$
20,094

 
$
21,124

 
$
4,127

 
$
20,453

 
$
151

Total:
 
 
 
 
 
 
 
 
 
Commercial & Industrial
$
1,535

 
$
2,334

 
$
227

 
$
1,655

 
$
2

Construction
10,795

 
12,942

 
1,318

 
11,228

 
66

Real estate
 
 
 
 
 
 
 
 
 
Commercial mortgage
22,029

 
27,045

 
551

 
23,719

 
125

Residential mortgage
15,174

 
16,433

 
1,984

 
16,027

 
70

Installment
114

 
135

 
47

 
118

 

Total
$
49,647

 
$
58,889

 
$
4,127

 
$
52,747

 
$
263


15

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

 
December 31, 2014
 
Three Months Ended March 31, 2014
 
Recorded
 
Unpaid
 
Related
 
Average
 
Interest
(in thousands)
Investment
 
Balance
 
Allowance
 
Investment
 
Recognized
With no related
 
 
 
 
 
 
 
 
 
allowance recorded:
 
 
 
 
 
 
 
 
 
Commercial & Industrial
$
1,082

 
$
2,245

 
$

 
$
1,911

 
$
3

Construction
 
 
 
 
 
 
 
 
 
1-4 family residential
 
 
 
 
 
 
 
 
 
construction

 

 

 

 

Commercial construction
4,273

 
6,765

 

 
6,946

 
13

Real estate
 
 
 
 
 
 
 
 
 
Commercial Mortgage
 
 
 
 
 
 
 
 
 
Owner occupied
12,319

 
12,692

 

 
16,590

 
94

Non-owner occupied
3,550

 
8,130

 

 
2,927

 
13

Residential Mortgage
 
 
 
 
 
 
 
 
 
Secured by 1-4 family
 
 
 
 
 
 
 
 
 
1st lien
6,447

 
7,104

 

 
9,557

 
27

Junior lien
1,372

 
2,729

 

 
2,319

 
3

Installment
11

 
32

 

 
65

 

 
$
29,054

 
$
39,697

 
$

 
$
40,315

 
$
153

With an allowance recorded:
 
 
 
 
 
 
 
 
 
Commercial & Industrial
$
565

 
$
564

 
$
412

 
$
1,840

 
$

Construction
 
 
 
 
 
 
 
 
 
1-4 family residential
 
 
 
 
 
 
 
 
 
construction

 

 

 

 

Commercial construction
6,379

 
6,380

 
887

 
5,097

 
18

Real estate
 
 
 
 
 
 
 
 
 
Commercial Mortgage
 
 
 
 
 
 
 
 
 
Owner occupied
5,313

 
5,313

 
379

 
7,100

 
56

Non-owner occupied
487

 
487

 
100

 
5,471

 

Residential Mortgage
 
 
 
 
 
 
 
 
 
Secured by 1-4 family
 
 
 
 
 
 
 
 
 
1st lien
4,970

 
4,981

 
1,009

 
10,217

 
50

Junior lien
1,987

 
2,013

 
708

 
2,865

 
3

Installment
104

 
104

 
47

 
1,193

 
2

 
$
19,805

 
$
19,842

 
$
3,542

 
$
33,783

 
$
129

Total:
 
 
 
 
 
 
 
 
 
Commercial & Industrial
$
1,647

 
$
2,809