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EX-31.1 - EXHIBIT 31.1 - Xenith Bankshares, Inc.a20160331exhibit311.htm
EX-31.2 - EXHIBIT 31.2 - Xenith Bankshares, Inc.a20160331exhibit312.htm
EX-32.1 - EXHIBIT 32.1 - Xenith Bankshares, Inc.a20160331exhibit321.htm
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, 2016

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 29, 2016 was 171,330,585 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, 2016
 
 
December 31, 2015
 
 
 
 
 
Consolidated Statements of Operations
 
Three months ended March 31, 2016 and 2015
 
 
 
 
 
Consolidated Statements of Comprehensive Income
 
Three months ended March 31, 2016 and 2015
 
 
 
 
 
Consolidated Statement of Changes in Shareholders' Equity
 
Three months ended March 31, 2016
 
 
 
 
 
Consolidated Statements of Cash Flows
 
Three months ended March 31, 2016 and 2015
 
 
 
 
 
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, 2016
 
December 31, 2015
Assets:
 
 
 
Cash and due from banks
$
17,356

 
$
17,031

Interest-bearing deposits in other banks
721

 
691

Overnight funds sold and due from Federal Reserve Bank
43,855

 
46,024

Investment securities available for sale, at fair value
199,116

 
198,174

Restricted equity securities, at cost
12,007

 
9,830

Loans held for sale
51,306

 
56,486

Loans
1,520,844

 
1,541,502

Allowance for loan losses
(21,228
)
 
(23,184
)
Net loans
1,499,616

 
1,518,318

Premises and equipment, net
50,885

 
52,245

Interest receivable
4,305

 
4,116

Other real estate owned and repossessed assets,
 
 
 
net of valuation allowance
8,661

 
12,409

Net deferred tax assets, net of valuation allowance
90,723

 
92,142

Bank-owned life insurance
51,044

 
50,695

Other assets
10,778

 
7,779

Totals assets
$
2,040,373

 
$
2,065,940

Liabilities and Shareholders' Equity:
 
 
 
Deposits:
 
 
 
Noninterest-bearing demand
$
291,770

 
$
298,351

Interest-bearing:
 
 
 
Demand
696,751

 
693,413

Savings
63,971

 
61,023

Time deposits:
 
 
 
Less than $100
337,804

 
343,031

$100 or more
293,962

 
309,327

Total deposits
1,684,258

 
1,705,145

Federal Home Loan Bank borrowings
11,000

 
25,000

Other borrowings
29,811

 
29,689

Interest payable
481

 
463

Other liabilities
21,204

 
15,022

Total liabilities
1,746,754

 
1,775,319

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; 171,330,585 and 171,128,266 shares issued
 
 
 
and outstanding on March 31, 2016 and December 31, 2015,
 
 
 
respectively
1,713

 
1,711

Capital surplus
590,790

 
590,417

Accumulated deficit
(301,198
)
 
(302,580
)
Accumulated other comprehensive income, net of tax
1,768

 
560

Total shareholders' equity before non-controlling interest
293,073

 
290,108

Non-controlling interest
546

 
513

Total shareholders' equity
293,619

 
290,621

Total liabilities and shareholders' equity
$
2,040,373

 
$
2,065,940

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, 2016

March 31, 2015
Interest Income:
 

 
Loans, including fees
$
16,732


$
16,159

Investment securities
1,350


1,742

Overnight funds sold and due from FRB
44


59

Total interest income
18,126


17,960

Interest Expense:
 


 

Deposits:
 


 

Demand
839


674

Savings
16


10

Time deposits:
 


 

Less than $100
953


909

$100 or more
911


934

Interest on deposits
2,719


2,527

Federal Home Loan Bank borrowings
18


324

Other borrowings
473


418

Total interest expense
3,210


3,269

Net interest income
14,916


14,691

Provision for loan losses


600

Net interest income after provision for loan losses
14,916


14,091

Noninterest Income:
 


 

Mortgage banking revenue
4,439


4,223

Service charges on deposit accounts
1,139


1,142

Income from bank-owned life insurance
349


349

Gain on sale of investment securities available for sale (1)


112

Visa check card income
641


641

Other
384


858

Total noninterest income
6,952


7,325

Noninterest Expense:
 


 

Salaries and employee benefits
10,781


10,667

Professional and consultant fees
634


808

Occupancy
1,623


1,629

FDIC insurance
414


624

Data processing
1,308


1,431

Problem loan and repossessed asset costs
101


120

Impairments and gains and losses on sales of other real estate owned and repossessed assets, net
(177
)

858

Impairments and gains and losses on sale of premises and equipment, net


14

Equipment
305


350

Directors' and regional board fees
246


302

Advertising and marketing
270


260

Merger-related expenses
1,568



Other
2,458


2,444

Total noninterest expense
19,531


19,507

Income before provision for income taxes
2,337


1,909

Provision for income taxes - current
15


40

Provision for income taxes - deferred
734



Net income
1,588


1,869

Net income attributable to non-controlling interest
206


534

Net income attributable to Hampton Roads Bankshares, Inc.
$
1,382


$
1,335

Per Share:
 


 

Basic and diluted income per share
$
0.01


$
0.01

(1) Includes $0 and $112 accumulated other comprehensive income reclassifications for unrealized net gains on available for sale securities during the three months ended March 31, 2016 and 2015, respectively.
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, 2016

March 31, 2015
Net income
 


1,588


 


1,869

Other comprehensive income, net of tax:
 


 


 


 

Change in unrealized gain (loss) on securities available for sale
1,893


 


1,916


 

Tax effect (*)
(685
)

 




 

Reclassification adjustment for securities gains included in net income


 


(112
)

 

Tax effect (*)


 




 

Other comprehensive income, net of tax



1,208





1,804

Comprehensive income
 


2,796


 


3,673

Comprehensive income attributable to non-controlling interest
 


206


 


534

Comprehensive income attributable to Hampton Roads Bankshares, Inc.
 


$
2,590


 


$
3,139

(*) At December 31, 2015, the Company determined that it was more likely than not that a portion of the valuation allowance on net deferred tax assets could be released, therefore, beginning in the fourth quarter of 2015, the tax effect on other comprehensive income (loss) is presented. In quarters prior to the fourth quarter of 2015, there was a full valuation allowance against its net deferred tax assets; therefore, there was no stated tax effect in those prior quarters.
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




(in thousands, except share data)
Common Stock

Capital

Accumulated

Comprehensive Income,

Non-controlling

Total Shareholders'
(unaudited)
Shares

Amount

Surplus

Deficit

Net of Tax

Interest

Equity
Balance at December 31, 2015
171,128,266


$
1,711


$
590,417


$
(302,580
)

$
560


$
513


$
290,621

Net income






1,382




206


1,588

Other comprehensive income








1,208




1,208

Share-based compensation expense




420








420

Net settlement of restricted stock units
202,319


2


(47
)







(45
)
Distributed non-controlling interest










(173
)

(173
)
Balance at March 31, 2016
171,330,585


$
1,713


$
590,790


$
(301,198
)

$
1,768


$
546


$
293,619

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, 2016
March 31, 2015
Operating Activities:
 

 

Net income
$
1,588

$
1,869

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

 

Depreciation and amortization
734

801

Deferred income tax expense
734


Amortization of fair value adjustments
272

79

Provision for loan losses

600

Proceeds from mortgage loans held for sale
153,876

130,729

Originations of mortgage loans held for sale
(148,696
)
(164,156
)
Share-based compensation expense
420

572

Net amortization of premiums and accretion of discounts on investment securities available for sale
59

355

Income from bank-owned life insurance
(349
)
(349
)
Gain on sale of investment securities available for sale

(112
)
Impairments and gains and losses on sales of other real estate owned and repossessed assets
(177
)
858

Impairments and gains and losses on sales of premises and equipment

14

Changes in:
 

 

Interest receivable
(189
)
294

Other assets
(3,149
)
(1,336
)
Interest payable
18

22

Other liabilities
6,182

1,040

Net cash provided by (used in) operating activities
11,323

(28,720
)
Investing Activities:
 

 

Proceeds from maturities and calls of investment securities available for sale
8,892

8,069

Proceeds from sale of investment securities available for sale

61,178

Purchase of investment securities available for sale
(8,000
)

Proceeds from sale of restricted equity securities
4,122

2,121

Purchase of restricted equity securities
(6,299
)
(196
)
Proceeds from sale of premises and equipment

5

Purchase of premises and equipment
(108
)
(140
)
Net (increase) decrease in loans
18,254

(111,623
)
Proceeds from sale of other real estate owned and repossessed assets, net
5,107

3,183

Net cash provided by (used in) investing activities
21,968

(37,403
)
Financing Activities:
 

 

Net increase (decrease) in deposits
(20,887
)
102,070

Repayments of short term Federal Home Loan Bank borrowings
(14,000
)

Repayments of long term Federal Home Loan Bank borrowings

(40,000
)
Repurchase of common stock in the settlement of restricted stock units
(45
)
1

Distributed non-controlling interest
(173
)
(173
)
Net cash provided by (used in) financing activities
(35,105
)
61,898

Decrease in cash and cash equivalents
(1,814
)
(4,225
)
Cash and cash equivalents at beginning of period
63,746

103,619

Cash and cash equivalents at end of period
$
61,932

$
99,394

Supplemental cash flow information:
 

 

Cash paid for interest
$
3,070

$
3,001

Cash paid for income taxes

3

Supplemental non-cash information:
 



Change in unrealized gain on securities available for sale
$
1,208

$
1,804

Transfer from other real estate owned and repossessed assets to loans
545

594

Transfer from loans to other real estate owned and repossessed assets
993

798

Transfer from premises and equipment to other real estate owned and repossessed assets
734


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, 2016 are not necessarily indicative of the results to be expected for the full year. The Company has one banking subsidiary, The Bank of Hampton Roads (“BOHR” or "the Bank"), which constitutes 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, 2015 (“2015 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

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. During the third quarter of 2015, ASU 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date amends the effective date for ASU 2014-09 for the Company to January 1, 2018. 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.

In February 2016, the FASB issued ASU 2016-02 Leases, ASC Topic 842, which replaces ASC Topic 840 Leases; the core principle of Topic 842 is that a lessee should recognize the assets and liabilities that arise from leases. A lessee should recognize in the balance sheet a liability to make lease payments (the lease liability) and a right-of-use asset representing its right to use the underlying asset for the lease term. For leases with a term of 12 months or less, a lessee is permitted to make an accounting policy election by class of underlying asset not to recognize lease assets and lease liabilities. If a lessee makes this election, it should recognize lease expense for such leases generally on a straight-line basis over the lease term. The recognition, measurement, and presentation of expenses and cash flows arising from a lease by a lessee are as follows:

For finance leases, a lessee is required to do the following
1. Recognize a right-of-use asset and a lease liability, initially measured at the present value of the lease payments, in the statement of financial position;
2. Recognize interest on the lease liability separately from amortization of the right-of-use asset in the statement of comprehensive income;

8

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

3. Classify repayments of the principal portion of the lease liability within financing activities and payments of interest on the lease liability and variable lease payments within operating activities in the statement of cash flows.

For operating leases, a lessee is required to do the following:
1. Recognize a right-of-use asset and a lease liability, initially measured at the present value of the lease payments, in the statement of financial position;
2. Recognize a single lease cost, calculated so that the cost of the lease is allocated over the lease term on a generally straight-line basis;
3. Classify all cash payments within operating activities in the statement of cash flows.

The effective date for public business entities is for annual periods, and interim periods within those annual periods, beginning after December 15, 2018. Early adoption is permitted. The Company will evaluate whether adoption of this new standard will have a material impact on the Company’s consolidated financial statements.

On March 30, 2016, the FASB issued ASU 2016-09, Improvements to Employee Share-Based Payment Accounting, which is intended to improve the accounting for share-based payment transactions as part of the FASB’s simplification initiative. The ASU changes seven aspects of the accounting for share-based payment award transactions, including: (1) accounting for income taxes; (2) classification of excess tax benefits on the statement of cash flows; (3) forfeitures; (4) minimum statutory tax withholding requirements; (5) classification of employee taxes paid on the statement of cash flows when an employer withholds shares for tax-withholding purposes; (6) practical expedient - expected term (nonpublic only); and (7) intrinsic value (nonpublic only). The ASU is effective for fiscal years beginning after December 15, 2016, and interim periods within those years for public business entities. Early adoption is permitted in any interim or annual period provided that the entire ASU is adopted. The Company will evaluate whether adoption of this new standard will have a material impact on the Company’s consolidated financial statements.

Xenith Merger

On February 10, 2016, the Company entered into an Agreement and Plan of Reorganization (the “Merger Agreement”) with Xenith Bankshares, Inc. (“Xenith”), a Virginia corporation, the holding company for Xenith Bank. The Merger Agreement provides that, upon the terms and subject to the conditions set forth therein, Xenith will merge with and into the Company (the “Merger”), with the Company as the surviving corporation in the Merger. Under the terms of the agreement, Xenith shareholders will receive 4.4 shares of Company common stock for each share of Xenith common stock. Based on the closing price of the Company’s common stock on February 10, 2016, the transaction was valued at approximately $107.2 million. Upon closing, the Company's shareholders and Xenith shareholders will own approximately 74% and 26%, respectively, of the stock in the combined company. The transaction is subject to shareholder and regulatory approval and is expected to close in the third quarter of 2016.




9

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 months ended March 31, 2016 and 2015.  There were 3,428,783 and 5,510,035 stock options not included in the diluted earnings per share calculations for the three months ended March 31, 2016 and March 31, 2015, respectively, because to do so would be antidilutive.
 


 
(in thousands, except share and per share data)
Three Months Ended
(unaudited)
March 31, 2016

March 31, 2015

 

 
Net income attributable to Hampton Roads Bankshares, Inc.
$
1,382


$
1,335

Shares:
 

 
Weighted average shares outstanding
171,270,219


170,580,502

Weighted average vested restricted stock units
645,670


367,935


 


Weighted average number of common shares outstanding
171,915,889


170,948,437







Dilutive effect of TARP-related warrants
452,924


441,829

Dilutive effect of restricted stock units
275,020


821,518

Dilutive effect of stock options
91,896



Total dilutive effect
819,840


1,263,347


 

 
Diluted weighted average number of common shares outstanding
172,735,729


172,211,784

Basic and diluted income per share
$
0.01


$
0.01

 

10

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 March 31, 2016 and December 31, 2015 were as follows.
 
 
March 31, 2016
 
 
 
Gross
 
Gross
 
 
 
Amortized
 
Unrealized
 
Unrealized
 
Fair
(in thousands)
Cost
 
Gains
 
Losses
 
Value
U.S. agency securities
$
11,913

 
$
666

 
$

 
$
12,579

Corporate bonds
11,991

 

 
664

 
11,327

Mortgage-backed securities -
 
 
 
 
 
 
 
Agency
147,675

 
3,129

 
35

 
150,769

Asset-backed securities
23,796

 
6

 
774

 
23,028

Equity securities
970

 
443

 

 
1,413

Total investment securities
 
 
 
 
 
 
 
available for sale
$
196,345

 
$
4,244

 
$
1,473

 
$
199,116


 
December 31, 2015
 
 
 
Gross
 
Gross
 
 
 
Amortized
 
Unrealized
 
Unrealized
 
Fair
(in thousands)
Cost
 
Gains
 
Losses
 
Value
U.S. agency securities
$
12,565

 
$
507

 
$

 
$
13,072

Corporate bonds
11,994

 

 
804

 
11,190

Mortgage-backed securities -
 
 
 
 
 
 
 
Agency
147,980

 
1,498

 
279

 
149,199

Asset-backed securities
23,787

 

 
495

 
23,292

Equity securities
970

 
451

 

 
1,421

Total investment securities
 
 
 
 
 
 
 
available for sale
$
197,296

 
$
2,456

 
$
1,578

 
$
198,174


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, 2016 and December 31, 2015.
 
 
March 31, 2016
(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
$

 
$

 
$
11,327

 
$
664

 
$
11,327

 
$
664

Mortgage-backed securities -
 
 
 
 
 
 
 
 
 
 
 
Agency
1,966

 
3

 
2,416

 
32

 
4,382

 
35

Asset-backed securities
13,543

 
493

 
5,664

 
281

 
19,207

 
774

 
$
15,509

 
$
496

 
$
19,407

 
$
977

 
$
34,916

 
$
1,473

 

11

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

 
December 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

 


11,190


804


11,190


804

Mortgage-backed securities -
 
 
 
 
 
 
 
 
 
 
 
Agency
56,787

 
244

 
1,517

 
35

 
58,304

 
279

Asset-backed securities
17,554

 
291

 
5,738

 
204

 
23,292

 
495

 
$
74,341


$
535

 
$
18,445

 
$
1,043

 
$
92,786

 
$
1,578

 
Debt securities with unrealized losses totaling $1.5 million at March 31, 2016 included four corporate securities, six mortgage-backed agency securities, and seven asset-backed securities, compared with unrealized losses totaling $1.6 million at December 31, 2015, which included four corporate securities, twenty-three mortgage-backed agency securities, and nine 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.
 
Other-than-temporary impairment (“OTTI”)
 
During the three months ended March 31, 2016 and 2015, 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, 2016 and December 31, 2015 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. 
 

12

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

 
March 31, 2016
 
December 31, 2015
 
Amortized
 
 
 
Amortized
 
 
(in thousands)
Cost
 
Fair Value
 
Cost
 
Fair Value
Due after one year
 
 
 
 
 
 
 
but less than five years
2,128

 
2,182

 
2,253

 
2,304

Due after five years
 
 
 
 
 
 
 
but less than ten years
12,434

 
11,854

 
12,518

 
11,785

Due after ten years
9,342

 
9,870

 
9,788

 
10,173

Mortgage-backed securities -
 
 
 
 
 
 
 
Agency
147,675

 
150,769

 
147,980

 
149,199

Asset-backed securities
23,796

 
23,028

 
23,787

 
23,292

Equity securities
970

 
1,413

 
970

 
1,421

Total available for sale securities
$
196,345

 
$
199,116

 
$
197,296

 
$
198,174


Federal Home Loan Bank (“FHLB”)
 
The Company’s investment in FHLB stock totaled $2.3 million at March 31, 2016 and $2.9 million at December 31, 2015.  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, 2016 and December 31, 2015, 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 $9.7 million at March 31, 2016 and $7.0 million at December 31, 2015.  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, 2016 and December 31, 2015. No impairment has been recognized for any of the other restricted equity securities, including the investment in FRB.


13

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.

The total of our loans by segment at March 31, 2016 and December 31, 2015 are as follows.
(in thousands)
March 31, 2016
 
December 31, 2015
Commercial and Industrial
$
224,011

 
$
233,319

Construction
139,593

 
141,208

Real estate - commercial mortgage
642,345

 
655,895

Real estate - residential mortgage
345,632

 
349,758

Installment
169,643

 
161,918

Deferred loan fees and related costs
(380
)
 
(596
)
Total loans
$
1,520,844

 
$
1,541,502

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, 2016 and 2015 is as follows.
 
 
 
Three Months Ended March 31, 2016
 
 
 
 
 
Real Estate
 
 
 
 
 
 
 
Commercial
 
 
 
Commercial
 
Residential
 
 
 
 
 
 
(in thousands)
and Industrial
 
Construction
 
Mortgage
 
Mortgage
 
Installment
 
Unallocated Qualitative
 
Total
Allowance for loan losses:
 
 
 
 
 
 
 
 
 
 
 
 
 
Beginning balance
$
3,576

 
$
3,339

 
$
6,302

 
$
7,501

 
$
839

 
$
1,627

 
$
23,184

Charge-offs
(46
)
 
(312
)
 
(751
)
 
(1,603
)
 
(53
)
 

 
(2,765
)
Recoveries
63

 
268

 
248

 
220

 
10

 

 
809

Provision
(529
)
 
176

 
(727
)
 
210

 
153

 
717

 

Ending balance
$
3,064

 
$
3,471

 
$
5,072

 
$
6,328

 
$
949

 
$
2,344

 
$
21,228

Ending balance:  attributable to
 
 
 
 
 
 
 
 
 
 
 
 
 
loans individually evaluated
 
 
 
 
 
 
 
 
 
 
 
 
 
for impairment
$
205

 
$
961

 
$
1,126

 
$
1,304

 
$
88

 
 
 
$
3,684

Recorded investment: loans
 
 
 
 
 
 
 
 
 
 
 
 
 
individually evaluated for
 
 
 
 
 
 
 
 
 
 
 
 
 
impairment
$
3,700

 
$
20,798

 
$
27,225

 
$
11,127

 
$
98

 
 
 
 
Ending balance:  attributable to
 
 
 
 
 
 
 
 
 
 
 
 
 
loans collectively evaluated
 
 
 
 
 
 
 
 
 
 
 
 
 
for impairment
$
2,859

 
$
2,510

 
$
3,946

 
$
5,024

 
$
861

 
$
2,344

 
$
17,544

Recorded investment: loans
 
 
 
 
 
 
 
 
 
 
 
 
 
collectively evaluated for
 
 
 
 
 
 
 
 
 
 
 
 
 
impairment
$
220,311

 
$
118,795

 
$
615,120

 
$
334,505

 
$
169,545

 
 
 
 


14

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

 
Three Months Ended March 31, 2015
 
 
 
 
 
Real Estate
 
 
 
 
 
 
 
Commercial
 
 
 
Commercial
 
Residential
 
 
 
 
 
 
(in thousands)
and Industrial
 
Construction
 
Mortgage
 
Mortgage
 
Installment
 
Unallocated Qualitative
 
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

 
 
 
 

Management believes the allowance for loan losses as of March 31, 2016 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 $62.9 million and $65.9 million at March 31, 2016, and December 31, 2015, 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 $57.6 million and $60.5 million at March 31, 2016, and December 31, 2015, 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 $21.5 million and $37.0 million at March 31, 2016, and December 31, 2015, respectively.  Loans written down to their estimated fair value of collateral less the costs to sell account for $4.2 million and $18.6 million of the impaired loans for which no allowance has been provided as of March 31, 2016, and December 31, 2015, 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, 2016 and December 31, 2015, as well as average investment and interest recognized for the three months ended March 31, 2016 and 2015, for impaired loans by major segment and class.

15

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

 
March 31, 2016
 
Three Months Ended 
 March 31, 2016
 
Recorded
 
Unpaid
 
Related
 
Average
 
Interest
(in thousands)
Investment
 
Balance
 
Allowance
 
Investment
 
Recognized
With no related
 
 
 
 
 
 
 
 
 
allowance recorded:
 
 
 
 
 
 
 
 
 
Commercial & Industrial
$
1,247

 
$
1,594

 
$

 
$
1,476

 
$
2

Construction
 
 
 
 
 
 
 
 
 
1-4 family residential
 
 
 
 
 
 
 
 
 
construction

 

 

 

 

Commercial construction
746

 
1,080

 

 
840

 
1

Real estate
 
 
 
 
 
 
 
 
 
Commercial Mortgage
 
 
 
 
 
 
 
 
 
Owner occupied
10,484

 
10,893

 

 
10,830

 
86

Non-owner occupied
4,255

 
6,338

 

 
4,541

 
17

Residential Mortgage
 
 
 
 
 
 
 
 
 
Secured by 1-4 family
 
 
 
 
 
 
 
 
 
1st lien
4,093

 
4,939

 

 
4,583

 
1

Junior lien
633

 
978

 

 
836

 

Installment
10

 
31

 

 
15

 

 
$
21,468

 
$
25,853

 
$

 
$
23,121

 
$
107

With an allowance recorded:
 
 
 
 
 
 
 
 
 
Commercial & Industrial
$
2,453

 
$
2,650

 
$
205

 
$
2,479

 
$

Construction
 
 
 
 
 
 
 
 
 
1-4 family residential
 
 
 
 
 
 
 
 
 
construction

 

 

 

 

Commercial construction
20,052

 
21,374

 
961

 
20,075

 
49

Real estate
 
 
 
 
 
 
 
 
 
Commercial Mortgage
 
 
 
 
 
 
 
 
 
Owner occupied
8,516

 
8,616

 
1,035

 
8,657

 
49

Non-owner occupied
3,970

 
4,097

 
91

 
4,887

 
49

Residential Mortgage
 
 
 
 
 
 
 
 
 
Secured by 1-4 family
 
 
 
 
 
 
 
 
 
1st lien
4,830

 
4,830

 
703

 
4,856

 
32

Junior lien
1,571

 
1,571

 
601

 
1,624

 
11

Installment
88

 
88

 
88

 
88

 

 
$
41,480

 
$
43,226

 
$
3,684

 
$
42,666

 
$
190

Total:
 
 
 
 
 
 
 
 
 
Commercial & Industrial
$
3,700

 
$
4,244

 
$
205

 
$
3,955

 
$
2

Construction
20,798

 
22,454

 
961

 
20,915

 
50

Real estate
 
 
 
 
 
 
 
 
 
Commercial mortgage
27,225

 
29,944

 
1,126

 
28,915

 
201

Residential mortgage
11,127

 
12,318

 
1,304

 
11,899

 
44

Installment
98

 
119

 
88

 
103

 

Total
$
62,948

 
$
69,079

 
$
3,684

 
$
65,787

 
$
297


16

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

 
December 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
$
3,735

 
$
4,317

 
$

 
$
1,344

 
$
2

Construction
 
 
 
 
 
 
 
 
 
1-4 family residential
 
 
 
 
 
 
 
 
 
construction

 

 

 

 

Commercial construction
14,913

 
16,485

 

 
4,630

 
16

Real estate
 
 
 
 
 
 
 
 
 
Commercial Mortgage
 
 
 
 
 
 
 
 
 
Owner occupied
10,309

 
10,607

 

 
12,737

 
74

Non-owner occupied
2,879

 
3,048

 

 
5,208

 
4

Residential Mortgage
 
 
 
 
 
 
 
 
 
Secured by 1-4 family
 
 
 
 
 
 
 
 
 
1st lien
4,253

 
4,649

 

 
6,866

 
15

Junior lien
872

 
1,336

 

 
1,495

 
1

Installment
10

 
31

 

 
14

 

 
$
36,971

 
$
40,473

 
$

 
$
32,294

 
$
112

With an allowance recorded:
 
 
 
 
 
 
 
 
 
Commercial & Industrial
$
469

 
$
469

 
$
318

 
$
311

 
$

Construction
 
 
 
 
 
 
 
 
 
1-4 family residential
 
 
 
 
 
 
 
 
 
construction

 

 

 

 

Commercial construction
6,179

 
6,179

 
951

 
6,598

 
50

Real estate
 
 
 
 
 
 
 
 
 
Commercial Mortgage
 
 
 
 
 
 
 
 
 
Owner occupied
9,230

 
9,230

 
1,287

 
5,774

 
47

Non-owner occupied
5,530

 
7,030

 
629

 

 

Residential Mortgage
 
 
 
 
 
 
 
 
 
Secured by 1-4 family
 
 
 
 
 
 
 
 
 
1st lien
5,721

 
5,877

 
1,445

 
5,813

 
43

Junior lien
1,686

 
1,686

 
729

 
1,853

 
11

Installment
88

 
88

 
88

 
104

 

 
$
28,903

 
$
30,559

 
$
5,447

 
$
20,453

 
$
151

Total:
 
 
 
 
 
 
 
 
 
Commercial & Industrial
$
4,204

 
$
4,786

 
$
318

 
$
1,655

 
$
2

Construction
21,092

 
22,664

 
951

 
11,228

 
66

Real estate
 
 
 
 
 
 
 
 
 
Commercial mortgage
27,948

 
29,915

 
1,916

 
23,719

 
125

Residential mortgage
12,532

 
13,548

 
2,174

 
16,027

 
70

Installment
98

 
119