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EX-31.2 - EXHIBIT 31.2 - Xenith Bankshares, Inc.a20150930exhibit312.htm
EX-10.4 - EXHIBIT 10.4 - Xenith Bankshares, Inc.a20150930exhibit104.htm
EX-31.1 - EXHIBIT 31.1 - Xenith Bankshares, Inc.a20150930exhibit311.htm
EX-32.1 - EXHIBIT 32.1 - Xenith Bankshares, Inc.a20150930exhibit321.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 September 30, 2015

Commission File Number:  001-32968
 
Hampton Roads Bankshares, Inc.
(Exact name of registrant as specified in its charter)
 
 
 
Virginia
54-2053718
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
 
 
641 Lynnhaven Parkway Virginia Beach, Virginia
23452
(Address of principal executive offices)
(Zip Code)
 
(757) 217-1000
(Registrant's telephone number, including area code)
 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.
Yes x No ¨

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.  (Check one):
Large accelerated filer        ¨    Accelerated filer        ¨
Non-accelerated filer        ¨    Smaller reporting company    x
(Do not check if a smaller reporting company)
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).
Yes ¨ No x
 
The number of shares outstanding of the issuer's Common Stock as of October 30, 2015 was 170,954,480 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
 
September 30, 2015
 
 
December 31, 2014
 
 
 
 
 
Consolidated Statements of Operations
 
Three and nine months ended September 30, 2015 and 2014
 
 
 
 
 
Consolidated Statements of Comprehensive Income
 
Three and nine months ended September 30, 2015 and 2014
 
 
 
 
 
Consolidated Statement of Changes in Shareholders' Equity
 
Nine months ended September 30, 2015
 
 
 
 
 
Consolidated Statements of Cash Flows
 
Nine months ended September 30, 2015 and 2014
 
 
 
 
 
Notes to Consolidated Financial Statements
 
 
 
ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
 
AND RESULTS OF OPERATIONS
 
 
 
 
ITEM 3
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
 
 
ITEM 4
CONTROLS AND PROCEDURES
 
 
 
PART II
OTHER INFORMATION
 
 
 
 
ITEM 1
LEGAL PROCEEDINGS
 
 
 
ITEM 1A
RISK FACTORS
 
 
 
ITEM 2
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
 
 
 
ITEM 3
DEFAULTS UPON SENIOR SECURITIES
 
 
 
ITEM 4
MINE SAFETY DISCLOSURES
 
 
 
ITEM 5
OTHER INFORMATION
 
 
 
ITEM 6
EXHIBITS
 
 
 
 
SIGNATURES
 
 
 
 
EXHIBIT INDEX

2

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




CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
 
 
 
(unaudited)
September 30, 2015
 
December 31, 2014
Assets:
 
 
 
Cash and due from banks
$
17,616

 
$
16,684

Interest-bearing deposits in other banks
1,035

 
1,349

Overnight funds sold and due from Federal Reserve Bank
46,110

 
85,586

Investment securities available for sale, at fair value
204,034

 
302,221

Restricted equity securities, at cost
10,398

 
15,827

Loans held for sale
46,476

 
22,092

Loans
1,534,596

 
1,422,935

Allowance for loan losses
(22,874
)
 
(27,050
)
Net loans
1,511,722

 
1,395,885

Premises and equipment, net
61,706

 
63,519

Interest receivable
4,149

 
4,503

Other real estate owned and repossessed assets,
 
 
 
net of valuation allowance
12,450

 
21,721

Bank-owned life insurance
50,406

 
49,536

Other assets
11,510

 
9,683

Totals assets
$
1,977,612

 
$
1,988,606

Liabilities and Shareholders' Equity:
 
 
 
Deposits:
 
 
 
Noninterest-bearing demand
$
330,514

 
$
266,921

Interest-bearing:
 
 
 
Demand
625,128

 
621,066

Savings
63,651

 
56,221

Time deposits:
 
 
 
Less than $100
344,142

 
342,794

$100 or more
323,373

 
294,346

Total deposits
1,686,808

 
1,581,348

Federal Home Loan Bank borrowings
40,000

 
165,847

Other borrowings
29,569

 
29,224

Interest payable
483

 
560

Other liabilities
16,313

 
14,130

Total liabilities
1,773,173

 
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; 170,954,480 and 170,572,217 shares issued
 
 
 
and outstanding on September 30, 2015 and December 31, 2014,
 
 
 
respectively
1,709

 
1,706

Capital surplus
590,120

 
588,692

Accumulated deficit
(391,171
)
 
(395,535
)
Accumulated other comprehensive income, net of tax
2,944

 
2,134

Total shareholders' equity before non-controlling interest
203,602

 
196,997

Non-controlling interest
837

 
500

Total shareholders' equity
204,439

 
197,497

Total liabilities and shareholders' equity
$
1,977,612

 
$
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

Nine Months Ended
(unaudited)
September 30, 2015

September 30, 2014

September 30, 2015

September 30, 2014
Interest Income:
 

 

 

 
Loans, including fees
$
17,296


$
15,967


$
50,908


$
47,243

Investment securities
1,436


2,331


4,733


6,864

Overnight funds sold and due from FRB
28


45


126


128

Total interest income
18,760


18,343


55,767


54,235

Interest Expense:
 


 


 


 

Deposits:
 


 


 


 

Demand
661


697


2,005


1,978

Savings
15


8


39


24

Time deposits:
 


 


 


 

Less than $100
968


868


2,821


2,450

$100 or more
991


830


2,932


2,346

Interest on deposits
2,635


2,403


7,797


6,798

Federal Home Loan Bank borrowings
95


357


668


1,185

Other borrowings
439


411


1,281


1,088

Total interest expense
3,169


3,171


9,746


9,071

Net interest income
15,591


15,172


46,021


45,164

Provision for loan losses


16


600


116

Net interest income



 





 

after provision for loan losses
15,591


15,156


45,421


45,048

Noninterest Income:
 


 


 


 

Mortgage banking revenue
5,722


3,215


15,444


8,169

Service charges on deposit accounts
1,273


1,196


3,713


3,550

Income from bank-owned life insurance
302


278


956


3,823

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


58


238


243

Loss on sale of premises and equipment


(82
)

(14
)

(113
)
Gain on sale of other real estate owned and repossessed assets
34


173


53


317

Impairment of other real estate owned and repossessed assets
(259
)

(426
)

(1,524
)

(1,852
)
Visa check card income
677


710


1,994


1,957

Other
666


1,012


2,032


2,863

Total noninterest income
8,415


6,134


22,892


18,957

Noninterest Expense:
 


 


 


 

Salaries and employee benefits
13,688


10,210


35,604


28,886

Professional and consultant fees
1,542


1,146


3,810


4,296

Occupancy
1,664


1,712


4,919


4,933

FDIC insurance
339


601


1,361


1,755

Data processing
1,516


1,248


4,554


3,414

Problem loan and repossessed asset costs
538


489


1,150


1,296

Equipment
349


490


1,034


1,254

Directors' and regional board fees
433


325


1,028


1,255

Advertising and marketing
386


423


1,090


1,026

Other
2,696


2,505


7,710


7,263

Total noninterest expense
23,151


19,149


62,260


55,378

Income before provision for income taxes
855


2,141


6,053


8,627

Provision for income taxes (benefit)
51


(45
)

126


(1
)
Net income
804


2,186


5,927


8,628

Net income attributable to non-controlling interest
501


190


1,563


297

Net income attributable to
 


 


 


 

Hampton Roads Bankshares, Inc.
$
303


$
1,996


$
4,364


$
8,331

Per Share:
 


 


 


 

Basic and diluted income per share
$


$
0.01


$
0.03


$
0.05

(1) Includes $0, $58, $238 and $243 accumulated other comprehensive income reclassifications for unrealized net gains on available for sale securities during the three months ended September 30, 2015 and 2014 and the nine months ended September 30, 2015 and 2014, 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
 
Nine Months Ended
(unaudited)
September 30, 2015
 
September 30, 2014
 
September 30, 2015
 
September 30, 2014
Net income
 

 
$
804

 
 

 
$
2,186

 
 

 
$
5,927

 
 

 
$
8,628

Other comprehensive income (loss),
 

 
 
 
 

 
 
 
 

 
 
 
 

 
 
net of tax
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Change in unrealized gain (loss)
 

 
 
 
 

 
 
 
 

 
 
 
 

 
 
on securities available for sale
$
350

 
 
 
$
(1,922
)
 
 
 
$
1,048

 
 
 
$
2,506

 
 
Reclassification adjustment for
 

 
 
 
 

 
 
 
 

 
 
 
 

 
 
securities gains included in
 

 
 
 
 

 
 
 
 

 
 
 
 

 
 
net income

 
 
 
(58
)
 
 
 
(238
)
 
 
 
(243
)
 
 
Other comprehensive income (loss),
 

 
 
 
 

 
 
 
 

 
 
 
 

 
 
net of tax
 

 
350

 
 

 
(1,980
)
 
 

 
810

 
 

 
2,263

Comprehensive income
 

 
1,154

 
 

 
206

 
 

 
6,737

 
 

 
10,891

Comprehensive income
 

 
 
 
 

 
 
 
 

 
 
 
 

 
 
attributable to non-controlling interest
 

 
501

 
 

 
190

 
 

 
1,563

 
 

 
297

Comprehensive income
 

 
 
 
 

 
 
 
 

 
 
 
 

 
 
attributable to
 

 
 
 
 

 
 
 
 

 
 
 
 

 
 
Hampton Roads Bankshares, Inc.
 

 
$
653

 
 

 
$
16

 
 

 
$
5,174

 
 

 
$
10,594

See accompanying notes to consolidated financial statements.

5

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


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

 
$
1,706

 
$
588,692

 
$
(395,535
)
 
$
2,134

 
$
500

 
$
197,497

Net income

 

 

 
4,364

 

 
1,563

 
5,927

Other comprehensive income

 

 

 

 
810

 

 
810

Share-based compensation expense

 

 
1,428

 

 

 

 
1,428

Net settlement of restricted stock units
382,263

 
3

 

 

 

 

 
3

Distributed non-controlling interest

 

 

 

 

 
(1,226
)
 
(1,226
)
Balance at September 30, 2015
170,954,480

 
$
1,709

 
$
590,120

 
$
(391,171
)
 
$
2,944

 
$
837

 
$
204,439

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)
Nine Months Ended
(unaudited)
September 30, 2015
September 30, 2014
Operating Activities:
 

 

Net income
$
5,927

$
8,628

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

 

Depreciation and amortization
2,387

2,554

Amortization of intangible assets and fair value adjustments
444

(33
)
Provision for loan losses
600

116

Proceeds from mortgage loans held for sale
528,079

329,611

Originations of mortgage loans held for sale
(552,463
)
(330,337
)
Share-based compensation expense
1,428

843

Net amortization of premiums and accretion of discounts on investment securities available for sale
1,712

1,537

Income from bank-owned life insurance
(956
)
(3,823
)
Gain on sale of investment securities available for sale
(238
)
(243
)
Loss on sale of premises and equipment
14

113

Gain on sale of other real estate owned and repossessed assets
(53
)
(317
)
Impairment of other real estate owned and repossessed assets
1,524

1,852

Changes in:
 

 

Interest receivable
354

322

Other assets
(1,818
)
142

Interest payable
(77
)
(5,498
)
Other liabilities
2,183

(490
)
Net cash provided by (used in) operating activities
(10,953
)
4,977

Investing Activities:
 

 

Proceeds from maturities and calls of investment securities available for sale
25,670

30,853

Proceeds from sale of investment securities available for sale
82,695

115,756

Purchase of investment securities available for sale
(10,842
)
(172,255
)
Proceeds from sale of restricted equity securities
8,916

1,975

Purchase of restricted equity securities
(3,487
)
(427
)
Proceeds from sale of premises and equipment

1,550

Purchase of premises and equipment
(588
)
(1,174
)
Net increase in loans
(119,807
)
(5,410
)
Proceeds from bank-owned life insurance death benefit
80

5,341

Proceeds from sale of other real estate owned and repossessed assets, net
10,721

14,981

Net cash used in investing activities
(6,642
)
(8,810
)
Financing Activities:
 

 

Net increase in deposits
105,460

89,313

Repayments of Federal Home Loan Bank borrowings
(165,500
)
(27,516
)
Proceeds from Federal Home Loan Bank borrowings
40,000


Settlement of restricted stock units
3

(25
)
Distributed non-controlling interest
(1,226
)
(144
)
Net cash provided by (used in) financing activities
(21,263
)
61,628

Increase (decrease) in cash and cash equivalents
(38,858
)
57,795

Cash and cash equivalents at beginning of period
103,619

62,301

Cash and cash equivalents at end of period
$
64,761

$
120,096

Supplemental cash flow information:
 

 

Cash paid for interest
$
9,218

$
14,569

Cash paid for income taxes
8


Supplemental non-cash information:
 



Change in unrealized gain (loss) on securities available for sale
$
810

$
2,263

Transfer from other real estate owned and repossessed assets to loans
696

1,661

Transfer from other real estate owned and repossessed assets to other assets
449


Transfer from loans to other real estate owned and repossessed assets
4,066

4,286

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 nine months ended September 30, 2015 are not necessarily indicative of the results to be expected for the full year. As of September 30, 2015, the Company had 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. After receiving regulatory approval, the Company merged BOHR and Shore into one bank subsidiary on October 13, 2015.

For further information, refer to the consolidated financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014 (“2014 Form 10-K”).

Use of Estimates in the Preparation of Financial Statements

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

Recent Accounting Pronouncements

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

During the second quarter of 2014, ASU 2014-09, Revenue from Contracts with Customers (“new revenue standard”), was issued. ASU 2014-09 represents a comprehensive reform of many of the revenue recognition requirements in GAAP. The ASU creates a new topic within the Accounting Standards Codification (“ASC”), Topic 606, Revenue from Contracts with Customers. The new revenue standard will supersede the current revenue recognition requirements in Topic 605, Revenue Recognition, and supersedes or amends much of the industry-specific revenue recognition guidance found throughout the ASC. The core principle of the new revenue standard is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods and services. The ASU creates a five-step process for achieving that core principle: (1) identifying the contract with the customer, (2) identifying the performance obligations in the contract, (3) determining the transaction price, (4) allocating the transaction price to the performance obligations, and (5) recognizing revenue when an entity has completed the performance obligations. The ASU also requires additional disclosures that allow users of the financial statements to understand the nature, timing, and uncertainty of revenue and cash flows resulting from contracts with customers. 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.




8

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

NOTE B - Earnings Per Share
 
The following table shows the basic and diluted earnings per share calculations for the three and nine months ended September 30, 2015 and 2014.  There were 2,425,140 and 4,943,775 stock options not included in the diluted earnings per share calculations for the three and nine months ended September 30, 2015 and September 30, 2014, respectively, because to do so would be antidilutive.
 


 




(in thousands, except share and per share data)
Three Months Ended

Nine Months Ended
(unaudited)
September 30, 2015

September 30, 2014

September 30, 2015

September 30, 2014

 

 

 

 
Net income attributable to Hampton Roads Bankshares, Inc.
$
303


$
1,996


$
4,364


$
8,331

Shares:
 

 

 


Weighted average shares outstanding
170,803,757


170,292,189


170,694,643


170,273,089

Vested restricted stock units
725,381


692,934


725,381


692,934


 






Weighted average number
of common shares outstanding
171,529,138


170,985,123


171,420,024


170,966,023













Dilutive effect of TARP-related warrants
496,782


432,337


474,212


436,348

Dilutive effect of Restricted stock units
484,243


631,817


416,066


651,087

Dilutive effect of Stock options
273,334




177,799



Total dilutive effect
1,254,359


1,064,154


1,068,077


1,087,435


 

 




Diluted weighted average number of common shares outstanding
172,783,497


172,049,277


172,488,101


172,053,458

Basic and diluted income per share
$


$
0.01


$
0.03


$
0.05

 

9

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

NOTE C - Investment Securities
 
The amortized cost, gross unrealized gains and losses, and fair values of investment securities available for sale at September 30, 2015 and December 31, 2014 were as follows.
 
 
September 30, 2015
 
 
 
Gross
 
Gross
 
 
 
Amortized
 
Unrealized
 
Unrealized
 
Fair
(in thousands)
Cost
 
Gains
 
Losses
 
Value
U.S. agency securities
$
13,568

 
$
644

 
$

 
$
14,212

Corporate bonds
11,996

 

 
690

 
11,306

Mortgage-backed securities -
 
 
 
 
 
 
 
Agency
150,775

 
2,950

 
62

 
153,663

Asset-backed securities
23,781

 
7

 
366

 
23,422

Equity securities
970

 
461

 

 
1,431

Total investment securities
 
 
 
 
 
 
 
available for sale
$
201,090

 
$
4,062

 
$
1,118

 
$
204,034


 
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 September 30, 2015 and December 31, 2014.
 
 
September 30, 2015
(in thousands)
Less than 12 Months
 
12 Months or More
 
Total
 
 
 
Unrealized
 
 
 
Unrealized
 
 
 
Unrealized
Description of Securities
Fair Value
 
Loss
 
Fair Value
 
Loss
 
Fair Value
 
Loss
Corporate bonds
$

 
$

 
$
11,306

 
$
690

 
$
11,306

 
$
690

Mortgage-backed securities -
 
 
 
 
 
 
 
 
 
 
 
Agency
7,926

 
42

 
1,585

 
20

 
9,511

 
62

Asset-backed securities
14,940

 
168

 
5,744

 
198

 
20,684

 
366

 
$
22,866

 
$
210

 
$
18,635

 
$
908

 
$
41,501

 
$
1,118

 

10

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

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

 
542


2,517


1


13,979


543

Mortgage-backed securities -
 
 
 
 
 
 
 
 
 
 
 
Agency
17,881

 
77

 
7,895

 
136

 
25,776

 
213

Asset-backed securities
34,896

 
570

 
15,379

 
578

 
50,275

 
1,148

Equity securities
181

 
9

 

 

 
181

 
9

 
$
64,420


$
1,198

 
$
25,791

 
$
715

 
$
90,211

 
$
1,913

 
Debt securities with unrealized losses totaling $1.1 million at September 30, 2015 included four corporate securities, eight 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 September 30, 2015, none of the equity securities experienced unrealized losses compared with one of the equity securities which experienced an unrealized loss totaling $9 thousand at December 31, 2014. The Company’s unrealized losses on equity securities were caused by what management deems to be transitory fluctuations in market valuation.

Other-than-temporary impairment (“OTTI”)
 
During the nine months ended September 30, 2015 and 2014, none of the investment securities available for sale were determined to be other-than-temporarily impaired; therefore, no losses were recognized through noninterest income.
 
Management evaluates securities for OTTI at least on a quarterly basis, and more frequently when economic or market conditions warrant such an evaluation.  In determining OTTI, management considers many factors, including (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, (3) whether the market decline was affected by macroeconomic conditions, and (4) whether the Company has the intent to sell the security or it is more likely than not that it will be required to sell the security before its anticipated recovery.  The assessment of whether an other-than-temporary decline exists involves a high degree of subjectivity and judgment and is based on the information available to management at a point in time.
 
When OTTI occurs, the amount of the OTTI recognized in earnings depends on whether an entity intends to sell the security or it is more likely than not it will be required to sell the security before recovery of its amortized cost basis, less any current period credit loss.  If an entity intends to sell or it is more likely than not that it will be required to sell the security before recovery of its amortized cost basis, less any current period credit loss, the OTTI shall be recognized in earnings equal to the entire difference between the investment’s amortized cost basis and its fair value at the balance sheet date.  If an entity does not intend to sell the security and it is not more likely than not that the entity will be required to sell the security before recovery of its amortized cost basis less any current period loss, the OTTI shall be separated into the amount representing the credit loss and the amount related to all other factors.  The amount of the total OTTI related to the credit loss is determined based on the present value of cash flows expected to be collected and is recognized in earnings.  The amount of the total OTTI related to other factors is recognized in other comprehensive income, net of applicable taxes.  The previous amortized cost basis less the OTTI recognized in earnings becomes the new amortized cost basis of the investment.
 
Maturities of investment securities
 
The amortized cost and fair value by contractual maturity of investment securities available for sale that are not determined to be other-than-temporarily impaired at September 30, 2015 and December 31, 2014 are shown below. 
 

11

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

Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.  Mortgage-backed and asset-backed securities, which are not due at a single maturity date, and equity securities, which do not have contractual maturities, are shown separately. 
 
 
September 30, 2015
 
December 31, 2014
 
Amortized
 
 
 
Amortized
 
 
(in thousands)
Cost
 
Fair Value
 
Cost
 
Fair Value
Due in one year or less
$

 
$

 
$
970

 
$
982

Due after one year
 
 
 
 
 
 
 
but less than five years
2,255

 
2,317

 
5,670

 
5,726

Due after five years
 
 
 
 
 
 
 
but less than ten years
12,731

 
12,135

 
13,228

 
12,806

Due after ten years
10,578

 
11,066

 
12,254

 
12,699

Mortgage-backed securities -
 
 
 
 
 
 
 
Agency
150,775

 
153,663

 
212,650

 
215,428

Asset-backed securities
23,781

 
23,422

 
54,345

 
53,197

Equity securities
970

 
1,431

 
970

 
1,383

Total available for sale securities
$
201,090

 
$
204,034

 
$
300,087

 
$
302,221


Federal Home Loan Bank (“FHLB”)
 
The Company’s investment in FHLB stock totaled $3.5 million at September 30, 2015 and $9.2 million at December 31, 2014.  FHLB stock is generally viewed as a long-term investment and as a restricted investment security because it is required to be held in order to access FHLB advances (i.e. borrowings).  It is carried at cost as there is no active market or exchange for the stock other than the FHLB or member institutions.  Therefore, when evaluating FHLB stock for impairment, its value is based on ultimate recoverability of the par value rather than by recognizing temporary declines in value.  The Company does not consider this investment to be other-than-temporarily impaired at September 30, 2015 and December 31, 2014, and no impairment has been recognized.
 
Federal Reserve Bank (“FRB”) and Other Restricted Stock
 
The Company’s investment in FRB and other restricted stock totaled $6.9 million at September 30, 2015 and $6.6 million at December 31, 2014.  FRB stock comprises the majority of this amount and is generally viewed as a long-term investment and as a restricted investment security as it is required to be held to effect membership in the Federal Reserve System.  It is carried at cost as there is not an active market or exchange for the stock other than the FRB or member institutions.  The Company does not consider these investments to be other-than-temporarily impaired at September 30, 2015 and December 31, 2014, except for one restricted equity security, which was determined to be other-than-temporarily impaired at December 31, 2014 for which a $10 thousand impairment was recorded in 2014. No impairment has been recognized for any of the other restricted equity securities, including the investment in FRB.


12

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

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

The total of our loans by segment at September 30, 2015 and December 31, 2014 are as follows.
 
(in thousands)
September 30, 2015
 
December 31, 2014
Commercial and Industrial
$
231,754

 
$
219,029

Construction
137,410

 
136,955

Real estate - commercial mortgage
658,189

 
639,163

Real estate - residential mortgage
352,345

 
354,017

Installment
155,423

 
74,821

Deferred loan fees and related costs
(525
)
 
(1,050
)
Total loans
$
1,534,596

 
$
1,422,935

 
Allowance for Loan Losses

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

 
Three Months Ended September 30, 2015
 
 
 
 
 
Real Estate
 
 
 
 
 
 
 
Commercial
 
 
 
Commercial
 
Residential
 
 
 
 
 
 
(in thousands)
and Industrial
 
Construction
 
Mortgage
 
Mortgage
 
Installment
 
Unallocated
 
Total
Allowance for loan losses:
 
 
 
 
 
 
 
 
 
 
 
 
 
Beginning balance
$
6,589

 
$
4,281

 
$
6,440

 
$
5,870

 
$
788

 
$
3,768

 
$
27,736

Charge-offs
(3,705
)
 
(1,557
)
 
(22
)
 
(312
)
 
(42
)
 

 
(5,638
)
Recoveries
235

 
126

 
284

 
125

 
6

 

 
776

Provision
(36
)
 
210

 
(507
)
 
1,161

 
20

 
(848
)
 

Ending balance
$
3,083

 
$
3,060

 
$
6,195

 
$
6,844

 
$
772

 
$
2,920

 
$
22,874



13

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

 
Three Months Ended September 30, 2014
 
 
 
 
 
Real Estate
 
 
 
 
 
 
 
Commercial
 
 
 
Commercial
 
Residential
 
 
 
 
 
 
(in thousands)
and Industrial
 
Construction
 
Mortgage
 
Mortgage
 
Installment
 
Unallocated
 
Total
Allowance for loan losses:
 
 
 
 
 
 
 
 
 
 
 
 
 
Beginning balance
$
1,528

 
$
3,984

 
$
7,652

 
$
7,134

 
$
1,560

 
$
4,204

 
$
26,062

Charge-offs
(200
)
 
(943
)
 
(257
)
 
(1,020
)
 
(153
)
 

 
(2,573
)
Recoveries
2,723

 
1,113

 
469

 
883

 
25

 

 
5,213

Provision
(1,707
)
 
(306
)
 
1,430

 
335

 
406

 
(142
)
 
16

Ending balance
$
2,344

 
$
3,848

 
$
9,294

 
$
7,332

 
$
1,838

 
$
4,062

 
$
28,718




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

 
$
4,342

 
$
6,854

 
$
7,142

 
$
979

 
$
3,128

 
$
27,050

Charge-offs
(4,074
)
 
(2,021
)
 
(288
)
 
(782
)
 
(170
)
 

 
(7,335
)
Recoveries
875

 
617

 
518

 
507

 
42

 

 
2,559

Provision
1,677

 
122

 
(889
)
 
(23
)
 
(79
)
 
(208
)
 
600

Ending balance
$
3,083

 
$
3,060

 
$
6,195

 
$
6,844

 
$
772

 
$
2,920

 
$
22,874

Ending balance:  attributable to
 
 
 
 
 
 
 
 
 
 
 
 
 
loans individually evaluated
 
 
 
 
 
 
 
 
 
 
 
 
 
for impairment
$
175

 
$
715

 
$
573

 
$
2,134

 
$
1

 
 
 
$
3,598

Recorded investment: loans
 
 
 
 
 
 
 
 
 
 
 
 
 
individually evaluated for
 
 
 
 
 
 
 
 
 
 
 
 
 
impairment
$
4,236

 
$
20,983

 
$
25,638

 
$
12,405

 
$
66

 
 
 
 
Ending balance:  attributable to
 
 
 
 
 
 
 
 
 
 
 
 
 
loans collectively evaluated
 
 
 
 
 
 
 
 
 
 
 
 
 
for impairment
$
2,908

 
$
2,345

 
$
5,622

 
$
4,710

 
$
771

 
$
2,920

 
$
19,276

Recorded investment: loans
 
 
 
 
 
 
 
 
 
 
 
 
 
collectively evaluated for
 
 
 
 
 
 
 
 
 
 
 
 
 
impairment
$
227,518

 
$
116,427

 
$
632,551

 
$
339,940

 
$
155,357

 
 
 
 



14

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

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

 
$
9,807

 
$
10,135

 
$
7,914

 
$
521

 
$
4,250

 
$
35,031

Charge-offs
(1,361
)
 
(6,370
)
 
(2,466
)
 
(3,276
)
 
(678
)
 

 
(14,151
)
Recoveries
2,993

 
2,396

 
737

 
1,441

 
155

 

 
7,722

Provision
(1,692
)
 
(1,985
)
 
888

 
1,253

 
1,840

 
(188
)
 
116

Ending balance
$
2,344

 
$
3,848

 
$
9,294

 
$
7,332

 
$
1,838

 
$
4,062

 
$
28,718

Ending balance:  attributable to
 
 
 
 
 
 
 
 
 
 
 
 
 
loans individually evaluated
 
 
 
 
 
 
 
 
 
 
 
 
 
for impairment
$
463

 
$
602

 
$
2,096

 
$
2,244

 
$
47

 
 
 
$
5,452

Recorded investment: loans
 
 
 
 
 
 
 
 
 
 
 
 
 
individually evaluated for
 
 
 
 
 
 
 
 
 
 
 
 
 
impairment
$
2,051

 
$
6,246

 
$
27,430

 
$
17,627

 
$
115

 
 
 
 
Ending balance:  attributable to
 
 
 
 
 
 
 
 
 
 
 
 
 
loans collectively evaluated
 
 
 
 
 
 
 
 
 
 
 
 
 
for impairment
$
1,881

 
$
3,246

 
$
7,198

 
$
5,088

 
$
1,791

 
$
4,062

 
$
23,266

Recorded investment: loans
 
 
 
 
 
 
 
 
 
 
 
 
 
collectively evaluated for
 
 
 
 
 
 
 
 
 
 
 
 
 
impairment
$
203,865

 
$
125,260

 
$
607,838

 
$
329,488

 
$
62,047

 
 
 
 

Management believes the allowance for loan losses as of September 30, 2015 is adequate to absorb losses inherent in the portfolio.  However, the allowance is subject to regulatory examinations and determination as to adequacy, which may take into account such factors as the methodology used to calculate the allowance and the size of the allowance in comparison to peer banks identified by regulatory agencies.  Such agencies may require us to recognize additions to the allowance for loan losses based on their judgments about information available at the time of the examinations.
 
Impaired Loans
 
Total impaired loans were $63.3 million and $48.9 million at September 30, 2015, and December 31, 2014, respectively.  The Company continues to resolve its troubled loans through charge-offs, curtailments, pay offs, and returns of loans to performing status. Collateral dependent impaired loans were $57.9 million and $43.3 million at September 30, 2015, and December 31, 2014, respectively, and are measured at the fair value of the underlying collateral less costs to sell. Impaired loans for which no allowance is provided totaled $40.7 million and $29.1 million at September 30, 2015, and December 31, 2014, respectively.  Loans written down to their estimated fair value of collateral less the costs to sell account for $22.0 million and $7.6 million of the impaired loans for which no allowance has been provided as of September 30, 2015, and December 31, 2014, respectively. The weighted average age of appraisals for collateral dependent loans is 0.94 and 0.56 years at September 30, 2015 and December 31, 2014, respectively.  The remaining impaired loans for which no allowance is provided are expected to be fully covered by the fair value of the collateral, and therefore, no loss is expected on these loans.

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

15

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

 
September 30, 2015
 
Three Months Ended 
 September 30, 2015
 
Nine Months Ended 
 September 30, 2015
 
Recorded
 
Unpaid
 
Related
 
Average
 
Interest
 
Average
 
Interest
(in thousands)
Investment
 
Balance
 
Allowance
 
Investment
 
Recognized
 
Investment
 
Recognized
With no related
 
 
 
 
 
 
 
 
 
 
 
 
 
allowance recorded:
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial & Industrial
$
3,950

 
$
4,878

 
$

 
$
4,017

 
$
4

 
$
4,063