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Table of Contents
 
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
FORM 10-Q
 
x
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
    
 
SECURITIES EXCHANGE ACT 1934
 
           For the quarterly period ended June 30, 2002
 
Commission File Number 005-62335
 
 
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.)
 
201 Volvo Parkway, Chesapeake, VA 23320
(Address of principal executive offices) (Zip Code)
 
Registrant’s telephone number, including area code:  (757) 436-1000
 
 
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 the number of shares outstanding of each of the issuer’s classes of common stock as of June 30, 2002.
 
Common Stock, $.625 Par Value
  
7,639,974 Shares
 

Table of Contents
 
HAMPTON ROADS BANKSHARES, INC.
 
TABLE OF CONTENTS
 
PART I—FINANCIAL INFORMATION
     
ITEM 1—FINANCIAL STATEMENTS (unaudited)
     
  
3
June 30, 2002
     
December 31, 2001
     
  
4
Three Months ended June 30, 2002
     
Three Months ended June 30, 2001
     
Six Months ended June 30, 2002
     
Six Months ended June 30, 2001
     
  
5
Six months ended June 30, 2002
     
Year ended December 31, 2001
     
  
6
Six Months ended June 30, 2002
     
Six Months ended June 30, 2001
     
  
7
  
9
  
11
PART II—OTHER INFORMATION
     
  
17
  
17
  
17
  
17
  
17
  
17
  
17

2

Table of Contents
 
PART 1—FINANCIAL INFORMATION
 
ITEM 1—Financial Statements
 
HAMPTON ROADS BANKSHARES, INC.
 
CONSOLIDATED BALANCE SHEETS
 
    
June 30, 2002
     
December 31, 2001
  
    
(Unaudited)
     
(Audited)
  
ASSETS
                  
Cash and due from banks
   
$
11,677,032
 
   
$
8,243,788
 
Overnight funds sold
   
 
16,688,038
 
   
 
18,721,307
 
    
  
    
 
28,365,070
 
   
 
26,965,095
 
Investment securities
   
 
36,294,303
 
   
 
13,273,275
 
Federal Reserve Bank stock
   
 
631,100
 
   
 
630,450
 
Federal Home Loan Bank stock
   
 
500,000
 
   
 
—  
 
    
  
    
 
37,425,403
 
   
 
13,903,725
 
Loans
   
 
194,686,484
 
   
 
189,141,610
 
Allowance for loan losses
   
 
(2,244,320
)
   
 
(2,121,137
)
    
  
Net loans
   
 
192,442,164
 
   
 
187,020,473
 
Premises and equipment
   
 
8,277,557
 
   
 
8,477,631
 
Interest receivable
   
 
1,299,727
 
   
 
1,093,852
 
Real estate acquired in settlement of loans
   
 
551,149
 
   
 
562,498
 
Deferred tax assets
   
 
1,218,691
 
   
 
1,162,669
 
Other assets
   
 
1,098,558
 
   
 
893,818
 
    
  
TOTAL ASSETS
   
$
270,678,319
 
   
$
240,079,761
 
    
  
LIABILITIES & SHAREHOLDERS’ EQUITY
                  
Deposits:
                  
Noninterest bearing demand
   
$
53,641,502
 
   
$
45,811,413
 
Interest bearing:
                  
Demand
   
 
47,853,481
 
   
 
39,511,642
 
Savings
   
 
10,705,591
 
   
 
9,788,712
 
Time deposits:
                  
Less than $100,000
   
 
70,277,076
 
   
 
68,463,475
 
$100,000 or more
   
 
39,024,754
 
   
 
34,940,030
 
    
  
Total deposits
   
 
221,502,404
 
   
 
198,515,272
 
Interest payable
   
 
562,731
 
   
 
583,319
 
Other liabilities
   
 
2,402,155
 
   
 
2,123,191
 
Other borrowings
   
 
10,005,000
 
   
 
3,235,000
 
    
  
Total liabilities
   
 
234,472,290
 
   
 
204,456,782
 
Shareholders’ equity:
                  
Common stock, $.625 par value:
                  
Authorized shares—40,000,000 Issued and outstanding shares—7,639,974 in 2002; and 7,518,066 in 2001
   
 
4,774,984
 
   
 
4,698,791
 
Capital surplus
   
 
17,322,614
 
   
 
16,369,564
 
Retained earnings
   
 
14,108,431
 
   
 
14,554,624
 
    
  
Total shareholders’ equity
   
 
36,206,029
 
   
 
35,622,979
 
    
  
TOTAL LIABILITIES & SHAREHOLDERS’ EQUITY
   
$
270,678,319
 
   
$
240,079,761
 
    
  
 
See notes to consolidated financial statements (unaudited).

3

Table of Contents
 
PART 1—FINANCIAL INFORMATION
 
ITEM 1—Financial Statements (Cont.)
 
HAMPTON ROADS BANKSHARES, INC.
 
CONSOLIDATED STATEMENTS OF INCOME (unaudited)
 
      
Three Months Ended
June 30, 2002
     
Three Months Ended
June 30, 2001
   
Six Months Ended
June 30, 2002
   
Six Months Ended
June 30, 2001
Interest income:
                                
Loans, including fees
     
$
3,832,013
     
$
3,747,964
   
$
7,530,815
   
$
7,495,360
Investment securities
     
 
431,119
     
 
251,290
   
 
647,788
   
 
560,131
Overnight funds sold
     
 
46,878
     
 
82,518
   
 
118,499
   
 
164,739
      
    
  
  
Total interest income
     
 
4,310,010
     
 
4,081,772
   
 
8,297,102
   
 
8,220,230
Interest expense:
                                
Deposits:
                                
Demand
     
 
167,801
     
 
208,708
   
 
307,227
   
 
458,052
Savings
     
 
27,629
     
 
45,567
   
 
55,067
   
 
109,531
Time deposits:
                                
Less than $100,000
     
 
807,372
     
 
987,321
   
 
1,649,551
   
 
1,999,421
$100,000 or more
     
 
298,553
     
 
272,395
   
 
590,145
   
 
547,451
Other borrowings
     
 
70,318
     
 
38
   
 
76,842
   
 
38
      
    
  
  
Total interest expense
     
 
1,371,673
     
 
1,514,029
   
 
2,678,832
   
 
3,114,493
Net interest income
     
 
2,938,337
     
 
2,567,743
   
 
5,618,270
   
 
5,105,737
Provision for loan losses
     
 
123,000
     
 
93,000
   
 
222,000
   
 
177,000
      
    
  
  
Net interest income after provision for loan losses
     
 
2,815,337
     
 
2,474,743
   
 
5,396,270
   
 
4,928,737
Noninterest income:
                                
Service charges on deposit accounts
     
 
420,378
     
 
410,152
   
 
790,662
   
 
805,747
ATM surcharge fees
     
 
63,972
     
 
60,642
   
 
122,759
   
 
113,076
Other service charges and fees
     
 
224,680
     
 
159,759
   
 
404,348
   
 
307,340
      
    
  
  
Total noninterest income
     
 
709,030
     
 
630,553
   
 
1,317,769
   
 
1,226,163
Noninterest expense:
                                
Salaries and employee benefits
     
 
1,302,655
     
 
1,132,667
   
 
2,600,672
   
 
2,283,059
Occupancy
     
 
228,274
     
 
202,783
   
 
458,271
   
 
414,373
Data processing
     
 
101,945
     
 
94,905
   
 
198,289
   
 
191,987
Other
     
 
651,208
     
 
539,037
   
 
1,186,062
   
 
1,049,921
      
    
  
  
Total noninterest expense
     
 
2,284,082
     
 
1,969,392
   
 
4,443,294
   
 
3,939,340
      
    
  
  
Income before provision for income taxes
     
 
1,240,285
     
 
1,135,904
   
 
2,270,745
   
 
2,215,560
Provision for income taxes
     
 
419,988
     
 
386,207
   
 
770,345
   
 
753,289
      
    
  
  
Net Income
     
$
820,297
     
$
749,697
   
$
1,500,400
   
$
1,462,271
      
    
  
  
Basic Earnings per share
     
$
0.11
     
$
0.10
   
$
0.20
   
$
0.19
      
    
  
  
Diluted earnings per share
     
$
0.10
     
$
0.10
   
$
0.19
   
$
0.19
      
    
  
  
Basic weighted average shares outstanding
     
 
7,614,576
     
 
7,509,117
   
 
7,554,808
   
 
7,505,742
Effect of dilutive stock options
     
 
234,970
     
 
271,654
   
 
229,006
   
 
285,379
      
    
  
  
Diluted weighted average shares outstanding
     
 
7,849,546
     
 
7,780,771
   
 
7,783,814
   
 
7,791,121
      
    
  
  
 
 
See notes to consolidated financial statements (unauditied).

4

Table of Contents
 
PART 1—FINANCIAL INFORMATION
 
ITEM 1—Financial Statements (Cont.)
 
HAMPTON ROADS BANKSHARES, INC.
 
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (unaudited)
 
    
Common Stock
     
Capital
Surplus
     
Retained
Earnings
     
Total
  
    
Shares
     
Amount
           
Balance at January 1, 2001
   
7,496,426
 
   
$
4,685,266
 
   
$
16,222,904
 
   
$
13,300,884
 
   
$
34,209,054
 
Shares issued related to:
                                           
401(k) plan
   
9,189
 
   
 
5,743
 
   
 
67,770
 
   
 
—  
 
   
 
73,513
 
Exercise of stock options
   
12,495
 
   
 
7,810
 
   
 
56,541
 
   
 
—  
 
   
 
64,351
 
Payout of fractional shares
   
(44
)
   
 
(28
)
   
 
(410
)
   
 
—  
 
   
 
(438
)
Tax benefit of stock option exercises
   
—  
 
   
 
—  
 
   
 
22,759
 
   
 
—  
 
   
 
22,759
 
Net income
   
—  
 
   
 
—  
 
   
 
—  
 
   
 
3,130,311
 
   
 
3,130,311
 
Cash dividends ($0.25 per share)
   
—  
 
   
 
—  
 
   
 
—  
 
   
 
(1,876,571
)
   
 
(1,876,571
)
    
  
  
  
  
Balance at December 31, 2001
   
7,518,066
 
   
 
4,698,791
 
   
 
16,369,564
 
   
 
14,554,624
 
   
 
35,622,979
 
Shares issued related to:
                                           
401(k) plan
   
8,516
 
   
 
5,323
 
   
 
62,807
 
   
 
—  
 
   
 
68,130
 
Exercise of stock options
   
35,389
 
   
 
22,118
 
   
 
197,662
 
   
 
—  
 
   
 
219,780
 
Dividend reinvestment
   
142,960
 
   
 
89,350
 
   
 
1,120,091
 
   
 
—  
 
   
 
1,209,440
 
Payout of fractional shares
   
(39
)
   
 
(25
)
   
 
(324
)
   
 
—  
 
   
 
(349
)
Tax benefit of stock option exercises
   
—  
 
   
 
—  
 
   
 
51,581
 
   
 
—  
 
   
 
51,581
 
Common stock repurchased and surrendered
   
(64,918
)
   
 
(40,573
)
   
 
(478,767
)
   
 
—  
 
   
 
(519,340
)
Net income
   
—  
 
   
 
—  
 
   
 
—  
 
   
 
1,500,400
 
   
 
1,500,400
 
Cash dividends ($0.26 per share)
   
—  
 
   
 
—  
 
   
 
—  
 
   
 
(1,946,593
)
   
 
(1,946,593
)
    
  
  
  
  
Balance at June 30, 2002
   
7,639,974
 
   
$
4,774,984
 
   
$
17,322,614
 
   
$
14,108,431
 
   
$
36,206,029
 
    
  
  
  
  
 
 
See notes to consolidated financial statements (unaudited).

5

Table of Contents
PART 1—FINANCIAL INFORMATION
 
ITEM 1—Financial Statements (Cont.)
 
HAMPTON ROADS BANKSHARES, INC
 
CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
 
    
Six Months Ended June 30, 2002
     
Six Months Ended June 30, 2001
  
Operating Activities:
                  
Net income
   
$
1,500,400
 
   
$
1,462,271
 
Adjustments to reconcile net income to net cash provided by operating activities:
                  
Depreciation and amortization
   
 
257,986
 
   
 
295,392
 
Provision for loan losses
   
 
222,000
 
   
 
177,000
 
Net amortization of premiums and accretion of discounts on investment securities
   
 
(144,214
)
   
 
(12,187
)
Gain on sale of real estate acquired in settlement of loans
   
 
—  
 
   
 
(4,447
)
Gain on sale of premises and equipment
   
 
(1,974
)
   
 
—  
 
Changes in:
                  
Deferred taxes
   
 
(56,022
)
   
 
—  
 
Interest receivable
   
 
(205,875
)
   
 
8,120
 
Other assets
   
 
(220,632
)
   
 
(87,617
)
Interest payable
   
 
(20,588
)
   
 
(1,377
)
Other liabilities
   
 
412,039
 
   
 
350,366
 
    
  
Net cash provided by operating activities
   
 
1,743,120
 
   
 
2,187,521
 
Investing Activities:
                  
Proceeds from maturities and calls of investment securities
   
 
14,253,186
 
   
 
15,547,524
 
Purchase of investment securities
   
 
(37,130,000
)
   
 
(8,000,000
)
Purchase of Federal Reserve Bank stock
   
 
(650
)
   
 
(4,100
)
Purchase of Federal Home Loan Bank stock
   
 
(500,000
)
   
 
—  
 
Net increase in total loans
   
 
(5,643,691
)
   
 
(15,261,891
)
Purchase of premises and equipment
   
 
(48,787
)
   
 
(126,489
)
Cash proceeds from sale of premises and equipment
   
 
8,741
 
   
 
—  
 
Cash received from rental income (paid for) development and improvement of real estate acquired in settlement of loans, net
   
 
11,349
 
   
 
24,554
 
Proceeds from sale of real estate acquired in settlement of loans
   
 
—  
 
   
 
237,448
 
    
  
Net cash used in investing activities
   
 
(29,049,852
)
   
 
(7,582,954
)
Financing Activities:
                  
Net increase in deposits
   
 
22,987,132
 
   
 
3,662,038
 
Net increase in other borrowings
   
 
6,770,000
 
   
 
—  
 
Common stock repurchased and surrendered
   
 
(519,340
)
   
 
—  
 
Dividends reinvested
   
 
1,209,440
 
   
 
—  
 
Proceeds from shares issued related to 401(k) plan
   
 
68,130
 
   
 
73,513
 
Cash proceeds from exercise of stock options
   
 
137,938
 
   
 
25,959
 
Dividends paid
   
 
(1,946,593
)
   
 
(1,876,571
)
    
  
Net cash provided by financing activities
   
 
28,706,707
 
   
 
1,884,939
 
    
  
Increase (decrease) in cash and cash equivalents
   
 
1,399,975
 
   
 
(3,510,494
)
Cash and cash equivalents at beginning of period
   
 
26,965,095
 
   
 
14,077,613
 
    
  
Cash and cash equivalents at end of period
   
$
28,365,070
 
   
$
10,567,119
 
    
  
Supplemental noncash information:
                  
Net transfer between loans and real estate acquired in settlement of loans
   
$
—  
 
   
$
195,000
 
 
See notes to consolidated financial statements (unaudited).

6

Table of Contents
HAMPTON ROADS BANKSHARES, INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
June 30, 2002
 
NOTE A—BASIS OF PRESENTATION
 
Hampton Roads Bankshares, Inc., a Virginia corporation (the “Holding Company”), was incorporated under the laws of the Commonwealth of Virginia on February 28, 2001, primarily to serve as a holding company for Bank of Hampton Roads (the “Bank”). On July 1, 2001, all Bank of Hampton Roads common stock, $0.625 par value, was converted to the common stock, $0.625 par value, of Hampton Roads Bankshares, Inc. on a share for share exchange basis, making the Bank a wholly owned subsidiary of the Holding Company. This reorganization was accounted for in a manner similar to a pooling of interest. Accordingly, the prior period consolidated financial statements of Hampton Roads Bankshares, Inc. (the “Company”) are identical to the prior period consolidated financial statements of the Bank.
 
The accompanying unaudited financial statements have been prepared in accordance with generally accepted accounting principles 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 generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. For further information, refer to the financial statements and footnotes thereto included in the Company’s annual report on Form 10-K for the year ended December 31, 2001.
 
In July 2001, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 141, “Business Combinations” and SFAS No. 142, “Goodwill and Other Intangible Assets.” Statement No. 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001; the use of the pooling-of-interest method of accounting is prohibited after this time, except for combinations of mutual enterprises. SFAS No. 141 also established specific criteria for the recognition of intangible assets separately from goodwill. SFAS No. 142 eliminates the amortization of goodwill and instead requires a periodic review of any goodwill balance for possible impairment. It also requires that goodwill be allocated at the reporting unit level. SFAS No. 142 is effective for years beginning after December 15, 2001. SFAS No. 142 also contains provisions related to intangible assets other than goodwill. The adoption of these statements did not have a material impact on the Company’s financial statements.
 
In October 2001, the FASB issued SFAS No. 144, “Accounting for the Impairment of Long-Lived Assets” which supercedes SFAS No. 121, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of” and the accounting and reporting provisions of APB No. 30, “Reporting the Results of Operations-Reporting the Effects of Disposal of a segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions,” for the disposal of a segment of business. SFAS No. 144 retains many of the provisions of SFAS No. 121, but addresses certain implementation issues associated with that statement. SFAS No. 144 is effective for fiscal years beginning after December 15, 2001. The adoption of this statement did not have a material impact on the Company’s financial statements.
 
NOTE B—INVESTMENT SECURITIES
 
The aggregate carrying (amortized cost) and estimated fair market values of investment securities held to maturity were:
 
    
June 30, 2002
   
December 31, 2001
    
Amortized
Cost
   
Estimated
Market Value
   
Amortized
Cost
   
Estimated
Market Value
U.S. Agency securities
   
$
36,272,810
   
$
36,680,493
   
$
13,248,569
   
$
13,442,465
Mortgage backed securities
   
 
21,493
   
 
21,384
   
 
24,706
   
 
24,519
    
  
  
  
Total held-to-maturity securities
   
$
36,294,303
   
$
36,701,877
   
$
13,273,275
   
$
13,466,984
    
  
  
  

7

Table of Contents
 
NOTE C—LOANS
 
Major classifications of loans are summarized as follows:
 
    
June 30, 2002
   
December 31, 2001
Commercial
   
$
51,134,067
   
$
48,428,566
Construction
   
 
32,390,460
   
 
28,620,409
Real estate-commercial mortgage
   
 
64,528,854
   
 
60,494,995
Real estate-residential mortgage
   
 
26,523,770
   
 
32,212,316
Installment loans to individuals
   
 
20,069,326
   
 
19,327,859
Deferred loan fees and related costs
   
 
40,007
   
 
57,465
    
  
Total loans
   
$
194,686,484
   
$
189,141,610
    
  
 
Non-performing assets are as follows:
 
    
June 30, 2002
     
December 31, 2001
  
Loans 90 days past due and still accruing interest
   
$
570,614
 
   
$
664,206
 
Nonaccrual loans
   
 
64,457
 
   
 
12,597
 
Real estate acquired in settlement of loans
   
 
551,149
 
   
 
562,498
 
    
  
Total non-performing assets
   
$
1,186,220
 
   
$
1,239,301
 
    
  
Allowance as a percentage of non-performing assets
   
 
189
%
   
 
171
%
Non-performing assets as a percentage of total loans
   
 
0.61
%
   
 
0.66
%
 
NOTE D—ALLOWANCE FOR LOAN LOSSES
 
Transactions affecting the allowance for loan losses during the six months ended June 30, 2002 and 2001 were as follows:
 
    
2002
     
2001
  
Balance at beginning of year
   
$
2,121,137
 
   
$
1,969,271
 
Provision for loan losses
   
 
222,000
 
   
 
177,000
 
Loans charged off
   
 
(131,167
)
   
 
(18,812
)
Recoveries
   
 
32,350
 
   
 
3,173
 
    
  
Balance at end of period
   
$
2,244,320
 
   
$
2,130,632
 
    
  
 
NOTE E—PREMISES AND EQUIPMENT
 
Premises and equipment consisted of the following:
 
    
June 30, 2002
     
December 31, 2001
  
Land
   
$
2,766,638
 
   
$
2,766,638
 
Buildings and improvements
   
 
4,968,095
 
   
 
4,954,770
 
Equipment, furniture and fixtures
   
 
3,535,600
 
   
 
3,514,638
 
    
  
    
 
11,270,333
 
   
 
11,236,046
 
Less accumulated depreciation
   
 
(2,992,776
)
   
 
(2,758,415
)
    
  
Net premises and equipment
   
$
8,277,557
 
   
$
8,477,631
 
    
  

8

Table of Contents
 
ITEM 2—MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
 
On April 24, 2001, the shareholders approved the reorganization of the Bank of Hampton Roads into the holding company structure in accordance with the terms and conditions set forth in the Agreement and Plan of Reorganization, dated March 13, 2001, and the related Plan of Share Exchange between the Bank and Hampton Roads Bankshares, Inc. This transaction was consummated on July 1, 2001 and accordingly, financial information for the period ended June 30, 2002, contained herein, reflects the consolidated operations of the Bank and the Holding Company. The Holding Company did not engage in any business activity prior to the July 1, 2001 effective date of the reorganization, and its one significant asset at the present time is its investment in the Bank resulting from the reorganization.
 
Bank of Hampton Roads was organized in March of 1987 and commenced banking operations in December of 1987. The Bank engages in a general community and commercial banking business, emphasizing the needs of individuals as well as small and medium sized businesses in its primary service area.
 
The following discussion and analysis by the Company’s management compares the financial condition and results of the Company’s operations for the six months and three months ended June 30, 2002 and June 30, 2001. The following should be read in conjunction with the Company’s 2001 Annual Report.
 
Financial Condition
 
The first six months of 2002 proved to be very successful for Hampton Roads Bankshares, Inc., with average assets increasing an additional $30.0 million over the 2001 average balance, to a new record of $247.2 million. The Company’s total assets at June 30, 2002 reached a new high of $270.7 million, up $30.6 million or 12.7% from $240.1 million on December 31, 2001.
 
The Company’s primary market objective focuses on generating construction, real estate, consumer and commercial loans to small and medium sized businesses as well as individuals. The loan portfolio grew $5.5 million to a record $194.7 million on June 30, 2002 from $189.1 million on December 31, 2001. Average loans for the first six months of 2002 increased $19.9 million from the average in 2001 to a record $188.8 million. An emphasis has been placed on maintaining the diversification of the loan portfolio with respect to loan type, nature of collateral and geographic location. This emphasis has resulted in success, with no one loan type holding a disproportionately large percentage of the overall loan portfolio. Asset quality has continued to be strong for all loans. The allowance for loan losses on June 30, 2002 was $2.2 million, or 1.15% of outstanding loans. Loan charge-offs, net of recoveries, were $98,817 for the first six months of 2002. Based upon management’s review of historical trends and the estimate of losses inherent in the portfolio, it considers the allowance to be adequate.
 
Competitive interest rates on deposits, growth in branch office locations and aggressive call programs by branch personnel have contributed to successful market share gains. In the first six months of 2002, the Company has experienced a $24.4 million or 13.6% increase in average deposits from the average 2001 balance to a new high of $204.2 million. Total deposits increased from $198.5 million at December 31, 2001 to $221.5 million at June 30, 2002, an increase of $23.0 million or 11.6%. This positive growth trend occurred in all of our offices and was supported by the Company’s advertising campaign, special deposit promotions, and product enhancements. As the Company grows it will continue to seek core deposits as they are the main source of funds for the Company’s earning assets.
 
The Company’s investment portfolio, consisting primarily of U.S. Agency securities, serves as a source of liquidity to fund future loan growth and to meet the necessary collateral requirements for public funds on deposit. The investment portfolio was $36.3 million or 13.4% of total assets on June 30, 2002 compared to $13.3 million or 5.5% of total assets on December 31, 2001. Overnight funds sold are temporary investments used for daily cash management purposes, as well as management of short-term interest rate opportunities and interest rate risk. Overnight funds sold decreased by $2.0 million or 10.9% at June 30, 2002 compared to December 31, 2001. The increase in investments and decline in overnight funds sold was due to the purchase of $37.1 million in investment securities, net of investment calls/ maturities of $14.3 million in the first six months of 2002.
 

9

Table of Contents
 
 
Premises and equipment has decreased through the first six months of 2002, by a net amount of $200,074 due to depreciation of $242,094 offset by fixed asset purchases, net of disposals, of $42,020.
 
Results of Operations
 
During the first six months of 2002, the Company had net income of $1.50 million, resulting in a return of 1.22% on average total assets of $247.2 million. During the comparable period in 2001, the Company earned $1.46 million resulting in a return of 1.43% on average total assets of $206.4 million. Net income for the three months ended June 30, 2002 increased 9.4% to $820,297 as compared to the three months ended June 30, 2001. Diluted earnings per share was unchanged at $0.19 per share for the first six months of 2002 and $.10 per share for the three months ended June 30, 2002, as compared to the same period in 2001.
 
Net interest income, the principal source of the Company’s earnings, represents the difference between interest and fees earned from lending and investment activities and the interest paid to fund these activities. Variations in the volume and mix of assets and liabilities and their relative sensitivity to interest rate movements impact net interest income.
 
Due to the low interest rate environment, loan yields declined, however, our strong loan demand led to a record increase in the average loan volume, and sustained the Company’s earnings. Interest income on loans increased $35 thousand in the first six months of 2002 to $7.53 million from $7.50 million for the six months ended June 30, 2001. For the three months ended June 30, 2002, interest income on loans increased $84 thousand or 2.2% as compared to the same period in 2001. As a result of a $7.70 million or 40.4% increase in average investment securities and a 17.7% change in rates for the first six months of 2002 compared to 2001, interest income on investment securities increased by $87,657 or 15.6% for the first six months of 2002 as compared to the same time period in the prior year. For the three months ended June 30, 2002, average investment securities increased $13.0 million, and as a result, interest income on investment securities increased $179,829 or 71.6% as compared to the three months ended June 30, 2001. Interest on overnight funds sold decreased $46,240 for the first six months of 2002 and $35,640 in the three months ended June 30, 2002, as compared to the same period in 2001, predominantly due to declining interest rates.
 
Interest expense on deposits and borrowings decreased in 2002 by $435,661, or 14.0%, when compared to the same six month period in 2001. For the three months ended June 30, 2002, interest expense on deposits and borrowings decreased $142,356 or 9.4% as compared to the three months ended June 30, 2001. This decrease is due to the decrease in overall rates paid on liabilities, as a result of the lower interest rate environment, which was partially offset by the record increase in the Company’s average interest bearing liabilities.
 
The net interest margin, which is calculated by expressing net interest income as a percentage of average interest earning assets, is an indicator of the Company’s efficiency in generating income from earning assets. The net interest margin is affected by the structure of the balance sheet as well as by competition and the economy. The Company’s net interest margin decreased from 5.46% during the first six months of 2001 to 4.95% for the same period in 2002. This decrease can be attributed to changes in the balance sheet mix, changes in the yields obtained from interest earning assets and paid on interest bearing liabilities, the falling interest rate environment, and changes in volume.
 
Noninterest income increased by $91,606, or 7.5% in the first six months of 2002 from $1.23 million for the period ended June 30, 2001 to $1.32 million for the period ended June 30, 2002. Service charges on deposit accounts, representing 60.0% of total noninterest income, decreased $15,085 or 1.9% from 2001 to 2002, predominately due to a 4.8% decline in NSF fee income. Other service charges and fees, which include late charges, cashiers check fees, credit card fees, ATM network and VISA check card fees, safe deposit box rentals and dividends, increased $97,008 or 31.6% in 2002. For the three months ended June 30, 2002, total noninterest income increased $78,477 or 12.4% as compared to the same period in 2001. Service charges on deposit accounts increased $10,226 or 2.5% in the same period due to the increase in the number of deposit accounts. The overall increase in noninterest income is in line with the Company’s objective of increasing the share of income from noninterest sources to reduce its traditional dependence on the net interest margin.

10

Table of Contents
 
Noninterest expense consists of salaries and benefits provided to employees of the Company, expenses related to premises and equipment, data processing expenses, and operating expenses associated with day to day business affairs. Total noninterest expense increased $503,954 or 12.8% in the first six months of 2002 when compared to the same period in 2001. For the three months ended June 30, 2002, noninterest expense increased $314,690 or 16.0% as compared to the three months ended June 30, 2001. This increase can primarily be attributed to a 13.9% increase in salaries and benefits resulting from the addition of several new positions in the fourth quarter of 2001 and the first quarter of 2002, due to the Company’s expansion.
 
Capital Resources and Liquidity
 
Shareholders’ equity was $36.2 million or 13.4% of total assets as of June 30, 2002 as compared to $35.6 million or 14.8% as of December 31, 2001. Under Federal Reserve Bank (“FRB”) rules, the Company was considered “well-capitalized”, the highest category of capitalization defined by the regulators as of June 30, 2002. The Company’s ability to generate capital through earnings and the Dividend Reinvestment and Optional Cash Purchase Plan available to its shareholders has been exceptional. Management believes that a strong capital position is necessary to take advantage of attractive growth and investment opportunities. On April 15, 2002, the Company paid a cash dividend of $0.26 per share, totaling $1,946,593.
 
In December 2001, the Company implemented a Stock Repurchase Program, where the Company agreed to buy back up to 375,000 shares of its common stock at a price of $8.00 per share during the time frame of December 17, 2001 to February 14, 2002. Upon expiration of the program, 64,918 shares for a total of $519,340 were repurchased by the Company.
 
A key goal of asset/liability management is to maintain an adequate degree of liquidity without impairing long-term earnings. Liquidity represents the Company’s ability to provide adequate funding sources for loan growth or deposit withdrawals. Short-term liquidity is primarily provided by access to the federal funds market through established correspondent banking relationships. Funds can also be obtained through the Company’s borrowing privileges at the Federal Reserve and Federal Home Loan Bank of Atlanta. Additional liquidity is available through loan repayments and maturities of the Company’s investment portfolio. The Company maintains a very liquid portfolio of both assets and liabilities and attempts to mitigate the risk inherent in changing rates in this manner. At June 30, 2002, cash, overnight funds sold, investments in securities, and loans maturing or repricing within one year were$128.0 million or 47.3% of total assets. Management believes that the Company maintains overall liquidity sufficient to satisfy its depositors’ requirements and to meet its customers’ credit needs.
 
Forward Looking Statements
 
Included in this discussion are forward-looking management comments and other statements that reflect management’s current outlook for the future. Such forward-looking statements are not guarantees of future performance and are subject to risks and uncertainties that could cause actual results to differ materially from those anticipated in the statements. Such risks and uncertainties include, but are not limited to, general business and economic conditions, climatic conditions, competitive pricing pressures, and product availability.
 
ITEM 3—QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
The Company’s primary component of market risk is interest rate volatility. Fluctuations in interest rates will impact both the level of interest income and interest expense and the market value of the Company’s interest earning assets and interest bearing liabilities.
 
The primary goal of the Company’s asset/liability management strategy is to maximize its net interest income over time while keeping interest rate risk exposure within levels established by the Company’s management. The Company’s ability to manage its interest rate risk depends generally on the Company’s ability to match the maturities and repricing characteristics of its assets and liabilities while taking into account the separate goals of maintaining asset quality and liquidity and achieving the desired level of net interest income. The principal variables that affect the Company’s management of its interest rate risk include the Company’s existing interest rate gap position, management’s assessment of future interest rates, and the withdrawal of liabilities over time.

11

Table of Contents
The Company’s primary technique for managing its interest rate risk exposure is the management of the Company’s interest sensitivity gap. The interest sensitivity gap is defined as the difference between the amount of interest earning assets anticipated, based upon certain assumptions, to mature or reprice within a specific time period and the amount of interest bearing liabilities anticipated, based upon certain assumptions, to mature or reprice within that time period. At June 30, 2002, the Company’s one year “negative gap” (interest bearing liabilities maturing or repricing within a period exceed interest earning assets maturing or repricing within the same period) was approximately ($1.1) million, or (0.42%) of total assets. Thus, during periods of falling interest rates, this implies that the Company’s net interest income would be positively affected because the cost of the Company’s interest bearing liabilities is likely to be reduced more quickly than the yield of its interest earning assets. At December 31, 2001, the Company’s one year “positive gap” was approximately $8.7 million, or 3.64% of total assets.

12

Table of Contents
 
The following tables set forth the amounts of interest earning assets and interest bearing liabilities outstanding at June 30, 2002 and December 31, 2001 that are subject to repricing or that mature in each of the future time periods shown. Loans and securities with call or balloon provisions are included in the period in which they balloon or may first be called. Except as stated above, the amount of assets and liabilities shown that reprice or mature during a particular period were determined in accordance with the contractual terms of the asset or liability.
 
Interest Sensitivity Analysis
June 30, 2002
 
    
0-3
Months
     
4-12
Months
     
1-3 Years
     
4-5 Years
     
Over
5 Years
     
Total
    
(in thousands)
Interest earning assets:
                                                    
Loans
   
$
79,045
 
   
$
18,099
 
   
$
37,626
 
   
$
55,243
 
   
$
4,673
 
   
$
194,686
Investment securities
   
 
19,219
 
   
 
6,499
 
   
 
500
 
   
 
8,926
 
   
 
2,281
 
   
 
37,425
Overnight funds sold
   
 
16,688
 
   
 
—  
 
   
 
—  
 
   
 
—  
 
   
 
—  
 
   
 
16,688
    
  
  
  
  
  
Total interest earning assets
   
$
114,952
 
   
$
24,598
 
   
$
38,126
 
   
$
64,169
 
   
$
6,954
 
   
$
248,799
    
  
  
  
  
  
Cumulative totals
   
$
114,952
 
   
$
139,550
 
   
$
177,676
 
   
$
241,845
 
   
$
248,799
 
       
    
  
  
  
  
      
Interest checking
   
$
13,515
 
   
$
—  
 
   
$
—  
 
   
$
—  
 
   
$
—  
 
   
$
13,515
Money market
   
 
34,338
 
   
 
—  
 
   
 
—  
 
   
 
—  
 
   
 
—  
 
   
 
34,338
Savings
   
 
10,706
 
   
 
—  
 
   
 
—  
 
   
 
—  
 
   
 
—  
 
   
 
10,706
Time deposits
   
 
39,829
 
   
 
39,790
 
   
 
18,080
 
   
 
11,518
 
   
 
85
 
   
 
109,302
FHLB borrowings
   
 
—  
 
   
 
2,500
 
   
 
7,500
 
   
 
—  
 
   
 
—  
 
   
 
10,000
Other borrowings
   
 
—  
 
   
 
5
 
   
 
—  
 
   
 
—  
 
   
 
—  
 
   
 
5
    
  
  
  
  
  
Total interest bearing liabilities
   
$
98,388
 
   
$
42,295
 
   
$
25,580
 
   
$
11,518
 
   
$
85
 
   
$
177,866
    
  
  
  
  
  
Cumulative totals
   
$
98,388
 
   
$
140,683
 
   
$
166,263
 
   
$
177,781
 
   
$
177,866
 
       
    
  
  
  
  
      
Interest sensitivity gap
   
$
16,564
 
   
$
(17,697
)
   
$
12,546
 
   
$
52,651
 
   
$
6,869
 
   
$
70,933
Cumulative interest sensitivity gap
   
$
16,564
 
   
$
(1,133
)
   
$
11,413
 
   
$
64,064
 
   
$
70,933
 
       
Cumulative interest sensitivity gap as a percentage of total assets
   
 
6.12
%
   
 
-0.42
%
   
 
4.22
%
   
 
23.67
%
   
 
26.21
%
       

13

Table of Contents
 
Interest Sensitivity Analysis
December 31, 2001
 
    
0-3
Months
     
4-12
Months
     
1-3
Years
     
4-5
Years
     
Over
5 Years
     
Total
    
(in thousands)
Interest earning assets:
                                                    
Loans
   
$
74,575
 
   
$
24,996
 
   
$
38,740
 
   
$
45,683
 
   
$
5,148
 
   
$
189,142
Investment securities
   
 
5,999
 
   
 
5,250
 
   
 
2,000
 
   
 
25
 
   
 
630
 
   
 
13,904
Overnight funds sold
   
 
18,721
 
   
 
—  
 
   
 
—  
 
   
 
—  
 
   
 
—  
 
   
 
18,721
    
  
  
  
  
  
Total interest earning assets
   
$
99,295
 
   
$
30,246
 
   
$
40,740
 
   
$
45,708
 
   
$
5,778
 
   
$
221,767
    
  
  
  
  
  
Cumulative totals
   
$
99,295
 
   
$
129,541
 
   
$
170,281
 
   
$
215,989
 
   
$
221,767
 
       
    
  
  
  
  
      
Interest bearing liabilities:
                                                    
Interest checking
   
$
14,418
 
   
$
—  
 
   
$
—  
 
   
$
—  
 
   
$
—  
 
   
$
14,418
Money market
   
 
25,093
 
   
 
—  
 
   
 
—  
 
   
 
—  
 
   
 
—  
 
   
 
25,093
Savings
   
 
9,789
 
   
 
—  
 
   
 
—  
 
   
 
—  
 
   
 
—  
 
   
 
9,789
Time deposits
   
 
31,035
 
   
 
37,222
 
   
 
23,760
 
   
 
11,382
 
   
 
5
 
   
 
103,404
Other borrowings
   
 
—  
 
   
 
3,235
 
   
 
—  
 
   
 
—  
 
   
 
—  
 
   
 
3,235
    
  
  
  
  
  
Total interest bearing liabilities
   
$
80,335
 
   
$
40,457
 
   
$
23,760
 
   
$
11,382
 
   
$
5
 
   
$
155,939
    
  
  
  
  
  
Cumulative totals
   
$
80,335
 
   
$
120,792
 
   
$
144,552
 
   
$
155,934
 
   
$
155,939
 
       
    
  
  
  
  
      
Interest sensitivity gap
   
$
18,960
 
   
$
(10,211
)
   
$
16,980
 
   
$
34,326
 
   
$
5,773
 
   
$
65,828
Cumulative interest sensitivity gap
   
$
18,960
 
   
$
8,749
 
   
$
25,729
 
   
$
60,055
 
   
$
65,828
 
       
Cumulative interest sensitivity gap as a percentage of total assets
   
 
7.90
%
   
 
3.64
%
   
 
10.72
%
   
 
25.01
%
   
 
27.42
%
       
 
The following tables provide information about the Company’s financial instruments that are sensitive to changes in interest rates as of June 30, 2002 and December 31, 2001, based on maturity or repricing dates. The Company had no derivative financial instruments, foreign currency exposure, or trading portfolio as of June 30, 2002 or December 31, 2001.

14

Table of Contents
 
On-Balance Sheet Financial Instruments
June 30, 2002
 
    
Principal Amount Maturing or Repricing in:
  
    
1 Year
     
2 Years
     
3 Years
     
4 Years
     
5 Years
       
Over 5 Years
     
Total
  
    
(in thousands)
  
Interest earning assets:
                                                                 
Fixed rate loans
   
$
25,341
 
   
$
13,050
 
   
$
24,576
 
   
$
23,956
 
   
$
31,287
 
     
$
4,673
 
   
$
122,883
*
Average interest rate
   
 
8.34
%
   
 
9.15
%
   
 
8.68
%
   
 
9.87
%
   
 
7.83
%
     
 
8.55
%
         
Variable rate loans
   
$
71,763
 
   
$
—  
 
   
$
—  
 
   
$
—  
 
   
$
—  
 
     
$
—  
 
   
$
71,763
 
Average interest rate
   
 
6.26
%
                                                        
Investment securities
   
$
2,499
 
   
$
10,150
 
   
$
4,000
 
   
$
6,569
 
   
$
11,926
 
     
$
2,281
 
   
$
37,425
 
Average interest rate
   
 
5.00
%
   
 
3.59
%
   
 
4.52
%
   
 
4.96
%
   
 
5.10
%
     
 
5.12
%
         
Interest bearing liabilities:
                                                                 
Interest checking
   
$
13,515
 
   
$
—  
 
   
$
—  
 
   
$
—  
 
   
$
—  
 
     
$
—  
 
   
$
13,515
 
Average interest rate
   
 
0.50
%
                                                        
Money market
   
$
34,338
 
   
$
—  
 
   
$
—  
 
   
$
—  
 
   
$
—  
 
     
$
—  
 
   
$
34,338
 
Average interest rate
   
 
1.87
%
                                                        
Savings
   
$
10,706
 
   
$
—  
 
   
$
—  
 
   
$
—  
 
   
$
—  
 
     
$
—  
 
   
$
10,706
 
Average interest rate
   
 
0.80
%
                                                        
Time deposits
   
$
79,619
 
   
$
10,912
 
   
$
7,168
 
   
$
7,555
 
   
$
3,963
 
     
$
85
 
   
$
109,302
 
Average interest rate
   
 
3.50
%
   
 
4.89
%
   
 
6.27
%
   
 
6.68
%
   
 
4.79
%
     
 
5.01
%
         
FHLB borrowings
   
$
2,500
 
   
$
5,000
 
   
$
2,500
 
   
$
—  
 
   
$
—  
 
     
$
—  
 
   
$
10,000
 
Average interest rate
   
 
2.84
%
   
 
3.51
%
   
 
4.56
%
                                      
Other borrowings
   
$
5
 
   
$
—  
 
   
$
—  
 
   
$
—  
 
   
$
—  
 
     
$
—  
 
   
$
5
 
Average interest rate
   
 
4.25
%
                                                        
*
 
Net of deferred loan costs of $40 thousand.

15

Table of Contents
 
On-Balance Sheet Financial Instruments
December 31, 2001
 
 
    
Principal Amount Maturing or Repricing in:
  
    
1 Year
     
2 Years
     
3 Years
     
4 Years
     
5 Years
       
Over 5 Years
     
Total
  
    
(in thousands)
  
Interest earning assets:
                                                                 
Fixed rate loans
   
$
31,214
 
   
$
14,459
 
   
$
24,281
 
   
$
22,383
 
   
$
23,300
 
     
$
5,148
 
   
$
120,785
*
Average interest rate
   
 
8.29
%
   
 
8.88
%
   
 
8.84
%
   
 
9.00
%
   
 
8.39
%
     
 
8.56
%
         
Variable rate loans
   
$
68,299
 
   
$
—  
 
   
$
—  
 
   
$
—  
 
   
$
—  
 
     
$
—  
 
   
$
68,299
 
Average interest rate
   
 
6.35
%
                                                        
Investment securities
   
$
2,000
 
   
$
1,999
 
   
$
—  
 
   
$
—  
 
   
$
3,000
 
     
$
6,905
 
   
$
13,904
 
Average interest rate
   
 
5.86
%
   
 
5.65
%
                     
 
5.83
%
     
 
5.77
%
         
Interest bearing liabilities:
                                                                 
Interest checking
   
$
14,418
 
   
$
—  
 
   
$
—  
 
   
$
—  
 
   
$
—  
 
     
$
—  
 
   
$
14,418
 
Average interest rate
   
 
0.50
%
                                                        
Money market
   
$
25,093
 
   
$
—  
 
   
$
—  
 
   
$
—  
 
   
$
—  
 
     
$
—  
 
   
$
25,093
 
Average interest rate
   
 
1.82
%
                                                        
Savings
   
$
9,789
 
   
$
—  
 
   
$
—  
 
   
$
—  
 
   
$
—  
 
     
$
—  
 
   
$
9,789
 
Average interest rate
   
 
0.80
%
                                                        
Time deposits
   
$
68,257
 
   
$
18,363
 
   
$
5,397
 
   
$
8,430
 
   
$
2,952
 
     
$
5
 
   
$
103,404
 
Average interest rate
   
 
3.97
%
   
 
5.63
%
   
 
5.99
%
   
 
6.73
%
   
 
5.86
%
     
 
5.20
%
         
Other borrowings
   
$
3,235
 
   
$
—  
 
   
$
—  
 
   
$
—  
 
   
$
—  
 
     
$
—  
 
   
$
3,235
 
Average interest rate
   
 
4.25
%
                                                        
*
 
Net of deferred loan costs of $58 thousand.
 

16

Table of Contents
 
PART II—OTHER INFORMATION
 
ITEM 1—LEGAL PROCEEDINGS
 
As of June 30, 2002, there were no significant legal proceedings against the Company.
 
ITEM 2—CHANGES IN SECURITIES
 
There were no changes in the Company’s securities during the quarter.
 
ITEM 3—DEFAULTS UPON SENIOR SECURITIES
 
There were no defaults upon senior securities during the quarter.
 
ITEM 4—SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
 
The Company’s annual meeting of shareholders was held on April 23, 2002.
 
The shareholders of the Company re-elected Robert H. Powell III, Bobby L. Ralph, and Emil A. Viola as directors of the Company with 4,732,788 shares representing 63.29% of the outstanding stock voting for the election.
 
The shareholders of the Company voted for the election of KPMG LLP as the Company’s independent public accountants for 2002 with 4,716,757 shares or 63.08% of the outstanding stock ratifying the election.
 
ITEM 5—OTHER INFORMATION
 
None.
 
ITEM 6—EXHIBITS AND REPORTS ON FORM 8-K
 
None.
 
SIGNATURES
 
Pursuant to the requirements of the Securities and Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
HAMPTON ROADS BANKSHARES, INC.
(Registrant)
/s/    CYNTHIA A. SABOL         
Cynthia A. Sabol
Senior Vice President and
Chief Financial Officer
 
DATE: August 9, 2002
 

17