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HMPR > SEC Filings for HMPR > Form 10-Q on 14-May-2013All Recent SEC Filings

Show all filings for HAMPTON ROADS BANKSHARES INC | Request a Trial to NEW EDGAR Online Pro

Form 10-Q for HAMPTON ROADS BANKSHARES INC


14-May-2013

Quarterly Report


Item 2. Management's Discussion and Analysis of Results of Operations and Financial Condition

Forward-Looking Statements

This Form 10-Q contains "forward-looking statements" within the meaning of the U.S. Private Securities Litigation Reform Act of 1995. When or if used in this quarterly report or any Securities and Exchange Commission ("SEC") filings, other public or shareholder communications, or in oral statements made with the approval of an authorized executive officer, the words or phrases "anticipate," "would be," "will allow," "intends to," "will likely result," "are expected to," "will continue," "is anticipated," "is estimated," "is projected," or similar expressions are intended to identify "forward-looking statements."

For a discussion of the risks, uncertainties, and assumptions that could affect our future events, developments, or results, you should carefully review the risk factors summarized below and the more detailed discussion in the "Risk Factors" section of this report. Our risks include, without limitation, the following:

Our success is largely dependent on retaining key management team members;

We are not paying dividends on our Common Stock and currently are prevented from doing so. The failure to resume paying dividends on our Common Stock may adversely affect the market price of our Common Stock;

We incurred significant losses in 2010, 2011, and 2012. While we returned to profitability in the first quarter of 2013, we can make no assurances that we will continue to be profitable throughout the remainder of the year. An inability to improve our profitability could adversely affect our operations;

The formal investigation by the SEC may result in penalties, sanctions, or a restatement of our previously issued financial statements;

Economic, market, or operational developments may negatively impact our ability to maintain required capital levels or otherwise negatively impact our financial condition;

Virginia law and the provisions of our Articles of Incorporation and Bylaws could deter or prevent takeover attempts by a potential purchaser of our Common Stock that would be willing to pay you a premium for your shares of our Common Stock;

Our ability to maintain adequate sources of funding and liquidity may be negatively impacted by the economic environment which may, among other things, impact our ability to resume the payment of dividends or satisfy our obligations;

Our future success is dependent on our ability to compete effectively in the highly competitive banking industry;

Sales, or the perception that sales could occur, of large amounts of our Common Stock by our institutional investors may depress our stock price;

The concentration of our loan portfolio continues to be in commercial real estate, construction, and equity line lending, which may expose us to greater risk of loss;

If the value of real estate in the markets we serve were to decline materially, the value of our foreclosed real estate could decline or a significant portion of our loan portfolio could become under-collateralized, which could have a material adverse effect on our loan losses, results of operations, and financial condition;

We have had large numbers of problem loans. Although problem loans have declined significantly, there is no assurance that they will continue to do so;

The determination of the appropriate balance of our allowance for loan losses is merely an estimate of the inherent risk of loss in our existing loan portfolio and may prove to be incorrect. If such estimate is proven to be materially incorrect and we are required to increase our allowance for loan losses, our results of operations, financial condition, and the market price of our Common Stock could be materially adversely affected;

Our profitability will be jeopardized if we are unable to successfully manage interest rate risk;

We may face increasing deposit-pricing pressures, which may, among other things, reduce our profitability;

We face a variety of threats from technology-based frauds and scams;

Our operations and customers might be affected by the occurrence of a natural disaster or other catastrophic event in our market area;

The Company and BOHR have entered into a Written Agreement with the FRB and the Bureau of Financial Institutions that subjects the Company and BOHR to significant restrictions and requires us to designate a significant amount of our resources to complying with the agreement, and it may have a material adverse effect on our operations and the value of our Common Stock;

The Company has received a grand jury subpoena from the United States Department of Justice, Criminal Division. Although the Company has been advised that it is not a target or a subject of the investigation at this time and we do not believe we will become a target or a subject of the investigation, there can be no assurances as to the timing or eventual outcome of the related investigation;


Table of Contents

HAMPTON ROADS BANKSHARES, INC.

PART I. FINANCIAL INFORMATION

Item 2. Management's Discussion and Analysis of Results of Operations and Financial Condition

Our business, financial condition, and results of operations are highly regulated and could be adversely affected by new or changed regulations and by the manner in which such regulations are applied by regulatory authorities;

Banking regulators have broad enforcement power, but regulations are meant to protect depositors and not investors;

The fiscal, monetary, and regulatory policies of the Federal Government and its agencies could have a material adverse effect on our results of operations;

Government legislation and regulation may adversely affect our business, financial condition, and results of operations; and

The soundness of other financial institutions could adversely affect us.

Our forward-looking statements could be incorrect in light of these risks, uncertainties, and assumptions. The future events, developments, or results described in this report could turn out to be materially different. We have no obligation to publicly update or revise our forward-looking statements after the date of this report and you should not expect us to do so.

Critical Accounting Policies

GAAP is complex and requires management to apply significant judgment to various accounting, reporting, and disclosure matters. Management must use assumptions, judgments, and estimates when applying these principles where precise measurements are not possible or practical. These policies are critical because they are highly dependent upon subjective or complex assumptions, judgments, and estimates. Our assumptions, judgments, and estimates may be incorrect and changes in such assumptions, judgments, and estimates may have a significant impact on the consolidated financial statements and the accompanying notes. Actual results, in fact, could differ materially from those estimates. We consider our policies on allowance for loan losses, the valuation of deferred taxes, the valuation of foreclosed real estate, and the estimated fair value of financial instruments to be critical accounting policies. Refer to our 2012 Form 10-K for further discussion of these policies.

Material Trends and Uncertainties

Currently, the U.S. economy appears to be slowly recovering from one of its longest and most severe economic recessions in recent history. Continued improvements in general economic conditions and credit performance of the Company's loan portfolio coupled with cost savings initiatives and strong performance from our mortgage subsidiary resulted in $632 thousand net income for the three months ended March 31, 2013. While the pace of economic growth remains slow and regulatory and legislative friction continues to hamper the recovery, we expect to be profitable for the full year 2013.

During 2012 and the first three months of 2013, problem loans were reduced significantly from previous levels. As a result of this improvement and continued declines in the loan portfolio due to pay-downs and charge-offs, there was no provision for loan losses during the quarter ended March 31, 2013 compared to $7.3 million in the same period in 2012. We expect that the provision for loan losses will continue to be favorably impacted by these trends. Additionally, during the first quarter of 2013, losses on other real estate owned and repossessed assets decreased $2.1 million compared to the first quarter of 2012.

For further discussion of the material trends and uncertainties that may affect our results and financial condition, refer to the risk factors contained in this report.

Overview

Throughout the first three months of 2013, economic conditions in the markets in which our borrowers operate continued their slow recovery and the levels of loan delinquencies and rates of default continued to improve. The Company reported net income for the three month period ended March 31, 2013 primarily resulting from strong mortgage earnings and significant decreases in both the provision for loan losses and losses on other real estate owned and repossessed assets, partially offset by an impairment of premises and equipment that is further described in the notes of this report. As of March 31, 2013, the Company exceeded the regulatory capital minimums and BOHR and Shore were considered "well capitalized" under the risk-based capital standards.


Table of Contents

HAMPTON ROADS BANKSHARES, INC.

PART I. FINANCIAL INFORMATION

Item 2. Management's Discussion and Analysis of Results of Operations and Financial Condition

The following is a summary of our financial condition as of March 31, 2013 and our financial performance for the three month period then ended.

Assets were $2.0 billion at March 31, 2013. Total assets decreased by $21.8 million or 1% from $2.1 billion at December 31, 2012. The decrease in assets was primarily associated with a $32.2 million or 38% decrease in loans held for sale, a $19.6 million or 1% decrease in gross loans, and a $7.2 million or 9% decrease in premises and equipment, partially offset by a $24.8 million or 30% increase in overnight funds sold and due from FRB and a $16.2 million or 6% increase in investment securities available for sale.

Investment securities available for sale increased $16.2 million to $292.7 million during the first three months of 2013 from $276.5 million at December 31, 2012. The increase primarily resulted from the addition of $19.9 million of asset-backed securities to our portfolio, partially offset by the pay-downs of $3.4 million of our mortgage-backed securities
- agency.

Gross loans decreased by $19.6 million or 1% during the three months ended March 31, 2013. Our loan trends during the first three months of 2013 have been influenced by demand for real estate - commercial mortgage loans, a managed reduction in construction related exposure, and run-off in residential real estate loans due to refinance activity.

Impaired loans decreased by $29.4 million during the three months ended March 31, 2013 from $141.0 million at December 31, 2012. The majority of the decrease is due to charge-offs and resolutions in the overall portfolio, including a $6.9 million decrease in impaired commercial and industrial loans, a $5.4 million decrease in impaired construction loans, a $11.9 million decrease in impaired real estate-commercial mortgage loans, and a $5.0 million decrease in impaired real estate-residential mortgage loans.

Allowance for loan losses at March 31, 2013 decreased $4.7 million to $43.7 million from $48.4 million at December 31, 2012 as net charge-offs exceeded additional provisions for loan losses. Both the absolute and relative levels of non-performing loans, particularly newly identified problem credits, decreased during the three months ended March 31, 2013. We have experienced this trend over the past ten quarters.

Deposits decreased $22.6 million or 1% from December 31, 2012 as a result of decreases of $23.5 million in noninterest-bearing demand deposits, $31.1 million in time deposits under $100 thousand, and $20.8 million in time deposits over $100 thousand, partially offset by an increase of $50.7 million in interest-bearing demand deposits. Declines in deposits resulted from the Company's strategy of reducing funding rates in an effort to improve earnings and optimize excess liquidity. The increase in interest-bearing demand deposits resulted from a money market promotion that offered a special introductory rate for new money.

Net income attributable to Hampton Roads Bankshares, Inc. for the three months ended March 31, 2013 was $632 thousand as compared with net loss attributable to Hampton Roads Bankshares, Inc. of $7.9 million or $0.23 per common diluted share for the three months ended March 31, 2012. Net income for the three months ended March 31, 2013 was primarily attributable to strong mortgage earnings and significant decreases in provision for loan losses and losses on other real estate owned and repossessed assets, partially offset by an impairment of premises and equipment.

Net interest income decreased $770 thousand to $15.9 million for the three months ended March 31, 2013 as compared to the same period in 2012. The decrease was due primarily to the decreases in average interest-earning assets during those time periods, partially offset by an increase in net interest margin. Net interest margin increased 7-basis points to 3.45% at March 31, 2013 from 3.38% at March 31, 2012 due to a reduction in funding costs and a decline in non-performing loans.

We had no provision for loan losses for the three months ended March 31, 2013 compared to $7.3 million for the same period in 2012. The decrease was due to an overall continued improvement in asset quality, a continued reduction in newly identified problem loans, and continuing declines in loans outstanding.


Table of Contents

HAMPTON ROADS BANKSHARES, INC.

PART I. FINANCIAL INFORMATION

Item 2. Management's Discussion and Analysis of Results of Operations and Financial Condition

Noninterest income for the three months ended March 31, 2013 was $5.4 million, a 75% increase over the comparative period in 2012. This was largely due to continued strong mortgage origination revenues from the continued low interest rate environment, supplemented by a decline in losses and impairments on foreclosed real estate.

Noninterest expense was $19.4 million for the three months ended March 31, 2013, which was a decrease of $479 thousand or 2% over the comparable period for 2012, due to decreases in data processing expense and legal fees and costs associated with lower levels of non-performing assets, partly offset by higher salary and benefit expense in our mortgage operations to meet higher loan demand and the expense accrued for incentive compensation plans at the Banks.

Our effective tax rate was 0% for the three months ended March 31, 2013 compared to 0% for the comparable period in 2012. These rates differ from the statutory rate due primarily to the valuation allowance against the Company's deferred tax assets.

ANALYSIS OF RESULTS OF OPERATIONS

Net Interest Income and Net Interest Margin. Net interest income, a major component of our earnings, is the difference between the income generated by interest-earning assets and the cost of interest-bearing liabilities. Net interest margin, which is calculated by expressing net interest income as a percentage of average interest-earning assets, is an indicator of effectiveness in generating income from earning assets. Net interest income and net interest margin may be significantly impacted by the market interest rates (rate); the mix, duration, and volume of interest-earning assets and interest-bearing liabilities (volume); changes in the yields earned and rates paid; and the level of noninterest-bearing liabilities available to support interest-earning assets. Our management team strives to maximize net interest income through prudent balance sheet administration and by maintaining appropriate risk levels as determined by our Asset / Liability Committee ("ALCO") and the Board of Directors.

Net interest income for the three months ended March 31, 2013 was $15.9 million, a decrease of $770 thousand from $16.7 million for the three months ended March 31, 2012. The decrease in net interest income for the three months ended March 31, 2013 was due primarily to the decreases in average interest-earning assets and the yields received on these assets, partially offset by an increase in net interest margin. Our net interest margin increased to 3.45% for the three months ended March 31, 2013 from 3.38% during the three months ended March 31, 2012. The increase in net interest margin from the prior period is due primarily to an overall reduction in the cost of funds and a decline in non-performing loans.

Interest-earning assets consist of loans, investment securities, and overnight funds sold and due from FRB. Interest income on loans, including fees, decreased $1.8 million to $17.7 million for the three months ended March 31, 2013 compared to the same period during 2012. This decrease was predominantly a result of a $41.7 million decrease in average loan balance as well as the 31-basis point decrease in average yield during the three months ended March 31, 2013 compared to the same time period during 2012. Interest income on investment securities decreased $193 thousand to $1.8 million for the three months ended March 31, 2013 compared to the same period during 2012. This decrease was due to a $1.9 million decrease in average investment securities as well as a 22-basis point decrease in average yield during the three months ended March 31, 2013 compared to the same time period during 2012. Interest income on overnight funds sold and due from FRB decreased $35 thousand for the three months ended March 31, 2013 compared to the same period during 2012.

Interest-bearing liabilities consist of deposit accounts and borrowings. Interest expense on deposits decreased $1.2 million to $2.5 million for the three months ended March 31, 2013 compared to the same period during 2012. This decrease resulted from a $212.0 million decrease in average interest-bearing deposits and a 19-basis point decrease in the average interest rate paid on interest-bearing deposits for the three months ended March 31, 2013 compared to the three months ended March 31, 2012. A reduction in the average rate paid on time deposits to 1.09% for the first three months of 2013 from 1.33% for the first three months of 2012 contributed significantly toward the decrease in overall deposit rates. Our average rate on savings deposits decreased to 0.07% during the three months ended March 31, 2013 from 0.14% during the three months ended March 31, 2012. Interest expense on borrowings, which consisted of FHLB borrowings and other borrowings, decreased $127 thousand to $1.1 million for the three months ended March 31, 2013 compared to the same period during 2012.


Table of Contents

HAMPTON ROADS BANKSHARES, INC.

PART I. FINANCIAL INFORMATION

Item 2. Management's Discussion and Analysis of Results of Operations and Financial Condition

The table (in thousands, except percentages) below represents the average interest-earning assets and average interest-bearing liabilities, the average yields earned on such assets and rates paid on such liabilities, the net interest margin, and the variance in interest income and expense caused by differences in average balances and rates for the three months ended March 31, 2013 and 2012.

                                                                    Three Months Ended                                   Three Months Ended
                                                                      March 31, 2013                                       March 31, 2012                             2013 Compared to 2012
                                                                                                                                                    Interest
                                                                          Interest       Average                       Interest       Average        Income/                Variance
                                                            Average        Income/       Yield/          Average        Income/       Yield/         Expense             Attributable to
                                                            Balance        Expense        Rate           Balance        Expense        Rate         Variance           Rate            Volume
Assets:
Interest-earning assets
Loans                                                     $ 1,487,384     $  17,673          4.82 %    $ 1,529,113     $  19,521          5.13 %    $  (1,848 )    $     (1,315 )      $  (533 )
Investment securities                                         303,947         1,815          2.42 %        305,855         2,008          2.64 %         (193 )            (180 )          (13 )
Interest-bearing deposits in other banks                          823            -           0.11 %          1,114            -           0.10 %            -                 -             -
Overnight funds sold and due from FRB                          82,592            42          0.20 %        150,893            77          0.20 %          (35 )               -            (35 )

Total interest-earning assets                               1,874,746        19,530          4.22 %      1,986,975        21,606          4.37 %       (2,076 )          (1,495 )         (581 )
Noninterest-earning assets                                    156,513                                      172,513

Total assets                                              $ 2,031,259                                  $ 2,159,488


Liabilities and Shareholders' Equity:
Interest-bearing liabilities
Interest-bearing demand deposits                          $   545,891     $     509          0.38 %    $   532,315     $     460          0.35 %    $      49      $         37        $    12
Savings deposits                                               60,882            10          0.07 %         61,985            22          0.14 %          (12 )             (11 )           (1 )
Time deposits                                                 749,786         2,008          1.09 %        974,291         3,224          1.33 %       (1,216 )            (473 )         (743 )

Total interest-bearing deposits                             1,356,559         2,527          0.76 %      1,568,591         3,706          0.95 %       (1,179 )            (447 )         (732 )
Borrowings                                                    236,003         1,073          1.84 %        236,524         1,200          2.04 %         (127 )            (124 )           (3 )

Total interest-bearing liabilities                          1,592,562         3,600          0.92 %      1,805,115         4,906          1.09 %       (1,306 )            (571 )         (735 )
Noninterest-bearing liabilities
Demand deposits                                               238,309                                      222,979
Other liabilities                                              15,027                                       19,111

Total noninterest-bearing liabilities                         253,336                                      242,090

Total liabilities                                           1,845,898                                    2,047,205
Shareholders' equity                                          185,361                                      112,283

Total liabilities and shareholders' equity                $ 2,031,259                                  $ 2,159,488

Net interest income                                                       $  15,930                                    $  16,700

Net interest spread                                                                          3.30 %                                       3.28 %
Net interest margin                                                                          3.45 %                                       3.38 %

Note: Interest income from loans included fees of $434 thousand at March 31, 2013 and $266 thousand at March 31, 2012. Average nonaccrual loans of $85.2 million and $134.0 million were included in average loans for March 31, 2013 and 2012, respectively.


Table of Contents

HAMPTON ROADS BANKSHARES, INC.

PART I. FINANCIAL INFORMATION

Item 2. Management's Discussion and Analysis of Results of Operations and Financial Condition

Our method for calculating net interest margin has been adjusted. In the past, we excluded nonaccrual loans from our calculation. We now include nonaccrual loans in the calculation. A reconciliation of the methods is below for the first three months of March 31, 2013 and 2012.

                                                              March 31,
                                                           2013        2012

        Net interest margin, including nonaccrual loans     3.45 %      3.38 %
        Impact of excluding nonaccrual loans                0.16 %      0.24 %

        Net interest margin, excluding nonaccrual loans     3.61 %      3.62 %

Noninterest Income. For the quarter ended March 31, 2013, total noninterest income was $5.4 million, an increase of $2.3 million as compared to $3.1 million for the first quarter of 2012. Noninterest income comprised 25% and 16% of total revenue for the first three months of 2013 and 2012, respectively. The following table provides a summary of noninterest income (in thousands) for the three months ended March 31, 2013 and 2012.

                                                              Three Months Ended
                                                                   March 31,
                                                              2013           2012

 Mortgage banking revenue                                   $   5,964      $  3,258
 Service charges on deposit accounts                            1,217         1,342
 Income from bank-owned life insurance                            373           399
 Impairment of premises and equipment                          (2,825 )          -
 Losses on other real estate owned and repossessed assets        (904 )      (2,964 )
 Loss on sale of investment securities                             -            (13 )
 Visa check card income                                           596           499
 Rental income                                                    152           187
 ATM surcharge and network fees                                   100           217
 Other                                                            755           184


 Total noninterest income                                   $   5,428      $  3,109

Mortgage banking revenue increased to $6.0 million in the three month period ended March 31, 2013 compared to $3.3 million in the prior year period due to a 53% increase in loans sold. Service charges on deposit accounts decreased $125 . . .

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