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HMPR > SEC Filings for HMPR > Form 10-Q on 14-Aug-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-Aug-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 half 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;

Our mortgage banking earnings are cyclical and sensitive to the level of interest rates, changes in economic conditions, decreased economic activity, and slowdowns in the housing market, any of which could adversely impact our results of 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 other real estate owned 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;


HAMPTON ROADS BANKSHARES, INC.

PART I. FINANCIAL INFORMATION

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

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 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;

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 other real estate owned, 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 $721 thousand in net income attributable to Hampton Roads Bankshares, Inc. for the six months ended June 30, 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,although such profitability is not assured.

During 2012 and the first six 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, our provision for loan losses during the six months ended June 30, 2013 was $1.0 million compared to $11.6 million in the same period in 2012. The increasing moderation of defaults from better asset quality and stabilized and improved collateral values has resulted in fewer impaired loans and a substantial reduction in specific impairments. Historical losses taken in prior years are now rolling off of the weighted loss calculations we use to determine the reserves that are based on these historical loss trends in conjunction with other quantitative and qualitative factors. We expect that the provision for loan losses will continue to be favorably impacted by these trends. Additionally, during the first half of 2013, losses on other real estate owned and repossessed assets decreased $6.2 million compared to the first half of 2012. The performance of our mortgage banking subsidiary may be negatively impacted as interest rates, which have been at historic lows for several years resulting in a high volume of mortgage loan refinancing activity, rise to more typical levels.


HAMPTON ROADS BANKSHARES, INC.

PART I. FINANCIAL INFORMATION

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

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 six 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 six month period ended June 30, 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 June 30, 2013, the Company exceeded the regulatory capital minimums and BOHR and Shore were considered "well capitalized" under the risk-based capital standards.

The following is a summary of our financial condition as of June 30, 2013 and our financial performance for the three and six months then ended.

Assets were $2.0 billion at June 30, 2013. Total assets decreased by $45.2 million or 2% from $2.1 billion at December 31, 2012. The decrease in assets was primarily associated with a $32.7 million or 39% decrease in loans held for sale and a $32.0 million or 2% decrease in gross loans, partially offset by a $23.5 million or 28% increase in overnight funds sold and due from FRB.

Investment securities available for sale increased $1.9 million to $278.4 million during the first six months of 2013 from $276.5 million at December 31, 2012. The increase primarily resulted from the addition of $34.5 million of asset-backed securities to our portfolio, partially offset by the sales and settlements of our mortgage-backed securities and the decrease in net unrealized gains in our portfolio. During the six months ended June 30, the Company sold securities generating a gain of $763 thousand. Those dispositions, in conjunction with a general increase in interest rates, contributed to a decrease in the net unrealized gains in our portfolio.

Gross loans decreased by $32.0 million or 2% during the six months ended June 30, 2013. This decrease was driven by the reductions in non-performing loans through charge-offs and resolutions. The majority of the recent loan demand within our markets has come from the real estate - commercial mortgage category.

Impaired loans decreased by $48.6 million during the six months ended June 30, 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 $9.3 million decrease in impaired commercial and industrial loans, a $14.1 million decrease in impaired construction loans, a $17.7 million decrease in impaired real estate-commercial mortgage loans, and a $7.3 million decrease in impaired real estate-residential mortgage loans.

Allowance for loan losses at June 30, 2013 decreased 21% to $38.2 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 six months ended June 30, 2013.

Deposits decreased $41.4 million or 3% from December 31, 2012 as a result of decreases of $52.4 million in time deposits under $100 thousand and $56.8 million in time deposits over $100 thousand, partially offset by increases of $5.1 million in noninterest-bearing demand deposits, $55.8 million in interest-bearing demand deposits, and $6.9 million in interest-bearing savings deposits. Declines in deposits resulted from the Company's strategy of reducing funding rates in an effort to improve earnings. The increase in interest-bearing demand deposits resulted from a money market promotion that offered a special introductory rate for new money.


HAMPTON ROADS BANKSHARES, INC.

PART I. FINANCIAL INFORMATION

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

Net income attributable to Hampton Roads Bankshares, Inc. for the three and six months ended June 30, 2013 was $89 thousand and $721 thousand, respectively, as compared with net loss attributable to Hampton Roads Bankshares, Inc. of $5.7 million and $13.6 million for the three and six months, respectively, ended June 30, 2012. Net income for the six months ended June 30, 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 related to branch closures.

Net interest income decreased $102 thousand and $873 thousand to $16.1 million and $32.0 million for the three and six months, respectively, ended June 30, 2013 as compared to the same periods 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 5-basis points to 3.44% for both the three and six month periods ended June 30, 2013 from 3.39% for both the three and six month periods ended June 30, 2012 due to a reduction in funding costs and a decline in non-performing loans.

We had $1.0 million in provision for loan losses for the three and six months ended June 30, 2013 compared to $4.3 million and $11.6 million for the same periods 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. The increasing moderation of defaults from better asset quality and stabilized and improved collateral values has resulted in fewer impaired loans and a substantial reduction in specific impairments. Additionally, larger historical losses taken in prior quarters are now rolling off of the weighted loss calculations we use to determine the reserves that are largely based on these historical loss trends.

Noninterest income for the three and six months ended June 30, 2013 was $7.6 million and $13.0 million, respectively, a 281% and 155% increase over the comparative periods in 2012. This was largely due to strong mortgage origination revenues from the continued low interest rate environment, supplemented by a decline in losses on other real estate owned and repossessed assets.

Noninterest expense was $22.2 million and $41.6 million for the three and six months ended June 30, 2013, which was an increase of $3.4 million and $2.9 million over the comparable periods for 2012, due to higher salary and benefit expense partially offset by a decrease in problem loan and repossessed asset costs, FDIC insurance, and professional and consultant fees.

Our effective tax rate was 5.60% for the six months ended June 30, 2013 compared to 0% for the comparable period in 2012. These taxes related to state income taxes owed. 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.


HAMPTON ROADS BANKSHARES, INC.

PART I. FINANCIAL INFORMATION

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

Net interest income for the three and six months ended June 30, 2013 was $16.1 million and $32.0 million, a decrease of $102 thousand and $873 thousand from $16.2 million and $32.9 million for the three and six months, respectively, ended June 30, 2012. The decrease in net interest income for the six months ended June 30, 2013 was due to decreases in average interest-earning assets and the yields received on these assets. Our net interest margin increased to 3.44% for both of the three and six months ended June 30, 2013 from 3.39% for both of the same comparative periods ended June 30, 2012. The increase in net interest margin is due primarily to an overall reduction in the cost of funds and a decline in non-performing loans.

Interest-earning assets consist predominantly of loans, investment securities, and overnight funds sold and due from FRB. Interest income on loans, including fees, decreased $2.8 million to $35.4 million for the six months ended June 30, 2013 compared to the same period during 2012. This decrease was a result of a $29.3 million decrease in average loan balance as well as the 26-basis point decrease in average yield during the six months ended June 30, 2013 compared to the same time period during 2012. During the three months ended June 30, 2013, interest income on loans, including fees decreased $914 thousand to $17.7 million compared to the same period during 2012. Interest income on investment securities decreased $352 thousand to $3.7 million for the six months ended June 30, 2013 compared to the same period during 2012. This decrease was due to a $16.1 million decrease in average investment securities as well as a 9-basis point decrease in average yield during the six months ended June 30, 2013 compared to the same time period during 2012. Interest income on investment securities decreased $159 thousand to $1.8 million for the three months ended June 30, 2013 compared to the same period during 2012. Interest income on overnight funds sold and due from FRB decreased $6 thousand and $41 thousand to $63 thousand and $105 thousand for the three and six months, respectively, ended June 30, 2013 compared to the same periods during 2012.

Interest-bearing liabilities consist of deposit accounts and borrowings. Interest expense on deposits decreased $864 thousand and $2.0 million to $2.4 million and $5.0 million for the three and six months, respectively, ended June 30, 2013 compared to the same periods during 2012. This decrease resulted from a $182.7 million decrease in average interest-bearing deposits and a 18-basis point decrease in the average interest rate paid on interest-bearing deposits for the six months ended June 30, 2013 compared to the six months ended June 30, 2012. A reduction in the average rate paid on time deposits to 1.07% for the first six months of 2013 from 1.29% for the first six months of 2012 contributed significantly toward the decrease in overall deposit rates. Our average rate on savings deposits decreased to 0.05% and 0.06% during the three and six months ended June 30, 2013 from 0.13% and 0.14% during the three and six months ended June 30, 2012. Interest expense on borrowings, which consisted of FHLB borrowings and other borrowings, decreased $114 thousand and $241 thousand to $1.1 million and $2.1 million for the three and six months, respectively, ended June 30, 2013 compared to the same period during 2012.


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 expresses 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 and six months ended June 30, 2013 and 2012.

                                          Three Months Ended                        Three Months Ended
                                             June 30, 2013                             June 30, 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                           $ 1,465,714    $  17,687        4.84  %   $ 1,482,419    $  18,601        5.03  %   $    (914)   $  (705)    $  (209)
Investment securities               298,100        1,839        2.47          328,361        1,998        2.44           (159)        25        (184)
Interest-bearing deposits
in other banks                          952             -       0.06            1,208            1        0.21             (1)        (1)           -
Overnight funds sold
and due from FRB                    110,136           63        0.23          104,283           69        0.27             (6)       (10)          4
Total interest-earning assets     1,874,902       19,589        4.19        1,916,271       20,669        4.33         (1,080)      (691)       (389)
Noninterest-earning assets          152,658                                   170,664
Total assets                    $ 2,027,560                               $ 2,086,935

Liabilities and Shareholders'
Equity:
Interest-bearing liabilities
Interest-bearing demand
deposits                        $   572,494    $     558        0.39  %   $   531,663    $     489        0.37  %   $      69    $    31     $    38
Savings deposits                     67,375            9        0.05           62,945           21        0.13            (12)       (13)          1
Time deposits                       700,916        1,856        1.06          899,757        2,777        1.24           (921)      (307)       (614)
Total interest-bearing
deposits                          1,340,785        2,423        0.72        1,494,365        3,287        0.88           (864)      (289)       (575)
Borrowings                          235,883        1,071        1.82          236,352        1,185        2.01           (114)      (112)         (2)
Total interest-bearing
liabilities                       1,576,668        3,494        0.89        1,730,717        4,472        1.04           (978)      (401)       (577)
Noninterest-bearing
liabilities
Demand deposits                     249,322                                   230,443
Other liabilities                    15,900                                    19,216
Total noninterest-bearing
liabilities                         265,222                                   249,659
Total liabilities                 1,841,890                                 1,980,376
Shareholders' equity                185,670                                   106,559
Total liabilities
and shareholders' equity        $ 2,027,560                               $ 2,086,935
Net interest income                            $  16,095                                 $  16,197
Net interest spread                                             3.30  %                                   3.29  %
Net interest margin                                             3.44  %                                   3.39  %

Interest income from loans included fees of $732 thousand for the three months ended June 30, 2013 and $257 thousand for the three months ended June 30, 2012. Average nonaccrual loans of $69.9 million and $135.0 million were included in average loans for June 30, 2013 and 2012, respectively. The change in interest due to both rate and volume has been allocated to variance attributable to rate and variance attributable to volume in proportion to the relationship for the absolute amount of change in each.


HAMPTON ROADS BANKSHARES, INC.

PART I. FINANCIAL INFORMATION

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




                                            Six Months Ended                          Six Months Ended
                                              June 30, 2013                             June 30, 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:
. . .
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