10-K 1 hrb1231201410k.htm 10-K HRB.12.31.2014.10K

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.  20549
 
FORM 10-K
 
Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the fiscal year ended December 31, 2014
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)
 
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Name of each exchange on which registered
Common Stock, par value $0.01 per share   
The NASDAQ Global Select Market


Securities registered pursuant to Section 12(g) of the Act:  None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨ No x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨ No x

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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.  o

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). ¨ No x
 
State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the registrant’s most recently completed second fiscal quarter:  $58,999,610
 
The number of shares outstanding of the issuer's Common Stock as of March 25, 2015 was 170,572,217 shares, par value $0.01 per share.
 
DOCUMENTS INCORPORATED BY REFERENCE
 
 
Portions of the registrant’s Proxy Statement for the 2015 Annual Meeting of Shareholders are incorporated by reference into Part III hereof.

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HAMPTON ROADS BANKSHARES, INC.
 
 
 
 
 

Hampton Roads Bankshares, Inc.
Form 10-K Annual Report
For the Year Ended December 31, 2014
Table of Contents
 
Part I
 
 
Item 1
Business
Item 1A
Risk Factors
Item 1B
Unresolved Staff Comments
Item 2
Properties
Item 3
Legal Proceedings
Item 4
Mine Safety Disclosures
Part II
 
 
Item 5
Market for Registrant's Common Equity, Related Shareholder Matters, and Issuer Purchases of Equity Securities
 
Item 6
Selected Financial Data
Item 7
Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 7A
Quantitative and Qualitative Disclosures About Market Risk
Item 8
Financial Statements and Supplementary Data
Item 9
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
Item 9A
Controls and Procedures
Item 9B
Other Information
Part III
 
 
Item 10
Directors, Executive Officers, and Corporate Governance
Item 11
Executive Compensation
Item 12
Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters
Item 13
Certain Relationships and Related Transactions and Director Independence
Item 14
Principal Accounting Fees and Services
Part IV
 
 
Item 15
Exhibits and Financial Statement Schedules
 
Signatures


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HAMPTON ROADS BANKSHARES, INC.

PART 1

ITEM 1 - BUSINESS
 
Overview

Unless indicated otherwise, the terms “we,” “us,” or “our” refer to Hampton Roads Bankshares, Inc. and its consolidated subsidiaries.
Hampton Roads Bankshares, Inc. (the “Company”), a Virginia corporation, incorporated under the laws of the Commonwealth of Virginia on February 28, 2001, serves as a multi-bank holding company for Bank of Hampton Roads (“BOHR”) and Shore Bank (“Shore” and collectively, the “Banks”). 
BOHR is a Virginia state-chartered commercial bank with 17 full-service offices in the Hampton Roads region of southeastern Virginia, including six offices in the city of Chesapeake, three offices in the city of Norfolk, six offices in the city of Virginia Beach, one office in Emporia, and one office in the city of Suffolk.  In addition, BOHR has 10 full-service offices located in Richmond, Virginia and the Northeastern and Research Triangle regions of North Carolina that do business as Gateway Bank.  BOHR has three wholly-owned operating subsidiaries: Harbour Asset Servicing, Inc., which is inactive; Gateway Investment Services, Inc., which is intended to assist customers in their securities brokerage activities through an arrangement with an unaffiliated broker-dealer earning revenue through a commission sharing arrangement with the unaffiliated broker-dealer, is currently inactive; and Gateway Bank Mortgage, Inc., which provides mortgage banking services such as originating and processing mortgage loans for sale into the secondary market. 
The Company also owns all of the common stock of Gateway Capital Statutory Trust I, Gateway Capital Statutory Trust II, Gateway Capital Statutory Trust III, and Gateway Capital Statutory Trust IV (collectively, the “Gateway Capital Trusts”).  The Gateway Capital Trusts are not consolidated as part of the Company’s consolidated financial statements.  However, the junior subordinated debentures issued by the Company to the Gateway Capital Trusts are included in other borrowings, and the Company’s equity interest in the Gateway Capital Trusts is included in other assets.
Shore is a Virginia state-chartered commercial bank with 7 full-service offices located on the Delmarva Peninsula, otherwise known as the Eastern Shore.  Shore operates on the Virginia, Maryland, and Delaware portions of the Eastern Shore, including the counties of Accomack and Northampton in Virginia and the Pocomoke City and Salisbury market areas in Maryland.  Shore has an investment in a Virginia title insurance agency that enables Shore to offer title insurance policies to its real estate loan customers.  Shore also operates 3 loan production offices ("LPO") in West Ocean City and Glen Burnie, Maryland and Rehoboth Beach, Delaware. 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. SPF is headquartered in Glen Burnie, Maryland, a suburb of Baltimore, Maryland.
Over the last few years, one of our priorities was to return our focus to core community banking by reducing branches in close proximity with one another, which was intended to improve overall efficiency and enable us to shift capital towards investments in mobile and online technologies.  On December 31, 2010, we had 58 branches, and by December 31, 2014, we had reduced our number of branches to 34.
Our principal executive office is located at 641 Lynnhaven Parkway, Virginia Beach, Virginia 23452 and our telephone number is (757) 217-1000.  The Company’s common stock, par value $0.01 per share (the “Common Stock”), trades on the NASDAQ Global Select Market under the symbol “HMPR.”  A significant portion of our outstanding Common Stock is owned by three institutional investors.


Business
 
Principal Products or Services
 
Hampton Roads Bankshares, Inc. engages in a general community and commercial banking business, targeting the banking needs of individuals and small- to medium-sized businesses in its primary service areas, which include the Hampton Roads region of southeastern Virginia, the Northeastern and Research Triangle regions of North Carolina, the Eastern Shore of Virginia, Maryland, and Delaware, the Baltimore region of Maryland, and Richmond, Virginia.  The Company’s primary products are traditional loan and deposit banking services. 
We offer a broad range of interest-bearing and noninterest-bearing deposit accounts, including commercial and retail checking accounts, Negotiable Order of Withdrawal accounts, savings accounts, and individual retirement accounts as well as certificates

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of deposit with a range of maturity date options.  The primary sources of deposits are small- and medium-sized businesses and individuals within our target markets.  Additionally, we may obtain both national certificates of deposit and brokered certificates of deposit.
All deposit accounts are insured by the Federal Deposit Insurance Corporation (“FDIC”) up to the maximum allowed by law of $250,000.  We offer a range of commercial, real estate, and consumer loans.  Our loan portfolio is comprised of the following categories:  commercial and industrial, construction, real estate-commercial mortgage, real estate-residential mortgage, and installment.  Commercial and industrial loans are loans to businesses that are typically not collateralized by real estate.  Generally, the purpose of commercial and industrial loans is for the financing of accounts receivable, inventory, or equipment and machinery.  Construction loans are made to individuals and businesses for the purpose of construction of single family residential properties, multi-family properties, and commercial projects as well as the development of residential neighborhoods and commercial office parks.  We have continued to decrease our exposure to this category of loans within our portfolio.  Commercial mortgage loans are made for the purchase and re-financing of owner occupied commercial properties as well as non-owner occupied income producing properties.  Our residential mortgage portfolio includes first and junior lien mortgage loans, home equity lines of credit, and other term loans secured by first and junior lien mortgages.  Installment loans are made on a regular basis for personal, family, and general household purposes.  More specifically, we make automobile loans, marine loans, home improvement loans, loans for vacations, and debt consolidation loans. 
Our primary lending objective is to enhance customer relationships by meeting business and consumer needs in our market areas, while maintaining our standards of profitability and credit quality.  All lending decisions are based upon an evaluation of the financial strength and credit history of the borrower and the quality and value of the collateral securing the loan.  With few exceptions, personal guarantees are required on all loans.
The direct lending activities in which the Company engages carry the risk that the borrowers will be unable to perform on their obligations. As such, interest rate policies of the Board of Governors of the Federal Reserve System (the "Federal Reserve") and general economic conditions, nationally and in the Company's primary market areas, have a significant impact on the Company's results of operations. To the extent that economic conditions deteriorate, business and individual borrowers may be less able to meet their obligations to the Company in full, in a timely manner, resulting in decreased earnings or losses to the Company. To the extent the Company makes fixed rate loans, general increases in interest rates will tend to reduce the Company's spread as the interest rates the Company must pay for deposits may increase while interest income may be unchanged. Economic conditions may also adversely affect the value of property pledged as security for loans and the ability to liquidate that property to satisfy a loan if necessary.
The Company's goal is to mitigate risks in the event of unforeseen threats to the loan portfolio as a result of economic downturn or other negative influences. Plans for mitigating inherent risks in managing loan assets include: carefully enforcing loan policies and procedures and modifying those policies on occasion to account for changing or emerging risks or changing market conditions, evaluating each borrower's business plan and financial condition during the underwriting process and throughout the loan term, identifying and monitoring primary and alternative sources for loan repayment, and maintaining sufficient collateral to mitigate economic loss in the event of liquidation. An allowance for loan losses has been established which consists of general, specific, and unallocated components. A risk rating system is employed to estimate loss exposure and provide a measuring system for setting general reserve allocations.  The general component relates to groups of homogeneous loans not designated for specific impairment analysis that are collectively evaluated for potential loss.  The specific component relates to loans that are determined to be impaired and, therefore, individually evaluated for impairment.  The specific allowance for loan losses is based on a loan-by-loan analysis and varies between impaired loans largely due to the value of the loan’s underlying collateral.  An unallocated component is maintained to cover uncertainties that could affect management’s estimate of probable losses and considers internal portfolio management effectiveness and external macroeconomic factors. 
The composition of the Company's loan portfolio is weighted toward commercial real estate and real estate construction.  At December 31, 2014, commercial real estate and real estate construction represented 54.5% of the loan portfolio.  These loans are underwritten to mitigate lending risks typical of this type of loan such as declines in real estate values, changes in borrower cash flow, and general economic conditions. The Company typically requires a maximum loan to value of 80% or less and minimum cash flow debt service coverage at the time of origination of 1.25 to 1.0. Personal guarantees are required by policy, with a limited number of exceptions being granted due to mitigating factors.
The general terms and underwriting standards for each type of loan is incorporated into the Company's lending policies. These policies are analyzed periodically by management, and the policies are reviewed and approved by a designated subcommittee of the Board on an annual basis. The Company's loan policies and practices described in this report are subject to periodic change, and each guideline or standard is subject to waiver or exception in the case of any particular loan, with approval by the appropriate officer or committee, in accordance with the Company's loan policies. Policy standards are often stated in mandatory terms, such as "shall" or "must", but these provisions are subject to exception where appropriately mitigated. Policy requires that loan value

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not exceed a percentage of "market value" or "fair value" based upon appraisals or evaluations obtained in the ordinary course of the Company's underwriting practices.
Loans are secured primarily by duly recorded first deeds of trust. In some cases, the Company may accept a recorded second lien position. In general, borrowers will have a proven ability to build, lease, manage and/or sell a commercial or residential project and demonstrate satisfactory financial condition. Additionally, an equity contribution toward the project is required. Construction loans require that the financial condition and experience of the general contractor and major subcontractors be satisfactory to the Company. Guaranteed, fixed price construction contracts are required whenever appropriate, along with payment and performance bonds or completion bonds for larger scale projects.
Commercial land acquisition and construction loans are secured by real property where loan proceeds will be used to acquire land and to construct or improve appropriately zoned real property for the creation of income producing or owner user commercial properties. Borrowers are required to contribute equity into each project at levels determined by Loan Policy. Commercial land acquisition and construction loans generally are underwritten with a maximum term of 24 months.  Loan-to-value ("LTV") ratios, with few exceptions, are maintained consistent with or below supervisory guidelines.
All construction draw requests must be presented in writing on American Institute of Architects documents and certified by the contractor, the borrower and the borrower's architect. Each draw request shall also include the borrower's soft cost breakdown certified by the borrower or its Chief Financial Officer. Prior to an advance, the Company or its contractor inspects the project to determine that the work has been completed in order to justify the draw requisition.
Commercial permanent loans are secured by improved real property which is generating income in the normal course of operation. Debt service coverage, assuming stabilized occupancy, must be satisfactory to support a permanent loan. At the time of origination, the debt service coverage ratio is ordinarily at least 1.25 to 1.0.  As part of the underwriting process, debt service coverage ratios are stress tested assuming a 200 basis point increase in interest rates from their current levels.
Personal guarantees are generally received from the principals on commercial real estate loans, and only in instances where the loan-to-value is sufficiently low and the debt service is sufficiently high is consideration given to either limiting or not requiring personal recourse. Updated appraisals for real estate secured loans are obtained as necessary and appropriate to borrower financial condition, project status, loan terms, and market conditions.
The Company is also an active traditional commercial lender providing loans for a variety of purposes, including cash flow, equipment and accounts receivable financing. This loan category represents 15.4% of the Company's loan portfolio at December 31, 2014 and is generally priced at a variable or adjustable rate. Commercial loans must meet reasonable underwriting standards, including appropriate collateral, and cash flow necessary to support debt service.  Residential home mortgage loans, including home equity lines and loans, make up 24.9% of the loan portfolio. These credits represent both first and second liens on residential property almost exclusively located in the Company’s primary market areas. The remaining 5.3% of the loan portfolio consists of retail consumer installment loans. At December 31, 2014, approximately 30.0% of the consumer installment loan portfolio is comprised of marine loans originated by our new financing unit SPF.
The risk of nonpayment (or deferred payment) of loans is inherent in commercial lending. The Company's marketing focus on small to medium-sized businesses may result in the assumption by the Company of certain lending risks that are different from those inherent in loans to larger companies. The policies and procedures of the Company dictate that all loan applications are to be carefully evaluated and attempt to minimize credit risk exposure by use of extensive loan application data, due diligence, and approval and monitoring procedures; however, there can be no assurance that such procedures can eliminate such lending risks.
We offer other banking-related specialized products and services to our customers, such as travelers’ checks, coin counters, wire services, online banking, and safe deposit box services. Additionally, we offer our commercial customers various cash management products including remote deposit. Remote Deposit Capture allows our customers to make check deposits conveniently from their office with a small desktop scanner for faster funds availability and to begin earning interest sooner. Our  merchant services offers a suite of payment processing solutions tailored to retailers and other specific industries allowing processing of all major credit cards 24 hours a day 365 days a year.  We issue letters of credit and standby letters of credit, most of which are related to real estate construction loans, for some of our commercial customers.  We also facilitate the use of back-to-back swaps to help us and our customers manage interest rate risk.  We have not engaged in any securitizations of loans.
Additional Services
In addition to its banking operations, the Company has two other reportable segments:  Mortgage and Corporate.  Gateway Bank Mortgage, Inc. comprises our Mortgage segment and provides mortgage banking services such as originating and processing mortgage loans for sale to the secondary market.  Our Corporate segment includes the holding Company, and immaterial passive operating results from inactive subsidiary units.Through an arrangement with an unaffiliated broker-dealer, we provide our customers access to securities, brokerage, and investment advisory services.  For financial information about our business segments, see Note 16, Business Segment Reporting, of the Notes to Consolidated Financial Statements.

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We offer telephone, internet, and mobile banking to our customers. These services allow both commercial and retail customers to access detailed account information and execute a wide variety of banking transactions, including balance transfers and bill payment, by means other than a traditional teller or automated teller machine (“ATM”). We believe these services are particularly attractive to our customers, as these services enable them to conduct their banking business and monitor their accounts at any time. Telephone, internet, and mobile banking assist us in attracting and retaining customers and encourage our existing customers to consider us for all of their banking and financial needs.
Throughout our markets, we have a network of thirty-eight ATMs, which are also accessible by the customers of our subsidiary banks.  Our customers can also access ATMs not owned by the Banks.
Competition

The financial services industry in our market area remains highly competitive and is constantly evolving.  We experience strong competition from other financial services organizations, some of which are not subject to the same degree of regulation that is imposed on us.  Many of them have broader geographic markets and substantially greater resources, and therefore, can offer more diversified products and services. 
In our market areas, we compete with large national and regional financial institutions, savings banks, and other independent community banks, as well as credit unions, consumer finance companies, mortgage companies, and loan production offices.  Competition for deposits and loans is affected by factors such as interest rates and terms offered, the number and location of branches, types of products offered, and reputation of the institution.  We believe that the pricing and structure of our products, as well as our high quality service and community involvement, helps us remain competitive and contributes to our overall success in the markets we serve.
Market
 
Our primary service area is encompassed by the Virginia Beach – Norfolk – Newport News, VA-NC Metropolitan Statistical Area, the 37th largest metropolitan area in the United States, with a population of approximately 1.7 million.  The Company’s market area includes the Hampton Roads region including the cities of Chesapeake, Norfolk, Virginia Beach, Portsmouth, and Suffolk, Virginia; the Northeastern and Research Triangle regions of North Carolina; the Eastern Shore of Virginia and Maryland; the Baltimore region of Maryland; Richmond, Virginia; Ocean City, Maryland; and Rehoboth Beach, Delaware.  The Hampton Roads region is recognized as the eighth largest metro area in the Southeast U.S. and the second largest between Atlanta and Washington D.C.  Six of the 10 largest population centers in the U.S. are located within 750 miles of Hampton Roads.  This region has a diverse, well-rounded economy supported by a solid manufacturing base.  However, due to a substantial military presence, the U.S. government has a significant impact on the economy of our region. 
The U.S. Navy’s Atlantic Fleet is headquartered at the Norfolk Naval Base, which is the largest Navy base in the world.  Additionally, Portsmouth is the home of the Norfolk Naval Shipyard, which is the U.S. Navy’s largest ship repair yard, and the Portsmouth Naval Medical Center, the U.S. Navy’s largest hospital.  In Newport News, Newport News Shipbuilding, a division of Huntington Ingalls Industries, is the nation’s sole designer, builder, and refueler of nuclear-powered aircraft carriers and one of only two shipyards capable of designing and building nuclear-powered submarines.  The area is also home to the National Aeronautics and Space Administration / Langley Research Center in Hampton, the Colonial Williamsburg Foundation (hotels and museums), three marine terminals owned by the Virginia Port Authority (shipping), and the Anheuser-Busch Williamsburg Brewery (beverage).  Furthermore, the U.S. Army, Air Force, and Coast Guard each have a significant presence in the Greater Hampton Roads area with bases in the region.
Leading employers in the private sector include Stihl, Inc. (chain saws), Sumitomo Machinery Corporation of America (industrial motor drives), Canon Virginia, Inc. (copiers, laser printers, and supplies), Dollar Tree Stores, Inc. (retail), Lumber Liquidators, Inc. (hardwood flooring retailer), Norfolk Southern Corporation (transportation), and Mitsubishi Corporation (various manufacturing operations).
The Fifth District of the Federal Reserve System
According to the Federal Reserve Bank of Richmond’s February 2015 update on the economy report for the Fifth District (which includes our major market areas of Virginia, North Carolina, and Maryland), the Fifth District economy improved somewhat in recent months, with positive employment reports and generally stable business conditions, although housing market indicators were more mixed.
Virginia Markets
On a year-over-year basis, total employment in Virginia in December 2014 expanded 0.8 percent, led by growth in education and health services (2.3%) and leisure and hospitality (1.9%). The Richmond Metropolitan Statistical Area ("MSA") grew by 2.4%, the Virginia Beach-Norfolk MSA grew by 1.1%, and Northampton and Accomack Counties are expected to grow by 1.2%. The unemployment rate in Virginia declined to 4.8% in December 2014, making Virginia one of nineteen states to have an unemployment

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rate lower than 5.0%. The unemployment rate in the Richmond MSA was 5.1% in December 2014, down from 5.4% in December 2013, and in the Virginia Beach-Norfolk MSA it was 5.3% in December 2014, down from 5.6% in December 2013. Non-business bankruptcies in Virginia were down 8.2% in 2014 compared to 2013 and the share of mortgages with payments 90 or more days past due declined from 2.1% in 2013 to 1.8% in 2014. According to CoreLogic Information Solutions, Virginia home values appreciated 1.1% since December 2013, with home values in the Richmond MSA growing 4.9% and in the Virginia Beach-Norfolk MSA growing 0.7%. According to Virginia Beach-based Real Estate Information Network, the region's multiple listing service, existing home sales in the Hampton Roads region lost the forward momentum in 2014 that had been building slowly since 2012. Total number of existing homes sold in South Hampton Roads in 2014 was 13,216, down 1.1 percent from 2013. The lack of consistent job growth likely had an impact on the housing market last year - the region created about 6,000 jobs in 2012, 7,500 in 2013, and fewer than 2,000 in 2014.
According to the Old Dominion University Economic Forecasting Project, the Hampton Roads economy is expected to grow at a slower rate in 2015 than in 2014, and will be slower than the historical annual average of 3.1% and slower than that of the nation. The region's economy, as measured by Real Gross Regional Product, expanded at a rate of 2.2% in 2014. While the Department of Defense spending has continued to provide stability to overall growth in Hampton Roads during the last decade, total military spending within the region increased from $18.4 billion to $18.8 billion or by only $500 million in 2014, and it is expected that this spending will decline by $100 million in 2015. Reduced defense spending in Hampton Roads is expected to continue to dampen the regional economic growth in 2015 and beyond. However, other important changes in 2015 likely to raise regional income in Hampton Roads include growth in port activity, growth of the health care industry, continued lower gasoline prices, and increases in tourism spending. Major factors that contributed to the port's growth are larger ships calling at the port, its access to round-the-clock deep water, and additional business generated by the region's economic development efforts. Factors that we expect to contribute to higher tourism revenue during 2015 are: moderate increases in federal travel; lower gasoline prices; lower heating oil prices in the Northeast; positive growth in the national economy, particularly in the Hampton Roads' main tourist market areas; and a continued slowdown in additional supply of hotel rooms.
North Carolina Markets
North Carolina’s economy continued to improve in recent months, with strong employment growth, improving household conditions, and mostly positive housing market indicators. On a year-over-year basis, employment in North Carolina expanded 2.8% in 2014 - faster than the national increase of 2.2%. Employment grew in the Durham MSA by 1.4%, in Greensboro-High Point MSA by 1.9%, in Raleigh-Cary MSA by 3.5%, in Wilmington MSA by1.7%, and in Pasquotank County declined by 5.2%. North Carolina’s unemployment rate fell to 5.5% in December 2014 - the lowest unemployment rate in the state since April 2008 - compared to 6.9% in December 2013. Non-business bankruptcies in North Carolina were down 8.0% in 2014 compared to 2013 and the share of mortgages with payments 90 or more days past due declined from 2.5% in 2013 to 2.2% in 2014. According to CoreLogic Information Solutions, home values in North Carolina appreciated 2.3% on a year-over-year basis.

Concentrations
 
The majority of our depositors are located and doing business in our targeted market areas, and we lend a substantial portion of our capital and deposits to individual and business borrowers in these market areas.  Any factors adversely affecting the economy of the Greater Hampton Roads area could, in turn, adversely affect our performance.  The Company has no significant concentrations to any one customer. 

Government Supervision and Regulation
 
General
 
As a bank holding company, the Company is subject to regulation under the Bank Holding Company Act of 1956, as amended, and the examination and reporting requirements of the Federal Reserve.
 
Other federal and state laws govern the activities of our Banks, including the activities in which they may engage, the investments they may make, the aggregate amount of loans they may grant to one borrower, and the dividends they may declare and pay to us. Our banking subsidiaries are also subject to various consumer and compliance laws. As Virginia state-chartered banks, BOHR and Shore are primarily subject to regulation, supervision, and examination by the Bureau of Financial Institutions of the Virginia State Corporation Commission (“Bureau of Financial Institutions”).  In addition, we are regulated and supervised by the Federal Reserve through the Federal Reserve Bank of Richmond (“FRB”).  We must furnish to the Federal Reserve quarterly and annual reports containing detailed financial statements and schedules.  All aspects of our operations, including reserves, loans, mortgages, capital, issuance of securities, payment of dividends, and establishment of branches are governed by these authorities.  These authorities are able to impose penalties, initiate civil and administrative actions, and take further steps to prevent us from engaging in unsafe or unsound practices.  In this regard, the Federal Reserve has adopted capital adequacy requirements. 

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The following description summarizes the more significant federal and state laws applicable to us. To the extent that statutory or regulatory provisions are described, the description is qualified in its entirety by reference to that particular statutory or regulatory provision.

Bank Holding Company Act

Under the Bank Holding Company Act, we are subject to periodic examination by the Federal Reserve and required to file periodic reports regarding our operations and any additional information that the Federal Reserve may require. Our activities at the bank holding company level are limited to:

•
banking, managing, or controlling banks;
•
furnishing services to or performing services for our subsidiaries; and
•
engaging in other activities that the Federal Reserve has determined by regulation or order to be so closely related to banking as to be a proper incident to these activities.

Some of the activities that the Federal Reserve has determined by regulation to be closely related to the business of a bank holding company include making or servicing loans and specific types of leases, performing specific data processing services, and acting in some circumstances as a fiduciary, investment, or financial adviser.
 
With some limited exceptions, the Bank Holding Company Act requires every bank holding company to obtain the prior approval of the Federal Reserve before: 
•
acquiring substantially all the assets of any bank and
•
acquiring direct or indirect ownership or control of any voting shares of any bank if after such acquisition it would own or control more than 5% of the voting shares of such bank (unless it already owns or controls the majority of such shares) or merging or consolidating with another bank holding company.
 
In addition, and subject to some exceptions, the Bank Holding Company Act and the Change in Bank Control Act (the “Acts”), together with their regulations, require Federal Reserve approval prior to any person or Company acquiring “control” of a bank holding company, which is generally deemed to occur if an individual or company acquires 25% or more of any class of voting securities of the bank holding company. Under the Acts, prior notice to the Federal Reserve is required if a person acquires 10% or more, but less than 25%, of any class of voting securities and if the institution has registered securities under Section 12 of the Securities Exchange Act of 1934 (the “Exchange Act”) or no other person owns a greater percentage of that class of voting securities immediately after the transaction. The regulations provide a procedure for challenging this rebuttable control presumption.  CapGen Capital Group VI LP (“CapGen”) has received Federal Reserve approval as a bank holding company to “control” the Company and currently owns 29.91% of the outstanding Common Stock.  Our next two largest investors, Anchorage Capital Group, L.L.C. (“Anchorage”), and The Carlyle Group, L.P. (“Carlyle”) each own 24.86% of the outstanding Common Stock, and are prohibited from owning 25% or more of the outstanding Common Stock of the Company.  None of our other investors currently owns 25% or more of the outstanding Common Stock of the Company.

Capital Requirements

The Federal Reserve has issued risk-based and leverage capital guidelines applicable to banking organizations that it supervises.  The federal capital standards define capital and establish minimum capital requirements in relation to assets and off-balance sheet exposure as adjusted for credit risk.  The risk-based capital standards currently in effect are designed to make regulatory capital requirements more sensitive to differences in risk profiles among bank holding companies and banks, to account for off-balance sheet exposure, and to minimize disincentives for holding liquid assets.  Assets and off-balance sheet items are assigned to broad risk categories, each with an appropriate risk weighting.  The resulting capital ratios represent capital as a percentage of total risk-weighted assets and off-balance sheet items.   
 
Under the risk-based capital requirements, the Company and our bank subsidiaries are each generally required to maintain a minimum ratio of total capital to risk-weighted assets (including specific off-balance sheet activities, such as standby letters of credit).  At least half of the total capital must be composed of “Tier 1 Capital,” which is defined as common equity, retained earnings, qualifying perpetual preferred stock, and minority interests in common equity accounts of consolidated subsidiaries, less certain intangible assets. The remainder may consist of “Tier 2 Capital,” which is defined as subordinated debt, some hybrid capital

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instruments and other qualifying preferred stock, and a limited amount of the allowance for loan losses and pretax net unrealized holding gains on certain equity securities. In addition, each of the federal banking regulatory agencies has established minimum leverage capital requirements for banking organizations. Under these requirements, banking organizations must maintain a minimum ratio of Tier 1 Capital to adjusted average quarterly assets equal to 4%, subject to federal bank regulatory evaluation of an organization’s overall safety and soundness. In summary, the capital measures used by the federal banking regulators are Total Risk-Based Capital ratio (the total of Tier 1 Capital and Tier 2 Capital as a percentage of total risk-weighted assets), Tier 1 Risk-Based Capital ratio (Tier 1 capital divided by total risk-weighted assets), and the Leverage ratio (Tier 1 capital divided by adjusted average total assets).  Generally, under these regulations, a bank will be:
 
●  “well capitalized” if it has a Total Risk-Based Capital ratio of 10% or greater, a Tier 1 Risk-Based Capital ratio of 6% or greater, a Leverage ratio of 5% or greater,
●“adequately capitalized” if it has a Total Risk-Based Capital ratio of 8% or greater, a Tier 1 Risk-Based Capital ratio of 4% or greater, and a Leverage ratio of 4% or greater (or 3% in certain circumstances) and is not well capitalized,
●“undercapitalized” if it has a Total Risk-Based Capital ratio of less than 8%, a Tier 1 Risk-Based Capital ratio of less than 4% (or 3% in certain circumstances), or a Leverage ratio of less than 4% (or 3% in certain circumstances),
●“significantly undercapitalized” if it has a Total Risk-Based Capital ratio of less than 6%, a Tier 1 Risk-Based Capital ratio of less than 3%, or a Leverage ratio of less than 3%, or
●“critically undercapitalized” if its tangible equity is equal to or less than 2% of tangible assets.
 
In addition, the Federal Reserve may require banks to maintain capital at levels higher than those required by general regulatory requirements.  BOHR and Shore were “well capitalized” at December 31, 2014.  
 
The risk-based capital standards of the FDIC and the FRB explicitly identify concentrations of credit risk and the risk arising from non-traditional activities, as well as an institution’s ability to manage these risks, as important factors to be taken into account by the agency in assessing an institution’s overall capital adequacy. The capital guidelines also provide that an institution’s exposure to a decline in the economic value of its capital due to changes in interest rates be considered by the agency as a factor in evaluating a banking organization’s capital adequacy.
 
Changes in Capital Requirements
 
In December 2010, the Basel Committee released its final framework for strengthening international capital and liquidity regulation on Banking Supervision in “Basel III:  A Global Regulatory Framework for More Resilient Banks and Banking Systems”. The Federal Reserve approved a final rule regarding capital requirements on July 2, 2013.  The rule will implement in the United States the Basel III regulatory capital reforms from the Basel Committee on Banking Supervision and certain changes required by the Dodd-Frank Wall Street Reform and Consumer Protection Act.  Basel III will require bank holding companies and their bank subsidiaries to maintain more capital, with a greater emphasis on common equity.
 
The Basel III final capital framework, among other things, (i) introduces as a new capital measure “Common Equity Tier 1” (“CET1”), (ii) specifies that Tier 1 capital consists of CET1 and “Additional Tier 1 capital” instruments meeting specified requirements, (iii) defines CET1 narrowly by requiring that most adjustments to regulatory capital measures be made to CET1 and not to the other components of capital, and (iv) expands the scope of the adjustments as compared to existing regulations.
 
When fully phased-in, Basel III requires banks to maintain (i) as a newly adopted international standard, a minimum ratio of CET1 to risk-weighted assets of at least 4.5% plus a “capital conservation buffer” of 2.5%, (ii) a minimum ratio of Tier 1 capital to risk-weighted assets of at least 6.0% plus the capital conservation buffer, (iii) a minimum ratio of Total (Tier 1 plus Tier 2) capital to risk-weighted assets of at least 8.0% plus the capital conservation buffer, and (iv) as a newly adopted international standard, a minimum leverage ratio of 4%, calculated as the ratio of Tier 1 capital to balance sheet exposures plus certain off-balance sheet exposures (computed as the average for each quarter of the month-end ratios for the quarter).
 
Banking institutions with a ratio of CET1 to risk-weighted assets above the minimum but below the conservation buffer (or below the combined capital conservation buffer and countercyclical capital buffer, when the latter is applied) may face constraints on dividends, equity repurchases, and compensation based on the amount of the shortfall.
 
The Basel III final framework provides for a number of new deductions from and adjustments to CET1. These include, for example, the requirement that mortgage servicing assets, deferred tax assets related to temporary differences that could not be realized through net operating loss carrybacks, and significant investments in non-consolidated financial entities be deducted from CET1

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to the extent that any one such category exceeds 10% of CET1 or all such categories in the aggregate exceed 15% of CET1.  The Company does not have any recognized mortgage servicing assets, deferred tax assets, or significant investments in non-consolidated entities as of December 31, 2014.

The Basel III Capital Rules prescribe a standardized approach for risk weightings that expand the risk-weighting categories from the current four Basel I-derived categories (0%, 20%, 50% and 100%) to a much larger and more risk-sensitive number of categories, depending on the nature of the assets, generally ranging from 0% for U.S. government and agency securities, to 600% for certain equity exposures, and resulting in higher risk weights for a variety of asset categories. Specifics changes to current rules impacting the Company’s determination of risk-weighted assets include, among other things:
 
•
Applying a 150% risk weight instead of a 100% risk weight for certain high volatility commercial real estate acquisition, development and construction loans.
•
Assigning a 150% risk weight to exposures (other than residential mortgage exposures) that are 90 days past due.
•
Providing for a 20% credit conversion factor for the unused portion of a commitment with an original maturity of one year or less that is not unconditionally cancellable (currently set at 0%). 
•
Providing for a risk weight, generally not less than 20% with certain exceptions, for securities lending transactions based on the risk weight category of the underlying collateral securing the transaction.

The new minimum capital requirements are effective January 1, 2015, whereas the capital conservation buffer and the deductions from common equity Tier 1 capital phase in between 2015 and 2019. 

The Basel III Notice also changes the prompt corrective action capital requirements effective in 2015. After the change, an institution would be deemed to be: (i) “well capitalized” if it has a total risk based capital ratio of 10.0% or more, a Tier 1 risk based capital ratio of 8.0% or more, a CET1 risk based capital ratio of 6.5% or more, and a leverage capital ratio of 5.0% or more, (ii) “adequately capitalized” if it has a total risk based capital ratio of 8.0% or more, a Tier 1 risk based capital ratio of 6.0% or more, a CET1 risk based capital ratio of 4.5% or more, and a leverage capital ratio of 4.0% or more, (iii) “undercapitalized” if it has a total risk based capital ratio of less than 8.0%, a Tier 1 risk based capital ratio of less than 6.0%, a CET1 risk based capital ratio of less than 4.5%, and a leverage capital ratio of less than 4.0%, (iv) “significantly undercapitalized” if it has a total risk based capital ratio of less than 6.0%, a Tier 1 risk based capital ratio of less than 4.0%, a CET1 risk based capital ratio of less than 3.0%, and a leverage capital ratio of less than 3.0%, and (v) “critically undercapitalized” if it has a ratio of tangible equity to total assets that is less than or equal to 2.0%. Tangible equity would be defined for this purpose as Tier 1 capital (common equity Tier 1 capital plus any additional Tier 1 capital elements) plus any outstanding perpetual preferred stock that is not already included in Tier 1 capital.

Payment of Dividends

The Company is a legal entity separate and distinct from the Banks and their subsidiaries. Substantially all of our cash revenues will result from dividends paid to us by our Banks and interest earned on investments. Our Banks are subject to laws and regulations that limit the amount of dividends that they can pay. Under Virginia law, a bank may declare a dividend out of the bank’s net undivided profits, but not in excess of its accumulated retained earnings.  Additionally, our Banks may not declare a dividend, unless the dividend is approved by the Federal Reserve, if the total amount of all dividends, including the proposed dividend, declared by the bank in any calendar year exceeds the total of the bank’s retained net income of that year to date, combined with its retained net income of the two preceding years.  Federal Reserve regulations also provide that a bank may not declare a dividend in excess of its undivided profits without Federal Reserve approval.  Our Banks may not declare or pay any dividend if, after making the dividend, the bank would be “undercapitalized,” as defined in the banking regulations.

The Federal Reserve and the Bureau of Financial Institutions have the general authority to limit the dividends paid by insured banks if the payment is deemed an unsafe and unsound practice. Both the Federal Reserve and the Bureau of Financial Institutions have indicated that paying dividends that deplete a bank’s capital base to an inadequate level would be an unsound and unsafe banking practice.

In addition, we are subject to certain regulatory requirements to maintain capital at or above regulatory minimums. These regulatory requirements regarding capital affect our dividend policies. Regulators have indicated that bank holding companies should generally pay dividends only if the organization’s net income attributable to Hampton Roads Bankshares, Inc.  over the past year has been sufficient to fully fund the dividends and the prospective rate of earnings retention appears consistent with the organization’s capital needs, asset quality, and overall financial condition.


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Insurance of Accounts, Assessments, and Regulation by the FDIC

The deposits of our bank subsidiaries are insured by the FDIC up to the limits set forth under applicable law and are subject to the deposit insurance assessments of the Deposit Insurance Fund (“DIF”) of the FDIC.  Under the Dodd-Frank Act (refer to discussion below), a permanent increase in deposit insurance was authorized to $250,000.  The coverage limit is per depositor, per insured depository institution for each ownership category.

This system is intended to tie each bank’s deposit insurance assessments to the risk it poses to the FDIC’s DIF.  Under the risk-based assessment system, the FDIC evaluates each bank’s risk based on three primary factors:  (1) its supervisory rating, (2) its financial ratios, and (3) its long-term debt issuer rating, if applicable.  In addition to being influenced by the risk profile of the particular depository institution, FDIC premiums are also influenced by the size of the DIF in relation to total deposits in FDIC insured banks.  Rates vary between 2.5 and 45 basis points, depending on the insured institution’s Risk Category.  Initial base assessment rates range from 5-9 basis points for Risk Category I institutions to 35 basis points for Risk Category IV institutions.  In addition, premiums increase for institutions that rely on excessive amounts of brokered deposits to fund rapid growth, excluding Certificate of Deposit Account Registry Service (“CDARS”), and decrease for institutions’ unsecured debt.  After applying all possible adjustments, minimum and maximum total base assessment rates range from 2.5-9 basis points for Risk Category I institutions to 30-45 basis points for Risk Category IV institutions.  Either an increase in the Risk Category of our bank subsidiaries or adjustments to the base assessment rates could have a material adverse effect on our earnings.  As the DIF reserve ratio is replenished to certain thresholds in the future, these assessment rates may decrease without further action by the FDIC being required.  The FDIC also has authority to impose special assessments.
Assessments generally are based upon a depository institution’s average total consolidated assets minus the average tangible equity of the insured depository institution during the assessment period. Pursuant to the Dodd-Frank Act, the minimum deposit insurance fund ratio will increase from 1.15% to 1.35% by September 30, 2020, and the cost of the increase will be borne by depository institutions with assets of $10.0 billion or more.
The Dodd-Frank Act also provides the FDIC with discretion to determine whether to pay rebates to insured depository institutions when its deposit insurance reserves exceed certain thresholds. Previously, the FDIC was required to give rebates to depository institutions equal to the excess once the reserve ratio exceeded 1.50%, and was required to rebate 50% of the excess over 1.35% but not more than 1.50% of insured deposits. The FDIC adopted a final rule on February 7, 2011 that implemented these provisions of the Dodd-Frank Act. 
Additionally, by participating in the transaction account guarantee program under the FDIC Temporary Liquidity Guarantee Program (“TLGP”), banks temporarily become subject to an additional assessment on deposits in excess of $250,000 in certain transaction accounts and additionally for assessments from 50 basis points to 100 basis points per annum depending on the initial maturity of the debt. Further, all FDIC insured institutions are required to pay assessments to the FDIC to fund interest payments on bonds issued by the Financing Corporation (“FICO”), an agency of the Federal Government established to recapitalize the predecessor to the DIF.  The FICO assessment rate, which is determined on a quarterly basis and computed on assets, was 0.00155% for the fourth quarter of 2014.  These assessments will continue until the FICO bonds mature in 2019. 
The FDIC is authorized to prohibit any insured institution from engaging in any activity that the FDIC determines by regulation or order to pose a serious threat to the DIF. Also, the FDIC may initiate enforcement actions against banks, after first giving the institution’s primary regulatory authority an opportunity to take such action. The FDIC may terminate the deposit insurance of any depository institution if it determines, after a hearing, that the institution has engaged or is engaging in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations, or has violated any applicable law, regulation, order or any condition imposed in writing by the FDIC. It also may suspend deposit insurance temporarily during the hearing process for the permanent termination of insurance, if the institution has no tangible capital. If deposit insurance is terminated, the deposits at the institution at the time of termination, less subsequent withdrawals, shall continue to be insured for a period from six months to two years, as determined by the FDIC. We are unaware of any existing circumstances that could result in the termination of any of our bank subsidiaries’ deposit insurance.

Dodd-Frank Act

On July 21, 2010, the Dodd-Frank Act, which significantly changes the regulation of financial institutions and the financial services industry, was signed into law.  The Dodd-Frank Act, together with the regulations to be developed thereunder, includes provisions affecting large and small financial institutions alike, including several provisions that will affect how community banks, thrifts, and small bank and thrift holding companies will be regulated in the future.  The Dodd-Frank Act requires a number of federal agencies to adopt a broad range of new rules and regulations and to prepare various studies and reports for Congress.  The federal

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agencies are given significant discretion in drafting these rules and regulations, and consequently, many of the details and much of the impact of the Dodd-Frank Act may not be known for some time.

The Dodd-Frank Act, among other things, limits interchange fees payable on debit card transactions, includes provisions that affect corporate governance and executive compensation at all publicly-traded companies, and allows financial institutions to pay interest on business checking accounts.

On December 10, 2013, five financial regulatory agencies, including the Federal Reserve, Commodity Futures Trading Commission, FDIC, Office of the Comptroller of the Currency, and the Securities and Exchange Commission, adopted final rules implementing a provision of the Dodd-Frank Act, commonly referred to as the Volcker Rule.  The final rules generally would prohibit banking entities from:
•
engaging in short-term proprietary trading of securities, derivatives, commodity futures and options on these instruments for their own account;
•
owning, sponsoring, or having certain relationships with hedge funds or private equity funds, referred to as “covered funds”.

On January 14, 2014, the five financial regulatory agencies approved an adjustment to the final rule by allowing banks to keep certain collateralized debt obligations (“CDOs”) acquired by the bank before the Volcker Rule was finalized, if the CDO was established before May 2010 and is backed primarily by trust preferred securities issued by banks with less than $15 billion in assets established.  The final rules are effective April 1, 2014; however, the Federal Reserve has extended the conformance period until July 21, 2017.  As of December 31, 2014, our investment portfolio did not contain any securities subject to the Volcker Rule.

Consumer Financial Protection Bureau

The Dodd-Frank Act created a new, independent federal agency, the Consumer Financial Protection Bureau (“CFPB”) having broad rule-making, supervisory, and enforcement powers under various federal consumer financial protection laws, including the Equal Credit Opportunity Act, Truth in Lending Act, Real Estate Settlement Procedures Act, Fair Credit Reporting Act, Fair Debt Collection Act, the Consumer Financial Privacy provisions of the Gramm-Leach-Bliley Act, and certain other statutes. The CFPB has examination and primary enforcement authority with respect to depository institutions with $10.0 billion or more in assets. Smaller institutions, including the Banks, are subject to rules promulgated by the CFPB but continue to be examined and supervised by federal banking regulators for consumer compliance purposes. The CFPB has authority to prevent unfair, deceptive, or abusive practices in connection with the offering of consumer financial products. The Dodd-Frank Act permits states to adopt consumer protection laws and standards that are more stringent than those adopted at the federal level and, in certain circumstances, permits state attorneys general to enforce compliance with both the state and federal laws and regulations.

In 2013, the CFPB adopted a rule, effective in January 2014, to implement certain sections of the Dodd-Frank Act requiring creditors to make a reasonable, good faith determination of a consumer’s ability to repay any closed-end consumer credit transaction secured by a 1-4 family dwelling.  The rule also establishes certain protections from liability under this requirement to ensure a borrower’s ability to repay for loans that meet the definition of “qualified mortgage.”  Loans that satisfy this “qualified mortgage” safe harbor will be presumed to have complied with the new ability-to-repay standard.  We have assessed our current lending practices and have determined that a large majority of mortgage loans that we originate are Government Sponsored Enterprise-eligible ("GSE-eligible") and are therefore qualified mortgages.  We have also determined that the Company’s lending policies comply with the requirement to consider certain underwriting factors under the ability-to-repay standard.

Emergency Economic Stabilization Act of 2008 (“EESA”)
The EESA, enacted on October 3, 2008, authorized the Secretary of the United States Department of the Treasury (the “Treasury”) to purchase or guarantee up to $700.0 billion in troubled assets from financial institutions under the Troubled Asset Relief Program (“TARP”).  Pursuant to authority granted under EESA, the Secretary of the Treasury created the TARP Capital Purchase Program (“TARP CPP”) under which the Treasury could invest up to $250.0 billion in senior preferred stock of U.S. banks and savings associations or their holding companies.
On December 31, 2008, the Company entered into a Letter Agreement and Securities Purchase Agreement with the Treasury under the Treasury’s TARP CPP, pursuant to which the Company sold 80,347 shares of our Fixed-Rate Cumulative Perpetual Preferred Stock, Series C, no par value per share, having a liquidation preference of $1,000 per share (the “Series C Preferred”)  and a warrant (the “Warrant”) to purchase 53,035 shares of our Common Stock at an initial exercise price of $227.25 per share, subject to certain anti-dilution and other adjustments, for an aggregate purchase price of $80.3 million in cash.

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On August 12, 2010 the Company and Treasury executed the Exchange Agreement, which provided for (i) the exchange of 80,347 shares of Series C Preferred for 80,347 shares of a newly-created Series C-1 preferred stock (“Series C-1 Preferred”) with a liquidation preference of $1,000, (ii) the conversion of the Series C-1 Preferred at a discounted conversion value of $6,500 per share into 2,089,022 shares of the Company’s Common Stock at a conversion price of $10.00 per share, and (iii) the amendment of the terms of the Warrant to provide for the purchase of up to 53,035 shares of the Company’s Common Stock at an exercise price of $10.00 per share for a ten-year term following the issuance of the amended warrant to the Treasury (the “Amended TARP Warrant”).   The Company and Treasury consummated the transactions contemplated by the Exchange Agreement on September 30, 2010. 
On September 27, 2012, as a result of a capital raise and the Amended TARP Warrant's anti-dilution provisions, the number of shares purchasable was adjusted to 757,633 shares of the Company’s Common Stock and the exercise price to purchase such shares was adjusted to $0.70 per share.
On April 14, 2014, the Treasury sold its Common Stock, which it acquired through the Company’s participation in the TARP CPP. As a result of participation in TARP, our executives and certain of our employees were subject to compensation related limitations and restrictions, which applied so long as the Treasury held the Common Stock it received in return for the financial assistance it provided us (disregarding any warrants to purchase our Common Stock that the Treasury may hold). Therefore, the compensation related limitations and restrictions will not apply to compensation earned after the Treasury’s sale. In connection with the Treasury’s sale, the Company agreed to cancel certain restricted stock units that became non-payable under the Treasury’s TARP regulations at the time of sale.
Sarbanes-Oxley Act of 2002
The Sarbanes-Oxley Act of 2002 comprehensively revised the laws affecting corporate governance, accounting obligations, and corporate reporting for companies with equity or debt securities registered under the Exchange Act, as amended. In particular, the Sarbanes-Oxley Act of 2002 established (1) requirements for audit committees, including independence, expertise, and responsibilities; (2) certification responsibilities for the chief executive officer and chief financial officer with respect to the Company’s financial statements; (3) standards for auditors and regulation of audits; (4) increased disclosure and reporting obligations for reporting companies and their directors and executive officers; and (5) increased civil and criminal penalties for violation of the federal securities laws.

Bank Secrecy Act (“BSA”)
 
Under the BSA, a financial institution is required to have systems in place to detect certain transactions, based on the size and nature of the transaction. Financial institutions are generally required to report cash transactions involving $10 thousand or more to the Treasury. In addition, financial institutions are required to file suspicious activity reports for transactions that involve $5 thousand or more and which the financial institution knows, suspects, or has reason to suspect involves illegal funds, is designed to evade the requirements of the BSA, or has no lawful purpose.
 
USA Patriot Act of 2001 (“Patriot Act”)
 
In October 2001, the Patriot Act was enacted in response to the terrorist attacks in New York, Pennsylvania, and Washington, D.C. that occurred on September 11, 2001.  The Patriot Act is intended to strengthen U.S. law enforcement and the intelligence communities’ abilities to work cohesively to combat terrorism on a variety of fronts.  The Patriot Act contains sweeping anti-money laundering and financial transparency laws and imposes various regulations, including standards for verifying client identification at account opening and rules to promote cooperation among financial institutions, regulators, and law enforcement entities in identifying parties that may be involved in terrorism or money laundering.  The continuing and potential impact of the Patriot Act and related regulations and policies on financial institutions of all kinds is significant and wide-ranging.
 
Gramm-Leach-Bliley Act of 1999 (“GLBA”)
 
The GLBA covers a broad range of issues, including a repeal of most of the restrictions on affiliations among depository institutions, securities firms, and insurance companies. The following description summarizes some of its significant provisions.
 
The GLBA contains extensive customer privacy protection provisions. Under these provisions, a financial institution must provide to its customers, both at the inception of the customer relationship and on an annual basis, the institution’s policies and procedures regarding the handling of customers’ nonpublic personal financial information. The law provides that, except for specific limited exceptions, an institution may not provide such personal information to unaffiliated third parties unless the institution discloses to the customer that such information may be so provided and the customer is given the opportunity to opt out of such disclosure. An institution may not disclose to a non-affiliated third party, other than to a consumer credit reporting agency, customer account

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numbers or other similar account identifiers for marketing purposes. The GLBA also provides that the states may adopt customer privacy protections that are stricter than those contained in the act.
 
The GLBA repeals sections 20 and 32 of the Glass-Steagall Act, thus permitting unrestricted affiliations between banks and securities firms.

Community Reinvestment Act of 1977 (“CRA”)
 
Under the CRA and related regulations, depository institutions have an affirmative obligation to assist in meeting the credit needs of their market areas, including low- and moderate-income areas, consistent with safe and sound banking practice. The CRA requires the adoption by each institution of a CRA statement for each of its market areas describing the depository institution’s efforts to assist in its community’s credit needs. Depository institutions are periodically examined for compliance with the CRA and are periodically assigned ratings in this regard. Banking regulators consider a depository institution’s CRA rating when reviewing applications to establish new branches, undertake new lines of business, and/or acquire part or all of another depository institution. An unsatisfactory rating can significantly delay or even prohibit regulatory approval of a proposed transaction by a bank holding company or its depository institution subsidiaries.
 
The GLBA and federal bank regulators have made various changes to the CRA. Among other changes, CRA agreements with private parties must be disclosed and annual reports must be made to a bank’s primary federal regulator. A bank holding company or any of its subsidiaries will not be permitted to engage in new activities authorized under the GLBA if any bank subsidiary received less than a “satisfactory” rating in its latest CRA examination.  During our last CRA exam, our rating was “satisfactory.”
 
Monetary Policy
 
The commercial banking business is affected not only by general economic conditions but also by the monetary policies of the Federal Reserve. The instruments of monetary policy employed by the Federal Reserve include open market operations in United States government securities, changes in the discount rate on member bank borrowings,  changes in reserve requirements against deposits held by federally insured banks, and quantitative easing. The Federal Reserve’s monetary policies have had a significant effect on the operating results of commercial banks in the past and are expected to continue to do so in the future. In view of changing conditions in the national and international economies and in the money markets, as well as the effect of actions by monetary and fiscal authorities, including the Federal Reserve, no prediction can be made as to possible future changes in interest rates, deposit levels, loan demand, or the business and earnings of our bank subsidiaries, their subsidiaries, or any of our other subsidiaries.
 
Transactions with Affiliates
 
Transactions between banks and their affiliates are governed by Sections 23A and 23B of the Federal Reserve Act. An affiliate of a bank is any bank or entity that controls, is controlled by, or is under common control with such bank. Generally, Sections 23A and 23B (i) limit the extent to which the bank or its subsidiaries may engage in “covered transactions” with any one affiliate to an amount equal to 10% of such institution’s capital stock and surplus and maintain an aggregate limit on all such transactions with affiliates to an amount equal to 20% of such capital stock and surplus and (ii) require that all such transactions be on terms substantially the same as, or at least as favorable to those that, the bank has provided to a non-affiliate.
 
The term “covered transaction” includes the making of loans, purchase of assets, issuance of a guarantee, and similar other types of transactions. Section 23B applies to “covered transactions” as well as sales of assets and payments of money to an affiliate. These transactions must also be conducted on terms substantially the same as, or at least as favorable, to those that the bank has provided to non-affiliates.
 
The Dodd-Frank Act changed the definition of “covered transaction” in Sections 23A and 23B and limitations on asset purchases from insiders. With respect to the definition of “covered transaction,” the Dodd-Frank Act defines that term to include the acceptance of debt obligations issued by an affiliate as collateral for a bank’s loan or extension of credit to another person or Company. In addition, a “derivative transaction” with an affiliate is now deemed to be a “covered transaction” to the extent that such a transaction causes a bank or its subsidiary to have a credit exposure to the affiliate. A separate provision of the Dodd-Frank Act states that an insured depository institution may not “purchase an asset from or sell an asset to” a bank insider (or their related interests) unless (1) the transaction is conducted on market terms between the parties and (2) it has been approved in advance by the majority of the institution’s non-interested directors if the proposed transaction represents more than 10 percent of the capital stock and surplus of the insured institution.


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Loans to Insiders
 
The Federal Reserve Act and related regulations impose specific restrictions on loans to directors, executive officers, and principal shareholders of banks. Under Section 22(h) of the Federal Reserve Act and Regulation O, loans to a director, an executive officer, and to a principal shareholder of a bank as well as to entities controlled by any of the foregoing may not exceed, together with all other outstanding loans to such person and entities controlled by such person, the bank’s loan-to-one borrower limit. For this purpose, the bank’s loan-to-one borrower limit is 15% of the bank’s unimpaired capital and unimpaired surplus in the case of loans that are not fully secured and an additional 10% of the bank’s unimpaired capital and unimpaired surplus in the case of loans that are fully secured by readily marketable collateral having a market value at least equal to the amount of the loan.  Loans in the aggregate to insiders and their related interests as a class may not exceed the bank’s unimpaired capital and unimpaired surplus. Section 22(h) also prohibits loans above amounts prescribed by the appropriate federal banking agency to directors, executive officers, and principal shareholders of a bank or bank holding company and to entities controlled by such persons, unless such loan is approved in advance by a majority of the board of directors of the bank with any “interested” director not participating in the voting. The Federal Reserve has prescribed the loan amount, which includes all other outstanding loans to such person as to which such prior board of director approval is required, as being the greater of $25 thousand or 5% of capital and surplus (up to $500 thousand). Section 22(h) requires that loans to directors, executive officers, and principal shareholders be made on terms and underwriting standards substantially the same as those offered in comparable transactions to other persons.  Violations of Section 22(h) of the Federal Reserve Act and Regulation O could subject the Company to civil penalties.  As of December 31, 2014, there were no loans to insiders and their related interests in the aggregate that exceeded the restrictions imposed by the Federal Reserve Act and related regulations.
 
Other Safety and Soundness Regulations    
 
There are significant obligations and restrictions imposed on bank holding companies and their depository institution subsidiaries by federal law and regulatory policy that are designed to reduce potential loss exposure to the depositors of such depository institutions and to the FDIC insurance fund in the event that the depository institution is insolvent or is in danger of becoming insolvent. These obligations and restrictions are not for the benefit of investors. Regulators may pursue an administrative action against any bank holding company or bank that violates the law, engages in an unsafe or unsound banking practice, or is about to engage in an unsafe or unsound banking practice. The administrative action could take the form of a cease and desist proceeding, a removal action against the responsible individuals or, in the case of a violation of law or unsafe and unsound banking practice, a civil monetary penalty action. A cease and desist order, in addition to prohibiting certain action, could also require that certain actions be undertaken. Under the Dodd-Frank Act and the policies of the Federal Reserve, we are required to serve as a source of financial strength to our subsidiary depository institutions and to commit resources to support the Banks in circumstances where we might not do so otherwise.
 
The federal banking agencies also have broad powers under current federal law to take prompt corrective action to resolve problems of insured depository institutions.  The extent of these powers depends upon whether the institution in question is well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, or critically undercapitalized, as defined by the law.  As of December 31, 2014, BOHR and Shore were “well capitalized.”  
 
State banking regulators also have broad enforcement powers over the Banks, including the power to impose fines and other civil and criminal penalties and to appoint a conservator.

Consumer Laws Regarding Fair Lending
 
In addition to the CRA described above, other federal and state laws regulate various lending and consumer aspects of our business. Governmental agencies, including the United States Department of Housing and Urban Development, the Federal Trade Commission, and the United States Department of Justice, have become concerned that prospective borrowers may experience discrimination in their efforts to obtain loans from depository and other lending institutions. These agencies have brought litigation against depository institutions alleging discrimination against borrowers. Many of these suits have been settled, in some cases for material sums of money, short of a full trial.

These governmental agencies have clarified what they consider to be lending discrimination and have specified various factors that they will use to determine the existence of lending discrimination under the Equal Credit Opportunity Act and the Fair Housing Act, including evidence that a lender discriminated on a prohibited basis, evidence that a lender treated applicants differently based on prohibited factors in the absence of evidence that the treatment was the result of prejudice or a conscious intention to discriminate, and evidence that a lender applied an otherwise neutral non-discriminatory policy uniformly to all applicants but the practice had a discriminatory effect unless the practice could be justified as a business necessity.

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Banks and other depository institutions also are subject to numerous consumer-oriented laws and regulations. These laws, which include the Truth in Lending Act, the Truth in Savings Act, the Real Estate Settlement Procedures Act, the Electronic Funds Transfer Act, the Equal Credit Opportunity Act, and the Fair Housing Act, require compliance by depository institutions with various disclosure requirements and requirements regulating the availability of funds after deposit or the making of some loans to customers.

Future Regulatory Uncertainty
 
Because federal and state regulation of financial institutions changes regularly and is the subject of constant legislative debate, we cannot forecast how federal and state regulation of financial institutions may change in the future and, as a result, impact our operations. As a result of the financial crisis, additional regulatory burden has been created, and we fully expect that the financial institution industry will remain heavily regulated going forward.
 
Recent Events

Termination of a Material Definitive Agreement
On February 9, 2015, the Company received notice of the termination of the memorandum of understanding, effective March 27, 2014 (the “MOU”), by and among the Company, BOHR, FRB and the Bureau of Financial Institutions. The termination of the MOU was effective February 5, 2015. Under the MOU, the Company and BOHR had agreed that they would obtain prior written approval of the FRB and the Bureau of Financial Institutions before, (i) either the Company or BOHR declared or paid dividends of any kind; (ii) the Company made any payments on its trust preferred securities; (iii) the Company incurred or guaranteed any debt; or (iv) the Company purchased or redeemed any shares of its stock. In addition, the MOU instituted certain reporting requirements and addressed ongoing regulatory requirements.

Marine Loan Portfolio Purchase

On January 27, 2015, the Company announced that BOHR has agreed to acquire a marine loan portfolio from SGB North America, Inc. ("SGB"). The portfolio consists of approximately $135.0 million of retail loans and dealer inventory or floor plan financing lines of credit. In addition, BOHR and SGB have agreed to certain arrangements where BOHR will be compensated upon the occurrence of events of loan default of certain loans within one year following closing of the transaction. The transaction closed during the first quarter of 2015 with BOHR funding $104.4 million in unpaid principal balances of marine related assets.

Employees
 
As of December 31, 2014, we had 537 employees, of whom 510 were full-time.  None of our employees are represented by any collective bargaining agreements.
 
Available Information
 
We maintain internet websites at www.bankofhamptonroads.com, www.shorebank.com, www.gatewaybankandtrust.com, www.shorepremierfinance.com, and www.dnjmortgage.com. These websites contain a link to our filings with the U.S. Securities and Exchange Commission (“SEC”), including those on Form 10-K, Form 10-Q, and Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act.  The reports are made available on these websites as soon as practicable following the filing of the reports with the SEC.  The information is free of charge and may be reviewed, downloaded, and printed from each website at any time.
 
Any material we file with the SEC may be read and copied at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, D.C.  20549.  You may obtain information on the operation of the SEC’s Public Reference Room by calling the SEC at 1-800-SEC-0330.  Copies of these materials may be obtained at prescribed rates from the SEC at such address.  These materials can also be inspected on the SEC’s website at www.sec.gov.


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ITEM 1A – RISK FACTORS
 
An investment in our Common Stock involves risks.  You should carefully consider the risks described below in conjunction with the other information in this Form 10-K, including our consolidated financial statements and related notes, before investing in our Common Stock.  In addition to the other information contained in this report, the following risks may affect us.  This Form 10-K contains forward-looking statements that involve risks and uncertainties, including statements about our future plans, objectives, intentions, and expectations.  Past results are not a reliable indicator of future results, and historical trends should not be used to anticipate results or trends in future periods. Many factors, including those described below, could cause actual results to differ materially from those discussed in forward-looking statements.
 
Risks Relating to our Business
 
Our success is largely dependent on attracting and retaining key management team members.
 
We are a customer-focused and relationship-driven organization. Future growth is expected to be driven in large part by the relationships maintained with customers. While we have assembled an experienced and talented senior management team, maintaining this team, while at the same time developing other managers and/or attracting new talent in order that management succession can be achieved, is not assured. The unexpected loss of key employees could have a material adverse effect on our business and may result in lower revenues or reduced earnings.
 
We are not paying dividends on our Common Stock currently and absent regulatory approval 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 paid cash dividends on our Common Stock prior to the third quarter of 2009. During the third quarter of 2009, we suspended dividend payments. Absent permission from the Virginia State Corporation Commission, BOHR may pay dividends to us only to the extent of positive accumulated retained earnings. The retained deficit of BOHR, our principal banking subsidiary, was $455.9 million as of December 31, 2014. It is unlikely in the foreseeable future that we would be able to pay dividends if BOHR cannot pay dividends to us. As a result, there is no assurance if or when we will be able to resume paying cash dividends.

In addition, all dividends are declared and paid at the discretion of our Board of Directors and are dependent upon our liquidity, financial condition, results of operations, regulatory capital requirements, and such other factors as our Board of Directors may deem relevant. The ability of our banking subsidiaries to pay dividends to us is also limited by obligations to maintain sufficient capital and by other general restrictions on dividends that are applicable to our banking subsidiaries. If we do not satisfy these regulatory requirements, we are unable to pay dividends on our Common Stock.

We incurred significant losses from 2009 to 2012.  While we returned to profitability in 2013 and continued to be profitable during 2014, we can make no assurances that will continue.  An inability to improve our profitability could adversely affect our operations and our capital levels.
 
Since 2008, our loan customers have operated in an economically stressed environment.  While broader economic conditions have begun to gradually improve, economic conditions in the markets in which we operate remain somewhat constrained. Consequently, the levels of loan delinquencies and defaults that we have experienced continue to be higher than historical levels and our net interest income, before the provision for loan losses, has not grown over this period.

Our net income attributable to Hampton Roads Bankshares, Inc. was $9.3 million and $4.1 million for the years ended December 31, 2014 and 2013, respectively, but our net loss attributable to Hampton Roads Bankshares, Inc. for the year ended December 31, 2012 was $25.1 million.  There is no guarantee that we will be able to maintain this improvement in our net income. In addition to the risk that the broader economic conditions will stagnate or reverse their improvements, our mortgage banking earnings are particularly volatile due to their dependence upon the direction and level of mortgage interest rates.

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.

Our mortgage banking earnings are dependent upon our ability to originate loans and sell them to investors. Loan production levels are sensitive to changes in the level of interest rates and changes in economic conditions. A significant portion of increases in our mortgage banking earnings over the last few years was due to historically low interest rate environment that resulted in a high volume of mortgage loan refinancing activity. As the interest rate environment began to return to more typical levels, starting in late summer

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of 2013 and continuing throughout 2014, mortgage loan refinancing activity was significantly reduced. Loan production levels may also suffer if we experience a slowdown in the local housing market or tightening credit conditions. Any sustained period of decreased activity caused by fewer refinancing transactions, higher interest rates, housing price pressure or loan underwriting restrictions would adversely affect our mortgage originations and, consequently, could significantly reduce our income from mortgage banking activities. As a result, these conditions would also adversely affect our results of operations.

Economic, market, or operational developments may negatively impact our ability to maintain required capital levels or otherwise negatively impact our financial condition.
 
At December 31, 2014, BOHR and Shore were classified as “well capitalized” for regulatory capital purposes.  However, impairments to our loan or securities portfolio, declines in our earnings or a combination of these or other factors could change our capital position in a relatively short period of time.  If BOHR or Shore is unable to remain “well capitalized,” it will not be able to renew or accept brokered deposits without prior regulatory approval or offer interest rates on deposit accounts that are significantly higher than the average rates in its market area. As a result, it would be more difficult for us to attract new deposits as our existing brokered deposits mature and do not rollover and to retain or increase non-brokered deposits.  If we are not able to attract new deposits, our ability to fund our loan portfolio may be adversely affected.  In addition, any negative impact to our capital position may cause the Banks to have to pay higher insurance premiums to the FDIC, which will reduce our earnings.
 
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 Articles of Incorporation, as well as the Company’s Bylaws (the “Bylaws”), contain provisions that may be deemed to have the effect of discouraging or delaying uninvited attempts by third parties to gain control of the Company. These provisions include the ability of our board to set the price, term, and rights of, and to issue, one or more series of our preferred stock. Our Articles of Incorporation and Bylaws do not provide for the ability of stockholders to call special meetings.
 
Similarly, the Virginia Stock Corporation Act contains provisions designed to protect Virginia corporations and employees from the adverse effects of hostile corporate takeovers. These provisions reduce the possibility that a third party could affect a change in control without the support of our incumbent directors. These provisions may also strengthen the position of current management by restricting the ability of shareholders to change the composition of the board, to affect its policies generally, and to benefit from actions that are opposed by the current board.
 
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.

The management of liquidity risk is critical to the management of our business and to our ability to service our customer base.  Our access to funding sources in amounts adequate to finance our activities on terms which are acceptable to us could be impaired by factors that affect us specifically or the financial services industry or economy in general.  In managing our balance sheet, a primary source of funding is customer deposits. Our ability to continue to attract these deposits and other funding sources is subject to variability based upon a number of factors including volume and volatility in the securities markets and the relative interest rates that we are prepared to pay for these liabilities. Our potential inability to maintain adequate sources of funding may, among other things, impact our ability to resume the payment of dividends or satisfy our obligations.
 
An inability to raise funds through deposits, borrowings, the sale of investments or loans, the issuance of equity and debt securities, and other sources could have a substantial negative effect on our liquidity. Factors that could detrimentally impact our access to liquidity sources include operating losses; rising levels of non-performing assets; a decrease in the level of our business activity as a result of a downturn in the markets in which our loans or deposits are concentrated or as a result of a loss of confidence in us by our customers, lenders, and/or investors; or adverse regulatory action against us.  Our ability to borrow could also be impaired by factors that are not specific to us, such as a disruption in the financial markets or negative views and expectations about the prospects for the financial industry.
 
The availability and level of deposits and other funding sources, including borrowings and the issuance of equity and debt securities, is highly dependent upon the perception of the liquidity and creditworthiness of the financial institution, and such perception can change quickly in response to market conditions or circumstances unique to a particular company. Concerns about our financial condition or concerns about our credit exposure to other persons could adversely impact our sources of liquidity, financial position, regulatory capital ratios, results of operations, and our business prospects.



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Our future success is dependent on our ability to compete effectively in the highly competitive banking industry.
 
We face vigorous competition from other banks and other financial institutions, including savings and loan associations, savings banks, finance companies, and credit unions for deposits, loans, and other financial services that serve our market area.  A number of these banks and other financial institutions are significantly larger than we are and have substantially greater access to capital and other resources, as well as larger lending limits and branch systems, and offer a wider array of banking services.  Many of our non-bank competitors are not subject to the same extensive regulations that govern us. As a result, these non-bank competitors have advantages over us in providing certain services. While we believe we compete effectively with these other financial institutions serving our primary markets, we may face a competitive disadvantage to larger institutions.  If we have to raise interest rates paid on deposits or lower interest rates charged on loans to compete effectively, our net interest margin and income could be negatively affected. Failure to compete effectively to attract new, or to retain existing, clients may reduce or limit our margins and our market share and may adversely affect our results of operations, financial condition, growth, and the market price of our Common Stock.
 
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 market price of our Common Stock could drop if our existing shareholders decide to sell their shares.  As of December 31, 2014, Anchorage, CapGen, and Carlyle owned 24.86%, 29.91%, and 24.86%, respectively, of the outstanding shares of our Common Stock.  Pursuant to the various definitive investment agreements that we have entered into with these shareholders, the Company has an effective registration statement covering the resale of shares of our Common Stock by each of the shareholders listed above.  These shareholders could utilize this registration statement by reselling the shares of our Common Stock they currently hold.  If any of these shareholders sell large amounts of our Common Stock, or other investors perceive such sales to be imminent, the market price of our Common Stock could drop significantly.  In addition, sale of our Common Stock by Anchorage, CapGen, and Carlyle could adversely impact our ability to realize certain deferred tax benefits relating to prior losses, thereby increasing our effective tax rate in the future.
 
The concentration of our loan portfolio continues to be in real estate – commercial mortgage, equity line lending, and construction, which may expose us to greater risk of loss.

Our business strategy centers, in part, on offering real estate - commercial mortgage and equity line loans secured by real estate in order to generate interest income.  These types of loans generally have higher yields due to an elevated risk profile compared to traditional one-to-four family residential mortgage loans.  At December 31, 2014 real estate – commercial mortgage and equity line lending totaled $639.2 million and $128.3 million, respectively.  These loan categories combined represented 53.9% of total loans.  Such loans increase our credit risk profile relative to other financial institutions that have lower concentrations of real estate - commercial mortgage and equity line loans.
 
Loans secured by real estate – commercial mortgage properties are generally for larger amounts than one-to-four family residential mortgage loans.  Payments on loans secured by these properties generally are dependent on the income produced by the underlying properties which, in turn, depends on the successful operation and management of the properties.  Accordingly, repayment of these loans is subject to adverse conditions in the real estate market or the local economy.  While we seek to minimize these risks in a variety of ways, there can be no assurance that these measures will protect against credit-related losses.
 
Equity line lending allows a customer to access an amount up to their line of credit for the term specified in their agreement.  At the expiration of the term of an equity line, a customer may have the entire principal balance outstanding as opposed to a one-to-four family residential mortgage loan where the principal is disbursed entirely at closing and amortizes throughout the term of the loan.  We cannot predict when and to what extent our customers will access their equity lines.  While we seek to minimize this risk in a variety of ways, including attempting to employ conservative underwriting criteria, there can be no assurance that these measures will protect against credit-related losses.
 
Our loan portfolio contains loans used to finance construction and land development.  Construction financing typically involves a higher degree of credit risk than financing on improved, owner-occupied real estate.  Risk of loss on a construction loan is largely dependent upon the accuracy of the initial estimate of the property’s value at completion of construction, the marketability of the property, and the bid price and estimated cost (including interest) of construction.  If the estimate of construction costs proves to be inaccurate, we may be required to advance funds beyond the amount originally committed to permit completion of the project.  If the estimate of the value proves to be inaccurate, we may be confronted, at or prior to the maturity of the loan, with a project whose value is insufficient to assure full repayment.  When lending to builders, the cost of construction breakdown is provided by the

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builder, as well as supported by the appraisal.  Although our underwriting criteria were designed to evaluate and minimize the risks of each construction loan, there can be no guarantee that these practices will have safeguarded against material delinquencies and losses to our operations.
 
At December 31, 2014 we had loans of $137.0 million or 9.6% of total loans outstanding to finance construction and land development.  Construction and land development loans are dependent on the successful completion of the projects they finance, however, in many cases such construction and development projects in our primary market areas are not being completed in a timely manner, if at all.  A portion of our residential and real estate – commercial mortgage lending is secured by vacant or unimproved land.  Loans secured by vacant or unimproved land are generally more risky than loans secured by improved property for one-to-four family residential mortgage loans. Since vacant or unimproved land is generally held by the borrower for investment purposes or future use, payments on loans secured by vacant or unimproved land will typically rank lower in priority to the borrower than a loan the borrower may have on their primary residence or business.  These loans are more susceptible to adverse conditions in the real estate market and local economy.
 
General economic conditions in the markets in which we do business may decline and may have a material adverse effect on our results of operations and financial condition.
 
The local economies where the Company does business are heavily reliant on military spending and may be adversely impacted by significant cuts to such spending that might result from recent Congressional budgetary enactments. Real estate values are affected by various factors in addition to local economic conditions, including, among other things, changes in general or regional economic conditions, government rules or policies, and natural disasters. With 95.8% of our loans concentrated in the regions of Hampton Roads, Richmond, the Eastern Shore of Virginia, and the Research Triangle and Northeast North Carolina regions, a decline in local economic conditions could adversely affect the value of the real estate collateral securing our loans. A decline in property values could diminish our ability to recover on defaulted loans by selling the real estate collateral, making it more likely that we would suffer additional losses on defaulted loans and/or foreclosed properties by requiring additions to our allowance for loan losses through increased provisions for loan losses. Also, a decline in local economic conditions may have a greater effect on our earnings and capital than on the earnings and capital of financial institutions whose real estate portfolios are more geographically diverse. While our policy is to obtain updated appraisals on a periodic basis, there are no assurances that we may be able to realize the amount indicated in the appraisal upon disposition of the underlying property. We take into account all available information in assessing the fair value of other real estate owned and repossessed assets, including pending offers, recent appraisals, and other indicators. However, differences may exist between our estimate of fair value and the amount we ultimately realize upon sale, and such differences could be material.

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

Our non-performing assets ratio, defined as the ratio of loans 90 days past due and still accruing interest plus nonaccrual loans plus other real estate owned and repossessed assets to gross loans plus loans held for sale plus other real estate owned and repossessed assets was 2.95% and 5.29% at December 31, 2014 and December 31, 2013, respectively. On December 31, 2014, 0.64% of our loans was 30 to 89 days delinquent and treated as performing assets. The administration of non-performing loans is an important function in attempting to mitigate any future losses related to our non-performing assets.

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. 
 
We maintain an allowance for loan losses, which is a reserve established through a provision for loan losses charged to our expenses that represents management’s best estimate of probable losses within our existing portfolio of loans.  Our allowance for loan losses was $27.1 million at December 31, 2014, which represented 1.90% of our total loans, as compared to $35.0 million, or 2.53% of total loans, at December 31, 2013.  The level of the allowance reflects management’s estimates and judgments as to specific credit risks, evaluation of industry concentrations, loan loss experience, current loan portfolio quality, present economic, political, and regulatory conditions, and incurred but unidentified losses inherent in the current loan portfolio.  For further discussion on the impact continued weak economic conditions have on the collateral underlying our loan portfolio, see above section “General economic conditions in the markets in which we do business may decline and may have a material adverse effect on our results of operations and financial condition.” 
 

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The determination of the appropriate level of the allowance for loan losses inherently involves a high degree of subjectivity and requires management to make significant estimates of current credit risks and future trends, all of which may undergo material changes.  In addition, regulatory agencies, as an integral part of their examination process, periodically review the estimated losses of loans.  Such agencies may require us to recognize additional losses based on their judgments about information available to them at the time of their examination.  Furthermore, certain proposed changes to GAAP, if implemented as proposed, may require us to increase our estimate for losses embedded in our loan portfolio, resulting in an adverse impact to our results of operations and level of regulatory capital.  Accordingly, the allowance for loan losses may not be adequate to cover loan losses or significant increases to the allowance for loan losses may be required in the future if economic conditions should worsen.  Any such increases in the allowance for loan losses may have a material adverse effect on our results of operations, financial condition, and the market price of our Common Stock.
 
Our profitability will be jeopardized if we are unable to successfully manage interest rate risk.
 
Our profitability depends in substantial part upon the spread between the interest rates earned on investments and loans and the interest rates paid on deposits and other interest-bearing liabilities.  These rates are normally in line with general market rates and rise and fall based on management’s view of our needs.  Changes in interest rates will affect our operating performance and financial condition in diverse ways including the prices of securities, loans and deposits, and the volume of loan originations in our mortgage banking business, and could result in decreases to our earnings. Our net interest income will be adversely affected if market interest rates change so that the interest we pay on deposits and borrowings increases faster than the interest we earn on loans and investments.  This could, in turn, have a material adverse effect on the market price of our Common Stock.
 
We may face increasing deposit-pricing pressures, which may, among other things, reduce our profitability.

Deposit pricing pressures may result from competition as well as changes to the interest rate environment. Under current conditions, pricing pressures also may arise from depositors who demand premium interest rates from what they perceive to be a troubled financial institution. There is intense competition for deposits. The competition has had an impact on interest rates paid to attract deposits as well as fees charged on deposit products. In addition to the competitive pressures from other depository institutions, we face heightened competition from non-depository financial products such as securities and other alternative investments.
 
Furthermore, technology and other market changes have made it more convenient for bank customers to transfer funds for investing purposes. Bank customers also have greater access to deposit vehicles that facilitate spreading deposit balances among different depository institutions to maximize FDIC insurance coverage. In addition to competitive forces, we also are at risk from market forces as they affect interest rates. It is not uncommon when interest rates transition from a low interest rate environment to a rising rate environment for deposit and other funding costs to rise in advance of yields on earning assets. In order to keep deposits required for funding purposes, it may be necessary to raise deposit rates without commensurate increases in asset pricing in the short term. Finally, we may see interest rate pricing pressure from depositors concerned about our financial condition and levels of non-performing assets.
 
We face a variety of threats from technology-based frauds and scams.
 
Financial institutions are a prime target of criminal activities through various channels of information technology. We attempt to mitigate risk from such activities through policies, procedures, and preventative and detective measures. Although the Company devotes significant resources to maintain and regularly upgrade its systems and processes that are designed to protect the security of the Company’s computer systems, software, networks and other technology assets, as well as its intellectual property, and the confidentiality, integrity and availability of information belonging to the Company and its customers, the Company’s security measures do not provide absolute security.
In fact, many financial services institutions, retailers and other companies engaged in data processing have reported breaches in the security of their websites or other systems, some of which have involved sophisticated and targeted attacks intended to obtain unauthorized access to confidential information, destroy data, disable or degrade service, or sabotage systems, often through the introduction of computer viruses or malware, cyber-attacks and other means.
Third parties with which the Company does business or that facilitate its business activities, including exchanges, clearinghouses, payment and ATM networks, financial intermediaries or vendors that provide services or technology solutions for the Company’s operations, could also be sources of operational and security risks to the Company, including with respect to breakdowns or failures of their systems, misconduct by their employees or cyber-attacks that could affect their ability to deliver a product or service to the Company or result in lost or compromised information of the Company or its customers.

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While we maintain insurance coverage designed to provide a level of financial protection to our business risks posed by business interruption, fraud losses, business recovery expenses, and other potential losses or expenses that may be experienced from a significant event are not readily predictable and, therefore, could have an impact on our results of operations.

Our operations and customers might be affected by the occurrence of a natural disaster or other catastrophic event in our market area.
 
Because a substantial portion of our loans are with customers and businesses located in the central and coastal portions of Virginia, North Carolina, and Maryland, catastrophic events, including natural disasters such as hurricanes which have historically struck the east coast of the United States with some regularity, or terrorist attacks, could disrupt our operations. Any of these natural disasters or other catastrophic events could have a negative impact on our financial centers and customer base as well as collateral values and the strength of our loan portfolio. Any natural disaster or catastrophic event affecting us could have a material adverse impact on our operations and the market price of our Common Stock. 


Risks Relating to Market, Legislative, and Regulatory Events

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.

Current economic conditions, particularly in the financial markets, have resulted in government regulatory agencies placing increased focus and scrutiny on the financial services industry.  The U.S. Government has intervened on an unprecedented scale, responding to what has been commonly referred to as the financial crisis.  Compliance with increased government regulation may significantly increase our costs, impede the efficiency of our internal business processes, require us to increase our regulatory capital, and limit our ability to pursue business opportunities in an efficient manner.  The increased costs associated with anticipated regulatory and political scrutiny could adversely impact our results of operations.
 
New proposals for legislation continue to be introduced in the U.S. Congress that could further substantially increase regulation of the financial services industry.  Federal and state regulatory agencies also frequently adopt changes to their regulations and/or change the manner in which existing regulations are applied.  We cannot predict whether any pending or future legislation will be adopted or the substance and impact of any such new legislation on us.  Additional regulation could affect us in a substantial way and could have an adverse effect on our business, financial condition, and results of operations.
 
Banking regulators have broad enforcement power, but regulations are meant to protect depositors and not investors.
 
We are subject to supervision by several governmental regulatory agencies. The regulators’ interpretation and application of relevant regulations are beyond our control, may change rapidly and unpredictably, and can be expected to influence our earnings and growth. In addition, if we do not comply with regulations that are applicable to us, we could be subject to regulatory penalties, which could have an adverse effect on our business, financial condition, and results of operations.

All such government regulations may limit our growth and the return to our investors by restricting activities such as the payment of dividends, mergers with, or acquisitions by, other institutions, investments, loans and interest rates, interest rates paid on deposits, the use of brokered deposits, and the creation of financial centers. Although these regulations impose costs on us, they are intended to protect depositors. The regulations to which we are subject may not always be in the best interests of 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.
 
The Federal Reserve regulates the supply of money and credit in the United States.  Its policies determine, in large part, the cost of funds for lending and investing and the return earned on those loans and investments, both of which affect our net interest margin.  It also can materially decrease the value of financial assets we hold, such as debt securities.  Its policies also can adversely affect borrowers, potentially increasing the risk that they may fail to repay their loans. 

In addition, as a public company we are subject to securities laws and standards imposed by the Sarbanes-Oxley Act of 2002. Because we are a relatively small company, the costs of compliance are disproportionate compared with much larger organizations.  Continued growth of legal and regulatory compliance mandates could adversely affect our expenses, future results of operations, and the market price of our Common Stock.  In addition, the government and regulatory authorities have the power to impose rules or other

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requirements, including requirements that we are unable to anticipate, that could have an adverse impact on our results of operations and the market price of our Common Stock. 


Government legislation and regulation may adversely affect our business, financial condition, and results of operations.
 
On July 21, 2010, President Obama signed the Dodd-Frank Act into law. The Dodd-Frank Act makes extensive changes to the laws regulating financial services firms and requires significant rule-making. In addition, the law mandates multiple studies, which could result in additional legislative or regulatory action.  The Dodd-Frank Act has and will continue to have a broad impact on the financial services industry, including significant regulatory and compliance changes designed to improve supervision and oversight of and strengthen safety and soundness for the financial services sector.  Many of the provisions of the Dodd-Frank Act have begun to be or will be implemented over the next few years and will be subject to further rule-making and the discretion of applicable regulatory bodies.  Because the ultimate impact of the Dodd-Frank Act will depend on future regulatory rule-making and interpretation, we cannot predict the full effect of this legislation on our business, financial condition, or results of operations.  
 
Although management does not expect the Dodd-Frank Act to have a material adverse effect on the Company, it is not possible to predict at this time all the effects the Dodd-Frank Act will have on the Company and the rest of our industry.  It is possible that the Company’s interest expense could increase and deposit insurance premiums could change and steps may need to be taken to increase qualifying capital. 
 
On June 6, 2012, the federal bank regulatory agencies issued a series of proposed rules to revise the risk-based and leverage capital requirements and the method for calculating risk-weighted assets to make them consistent with the agreements that were reached by the Basel Committee in Basel III.  These federal bank regulatory agencies approved final rules on July 2, 2013.  The rules apply to all depository institutions, top-tier bank holding companies with total consolidated assets of $500.0 million or more, and top-tier savings and loan holding companies (“banking organizations”).  Although the final rules contain significant revisions from the proposed rules intended to provide relief to community banks, such as BOHR and Shore, many of the Basel III rules will apply to these institutions.  Among other things, the rules establish a new common equity Tier 1 minimum capital requirement and a higher minimum Tier 1 capital requirement, changes in the treatment of unrealized gains and losses on available for sale securities in the calculation of regulatory capital, and assigns higher risk weightings (150%) to exposures that are more than 90 days past due or are on nonaccrual status and certain commercial real estate facilities that finance the acquisition, development, or construction of real property.  The rules also limit a banking organization’s capital distributions and certain discretionary bonus payments if the banking organization does not hold a “capital conservation buffer” consisting of a specified amount of common equity Tier 1 capital in addition to the amount necessary to meet its minimum risk-based capital requirements.  For community banking organizations, the rules will be phased in beginning in 2015 and 2016.  The Company has assessed the impact of this rule making on our capital and the amount of capital required to support our business, and has concluded that it is unlikely to adversely affect our results of operations and financial condition.

For further discussion of these issues, see the “Government Supervision and Regulation” section found in Item 1 of this document.
 
Proposed and final regulations could restrict our ability to originate loans.
 
The CFPB has issued a rule designed to clarify how lenders can avoid legal liability under the Dodd-Frank Act, which would hold lenders accountable for ensuring a borrower’s ability to repay a mortgage. Loans that meet this definition of “qualified mortgage” will be presumed to have complied with the new ability-to-repay standard. Under the CFPB’s rule, a “qualified mortgage” loan must not contain certain specified features, including: 
•
excessive upfront points and fees (those exceeding 3% of the total loan amount, less “bona fide discount points” for prime loans);
•
interest-only payments;
•
negative-amortization; and
•
terms longer than 30 years.
 
Also, to qualify as a “qualified mortgage,” a borrower’s total monthly debt-to-income ratio may not exceed 43%. Lenders must also verify and document the income and financial resources relied upon to qualify the borrower for the loan and underwrite the loan based on a fully amortizing payment schedule and maximum interest rate during the first five years, taking into account all applicable taxes, insurance and assessments. The CFPB’s rule on qualified mortgages and similar rules could limit our ability to make certain

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types of loans or loans to certain borrowers, or could make it more expensive and time-consuming to make these loans, which could limit our growth or profitability.


The soundness of other financial institutions could adversely affect us.
 
Our ability to engage in routine funding transactions could be adversely affected by the actions and commercial soundness of other financial institutions.  Financial services institutions are interrelated as a result of trading, clearing, counterparty, or other relationships.  As a result, defaults by, or even rumors or questions about, one or more financial services institutions, or the financial services industry, generally, have led to market-wide liquidity problems and could lead to losses or defaults by us or by other institutions.  Many of these transactions expose us to credit risk in the event of default of our counterparty or client.  In addition, our credit risk may be exacerbated when the collateral held by us cannot be liquidated at prices sufficient to recover the full amount of the financial instrument exposure due to us.  There is no assurance that any such losses would not materially and adversely affect our results of operations and the value of, or market for, our Common Stock.
 
ITEM 1B – UNRESOLVED STAFF COMMENTS
 
Not applicable.
 
ITEM 2 - PROPERTIES
 
We own our executive office, which is located at 641 Lynnhaven Parkway, Virginia Beach, Virginia 23452.  As of December 31, 2014, we operated from the locations listed below:
City, State
 
Address
 
Lease/Own
California, MD
 
23076 Three Notch Road (3)
 
Lease
Cape Charles, VA
 
22468 Lankford Highway (1)
 
Own
Chesapeake, VA
 
201 Volvo Parkway (1)
 
Own
Chesapeake, VA
 
852 N George Washington Highway (1)
 
Own
Chesapeake, VA
 
712 Liberty Street (1)
 
Own
Chesapeake, VA
 
4108 Portsmouth Boulevard (1)
 
Own
Chesapeake, VA
 
239 Battlefield Boulevard S (1)
 
Own
Chesapeake, VA
 
1500 Mount Pleasant Road (1)
 
Lease Land/Own Building
Chesapeake, VA
 
204 Carmichael Way (2)
 
Own
Chincoteague, VA
 
6350 Maddox Boulevard (1)
 
Own
Edenton, NC
 
322 S Broad Street (4)
 
Own
Elizabeth City, NC
 
112 Corporate Drive (2)
 
Own
Elizabeth City, NC
 
1145 North Road Street (1)
 
Lease Land/Own Building
Elizabeth City, NC
 
1404 West Ehringhaus Street (1)
 
Own
Emporia, VA
 
100 Dominion Drive (1)
 
Own
Exmore, VA
 
4071 Lankford Highway (1)
 
Own
Glen Burnie, MD
 
6958 Aviation Blvd., Suite A1 (2)(5)
 
Lease
Greenville, NC
 
605-A Lynndale Court (3)
 
Lease
High Point, NC
 
4100 Mendenhall Oaks Parkway (3)
 
Lease
Kitty Hawk, NC
 
5406 North Croatan Highway (4)
 
Lease Land/Own Building

24
HAMPTON ROADS BANKSHARES, INC.

City, State
 
Address
 
Lease/Own
Moyock, NC
 
100 Moyock Commons Drive (1)
 
Own
Norfolk, VA
 
539 West 21st Street (1)
 
Lease
Norfolk, VA
 
4037 East Little Creek Road (1)
 
Lease
Norfolk, VA
 
999 Waterside Drive, Suite 101(1)
 
Lease
Ocean City, MD
 
9748 Steven Decatur Highway (1)(5)
 
Lease
Onley, VA
 
25253 Lankford Highway (4)
 
Lease Land/Own Building
Onley, VA
 
25020 Shore Parkway (2)
 
Own
Plymouth, NC
 
433 US Highway 64 East (1)
 
Own
Pocomoke City, MD
 
103 Pocomoke Marketplace (1)
 
Lease
Raleigh, NC
 
2235 Gateway Access Point (4)
 
Own
Rehoboth Beach, DE
 
19354B Coastal Highway (5)
 
Lease
Richmond, VA
 
5300 Patterson Avenue (1)
 
Own
Richmond, VA
 
8209 West Broad Street (1)
 
Own
Richmond, VA
 
12090 West Broad Street (1)
 
Own
Salisbury, MD
 
1503 South Salisbury Boulevard (1)
 
Own
Suffolk, VA
 
2825 Godwin Boulevard (4)
 
Own
Virginia Beach, VA
 
5472 Indian River Road (1)
 
Own
Virginia Beach, VA
 
1580 Laskin Road (4)
 
Lease Land/Own Building
Virginia Beach, VA
 
641 Lynnhaven Parkway (1)(2)
 
Own
Virginia Beach, VA
 
2098 Princess Anne Road (4)
 
Lease Land/Own Building
Virginia Beach, VA
 
3001 Shore Drive (1)
 
Lease
Virginia Beach, VA
 
281 Independence Boulevard (1)
 
Lease
Wilmington, NC
 
901 Military Cutoff Road (3)
 
Own
 
 
 
 
 
(1) Banking services
 
 
 
 
(2) Operations center
 
 
 
 
(3) Mortgage services
 
 
 
 
(4) Banking and mortgage services
 
 
 
 
(5) LPO
 
 
 
 
 
All of our properties are in good operating condition and are adequate for our present and anticipated future needs.
 

ITEM 3 - LEGAL PROCEEDINGS
 
In the ordinary course of operations, the Company may become a party to legal proceedings.  Based upon information currently available, management believes that such legal proceedings, in the aggregate, will not have a material adverse effect on our business, financial condition, cash flows, or results of operations except as provided below.

On November 21, 2014, in the matter of Scott C. Harvard v. Shore Bank et al (CL13-4525-00), the  Circuit Court for the City of Norfolk, Virginia ruled that former Shore Bank President Scott C. Harvard was entitled to $655,495.43 in severance pay, plus interest from May 20, 2014, and $155,000.00 in attorney’s fees, plus additional fees incurred since July 15, 2014.  Mr. Harvard had initiated the claim in June 2013 alleging that the Company and Shore Bank were contractually obligated to make certain severance payments to him following the termination of his employment in 2009. The Company asserts that Mr. Harvard was not entitled to a “golden parachute” severance due to application of a regulation under the TARP program and furthermore, that based upon the legally distinct entity from which Harvard derived his compensation, Shore Bank did not owe Harvard severance compensation.  The judge ruled in favor of Harvard that the prohibition of the payment of his contracted severance compensation was a taking of his private property without just compensation in violation of the Fifth Amendment to the Constitution, and further that the Company was prohibited

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HAMPTON ROADS BANKSHARES, INC.

from making the argument, based upon the doctrine of judicial estoppel, that Shore Bank was legally distinct from the holding company that employed Mr. Harvard. The Company plans to appeal this decision.

In December 2014, the Company reached a settlement with the SEC regarding the SEC's investigation of the Company's accounting treatment of its deferred tax asset ("DTA") and allowance for loan losses in 2009 and 2010. Under the settlement between the Company and the SEC, the Company consented to the terms of an administrative cease-and-desist order relating solely to the DTA without admitting or denying the SEC's findings and agreed to pay a civil penalty of $200,000. This settlement resolved the SEC’s investigation that was originally disclosed in November, 2010, and the accounting at issue was corrected in August, 2010, prior to the Company's recapitalization and senior management transition.

ITEM 4 - MINE SAFETY DISCLOSURES
 
None.
 
PART II

ITEM 5 - MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED SHAREHOLDER MATTERS, AND ISSUER PURCHASES OF EQUITY SECURITIES
 
Market Price of Common Stock and Dividend Payments
 
Market Information
 
Our Common Stock trades on the NASDAQ Global Select Market under the symbol "HMPR.
 
The following table sets forth for the periods indicated the high and low prices per share of our Common Stock as reported on the NASDAQ Global Select Market along with the quarterly cash dividends per share declared.  Per share prices do not include adjustments for markups, markdowns, or commissions.
 
Sales Price
 
Cash Dividend Declared
 
High
 
Low
 
2014
 
 
 
 
 
First Quarter
$
1.92

 
$
1.43

 
$
—

Second Quarter
1.76

 
1.57

 
—

Third Quarter
1.85

 
1.48

 
—

Fourth Quarter
1.80

 
1.48

 
—

 
 
 
 
 
 
2013
 
 
 
 
 
First Quarter
$
1.47

 
$
1.15

 
$
—

Second Quarter
1.51

 
1.19

 
—

Third Quarter
1.86

 
1.22

 
—

Fourth Quarter
1.76

 
1.35

 
—

 
Number of Shareholders of Record
 
As of March 25, 2015, we had 170,572,217 shares of Common Stock outstanding, which were held by 2,905 shareholders of record.

Dividend Policy
 
On July 30, 2009, the Board of Directors voted to suspend the quarterly dividend on Common Stock of the Company in order to preserve capital and liquidity.  Our ability to distribute cash dividends in the future may be limited by negative regulatory restrictions and the need to maintain sufficient consolidated capital.  In addition, the retained deficit of BOHR, our principal banking subsidiary, was $455.9 million as of December 31, 2014.  Absent permission from the Virginia State Corporation Commission, BOHR may pay dividends to us only to the extent of positive accumulated retained earnings.  It is unlikely in the foreseeable future that we would be able to pay dividends if BOHR cannot pay dividends to us.  Although we can seek to obtain a waiver of this prohibition, our

26
HAMPTON ROADS BANKSHARES, INC.

regulators may choose not to grant such a waiver, and we would not expect to be granted a waiver or be released from this obligation until our financial performance and retained earnings improve significantly.  As a result, there is no assurance if or when we will be able to resume paying cash dividends.
 
Recent Sales of Unregistered Securities
 
Not applicable.
 


Purchases of Equity Securities by the Issuer and Affiliated Purchasers
 
The Company announced an open ended program on August 13, 2003 by which management was authorized to repurchase an unlimited number of the Company’s shares of Common Stock in the open market and through privately negotiated transactions.  During 2014 the Company did not purchase any shares of its Common Stock.
 
ITEM 6 - SELECTED FINANCIAL DATA
 
Not applicable.
 
ITEM 7 - MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
 
Executive Overview
 
The following commentary provides information about the major components of our results of operations, financial condition, liquidity, and capital resources.  This discussion and analysis should be read in conjunction with the Consolidated Financial Statements and Notes to Consolidated Financial Statements.
Hampton Roads Bankshares, Inc. (the “Company”) is a multi-bank holding company headquartered in Virginia Beach, Virginia. The Company’s primary subsidiaries are Bank of Hampton Roads (“BOHR”) and Shore Bank (“Shore” collectively the “Banks”). The Banks engage in general community and commercial banking business, targeting the needs of individuals and small- to medium-sized businesses in our primary service areas. Currently, BOHR operates 17 full-service offices in the Hampton Roads region of southeastern Virginia and 10 full-service offices throughout Richmond, Virginia and the Northeastern and Research Triangle regions of North Carolina that do business as Gateway Bank (“Gateway”). Shore operates 7 full-service offices in the Eastern Shore of Virginia and Maryland and 3 loan production offices in Maryland and Delaware. Through various divisions, the Banks also offer mortgage banking and marine financing. Our largest investor shareholders include Anchorage Capital Group, L.L.C. (“Anchorage”), CapGen Capital Group VI LP (“CapGen”), and The Carlyle Group, L.P. (“Carlyle”). Anchorage, CapGen, and Carlyle own 24.86%, 29.91%, and 24.86%, respectively, of the outstanding shares of our Common Stock as of December 31, 2014. 
Our primary source of revenue is net interest income earned by our bank subsidiaries. Net interest income represents interest and fees earned from lending and investment activities less the interest paid on deposits and borrowings. Net interest income may be impacted by variations in the volume and mix of interest-earning assets and interest-bearing liabilities, changes in the yields earned and the rates paid, level of non-performing assets, and the level of noninterest-bearing liabilities available to support earning assets. In addition to net interest income, noninterest income is another important source of revenue. Noninterest income is derived primarily from service charges on deposits and mortgage banking revenue. Gains and losses on the sale or impairment of our other real estate owned and repossessed assets are recognized in noninterest income. Other significant factors that impact net income attributable to Hampton Roads Bankshares, Inc. are the provision for loan losses, and noninterest expense.
The direct lending activities in which the Company engages carry the risk that the borrowers will be unable to perform on their obligations. As such, interest rate policies of the Board of Governors of the Federal Reserve System (the "Federal Reserve") and general economic conditions, nationally and in the Company's primary market areas, have a significant impact on the Company's results of operations. To the extent that economic conditions deteriorate, business and individual borrowers may be less able to meet their obligations to the Company in full, in a timely manner, resulting in decreased earnings or losses to the Company. Regarding net interest margin, the Company makes fixed rate loans, whereby general increases in interest rates will tend to reduce the Company's spread as the interest rates the Company must pay for deposits may increase while interest income may be unchanged. Economic

27
HAMPTON ROADS BANKSHARES, INC.

conditions may also adversely affect the value of property pledged as security for loans and the ability to liquidate that property to satisfy a loan if necessary.
The Company's goal is to mitigate risks in the event of unforeseen threats to the loan portfolio as a result of economic downturn or other negative influences. Plans for mitigating inherent risks in managing loan assets include: carefully enforcing loan policies and procedures and modifying those policies on occasion to account for changing or emerging risks or changing market conditions, evaluating each borrower's business plan and financial condition during the underwriting process and throughout the loan term, identifying and monitoring primary and alternative sources for loan repayment, and maintaining sufficient collateral to mitigate economic loss in the event of liquidation. An allowance for loan losses has been established which consists of general, specific, and unallocated components.
A risk rating system is employed to estimate loss exposure and provide a measuring system for setting general reserve allocations. The general component relates to groups of homogeneous loans not designated for specific impairment analysis and are collectively evaluated for potential loss. The specific component relates to loans that are determined to be impaired and, therefore, individually evaluated for impairment. The specific allowance for loan losses is based on a loan-by-loan analysis and varies between impaired loans largely due to the value of the loan’s underlying collateral. An unallocated component is maintained to cover uncertainties that could affect management’s estimate of probable losses and considers internal portfolio management effectiveness and external macroeconomic factors.
The composition of the Company's loan portfolio is weighted toward commercial real estate and real estate construction.  At December 31, 2014, commercial real estate and real estate construction represented 54.5% of the loan portfolio.  These loans are underwritten to mitigate lending risks typical of this type of loan such as declines in real estate values, changes in borrower cash flow, and general economic conditions. The Company typically requires a maximum loan to value of 80% or less and minimum cash flow debt service coverage at the time of origination of 1.25 to 1.0. Personal guarantees are required by policy, with a limited number of exceptions being granted due to mitigating factors.
The general terms and underwriting standards for each type of loan is incorporated into the Company's lending policies. These policies are analyzed periodically by management, and the policies are reviewed and approved by a designated subcommittee of the Board on an annual basis. The Company's loan policies and practices described in this report are subject to periodic change, and each guideline or standard is subject to waiver or exception in the case of any particular loan, with approval by the appropriate officer or committee, in accordance with the Company's loan policies. Policy standards are often stated in mandatory terms, such as "shall" or "must", but these provisions are subject to exception where appropriately mitigated. Policy requires that loan value not exceed a percentage of "market value" or "fair value" based upon appraisals or evaluations obtained in the ordinary course of the Company's underwriting practices.
Loans are secured primarily by duly recorded first deeds of trust. In some cases, the Company may accept a recorded second lien position. In general, borrowers will have a proven ability to build, lease, manage and/or sell a commercial or residential project and demonstrate satisfactory financial condition. Additionally, an equity contribution toward the project is required. Construction loans require that the financial condition and experience of the general contractor and major subcontractors be satisfactory to the Company. Guaranteed, fixed price construction contracts are required whenever appropriate, along with payment and performance bonds or completion bonds for larger scale projects.
Commercial land acquisition and construction loans are secured by real property where loan proceeds will be used to acquire land and to construct or improve appropriately zoned real property for the creation of income producing or owner user commercial properties. Borrowers are required to contribute equity into each project at levels determined by Loan Policy. Commercial land acquisition and construction loans generally are underwritten with a maximum term of 24 months.  Loan-to-value ("LTV") ratios, with few exceptions, are maintained consistent with or below supervisory guidelines.
All construction draw requests must be presented in writing on American Institute of Architects documents and certified by the contractor, the borrower and the borrower's architect. Each draw request shall also include the borrower's soft cost breakdown certified by the borrower or its Chief Financial Officer. Prior to an advance, the Company or its contractor inspects the project to determine that the work has been completed in order to justify the draw requisition.
Commercial permanent loans are secured by improved real property which is generating income in the normal course of operation. Debt service coverage, assuming stabilized occupancy, must be satisfactory to support a permanent loan. At the time of origination, the debt service coverage ratio is ordinarily at least 1.25 to 1.0.  As part of the underwriting process, debt service coverage ratios are stress tested assuming a 200 basis point increase in interest rates from their current levels.
Personal guarantees are generally received from the principals on commercial real estate loans, and only in instances where the loan-to-value is sufficiently low and the debt service is sufficiently high is consideration given to either limiting or not requiring personal recourse. Updated appraisals for real estate secured loans are obtained as necessary and appropriate to borrower financial condition, project status, loan terms, and market conditions.

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HAMPTON ROADS BANKSHARES, INC.

The Company is also an active traditional commercial lender providing loans for a variety of purposes, including cash flow, equipment and accounts receivable financing. This loan category represents 15.4% of the Company's loan portfolio at December 31, 2014 and is generally priced at a variable or adjustable rate. Commercial loans must meet reasonable underwriting standards, including appropriate collateral, and cash flow necessary to support debt service.  Residential home mortgage loans, including home equity lines and loans, make up 24.9% of the loan portfolio. These credits represent both first and second liens on residential property almost exclusively located in the Company’s primary market areas. At December 31, 2014 the remaining 5.3% of the loan portfolio consists of retail consumer installment 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.
The risk of nonpayment (or deferred payment) of loans is inherent in commercial lending. The Company's marketing focus on small to medium-sized businesses may result in the assumption by the Company of certain lending risks that are different from those inherent in loans to larger companies. The policies and procedures of the Company dictate that all loan applications are to be carefully evaluated and attempt to minimize credit risk exposure by use of extensive loan application data, due diligence, and approval and monitoring procedures; however, there can be no assurance that such procedures can eliminate such lending risks.
 
Material Trends and Uncertainties
Currently, the U.S. economy is 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 resulted in $9.3 million in net income attributable to Hampton Roads Bankshares, Inc. for 2014.  While the pace of economic growth remains slow and regulatory and legislative friction continues to hamper the recovery, we expect to continue to be profitable for the full year 2015, although such profitability is not assured. 
During 2014 and 2013, problem loans were reduced significantly from previous levels.  As a result of this improvement, our provision for loan losses during 2014 was $218 thousand and $1.0 million in 2013 compared to $15.0 million 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 reduction in specific impairments.  Higher historical charge-offs taken in prior years are now rolling off of the weighted loss calculations we use to determine the reserves that are based, in part, on these historical loss trends. We expect that the provision for loan losses will continue to be favorably impacted by these trends in addition to overall improvement in asset quality.
Additionally, losses on other real estate owned and repossessed assets were $2.0 million during 2014, down from $3.6 million in 2013 and $22.7 million in 2012.  During the latter part of 2013 and throughout 2014, our mortgage banking subsidiary was negatively impacted as long-term interest rates temporarily rose, resulting in a significant decline of mortgage loan refinancing activity.  We believe any changes in the interest rate environment will continue to impact the level of profitability generated by this division.
The Company executed on a number of major commitments in 2014 to diversify its loan portfolio credit exposure and expand its market footprint. 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. SPF is headquartered in Glen Burnie, Maryland, a suburb of Baltimore, Maryland. SPF was started by hiring a group of lending professionals with deep expertise in marine finance. The team at SPF has developed several strategic partnerships that will assist in SPF's future growth. The plan is for SPF to grow the marine loan portfolio through direct loan originations of dealer floor plan loans and consumer retail loans, as well as purchases of existing marine loan portfolios. In addition to SPF, in July 2014, Shore also launched a new LPO for the Baltimore, Maryland metropolitan area, with a focus on commercial real estate and commercial and industrial lending relationships. The LPO team consists of highly experienced lending professionals who have more than 125 years of combined banking experience and deep market knowledge. Throughout 2014, Gateway Bank Mortgage, a subsidiary of BOHR, expanded in the markets we serve by opening mortgage loan offices in Maryland and North Carolina, and adding personnel to our team of mortgage lenders serving the Hampton Roads region of Virginia. In September 2014, BOHR, under its Gateway Bank brand, enhanced its prospects in Raleigh, North Carolina through the addition of a Market President dedicated to commercial banking business growth and development. The Company expects these strategic moves to have a significant impact to its growth in 2015 and in coming years.
Overview
Since 2008, our loan customers have operated in an economically stressed environment. However, the markets in which we operate have begun to experience generally more stable business conditions. The levels of loan delinquencies and defaults have continued to decline over the last several years, although they continue to be higher than historical levels. During this period, our net interest income, before the provision for loan losses, has not grown.
The Company reported net income for 2014 and 2013, compared to reporting net operating losses for 2010 to 2012, primarily resulting from improved general economic conditions and credit performance of the Company’s loan portfolio.  There is no guarantee that we

29
HAMPTON ROADS BANKSHARES, INC.

will be able to maintain this improvement in our net income. In addition to the risk that the broader economic conditions will stagnate or reverse their improvements, our mortgage banking earnings are particularly volatile due to their dependence upon the direction and level of mortgage interest rates.  As of December 31, 2014, 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 December 31, 2014 and our financial performance for the year then ended.
•
Assets were $2.0 billion at December 31, 2014.  Total assets increased by $38.3 million or 2.0% from December 31, 2013.  The increase in assets was primarily associated with a $42.7 million or 99.8% increase in overnight funds sold and due from FRB, a $38.4 million or 2.8% increase in gross loans, an $8.0 million or 22.8% decrease in the allowance for loan losses, offset by a $23.3 million or 7.1% decrease in investment securities available for sale, and a $14.9 million or 40.8% decrease in other real estate owned and repossessed assets.
•
Investment securities available for sale decreased $23.3 million to $302.2 million as of December 31, 2014 from $325.5 million at December 31, 2013.  During 2014, the Company sold securities generating net gains of $306 thousand.  A general decrease in interest rates contributed to an increase in the net unrealized gains in our portfolio.
•
Gross loans increased by $38.4 million or 2.8% during 2014.  The majority of the recent loan demand within our markets has come from the real estate - commercial mortgage and installment loan categories. 
•
Impaired loans decreased by $18.7 million, or 27.7% during 2014 to $48.9 million at December 31, 2014, compared to $67.6 million at December 31, 2013, primarily as a result of a downward trend in nonaccrual commercial loans.
•
Allowance for loan losses at December 31, 2014 decreased 22.8% to $27.1 million from $35.0 million at December 31, 2013 as net charge-offs of previously identified impaired loans exceeded additional provisions for loan losses. In particular, the specific component of the allowance for loan losses decreased to $3.5 million from $13.1 million.
•
Deposits at December 31, 2014 increased $58.0 million or 3.8% from December 31, 2013, as a result of increases of $21.5 million or 8.8% in noninterest-bearing demand deposits, increases of $18.2 million or 5.6% in time deposits less than $100 thousand, increases of $3.7 million or 1.3% in time deposits over $100 thousand, increases of $20.8 million or 3.5% in interest-bearing demand deposits, partially offset by decreases of $6.1 million or 9.7% in savings deposits.
•
Net income attributable to Hampton Roads Bankshares, Inc. for 2014 was $9.3 million, as compared with net income of $4.1 million for 2013 and net loss of $25.1 million for 2012.
•
Net interest income decreased $3.5 million in 2014 as compared to 2013.  The decrease was due primarily to the decreases in average interest-earning assets, and a decline in net interest margin.  We changed the method by which net interest margin is calculated in 2013 to include nonaccrual loans.  On this basis, net interest margin decreased by 15 basis points to 3.28% in 2014 compared to 3.43% and 3.39% in 2013 and 2012, respectively.
•
The continued improvement in the overall loan portfolio quality resulted in a loan loss provision of $218 thousand in 2014, compared to $1.0 million and $15.0 million in 2013 and 2012, respectively.
•
Noninterest income for 2014 was $24.6 million, compared to $25.5 million and $7.7 million in 2013 and 2012, respectively. Mortgage banking revenue continued to decline in 2014 as compared to 2013 and 2012, due to declines in both origination volume and margin, driven by rising market interest rates, which resulted in a dramatic negative impact on refinance demand. Offsetting these declines were decreases in losses on premises and equipment associated with certain branch closings that occurred in 2013, and decreases in other than temporary impairment of other real estate owned and repossessed assets. Income from bank-owned life insurance increased $798 thousand during 2014 to $4.1 million compared to $3.3 million and $1.6 million for 2013 and 2012, respectively.
•
Noninterest expense in 2014 finished at $74.7 million, decreasing $7.7 million or 9.3% compared to 2013, primarily due to lower salaries and employee benefits, occupancy, and FDIC insurance expenses.
•
The Company's return on average assets ratio (ROAA) was 0.47%, 0.20%, and (1.20%) for the years ended December 31, 2014, 2013, and 2012, respectively, and its return on average equity ratio (ROAE) was 4.81%, 2.22%, and (17.94%) for the years ended December 31, 2014, 2013, and 2012, respectively.
•
Our effective tax rate was 0.06% for 2014 compared to 1.6% and 9.2% for 2013 and 2012, respectively.  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.


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HAMPTON ROADS BANKSHARES, INC.


Critical Accounting Policies
U.S. generally accepted accounting principles (“GAAP”) are complex and require 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 material impact on the consolidated financial statements.  Actual results, in fact, could differ materially from those estimates.  We consider our policies on allowance for loan losses, the valuation of deferred taxes, and the valuation of other real estate owned to be critical accounting policies.
Allowance for Loan Losses 
The purpose of the allowance for loan losses is to provide for potential losses inherent in our loan portfolio.  Management considers numerous factors in determining the allowance for loan losses, including historical loan loss experience, the size and composition of the portfolio, and the estimated value of collateral and guarantees securing the loans.  
Management regularly reviews the loan portfolio to determine whether adjustments are necessary to maintain an allowance for loan losses sufficient to absorb losses.  Our review takes into consideration changes in the nature and volume of the loan portfolio, overall portfolio quality, review of specific problem loans, and review of current economic conditions that may affect the borrower’s ability to repay.  
Some of the tools used in the credit review process to identify potential problem loans include past due reports, collateral valuations (primarily from third parties), cash flow analysis of borrowers, and risk ratings of loans.  In addition to the review of credit quality through ongoing credit review processes, we perform a comprehensive allowance analysis for our loan portfolio at least quarterly. The allowance consists of specific, general, and unallocated components.
The specific component relates to loans that are determined to be impaired and, therefore, individually evaluated for impairment.  The specific allowance for loan losses necessary for these loans is based on a loan-by-loan analysis and varies between impaired loans largely due to the value of the loan’s underlying collateral.
The general component relates to groups of homogeneous loans not designated for specific allowance and collectively evaluated for impairment.  The general component is based on historical loss experience adjusted for qualitative factors where considered necessary and appropriate.  To arrive at the general component, the loan portfolio is grouped by loan type.  Each loan type is further subdivided by risk level as determined in our loan grading process.  A weighted average historical loss rate is computed for each group of loans over the trailing thirty-six months with higher weightings assigned to the most recent months.  
In addition, an adjustment factor may be applied.  The adjustment factor, which may be favorable or unfavorable, represents management’s judgment that inherent losses in a given group of loans are different from historical loss rates due to environmental factors unique to that specific group of loans.  These factors may relate to growth rate factors within the particular loan group; whether the recent loss history for a particular group of loans differs from its historical loss rate; the amount of loans in a particular group that have recently been designated as impaired and that may be indicative of future trends for this group; reported or observed difficulties that other banks are having with loans in the particular group; changes in the experience, ability, and depth of lending personnel; changes in the nature and volume of the loan portfolio and in the terms of loans; and changes in the volume and severity of past due loans, nonaccrual loans, and adversely classified loans.  
The sum of the historical loss rate and the adjustment factor comprise the estimated annual loss rate.  To adjust for risk levels, a loss allocation factor is estimated based on the segmented risk levels for the loan group and is keyed off of a pass credit rating.  The loss allocation factor is applied to the estimated annual loss rate to determine the expected annual loss amount. Within the Company’s model, the concept of “years to impairment” is used; Years to impairment is defined by the Company as the average period of time from the point at which a potential loss is incurred (marked by a downgrade to Special Mention risk grade) to the point at which the loss is confirmed, through the identification of the loss (i.e., loan default, resulting in ASC 310 reserve). The move out of a passing grade (risk rating 1-5) and into Special Mention (risk rating 6) is determined to be an indicator that a loss trigger event may have occurred or may occur in the foreseeable future and the loan is beginning to demonstrate initial signs of deterioration. Special mention loans are not considered impaired (management believes the Company will collect all contractual principal and interest as it comes due) and are performing satisfactorily, but are showing signs of potential weaknesses that may, if not corrected by the borrower, weaken further and possibly inadequately protect the Company’s position at some future date. The Company instituted in 2014 a new “pass/watch” risk grade for loans that do not provide acceptable credit metrics based upon analysis of financial statements but for which there is a strong mitigating factor such as satisfactory payment history. The “pass/watch” grade is considered a pass grade category and is now designated as Risk Grade 5. If the loan continues to deteriorate, it would be subsequently downgraded to substandard (risk rating 7), doubtful (risk rating 8), and then loss (risk rating 9). Such impaired loans are removed from the general reserve category and placed into the specific reserve category (although loans may be assigned a specific reserve of zero, depending

31
HAMPTON ROADS BANKSHARES, INC.

on the fair value of the underlying collateral); losses are then confirmed by the note’s default, subsequent impairment, and charge-off.
An unallocated component is maintained to cover uncertainties that could affect management’s estimate of probable losses. The unallocated component of the allowance reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating specific and general losses in the portfolio and represents inherent losses that may not otherwise be captured in the specific or general components.
Additionally, we apply an economic factor to recognize external forces over which management has no control and to estimate inherent losses that may otherwise be omitted from the allowance calculation.  The factors used in this calculation include published data for the gross domestic product growth rate, interest rate levels as measured by the prime rate, changes in regional real estate indices, and regional unemployment statistics.  
Additionally, the Company performs a self-diagnostic assessment to evaluate internal controls over the management of the credit process to derive an internal component to the unallocated portion of the allowance which is added to the aforementioned macroeconomic factors. 
Credit losses are an inherent part of our business and, although we believe the methodologies for determining the allowance for loan losses and the current level of the allowance are adequate, it is possible that there may be unidentified losses in the portfolio at any particular time that may become evident at a future date pursuant to additional internal analysis or regulatory comment.  Credit losses are also impacted by real estate values.  
To the extent possible, we use updated third party appraisals to assist us in determining the estimated fair value of our collateral dependent impaired loans.  While we believe our appraisal practices are consistent with industry norms, there can be no assurance that the fair values we estimate in determining how much impairment (if any) to recognize on our collateral dependent impaired loan portfolio will be realized in an actual sale of the property to a third party.  Additional provisions for such losses, if necessary, would negatively impact earnings.  As a result, our earnings could be adversely affected if our estimate of an adequate allowance is inaccurate by even a small amount.
Valuation of Deferred Taxes
Deferred tax assets and liabilities are recognized for future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis.  Deferred tax assets, including tax loss and credit carryforwards, and deferred tax liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.  Deferred income tax expense (benefit) represents the change during the period in the deferred tax assets and deferred tax liabilities.
Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized.  Realization of the deferred tax asset is dependent on generating sufficient taxable income in future years, and, as such, material changes could impact our financial condition and results of operations. 
As of December 31, 2014, we have recorded a valuation allowance of $168.7 million on our net deferred tax assets.  Internal Revenue Code Section 382 (“Section 382”) limitations related to the capital raised and resulting change in control for tax purposes during the third and fourth quarters of 2010 add further uncertainty as to the realizability of the deferred tax assets in future periods.  In this regard, sale of our Common Stock by Anchorage, CapGen, or Carlyle could adversely impact our ability to realize certain deferred tax benefits relating to prior losses, thereby increasing our effective tax rate in the future. 
While net operating losses incurred after our 2010 change in control are not limited, we have not recognized any benefit in our consolidated financial statements due to the continued uncertainty of our ability to realize such deferred tax assets.  We do not expect to reverse some or all of our valuation allowance established against our net deferred tax assets until such a time we return to profitability for three or more years and can reasonably expect to continue to be profitable in future periods (and thereby begin utilizing our available net operating loss carryforwards).
Valuation of Other Real Estate Owned
Other real estate owned and repossessed assets include real estate acquired in the settlement of loans and other repossessed collateral and is initially recorded at the lower of the recorded loan balance or estimated fair value less estimated disposal costs.  Although by policy, each property in other real estate owned is to receive an updated appraisal on an annual basis, we cannot be certain that the most recent appraisal represents current market conditions.  Similar to the discussion above under Allowance for Loan Losses, there can be no assurance that the fair values we estimate in determining how much impairment (if any) to recognize on our foreclosed real estate portfolio will be realized in an actual sale of the property to a third party.
At foreclosure, any excess of the loan balance over the fair value of the property (less estimated costs to sell) is charged to the allowance for loan losses.  Such carrying value is periodically reevaluated and written down if there is an indicated subsequent decline in fair value.  Costs to bring a property to salable condition are capitalized up to the fair value of the property while costs to

32
HAMPTON ROADS BANKSHARES, INC.

maintain a property in salable condition are expensed as incurred.  Gains and losses on sales of other real estate owned upon disposition and write-downs of other real estate owned during the holding period are recognized in noninterest income. 
 
Analysis of Results of Operations
Net income attributable to Hampton Roads Bankshares, Inc. for 2014 was $9.3 million, as compared with net income of $4.1 million and net loss of $25.1 million for 2013 and 2012, respectively. 
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.
Interest-earning assets consist of loans, investment securities, overnight funds sold and due from FRB, and interest-bearing deposits in other banks. Interest-bearing liabilities consist of deposit accounts and borrowings.
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.


33
HAMPTON ROADS BANKSHARES, INC.

Table 1 presents the average interest-earning assets and average interest-bearing liabilities, the average yields earned on such assets and rates paid on such liabilities, and the net interest margin for the indicated periods.
Table 1:  Average Balance Sheet and Net Interest Margin Analysis
 
2014
 
2013
 
2012
(in thousands, except average yield/rate data)
Average Balance
 
Interest Income/Expense
 
Average Yield/Rate
 
Average Balance
 
Interest Income/Expense
 
Average Yield/Rate
 
Average Balance
 
Interest Income/Expense
 
Average Yield/Rate
Assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loans
$
1,396,443

 
$
63,132

 
4.52
%
 
$
1,437,967

 
$
68,954

 
4.80
%
 
$
1,489,692

 
$
74,162

 
4.98
%
Investment securities
342,996

 
9,018

 
2.63

 
308,161

 
7,710

 
2.50

 
317,866

 
7,893

 
2.48

Overnight funds sold
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
and due from FRB
90,177

 
193

 
0.21

 
103,852

 
238

 
0.23

 
111,331

 
245

 
0.22

Interest-bearing deposits
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
in other banks
845

 
—

 
—

 
712

 
1

 
0.14

 
880

 
2

 
0.23

Total interest-earning assets
1,830,461

 
72,343

 
3.95

 
1,850,692

 
76,903

 
4.16

 
1,919,769

 
82,302

 
4.29

Noninterest-earning assets
143,419

 
 
 
 
 
156,101

 
 
 
 
 
170,398

 
 
 
 
Total assets
$
1,973,880

 
 
 
 
 
$
2,006,793

 
 
 
 
 
$
2,090,167

 
 
 
 
Liabilities and Shareholders' Equity:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing liabilities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing demand deposits
$
616,215

 
$
2,667

 
0.43
%
 
$
570,390

 
$
2,156

 
0.38
%
 
$
530,526

 
$
2,003

 
0.38
%
Savings deposits
57,987

 
31

 
0.05

 
64,754

 
36

 
0.06

 
61,371

 
78

 
0.13

Time deposits
625,532

 
6,563

 
1.05

 
683,870

 
7,155

 
1.05

 
865,381

 
10,505

 
1.21

Total interest-bearing deposits
1,299,734

 
9,261

 
0.71

 
1,319,014

 
9,347

 
0.71

 
1,457,278

 
12,586

 
0.86

Borrowings
206,832

 
3,037

 
1.47

 
231,012

 
4,055

 
1.76

 
236,305

 
4,692

 
1.99

Total interest-bearing liabilities
1,506,566

 
12,298

 
0.82

 
1,550,026

 
13,402

 
0.86

 
1,693,583

 
17,278

 
1.02

Noninterest-bearing liabilities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Demand deposits
256,652

 
 
 
 
 
256,413

 
 
 
 
 
238,395

 
 
 
 
Other liabilities
16,526

 
 
 
 
 
16,368

 
 
 
 
 
18,327

 
 
 
 
Total noninterest-bearing liabilities
273,178

 
 
 
 
 
272,781

 
 
 
 
 
256,722

 
 
 
 
Total liabilities
1,779,744

 
 
 
 
 
1,822,807

 
 
 
 
 
1,950,305

 
 
 
 
Shareholders' equity
194,136

 
 
 
 
 
183,986

 
 
 
 
 
139,862

 
 
 
 
Total liabilities and shareholders' equity
$
1,973,880

 
 
 
 
 
$
2,006,793

 
 
 
 
 
$
2,090,167

 
 
 
 
Net interest income
 
 
$
60,045

 
 
 
 
 
$
63,501

 
 
 
 
 
$
65,024

 
 
Net interest spread
 
 
 
 
3.13
%
 
 
 
 
 
3.30
%
 
 
 
 
 
3.27
%
Net interest margin
 
 
 
 
3.28
%
 
 
 
 
 
3.43
%
 
 
 
 
 
3.39
%
Note:  Interest income from loans includes fees of $1,478 in 2014, $1,917 in 2013, and $1,067 in 2012.  Average nonaccrual loans of $34,227, $60,877, and $121,108 are included in average loans for 2014, 2013, and 2012, respectively. 
 
 
 
 

34
HAMPTON ROADS BANKSHARES, INC.

Our method for calculating net interest margin has been adjusted.  Prior to 2013, we excluded nonaccrual loans from our calculation.  We now include nonaccrual loans in the calculations, and prior year amounts have been adjusted retroactively to reflect this method.    A reconciliation of the methods is below for the years ended December 31, 2014, 2013, and 2012.
 
Years Ended
 
December 31, 2014
 
December 31, 2013
 
December 31, 2012
Net interest margin,
 
 
 
 
 
excluding nonaccrual loans
3.34
 %
 
3.55
 %
 
3.62
 %
Impact of excluding
 
 
 
 
 
nonaccrual loans
(0.06
)%
 
(0.12
)%
 
(0.23
)%
Net interest margin
 
 
 
 
 
including nonaccrual loans
3.28
 %
 
3.43
 %
 
3.39
 %
Table 2 below shows the variance in interest income and expense caused by differences in average balances and rates.
Table 2:  Effect of Changes in Rate and Volume on Net Interest Income
 
2014 Compared to 2013
 
2013 Compared to 2012
 
Interest
Income/
Expense
Variance
 
 
 
 
 
Interest
Income/
Expense
Variance
 
 
 
 
 
 
Variance
Attributable to
 
 
Variance
Attributable to
 
 
 
 
(in thousands)
 
Rate
 
Volume
 
 
Rate
 
Volume
Interest-Earning Assets:
 
 
 
 
 
 
 
 
 
 
 
Loans
$
(5,822
)
 
$
(3,831
)
 
$
(1,991
)
 
$
(5,208
)
 
$
(2,633
)
 
$
(2,575
)
Investment securities
1,308

 
436

 
872

 
(183
)
 
58

 
(241
)
Overnight funds sold
 
 
 
 
 
 
 
 
 
 
 
and due from FRB
(45
)
 
(14
)
 
(31
)
 
(7
)
 
9

 
(16
)
Interest-bearing deposits
 
 
 
 
 
 
 
 
 
 
 
in other banks
(1
)
 
(1
)
 
—

 
(1
)
 
(1
)
 
—

Total interest-earning assets
(4,560
)
 
(3,410
)
 
(1,150
)
 
(5,399
)
 
(2,567
)
 
(2,832
)
Interest-Bearing Liabilities:
 
 
 
 
 
 
 
 
 
 
 
Deposits
(86
)
 
51

 
(137
)
 
(3,239
)
 
(2,045
)
 
(1,194
)
Borrowings
(1,018
)
 
(594
)
 
(424
)
 
(637
)
 
(532
)
 
(105
)
Total interest-
 
 
 
 
 
 
 
 
 
 
 
bearing liabilities
(1,104
)
 
(543
)
 
(561
)
 
(3,876
)
 
(2,577
)
 
(1,299
)
Net interest income
$
(3,456
)
 
$
(2,867
)
 
$
(589
)
 
$
(1,523
)
 
$
10

 
$
(1,533
)
 
 
 
 
 
 
 
 
 
 
 
 
Note:  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.
 
Interest income on loans, including fees, decreased predominantly as a result of a decline in the average yield on loans and the decline in average loan balances.  Interest income on investment securities increased due to higher reinvestment rates, slower prepayment speeds, security allocation, and an increase in the overall size of the average investment portfolio, as we invested a portion of available liquidity to offset the effect of the decline in average loan balances.  
Interest expense on deposits decreased modestly in 2014 compared to 2013 primarily due to a decline in average interest-bearing deposits. Interest expense on borrowings, which consisted of FHLB borrowings and other borrowings, decreased mainly due to maturing FHLB advances being paid down, as well as the overall lower average interest rate paid on borrowings.

Noninterest Income
Noninterest income comprised 25.4% of total revenue in 2014, 24.9% in 2013 and 8.5% in 2012.  We define total revenue as the sum of interest income and noninterest income. The primary cause of this increase in noninterest income as a percentage of total revenue was a reduction in other than temporary impairment of other real estate owned and repossessed assets, a reduction in impairment of premises and equipment, which were offset by declines in mortgage banking revenue and total interest income. 

35
HAMPTON ROADS BANKSHARES, INC.

Table 3 provides a summary of noninterest income for the years ended December 31, 2014, 2013, and 2012.
Table 3:  Noninterest Income
 
 
 
 
 
 
 
2014 Compared to 2013
 
2013 Compared to 2012
(in thousands, except for percentages)
2014
 
2013
 
2012
 
$
 
%
 
$
 
%
Mortgage banking revenue
$
11,389

 
$
15,832

 
$
18,403

 
$
(4,443
)
 
(28.1
)%
 
$
(2,571
)
 
(14.0
)%
Service charges on deposit accounts
4,703

 
5,014

 
5,186

 
(311
)
 
(6.2
)
 
(172
)
 
(3.3
)
Income from bank-owned life insurance
4,110

 
3,312

 
1,620

 
798

 
24.1

 
1,692

 
104.4

Gain on sale of investment securities available for sale
306

 
781

 
627

 
(475
)
 
(60.8
)
 
154

 
24.6

Gain (loss) on sale of premises and equipment
(112
)
 
580

 
(192
)
 
(692
)
 
(119.3
)
 
772

 
(402.1
)
Impairment of premises & equipment
—

 
(2,825
)
 
—

 
2,825

 
100.0

 
(2,825
)
 
100.0

Gain (loss) on sale of other real estate owned & repossessed assets
360

 
356

 
(8,524
)
 
4

 
1.1

 
8,880

 
(104.2
)
Other than temporary impairment of other real estate owned and repossessed assets
(2,405
)
 
(3,914
)
 
(14,126
)
 
1,509

 
38.6

 
10,212

 
(72.3
)
Visa check card income
2,635

 
2,556

 
2,385

 
79

 
3.1

 
171

 
7.2

Other
3,650

 
3,820

 
2,288

 
(180
)
 
(4.7
)
 
1,532

 
67.0

Total noninterest income
$
24,636

 
$
25,512

 
$
7,667

 
$
(886
)
 
(3.5
)%
 
$
17,845

 
232.8
 %
Mortgage banking revenue declined in 2014 compared to 2013 and 2012, due to decreases in both origination volume and margin, driven by rising market interest rates which had dramatic negative impact on refinance demand during the first part of the year. Refinancing activity accounted for 33% of mortgage originations during 2014, as compared to 48% for 2013.
As the Company closed down certain branches in 2013, it recorded impairments to premises and equipment as those properties were transferred to other real estate owned and repossessed assets. Similar branch closings did not occur in 2014. The combined gain on sale of other real estate owned and repossessed assets and other than temporary impairment of other real estate owned and repossessed assets declined during 2014 and 2013, compared to 2012, as market values continued to stabilize.
Noninterest Expense
Noninterest expense represents our operating and overhead expenses.  The efficiency ratio, calculated by dividing noninterest expense by the sum of net interest income and noninterest income excluding securities gains was 88.5% in 2014 compared to 93.3% in 2013 and 113.0% in 2012. Table 4 provides a summary of noninterest expense for the years ended December 31, 2014, 2013, and 2012. 
Table 4:  Noninterest Expense
 
 
 
 
 
 
 
2014 Compared to 2013
 
2013 Compared to 2012
(in thousands, except for percentages)
2014
 
2013
 
2012
 
$
 
%
 
$
 
%
Salaries and employee benefits
$
38,930

 
$
41,223

 
$
39,321

 
$
(2,293
)
 
(5.6
)%
 
$
1,902

 
4.8
 %
Professional and consultant fees
6,108

 
5,910

 
7,585

 
198

 
3.4

 
(1,675
)
 
(22.1
)
Occupancy
6,476

 
9,092

 
7,558

 
(2,616
)
 
(28.8
)
 
1,534

 
20.3

FDIC insurance
2,366

 
4,762

 
4,609

 
(2,396
)
 
(50.3
)
 
153

 
3.3

Data processing
4,610

 
4,198

 
3,928

 
412

 
9.8

 
270

 
6.9

Problem loan and repossessed asset costs
1,788

 
2,429

 
3,850

 
(641
)
 
(26.4
)
 
(1,421
)
 
(36.9
)
Equipment
1,726

 
1,730

 
2,772

 
(4
)
 
(0.2
)
 
(1,042
)
 
(37.6
)
Directors' and regional board fees
1,591

 
1,493

 
913

 
98

 
6.6

 
580

 
63.5

Advertising and marketing
1,513

 
1,431

 
621

 
82

 
5.7

 
810

 
130.4

Other
9,549

 
10,080

 
10,270

 
(531
)
 
(5.3
)
 
(190
)
 
(1.9
)
Total noninterest expense
$
74,657

 
$
82,348

 
$
81,427

 
$
(7,691
)
 
(9.3
)%
 
$
921

 
1.1
 %
Salaries and employee benefits expense declined in 2014, compared to 2013, mainly driven by a lower employee headcount, and decreases in commission expense. In 2014, we included quality assurance expense in professional and consultant fees. We reclassified $124 thousand and $20 thousand from other in 2013 and 2012, respectively to reflect this change. Occupancy expense declined due to lower depreciation and rental expenses, as we have reduced the number of physical locations of our bank subsidiaries. FDIC insurance expense has declined as our assessment rates have decreased due to the Company’s improved risk profile.

36
HAMPTON ROADS BANKSHARES, INC.

Data processing expenses increased due to higher software license and maintenance fees. Problem loan and repossessed asset costs declined due to the overall decrease in other real estate owned and repossessed assets. Other noninterest expense declined due to decreases in probable losses and loss factors for unfunded commitments which reduced the need for an additional reserve, decreases in mortgage credit evaluation and appraisal costs, and decreased insurance expense.

Analysis of Financial Condition
Assets were $2.0 billion at December 31, 2014.  Total assets increased by $38.3 million or 2.0% from December 31, 2013. The increase in assets was primarily associated with a $42.7 million or 99.8% increase in overnight funds sold and due from FRB, a $38.4 million or 2.8% increase in gross loans, an $8.0 million or 22.8% decrease in the allowance for loan losses, offset by a $23.3 million or 7.1% decrease in investment securities available for sale, and a $14.9 million or 40.8% decrease in other real estate owned and repossessed assets.

Cash and Cash Equivalents
Cash and cash equivalents includes cash and due from banks, interest-bearing deposits in other banks, and overnight funds sold and due from FRB.  Cash and cash equivalents are used for daily cash management purposes, management of short-term interest rate opportunities, and liquidity.  Cash and cash equivalents as of December 31, 2014 were $103.6 million compared to $62.3 million at December 31, 2013 and consisted mainly of deposits with FRB.  In the future, the Company expects to utilize its cash on hand to support loan origination activity.
Investment Securities
Our investment portfolio at December 31, 2014 consisted primarily of U.S. agency, mortgage-backed securities (“MBS”), and asset-backed securities ("ABS"). The allocation to ABS, which began in 2013, provides the Company with a floating rate asset, which mitigates the interest rate risk inherent in certain other asset classes, e.g., MBS. Repayment of principal and interest of the ABS is dependent upon the performance of the underlying loan collateral.
The Company performs due diligence of each security on a pre- and post-purchase basis to evaluate the underlying collateral and invests in the investment grade tranches of securitizations. However, should defaults or loss severities exceed the credit enhancement in the structure, payment of principal or interest may be impacted. The Company currently does not own any collateralized loan obligation securities that are not compliant with the Volcker Rule.
Our available for sale securities are reported at fair value and are used primarily for liquidity, pledging, earnings, and asset / liability management purposes and are reviewed quarterly for possible impairment.  Due to portfolio activity, the fair value of our available for sale investment securities at December 31, 2014 decreased $23.3 million or 7.1% to $302.2 million compared to $325.5 million at December 31, 2013.
Table 5 displays the contractual maturities and weighted average yields of investment securities at December 31, 2014.  Actual maturities may differ from contractual maturities because certain issuers may have the right to call or prepay obligations with or without call or prepayment penalties.  In addition, the effective life or duration of MBS and ABS is also less than the contractual maturity since these securities pay principal and interest monthly.

37
HAMPTON ROADS BANKSHARES, INC.

Table 5:  Investment Maturities and Yields
(in thousands, except weighted average yield data)
Amortized Cost
 
Estimated Fair Value
 
Weighted Average Yield
U.S. agency securities:
 
 
 
 
 
Within 1 year
$
970

 
$
982

 
4.05
%
After 1 year but within 5 years
1,590

 
1,655

 
4.13

After 5 years but within 10 years
2,228

 
2,317

 
4.25

Over 10 years
12,254

 
12,699

 
3.72

Total U.S. agency securities
17,042

 
17,653

 
3.85

Corporate bonds:
 
 
 
 
 

After 1 year but within 5 years
4,080

 
4,071

 
1.81

After 5 years but within 10 years
11,000

 
10,489

 
2.10

Total corporate debt securities
15,080

 
14,560

 
2.02

Mortgage-backed securities:
 
 
 
 
 

Agency
212,650

 
215,428

 
2.40

Total mortgage-backed securities
212,650

 
215,428

 
2.40

Asset-backed securities:
 
 
 
 
 

After 5 years but within 10 years
14,662

 
14,426

 
2.59

Over 10 years
39,683

 
38,771

 
2.72

Total asset-backed securities
54,345

 
53,197

 
2.68

Equity securities
970

 
1,383

 
—

Total investment securities available for sale
$
300,087

 
$
302,221

 
2.52
%

Table 6 provides information regarding the composition of our securities portfolio showing selected yields.  For more information on investment securities, refer to Note 5, Investment Securities, of the Notes to Consolidated Financial Statements.
Table 6:  Composition of Securities Portfolio
 
December 31,
 
2014
 
2013
 
2012
(in thousands, except
Amortized
 
Estimated
 
Weighted Average
 
Amortized
 
Estimated
 
Weighted Average
 
Amortized
 
Estimated
 
Weighted Average
weighted average yield data)
Cost
 
Fair Value
 
Yield
 
Cost
 
Fair Value
 
Yield
 
Cost
 
Fair Value
 
Yield
Securities available
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
for sale:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. agency
$
17,042

 
$
17,653

 
3.85
%
 
$
21,500

 
$
21,998

 
3.82
%
 
$
31,522

 
$
32,988

 
3.22
%
State and municipal
—

 
—

 
—

 
525

 
537

 
4.95

 
527

 
631

 
4.95

Corporate
15,080

 
14,560

 
2.02

 
17,212

 
17,542

 
2.65

 
2,864

 
2,953

 
2.51

Mortgage-backed -
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Agency
212,650

 
215,428

 
2.40

 
227,662

 
225,845

 
2.68

 
202,024

 
207,194

 
2.56

Non-agency
—

 
—

 
—

 
8,150

 
8,180

 
2.10

 
32,161

 
32,152

 
2.37

Asset-backed
54,345

 
53,197

 
2.68

 
50,330

 
49,871

 
2.27

 
—

 
—

 
—

Equity
970

 
1,383

 
—

 
970

 
1,511

 
—

 
520

 
537

 
—

Total securities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
available for sale
$
300,087

 
$
302,221

 
2.52
%
 
$
326,349

 
$
325,484

 
2.68
%
 
$
269,618

 
$
276,455

 
2.62
%

Loans
As a holding company of two community banks, we have a primary objective of meeting the business and consumer credit needs within our markets where standards of profitability, client relationships, and credit quality intersect. Our loan portfolio is comprised of commercial and industrial, construction, real estate-commercial mortgage, real estate-residential mortgage, and installment loans. Lending decisions are based upon evaluation of the financial strength and credit history of the borrower and the quality and value of the collateral securing the loan. Personal guarantees are required on most loans; however, prudent exceptions are made on occasion based upon the financial viability of the borrowing entity or the underlying project that is being financed.

38
HAMPTON ROADS BANKSHARES, INC.


As shown in Table 7, the overall loan portfolio increased $38.4 million or 2.8% to $1.4 billion at December 31, 2014.
Table 7:  Loans by Classification
 
 
December 31,
 
 
2014
 
2013
 
2012
 
2011
 
2010
(in thousands, except for percentages)
 
Balance
 
%
 
Balance
 
%
 
Balance
 
%
 
Balance
 
%
 
Balance
 
%
Loan Classification:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial & Industrial
 
$
219,029

 
15.4
 %
 
$
225,492

 
16.3
 %
 
$
267,080

 
18.6
 %
 
$
256,058

 
17.0
%
 
$
304,550

 
15.5
 %
Construction
 
136,955

 
9.6

 
158,473

 
11.4

 
206,391

 
14.4

 
284,984

 
18.9

 
475,284

 
24.3

Real Estate -
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial mortgage
 
639,163

 
44.9

 
590,475

 
42.6

 
530,042

 
37.0

 
522,052

 
34.7

 
658,969

 
33.6

Residential mortgage
 
354,017

 
24.9

 
354,035

 
25.6

 
372,591

 
26.0

 
414,957

 
27.6

 
487,559

 
24.9

Installment
 
74,821

 
5.3

 
57,623

 
4.2

 
56,302

 
3.9

 
26,525

 
1.8

 
32,708

 
1.7

Deferred loan fees and related costs
 
(1,050
)
 
(0.1
)
 
(1,567
)
 
(0.1
)
 
(131
)
 
—

 
157

 
—

 
(303
)
 
—

Total loans
 
$
1,422,935

 
100.0
 %
 
$
1,384,531

 
100.0
 %
 
$
1,432,275

 
100.0
 %
 
$
1,504,733

 
100.0
%
 
$
1,958,767

 
100.0
 %
Overall our loan trends during 2014 have been influenced by continued modest demand for loans in nearly all our loan categories. The Company has experienced greater demand for commercial real estate related credit relative to other loan types. Credit concentrations are measured against internal and prudential regulatory guidelines. The installment loan portfolio increased due to the growth in direct lending activity generated by the Shore Premier Finance marine lending unit.
In addition to the aforementioned modest demand for credit, the contraction seen in certain loan categories stems from the continued resolution of problem loans. Origination volumes were also offset by principal pay-downs and scheduled amortization in the portfolio. Additionally, our prudent business practices and internal guidelines and underwriting standards will continue to be followed in making lending decisions in order to manage exposure to credit-related losses.
Table 8 indicates our loans by geographic area as of December 31, 2014. 
Table 8:  Loans by Geographic Location
 
Commercial
& Industrial
 
 
 
Real Estate
 
 
 
 
(in thousands)
 
Construction
 
Commercial Mortgage
 
Residential Mortgage
 
Installment
 
Total
Hampton Roads
$
156,346

 
$
69,376

 
$
360,026

 
$
88,154

 
$
7,046

 
$
680,948

Eastern Shore (DE/MD/VA)
22,817

 
19,327

 
109,949

 
98,509

 
2,911

 
253,513

Richmond
12,372

 
10,419

 
83,924

 
36,643

 
517

 
143,875

Northeast NC
19,988

 
18,257

 
48,861

 
41,425

 
4,614

 
133,145

Triangle
2,683

 
13,752

 
14,519

 
66,580

 
38

 
97,572

Outer Banks
4,092

 
4,918

 
16,270

 
22,586

 
196

 
48,062

Wilmington
38

 
906

 
5,614

 
120

 
2

 
6,680

Other
693

 
—

 
—

 
—

 
59,497

 
60,190

Total loans
$
219,029

 
$
136,955

 
$
639,163

 
$
354,017

 
$
74,821

 
$
1,423,985

Note:  This table does not include deferred loan fees of $1.1 million.
 
 
 
 
 
 
 

39
HAMPTON ROADS BANKSHARES, INC.

Table 9 sets forth the maturity periods of our loan portfolio as of December 31, 2014.  Demand loans are reported as due within one year. 
Table 9:  Loan Maturities Schedule
 
Commercial
& Industrial
 
 
 
Real Estate
 
 
 
 
(in thousands)
 
Construction
 
Commercial Mortgage
 
Residential Mortgage
 
Installment
 
Total
Variable Rate:
 
 
 
 
 
 
 
 
 
 
 
Within 1 year
$
63,064

 
$
33,807

 
$
19,869

 
$
6,772

 
$
504

 
$
124,016

1 to 5 years
30,659

 
24,162

 
45,205

 
11,358

 
6,097

 
117,481

After 5  years
3,075

 
10,846

 
27,467

 
213,354

 
2,872

 
257,614

Total variable rate
96,798

 
68,815

 
92,541

 
231,484

 
9,473

 
499,111

Fixed Rate:
 
 
 
 
 
 
 
 
 
 
 
Within 1 year
19,751

 
19,089

 
60,794

 
8,571

 
1,255

 
109,460

1 to 5 years
93,202

 
44,794

 
394,009

 
65,074

 
5,768

 
602,847

After 5 years
9,278

 
4,257

 
91,819

 
48,888

 
58,325

 
212,567

Total fixed rate
122,231

 
68,140

 
546,622

 
122,533

 
65,348

 
924,874

Total maturities
$
219,029

 
$
136,955

 
$
639,163

 
$
354,017

 
$
74,821

 
$
1,423,985

Note:  This table does not include deferred loan fees of $1.1 million.
 
 
 
 
 
 
Allowance for Loan Losses and Provision for Loan Losses
The allowance for loan losses was $27.1 million or 1.90% of outstanding loans as of December 31, 2014 compared with $35.0 million or 2.53% of outstanding loans as of December 31, 2013. 
The allowance for loan losses decreased $8.0 million during 2014 as a result of net charge-offs exceeding additional provisions for loan losses. Net charge-offs were $8.2 million during 2014 compared with $14.4 million during 2013. Our provision for loan losses was $218 thousand during 2014 compared to $1.0 million recorded during 2013. We did not make any significant changes to our methodology or model for estimating the allowance for loan losses during any of the past three years.
An analysis of the allowance for loans losses for the years ended December 31, 2014, 2013, 2012, 2011, and 2010 is shown in Table 10.  Additional information about the allowance for loan losses can be found in Note 1, Basis of Financial Statement Presentation and Summary of Significant Accounting Policies, and Note 6, Loans and Allowance for Loan Losses, of the Notes to Consolidated Financial Statements.

40
HAMPTON ROADS BANKSHARES, INC.

Table 10:  Allowance for Loan Losses Analysis
(in thousands, except for percentages)
2014
 
2013
 
2012
 
2011
 
2010
Allowance for loan losses:
 
 
 
 
 
 
 
 
 
Balance at beginning of year
$
35,031

 
$
48,382

 
$
74,947

 
$
157,253

 
$
132,697

Charge-offs:
 
 
 
 
 
 
 
 
 
Commercial and industrial
(1,713
)
 
(6,187
)
 
(18,489
)
 
(19,005
)
 
(25,187
)
Construction
(7,270
)
 
(5,140
)
 
(10,965
)
 
(97,036
)
 
(103,268
)
Real estate - commercial mortgage
(4,038
)
 
(2,878
)
 
(11,462
)
 
(23,760
)
 
(49,419
)
Real estate - residential mortgage
(4,000
)
 
(6,979
)
 
(9,033
)
 
(15,403
)
 
(14,012
)
Installment
(724
)
 
(355
)
 
(603
)
 
(1,386
)
 
(1,540
)
Total charge-offs
(17,745
)
 
(21,539
)
 
(50,552
)
 
(156,590
)
 
(193,426
)
Recoveries:
 
 
 
 
 
 
 
 
 
Commercial and industrial
3,427

 
1,603

 
1,140

 
1,834

 
1,049

Construction
2,765

 
2,200

 
4,387

 
2,229

 
3,328

Real estate - commercial mortgage
1,465

 
995

 
2,397

 
1,382

 
1,221

Real estate - residential mortgage
1,701

 
2,245

 
848

 
694

 
415

Installment
188

 
145

 
221

 
295

 
169

Total recoveries
9,546

 
7,188

 
8,993

 
6,434

 
6,182

Net charge-offs
(8,199
)
 
(14,351
)
 
(41,559
)
 
(150,156
)
 
(187,244
)
Provision for loan losses
218

 
1,000

 
14,994

 
67,850

 
211,800

Balance at end of year
$
27,050

 
$
35,031

 
$
48,382

 
$
74,947

 
$
157,253

Allowance for loan losses to year-end loans
1.90
%
 
2.53
%
 
3.38
%
 
4.98
%
 
8.03
%
Ratio of net charge-offs to average loans
0.60

 
1.03

 
2.89

 
8.67

 
8.26

The allowance consists of specific, general, and unallocated components.  Table 11 provides an allocation of the allowance for loan losses and other related information at December 31, 2014 and 2013.
Table 11:  Allowance for Loan Losses Components and Related Data
 
December 31,
(in thousands, except for percentages)
2014
 
2013
Allowance for loan losses:
 
 
 
Specific component
$
3,542

 
$
13,141

Pooled component
20,380

 
17,640

Unallocated component
3,128

 
4,250

Total
$
27,050

 
$
35,031

Impaired loans
$
48,859

 
$
67,558

Non-impaired loans
1,374,076

 
1,316,973

Total loans
$
1,422,935

 
$
1,384,531

 
 
 
 
Specific component as % of impaired loans
7.25
%
 
19.45
%
Pooled component as % of non-impaired loans
1.48

 
1.34

Allowance as % of loans
1.90

 
2.53

Allowance as % of nonaccrual loans
125.77

 
87.90

The specific component of our allowance for loan losses relates to loans that are determined to be impaired and, therefore, are individually evaluated for impairment.  The specific component decreased during 2014, primarily due to the charge-off of loans with specific reserves.  Impaired loans decreased to $48.9 million at December 31, 2014 from $67.6 million at December 31, 2013.  Of these loans, $21.5 million were on nonaccrual status at December 31, 2014 as compared with $39.9 million at December 31, 2013, a decrease of 46.0%.

41
HAMPTON ROADS BANKSHARES, INC.

The general or pooled component relates to groups of homogeneous loans not designated for a specific allowance and collectively evaluated for impairment. The increase in the pooled component is the result of qualitative adjustments applied after an assessment of years to impairment for the various loan categories, consideration of macroeconomic factors, and evaluation of weighted historical loss rates, in addition to growth of non-impaired loans. Due to strong net recoveries, significant additional provision for loan losses was not necessary to increase the general reserve.
An unallocated component is maintained to cover uncertainties that could affect management’s estimate of probable losses. The unallocated portion of the loan loss allowance decreased due to a combination of factors. Macroeconomic indicators, particularly GDP measures, tended to fluctuate broadly during 2014. However, in the second half of 2014, GDP and unemployment measures in the Company's primary markets improved, which contributed to the overall decline in the unallocated component that considers external variables. The portion of the unallocated component that considers internal variables declined as a reflection of management’s assessment of the improved health of the portfolio and the high quality of the Company’s credit processes.
Table 12 displays certain ratios used by management in assessing the adequacy of the allowance for loan losses at December 31, 2014 and 2013.
Table 12:  Adequacy of the Allowance for Loan Losses 
 
December 31, 2014
 
December 31, 2013
Non-performing loans for which full loss
 
 
 
has been charged off to total loans
0.55
%
 
0.68
%
Non-performing loans for which full loss
 
 
 
has been charged off to non-performing
 
 
 
loans
35.55

 
23.54

Charge-off rate for non-performing loans for
 
 
 
which the full loss has been charged off
58.19

 
53.40

Coverage ratio net of non-performing loans for
 
 
 
which the full loss has been charged off
195.16

 
114.97

Total allowance divided by total loans less
 
 
 
non-performing loans for which the full loss
 
 
 
has been charged off
1.95

 
2.55

Allowance for individually impaired loans
 
 
 
divided by impaired loans for which an
 
 
 
allowance has been provided
17.88

 
39.94

 
At December 31, 2014, management believed the level of the allowance for loan losses to be commensurate with the risk existing in our 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.
We allocated the allowance for loan losses to the loan categories as shown in Table 13 and their respective percentages to each related loan category.  Notwithstanding these allocations, the entire allowance for loan losses is available to absorb charge-offs in any loan category. 
Table 13:  Allocation of Allowance for Loan Losses
(in thousands)
2014
 
2013
 
2012
 
2011
 
2010
Commercial and Industrial
$
4,605

2.10
%
 
$
2,404

1.07
%
 
$
6,253

2.34
%
 
$
13,605

5.31
%
 
$
18,610

6.11
%
Construction
4,342

3.17

 
9,807

6.19

 
15,728

7.62

 
24,826

8.71

 
83,052

17.47

Real estate - commercial mortgage
6,854

1.07

 
10,135

1.72

 
9,862

1.86

 
17,101

3.28

 
25,426

3.86

Real estate - residential mortgage
7,142

2.02

 
7,914

2.24

 
9,953

2.67

 
12,060

2.91

 
17,973

3.69

Installment
979

1.31

 
521

0.90

 
887

1.58

 
2,067

7.79

 
3,400

10.40

Unallocated
3,128

—

 
4,250

—

 
5,699

—

 
5,288

—

 
8,792

—

Total allowance for loan losses
$
27,050

1.90
%
 
$
35,031

2.53
%
 
$
48,382

3.38
%
 
$
74,947

4.98
%
 
$
157,253

8.03
%
 

42
HAMPTON ROADS BANKSHARES, INC.


Non-Performing Assets 
Management classifies non-performing assets as those loans on which payments have been delinquent 90 days and are still accruing interest, nonaccrual loans, and other real estate and repossessed assets.  Total non-performing assets were $43.2 million or 2.2% of total assets at December 31, 2014 as compared to $76.5 million or 3.9% of total assets at December 31, 2013.  At December 31, 2014 and 2013 there were no loans categorized as 90 days or more past due and still accruing interest.  We had $21.7 million and $36.7 million of other real estate owned and repossessed assets at December 31, 2014 and 2013, respectively.  This decline was mainly due to sales of real estate owned outpacing new foreclosures and transfers in. The Company’s largest borrower, as measured by total exposure, was downgraded to substandard in the third quarter of 2014. There is the potential for non-performing assets to materially increase should this borrower’s ability to repay become negatively affected. Our non-performing assets ratio, defined as the ratio of non-performing assets to gross loans plus loans held for sale plus other real estate owned and repossessed assets was 2.95% and 5.29% at December 31, 2014 and 2013, respectively.
Non-performing assets by geographic location at December 31, 2014 is shown in Table 14.
Table 14:  Non-performing Assets by Geographic Location
 
Commercial
& Industrial
 
 
 
Real Estate
 
 
 
 
(in thousands)
 
Construction
 
Commercial Mortgage
 
Residential Mortgage
 
Installment
 
Total
Hampton Roads
$
1,017

 
$
763

 
$
5,469

 
$
1,708

 
$
11

 
$
8,968

Eastern Shore (DE/MD/VA)
43

 
797

 
1,842

 
2,445

 
—

 
5,127

Richmond
3

 
715

 
672

 
1,121

 
—

 
2,511

Northeast NC
329

 
5,213

 
3,068

 
4,809

 
—

 
13,419

Triangle
2

 
1,621

 
468

 
3,273

 
—

 
5,364

Outer Banks
100

 
—

 
397

 
764

 
—

 
1,261

Wilmington
306

 
1,278

 
84

 
1,170

 
—

 
2,838

Other
3,740

 
—

 
—

 
—

 
—

 
3,740

Total non-performing
 
 
 
 
 
 
 
 
 
 
 
assets
$
5,540

 
$
10,387

 
$
12,000

 
$
15,290

 
$
11

 
$
43,228


Non-performing assets as of December 31, 2014, 2013, 2012, 2011, and 2010 is shown in Table 15.
Table 15:  Non-performing Assets
 
December 31,
(in thousands)
2014
 
2013
 
2012
 
2011
 
2010
Loans 90 days past due and still accruing interest
$
—

 
$
—

 
$
1,024

 
$
84

 
$
—

Nonaccrual loans, including nonaccrual impaired loans
21,507

 
39,854

 
97,411

 
133,161

 
255,992

Other real estate owned and repossessed assets
21,721

 
36,665

 
32,215

 
63,613

 
59,423

Non-performing assets
$
43,228

 
$
76,519

 
$
130,650

 
$
196,858

 
$
315,415


Loans are placed in nonaccrual status when the collection of principal or interest becomes uncertain, part of the balance has been charged off and no restructuring has occurred, or the loans reach 90 days past due, whichever occurs first, unless there are extenuating circumstances.a
As shown in Table 16, nonaccrual loans were $21.5 million at December 31, 2014 compared to $39.9 million at December 31, 2013.  If income on nonaccrual loans had been recorded under original terms, $1.7 million and $2.0 million of additional interest income would have been recorded in 2014 and 2013, respectively. 




43
HAMPTON ROADS BANKSHARES, INC.

Table 16:  Nonaccrual Loans
 
December 31,
(in thousands)
2014
 
2013
Commercial and Industrial
$
1,494

 
$
2,794

Construction
3,621

 
10,614

Real estate-commercial mortgage
8,190

 
12,633

Real estate-residential mortgage
8,191

 
13,679

Installment
11

 
134

Total nonaccrual loans
$
21,507

 
$
39,854

Deposits
Total deposits at December 31, 2014 were $1.6 billion, an increase of $58.0 million or 3.8% from December 31, 2013.  In recent years, our deposit composition has improved as a result of strategies to grow demand deposits, while de-emphasizing non-core certificates of deposit. Table 17 shows deposits by classification and average rate paid at December 31, 2014, 2013, and 2012.
Table 17:  Deposits by Classification
 
December 31,
 
2014
 
2013
 
2012
(in thousands, except for percentages)
Balance
 
%
 
Avg Rate Paid %
 
Balance
 
%
 
Avg Rate Paid %
 
Balance
 
%
 
Avg Rate Paid %
Deposit Classifications:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Noninterest-bearing demand
$
266,921

 
17
%
 
—
%
 
$
245,409

 
16
%
 
—
%
 
$
263,266

 
16
%
 
—
%
Interest-bearing demand
621,066

 
39

 
0.43

 
600,315

 
40

 
0.38

 
519,799

 
32

 
0.38

Savings
56,221

 
3

 
0.05

 
62,283

 
4

 
0.06

 
59,876

 
4

 
0.13

Time deposits less than $100
342,794

 
22

 
1.00

 
324,635

 
21

 
1.02

 
393,580

 
24

 
1.15

Time deposits $100 or more
294,346

 
19

 
1.10

 
290,686

 
19

 
1.07

 
381,253

 
24

 
1.28

Total deposits
$
1,581,348

 
100
%
 
0.71
%
 
$
1,523,328

 
100
%
 
0.71
%
 
$
1,617,774

 
100
%
 
0.86
%
The Company continues to focus on core deposit growth as its primary source of funding. Core deposits are non-brokered and consist of noninterest-bearing demand accounts, interest-bearing checking accounts, money market accounts, savings accounts, and time deposits of less than $100 thousand. Core deposits totaled $1.2 billion or 78.2% of total deposits at December 31, 2014, compared to 77.6% of total deposits at December 31, 2013.
Borrowings
We use short-term and long-term borrowings from various sources including the FRB discount window, FHLB, and trust preferred securities.  We manage the level of our borrowings to ensure that we have adequate sources of liquidity.  At December 31, 2014 and 2013, we had advances from the FHLB totaling $165.8 million and $194.2 million, respectively. Interest is payable on a monthly basis until maturity. All FHLB borrowings at December 31, 2014 mature by September 2015.
The Company has four placements of trust preferred securities.  The carrying amount and par amount is shown in Table 18.
Table 18:  Trust Preferred Securities
 
 
Carrying
Amount
 
Par
Amount
 
Interest
Rate
 
Redeemable
On or After
 
Mandatory
Redemption
(in thousands except for interest rates)
 
 
 
 
 
Gateway Capital Statutory Trust I
 
$
5,226

 
$
8,248

 
LIBOR + 3.10%
 
September 17, 2008
 
September 17, 2033
Gateway Capital Statutory Trust II
 
4,265

 
7,217

 
LIBOR + 2.65%
 
July 17, 2009
 
June 17, 2034
Gateway Capital Statutory Trust III
 
7,416

 
15,464

 
LIBOR + 1.50%
 
May 30, 2011
 
May 30, 2036
Gateway Capital Statutory Trust IV
 
12,317

 
25,774

 
LIBOR + 1.55%
 
July 30, 2012
 
July 30, 2037

44
HAMPTON ROADS BANKSHARES, INC.

LIBOR in the table above refers to three-month LIBOR.  In all four trusts, the trust issuer has invested the total proceeds from the sale of the trust preferred securities in junior subordinated deferrable interest debentures issued by the Company.  The trust preferred securities pay cumulative cash distributions quarterly at an annual rate, reset quarterly.  The dividends paid to holders of the trust preferred securities, which are recorded as interest expense, are deductible for income tax purposes.
The Company has fully and unconditionally guaranteed the trust preferred securities through the combined operation of the debentures and other related documents.  The Company’s obligation under the guarantee is unsecured and subordinate to our senior and subordinated indebtedness.  The aggregate carrying value of these debentures as of December 31, 2014 was $29.2 million.  The difference between the par amounts and the carrying amounts of the debentures is amortized using the interest method as an adjustment to interest expense each period.  Effective interest rates used by the Company as of December 31, 2014 were between 5.30% and 6.48%.
Capital Resources and Liquidity
Capital Resources.  Total shareholders’ equity increased $13.7 million or 7.4% to $197.5 million at December 31, 2014, from $183.8 million at December 31, 2013.
To preserve capital, on July 30, 2009 the Board of Directors voted to suspend the quarterly dividends on our Common Stock. Our ability to distribute cash dividends in the future may be limited by financial performance, regulatory restrictions, our desire or intent to reinvest our earnings, and the need to maintain sufficient consolidated capital.  
On September 27, 2012, the Company completed a capital raise, which resulted in $95.0 million in gross proceeds for which the Company issued, in the aggregate, 135,717,307 shares of Common Stock at a price of $0.70 per share. 
The Company and the Banks are subject to regulatory capital guidelines that measure capital relative to risk-weighted assets and off-balance sheet financial instruments.  Failure to meet minimum capital requirements can cause certain mandatory and discretionary actions by regulators that, if undertaken, could have a material effect on our consolidated financial statements.  Under capital adequacy guidelines and the regulatory framework for prompt correction action, the Banks must meet specific capital guidelines that involve quantitative and qualitative measures to ensure capital adequacy.  Tier I capital is comprised of shareholders’ equity, net of unrealized gains or losses on available for sale securities, less intangible assets, while total risk-based capital adds certain debt instruments and qualifying allowances for loan losses.  As of December 31, 2014, our consolidated regulatory capital ratios were Tier 1 Leverage Ratio of 11.08%, Tier 1 Risk-Based Capital Ratio of 13.90%, and Total Risk-Based Capital of 15.15%.  As of December 31, 2014, the Company exceeded the regulatory capital minimums, and BOHR and Shore were considered “well capitalized” under the risk-based capital standards.  Their Tier 1 Leverage Ratio, Tier 1 Risk-Based Capital Ratio, and Total Risk-Based Capital Ratio were as follows: 10.16%, 12.73%, and 13.99%, respectively for BOHR and 10.70%, 13.67%, and 14.79%, respectively for Shore.   
Liquidity.  Liquidity represents an institution’s ability to meet present and future financial obligations through either the sale or maturity of existing assets or the acquisition of additional funds through liability management.  It is used by management to provide continuous access to sufficient, reasonably priced funds.  Funding requirements are impacted by loan originations and refinancing, deposit growth, liability issuances and settlements, and off-balance sheet funding commitments.  We consider and comply with various regulatory guidelines regarding required liquidity levels and routinely monitor our liquidity position in light of the changing economic environment and customer activity.  Based on our liquidity assessments, we may alter our asset, liability, and off-balance sheet positions.  The ALCO monitors sources and uses of funds and modifies asset and liability positions as liquidity requirements change.  This process, combined with our ability to raise funds in money and capital markets, provides flexibility in managing the exposure to liquidity risk.  At December 31, 2014, cash and due from banks, interest-bearing deposits in other banks, overnight funds sold and due from FRB, and investment securities were $405.8 million or 20.4% of total assets. 
In an effort to satisfy our liquidity needs, we actively manage our assets and liabilities.  We have immediate liquid resources in cash and due from banks, interest-bearing deposits in other banks, and overnight funds sold and due from FRB.  The potential sources of short-term liquidity include interest-bearing deposits as well as the ability to pledge or sell certain assets including available for sale investment securities.  Short-term liquidity is further enhanced by our ability to pledge or sell loans in the secondary market and to secure borrowings from the FRB and FHLB.  Short-term liquidity is also generated from securities sold under agreements to repurchase, funds purchased, and short-term borrowings.  Deposits have historically provided us with a long-term source of stable and relatively lower cost funding.  Additional funding is available through the issuance of long-term debt.
At December 31, 2014, our Banks had credit lines in the amount of $228.2 million at the FHLB with advances of $165.8 million utilized.  These lines may be utilized for short- and/or long-term borrowing.  At December 31, 2014 and 2013, all our FHLB borrowings mature by September 2015.  We also possess additional sources of liquidity through a variety of borrowing arrangements.  The Banks also maintain federal funds lines with two regional banking institutions and through the FRB Discount Window.  These available lines totaled approximately $63.7 million and $38.9 million at December 31, 2014 and 2013, respectively.  These lines were not utilized for borrowing purposes during the years ended December 31, 2014 or 2013.

45
HAMPTON ROADS BANKSHARES, INC.

Under normal conditions, our liquid assets and the ability to generate liquidity through normal operations and various liability funding mechanisms should be sufficient to satisfy our depositors’ requirements, meet our customers’ credit needs, and supply adequate funding for our other business needs.  As demonstrated by some of the nation’s largest financial institutions, liquidity may be adversely affected if the sources of liquidity suddenly become unavailable.  Such a situation may occur when the financial condition of an institution deteriorates as the result of operating losses and rising levels of credit problems.  In such circumstances, credit availability and other funding sources may diminish significantly.
Contractual Obligations
We have contractual obligations to make future payments on debt and lease agreements.  Additionally, in the normal course of business, we enter into contractual arrangements whereby we commit to future purchases of products or services from unaffiliated parties.  Our contractual obligations consist of time deposits, borrowings, and operating lease obligations.  Our operating lease obligations have significantly decreased as a result of the termination of leases due to branch closings in 2013.  Table 19 shows payment detail for these contractual obligations as of December 31, 2014.
Table 19:  Contractual Obligations
 
Less than
1 Year
 
 
 
 
 
Over
5 Years
 
 
(in thousands)
 
1 - 3 Years
 
3 - 5 Years
 
 
Total
Time deposits
$
305,888

 
$
266,928

 
$
62,431

 
$
1,893

 
$
637,140

FHLB borrowings
165,847

 
—

 
—

 
—

 
165,847

Other borrowings
—

 
—

 
—

 
29,224

 
29,224

Operating lease obligations
2,138

 
4,219

 
3,907

 
13,052

 
23,316

Total contractual
 
 
 
 
 
 
 
 
 
obligations
$
473,873

 
$
271,147

 
$
66,338

 
$
44,169

 
$
855,527

Off-Balance Sheet Arrangements
We are a party to financial instruments with off-balance sheet risk in the normal course of business to meet our customers’ financing needs.  For more information on our off-balance sheet arrangements, refer to Note 13, Financial Instruments with Off-Balance-Sheet Risk, of the Notes to Consolidated Financial Statements. 
Legal Contingencies
Various legal actions arise from time to time in the normal course of our business.  For more information, refer to Item 3 “Legal Proceedings” in our 2014 Form 10-K.  Based upon information currently available, management believes that such legal proceedings, in the aggregate, will not have a material adverse effect on our business, financial condition, cash flows, or results of operations.  Management was not aware of any unasserted claims or assessments that may be probable of assertion at December 31, 2014.

Interest Rate Sensitivity
Market risk is the potential of loss arising from adverse changes in interest rates and prices.  We are exposed to market risk as a consequence of the normal course of conducting our business activities.  Management considers interest rate risk to be a significant market risk for the Company.  Fluctuations in interest rates will impact both the level of interest income and interest expense and the market value of the Company’s interest-earning assets and interest-bearing liabilities.
The primary goal of our asset/liability management strategy is to optimize net interest income while limiting exposure to fluctuations caused by changes in the interest rate environment.  Our ability to manage our interest rate risk depends generally on our ability to match the maturities and re-pricing characteristics of our assets and liabilities while taking into account the separate goals of maintaining asset quality and liquidity and achieving the desired level of net interest income.
Our management, guided by ALCO, determines the overall magnitude of interest sensitivity risk and then formulates policies governing asset generation and pricing, funding sources and pricing, and off-balance sheet commitments.  These decisions are based on management’s expectations regarding future interest rate movements, the state of the national and regional economy, and other financial and business risk factors.
The primary method that we use to quantify and manage interest rate risk is simulation analysis, which is used to model net interest income from assets and liabilities over a specified time period under various interest rate scenarios and balance sheet structures.  This analysis measures the sensitivity of net interest income over varying time horizons.  Key assumptions in the simulation analysis

46
HAMPTON ROADS BANKSHARES, INC.

relate to the behavior of interest rates and spreads, the changes in product balances, and the behavior of loan and deposit customers in different rate environments.
Table 20 illustrates the expected effect on net interest income for the year following each of the years ended 2014 and 2013 due to an immediate change in interest rates.  Estimated changes set forth below are dependent on material assumptions, such as those previously discussed.
Table 20:  Effect on Net Interest Income
 
2014
 
2013
 
Change in Net Interest Income
 
Change in Net Interest Income
(in thousands, except for percentages)
Amount
 
%
 
Amount
 
%
Change in Interest Rates:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 +200 basis points
$
 
3,811

 
6.08

 
%
 
$
 
(1,114
)
 
(1.82
)
 
%
 +100 basis points
 
 
1,940

 
3.09

 
 
 
 
 
(593
)
 
(0.97
)
 
 
–100 basis points
 
 
(2,552
)
 
(4.07
)
 
 
 
 
 
(1,265
)
 
(2.07
)
 
 
–200 basis points
 
 
N/A

 
N/A

 
 
 
 
 
N/A
 
 
N/A

 
 
As of December 31, 2014, we project an increase in net interest income in an increasing rate environment and a decrease in net interest income in a decreasing interest rate environment.  As of December 31, 2013, we projected a decrease in net interest income in both increasing and decreasing interest rate environments. Dependent upon timing and shifts in the interest rate term structure, certain rising rate scenarios are less favorable due to lower levels of assets with short-term re-pricing characteristics, as well as due to the variable rate structure on the majority of our borrowings and the floors on many loans that will cause a delay in any interest income improvement.
It should be noted, however, that the simulation analysis is based upon equivalent changes in interest rates for all categories of assets and liabilities.  In normal operating conditions, interest rate changes rarely occur in such a uniform manner.  Many factors affect the timing and magnitude of interest rate changes on financial instruments.  In addition, management may deploy strategies that offset some of the impact of changes in interest rates.  Consequently, variations should be expected from the projections resulting from the controlled conditions of the simulation analysis.  Management maintains a simulation model where it is assumed that interest rate changes occur gradually, that rate increases for interest-bearing liabilities lag behind the rate increases of interest-earning assets, and that the level of deposit rate increases will be less than the level of rate increases for interest-earning assets.
Caution About Forward-Looking Statements 
This Form 10-K contains “forward-looking statements” within the meaning of the U.S. Private Securities Litigation Reform Act of 1995.  When or if used in this annual report or any 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.”
Forward-looking statements are based on our current expectations and assumptions regarding our business, the economy, and other future conditions.  Because forward-looking statements relate to the future, they are subject to inherent uncertainties, risks, and changes in circumstances that are difficult to predict.  Our actual results may differ materially from those contemplated by the forward-looking statements.  They are neither statements of historical fact nor guarantees or assurances of future performance.  Therefore, we caution you against relying on any of these 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 in the 2014 Form 10-K.  Our risks include, without limitation, the following:
•
Our success is largely dependent on attracting and retaining key management team members;
•
We are not paying dividends on our Common Stock currently and absent regulatory approval 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 from 2009 to 2012. While we returned to profitability in 2013 and continued to be profitable during 2014, we can make no assurances that will continue. An inability to improve our profitability could adversely affect our operations and our capital levels.

47
HAMPTON ROADS BANKSHARES, INC.

•
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;
•
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 real estate – commercial mortgage, equity line lending, and construction, which may expose us to greater risk of loss;
•
General economic conditions in the markets in which we do business may decline and may have a material adverse effect on our results of operations and financial condition.;
•
We have had large numbers of problem loans, relative to our peers. 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;
•
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;
•
Proposed and final regulations could restrict our ability to originate loans; 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.

48
HAMPTON ROADS BANKSHARES, INC.

Use of Non-GAAP Financial Measures
The ratios “book value per common share-tangible,” “shareholders’ equity-tangible,” and “common shareholders’ equity-tangible” are non-GAAP financial measures.  The Company believes these measurements are useful in our press releases and other correspondence for investors, regulators, management, and others to evaluate capital adequacy and to compare against other financial institutions.  The following is a reconciliation of these non-GAAP financial measures with financial measures defined by GAAP.
(in thousands, except for percentages and per share data)
December 31, 2014
 
December 31, 2013
 
Total assets
$
1,988,606

 
$
1,950,272

 
Less:  intangible assets
842

 
1,437

 
Tangible assets
$
1,987,764

 
$
1,948,835

 
 
 
 
 
 
Shareholders' equity before
 
 
 
 
non-controlling interest
$
196,997

 
$
183,398

 
Less:  intangible assets
842

 
1,437

 
Shareholders' equity before
 
 
 
 
non-controlling interest - tangible
$
196,155

 
$
181,961

 
 
 
 
 
 
Shareholders' equity before
 
 
 
 
non-controlling interest (average)
$
193,761

 
$
183,328

 
Less:  intangible assets (average)
1,151

 
1,824

 
Shareholders' equity before
 
 
 
 
non-controlling interest - tangible (average)
$
192,610

 
$
181,504

 
 
 
 
 
 
Return on average equity
4.81

%
2.22

%
Impact of excluding intangible assets
0.03

 
0.03

 
Return on average equity - tangible
4.84

%
2.25

%
 
 
 
 
 
Shareholders' equity before
 
 
 
 
non-controlling interest to total assets
9.91

%
9.40

%
Impact of excluding intangible assets
0.04

 
0.06

 
Tangible common equity to tangible assets
9.87

%
9.34

%
 
 
 
 
 
Book value per share
$
1.15

 
$
1.08

 
Impact of excluding intangible assets
—

 
(0.01
)
 
Book value per share - tangible
$
1.15

 
$
1.07

 


49
HAMPTON ROADS BANKSHARES, INC.

ITEM 7A - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
Interest Rate Sensitivity
Market risk is the potential of loss arising from adverse changes in interest rates and prices.  We are exposed to market risk as a consequence of the normal course of conducting our business activities.  Management considers interest rate risk to be a significant market risk for the Company.  Fluctuations in interest rates will impact both the level of interest income and interest expense and the market value of the Company’s interest-earning assets and interest-bearing liabilities.
The primary goal of our asset/liability management strategy is to optimize net interest income while limiting exposure to fluctuations caused by changes in the interest rate environment.  Our ability to manage our interest rate risk depends generally on our ability to match the maturities and re-pricing characteristics of our assets and liabilities while taking into account the separate goals of maintaining asset quality and liquidity and achieving the desired level of net interest income. 
Our management, guided by ALCO, determines the overall magnitude of interest sensitivity risk and then formulates policies governing asset generation and pricing, funding sources and pricing, and off-balance sheet commitments.  These decisions are based on management’s expectations regarding future interest rate movements, the state of the national and regional economy, and other financial and business risk factors.
The primary method that we use to quantify and manage interest rate risk is simulation analysis, which is used to model net interest income from assets and liabilities over a specified time period under various interest rate scenarios and balance sheet structures.  This analysis measures the sensitivity of net interest income over a relatively short time horizon.  Key assumptions in the simulation analysis relate to the behavior of interest rates and spreads, the changes in product balances, and the behavior of loan and deposit customers in different rate environments.
The table below illustrates the expected effect on net interest income for the year following each of the years ended 2014 and 2013 due to an immediate change in interest rates.  Estimated changes set forth below are dependent on material assumptions, such as those previously discussed.
Effect on Net Interest Income
 
2014
 
2013
 
Change in Net Interest Income
 
Change in Net Interest Income
(in thousands, except for percentages)
Amount
 
%
 
Amount
 
%
Change in Interest Rates:
 
 
 
 
 
 
 
+200 basis points
$
3,811

 
6.08
%
 
$
(1,114
)
 
(1.82
)%
+100 basis points
1,940

 
3.09

 
(593
)
 
(0.97
)
–100 basis points
(2,552
)
 
(4.07
)
 
(1,265
)
 
(2.07
)
–200 basis points
N/A

 
N/A

 
N/A

 
N/A

 
As of December 31, 2014, we project an increase in net interest income in an increasing rate environment and a decrease in net interest income in a decreasing interest rate environment.  As of December 31, 2013, we projected a decrease in net interest income in both increasing and decreasing interest rate environments. Dependent upon timing and shifts in the interest rate term structure, certain rising rate scenarios are less favorable due to lower levels of assets with short-term re-pricing characteristics, as well as due to the variable rate structure on the majority of our borrowings and the floors on many loans that will cause a delay in any interest income improvement.
It should be noted, however, that the simulation analysis is based upon equivalent changes in interest rates for all categories of assets and liabilities.  In normal operating conditions, interest rate changes rarely occur in such a uniform manner.  Many factors affect the timing and magnitude of interest rate changes on financial instruments.  In addition, management may deploy strategies that offset some of the impact of changes in interest rates.  Consequently, variations should be expected from the projections resulting from the controlled conditions of the simulation analysis.  Management maintains a simulation model where it is assumed that interest rate changes occur gradually, that rate increases for interest-bearing liabilities lag behind the rate increases of interest-earning assets, and that the level of deposit rate increases will be less than the level of rate increases for interest-earning assets. 

50
HAMPTON ROADS BANKSHARES, INC.

ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
 
The following report of independent registered public accounting firm, audited consolidated financial statements of the Company for the year ended December 31, 2014, and notes to consolidated financial statements of the Company are included as a part of this Form 10-K.

•
Report of Independent Registered Public Accounting Firm
•
Consolidated Balance Sheets as of December 31, 2014 and 2013
•
Consolidated Statements of Operations for the years ended December 31, 2014, 2013, and 2012
•
Consolidated Statements of Comprehensive Income (Loss) for the years December 31, 2014, 2013, and 2012
•
Consolidated Statements of Changes in Shareholders’ Equity for the years ended December 31, 2014, 2013, and 2012
•
Consolidated Statements of Cash Flows for the years ended December 31, 2014, 2013, and 2012
•
Notes to Consolidated Financial Statements


51
HAMPTON ROADS BANKSHARES, INC.

Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders
Hampton Roads Bankshares, Inc.:
We have audited the accompanying consolidated balance sheets of Hampton Roads Bankshares, Inc. and subsidiaries as of December 31, 2014 and 2013, and the related consolidated statements of operations, comprehensive income (loss), changes in shareholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2014. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Hampton Roads Bankshares, Inc. and subsidiaries as of December 31, 2014 and 2013, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2014, in conformity with U.S. generally accepted accounting principles.

/s/ KPMG LLP
Norfolk, Virginia
March 25, 2015


52
HAMPTON ROADS BANKSHARES, INC.


Consolidated Balance Sheets
December 31, 2014 and 2013
(in thousands, except share data)
 
 
 
 
December 31, 2014
 
December 31, 2013
Assets:
 
 
 
Cash and due from banks
$
16,684

 
$
18,806

Interest-bearing deposits in other banks
1,349

 
654

Overnight funds sold and due from Federal Reserve Bank
85,586

 
42,841

Investment securities available for sale, at fair value
302,221

 
325,484

Restricted equity securities, at cost
15,827

 
17,356

Loans held for sale
22,092

 
25,087

Loans
1,422,935

 
1,384,531

Allowance for loan losses
(27,050
)
 
(35,031
)
Net loans
1,395,885

 
1,349,500

Premises and equipment, net
63,519

 
67,146

Interest receivable
4,503

 
4,811

Other real estate owned and repossessed assets,
 
 
 
net of valuation allowance
21,721

 
36,665

Intangible assets, net
842

 
1,437

Bank-owned life insurance
49,536

 
50,802

Other assets
8,841

 
9,683

Totals assets
$
1,988,606

 
$
1,950,272

Liabilities and Shareholders' Equity:
 
 
 
Deposits:
 
 
 
Noninterest-bearing demand
$
266,921

 
$
245,409

Interest-bearing:
 
 
 
Demand
621,066

 
600,315

Savings
56,221

 
62,283

Time deposits:
 
 
 
Less than $100
342,794

 
324,635

$100 or more
294,346

 
290,686

Total deposits
1,581,348

 
1,523,328

Federal Home Loan Bank borrowings
165,847

 
194,178

Other borrowings
29,224

 
28,983

Interest payable
560

 
6,025

Other liabilities
14,130

 
13,912

Total liabilities
1,791,109

 
1,766,426

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; 170,572,217 and 170,263,264 shares issued
 
 
 
and outstanding on December 31, 2014 and 2013,
 
 
 
respectively
1,706

 
1,703

Capital surplus
588,692

 
587,424

Retained deficit
(395,535
)
 
(404,864
)
Accumulated other comprehensive income (loss), net of tax
2,134

 
(865
)
Total shareholders' equity before non-controlling interest
196,997

 
183,398

Non-controlling interest
500

 
448

Total shareholders' equity
197,497

 
183,846

Total liabilities and shareholders' equity
$
1,988,606

 
$
1,950,272

See accompanying notes to consolidated financial statements.

53
HAMPTON ROADS BANKSHARES, INC.

Consolidated Statements of Operations
Years ended December 31, 2014, 2013, and 2012
(in thousands, except share and per share data)
2014
 
2013
 
2012
Interest Income:
 
 
 
 
 
Loans, including fees
$
63,132

 
$
68,954

 
$
74,162

Investment securities
9,018

 
7,710

 
7,893

Overnight funds sold and due from FRB
193

 
238

 
245

Interest-bearing deposits in other banks
—

 
1

 
2

Total interest income
72,343

 
76,903

 
82,302

Interest Expense:
 

 
 

 
 

Deposits:
 

 
 

 
 

Demand
2,667

 
2,156

 
2,003

Savings
31

 
36

 
78

Time deposits:
 

 
 

 
 

Less than $100
3,351

 
3,592

 
5,197

$100 or more
3,212

 
3,563

 
5,308

Interest on deposits
9,261

 
9,347

 
12,586

Federal Home Loan Bank borrowings
1,531

 
1,910

 
2,259

Other borrowings
1,506

 
2,145

 
2,433

Total interest expense
12,298

 
13,402

 
17,278

Net interest income
60,045

 
63,501

 
65,024

Provision for loan losses
218

 
1,000

 
14,994

Net interest income
 
 
 

 
 

after provision for loan losses
59,827

 
62,501

 
50,030

Noninterest Income:
 

 
 

 
 

Mortgage banking revenue
11,389

 
15,832

 
18,403

Service charges on deposit accounts
4,703

 
5,014

 
5,186

Income from bank-owned life insurance
4,110

 
3,312

 
1,620

Gain on sale of investment securities available for sale (includes $306, $781, and $627 accumulated other comprehensive income reclassifications for unrealized net gains on available for sale securities as of December 31, 2014, 2013, and 2012, respectively)
306

 
781

 
627

Gain (loss) on sale of premises and equipment
(112
)
 
580

 
(192
)
Impairment of premises and equipment
—

 
(2,825
)
 
—

Gain (loss) on sale of other real estate owned and repossessed assets
360

 
356

 
(8,524
)
Other than temporary impairment of other real estate owned and repossessed assets
(2,405
)
 
(3,914
)
 
(14,126
)
Visa check card income
2,635

 
2,556

 
2,385

Other
3,650

 
3,820

 
2,288

Total noninterest income
24,636

 
25,512

 
7,667

Noninterest Expense:
 

 
 

 
 

Salaries and employee benefits
38,930

 
41,223

 
39,321

Professional and consultant fees
6,108

 
5,786

 
7,565

Occupancy
6,476

 
9,092

 
7,558

FDIC insurance
2,366

 
4,762

 
4,609

Data processing
4,610

 
4,198

 
3,928

Problem loan and repossessed asset costs
1,788

 
2,429

 
3,850

Equipment
1,726

 
1,730

 
2,772

Directors' and regional board fees
1,591

 
1,493

 
913

Advertising and marketing
1,513

 
1,431

 
621

Other
9,549

 
10,204

 
10,290

Total noninterest expense
74,657

 
82,348

 
81,427

Income (loss) before provision for income taxes
9,806

 
5,665

 
(23,730
)
Provision for income taxes (benefit)
6

 
(90
)
 
(2,182
)
Net income (loss)
9,800

 
5,755

 
(21,548
)
Net income attributable to non-controlling interest
471

 
1,679

 
3,543

Net income (loss) attributable to
 

 
 

 
 

Hampton Roads Bankshares, Inc.
$
9,329

 
$
4,076

 
$
(25,091
)
Per Share:
 

 
 

 
 

Cash dividends declared
$
—

 
$
—

 
$
—

Basic income (loss)
$
0.05

 
$
0.02

 
$
(0.29
)
Diluted income (loss)
$
0.05

 
$
0.02

 
$
(0.29
)
See accompanying notes to consolidated financial statements.

54
HAMPTON ROADS BANKSHARES, INC.

Consolidated Statements of Comprehensive Income (Loss)
Years ended December 31, 2014, 2013, and 2012
 
(in thousands)
For the Years Ended
 
December 31, 2014
 
December 31, 2013
 
December 31, 2012
Net income (loss)
 
 
$
9,800

 
 
 
$
5,755

 
 
 
$
(21,548
)
Other comprehensive income (loss),
 
 
 
 
 
 
 
 
 
 
 
net of tax
 
 
 
 
 
 
 
 
 
 
 
Change in unrealized gain (loss)
 
 
 
 
 
 
 
 
 
 
 
on securities available for sale
$
3,305

 
 
 
$
(6,921
)
 
 
 
$
1,087

 
 
Reclassification adjustment for
 
 
 
 
 
 
 
 
 
 
 
securities gain included in
 
 
 
 
 
 
 
 
 
 
 
net income (loss)
(306
)
 
 
 
(781
)
 
 
 
(627
)
 
 
Other comprehensive income (loss),
 
 
 
 
 
 
 
 
 
 
 
net of tax
 
 
2,999

 
 
 
(7,702
)
 
 
 
460

Comprehensive income (loss)
 
 
12,799

 
 
 
(1,947
)
 
 
 
(21,088
)
Comprehensive income attributable
 
 
 
 
 
 
 
 
 
 
 
to non-controlling interest
 
 
471

 
 
 
1,679

 
 
 
3,543

Comprehensive income (loss)
 
 
 
 
 
 
 
 
 
 
 
attributable to
 
 
 
 
 
 
 
 
 
 
 
Hampton Roads Bankshares, Inc.
 
 
$
12,328

 
 
 
$
(3,626
)
 
 
 
$
(24,631
)
See accompanying notes to consolidated financial statements.

55
HAMPTON ROADS BANKSHARES, INC.

Consolidated Statements of Changes in Shareholders’ Equity
Years ended December 31, 2014, 2013, and 2012
 
 
 
 
 
 
 
 
 
 
Accumulated
 
 
 
 
 
 
 
 
 
 
 
 
 
Other
 
Non-
 
Total
(in thousands, except share data)
Common Stock
 
Capital
 
Retained
 
Comprehensive
 
controlling
 
Shareholders'
 
Shares
 
Amount
 
Surplus
 
Deficit
 
Income (Loss)
 
Interest
 
Equity
Balance at December 31, 2011
34,561,145

 
$
346

 
$
492,998

 
$
(383,849
)
 
$
6,377

 
$
242

 
$
116,114

Net income (loss)
—

 
—

 
—

 
(25,091
)
 
—

 
3,543

 
(21,548
)
Other comprehensive income
—

 
—

 
—

 
—

 
460

 
—

 
460

Shares issued related to:
 

 
 

 
 

 
 

 
 

 
 

 
 

Stock offering, net of issuance costs of $2,865
71,429,459

 
714

 
46,421

 
—

 
—

 
—

 
47,135

Rights offering and standby purchase, net of issuance costs of $1,080
64,287,848

 
643

 
43,278

 
—

 
—

 
—

 
43,921

Share-based compensation expense
—

 
—

 
165

 
—

 
—

 
—

 
165

Common stock surrendered and repurchased
(13,302
)
 
—

 
(15
)
 
—

 
—

 
—

 
(15
)
Change in stock financed
—

 
—

 
3,500

 
—

 
—

 
—

 
3,500

Distributed non-controlling interest
—

 
—

 
—

 
—

 
—

 
(2,563
)
 
(2,563
)
Balance at December 31, 2012
170,265,150

 
$
1,703

 
$
586,347

 
$
(408,940
)
 
$
6,837

 
$
1,222

 
$
187,169

Net income
—

 
—

 
—

 
4,076

 
—

 
1,679

 
5,755

Other comprehensive loss
—

 
—

 
—

 
—

 
(7,702
)
 
—

 
(7,702
)
Share-based compensation expense
—

 
—

 
1,080

 
—

 
—

 
—

 
1,080

Common stock surrendered
(1,886
)
 
—

 
(3
)
 
—

 
—

 
—

 
(3
)
Distributed non-controlling interest
—

 
—

 
—

 
—

 
—

 
(2,453
)
 
(2,453
)
Balance at December 31, 2013
170,263,264

 
$
1,703

 
$
587,424

 
$
(404,864
)
 
$
(865
)
 
$
448

 
$
183,846

Net income
—

 
—

 
—

 
9,329

 
—

 
471

 
9,800

Other comprehensive income
—

 
—

 
—

 
—

 
2,999

 
—

 
2,999

Share-based compensation expense
—

 
—

 
1,530

 
—

 
—

 
—

 
1,530

Net settlement of restricted stock units
308,953

 
3

 
(262
)
 
—

 
—

 
—

 
(259
)
Distributed non-controlling interest
—

 
—

 
—

 
—

 
—

 
(419
)
 
(419
)
Balance at December 31, 2014
170,572,217

 
$
1,706

 
$
588,692

 
$
(395,535
)
 
$
2,134

 
$
500

 
$
197,497

See accompanying notes to consolidated financial statements.

56
HAMPTON ROADS BANKSHARES, INC.

Consolidated Statements of Cash Flows
December 31, 2014, 2013, and 2012
(in thousands)
2014
2013
2012
Operating Activities:
 

 

 

Net income (loss)
$
9,800

$
5,755

$
(21,548
)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
 

 

 

Depreciation and amortization
3,371

4,384

4,050

Amortization of intangible assets and fair value adjustments
21

1,178

1,720

Provision for loan losses
218

1,000

14,994

Proceeds from mortgage loans held for sale
458,771

646,294

640,551

Originations of mortgage loans held for sale
(455,776
)
(587,313
)
(661,448
)
Share-based compensation expense
1,530

1,080

165

Net amortization of premiums and accretion of discounts on investment securities available for sale
1,741

2,838

3,835

Income from bank-owned life insurance
(4,110
)
(3,312
)
(1,620
)
Gain on sale of investment securities available for sale
(306
)
(781
)
(627
)
(Gain) loss on sale of premises and equipment
112

(580
)
192

Impairment of premises and equipment
—

2,825

—

(Gain) loss on sale of other real estate owned and repossessed assets
(360
)
(356
)
8,524

Other-than-temporary impairment of other real estate owned and repossessed assets
2,405

3,914

14,126

Changes in:
 

 

 

Interest receivable
308

266

1,252

Other assets
887

9,152

(363
)
Interest payable
(5,465
)
1,143

1,131

Other liabilities
218

3,261

(4,198
)
Net cash provided by operating activities
13,365

90,748

736

Investing Activities:
 

 

 

Proceeds from maturities and calls of investment securities available for sale
39,644

56,808

83,988

Proceeds from sale of investment securities available for sale
175,780

39,121

87,518

Purchase of investment securities available for sale
(190,597
)
(154,717
)
(166,239
)
Proceeds from sale of restricted equity securities
1,975

928

3,456

Purchase of restricted equity securities
(456
)
(218
)
(1,465
)
Proceeds from sale of premises and equipment
1,603

3,850

7,873

Purchase of premises and equipment
(1,459
)
(2,433
)
(2,918
)
Net (increase) decrease in loans
(51,780
)
13,395

4,422

Proceeds from bank-owned life insurance death benefit
5,341

5,709

—

Proceeds from sale of other real estate owned and repossessed assets, net
18,076

14,856

37,425

Net cash provided by (used in) investing activities
(1,873
)
(22,701
)
54,060

Financing Activities:
 

 

 

Net increase (decrease) in deposits
58,020

(94,440
)
(180,057
)
Repayments of Federal Home Loan Bank borrowings
(27,516
)
(67
)
(67
)
Repayments of other borrowings
—

(10,000
)
—

Repurchase of common stock in the settlement of restricted stock units
(259
)
—

—

Distributed non-controlling interest
(419
)
(2,453
)
(2,563
)
Issuance of stock offering shares, net
—

—

47,135

Issuance of rights offering shares, net
—

—

43,921

Common stock surrendered
—

(3
)
(15
)
Net cash provided by (used in) financing activities
29,826

(106,963
)
(91,646
)
Increase (decrease) in cash and cash equivalents
41,318

(38,916
)
(36,850
)
Cash and cash equivalents at beginning of period
62,301

101,217

138,067

Cash and cash equivalents at end of period
$
103,619

$
62,301

$
101,217

Supplemental cash flow information:
 

 

 

Cash paid for interest
$
16,903

$
12,259

$
16,147

Cash paid for / (refunded) from income taxes
86

(5,553
)
(6,043
)
Supplemental non-cash information:
 

 
 

Change in unrealized gain (loss) on securities available for sale
$
2,999

$
(7,702
)
$
460

Transfer from other real estate owned and repossessed assets to loans
1,621

6,016

—

Transfer from loans to other real estate owned and repossessed assets
6,798

25,528

28,677

Transfers from premises and equipment to other real estate owned and repossessed assets
—

3,352

—

Change in stock financed
—

—

(3,500
)
See accompanying notes to consolidated financial statements.


57
HAMPTON ROADS BANKSHARES, INC.


(1) Basis of Financial Statement Presentation and Summary of Significant Accounting Policies
 
Basis of Presentation.  Hampton Roads Bankshares, Inc. (the “Company”) is a multi-bank holding company incorporated in 2001 under the laws of the Commonwealth of Virginia.  The consolidated financial statements of Hampton Roads Bankshares, Inc. include the accounts of the Company and its wholly-owned subsidiaries:  Bank of Hampton Roads (“BOHR”) and Shore Bank (“Shore” and collectively with BOHR, the “Banks”) as well as their wholly-owned subsidiaries:  Harbour Asset Servicing, Inc.; Gateway Investment Services, Inc.; and Gateway Bank Mortgage, Inc.  The Company also owns all of the common stock of Gateway Capital Statutory Trust I, Gateway Capital Statutory Trust II, Gateway Capital Statutory Trust III, and Gateway Capital Statutory Trust IV (collectively, the “Gateway Capital Trusts”).  The Gateway Capital Trusts are not consolidated as part of the Company’s consolidated financial statements.  However, the junior subordinated debentures issued by the Company to the Gateway Capital Trusts are included in other borrowings, and the Company’s equity interest in the Gateway Capital Trusts is included in other assets.  Additionally, all significant intercompany balances and transactions have been eliminated in consolidation.
 
The Company primarily engages in the general community and commercial banking business, targeting the banking needs of individuals and small- to medium-sized businesses in its primary service areas, which include the Hampton Roads region of southeastern Virginia, the Northeastern and Research Triangle regions of North Carolina, the Eastern Shore of Virginia, Maryland, and Delaware, the Baltimore region of Maryland, and Richmond, Virginia.  The Company’s primary products are traditional loan and deposit banking services.  In addition, the Company offers mortgage banking services with loans that are sold in the secondary market and securities brokerage activities via an unaffiliated broker-dealer.  In December 2013, the Company sold its investments business conducted as Shore Investments.
 
On September 28, 2010, the holders of the Company’s Common Stock, par value $0.01 per share (the “Common Stock”), approved an amendment to the Company’s Amended and Restated Articles of Incorporation (the “Articles”) to affect a reverse stock split of the Common Stock.  On March 18, 2011, the Board of Directors of the Company unanimously adopted resolutions approving an amendment to the Articles to affect a 1-for-25 reverse stock split of all outstanding shares of the Common Stock, effective April 27, 2011 (the “Reverse Stock Split”).  Shareholders received one new share of Common Stock in replacement of every twenty-five shares they held on that date.  The Reverse Stock Split did not change the aggregate value of any shareholder’s shares of Common Stock or any shareholder’s ownership percentage of the Common Stock, except for minimal changes resulting from the treatment of fractional shares.  The Company did not issue any fractional shares as a result of the Reverse Stock Split.  The number of shares issued to each shareholder was rounded up to the nearest whole number.  All previously reported share and per share amounts in the accompanying consolidated financial statements and related notes have been restated to reflect the reverse stock split.

Use of Estimates.  The preparation of consolidated financial statements in conformity with U.S. generally accepted accounting principles (“GAAP”) requires management to make assumptions, judgments, and estimates that affect the reported amounts of assets and liabilities, disclosures of contingent assets and liabilities at the date of the consolidated financial statements, and the reported amounts of revenues and expenses during the periods presented.  Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near term are the determination of the allowance for loan losses, the valuation of other real estate owned, determination of fair value for financial instruments, and tax assets, liabilities, and expenses.
 
Summary of Significant Accounting Policies. The following is a summary of the significant accounting and reporting policies used in preparing the consolidated financial statements.
 
Fair Value.  The Company classifies assets and liabilities measured at fair value into three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value. Valuation methodologies for the fair value hierarchy are as follows:  obtaining fair value via quoted prices in active markets for identical assets or liabilities (Level 1), having observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities (Level 2), and using unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities (Level 3).

Cash and Due from Bank Accounts.  Cash and cash equivalents includes cash and due from banks, interest-bearing deposits in other banks, and overnight funds sold and due from the Federal Reserve Bank of Richmond (“FRB”).  Cash and cash equivalents

58
HAMPTON ROADS BANKSHARES, INC.

are used for daily cash management purposes, management of short-term interest rate opportunities, and liquidity.  The Company is required to maintain average reserve balances in cash with the FRB. The amounts of daily average required reserves for the final weekly reporting period were 19.9 million and $21.2 million at December 31, 2014 and 2013, respectively.
 
Investment Securities.  Except for the restricted equity securities, all investment securities are classified as “available for sale” and recorded at fair value, with unrealized gains and losses excluded from earnings and reported in other comprehensive income (loss), net of tax.  Purchase premiums and discounts are recognized in interest income using the interest method over the terms of the securities.  Gains and losses on the sale of securities are recorded on the trade date and are determined using the specific identification method.
 
Securities are evaluated for possible impairment when the fair value of the security is less than its amortized cost.  For debt securities, impairment is considered other-than-temporary and recognized in its entirety in the consolidated statements of operations if either we intend to sell the security or it is more likely than not that we will be required to sell the security before recovery of its amortized cost basis.  If, however, we do not intend to sell the security and it is not more likely than not that we will be required to sell the security before recovery, we must determine what portion of the impairment is attributable to a credit loss, which occurs when the amortized cost basis of the security exceeds the present value of the cash flows expected to be collected from the security.  If there is credit loss, the loss must be recognized in the consolidated statements of operations and the remaining portion of impairment must be recognized in other comprehensive income (loss).  For equity securities, impairment is considered to be other-than-temporary based on our ability and intent to hold the investment until a recovery of fair value.  Other-than-temporary impairment of an equity security results in a write-down that must be included in the consolidated statements of operations.  We regularly review each investment security for other-than-temporary impairment based on criteria that include the extent to which cost exceeds market price, the duration of that market decline, the financial health of and specific prospects for the issuer, our best estimate of the present value of cash flows expected to be collected from debt securities, our intention with regard to holding the security to maturity, and the likelihood that we would plan to sell or be required to sell the security before recovery.  All identified impairments on investment securities are taken in the periods identified.
 
Restricted Equity Securities.  The Company invests in stock of the Federal Home Loan Bank of Atlanta (“FHLB”), FRB, and two regional banking institutions.  These investments are carried at cost due to the redemption provisions of these entities and the restricted nature of the securities.  Management reviews for impairment based on the ultimate recoverability of the cost basis of these stocks.
 
Loans Held for Sale.  Mortgage loans held for sale are carried at the lower of cost or fair value in the aggregate. The fair value of mortgage loans held for sale is determined using current secondary market prices for loans with similar coupons, maturities, and credit quality. The fair value of mortgage loans held for sale is impacted by changes in market interest rates.  Net unrealized losses, if any, are recognized through a valuation allowance.
 
The Company originates single family, residential, first lien mortgage loans that are sold to secondary market investors on both a best efforts and (for the period from September 2012 to December 2013) on a mandatory delivery basis; the Company classifies these loans as held for sale.  In connection with the underwriting process, the Company enters into commitments to originate or purchase residential mortgage loans whereby the interest rate of the loan is agreed to prior to funding (“interest rate lock commitments”).  Generally, such interest rate lock commitments are for periods less than 60 days.  Interest rate lock commitments on residential mortgage loans that the Company intends to sell in the secondary market are considered derivatives. These derivatives are carried at fair value with changes in fair value reported as a component of gain on sale of the loans.  The Company manages its exposure to changes in fair value associated with these interest rate lock commitments by entering into simultaneous agreements to sell the residential loans to third party investors shortly after their origination and funding.
 
Under the best efforts method, loans originated for sale are primarily sold in the secondary market as whole loans. Whole loan sales are executed with the servicing rights being released to the buyer upon the sale, with the gain or loss on the sale equal to the difference between the proceeds received and the carrying value of the loans sold.  The Company is obligated to sell the loans only if the loans close.  As a result of the terms of the contractual relationships, the Company is not exposed to losses nor will it realize gains related to its rate-lock commitments due to subsequent changes in interest rates. 
 
Beginning in September 2012, the Company began selling some of its residential mortgage loan production on a mandatory delivery basis and using derivative instruments to manage the resulting interest rate risk.  These derivatives are entered into as balance sheet risk management instruments, and therefore, are not designated as an accounting hedge.  Under the mandatory delivery basis,

59
HAMPTON ROADS BANKSHARES, INC.

residential mortgage loans held for sale and commitments to borrowers to originate loans at agreed upon interest rates expose the Company to changes in market rates and conditions subsequent to the interest rate lock commitment until the loans are delivered to the investor.  The Company uses mortgage-based derivatives such as forward delivery commitments and To-Be-Announced securities in order to mitigate this market risk.  As of December 31, 2013, the Company had ceased selling any of its residential mortgage loan production on a mandatory delivery basis, and is not carrying any purchased derivative instruments on its balance sheet previously held to manage the related interest rate risk.
 
Loans.  The Company grants commercial and industrial, real estate, and installment loans to customers through its lending areas.  A substantial portion of the loan portfolio is represented by both commercial and residential mortgage loans throughout Virginia, Maryland, and North Carolina.  The ability of the Company’s debtors to honor their contracts is dependent upon several factors, including the value of the real estate and general economic conditions in this area.  Loans that management has the intent and ability to hold for the foreseeable future or until maturity or pay-off are reported at their outstanding unpaid principal balances adjusted for charge-offs and any deferred fees or costs on originated or purchased loans.  Interest income is accrued on the unpaid principal balance unless the loan is in nonaccrual.  Loan origination fees, net of certain direct origination costs, are deferred over the life of the loan and recognized as an adjustment of the related loan yield using the interest method except for lines of credit and loans with terms of 12 months or less where the straight-line method is used.  Net fees related to standby letters of credit are recognized over the commitment period.  In those instances when a loan prepays, the remaining deferred fee is recognized in the consolidated statements of operations. 
 
In an effort to minimize the interest risk exposure to both the Company and the borrower, the Company uses back-to-back plain vanilla LIBOR-based interest rate swaps.  Pay-floating, receive-fixed interest rate swaps are executed between the Company and certain commercial loan customers (whose underlying loan with one of the Banks is a floating rate) with an equal and offsetting pay-fixed, receive-floating interest rate swap executed with a dealer under a back-to-back swap program. This program enables the commercial loan customer to effectively exchange variable-rate interest payments under their existing obligations for payments based upon a fixed-rate interest, while simultaneously transferring the risk of a fixed rate from the Company to another third party.
 
Allowance for Loan Losses.  The allowance for loan losses is a valuation allowance consisting of the cumulative effect of the provision for loan losses, less loans charged off, plus any amounts recovered on loans previously charged off.  The provision for loan losses is the amount necessary, in management’s judgment, to maintain the allowance for loan losses at a level it believes sufficient to cover incurred losses in the collection of the Company’s loans.  Loans are charged against the allowance when, in management’s opinion, they are deemed wholly or partially uncollectible.  Recoveries of loans previously charged off are credited to the allowance when realized.
 
The allowance consists of specific, general, and unallocated components.  The specific component relates to loans that are determined to be impaired, and therefore, are individually evaluated for impairment.  For those loans, an allowance is established when the discounted cash flows, collateral value, or observable market price of the impaired loan is lower than the carrying value of that loan.  The general component relates to groups of homogeneous loans not designated for a specific allowance that are collectively evaluated for impairment.  The unallocated component covers uncertainties that could affect management’s estimate of probable losses.
 
The allowance for loan losses is evaluated on a regular basis by management and is based upon management’s periodic review of the collectability of the loans in light of historical loss experience, risk characteristics of the various categories of loans, adverse situations affecting individual loans, loan risk grades, estimated value of any underlying collateral, input by regulators, and prevailing economic conditions.  Further adjustments to the allowance for loan losses may be necessary based on changes in economic and real estate market conditions, further information regarding known problem loans, results of regulatory examinations, the identification of additional problem loans, and other factors.  This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available or as the borrower’s financial condition changes.

Impaired Loans.    A loan is considered impaired when it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement.  Certain loans are individually evaluated for impairment in accordance with the Company’s ongoing loan review procedures.  Impaired loans are measured at the present value of their expected future cash flows by discounting those cash flows at the loan’s effective interest rate or at the loan’s observable market price. The difference between this discounted amount and the loan balance is recorded as an allowance for loan losses.  For collateral dependent impaired loans, impairment is measured based upon the estimated fair value of the underlying collateral.  The majority of the Company's impaired loans are collateral-dependent. The Company will reduce the carrying value of the loan to the estimated fair value of

60
HAMPTON ROADS BANKSHARES, INC.

the collateral less estimated selling costs through a charge off to the allowance for loan losses.  The Company’s policy is to charge off impaired loans at the time of foreclosure, repossession, or liquidation or at such time any portion of the loan is deemed to be uncollectible and in no case later than 90 days in nonaccrual status.  Once a loan is considered impaired, it continues to be considered impaired until the collection of all contractual interest and principal is considered probable or the balance is charged off.  Real estate values are affected by various factors in addition to local economic conditions, including, among other things, changes in general or regional economic conditions, government rules or policies, and natural disasters.  While our policy is to obtain updated appraisals on a periodic basis, there are no assurances that we may be able to realize the amount indicated in the appraisal upon disposition of the underlying property.   

Nonaccrual and Past Due Loans.  Loans are placed in nonaccrual status when the collection of principal or interest becomes uncertain, part of the balance has been charged off and no restructuring has occurred, or the loans reach 90 days past due, whichever occurs first.  When loans are placed in nonaccrual status, interest receivable is reversed against interest income recognized in the current year.  Interest payments received thereafter are applied as a reduction of the remaining principal balance so long as doubt exists as to the ultimate collection of some or all of the contractual principal amount.  Loans are removed from nonaccrual status when they become current as to both principal and interest and when the collection of principal and interest is no longer considered doubtful. 
 
Modifications.  A restructured or modified loan results in a troubled debt restructuring (“TDR”) when a borrower is experiencing financial difficulty and the creditor grants a concession.  TDRs are included in impaired loans and can be in accrual or nonaccrual status.  Those in nonaccrual status are returned to accrual status after a period (generally at least six months) of performance under which the borrower demonstrates the ability and willingness to repay the loan. 
 
Premises and Equipment.  Land is reported at cost, while premises and equipment are reported at cost less accumulated depreciation and amortization.  Depreciation is calculated using the method that is most appropriate for the particular class but we generally use the straight-line method over the estimated useful lives of the related assets, which range from three years for equipment to fifty years for buildings.  Leasehold improvements are capitalized and depreciated on a straight-line basis over the life of the initial lease or the life of the asset, whichever is shorter.  Routine holding costs are charged to expense as incurred, while significant improvements are capitalized.  See also Note 7 Premises, Equipment and Leases, of the Notes to Consolidated Financial Statements, for discussion on transfers of closed branches to foreclosed real estate during 2013.
 
Long-Lived Assets.  Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.
 
Other Real Estate Owned and Repossessed Assets.  Other real estate owned and repossessed assets include real estate acquired in the settlement of loans and other repossessed collateral and is initially recorded at the lower of the recorded loan balance or estimated fair value less estimated disposal costs.  At foreclosure, any excess of the loan balance over the fair value of the property is charged to the allowance for loan losses.  Subsequently, if there is an indicated decline in the estimated fair value of the property, an impairment is recognized through a loss on other real estate owned and repossessed assets with an offsetting allowance for losses on foreclosed assets which reduces the carrying value of individual properties. The allowance is only reduced for charge-offs once the property is sold. Costs to bring a property to salable condition are capitalized up to the fair value of the property less selling costs while costs to maintain a property in salable condition are expensed as incurred. Losses on subsequent impairments recognized and gains and losses upon disposition of other real estate owned are recognized in noninterest income.  As indicated above, real estate values are affected by various factors in addition to local economic conditions, including, among other things, changes in general or regional economic conditions, government rules or policies, and natural disasters.  While our policy is to obtain updated appraisals on a periodic basis, there are no assurances that we may be able to realize the amount indicated in the appraisal upon disposition of the underlying property.

Intangible Assets.  Acquired intangible assets are recognized if the benefit of the assets can be sold, transferred, licensed, rented, or exchanged.  Intangible assets with an indefinite life are subject to impairment testing at least annually or more often if events or circumstances suggest potential impairment.  Other acquired intangible assets determined to have a finite life are amortized over their estimated useful life in a manner that best reflects the economic benefits of the intangible asset.  Intangible assets with a finite life are reviewed for impairment if conditions suggest the carrying amount is not recoverable.
 
Bank-Owned Life Insurance.  The Company purchased split-dollar life insurance policies on the lives of a limited number of officers, some of whom are no longer employees. The policies are recorded as an asset at the cash surrender value of the

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HAMPTON ROADS BANKSHARES, INC.

policies.  Increases or decreases in the cash surrender value, other than proceeds from death benefits, are recorded as income from bank-owned life insurance in noninterest income.  Proceeds from death benefits first reduce the cash surrender value attributable to the individual policy and then any additional proceeds are recorded as noninterest income.  The Company has accrued the present value of the expected cost of maintaining these policies over the expected life of the officers/employees.

Off-Balance Sheet Credit Exposures.  The Company, in the normal course of business to meet the financing needs of its customers, is a party to financial instruments with off-balance sheet risk.  These financial instruments include commitments to extend credit and standby letters of credit. These instruments involve, to varying degrees, elements of credit risk that have not been fully recognized in the consolidated balance sheets. The contract amount of these instruments reflects the extent of the Company’s involvement or “credit risk.”  The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments. 
 
Revenue Recognition.  Revenue earned on interest-earning assets is recognized based on the effective yield of the financial instrument; refer to the discussion above under the caption “Nonaccrual and Past Due Loans” for the Company’s accounting policy for the suspension of interest revenue recognition.  Service charges on deposit accounts are recognized as charged.  Credit-related fees, including letter of credit fees, are recognized in interest income when earned. 
 
Advertising Costs.  Advertising costs are expensed as incurred.
 
Share-Based Compensation.  The fair value of stock options is estimated at the date of grant using the Black-Scholes model.  Grants of restricted stock awards and/or units are valued based on closing market price of the Company’s stock on the day of grant.  Stock options and restricted stock granted with pro-rata vesting schedules are expensed over the vesting period on a straight-line basis.  The Company’s policy is to use authorized and unissued common shares to satisfy all share-based awards when the terms of the award provide that it will be equity settled at the Company’s election.  All of the Company’s share-based awards are equity-classified.
 
Income Taxes.  Deferred income tax assets and liabilities are determined using the balance sheet method.  Under this method, the net deferred tax asset or liability is determined based on the tax effects of the temporary differences between the book and tax bases of the various balance sheet assets and liabilities and gives current recognition to changes in tax rates and laws.
 
A deferred tax liability is recognized for all temporary differences that will result in future taxable income; a deferred tax asset is recognized for all temporary differences that will result in future tax deductions, subject to reduction of the asset by a valuation allowance in certain circumstances.  This valuation allowance is recognized if, based on an analysis of available evidence, management determines that it is more likely than not that some portion or all of the deferred tax asset will not be realized.  The valuation allowance is subject to ongoing adjustment based on changes in circumstances that affect management’s judgment about the realizability of the deferred tax asset.  Adjustments to increase or decrease the valuation allowance are charged or credited, respectively, to income tax expense. 
 
The impact of a tax position is recognized in the financial statements if it is probable that position is more likely than not to be sustained by the taxing authority.  Benefits from tax positions are measured at the highest tax benefit that is greater than 50% likely of being realized upon settlement.  To the extent that the final tax outcome of these matters is different from the amounts recorded, the differences (both favorably and unfavorably) impact income tax expense in the period in which the determination is made.  The Company recognizes interest and/or penalties related to income tax matters in other expense.
 
Per Share Data.  Basic earnings (loss) per share is computed by dividing net income (loss) attributable to Hampton Roads Bankshares, Inc. by the number of weighted average common shares outstanding for the period.  Diluted earnings (loss) per share reflects the dilutive effect of stock options using the treasury stock method.  For the year ended 2012, all options were anti-dilutive since the Company had a net loss attributable to Hampton Roads Bankshares, Inc.

Comprehensive Income (Loss).  Accounting principles generally require that recognized revenue, expenses, gains, and losses be included in net income or loss.  Certain changes in assets and liabilities, such as unrealized gains and losses on available for sale securities, are reported as a separate component of the equity section of the balance sheet.  Such items, along with the operating net income or loss, are components of comprehensive income or loss. 




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HAMPTON ROADS BANKSHARES, INC.

Recent Accounting Pronouncements

During the second quarter of 2014, ASU 2014-09, Revenue from Contracts with Customers (“new revenue standard”), was issued. ASU 2014-09 represents a comprehensive reform of many of the revenue recognition requirements in GAAP. The ASU creates a new topic within the Accounting Standards Codification (“ASC”), Topic 606, Revenue from Contracts with Customers. The new revenue standard will supersede the current revenue recognition requirements in Topic 605, Revenue Recognition, and supersedes or amends much of the industry-specific revenue recognition guidance found throughout the ASC. The core principle of the new revenue standard is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods and services. The ASU creates a five-step process for achieving that core principle: (1) identifying the contract with the customer, (2) identifying the performance obligations in the contract, (3) determining the transaction price, (4) allocating the transaction price to the performance obligations, and (5) recognizing revenue when an entity has completed the performance obligations. The ASU also requires additional disclosures that allow users of the financial statements to understand the nature, timing, and uncertainty of revenue and cash flows resulting from contracts with customers. The guidance in the ASU is effective for the Company on January 1, 2017. The new revenue standard permits the use of retrospective or cumulative effect transition methods. It appears that a majority of the Company’s contracts with customers (i.e., financial instruments) do not fall within the scope of the new revenue standard. Therefore, the Company does not expect the ASU to have a material impact on the Company’s reported financial results.

In 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 is not expected to have a material impact on the Company’s consolidated financial statements.

In August 2014, the FASB issued Accounting Standards Update (“ASU”) 2014-14, Receivables - Troubled Debt Restructuring by Creditors (Subtopic 310-40): Classification of Certain Government-Guaranteed Mortgage Loans upon Foreclosure, which will require creditors to derecognize certain foreclosed government-guaranteed mortgage loans and to recognize a separate other receivable that is measured at the amount the creditor expects to recover from the guarantor, and to treat the guarantee and the receivable as a single unit of account. ASU 2014-14 is effective for public business entities for annual periods, and interim periods within those annual periods, beginning after December 15, 2014. An entity can elect a prospective or a modified retrospective transition method, but must use the same transition method that it elected under FASB ASU No. 2014-04, Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure. Early adoption, including adoption in an interim period, is permitted if the entity already adopted ASU 2014-04. The adoption of the new guidance is not expected to have a material impact on the Company’s consolidated financial statements.

In July 2013, the FASB issued ASU 2013-11, Income Taxes, Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists, that requires an unrecognized tax benefit, or a portion of an unrecognized tax benefit, to be presented, with some exceptions, in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward. This update is effective for years and interim periods within those years beginning after December 15, 2013. Early adoption is permitted. The adoption of the new guidance did not have a material impact on the Company’s consolidated financial statements.


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HAMPTON ROADS BANKSHARES, INC.

(2) Regulatory Matters
 
Termination of a Material Definitive Agreement
On February 9, 2015, the Company received notice of the termination of the memorandum of understanding, dated effective March 27, 2014 (the “MOU”), by and among the Company, BOHR, FRB and the Bureau of Financial Institutions of the Virginia State Corporation Commission (“Bureau of Financial Institutions”).  The termination of the MOU was effective February 5, 2015. Under the MOU, the Company and BOHR had agreed that they would obtain prior written approval of the FRB and the Bureau of Financial Institutions before, (i) either the Company or BOHR declared or paid dividends of any kind; (ii) the Company made any payments on its trust preferred securities; (iii) the Company incurred or guaranteed any debt; or (iv) the Company purchased or redeemed any shares of its stock. In addition, the MOU instituted certain reporting requirements and addressed ongoing regulatory requirements.

TARP
On April 14, 2014, the United States Department of the Treasury (“Treasury”) sold its Common Stock, which it acquired through the Company’s participation in the Capital Purchase Program of the Treasury’s Troubled Asset Relief Program (“TARP CPP”). As a result of participation in TARP, our executives and certain of our employees were subject to compensation related limitations and restrictions, which applied so long as the Treasury held the Common Stock it received in return for the financial assistance it provided us (disregarding any warrants to purchase our Common Stock that the Treasury may hold). Therefore, the compensation related limitations and restrictions will not apply to compensation earned after the Treasury’s sale. In connection with the Treasury’s sale, the Company agreed to cancel certain restricted stock units that became non-payable under the Treasury’s TARP regulations at the time of sale.

(3) Earnings Per Share
 
The following table shows the basic and diluted earnings (loss) per share calculations for the years ended December 31, 2014, 2013, and 2012. 
 
(in thousands, except share and per share data)
December 31, 2014
 
December 31, 2013
 
December 31, 2012
Net income (loss) attributable to
 
 
 
 
 
Hampton Roads Bankshares, Inc.
$
9,329

 
$
4,076

 
$
(25,091
)
Shares:
 
 
 
 
 
Weighted average number
 
 
 
 
 
of common shares outstanding
170,841,420

 
170,371,336

 
87,837,369

Dilutive stock awards and warrants
1,086,447

 
699,401

 
—

Diluted weighted average number of
 
 
 
 
 
common shares outstanding
171,927,867

 
171,070,737

 
87,837,369

Basic income (loss) per share
$
0.05

 
$
0.02

 
$
(0.29
)
Diluted income (loss) per share
$
0.05

 
$
0.02

 
$
(0.29
)
 
The Company issued a ten-year warrant to purchase 757,633 common shares at an exercise price of $0.70 per share (see Note 12, The Amended TARP).  These shares were not included in the computation of diluted earnings per share as the effect was anti-dilutive for the year ended December 31, 2012 as presented in the table above.  Additionally, for the years ended December 31, 2014, 2013, and 2012, the number of anti-dilutive awards excluded from the diluted earnings per share calculation was 11 thousand, 24 thousand, and 27 thousand shares, respectively, consisting of out-of-the-money stock options.

(4) Capital Raise
 
During 2012 the Company closed on a capital raise (the “Capital Raise”), which resulted in $95.0 million in gross proceeds for which the Company issued, in the aggregate, 135,717,307 shares of Common Stock at a price of $0.70 per share.  The Capital Raise was comprised of three components (i) a private placement, (ii) a rights offering, and (iii) a standby purchase of shares not purchased in the rights offering.
 

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HAMPTON ROADS BANKSHARES, INC.

In connection with the first component of the Capital Raise, on May 21, 2012, the Company entered into a standby purchase agreement (the “Standby Purchase Agreement”) with the following entities or their affiliates or managed funds:  Anchorage Capital Group, L.L.C. (“Anchorage”), CapGen Capital Group VI LP (“CapGen”), and The Carlyle Group, L.P. (“Carlyle”) (Anchorage, CapGen, and Carlyle together, the “Investors”).  The Standby Purchase Agreement provided for, among other things, the sale of an aggregate of $50.0 million of the Company’s Common Stock at a price of $0.70 per share to the Investors.  On June 27, 2012 the Company closed on the first component of the Capital Raise, the $50.0 million Private Placement (the “Private Placement”), selling a total of 71,429,459 shares of the Company’s Common Stock at a price of $0.70 per share pursuant to the Investors.  In the Private Placement, Anchorage purchased 19,197,431 shares, CapGen purchased 33,710,394 shares, and Carlyle purchased 18,520,757 shares.
 
In connection with the Private Placement, and as required by the Standby Purchase Agreement, affiliates of the Investors terminated warrants they held to purchase 1,836,302 shares of the Company’s Common Stock at $10.00 per share.  The Investors each received a fee of $1.0 million in cash, for a total payment of $3.0 million, as compensation for performing their respective obligations under the Standby Purchase Agreement in connection with the Private Placement.  Each of the Investors was reimbursed for its fees and expenses.
 
On September 27, 2012, the Company closed on the second component of the Capital Raise, a public Common Stock rights offering (the “Rights Offering”).  The Company issued 21,000,687 shares of Common Stock, at a price of $0.70 per share, to holders of its Common Stock who elected to participate in the Rights Offering.  Total proceeds from the Rights Offering were $14.7 million. 

In connection with the Rights Offering, the Standby Purchase Agreement provided that the Investors would purchase from the Company, at the subscription price, a portion of the shares, if any, up to an aggregate of 53,518,176 shares, not subscribed for in the Rights Offering (the “Standby Purchase”).  On September 27, 2012, pursuant to the terms of the Standby Purchase Agreement, the Company closed on the third component of the Capital Raise where the Investors purchased a total of 43,287,161 shares of the Company’s Common Stock at $0.70 per share.  Anchorage purchased 16,007,143 shares, CapGen purchased 11,272,875 shares, and Carlyle purchased 16,007,143 shares.  Total proceeds from the Standby Purchase were $30.3 million. 
 
The Capital Raise resulted in an adjustment to the warrant to purchase Common Stock currently held by the United States Department of the Treasury (the “Treasury”).  The Treasury holds a warrant (the “Treasury Warrant”) that, before the Capital Raise, entitled it to purchase 53,035 shares of Common Stock at an exercise price of $10.00 per share.  As a result of the anti-dilution provisions of the Treasury Warrant, the Capital Raise caused the number of shares purchasable under the Treasury Warrant to be adjusted to 757,633 shares of our Common Stock and the exercise price to purchase such shares to be adjusted to $0.70 per share.

(5) Investment Securities
 
The amortized cost, gross unrealized gains and losses, and fair values of investment securities available for sale at December 31, 2014 and 2013 were as follows.
 
 
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

 

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HAMPTON ROADS BANKSHARES, INC.

 
2013
 
 Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
 
 
 
 
(in thousands)
 
 
 
U.S. agency securities
$
21,500

 
$
573

 
$
75

 
$
21,998

State and municipal securities
525

 
12

 
—

 
537

Corporate bonds
17,212

 
338

 
8

 
17,542

Mortgage-backed securities -
 
 
 
 
 
 
 
Agency
227,662

 
2,367

 
4,184

 
225,845

Non-agency
8,150

 
62

 
32

 
8,180

Asset-backed securities
50,330

 
129

 
588

 
49,871

Equity securities
970

 
541

 
—

 
1,511

Total investment securities
 
 
 
 
 
 
 
available for sale
$
326,349

 
$
4,022

 
$
4,887

 
$
325,484

 
For the year ended December 31, 2014, proceeds from sales of investment securities available for sale were $175.8 million and resulted in net realized gains of $306 thousand.  Proceeds from sales of available for sale securities totaled $39.1 million and resulted in net realized gains of $781 thousand for the year ended December 31, 2013.  Proceeds from sales of investment securities available for sale were $87.5 million and resulted in net realized gains of $627 thousand for the year ended December 31, 2012.
 
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 December 31, 2014 and 2013.
 
 
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

 
 
2013
(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
U.S. agency securities
$
5,793

 
$
75

 
$
—

 
$
—

 
$
5,793

 
$
75

Corporate bonds
3,706

 
8

 
—

 
—

 
3,706

 
8

Mortgage-backed securities -
 
 
 
 
 
 
 
 
 
 
 
Agency
118,921

 
3,946

 
3,221

 
238

 
122,142

 
4,184

Non-agency
2,127

 
32

 
—

 
—

 
2,127

 
32

Asset-backed securities
36,244

 
588

 
—

 
—

 
36,244

 
588

 
$
166,791

 
$
4,649

 
$
3,221

 
$
238

 
$
170,012

 
$
4,887

 

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HAMPTON ROADS BANKSHARES, INC.

Debt securities with unrealized losses totaling $1.9 million at December 31, 2014 included five corporate securities, twelve mortgage-backed agency securities, and eighteen asset-backed securities, compared with unrealized losses totaling $4.9 million at December 31, 2013, which included two U.S. agency securities, two corporate securities, fifty-five mortgage-backed agency securities, seven mortgage-backed non-agency securities, and twenty asset-backed securities. The severity and duration of this unrealized loss is expected to fluctuate with market interest rates.
 
The Company’s unrealized losses on equity securities were caused by what management deems to be transitory fluctuations in market valuation.  At December 31, 2014, one of the equity securities experienced an unrealized loss totaling $9 thousand, compared with none of the equity securities experiencing unrealized losses at December 31, 2013.   
 
Other-than-temporary impairment (“OTTI”)
 
During 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.
 
A rollforward of the cumulative OTTI losses recognized in earnings for available for sale equity securities for years ended December 31, 2014 and 2013 is as follows.
 
(in thousands)
Cumulative OTTI Losses
Balance, December 31, 2012
$
887

Less:  Realized OTTI on securities sold
69

Add:  Loss where impairment was not previously recognized
—

Add:  Loss where impairment was previously recognized
—

Balance, December 31, 2013
818

Less:  Realized OTTI on securities sold
—

Add:  Loss where impairment was not previously recognized
—

Add:  Loss where impairment was previously recognized
—

Balance, December 31, 2014
$
818



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HAMPTON ROADS BANKSHARES, INC.

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 December 31, 2014 and 2013 are shown below. 
 
Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.  Mortgage-backed and asset-backed securities, which are not due at a single maturity date, and equity securities, which do not have contractual maturities, are shown separately. 
 
 
2014
 
2013
 
Amortized
Cost
 
 
 
Amortized
Cost
 
 
(in thousands)
 
Fair Value
 
 
Fair Value
Due in one year or less
$
970

 
$
982

 
$
—

 
$
—

Due after one year
 
 
 
 
 
 
 
but less than five years
5,670

 
5,726

 
13,187

 
13,440

Due after five years
 
 
 
 
 
 
 
but less than ten years
13,228

 
12,806

 
9,311

 
9,659

Due after ten years
12,254

 
12,699

 
16,739

 
16,978

Mortgage-backed securities -
 
 
 
 
 
 
 
Agency
212,650

 
215,428

 
227,662

 
225,845

Non-agency
—

 
—

 
8,150

 
8,180

Asset-backed securities
54,345

 
53,197

 
50,330

 
49,871

Equity securities
970

 
1,383

 
970

 
1,511

Total available for sale securities
$
300,087

 
$
302,221

 
$
326,349

 
$
325,484

 
Federal Home Loan Bank (“FHLB”)
 
The Company’s investment in FHLB stock totaled $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 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 $6.6 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 December 31, 2014, except for one restricted equity security which was determined to be other-than-temporarily impaired and $10 thousand of impairment losses were recognized through noninterest income. No impairment has been recognized for any of the other restricted equity securities, including the investment in FRB.


68
HAMPTON ROADS BANKSHARES, INC.

Pledged securities
 
Investment securities at fair value that were pledged to secure deposits or outstanding borrowings or were pledged to secure potential future borrowings at December 31, 2014 and 2013 were as follows.
 
(in thousands)
2014
 
2013
Public deposits
$
38,718

 
$
34,728

Federal Home Loan Bank borrowings
22,647

 
64,883

Federal Reserve Bank borrowings
—

 
417

Other
11,668

 
14,910

 
$
73,033

 
$
114,938

 
(6) 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.
 
Commercial and industrial loans.  We make commercial and industrial loans to qualified businesses in our market areas.  Commercial and industrial loans are loans to businesses that are typically not collateralized by real estate.  Generally, the purpose of commercial and industrial loans is for the financing of accounts receivable, inventory, or equipment and machinery.  Repayment of commercial and industrial loans may be more substantially dependent upon the success of the business itself, and therefore, must be monitored more frequently.  In order to reduce our risk, the Banks require regular updates of the business’ financial condition, as well as that of the guarantors, and regularly monitor accounts receivable and payable of such businesses when deemed necessary. 
 
Construction loans.  We currently make new loans to finance construction and land development only on a limited basis, however, a large portion of our portfolio contains such loans.  We historically made construction loans to individuals and businesses for the purpose of construction of single family residential properties, multi-family properties, and commercial projects as well as the development of residential neighborhoods and commercial office parks.  The Company has managed construction loan exposure to align with regulatory supervisory guidance.  
 
Real estate - commercial mortgage loans.  We make commercial mortgage loans for the purchase and re-financing of owner-occupied commercial properties as well as non-owner occupied income producing properties.  These loans are secured by various types of commercial real estate including office, retail, warehouse, industrial, storage facilities, and other non-residential types of properties.  Commercial mortgage loans typically have maturities or are callable from one to five years.  Underwriting for commercial mortgages involves an examination of debt service coverage ratios, the borrower’s creditworthiness and past credit history, and the guarantor’s personal financial condition.  Underwriting for non-owner occupied commercial mortgages also involves evaluation of the terms of current leases and financial strength of the tenants. 
 
Real estate - residential mortgage loans.  We offer a wide range of residential mortgage loans through our Banks and our subsidiary, Gateway Bank Mortgage, Inc.  Our residential mortgage loans originated and held by the Banks include first and junior lien mortgage loans, home equity lines of credit, and other term loans secured by first and junior lien mortgages.  Residential mortgage loans have historically been lower risk loans in the Banks’ portfolios due to the ease in which the value of the collateral is ascertained, although the risks involved with these loans has been higher than historical averages due to falling home prices and high unemployment in our markets.

69
HAMPTON ROADS BANKSHARES, INC.

First mortgage loans are generally made for the purchase of permanent residences, second homes, or residential investment property.  Second mortgages and home equity loans are generally for personal, family, and household purposes such as home improvements, major purchases, education, and other personal needs.  Mortgages that are secured by a borrower’s primary residence are made on the basis of the borrower’s ability to repay the loan from his or her regular income as well as the general creditworthiness of the borrower.  Mortgages secured by residential investment property are made based upon the same guidelines as well as the borrower’s ability to cover any cash flow shortages during the marketing of such property for rent. 
 
Installment loans.  Installment loans are made on a regular basis for personal, family, and general household purposes.  More specifically, we make automobile loans, marine loans, home improvement loans, loans for vacations, and debt consolidation loans.  While consumer financing may entail greater collateral risk than real estate financing on a per loan basis, the relatively small principal balance of each loan mitigates the risk associated with this segment of the portfolio.
 
During 2012 and in 2013, the Company purchased several portfolios of loans secured by boats totaling $55.7 million that are classified as installment 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.

The total of our loans by segment at December 31, 2014 and 2013 are as follows.
 
(in thousands)
2014
 
2013
Commercial and Industrial
$
219,029

 
$
225,492

Construction
136,955

 
158,473

Real estate - commercial mortgage
639,163

 
590,475

Real estate - residential mortgage
354,017

 
354,035

Installment
74,821

 
57,623

Deferred loan fees and related costs
(1,050
)
 
(1,567
)
Total loans
$
1,422,935

 
$
1,384,531

 
Allowance for Loan Losses
 
The purpose of the allowance for loan losses is to provide for potential losses inherent in our loan portfolio.  Management regularly reviews the loan portfolio to determine whether adjustments are necessary to maintain an allowance for loan losses sufficient to absorb losses.  The allowance consists of specific, general, and unallocated components.  The specific component of our allowance for loan losses relates to loans that are determined to be impaired and, therefore, are individually evaluated for impairment.  The general component relates to loans not designated for a specific allowance and collectively evaluated for impairment.  An unallocated component is maintained to cover uncertainties that could affect management’s estimate of probable losses.
 
Loss factors are calculated using quantitative and qualitative data and then are applied to each of the loan segments to determine a reserve level for various subsets of each of the five segments of loans.  While portions of the allowance are attributable to specific portfolio segments, the entire allowance is available to absorb credit losses inherent in the total loan portfolio.


70
HAMPTON ROADS BANKSHARES, INC.

A rollforward of the activity within the allowance for loan losses by loan type and recorded investment in loans for the years ended December 31, 2014, 2013, and 2012 is as follows.
 
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
(1,713
)
 
(7,270
)
 
(4,038
)
 
(4,000
)
 
(724
)
 
 
 
(17,745
)
Recoveries
3,427

 
2,765

 
1,465

 
1,701

 
188

 
 
 
9,546

Provision
487

 
(960
)
 
(708
)
 
1,527

 
994

 
(1,122
)
 
218

Ending balance
$
4,605

 
$
4,342

 
$
6,854

 
$
7,142

 
$
979

 
$
3,128

 
$
27,050

Ending balance:  attributable to
 
 
 
 
 
 
 
 
 
 
 
 
 
loans individually evaluated
 
 
 
 
 
 
 
 
 
 
 
 
 
for impairment
$
412

 
$
887

 
$
479

 
$
1,717

 
$
47

 
 
 
$
3,542

Recorded investment: loans
 
 
 
 
 
 
 
 
 
 
 
 
 
individually evaluated for
 
 
 
 
 
 
 
 
 
 
 
 
 
impairment
$
1,647

 
$
10,652

 
$
21,669

 
$
14,776

 
$
115

 
 
 
 
Ending balance:  attributable to
 
 
 
 
 
 
 
 
 
 
 
 
 
loans collectively evaluated
 
 
 
 
 
 
 
 
 
 
 
 
 
for impairment
$
4,193

 
$
3,455

 
$
6,375

 
$
5,425

 
$
932

 
$
3,128

 
$
23,508

Recorded investment: loans
 
 
 
 
 
 
 
 
 
 
 
 
 
collectively evaluated for
 
 
 
 
 
 
 
 
 
 
 
 
 
impairment
$
217,382

 
$
126,303

 
$
617,494

 
$
339,241

 
$
74,706

 
 
 
 


71
HAMPTON ROADS BANKSHARES, INC.

 
2013
 
 
 
 
 
Real Estate
 
 
 
 
 
 
 
Commercial
 
 
 
Commercial
 
Residential
 
 
 
 
 
 
(in thousands)
and Industrial
 
Construction
 
Mortgage
 
Mortgage
 
Installment
 
Unallocated
 
Total
Allowance for loan losses:
 
 
 
 
 
 
 
 
 
 
 
 
 
Beginning balance
$
6,253

 
$
15,728

 
$
9,862

 
$
9,953

 
$
887

 
$
5,699

 
$
48,382

Charge-offs
(6,187
)
 
(5,140
)
 
(2,878
)
 
(6,979
)
 
(355
)
 
 
 
(21,539
)
Recoveries
1,603

 
2,200

 
995

 
2,245

 
145

 
 
 
7,188

Provision
735

 
(2,981
)
 
2,156

 
2,695

 
(156
)
 
(1,449
)
 
1,000

Ending balance
$
2,404

 
$
9,807

 
$
10,135

 
$
7,914

 
$
521

 
$
4,250

 
$
35,031

Ending balance:  attributable to
 
 
 
 
 
 
 
 
 
 
 
 
 
loans individually evaluated
 
 
 
 
 
 
 
 
 
 
 
 
 
for impairment
$
505

 
$
5,108

 
$
4,080

 
$
3,399

 
$
49

 
 
 
$
13,141

Recorded investment: loans
 
 
 
 
 
 
 
 
 
 
 
 
 
individually evaluated for
 
 
 
 
 
 
 
 
 
 
 
 
 
impairment
$
2,981

 
$
13,743

 
$
29,040

 
$
21,556

 
$
238

 
 
 
 
Ending balance:  attributable to
 
 
 
 
 
 
 
 
 
 
 
 
 
loans collectively evaluated
 
 
 
 
 
 
 
 
 
 
 
 
 
for impairment
$
1,899

 
$
4,699

 
$
6,055

 
$
4,515

 
$
472

 
$
4,250

 
$
21,890

Recorded investment: loans
 
 
 
 
 
 
 
 
 
 
 
 
 
collectively evaluated for
 
 
 
 
 
 
 
 
 
 
 
 
 
impairment
$
222,511

 
$
144,730

 
$
561,435

 
$
332,479

 
$
57,385

 
 
 
 

 
2012
 
 
 
 
 
Real Estate
 
 
 
 
 
 
 
Commercial
 
 
 
Commercial
 
Residential
 
 
 
 
 
 
(in thousands)
and Industrial
 
Construction
 
Mortgage
 
Mortgage
 
Installment
 
Unallocated
 
Total
Allowance for loan losses:
 
 
 
 
 
 
 
 
 
 
 
 
 
Beginning balance
$
13,605

 
$
24,826

 
$
17,101

 
$
12,060

 
$
2,067

 
$
5,288

 
$
74,947

Charge-offs
(18,489
)
 
(10,965
)
 
(11,462
)
 
(9,033
)
 
(603
)
 
 
 
(50,552
)
Recoveries
1,140

 
4,387

 
2,397

 
848

 
221

 
 
 
8,993

Provision
9,997

 
(2,520
)
 
1,826

 
6,078

 
(798
)
 
411

 
14,994

Ending balance
$
6,253

 
$
15,728

 
$
9,862

 
$
9,953

 
$
887

 
$
5,699

 
$
48,382

Ending balance:  attributable to
 
 
 
 
 
 
 
 
 
 
 
 
 
loans individually evaluated
 
 
 
 
 
 
 
 
 
 
 
 
 
for impairment
$
2,005

 
$
5,318

 
$
3,193

 
$
4,112

 
$
155

 
 
 
$
14,783

Recorded investment: loans
 
 
 
 
 
 
 
 
 
 
 
 
 
individually evaluated for
 
 
 
 
 
 
 
 
 
 
 
 
 
impairment
$
23,485

 
$
34,764

 
$
49,374

 
$
32,928

 
$
436

 
 
 
 
Ending balance:  attributable to
 
 
 
 
 
 
 
 
 
 
 
 
 
loans collectively evaluated
 
 
 
 
 
 
 
 
 
 
 
 
 
for impairment
$
4,248

 
$
10,410

 
$
6,669

 
$
5,841

 
$
732

 
$
5,699

 
$
33,599

Recorded investment: loans
 
 
 
 
 
 
 
 
 
 
 
 
 
collectively evaluated for
 
 
 
 
 
 
 
 
 
 
 
 
 
impairment
$
243,595

 
$
171,627

 
$
480,668

 
$
339,663

 
$
55,866

 
 
 
 

72
HAMPTON ROADS BANKSHARES, INC.


Management believes the allowance for loan losses as of December 31, 2014 is adequate to absorb losses inherent in the portfolio and is directionally consistent with the change in the quality of our loan 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
 
A loan is considered impaired when it is probable that all amounts due will not be collected according to the contractual terms of the loan agreement.  Impaired loans are measured based on the present value of payments expected to be received using the historical effective loan rate as the discount rate.  For collateral dependent impaired loans, impairment is measured based upon the fair value of the underlying collateral.  Management considers a loan to be collateral dependent when repayment of the loan is expected solely by the underlying collateral.  The Company’s policy is to charge off collateral dependent impaired loans at the earlier of foreclosure, repossession, or liquidation or at such time any portion of the loan is deemed to be uncollectible and in no case later than 90 days in nonaccrual status.  The Company will reduce the carrying value of the loan to the estimated fair value of the collateral less estimated selling costs through a charge off to the allowance for loan losses.  For loans that are not collateral dependent, impairment is measured using discounted cash flows.  Total impaired loans were $48.9 million and $67.6 million at December 31, 2014 and 2013, respectively.  Collateral dependent impaired loans were $43.3 million and $61.9 million at December 31, 2014 and 2013, respectively, and therefore, measured based upon the estimated fair value of the underlying collateral.
 
Impaired loans for which no allowance is provided totaled $29.1 million and $34.7 million at December 31, 2014 and 2013, respectively.  Loans written down to their estimated fair value of collateral less the costs to sell account for $7.6 million and $9.4 million of the impaired loans for which no allowance has been provided as of December 31, 2014 and 2013, respectively, and the weighted average age of appraisals for these loans is 0.56 years at December 31, 2014.  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 for December 31, 2014 and 2013 and average investment and interest recognized for impaired loans by major segment and class for each of the years ended December 31, 2014, 2013, and 2012.

73
HAMPTON ROADS BANKSHARES, INC.

 
2014
 
Recorded
 
Unpaid
 
Related
 
Average
 
Interest
(in thousands)
Investment
 
Balance
 
Allowance
 
Investment
 
Recognized
With no related
 
 
 
 
 
 
 
 
 
allowance recorded:
 
 
 
 
 
 
 
 
 
Commercial & Industrial
$
1,082

 
$
2,245

 
$
—

 
$
1,255

 
$
11

Construction
 
 
 
 
 
 
 
 
 
1-4 family residential
 
 
 
 
 
 
 
 
 
construction
—

 
—

 
—

 
—

 
—

Commercial construction
4,273

 
6,765

 
—

 
4,853

 
55

Real estate
 
 
 
 
 
 
 
 
 
Commercial Mortgage
 
 
 
 
 
 
 
 
 
Owner occupied
12,319

 
12,692

 
—

 
12,803

 
330

Non-owner occupied
3,550

 
8,130

 
—

 
4,850

 
16

Residential Mortgage
 
 
 
 
 
 
 
 
 
Secured by 1-4 family
 
 
 
 
 
 
 
 
 
1st lien
6,447

 
7,104

 
—

 
7,206

 
63

Junior lien
1,372

 
2,729

 
—

 
1,602

 
6

Installment
11

 
32

 
—

 
15

 
—

 
$
29,054

 
$
39,697

 
$
—

 
$
32,584

 
$
481

With an allowance recorded:
 
 
 
 
 
 
 
 
 
Commercial & Industrial
$
565

 
$
564

 
$
412

 
$
599

 
$
—

Construction
 
 
 
 
 
 
 
 
 
1-4 family residential
 
 
 
 
 
 
 
 
 
construction
—

 
—

 
—

 
—

 
—

Commercial construction
6,379

 
6,380

 
887

 
7,137

 
240

Real estate
 
 
 
 
 
 
 
 
 
Commercial Mortgage
 
 
 
 
 
 
 
 
 
Owner occupied
5,313

 
5,313

 
379

 
5,408

 
188

Non-owner occupied
487

 
487

 
100

 
514

 
—

Residential Mortgage
 
 
 
 
 
 
 
 
 
Secured by 1-4 family
 
 
 
 
 
 
 
 
 
1st lien
4,970

 
4,981

 
1,009

 
5,022

 
176

Junior lien
1,987

 
2,013

 
708

 
2,028

 
20

Installment
104

 
104

 
47

 
104

 
6

 
$
19,805

 
$
19,842

 
$
3,542

 
$
20,812

 
$
630

Total:
 
 
 
 
 
 
 
 
 
Commercial & Industrial
$
1,647

 
$
2,809

 
$
412

 
$
1,854

 
$
11

Construction
10,652

 
13,145

 
887

 
11,990

 
295

Real estate
 
 
 
 
 
 
 
 
 
Commercial mortgage
21,669

 
26,622

 
479

 
23,575

 
534

Residential mortgage
14,776

 
16,827

 
1,717

 
15,858

 
265

Installment
115

 
136

 
47

 
119

 
6

Total
$
48,859

 
$
59,539

 
$
3,542

 
$
53,396

 
$
1,111


74
HAMPTON ROADS BANKSHARES, INC.

 
2013
 
2012
 
Recorded
 
Unpaid
 
Related
 
Average
 
Interest
 
Average
 
Interest
(in thousands)
Investment
 
Balance
 
Allowance
 
Investment
 
Recognized
 
Investment
 
Recognized
With no related
 
 
 
 
 
 
 
 
 
 
 
 
 
allowance recorded:
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial & Industrial
$
2,049

 
$
3,108

 
$
—

 
$
2,334

 
$
20

 
$
21,860

 
$
18

Construction
 
 
 
 
 
 
 
 
 
 
 
 
 
1-4 family residential
 
 
 
 
 
 
 
 
 
 
 
 
 
construction
—

 
—

 
—

 
—

 
—

 
2,342

 
—

Commercial construction
6,437

 
9,398

 
—

 
9,301

 
132

 
19,281

 
4

Real estate
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial Mortgage
 
 
 
 
 
 
 
 
 
 
 
 
 
Owner occupied
13,565

 
14,784

 
—

 
14,087

 
274

 
19,163

 
323

Non-owner occupied
2,998

 
5,767

 
—

 
3,152

 
63

 
7,830

 
156

Residential Mortgage
 
 
 
 
 
 
 
 
 
 
 
 
 
Secured by 1-4 family
 
 
 
 
 
 
 
 
 
 
 
 
 
1st lien
7,931

 
9,372

 
—

 
8,953

 
106

 
8,686

 
3

Junior lien
1,598

 
2,805

 
—

 
1,824

 
12

 
7,569

 
24

Installment
80

 
175

 
—

 
62

 
—

 
221

 
6

 
$
34,658

 
$
45,409

 
$
—

 
$
39,713

 
$
607

 
$
86,952

 
$
534

With an allowance recorded:
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial & Industrial
$
932

 
$
932

 
$
505

 
$
1,689

 
$
—

 
$
3,247

 
$
39

Construction
 
 
 
 
 
 
 
 
 
 
 
 
 
1-4 family residential
 
 
 
 
 
 
 
 
 
 
 
 
 
construction
—

 
—

 
—

 
—

 
—

 
—

 
—

Commercial construction
7,306

 
7,305

 
5,108

 
7,417

 
71

 
16,247

 
233

Real estate
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial Mortgage
 
 
 
 
 
 
 
 
 
 
 
 
 
Owner occupied
6,868

 
6,945

 
849

 
7,001

 
239

 
15,531

 
318

Non-owner occupied
5,609

 
5,627

 
3,231

 
5,672

 
—

 
6,516

 
260

Residential Mortgage
 
 
 
 
 
 
 
 
 
 
 
 
 
Secured by 1-4 family
 
 
 
 
 
 
 
 
 
 
 
 
 
1st lien
9,695

 
9,779

 
2,221

 
9,872

 
166

 
14,195

 
544

Junior lien
2,332

 
2,332

 
1,178

 
2,352

 
22

 
3,927

 
140

Installment
158

 
295

 
49

 
165

 
6

 
217

 
5

 
$
32,900

 
$
33,215

 
$
13,141

 
$
34,168

 
$
504

 
$
59,880

 
$
1,539

Total:
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial & Industrial
$
2,981

 
$
4,040

 
$
505

 
$
4,023

 
$
20

 
$
25,107

 
$
57

Construction
13,743

 
16,703

 
5,108

 
16,718

 
203

 
37,870

 
237

Real estate
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial mortgage
29,040

 
33,123

 
4,080

 
29,912

 
576

 
49,040

 
1,057

Residential mortgage
21,556

 
24,288

 
3,399

 
23,001

 
306

 
34,377

 
711

Installment
238

 
470

 
49

 
227

 
6

 
438

 
11

Total
$
67,558

 
$
78,624

 
$
13,141

 
$
73,881

 
$
1,111

 
$
146,832

 
$
2,073





75
HAMPTON ROADS BANKSHARES, INC.

 Non-performing Assets

Non-performing assets consist of loans 90 days past due and still accruing interest, nonaccrual loans, and other real estate owned and repossessed assets.  Our non-performing assets ratio, defined as the ratio of non-performing assets to gross loans plus loans held for sale plus other real estate owned and repossessed assets was 2.95% and 5.29% at December 31, 2014 and 2013, respectively.

Non-performing assets as of December 31, 2014 and 2013 were as follows.
 
(in thousands)
2014
 
2013
Loans 90 days past due and still accruing interest
$
—

 
$
—

Nonaccrual loans, including nonaccrual impaired loans
21,507

 
39,854

Other real estate owned and repossessed assets
21,721

 
36,665

Non-performing assets
$
43,228

 
$
76,519



Nonaccrual and Past Due Loans
 
The Company generally places loans on nonaccrual status when the collection of contractually owed principal or interest becomes uncertain, part of the balance has been charged off and no restructuring has occurred, or the loans reach 90 days past due, whichever comes first.  When loans are placed on nonaccrual status, interest receivable is reversed against interest income recognized in the current year, and any prior year unpaid interest is charged off against the allowance for loan losses.  Interest payments received thereafter are applied as a reduction of the remaining principal balance so long as doubt exists as to the ultimate collection of the principal.  Loans are removed from nonaccrual status when they become current as to both principal and interest and when the collection of principal or interest is no longer doubtful.  A reconciliation of non-performing loans to impaired loans for the years ended December 31, 2014 and 2013 is as follows.
 
(in thousands)
2014
 
2013
Loans 90 days past due and still accruing interest
$
—

 
$
—

Nonaccrual loans, including nonaccrual impaired loans
21,507

 
39,854

Total non-performing loans
21,507

 
39,854

TDRs on accrual
25,028

 
23,282

Impaired loans on accrual
2,324

 
4,422

Total impaired loans
$
48,859

 
$
67,558

 
Nonaccrual loans were $21.5 million at December 31, 2014 compared to $39.9 million at December 31, 2013.  If income on nonaccrual loans had been recorded under original terms, $1.7 million, $2.0 million, and $6.7 million of additional interest income would have been recorded in 2014, 2013, and 2012, respectively. 


76
HAMPTON ROADS BANKSHARES, INC.

The following table provides a rollforward of nonaccrual loans for the years ended December 31, 2014 and 2013.
 
 
 
 
 
Real Estate
 
 
 
 
(in thousands)
Commercial & Industrial
 
Construction
 
Commercial Mortgage
 
Residential Mortgage
 
Installment
 
Total
Balance at December 31, 2012
$
22,412

 
$
28,505

 
$
25,032

 
$
21,207

 
$
255

 
$
97,411

Transfers in
2,003

 
10,911

 
13,964

 
12,313

 
320

 
39,511

Transfers to OREO
(8,405
)
 
(4,309
)
 
(3,783
)
 
(8,514
)
 
(3
)
 
(25,014
)
Charge-offs
(6,187
)
 
(5,140
)
 
(2,878
)
 
(6,979
)
 
(355
)
 
(21,539
)
Payments
(8,131
)
 
(17,728
)
 
(10,696
)
 
(3,528
)
 
(68
)
 
(40,151
)
Return to accrual
(7
)
 
(1,961
)
 
(7,561
)
 
(820
)
 
(15
)
 
(10,364
)
Loan type reclassification
1,109

 
336

 
(1,445
)
 
—

 
—

 
—

Balance at December 31, 2013
$
2,794

 
$
10,614

 
$
12,633

 
$
13,679

 
$
134

 
$
39,854

Transfers in
2,194

 
1,923

 
6,193

 
7,408

 
1,231

 
18,949

Transfers to OREO
—

 
(388
)
 
(982
)
 
(4,515
)
 
—

 
(5,885
)
Charge-offs
(1,713
)
 
(7,270
)
 
(4,038
)
 
(4,000
)
 
(724
)
 
(17,745
)
Payments
(771
)
 
(756
)
 
(4,631
)
 
(3,296
)
 
(630
)
 
(10,084
)
Return to accrual
(451
)
 
(502
)
 
(1,355
)
 
(1,274
)
 
—

 
(3,582
)
Loan type reclassification
(559
)
 
—

 
370

 
189

 
—

 
—

Balance at December 31, 2014
$
1,494

 
$
3,621

 
$
8,190

 
$
8,191

 
$
11

 
$
21,507

 
 
Age Analysis of Past Due Loans
 
An age analysis of past due loans as of December 31, 2014 and 2013 is as follows.
 
 
2014
 
 
 
 
 
 
 
 
 
 
 
 
 
90 Days or
 
 
 
 
 
 
 
 
 
 
 
 
 
More Past
 
30-59 Days
 
60-89 Days
 
90 Days
 
Total
 
 
 
Total
 
Due and
(in thousands)
Past Due
 
Past Due
 
Past Due
 
Past Due
 
Current
 
Loans
 
Accruing
Commercial & Industrial
$
648

 
$
—

 
$
1,494

 
$
2,142

 
$
216,887

 
$
219,029

 
$
—

Construction
 
 
 
 
 
 
 
 
 
 
 
 
 
1-4 family residential
 
 
 
 
 
 
 
 
 
 
 
 
 
construction
—

 
—

 
—

 
—

 
17,989

 
17,989

 
—

Commercial construction
66

 
395

 
3,621

 
4,082

 
114,884

 
118,966

 
—

Real estate
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial Mortgage
 
 
 
 
 
 
 
 
 
 
 
 
 
Owner occupied
4,567

 
364

 
4,417

 
9,348

 
241,426

 
250,774

 
—

Non-owner occupied
504

 
63

 
3,773

 
4,340

 
384,049

 
388,389

 
—

Residential Mortgage
 
 
 
 
 
 
 
 
 
 
 
 
 
Secured by 1-4 family
 
 
 
 
 
 
 
 
 
 
 
 
 
1st lien
1,905

 
266

 
5,940

 
8,111

 
217,656

 
225,767

 
—

Junior lien
264

 
—

 
2,251

 
2,515

 
125,735

 
128,250

 
—

Installment
—

 
—

 
11

 
11

 
74,810

 
74,821

 
—

Deferred loan fees
 
 
 
 
 
 
 
 
 
 
 
 
 
and related costs
—

 
—

 
—

 
—

 
(1,050
)
 
(1,050
)
 
—

Total
$
7,954

 
$
1,088

 
$
21,507

 
$
30,549

 
$
1,392,386

 
$
1,422,935

 
$
—

 

 

77
HAMPTON ROADS BANKSHARES, INC.

 
2013
 
30-59 Days
Past Due
 
60-89 Days
Past Due
 
90 Days
Past Due
 
Total
Past Due
 
 Current
 
Total
Loans
 
90 Days or
More Past
Due and
Accruing
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(in thousands)
 
 
 
 
 
 
Commercial & Industrial
$
317

 
$
—

 
$
2,794

 
$
3,111

 
$
222,381

 
$
225,492

 
$
—

Construction
 
 
 
 
 
 
 
 
 
 
 
 
 
1-4 family residential
 
 
 
 
 
 
 
 
 
 
 
 
 
construction
298

 
—

 
—

 
298

 
17,879

 
18,177

 
—

Commercial construction
1,031

 
132

 
10,614

 
11,777

 
128,519

 
140,296

 
—

Real estate
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial Mortgage
 
 
 
 
 
 
 
 
 
 
 
 
 
Owner occupied
1,961

 
360

 
4,932

 
7,253

 
266,661

 
273,914

 
—

Non-owner occupied
200

 
517

 
7,701

 
8,418

 
308,143

 
316,561

 
—

Residential Mortgage
 
 
 
 
 
 
 
 
 
 
 
 
 
Secured by 1-4 family
 
 
 
 
 
 
 
 
 
 
 
 
 
1st lien
2,983

 
237

 
10,877

 
14,097

 
209,564

 
223,661

 
—

Junior lien
367

 
2

 
2,802

 
3,171

 
127,203

 
130,374

 
—

Installment
1

 
—

 
134

 
135

 
57,488

 
57,623

 
—

Deferred loan fees
 
 
 
 
 
 
 
 
 
 
 
 
 
and related costs
—

 
—

 
—

 
—

 
(1,567
)
 
(1,567
)
 
—

Total
$
7,158

 
$
1,248

 
$
39,854

 
$
48,260

 
$
1,336,271

 
$
1,384,531

 
$
—

 
Credit Quality
 
As a result of the deteriorating economy during “The Great Recession”, problem loans and non-performing loans rose and led to significant increases to the allowance for loan losses and related provision expense.  During the past several years, the Company had a significant reduction in problem loans and as the credit quality of the loan portfolio has improved, we decreased the provision for loan losses significantly. 
 
Management regularly reviews the loan portfolio to determine whether adjustments to the allowance are necessary. The review takes into consideration changes in the nature and volume of the loan portfolio, overall portfolio quality, review of specific problem loans, and review of current economic conditions that may affect the borrower’s ability to repay.  In addition to the review of credit quality through ongoing credit review processes, management performs a comprehensive allowance analysis at least quarterly.  This analysis includes specific allowances for individual loans; general allowance for loan pools that factor in our historical loan loss experience, loan portfolio growth and trends, and economic conditions; and unallocated allowances predicated upon both internal and external factors. 
 
The internal rating system is a series of grades reflecting management’s risk assessment, based on its analysis of the borrower’s financial condition.  The “pass” category consists of a range of loan grades that reflect increasing, though still acceptable, risk.  Movement of risk through the various grade levels in the “pass” category is monitored for early identification of credit deterioration.  The “special mention” rating is attached to loans where the borrower exhibits material negative financial trends due to company specific or systematic conditions that, if left uncorrected, threaten its capacity to meet its debt obligations and the borrower is believed to have sufficient financial flexibility to react to and resolve its negative financial situation.  It is a transitional grade that is closely monitored for improvement or deterioration.  The “substandard” rating is applied to loans where the borrower exhibits well-defined weaknesses that jeopardize its continued performance and are of a severity that the distinct possibility of default exists.  Loans are placed in “nonaccrual” status when management does not expect to collect payments consistent with acceptable and agreed upon terms of repayment. In the first quarter of 2014, the Company instituted a new “pass/watch” risk grade for loans that do not provide acceptable credit metrics based upon analysis of financial statements but for which there is a strong mitigating factor such as satisfactory payment history. The “pass/watch” grade is considered a pass grade category.




78
HAMPTON ROADS BANKSHARES, INC.

The following tables provide information on December 31, 2014 and 2013 about the credit quality of the loan portfolio using the Company’s internal rating system as an indicator. 
 
 
2014
 
 
 
Special
Mention
 
 
 
Nonaccrual
Loans
 
 
(in thousands)
Pass
 
 
Substandard
 
 
Total
Commercial & Industrial
$
195,564

 
$
14,455

 
$
7,516

 
$
1,494

 
$
219,029

Construction
 
 
 
 
 
 
 
 
 
1-4 family residential
 
 
 
 
 
 
 
 
 
construction
17,623

 
366

 
—

 
—

 
17,989

Commercial construction
88,970

 
9,077

 
17,298

 
3,621

 
118,966

Real estate
 
 
 
 
 
 
 
 
 
Commercial Mortgage
 
 
 
 
 
 
 
 
 
Owner occupied
218,436

 
22,289

 
5,632

 
4,417

 
250,774

Non-owner occupied
369,745

 
9,778

 
5,093

 
3,773

 
388,389

Residential Mortgage
 
 
 
 
 
 
 
 
 
Secured by 1-4 family
 
 
 
 
 
 
 
 
 
1st lien
194,104

 
20,191

 
5,532

 
5,940

 
225,767

Junior lien
118,061

 
5,686

 
2,252

 
2,251

 
128,250

Installment
73,700

 
1,002

 
108

 
11

 
74,821

Deferred loan fees
 
 
 
 
 
 
 
 
 
and related costs
(1,050
)
 
—

 
—

 
—

 
(1,050
)
Total
$
1,275,153

 
$
82,844

 
$
43,431

 
$
21,507

 
$
1,422,935

 
 
2013
 
 
 
Special
Mention
 
 
 
Nonaccrual
Loans
 
 
(in thousands)
Pass
 
 
Substandard
 
 
Total
Commercial & Industrial
$
202,490

 
$
17,371

 
$
2,837

 
$
2,794

 
$
225,492

Construction
 
 
 
 
 
 
 
 
 
1-4 family residential
 
 
 
 
 
 
 
 
 
construction
17,288

 
277

 
612

 
—

 
18,177

Commercial construction
87,237

 
39,298

 
3,147

 
10,614

 
140,296

Real estate
 
 
 
 
 
 
 
 
 
Commercial Mortgage
 
 
 
 
 
 
 
 
 
Owner occupied
224,261

 
31,615

 
13,106

 
4,932

 
273,914

Non-owner occupied
278,124

 
23,924

 
6,812

 
7,701

 
316,561

Residential Mortgage
 
 
 
 
 
 
 
 
 
Secured by 1-4 family
 
 
 
 
 
 
 
 
 
1st lien
177,649

 
26,695

 
8,440

 
10,877

 
223,661

Junior lien
120,143

 
4,790

 
2,639

 
2,802

 
130,374

Installment
56,289

 
1,096

 
104

 
134

 
57,623

Deferred loan fees
 
 
 
 
 
 
 
 
 
and related costs
(1,567
)
 
—

 
—

 
—

 
(1,567
)
Total
$
1,161,914

 
$
145,066

 
$
37,697

 
$
39,854

 
$
1,384,531



79
HAMPTON ROADS BANKSHARES, INC.


 
Modifications
 
All restructured loans are not necessarily considered TDRs.  A restructured loan results in a TDR when two conditions are present 1) a borrower is experiencing financial difficulty and 2) a creditor grants a concession, such as offering an interest rate less than the current market interest rate for the remaining original life of the debt, extension of maturity date and/or dates at a stated interest rate lower than the current market rate for new debt with similar risk, reduction of face amount or maturity amount of the debt as stated in the instrument or other agreement, or reduction of accrued interest.  A concession may also include a transfer from the debtor to the creditor of receivables from third parties, real estate, or other assets to satisfy fully or partially a debt or an issuance or other granting of an equity interest to the creditor by the debtor to satisfy fully or partially a debt unless the equity interest is granted pursuant to existing terms for converting the debt into an equity interest.  Additionally, it is necessary for the Company to expect to collect all amounts due.
 
As of December 31, 2014 and 2013, loans classified as TDRs were $28.4 million and $31.0 million, respectively.  All of these were included in the impaired loan disclosure.  The following table shows the loans classified as TDRs by management at December 31, 2014 and 2013.
 
(in thousands except number of contracts)
December 31, 2014
 
December 31, 2013
 
 
 
Recorded
Investment
 
 
 
Recorded
Investment
Troubled Debt Restructurings
Number of Contracts
 
 
Number of Contracts
 
Commercial & Industrial
2

 
$
153

 
2

 
$
180

Construction
 
 
 
 
 
 
 
1-4 family residential construction
—

 
—

 
—

 
—

Commercial construction
13

 
8,905

 
14

 
8,192

Real estate
 
 
 
 
 
 
 
Commercial Mortgage
 
 
 
 
 
 
 
Owner occupied
11

 
13,619

 
14

 
15,466

Non-owner occupied
1

 
264

 
1

 
272

Residential Mortgage
 
 
 
 
 
 
 
Secured by 1-4 family, 1st lien
10

 
4,156

 
14

 
6,561

Secured by 1-4 family, junior lien
7

 
1,292

 
5

 
361

Installment
1

 
4

 
1

 
4

Total
45

 
$
28,393

 
51

 
$
31,036

 
Of total TDRs, $25.0 million was accruing and $3.4 million was nonaccruing at December 31, 2014 and $23.3 million was accruing and $7.8 million was nonaccruing at December 31, 2013.  Loans that are on nonaccrual status at the time of the restructuring generally remain on nonaccrual status for approximately six months before management considers whether such loans may return to accrual status.  TDRs in nonaccrual status are returned to accrual status after a period of performance under which the borrower demonstrates the ability and willingness to repay the loan in accordance with the modified terms.  For the year ended December 31, 2014, $576 thousand of the nonaccrual TDRs were returned to accrual status; $647 thousand of the nonaccrual TDRs were returned to accrual status during the year ended December 31, 2013. 

The following table shows a rollforward of accruing and nonaccruing TDRs for the year ended December 31, 2014. 

80
HAMPTON ROADS BANKSHARES, INC.

(in thousands)
Accruing
 
Nonaccruing
 
Total
Balance at December 31, 2013
$
23,282

 
$
7,754

 
$
31,036

Charge-offs
—

 
(3,166
)
 
(3,166
)
Payments
(4,617
)
 
(2,080
)
 
(6,697
)
New TDR designation
5,787

 
1,433

 
7,220

Release TDR designation
—

 
—

 
—

Transfer
576

 
(576
)
 
—

Balance at December 31, 2014
$
25,028

 
$
3,365

 
$
28,393

 
The allowance for loan losses allocated to TDRs was $1.9 million and $4.2 million at December 31, 2014 and 2013, respectively.  The total of TDRs charged off and the allocated portion of allowance for loan losses associated with TDRs charged off were $3.2 million and $2.9 million, respectively, during the year ended December 31, 2014 and $970 thousand and $632 thousand, respectively, during the year ended December 31, 2013.
 
At a minimum, TDRs are reported as such during the calendar year in which the restructuring or modification takes place.  In subsequent years, troubled debt restructured loans may be removed from this disclosure classification if the loan did not involve a below market rate concession and the loan is not deemed to be impaired based on the terms specified in the restructuring agreement.  
 
The following table shows a summary of the primary reason and pre- and post-modification outstanding recorded investment for loan modifications that were classified as TDRs during the years ended December 31, 2014,  2013, and 2012.  These tables include modifications made to existing TDRs as well as new modifications that are considered TDRs for the periods presented.  TDRs made with a below market rate that also include a modification of loan structure are included under rate change.

 
2014
(in thousands except number of contracts)
Rate
 
Structure
 
 Number of Contracts
 
Pre-
Modification
Outstanding
Recorded
Investment
 
Post-
Modification
Outstanding
Recorded
Investment
 
 Number of Contracts
 
Pre-
Modification
Outstanding
Recorded
Investment
 
Post-
Modification
Outstanding
Recorded
Investment
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Troubled Debt Restructurings
 
 
 
 
 
Commercial & Industrial
—

 
$
—

 
$
—

 
2

 
$
165

 
$
165

Construction
 
 
 
 
 
 
 
 
 
 
 
1-4 family residential construction
—

 
—

 
—

 
—

 
—

 
—

Commercial construction
—

 
—

 
—

 
1

 
5,185

 
5,185

Real estate
 
 
 
 
 
 
 
 
 
 
 
Commercial Mortgage
 
 
 
 
 
 
 
 
 
 
 
Owner occupied
1

 
451

 
451

 
1

 
241

 
241

Non-owner occupied
—

 
—

 
—

 
—

 
—

 
—

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

 
—

 
—

 
4

 
311

 
311

Secured by 1-4 family, junior lien
—

 
—

 
—

 
4

 
867

 
867

Installment
—

 
—

 
—

 
—

 
—

 
—

Total
1

 
$
451

 
$
451

 
12

 
$
6,769

 
$
6,769

 


81
HAMPTON ROADS BANKSHARES, INC.

 
2013
(in thousands except number of contracts)
Rate
 
Structure
 
 Number of Contracts
 
Pre-
Modification
Outstanding
Recorded
Investment
 
Post-
Modification
Outstanding
Recorded
Investment
 
 Number of Contracts
 
Pre-
Modification
Outstanding
Recorded
Investment
 
Post-
Modification
Outstanding
Recorded
Investment
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Troubled Debt Restructurings
 
 
 
 
 
Commercial & Industrial
2

 
$
223

 
$
180

 
—

 
$
—

 
$
—

Construction
 
 
 
 
 
 
 
 
 
 
 
1-4 family residential construction
—

 
—

 
—

 
—

 
—

 
—

Commercial construction
—

 
—

 
—

 
5

 
6,098

 
5,855

Real estate
 
 
 
 
 
 
 
 
 
 
 
Commercial Mortgage
 
 
 
 
 
 
 
 
 
 
 
Owner occupied
—

 
—

 
—

 
4

 
6,771

 
6,572

Non-owner occupied
1

 
2,010

 
1,992

 
—

 
—

 
—

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

 
—

 
—

 
4

 
2,130

 
1,813

Secured by 1-4 family, junior lien
—

 
—

 
—

 
5

 
369

 
360

Installment
—

 
—

 
—

 
1

 
4

 
4

Total
3

 
$
2,233

 
$
2,172

 
19

 
$
15,372

 
$
14,604

 
 
2012
(in thousands except number of contracts)
Rate
 
Structure
 
 Number of Contracts
 
Pre-
Modification
Outstanding
Recorded
Investment
 
Post-
Modification
Outstanding
Recorded
Investment
 
 Number of Contracts
 
Pre-
Modification
Outstanding
Recorded
Investment
 
Post-
Modification
Outstanding
Recorded
Investment
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Troubled Debt Restructurings
 
 
 
 
 
Commercial & Industrial
2

 
$
902

 
$
890

 
—

 
$
—

 
$
—

Construction
 
 
 
 
 
 
 
 
 
 
 
1-4 family residential construction
—

 
—

 
—

 
—

 
—

 
—

Commercial construction
—

 
—

 
—

 
—

 
—

 
—

Real estate
 
 
 
 
 
 
 
 
 
 
 
Commercial Mortgage
 
 
 
 
 
 
 
 
 
 
 
Owner occupied
—

 
—

 
—

 
1

 
5,300

 
5,198

Non-owner occupied
—

 
—

 
—

 
—

 
—

 
—

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

 
—

 
—

 
1

 
218

 
218

Secured by 1-4 family, junior lien
—

 
—

 
—

 
—

 
—

 
—

Installment
—

 
—

 
—

 
—

 
—

 
—

Total
2

 
$
902

 
$
890

 
2

 
$
5,518

 
$
5,416

 
 
The following table shows the balances as of December 31, 2014,  2013, and 2012 for loans modified as TDRs within the previous year and for which there was a payment default during the period.  The Company defines payment default as movement of the TDR to nonaccrual status. 
 

82
HAMPTON ROADS BANKSHARES, INC.

(in thousands except number of contracts)
2014
 
2013
 
2012
Troubled Debt Restructurings
Number of
Contracts
 
Recorded
Investment
 
Number of
Contracts
 
Recorded
Investment
 
Number of
Contracts
 
Recorded
Investment
That Subsequently Defaulted
 
 
 
 
 
Commercial & Industrial
—

 
$
—

 
—

 
$
—

 
—

 
$
—

Construction
 
 
 
 
 
 
 
 
 
 
 
1-4 family residential construction
—

 
—

 
—

 
—

 
—

 
—

Commercial construction
—

 
—

 
—

 
—

 
6

 
1,740

Real estate
 
 
 
 
 
 
 
 
 
 
 
Commercial Mortgage
 
 
 
 
 
 
 
 
 
 
 
Owner occupied
—

 
—

 
—

 
—

 
—

 
—

Non-owner occupied
—

 
—

 
—

 
—

 
—

 
—

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

 
—

 
—

 
—

 
1

 
650

Secured by 1-4 family, junior lien
—

 
—

 
—

 
—

 
—

 
—

Installment
—

 
—

 
—

 
—

 
—

 
—

Total
—

 
$
—

 
—

 
$
—

 
7

 
$
2,390

 
Loans that are considered TDRs are considered specifically impaired and the primary consideration for measurement of impairment is the present value of the expected cash flows.  However, given the prevalence of real estate secured loans in the Company’s portfolio of troubled assets, the majority of the Company’s TDR loans are ultimately considered collateral-dependent.  As a practical expedient, impairments are, therefore, calculated based upon the estimated fair value of the underlying collateral and observable market prices for the sale of the respective notes are not considered as a basis for impairment for any of the Company’s loans.
 
In determining the estimated fair value of collateral dependent impaired loans, the Company uses third party appraisals and, if necessary, utilizes a proprietary database of its own historical property appraisals in conjunction with external data and applies a relevant discount derived from analysis of appraisals of similar property type, vintage, and geographic location (for example, in situations where the most recent available appraisal is aged and an updated appraisal has not yet been received).
 
The Company does not participate in any government or company sponsored TDR programs and holds no corresponding assets.  Rather, loans are individually modified in situations where the Company believes it will minimize the probability of losses to the Company.  Additionally, the Company had no commitments to lend additional funds to debtors owing receivables whose terms have been modified in TDRs at December 31, 2014,  2013, and 2012.

(7) Premises and Equipment and Lease Commitments
 
During the first quarter of 2013, the Company recorded a $2.8 million impairment as a result of a decision to consolidate certain branches, including those subject to operating leases.  This consolidation also resulted in an additional $3.4 million decrease in premises and equipment from transferring branch building and land to other real estate owned.    Premises and equipment at December 31, 2014 and 2013 are summarized as follows.
 

83
HAMPTON ROADS BANKSHARES, INC.

(in thousands)
2014
 
2013
Land
$
21,992

 
$
23,272

Buildings and improvements
49,452

 
48,990

Leasehold improvements
1,361

 
1,484

Equipment, furniture, and fixtures
21,462

 
16,523

Construction in progress
219

 
1,202

 
94,486

 
91,471

Less accumulated depreciation and amortization
(30,967
)
 
(24,325
)
Premises and equipment, net
$
63,519

 
$
67,146

 
Depreciation and amortization of leasehold improvements expense for the years ended December 31, 2014,  2013, and 2012 was $3.4 million, $4.4 million, and $4.1 million, respectively. 
 
The Company leases land and buildings upon which certain of its operating facilities and financial center facilities are located.  These leases expire at various dates through August 31, 2049.  
 
Various facilities and equipment are leased under non-cancellable operating leases with initial remaining terms in excess of one year with options for renewal.  In addition to minimum rents, certain leases have escalation clauses and include provisions for additional payments to cover taxes, insurance, and maintenance.  The effects of the scheduled rent increases, which are included in the minimum lease payments, are recognized on a straight-line basis over the lease term.  Rental expense was $2.1 million for 2014 compared to $3.4 million for 2013 and $2.5 million for 2012. 
 

84
HAMPTON ROADS BANKSHARES, INC.

Future minimum lease payments, by year and in the aggregate, under non-cancellable operating leases at December 31, 2014 were as follows.
 
(in thousands)
Amount
2015
$
2,138

2016
2,125

2017
2,094

2018
1,969

2019
1,938

Thereafter
13,052

 
$
23,316

 
The Company has entered into contracts as lessor for excess office space.  Future minimum lease payments receivable under non-cancellable leasing arrangements at December 31, 2014 were not material.
 
(8) Intangible Assets
 
Intangible assets with an indefinite life are subject to impairment testing at least annually or more often if events or circumstances suggest potential impairment.  Other acquired intangible assets determined to have a finite life are amortized over their estimated useful life in a manner that best reflects the economic benefits of the intangible asset.  Intangible assets with a finite life are reviewed for impairment if conditions suggest the carrying amount is not recoverable.  A summary of intangible assets as of December 31, 2014 and 2013 is as follows.
 
 
2014
 
2013
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
 
 
 
(in thousands)
 
 
 
Intangible assets:
 
 
 
 
 
 
 
Core deposit intangible
$
4,756

 
$
3,914

 
$
4,756

 
$
3,319

Total intangible assets
$
4,756

 
$
3,914

 
$
4,756

 
$
3,319

 
The weighted-average amortization period for core deposit intangible pertaining to Shore is 8 years.  During 2013, the core deposit intangible for BOHR with a gross carrying amount of $3.3 million, and the employment contract intangible for Shore with a gross carrying amount of $95 thousand became fully amortized, and are not included in the 2013 amounts in the table above.
 
The aggregate amortization expense for intangible assets with finite lives for the year ended December 31, 2014 was $594 thousand compared to $973 thousand in 2013 and $1.3 million for 2012.  The estimated aggregate annual amortization expense for the years subsequent to December 31, 2014 is as follows. 
 
(in thousands)
Amount
2015
$
594

2016
248

2017
—

Total
$
842

 
 

85
HAMPTON ROADS BANKSHARES, INC.

(9) Other Real Estate Owned and Repossessed Assets
 
The following table shows a rollforward of other real estate owned and repossessed assets for the year ended December 31, 2014. 
 
(in thousands)
Amount
Balance at December 31, 2013
$
36,665

Transfers in (via foreclosure)
6,798

Sales
(19,697
)
Gain on sales
360

Impairments
(2,405
)
Balance at December 31, 2014
$
21,721


Other real estate owned and repossessed assets are presented net of an allowance for losses.  An analysis of the allowance for losses on these assets as of and for the years ended December 31, 2014, 2013, and 2012 is as follows.
 
(in thousands)
2014
 
2013
 
2012
Balance at beginning of year
$
12,776

 
$
19,100

 
$
20,022

Impairments
2,405

 
3,914

 
14,126

Charge-offs
(7,628
)
 
(10,238
)
 
(15,048
)
Balance at end of year
$
7,553

 
$
12,776

 
$
19,100

 
 Expenses applicable to other real estate owned and repossessed assets for the years ended December 31, 2014, 2013, and 2012 include the following.
(in thousands)
2014
 
2013
 
2012
(Gains) losses on sale of other real estate owned
$
360

 
$
(356
)
 
$
8,524

Impairments
2,405

 
3,914

 
14,126

Operating expenses
1,330

 
1,906

 
3,098

Total
$
4,095

 
$
5,464

 
$
25,748

 
(10) Deposits
 
Deposits are the primary source of funds for use in lending and general business purposes.  Our balance sheet growth is largely determined by the availability of deposits in our markets and the prospects of profitably utilizing the available deposits by increasing the loan or investment portfolios.  Total deposits at December 31, 2014 were $1.6 billion, an increase of $58.0 million or 3.8% from December 31, 2013.
 
The scheduled maturities of time deposits at December 31, 2014 and 2013 were as follows.

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HAMPTON ROADS BANKSHARES, INC.

 
2014
 
2013
 
Time Deposits
Less than $100
 
Time Deposits
$100 or More
 
Time Deposits
Less than $100
 
Time Deposits
$100 or More
(in thousands)
 
 
 
Maturity of:
 
 
 
 
 
 
 
3 months or less
$
45,072

 
$
39,112

 
$
67,352

 
$
53,720

3 months - 6 months
55,263

 
42,553

 
35,115

 
21,790

6 months - 12 months
59,226

 
64,662

 
71,134

 
61,320

1 year - 2 years
120,247

 
86,229

 
37,514

 
58,356

2 years - 3 years
33,529

 
26,923

 
81,366

 
58,742

3 years - 4 years
12,471

 
22,199

 
24,597

 
21,365

4 years - 5 years
15,813

 
11,948

 
6,085

 
14,535

Over 5 years
1,173

 
720

 
1,472

 
858

 
$
342,794

 
$
294,346

 
$
324,635

 
$
290,686


The Company continues to focus on core deposit growth as its primary source of funding. Core deposits are non-brokered and consist of noninterest-bearing demand accounts, interest-bearing checking accounts, money market accounts, savings accounts, and time deposits of less than $100 thousand. Core deposits totaled $1.2 billion or 78.2% of total deposits at December 31, 2014, compared to 77.6% of total deposits at December 31, 2013.

Total brokered deposits were $49.9 million and $51.3 million at December 31, 2014 and 2013, respectively.   Of these brokered funds $7.3 million and $7.7 million were interest-bearing demand deposits and the remaining $42.6 million and $43.6 million were time deposits at December 31, 2014 and 2013, respectively.


(11) Borrowings
 
As a member of the FHLB, the Company may borrow funds based on criteria established by the FHLB.  The FHLB may call these borrowings prior to maturity if the collateral balance falls below the borrowing level.  The borrowing arrangements with the FHLB could be either short- or long-term depending on our related costs and needs.
 
Total credit lines with the FHLB and available to the Company were $228.2 million at December 31, 2014.  At December 31, 2014 and 2013, the Company had loans from the FHLB totaling $165.8 million and $194.2 million, respectively.  Interest is payable on a monthly basis until maturity. All FHLB borrowings at December 31, 2014 mature by September 2015. To promote liquidity and enhance current earnings by way of reduction in interest expense, and after a review of the Company’s current level of assumed interest rate risk, the Company modified certain advances with the FHLB during 2011.  A majority of the Company’s existing fixed-rate advances were restructured as floating rate obligations at a fixed spread to three-month LIBOR with maturities ranging from 2.75 to 4.00 years. FHLB borrowings carry a weighted-average interest rate of 0.86% as of December 31, 2014 (including the impact of purchase accounting adjustments).  The FHLB borrowings were collateralized with residential real estate loans, commercial real estate loans, and investment securities. 
 
We also possess additional sources of liquidity through a variety of borrowing arrangements.  The Banks also maintain federal funds lines with two regional banking institutions and through the FRB Discount Window.  These available lines totaled approximately $63.7 million and $38.9 million at December 31, 2014 and 2013, respectively.  These lines were not utilized for borrowing purposes at December 31, 2014 or 2013.
 
Trust Preferred Securities
 
The Company has four placements of trust preferred securities.  The carrying amount and par amount is as follows:

87
HAMPTON ROADS BANKSHARES, INC.

 
 
Carrying
Amount
 
Par
Amount
 
Interest
Rate
 
Redeemable
On or After
 
Mandatory
Redemption
(in thousands except for interest rates)
 
 
 
 
 
Gateway Capital Statutory Trust I
 
$
5,226

 
$
8,248

 
LIBOR + 3.10%
 
September 17, 2008
 
September 17, 2033
Gateway Capital Statutory Trust II
 
4,265

 
7,217

 
LIBOR + 2.65%
 
July 17, 2009
 
June 17, 2034
Gateway Capital Statutory Trust III
 
7,416

 
15,464

 
LIBOR + 1.50%
 
May 30, 2011
 
May 30, 2036
Gateway Capital Statutory Trust IV
 
12,317

 
25,774

 
LIBOR + 1.55%
 
July 30, 2012
 
July 30, 2037

LIBOR in the table above refers to three-month LIBOR.  In all four trusts, the trust issuer has invested the total proceeds from the sale of the trust preferred securities in junior subordinated deferrable interest debentures issued by the Company.  The trust preferred securities pay cumulative cash distributions quarterly at an annual rate, reset quarterly.  The dividends paid to holders of the trust preferred securities, which are recorded as interest expense, are deductible for income tax purposes.
The Company has fully and unconditionally guaranteed the trust preferred securities through the combined operation of the debentures and other related documents.  The Company’s obligation under the guarantee is unsecured and subordinate to our senior and subordinated indebtedness.  The aggregate carrying value of these debentures as of December 31, 2014 was $29.2 million.  The difference between the par amounts and the carrying amounts of the debentures is amortized using the interest method as an adjustment to interest expense each period.  Effective interest rates used by the Company as of December 31, 2014 were between 5.30% and 6.48%.
 
(12) The Amended TARP
 
On December 31, 2008, as part of the Treasury’s Troubled Asset Relief Program Capital Purchase Program (“TARP CPP”), the Company entered into a Letter Agreement and Securities Purchase Agreement with the Treasury, pursuant to which the Company sold 80,347 shares of our Fixed-Rate Cumulative Perpetual Preferred Stock, Series C, no par value per share, having a liquidation preference of $1,000 per share (the “Series C Preferred”)  and a warrant (the “Warrant”) to purchase 53,035 shares of our Common Stock at an initial exercise price of $227.25 per share, subject to certain anti-dilution and other adjustments, for an aggregate purchase price of $80.3 million in cash.
 
On August 12, 2010, the Company and Treasury executed the Exchange Agreement, which provided for (i) the exchange of 80,347 shares of Series C Preferred for 80,347 shares of a newly-created Series C-1 preferred stock (“Series C-1 Preferred”), (ii) the conversion of the Series C-1 Preferred at a discounted conversion value of $6,500 per share into 2,089,022 shares of Common Stock at a conversion price of $10.00 per share, and (iii) the amendment of the terms of the Warrant to provide for the purchase of up to 53,035 shares of Common Stock at an exercise price of $10.00 per share for a ten-year term following the issuance of the amended warrant to the Treasury (the “Amended TARP Warrant”).   The transactions were consummated on September 30, 2010. 

As a result of the Capital Raise, which closed on September 27, 2012, and the Amended TARP Warrant's anti-dilution provisions, the number of shares underlying the Amended TARP Warrant was adjusted to 757,633 shares of our Common Stock and the exercise price to purchase such shares was adjusted to $0.70 per share.

The Amended TARP Warrant may be exercised at any time on or before September 29, 2020 by surrender of the Amended TARP Warrant and a completed notice of exercise attached as an annex to the Amended TARP Warrant and the payment of the exercise price for the shares of Common Stock for which the Amended TARP Warrant is being exercised.  The exercise price may be paid either by the withholding by the Company of such number of shares of Common Stock issuable upon exercise of the Amended TARP Warrant equal to the value of the aggregate exercise price of the Amended TARP Warrant determined by reference to the market price of our Common Stock on the trading day on which the Amended TARP Warrant is exercised or, if agreed to by us and the Amended TARP Warrant holder, by the payment of cash equal to the aggregate exercise price.  The Amended TARP Warrant and all rights under the Amended TARP Warrant are transferable and assignable.
 
(13) Financial Instruments with Off-Balance Sheet Risk
 
In the normal course of business to meet the financing needs of its customers, the Company is a party to financial instruments with off-balance sheet risk. These financial instruments include commitments to extend credit and standby letters of

88
HAMPTON ROADS BANKSHARES, INC.

credit.  Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Company upon extension of credit, is based on management’s credit evaluation of the counterparty. Collateral held varies but may include accounts receivable, inventory, property, plant and equipment, income-producing commercial properties, and real estate.  Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of the contractual obligation by a customer to a third party.  The majority of these guarantees extend until satisfactory completion of the customer’s contractual obligation.  Management does not anticipate any material losses will arise from additional funding of the aforementioned commitments or letters of credit.
 
These instruments involve, to varying degrees, elements of credit risk which have not been recognized in the consolidated balance sheets. The contract amount of these instruments reflects the extent of the Company’s involvement or credit risk.  The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments.  Contractual amounts at December 31, 2014 and 2013 were as follows.
(in thousands)
2014
 
2013
Financial instruments whose contract amounts
 
 
 
represent credit risk:
 
 
 
Commitments to extend credit
$
239,346

 
$
225,757

Standby letters of credit
15,760

 
17,311

 
$
255,106

 
$
243,068

 

89
HAMPTON ROADS BANKSHARES, INC.

(14) Retirement Plans
 
Defined Contribution Plan

Any employee of the Company or BOHR, who is at least 21 years of age, and has at least three months of service, is eligible to participate in the VBA Defined Contribution Plan for Hampton Roads Bankshares, Inc. (the “Plan”). Additionally, any employee of Shore who is at least 18 years old and has at least three months of service prior to April 1, 2011 is eligible to participate in the Plan. Participants may contribute up to 96% of their covered compensation, subject to statutory limitations, and the Company will make matching contributions of 100% of the first 3% of pay and 50% for the next 2% of pay that a participant contributes to the Plan. The Company may also make additional discretionary contributions to the Plan. Participants are fully vested in their contributions and the Company’s match immediately and become fully vested in the Company’s discretionary contributions after three years of service. The Company offers its stock as an investment option under the Plan.

The Company made matching contributions of $733 thousand, $790 thousand, and $726 thousand for the years ended December 31, 2014, 2013, and 2012, respectively.  The Company made no discretionary contributions in 2014, 2013, or 2012.

Supplemental Executive Retirement Plans (“SERP”)
 
The Company has entered into SERPs with several key officers.  Under these agreements, two officers are eligible to receive an annual benefit payable in fifteen installments each equal to $50 thousand following the attainment of their plan retirement date.  A third officer is eligible to receive a one-time lump sum payment of the lesser of $600 thousand or the amount he is otherwise entitled to under the supplemental retirement agreement following the attainment of his plan retirement date.  The change in benefit obligation and funded status for the years ended December 31, 2014, 2013, and 2012 were as follows.
 
(in thousands)
2014
 
2013
 
2012
Benefit obligation at beginning of year
$
746

 
$
1,710

 
$
1,543

Service cost
43

 
101

 
379

Interest cost
12

 
27

 
32

Settlements
(5
)
 
(1,092
)
 
(244
)
Benefit obligation at end of year
796

 
746

 
1,710

Fair value of plan assets
—

 
—

 
—

Funded status
$
(796
)
 
$
(746
)
 
$
(1,710
)
 
The amount of the funded status is the accrued benefit cost included in other liabilities on the balance sheet.  The amounts recognized in the consolidated balance sheets as of December 31, 2014 and 2013 were as follows.
(in thousands)
2014
 
2013
Accrued benefit cost included in other liabilities
$
(796
)
 
$
(746
)
 

The components of net periodic benefit cost for the years ended December 31, 2014, 2013, and 2012 were as follows.
 
2014
 
2013
 
2012
Service cost
$
43

 
$
101

 
$
379

Interest cost
12

 
27

 
32

(Gain) loss on settlements
—

 
(745
)
 
—

Net periodic benefit cost
$
55

 
$
(617
)
 
$
411

 

90
HAMPTON ROADS BANKSHARES, INC.

The weighted-average assumptions used to determine benefit obligations and net periodic pension benefit at December 31, 2014, 2013, and 2012 were as follows.  The rate of compensation increase only applies to the officer agreement with a Benefit Computation Base.
 
2014
 
2013
 
2012
Discount rate
4.73%
 
5.73%
 
7.00%
Rate of compensation increase
N/A
 
N/A
 
N/A
 
The Company recognizes expense each year related to the SERPs based on the present value of the benefits expected to be provided to the employees and any beneficiaries.  The Company did not make contributions to fund the supplemental retirement agreements in 2014, 2013, or 2012.  The plans are unfunded and there are no plan assets.  As of December 31, 2014, there are no benefit payments expected to be paid over the next ten years.

 
Board of Directors Retirement Agreement
 
The Company has entered into retirement agreements with certain members of the Board of Directors.  Participants are eligible for compensation under the plan upon the sixth anniversary of the participant’s first board meeting.  Benefits are to be paid in monthly installments commencing at retirement and ending upon the death, disability, or mutual consent of both parties to the agreement.  Under the plan, the participants continue to serve the Company after retirement by performing certain duties as outlined in the plan document.  During 2014, 2013, and 2012, the Company expensed $118 thousand, $21 thousand, and $40 thousand, respectively, related to this plan.
 
(15) Share-Based Compensation Plans
 
On October 4, 2011, the Company’s shareholders approved the 2011 Omnibus Incentive Plan (the “Plan”), which succeeds the Company’s 2006 Stock Incentive Plan and provided for the grant of up to 2,750,000 shares of our Common Stock as awards to employees of the Company and its related entities, members of the Board of Directors of the Company, and members of the board of directors of any of the Company’s related entities.  On June 25, 2012, the Company’s shareholders approved an amendment to the Plan that increased the number of shares reserved for issuance under the Plan to 13,675,000 of which 4,110,226 remain to be granted as of December 31, 2014.
 
Stock Options
 
Outstanding stock options consist of grants made to the Company’s directors and employees under share-based compensation plans that have been approved by the Company’s shareholders.  All outstanding options issued prior to 2014 have original terms that range from five to ten years and are either fully vested and exercisable at the date of grant or vest ratably over three to ten years. During 2014, there were 5,510,035 stock options granted to certain Company executive managers. The options granted during 2014 ratably vest over a four year period between 2015 and 2018, and expire in August 2021. A summary of the Company’s stock option activity and related information for the years ended December 31, 2014, 2013, and 2012 is as follows.

91
HAMPTON ROADS BANKSHARES, INC.

 
Options
Outstanding
 
Weighted
Average
Exercise Price
 
Average
Intrinsic
Value
 
 
 
 
 
 
Balance at December 31, 2011
30,556

 
$
355.37

 
$
—

Expired
(3,898
)
 
211.38

 
—

Balance at December 31, 2012
26,658

 
376.76

 
—

Expired
(2,475
)
 
221.15

 
—

Balance at December 31, 2013
24,183

 
392.44

 
—

Granted
5,510,035

 
1.62

 
—

Expired
(12,677
)
 
436.48

 
—

Balance at December 31, 2014
5,521,541

 
$
4.34

 
$
—

Options exercisable at
 
 
 
 
 
December 31, 2014
11,279

 
$
345.00

 
$
—


As of December 31, 2014, there was $4.9 million of total unrecognized compensation cost related to stock options. That cost is expected to be recognized over a weighted-average period of 2.33 years.

Restricted Stock Units
 
The Company granted restricted stock units to non-employee directors and certain employees as part of incentive programs.  The restricted stock units are settled in Common Stock of the Company and will generally vest over a range of one to four years. Grants of these awards were valued based on the closing price on the day of grant.  Compensation expense for outstanding restricted stock units is recognized ratably over the vesting periods of the awards.  The restricted stock units are not eligible to receive dividends or dividend equivalence until the RSUs are settled in Common Stock of the Company.  At that time, the participant will be entitled to all the same rights as a shareholder of the Company. 

A summary of the Company’s unvested restricted stock unit activity and related information for the years ended December 31, 2014, 2013, and 2012 is as follows.
 
Number
of Unvested Awards 
 
Weighted-Average
Grant Date
Fair Value
 
 
 
 
Balance at December 31, 2011
80

 
$
306.25

Vested
1,332,938

 
1.12

Forfeited
(125,079
)
 
1.32

Balance at December 31, 2012
1,207,939

 
1.12

Granted
1,000,189

 
1.50

Vested
(157,466
)
 
1.21

Forfeited
(189,732
)
 
1.12

Balance at December 31, 2013
1,860,930

 
1.32

Granted
1,721,612

 
1.64

Vested
(672,782
)
 
1.37

Forfeited and canceled
(787,199
)
 
1.27

Balance at December 31, 2014
2,122,561

 
$
1.57

 
At December 31, 2014, there were 955,247 of restricted stock units that were fully vested, of which 462,313 were settled in Common Stock of the Company during 2014. There were no restricted stock units settled in Common Stock of the Company during 2013.


92
HAMPTON ROADS BANKSHARES, INC.

As of December 31, 2014, there was $2.4 million of total unrecognized compensation cost related to restricted stock units.  That cost is expected to be recognized over a weighted-average period of 2.10 years.  During the twelve months ended December 31, 2014, the Company had 672,782 restricted stock units vest at a weighted average price of $1.37 per share.
 
Compensation cost relating to share-based awards is accounted for in the consolidated financial statements based on the fair value of the share-based award.  Share-based compensation expense recognized in the consolidated statements of operations for the years ended December 31, 2014, 2013, and 2012 was as follows.
 
(in thousands)
2014
 
2013
 
2012
Expense recognized:
 
 
 
 
 
Related to stock options
$
515

 
$
24

 
$
5

Related to restricted stock units
1,015

 
1,056

 
160

Related tax benefit
—

 
—

 
—

 
 
(16) Business Segment Reporting
 
The Company has identified its operating segments by product and subsidiary bank.  The Company’s two community bank subsidiaries, BOHR and Shore, provide loan and deposit services through full-service branches and loan production offices located in Virginia, North Carolina, Delaware, and Maryland. In addition to its banking operations, the Company has two additional reportable segments:  Mortgage and Corporate. Gateway Bank Mortgage, Inc. comprises our Mortgage segment and provides mortgage banking services such as originating and processing mortgage loans for sale to the secondary market.  Our Corporate segment includes the holding company, and immaterial passive operating results from inactive subsidiary units.
 
The accounting policies of the reportable segments are the same as those described in the summary of significant accounting policies.  Segment profit and loss is measured by net income prior to corporate overhead allocation.  Intersegment transactions are recorded at cost and eliminated as part of the consolidation process.  Because of the interrelationships between the segments, the information is not indicative of how the segments would perform if they operated as independent entities. 

93
HAMPTON ROADS BANKSHARES, INC.

The following tables show certain financial information as of and for the years ended December 31, 2014, 2013, and 2012 for each segment and in total. (Note: In order to be consistent with the presentation of total assets at December 31, 2014, total assets at December 31, 2013 and 2012 have been reclassified to remove the impact of investments in subsidiaries from the Eliminations and Corporate segments).
 
(in thousands)
Total
Elimination
BOHR
Shore
Mortgage
Corporate
Year Ended December 31, 2014
 
 
 
 
 
 
Net interest income (loss)
$
60,045

$
—

$
49,000

$
12,015

$
517

$
(1,487
)
Provision for loan losses
(218
)
—

260

(400
)
(78
)
—

Net interest income (loss)
 

 

 

 

 

 

after provision for loan losses
59,827

—

49,260

11,615

439

(1,487
)
Noninterest income
24,636

(285
)
10,577

3,224

11,542

(422
)
Noninterest expense
74,657

(285
)
46,994

12,661

11,020

4,267

Income (loss) before provision
 

 

 

 

 

 

for income taxes (benefit)
9,806

—

12,843

2,178

961

(6,176
)
Provision for income taxes (benefit)
6

—

—

(8
)
31

(17
)
Net income (loss)
9,800

—

12,843

2,186

930

(6,159
)
Net income attributable to
 

 

 

 

 

 

non-controlling interest
471

—

—

—

471

—

Net income (loss) attributable to
 

 

 

 

 

 

Hampton Roads Bankshares, Inc.
$
9,329

$
—

$
12,843

$
2,186

$
459

$
(6,159
)
Total assets at December 31, 2014
$
1,988,606

$
(65,634
)
$
1,671,450

$
338,117

$
34,644

$
10,029


 

94
HAMPTON ROADS BANKSHARES, INC.

(in thousands)
Total
Elimination
BOHR
Shore
Mortgage
Corporate
Year Ended December 31, 2013
 
 
 
 
 

 
Net interest income (loss)
$
63,501

$
—

$
52,857

$
11,780

$
720

$
(1,856
)
Provision for loan losses
(1,000
)
—

(250
)
(750
)
—

—

Net interest income (loss)
 

 

 

 

 

 

after provision for loan losses
62,501

—

52,607

11,030

720

(1,856
)
Noninterest income
25,512

(229
)
9,404

1,470

15,832

(965
)
Noninterest expense
82,348

(229
)
54,869

11,349

13,144

3,215

Income (loss) before provision
 

 

 

 

 

 

for income taxes (benefit)
5,665

—

7,142

1,151

3,408

(6,036
)
Provision for income taxes (benefit)
(90
)
—

(473
)
35

344

4

Net income (loss)
5,755

—

7,615

1,116

3,064

(6,040
)
Net income attributable to
 

 

 

 

 

 

non-controlling interest
1,679

—

—

—

1,679

—

Net income (loss) attributable to
 

 

 

 

 

 

Hampton Roads Bankshares, Inc.
$
4,076

$
—

$
7,615

$
1,116

$
1,385

$
(6,040
)
Total assets at December 31, 2013
$
1,950,272

$
(71,828
)
$
1,639,033

$
327,842

$
37,003

$
18,222


 

95
HAMPTON ROADS BANKSHARES, INC.

(in thousands)
Total
Elimination
BOHR
Shore
Mortgage
Corporate
Year Ended December 31, 2012
 
 
 
 
 

 
Net interest income (loss)
$
65,024

$
—

$
55,228

$
11,151

$
481

$
(1,836
)
Provision for loan losses
(14,994
)
—

(14,560
)
(434
)
—

—

Net interest income (loss)
 

 

 

 

 

 

after provision for loan losses
50,030

—

40,668

10,717

481

(1,836
)
Noninterest income
7,667

(245
)
(7,598
)
411

18,428

(3,329
)
Noninterest expense
81,427

(245
)
60,243

8,481

11,709

1,239

Income (loss) before provision
 

 

 

 

 

 

for income taxes (benefit)
(23,730
)
—

(27,173
)
2,647

7,200

(6,404
)
Provision for income taxes (benefit)
(2,182
)
—

—

—

—

(2,182
)
Net income (loss)
(21,548
)
—

(27,173
)
2,647

7,200

(4,222
)
Net income attributable to
 

 

 

 

 

 

non-controlling interest
3,543

—

—

—

3,543

—

Net income (loss) attributable to
 

 

 

 

 

 

Hampton Roads Bankshares, Inc.
$
(25,091
)
$
—

$
(27,173
)
$
2,647

$
3,657

$
(4,222
)
Total assets at December 31, 2012
$
2,054,092

$
(125,057
)
$
1,750,997

$
312,764

$
93,856

$
21,532


 

 
(17) Derivative Instruments
 
Derivatives are a financial instrument whose value is based on one or more underlying assets.  The Company originated residential mortgage loans for sale into the secondary market on both a best efforts and (from September 2012 to December 2013) on a mandatory delivery basis.  In connection with the underwriting process, the Company enters into commitments to lock-in the interest rate of the loan with the borrower prior to funding (“interest rate lock commitments”).  Generally, such interest rate lock commitments are for periods less than 60 days.  These interest rate lock commitments are considered derivatives.  The Company manages its exposure to changes in fair value associated with these interest rate lock commitments by entering into simultaneous agreements to sell the residential loans to third party investors shortly after their origination and funding.  At December 31, 2014 and 2013, the Company had loans held for sale of $22.1 million and $25.1 million, respectively.
 
Under the contractual relationship in the best efforts method, the Company is obligated to sell the loans only if the loans close.  As a result of the terms of these contractual relationships, the Company is not exposed to changes in fair value nor will it realize gains related to its rate-lock commitments due to subsequent changes in interest rates.  At December 31, 2014 and 2013, the Company had rate-lock commitments to originate residential mortgage loans (unfunded par amount of loans) on a best efforts basis in the amounts of $35.6 million and $35.6 million, respectively. 
 
From September 2012 to December 2013, the Company sold some of its mortgage loan production on a mandatory delivery basis and using derivative instruments (essentially forward delivery commitments and To-Be-Announced securities) to manage the resulting interest rate risk.  These derivatives were entered into as balance sheet risk management instruments, and therefore, were not designated as an accounting hedge.  Under the mandatory delivery approach, residential mortgage loans held for sale and commitments to borrowers to originate loans at agreed upon interest rates exposed the Company to changes in market rates and conditions subsequent to the interest rate lock commitment until the loans are delivered to the investor.    For the year ended December 31, 2013, the Company recorded a gain totaling $265 thousand related to mandatory delivery derivatives. Also, the

96
HAMPTON ROADS BANKSHARES, INC.

decrease in the carrying value of the underlying loans and interest rate lock commitments totaled $469 thousand.  Gains and losses on the Company’s derivative instruments are included within mortgage banking revenue on the Consolidated Statement of Operations. 
 
Additionally, to meet the needs of its commercial customers, the Company uses interest rate swaps to manage its interest rate risk.  Derivative contracts are executed between the Company and certain commercial loan customers with offsetting positions to dealers under a back-to-back swap program enabling the commercial loan customers to effectively exchange variable-rate interest payments under their existing obligations for fixed-rate interest payments.  For the period ended December 31, 2014 and 2013, the Company recorded gains totaling $227 thousand and $744 thousand, respectively, related to trading income on the interest rate swaps included in the back-to-back swap program that was included within other noninterest income on the Consolidated Statement of Operations.  There was no activity related to these interest rate swaps in 2012.
As of December 31, 2014 and December 31, 2013, the Company has derivative financial instruments not included in hedge relationships. These derivatives consist of interest rate swaps to facilitate interest rate management strategies for both the company and its commercial borrowers.
Certain financial instruments, including derivatives, may be eligible for offset in the consolidated balance sheet and/or subject to master netting arrangements. The Company’s derivative transactions with financial institution counterparties are generally executed under International Swaps and Derivative Association (ISDA) master agreements which include right of setoff provisions. In such cases there is generally a legally enforceable right to offset recognized amounts and there may be an intention to settle such amounts on a net basis. Nonetheless, the Company does not generally offset financial instruments for financial reporting purposes.
Information about financial instruments that are eligible for offset in the consolidated balance sheet as of December 31, 2014 and December 31, 2013 is presented in the following tables:

 
 
 
Gross
Net Amounts
Gross Amounts
 
 
 
 
Amounts
of Assets
Not Offset in the
 
 
 
Gross
Offset in
Presented
Consolidated Balance Sheets
 
 
 
Amounts
the
in the
 
 
 
 
 
of
Consolidated
Consolidated
 
Cash
 
 
 
Recognized
Balance
Balance
Financial
Collateral
Net
(in thousands)
 
Assets
Sheets
Sheets
Instruments
Received
Amount
Derivative assets:
 
 
 
 
 
 
 
December 31, 2014
 
$
913

$
—

$
913

$
197

$
—

$
716

     Interest rate swap agreements
 
 
 
 
 
 
 
December 31, 2013
 
 
 
 
 
 
 
     Interest rate swap agreements
 
986

—

986

156

—

830



97
HAMPTON ROADS BANKSHARES, INC.

 
 
 
Gross
Net Amounts
Gross Amounts
 
 
 
 
Amounts
of Liabilities
Not Offset in the
 
 
 
Gross
Offset in
Presented
Consolidated Balance Sheets
 
 
 
Amounts
the
in the
 
 
 
 
 
of
Consolidated
Consolidated
 
Cash
 
 
 
Recognized
Balance
Balance
Financial
Collateral
Net
(in thousands)
 
Liabilities
Sheets
Sheets
Instruments
Pledged
Amount
Derivative liabilities:
 
 
 
 
 
 
 
December 31, 2014
 
$
913

$
—

$
913

$
197

$
566

$
150

     Interest rate swap agreements
 
 
 
 
 
 
 
December 31, 2013
 
 
 
 
 
 
 
     Interest rate swap agreements
 
986

—

986

156

—

830


(18) Restrictions on Loans and Dividends from Subsidiaries
 
Regulatory agencies place certain restrictions on dividends paid and loans or advances made by the Banks to the Company.  The amount of dividends the Banks may pay to the Company, without prior approval, is limited to current year earnings plus retained net profits for the two preceding years.  Under these restrictions, at December 31, 2014, the Banks had no ability to pay dividends without prior approval.  Loans and advances from the Banks to the Company are limited based on regulatory capital.  As of December 31, 2014, there were no loans from the Banks to the Company.
 
(19) Regulatory Capital Requirements
 
The Company and the Banks are subject to regulatory capital requirements that measure capital relative to risk-weighted assets and off balance sheet financial instruments.  Failure to meet minimum capital requirements can cause certain mandatory and discretionary actions by regulators that, if undertaken, could have a material effect on our consolidated financial statements.  Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Banks must meet specific capital guidelines that involve quantitative and qualitative measures to ensure capital adequacy.  Tier I capital is comprised of shareholders’ equity and trust preferred securities net of unrealized gains or losses on available for sale securities and intangible assets, while total risk-based capital adds certain debt instruments and qualifying allowances for loan losses. 
 

98
HAMPTON ROADS BANKSHARES, INC.

A summary of the Company’s and the Banks’ required and actual capital components as of December 31, 2014 and 2013 is as follows.
 
Actual
 
For Capital
Adequacy Purposes
 
To Be Well Capitalized
Under Prompt Action
Provisions
 
 
 
 
 
 
(in thousands except for ratios)
Amount
 
Ratio
 
Amount
 
Ratio
 
Amount
 
Ratio
As of December 31, 2014
 
 
 
 
 
 
 
 
 
 
 
Tier 1 Capital:
 
 
 
 
 
 
 
 
 
 
 
Consolidated Company
$
221,533

 
13.90
%
 
$
63,759

 
4.00
%
 
N/A

 
N/A

Bank of Hampton Roads
168,760

 
12.73
%
 
53,032

 
4.00
%
 
79,548

 
6.00
%
Shore Bank
36,362

 
13.67
%
 
10,637

 
4.00
%
 
15,955

 
6.00
%
Total Risk-Based Capital:
 
 
 
 
 
 
 
 
 
 
 
Consolidated Company
241,546

 
15.15
%
 
127,518

 
8.00
%
 
N/A

 
N/A

Bank of Hampton Roads
185,425

 
13.99
%
 
106,065

 
8.00
%
 
132,581

 
10.00
%
Shore Bank
39,336

 
14.79
%
 
21,274

 
8.00
%
 
26,592

 
10.00
%
Leverage Ratio:
 
 
 
 
 
 
 
 
 
 
 
Consolidated Company
221,533

 
11.08
%
 
79,991

 
4.00
%
 
N/A

 
N/A

Bank of Hampton Roads
168,760

 
10.16
%
 
66,427

 
4.00
%
 
83,034

 
5.00
%
Shore Bank
36,362

 
10.70
%
 
13,595

 
4.00
%
 
16,994

 
5.00
%
As of December 31, 2013
 
 
 
 
 
 
 
 
 
 
 
Tier 1 Capital:
 
 
 
 
 
 
 
 
 
 
 
Consolidated Company
$
211,809

 
13.86
%
 
$
61,108

 
4.00
%
 
N/A

 
N/A

Bank of Hampton Roads
156,605

 
12.21
%
 
51,294

 
4.00
%
 
76,942

 
6.00
%
Shore Bank
33,581

 
13.80
%
 
9,732

 
4.00
%
 
14,598

 
6.00
%
Total Risk-Based Capital:
 
 
 
 
 
 
 
 
 
 
 
Consolidated Company
231,102

 
15.13
%
 
122,215

 
8.00
%
 
N/A

 
N/A

Bank of Hampton Roads
172,832

 
13.48
%
 
102,589

 
8.00
%
 
128,236

 
10.00
%
Shore Bank
36,563

 
15.03
%
 
19,464

 
8.00
%
 
24,330

 
10.00
%
Leverage Ratio:
 
 
 
 
 
 
 
 
 
 
 
Consolidated Company
211,809

 
10.74
%
 
78,927

 
4.00
%
 
N/A

 
N/A

Bank of Hampton Roads
156,605

 
9.58
%
 
65,415

 
4.00
%
 
81,769

 
5.00
%
Shore Bank
33,581

 
9.99
%
 
13,441

 
4.00
%
 
16,801

 
5.00
%
 
As of December 31, 2014, the Company exceeded the regulatory capital minimums, and BOHR and Shore were considered “well capitalized” under the risk-based capital standards.

(20) Fair Value Measurements
 
Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.  The Company classifies financial assets and liabilities measured at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value.  Valuation methodologies for the fair value hierarchy are as follows.
 
Level 1 – Quoted prices in active markets for identical assets or liabilities.  Level 1 assets and liabilities include debt and equity securities and derivative contracts that are traded in an active exchange market, as well as certain Treasury securities that are highly liquid and are actively traded in over-the-counter markets.
 
Level 2 – Observable inputs other than Level 1 prices, such as quoted prices for similar assets and liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.  Level 2 assets and liabilities include debt securities with quoted prices that are traded less

99
HAMPTON ROADS BANKSHARES, INC.

frequently than exchange-traded instruments and derivative contracts whose values are determined using a pricing model with inputs that are observable in the market or can be derived principally from or corroborated by observable market data. 
 
Level 3 – Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.  Level 3 assets and liabilities include values that are determined using pricing models, discounted cash flow methodologies, or similar techniques as well as assets and liabilities for which the determination of fair value requires significant management judgment or estimation. 
 
The categorization of an asset or liability within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement.
 
Recurring Basis
 
The Company measures or monitors certain of its assets on a fair value basis.  Fair value is used on a recurring basis for those assets and liabilities for which an election was made as well as for certain assets and liabilities in which fair value is the primary basis of accounting.  The following tables reflect the fair value of assets measured and recognized at fair value on a recurring basis in the consolidated balance sheets at December 31, 2014 and 2013.
(in thousands)
December 31,
2014
 
Fair Value Measurements at Reporting Date Using
Assets
 
Level 1
 
Level 2
 
Level 3
Investment securities available for sale
 
 
 
 
 
 
 
U.S. agency securities
$
17,653

 
$
—

 
$
17,653

 
$
—

Corporate bonds
14,560

 
—

 
14,560

 
—

Mortgage-backed securities -
 
 
 
 
 
 
 
Agency
215,428

 
—

 
215,428

 
—

Asset-backed securities
53,197

 
—

 
53,197

 
—

Equity securities
1,383

 
1,103

 
—

 
280

Total investment securities
 
 
 
 
 
 
 
available for sale
302,221

 
1,103

 
300,838

 
280

Derivative loan commitments
 
 
 
 
 
 
 
Interest rate lock commitments
472

 
—

 
—

 
472

Total derivative loan commitments
472

 
—

 
—

 
472

Interest rate swaps
913

 
—

 
913

 
—

Total assets
$
303,606

 
$
1,103

 
$
301,751

 
$
752

 
 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
 
Interest rate swaps
$
913

 
$
—

 
$
913

 
$
—

Total liabilities
$
913

 
$
—

 
$
913

 
$
—


100
HAMPTON ROADS BANKSHARES, INC.

(in thousands)
December 31,
2013
 
Fair Value Measurements at Reporting Date Using
Assets
 
Level 1
 
Level 2
 
Level 3
Investment securities available for sale
 
 
 
 
 
 
 
U.S. agency securities
$
21,998

 
$
—

 
$
21,998

 
$
—

State and municipal securities
537

 
—

 
537

 
—

Corporate bonds
17,542

 
—

 
17,542

 
—

Mortgage-backed securities -
 
 
 
 
 
 
 
Agency
225,845

 
—

 
225,845

 
—

Non-agency
8,180

 
—

 
8,180

 
—

Asset-backed securities
49,871

 
—

 
49,871

 
—

Equity securities
1,511

 
1,222

 
—

 
289

Total investment securities
 
 
 
 
 
 
 
available for sale
325,484

 
1,222

 
323,973

 
289

Derivative loan commitments
 
 
 
 
 
 
 
Interest rate lock commitments
844

 
—

 
—

 
844

Total derivative loan commitments
844

 
—

 
—

 
844

Interest rate swaps
986

 
—

 
986

 
—

Total assets
$
327,314

 
$
1,222

 
$
324,959

 
$
1,133

 
 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
 
Interest rate swaps
$
986

 
$
—

 
$
986

 
$
—

Total liabilities
$
986

 
$
—

 
$
986

 
$
—

 
The following table shows a rollforward of recurring fair value measurements categorized with Level 3 of the fair value hierarchy for the years ended December 31, 2014 and 2013.
 
Activity in Level 3
Fair Value Measurements
Year Ended December 31, 2014
 
Activity in Level 3
Fair Value Measurements
Year Ended December 31, 2013
 
 
(in thousands)
 
 
Investment
Securities
Available for Sale
 
Derivative
Loan
Commitments
 
Investment
Securities
Available for Sale
 
Derivative
Loan
Commitments
 
 
 
 
Description
 
 
 
Beginning of period balance
$
289

 
$
844

 
$
289

 
$
2,040

Unrealized gains included in:
 
 
 
 
 
 
 
Earnings
—

 
—

 
—

 
—

Other comprehensive income
—

 
—

 
—

 
—

Purchases
—

 
—

 
—

 
—

Sales
(9
)
 
—

 
—

 
—

Issuances
—

 
—

 
—

 
—

Settlements
—

 
(372
)
 
—

 
(1,196
)
End of period balance
$
280

 
$
472

 
$
289

 
$
844

 
The Company’s policy is to recognize transfers between levels of the fair value hierarchy on the date of the event or change in circumstances that caused the transfer. 
 
The following describes the valuation techniques used to estimate fair value for our assets and liabilities that are measured on a recurring basis.

Investment Securities Available for Sale.  Where quoted prices are available in an active market, securities are classified within Level 1 of the valuation hierarchy.  Level 1 securities would include highly liquid government bonds, mortgage products, and

101
HAMPTON ROADS BANKSHARES, INC.

exchange traded equities.  If quoted market prices are not available, then fair values are estimated by using pricing models or quoted prices of securities with similar characteristics.  Level 2 securities would include U.S. agency securities, mortgage-backed securities, obligations of states and political subdivisions, and certain corporate, asset-backed, and other securities valued using third party quoted prices in markets that are not active.  In certain cases where there is limited activity or less transparency around inputs to the valuation, securities are classified within Level 3 of the valuation hierarchy. 

Derivative Loan Commitments.  The Company originates mortgage loans for sale into the secondary market on both a best efforts and (for the period from September 2012 to December 2013) on a mandatory delivery basis.  Under the best efforts basis, the Company enters into commitments to originate mortgage loans whereby the interest rate is fixed prior to funding.  These commitments, in which the Company intends to sell in the secondary market, are considered freestanding derivatives.  Under the mandatory delivery basis, mortgage loans held for sale and commitments to borrowers to originate loans at agreed upon interest rates expose the Company to changes in market rates and conditions subsequent to the interest rate lock commitment.  The fair values of interest rate lock and mandatory delivery commitments, which are related to mortgage loan commitments and are categorized as Level 3, are based on quoted prices adjusted for commitments that the Company does not expect to fund.
 
Interest Rate Swaps.  The Company uses observable inputs to determine fair value of its interest rate swaps.  The valuation of these instruments is determined using widely accepted valuation techniques that are based on discounted cash flow analysis using the expected cash flows of each derivative over the contractual terms of the derivatives, including the period to maturity and market-based interest rate curves.  As of and for the year ended December 31, 2014, the fair values of the interest rate swaps were determined using a market standard methodology of netting the discounted future fixed cash receipts and the discounted expected variable cash payments.  The variable cash payments were based on an expectation of future interest rates (forward curves) derived from observable market interest rate curves.  Accordingly, the Company categorizes these financial instruments within Level 2 of the fair value hierarchy.

Nonrecurring Basis
 
Certain assets, specifically collateral dependent impaired loans and other real estate owned and repossessed assets, are measured at fair value on a nonrecurring basis; that is, the instruments are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances (for example, when there is evidence of impairment and an allowance is established to adjust the asset to its estimated fair value).  The adjustments are based on appraisals of underlying collateral or other observable market prices when current appraisals or observable market prices are available.  Where we do not have an appraisal that is less than 12 months old, an existing appraisal or other valuation would be utilized after discounting it to reflect current market conditions, and, as such, may include significant management assumptions and input with respect to the determination of fair value. 
 
To assist in the discounting process, a valuation matrix was developed to provide valuation guidance for collateral dependent loans and other real estate owned where it was deemed that an existing appraisal was outdated as to current market conditions.  The matrix applies discounts to external appraisals depending on the type of real estate and age of the appraisal.  The discounts are generally specific point estimates; however in some cases, the matrix allows for a small range of values.  The discounts were based in part upon externally derived statistical data.  The discounts were also based upon management’s knowledge of market conditions and prices of sales of other real estate owned.  In addition, matrix value adjustments may be made by our independent appraisal group to reflect property value trends within specific markets as well as actual sales data from market transactions and/or foreclosed real estate sales.  It is the Company’s policy to classify these as Level 3 assets within the fair value hierarchy.  The average age of appraisals for valuations of collateral dependent impaired loans was 0.56 years as of December 31, 2014.  Management periodically reviews the discounts in the matrix as compared to valuations from updated appraisals and modifies the discounts accordingly should updated appraisals reflect valuations significantly different than those derived utilizing the matrix.  To date, management believes the appraisal discount matrix has resulted in appropriate adjustments to existing appraisals thereby providing management with reasonable valuations for the collateral underlying the loan portfolio; however, while appraisals are indicators of fair value, the amount realized upon sale of these assets could be significantly different. 
 







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HAMPTON ROADS BANKSHARES, INC.



The following tables reflect the fair value of assets measured and recognized at fair value on a nonrecurring basis in the consolidated balance sheets at December 31, 2014 and 2013. 
 
 
Assets
Measured at
Fair Value
 
Fair Value Measurements at
December 31, 2014 Using
 
 
(in thousands)
 
Level 1
 
Level 2
 
Level 3
Impaired loans
$
40,107

 
$
—

 
$
—

 
$
40,107

Other real estate owned
 
 
 
 
 
 
 
and repossessed assets
21,721

 
—

 
—

 
21,721

 
 
Assets
Measured at
Fair Value
 
Fair Value Measurements at
 
 
December 31, 2013 Using
 
 
Level 1
 
Level 2
 
Level 3
Impaired loans
$
49,319

 
$
—

 
$
—

 
$
49,319

Other real estate owned
 
 
 
 
 
 
 
and repossessed assets
36,665

 
—

 
—

 
36,665

 
 
The following describes the valuation techniques used to estimate fair value for our assets that are required to be measured on a nonrecurring basis.
 
Impaired Loans.  The majority of the Company’s impaired loans are considered collateral dependent.  For collateral dependent impaired loans, impairment is measured based upon the estimated fair value of the underlying collateral.
 
Other Real Estate Owned and Repossessed Assets.  The adjustments to other real estate owned and repossessed assets are based primarily on appraisals of the real estate or other observable market prices.  Our policy is that fair values for these assets are based on current appraisals.  In most cases, we maintain current appraisals for these items.  Where we do not have a current appraisal, an existing appraisal would be utilized after discounting it to reflect changes in market conditions from the date of the existing appraisal, and, as such, may include significant management assumptions and input with respect to the determination of fair value. 
 
Branch Consolidation.  On March 27, 2013, the Company announced the consolidation of seven BOHR and Shore branch locations, six owned and one leased, into nearby branches.  This required an impairment analysis to be performed.  In connection with the analysis, five of the branch locations were determined to have carrying amounts that exceeded fair value at March 31, 2013.  Accordingly, the related carrying amounts of these branches were reduced to estimated fair value (less costs to sell) and the Company recorded an impairment totaling $2.8 million during the quarter ended March 31, 2013.  Management estimated the fair value of the branches by utilizing various market-based valuation techniques, including estimates from unrelated brokers, existing purchase offers from unrelated parties, and appraisals available as of the measurement date.  Approximately $3.4 million related to the remaining carrying values of the branch related assets was transferred into other real estate owned in accordance with relevant accounting guidance and are measured at fair value on a nonrecurring basis.
 
Significant Unobservable Inputs
 
The following table presents the significant unobservable inputs used to value the Company’s material Level 3 assets; these factors represent the significant unobservable inputs that were used in measurement of fair value.

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HAMPTON ROADS BANKSHARES, INC.

 
Fair Value at
December 31, 2014
 
 Significant Unobservable Inputs
by Valuation technique
 
Significant Unobservable
Inputs as of
December 31, 2014
(in thousands except for percentages)
 
 
 
 
 
Type
 
 
Derivative loan commitments
$
472

 
Pull through rate
 
88%
 
 
 
Percentage of loans that will
 
 
 
 
 
ultimately close
 
 
Impaired loans
40,107

 
Appraised value
 
10%
 
 
 
Discounts to reflect current market
 
 
 
 
 
conditions, ultimate collectability,
 
 
 
 
 
and estimated costs to sell
 
 
Other real estate owned
21,721

 
Appraised value
 
14%
 
 
 
Discounts to reflect current market
 
 
 
 
 
conditions, abbreviated holding
 
 
 
 
 
period, and estimated costs to sell
 
 
 
 
Other Fair Value Measurements
 
Additionally, accounting standards require the disclosure of the estimated fair value of financial instruments that are not recorded at fair value. For the financial instruments that the Company does not record at fair value, estimates of fair value are made at a point in time based on relevant market data and information about the financial instrument.  No readily available market exists for a significant portion of the Company’s financial instruments.  Fair value estimates for these instruments are based on current economic conditions, interest rate risk characteristics, and other factors. Many of these estimates involve uncertainties and matters of significant judgment and cannot be determined with precision. Therefore, the calculated fair value estimates in many instances cannot be substantiated by comparison to independent markets and, in many cases, may not be realizable in a current sale of the instrument.  In addition, changes in assumptions could significantly affect these fair value estimates.  The following methods and assumptions were used by the Company in estimating fair value of these financial instruments.
 
(a)    Cash and Cash Equivalents
Cash and cash equivalents include cash and due from banks, interest-bearing deposits in other banks, and overnight funds sold and due from FRB.  The carrying amount approximates fair value.
 
(b)    Investment Securities Available for Sale
Fair values are based on published market prices where available. If quoted market prices are not available, then fair values are estimated by using pricing models, quoted prices of securities with similar characteristics, or discounted cash flow.  Investment securities available for sale are carried at their aggregate fair value.
(c)    Restricted Equity Securities
These investments are carried at cost.  The carrying amount approximates fair value.
 
(d)    Loans Held For Sale
The carrying value of loans held for sale is a reasonable estimate of fair value since loans held for sale are expected to be sold within a short period.
 
(e)    Loans
To determine the fair values of loans other than those listed as nonaccrual, we use discounted cash flow analyses.  In these analyses, we use discount rates that are similar to the interest rates and terms currently being offered to borrowers of similar terms and credit quality.  For nonaccrual loans, we use a variety of techniques to measure fair value, such as using the current appraised value of the collateral, discounting the contractual cash flows, and analyzing market data that we may adjust due to the specific characteristics of the loan or collateral.

104
HAMPTON ROADS BANKSHARES, INC.

(f)    Interest Receivable and Interest Payable
The carrying amount approximates fair value.
(g)    Bank-Owned Life Insurance
The carrying amount approximates fair value.
 (h)    Deposits
The fair values disclosed for transaction deposits such as demand and savings accounts are equal to the amount payable on demand at the reporting date (this is, their carrying values).  The carrying amounts of variable-rate, fixed-term money market accounts and certificates of deposit approximate their fair values at the reporting date.  Fair values for fixed-rate certificates of deposit are estimated using a discounted cash flow calculation that applies market interest rates on comparable instruments to a schedule of aggregated expected monthly maturities on time deposits.
(i)    Borrowings
The fair value of borrowings is estimated using discounted cash flow analyses based on the rates currently offered for borrowings of similar remaining maturities and collateral requirements.  These include FHLB borrowings and other borrowings.
(j)    Commitments to Extend Credit and Standby Letters of Credit
The only amounts recorded for commitments to extend credit and standby letters of credit are the deferred fees arising from these unrecognized financial instruments.  These deferred fees are not deemed significant at December 31, 2014 and 2013, and as such, the related fair values have not been estimated.
 
The carrying amounts and fair values of those financial instruments that are not recorded at fair value at December 31, 2014 and 2013 were as follows.
 
2014
 
Carrying
Amount
 
Fair
Value
 
Fair Value Measurements at Reporting Date Using
(in thousands)
 
 
Level 1
 
Level 2
 
Level 3
Financial Assets:
 
 
 
 
 
 
 
 
 
Loans, net(1)
$
1,395,885

 
$
1,406,608

 
$
—

 
$
—

 
$
1,406,608

Financial Liabilities:
 
 
 
 
 
 
 
 
 
Deposits
1,581,348

 
1,565,278

 
—

 
1,565,278

 
—

FHLB borrowings
165,847

 
165,963

 
—

 
165,963

 
—

Other borrowings
29,224

 
56,703

 
—

 
56,703

 
—

 
 
2013
 
Carrying
Amount
 
Fair
Value
 
Fair Value Measurements at Reporting Date Using
(in thousands)
 
 
Level 1
 
Level 2
 
Level 3
Financial Assets:
 
 
 
 
 
 
 
 
 
Loans, net(1)
$
1,349,500

 
$
1,367,103

 
$
—

 
$
—

 
$
1,367,103

Financial Liabilities:
 
 
 
 
 
 
 
 
 
Deposits
1,523,328

 
1,485,554

 
—

 
1,485,554

 
—

FHLB borrowings
194,178

 
194,191

 
—

 
194,191

 
—

Other borrowings
28,983

 
56,703

 
—

 
56,703

 
—

(1)Carrying amount and fair value includes impaired loans.  Carrying amount is net of the allowance for loan losses.
 
(21) Income Taxes
 
The Company files federal income tax returns in the United States and in the states of Virginia, Delaware, Maryland, North Carolina, and Florida.  With few exceptions, the Company is no longer subject to United States federal and state income tax examinations by tax authorities for years prior to 2011.  The current and deferred components of income tax expense for the years ended December 31, 2014, 2013, and 2012 were as follows.

105
HAMPTON ROADS BANKSHARES, INC.

(in thousands)
2014
 
2013
 
2012
Current
$
6

 
$
(90
)
 
$
(2,182
)
Deferred
6,126

 
(86
)
 
(9,737
)
Deferred tax asset valuation allowance
(6,126
)
 
86

 
9,737

Income tax expense (benefit)
$
6

 
$
(90
)
 
$
(2,182
)
 
 The provisions for income taxes for the years ended December 31, 2014, 2013, and 2012 differ from the amount computed by applying the statutory federal income tax rate to income before taxes due to the following.

(in thousands)
2014
 
2013
 
2012
Federal income tax expense (benefit),
 
 
 
 
 
at statutory rate
$
3,432

 
$
1,983

 
$
(9,546
)
Change resulting from:
 
 
 
 
 
State income tax, net of federal benefit
4

 
(59
)
 
(529
)
Minority Interest
(165
)
 
(588
)
 
—

Valuation allowance of deferred tax assets
(6,126
)
 
86

 
9,737

Dividends and tax-exempt interest
—

 
—

 
10

Officers' life insurance
(1,374
)
 
(1,151
)
 
(299
)
Benefit from NOL carryback
—

 
—

 
(2,182
)
Return to provision adjustments
36

 
178

 
—

True-up of deferred assets and liabilities
—

 
(603
)
 
—

Write-off of deferred tax assets
2,128

 
—

 
—

Loss of deferred tax assets due to Section 382 limitation
1,919

 
—

 
—

Other
152

 
64

 
627

Income tax expense (benefit)
$
6

 
$
(90
)
 
$
(2,182
)
 

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. 


106
HAMPTON ROADS BANKSHARES, INC.

Significant components of the Company’s deferred tax assets and liabilities as of December 31, 2014 and 2013 were as follows.
 
(in thousands)
2014
 
2013
Deferred tax assets:
 
 
 
Allowance for loan losses
$
79,160

 
$
88,855

Federal net operating loss carryforward
73,879

 
66,722

State net operating loss carryforward
4,424

 
3,881

AMT carryforward
502

 
502

Impairment of other real estate owned, securities and other assets
8,610

 
13,078

Nonaccrual loan interest
13,077

 
11,941

Accrued expenses
1,761

 
1,593

Nonqualified deferred compensation
1,316

 
1,393

Other
—

 
320

Total deferred tax assets
 
 
 
before valuation allowance
182,729

 
188,285

Valuation allowance
(168,735
)
 
(175,970
)
Total deferred tax assets
13,994

 
12,315

Deferred tax liabilities:
 
 
 
Prepaid expenses
374

 
707

Deferred loan costs
936

 
749

Fair value adjustment to net assets
 
 
 
acquired in business combinations
10,210

 
9,533

Unrealized gain on securities
 
 
 
available for sale
789

 
—

Depreciation
1,645

 
1,289

Other
40

 
37

Total deferred tax liabilities
13,994

 
12,315

Net deferred tax asset
$
—

 
$
—

 
At December 31, 2014, the Company had net operating loss carryforwards of $211.1 million, which are available to offset future federal and state taxable income, if any, through 2034, however due to the 20-year carryforward period limitation, they will start to expire in 2029.  In addition, the Company has alternative minimum tax (“AMT”) credit carryforwards of $502 thousand, which are available to reduce federal regular income taxes, if any, over an indefinite period.  
 
In addition to a net operating loss and AMT carryforwards, our net deferred tax asset consisted primarily of three asset components offset by one liability component:  (1) At December 31, 2014, the timing difference related to the allowance for loan losses was $214.3 million, resulting in a deferred tax asset of $79.2 million.  (2) The timing difference related to impairment of other real estate owned, securities, and other assets was $23.3 million, resulting in a deferred tax asset of $8.6 million.  (3) Interest income related to non-performing loans (referred to as “lost interest”) is recognized as taxable income for tax purposes, but is not recorded as income for book purposes.  Lost interest was $35.4 million at December 31, 2014, resulting in a deferred tax asset of $13.1 million.  The aggregate deferred tax effect of all purchase accounting entries related to the acquisitions of GFH and Shore Financial Corporation resulted in a net deferred tax liability of $10.2 million at December 31, 2014. 

A valuation allowance related to all components of net deferred tax assets was established in 2009 and adjusted, as necessary, each reporting period.  The valuation allowance was established based upon a determination that it was not more likely than not the deferred tax assets would be fully realized primarily as a result of the significant operating losses experienced by the Company during year-end 2009 and thereafter. 
 

107
HAMPTON ROADS BANKSHARES, INC.

The Company had a $90 thousand net income tax benefit in 2013 relating to state tax refunds from the carryback of net operating losses related to 2008 and 2009 tax years.  Refunds were issued by the North Carolina Department of Taxation.  The Company had a $2.2 million income tax benefit in 2012.  The benefit relates to the carryback of the net operating loss related to the 2006 through 2008 tax years, and refunds that were approved and issued by the Internal Revenue Service.
 
The Company recognizes interest and penalties related to unrecognized tax benefits as part of the tax provision.  The Company recognized minimal amounts in penalties and fees for the years ended December 31, 2014, 2013, and 2012.  The Company has no uncertain tax positions at December 31, 2014.
 
(22) Condensed Parent Company Only Financial Statements
 
The condensed financial position as of December 31, 2014 and 2013 and the condensed results of operations and cash flows for each of the years in the three-year period ended December 31, 2014 of Hampton Roads Bankshares, Inc., parent company only, are presented below. In 2014, we changed our presentation of the Company's 51% ownership in a mortgage banking partnership. In previous financial statement presentations, 100% of this investment was included in Investment in subsidiaries, and a corresponding 49% was included in Non-controlling interest. The Company's 51% ownership is now reflected in Investment in subsidiaries. The 2013 Condensed Balance Sheet and the 2013 and 2012 Condensed Statements of Cash Flows were adjusted to reflect this change in presentation.
 
Condensed Balance Sheets

 
(in thousands)
2014
 
2013
Assets:
 
 
 
Cash on deposit with subsidiaries
$
15,887

 
$
25,380

Equity securities available for sale
1,383

 
246

Investment in subsidiaries
217,931

 
200,363

Other assets
2,348

 
1,704

Total assets
$
237,549

 
$
227,693

Liabilities:
 
 
 
Borrowings
$
29,224

 
$
28,983

Deferred tax liability
10,217

 
9,691

Other liabilities
1,111

 
5,621

Total liabilities
40,552

 
44,295

Shareholders' equity:
 
 
 
Common stock
1,706

 
1,703

Capital surplus
588,692

 
587,424

Retained deficit
(395,535
)
 
(404,864
)
Accumulated other comprehensive income (loss), net of tax
2,134

 
(865
)
Total shareholders' equity
196,997

 
183,398

Total liabilities and shareholders' equity
$
237,549

 
$
227,693




108
HAMPTON ROADS BANKSHARES, INC.

Condensed Statements of Operations
 
(in thousands)
2014
 
2013
 
2012
Income:
 
 
 
 
 
Interest income
$
19

 
$
6

 
$
108

Gain on sale of investment
 
 
 
 
 
securities available for sale
—

 
33

 
220

Other income
205

 
403

 
51

Total income
224

 
442

 
379

Expenses:
 
 
 
 
 
Interest expense
1,506

 
1,861

 
1,945

Other expense
4,265

 
3,214

 
1,157

Total expense
5,771

 
5,075

 
3,102

Loss before income taxes and equity in
 
 
 
 
 
undistributed earnings (loss) of subsidiaries
(5,547
)
 
(4,633
)
 
(2,723
)
Income tax expense (benefit)
—

 
—

 
(2,182
)
Equity in undistributed earnings (loss) of subsidiaries
14,876

 
8,709

 
(24,550
)
Net income (loss) attributable to
 
 
 
 
 
Hampton Roads Bankshares, Inc.
$
9,329

 
$
4,076

 
$
(25,091
)

 

109
HAMPTON ROADS BANKSHARES, INC.

Condensed Statements of Cash Flows

(in thousands)
2014
 
2013
 
2012
Operating Activities:
 
 
 
 
 
Net income (loss)
$
9,329

 
$
4,076

 
$
(25,091
)
Adjustments:
 
 
 
 
 
Equity in undistributed (earnings) loss of subsidiaries
(14,876
)
 
(8,709
)
 
24,550

Amortization of intangibles
241

 
490

 
491

Share-based compensation expense
1,530

 
1,080

 
165

Change in other assets
(118
)
 
5,850

 
(3,962
)
Change in other liabilities
(4,510
)
 
1,112

 
(3,960
)
Net cash provided by
 
 
 
 
 

(used in) operating activities
(8,404
)
 
3,899

 
(7,807
)
Investing Activities:
 
 
 
 
 
Investment in subsidiaries
—

 
—

 
(66,000
)
Purchase of investment securities
(830
)
 
—

 
—

Net cash used in investing activities
(830
)
 
—

 
(66,000
)
Financing Activities:
 
 
 
 
 
Issuance of private placement shares, net
—

 
—

 
47,135

Issuance of rights offering shares
—

 
—

 
43,921

Repurchase of common stock in the settlement of restricted stock units
(259
)
 
—

 
—

Common stock surrendered
—

 
(3
)
 
(15
)
Net cash provided by (used in) financing activities
(259
)
 
(3
)
 
91,041

Increase (decrease) in cash and cash equivalents
(9,493
)
 
3,896

 
17,234

Cash and cash equivalents at beginning of year
25,380

 
21,484

 
4,250

Cash and cash equivalents at end of year
$
15,887

 
$
25,380

 
$
21,484


 
(23) Related Party Transactions
 
Loans are made to the Company’s executive officers, directors, and principal shareholders, as well as to entities controlled by any of the foregoing, during the ordinary course of business.  In management’s opinion, these loans are made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable loans with other persons and do not involve more than normal risk of collectability or present other unfavorable features.  At December 31, 2014 and 2013, loans to executive officers, directors, and principal shareholders of the Company, as well as to entities controlled by any of the foregoing, amounted to $31.3 million and $61.7 million, respectively.  During 2014, additional loans made to related parties amounted to $2.9 million. Due to changes in the composition of the related party group, loans declined by $33.3 million in 2014.
 
Deposits are taken from the Company’s executive officers, directors, and principal shareholders, as well as to entities controlled by any of the foregoing, during the ordinary course of business.  In management’s opinion, these deposits are taken on substantially the same terms, including interest rates, as those prevailing at the time for comparable deposits from other persons.  At December 31, 2014 and 2013, deposits from executive officers, directors, and principal shareholders of the Company, as well as to entities controlled by any of the foregoing, amounted to $36.6 million and $32.9 million, respectively.
 

110
HAMPTON ROADS BANKSHARES, INC.

The Company leases its Kitty Hawk, North Carolina branch from a director and his wife for monthly payments of $19,342.  The lease is a land lease that commenced in April 2006 for a term of twenty years with an annual 2.50% escalation, with three optional five-year renewals.
 
The Company leases from a director the land on which one of its Eastern Shore branches is located for monthly payments of $2,280.  The terms of this lease were renewed for two years commencing June 5, 2014 and will expire June 5, 2016.  At that time, there is an option to renew the lease for another five-year term.

(24) Quarterly Financial Data (Unaudited)
 
Summarized unaudited quarterly financial data for the years ended December 31, 2014 and 2013 is as follows.
 
2014
(in thousands)
Fourth
 
Third
 
Second
 
First
Interest income
$
18,108

 
$
18,343

 
$
17,934

 
$
17,958

Interest expense
3,227

 
3,171

 
2,897

 
3,003

Net interest income
14,881

 
15,172

 
15,037

 
14,955

Provision for loan losses
102

 
16

 
—

 
100

Noninterest income
5,679

 
6,134

 
5,521

 
7,302

Noninterest expense
19,279

 
19,149

 
17,712

 
18,517

Income before provision
 
 
 
 
 
 
 
for income taxes
1,179

 
2,141

 
2,846

 
3,640

Provision for income taxes
7

 
(45
)
 
37

 
7

Net income
1,172

 
2,186

 
2,809

 
3,633

Net income attributable to
 
 
 
 
 
 
 
non-controlling interest
174

 
190

 
333

 
(226
)
Net income attributable
 
 
 
 
 
 
 
to Hampton Roads Bankshares, Inc.
$
998

 
$
1,996

 
$
2,476

 
$
3,859

Basic and diluted
 
 
 
 
 
 
 
income per share
$
0.01

 
$
0.01

 
$
0.01

 
$
0.02



111
HAMPTON ROADS BANKSHARES, INC.

 
2013
(in thousands)
Fourth
 
Third
 
Second
 
First
Interest income
$
18,760

 
$
19,024

 
$
19,589

 
$
19,530

Interest expense
3,084

 
3,224

 
3,494

 
3,600

Net interest income
15,676

 
15,800

 
16,095

 
15,930

Provision for loan losses
—

 
—

 
1,000

 
—

Noninterest income
4,598

 
7,902

 
7,584

 
5,428

Noninterest expense
19,933

 
20,790

 
22,193

 
19,432

Income before provision
 
 
 
 
 
 
 
for income taxes
341

 
2,912

 
486

 
1,926

Provision for income taxes
(247
)
 
22

 
135

 
—

Net income
588

 
2,890

 
351

 
1,926

Net income attributable to
 
 
 
 
 
 
 
non-controlling interest
37

 
86

 
262

 
1,294

Net income attributable
 
 
 
 
 
 
 
to Hampton Roads Bankshares, Inc.
$
551

 
$
2,804

 
$
89

 
$
632

Basic and diluted
 
 
 
 
 
 
 
income per share
$
—

 
$
0.02

 
$
—

 
$
—

loss per share
$
(0.03
)
 
$
(0.05
)
 
$
(0.15
)
 
$
(0.23
)
 
(25) Contingencies
 
In the ordinary course of operations, the Company may become a party to legal proceedings.  Based upon information currently available, management believes that such legal proceedings, in the aggregate, will not have a material adverse effect on our business, financial condition, results of operations, or cash flows.

(26) Subsequent Events

The Company has evaluated subsequent events for potential recognition and/or disclosure through the date these consolidated financial statements were issued.

On January 27, 2015, the Company announced that BOHR has agreed to acquire a marine loan portfolio from SGB North America, Inc. ("SGB"). The portfolio consists of approximately $135.0 million of retail loans and dealer inventory or floor plan financing lines of credit. In addition, BOHR and SGB have agreed to certain arrangements where BOHR will be compensated upon the occurrence of events of loan default of certain loans within one year following closing of the transaction. The transaction closed during the first quarter of 2015 with BOHR funding $104.4 million in unpaid principal balances of marine related assets.

HAMPTON ROADS BANKSHARES, INC.
 
ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
 
None.
 
ITEM 9A - CONTROLS AND PROCEDURES
 
The Company’s disclosure controls and procedures are designed to provide reasonable assurance that information required to be disclosed in the Company’s reports filed under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms, including, without limitation, that such information is accumulated and communicated

112
HAMPTON ROADS BANKSHARES, INC.

to Company management, including the Company’s principal executive and financial officer, as appropriate, to allow timely decisions regarding required disclosures.
 
Evaluation of Disclosure Controls and Procedures.  The Company, under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and the Chief Financial Officer, has evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Exchange Act) as of December 31, 2014.  Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, as of December 31, 2014, the Company’s disclosure controls and procedures were effective in providing reasonable assurance that material information is recorded, processed, summarized, and reported by management of the Company on a timely basis in order to comply with the Company’s disclosure obligations under the Exchange Act and the rules and regulations promulgated thereunder. 
 
Management’s Report on Internal Control Over Financial Reporting.  Management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) under the Exchange Act).  The Company’s internal control over financial reporting is designed to provide reasonable assurance to the Company’s management and board of directors regarding the reliability of financial reporting and preparation of financial statements for external purposes in accordance with GAAP.
 
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.  Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.
 
Management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2014.  In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control – Integrated Framework (1992).  Based on this assessment, management believes that, as of December 31, 2014, the Company’s internal control over financial reporting was effective based on those criteria.
 
This Annual Report on Form 10-K does not include an attestation report of the Company’s independent registered public accounting firm regarding internal control over financial reporting.  Management’s report was not subject to attestation requirements by the Company’s independent registered public accounting firm pursuant to rules of the SEC that permit the Company to provide only management’s report in its Annual Report on Form 10-K.
 
Changes in Internal Control over Financial Reporting.  No change in the Company’s internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) occurred during the quarter ended December 31, 2014 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

ITEM 9B – OTHER INFORMATION
 
None.
 
PART III 

ITEM 10 - DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE
 
The information required by this item will be provided by being incorporated herein by reference to the Company’s definitive proxy statement for the 2015 Annual Meeting of Shareholders.

ITEM 11 - EXECUTIVE COMPENSATION
 
The information required by this item will be provided by being incorporated herein by reference to the Company’s definitive proxy statement for the 2015 Annual Meeting of Shareholders.

ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED SHAREHOLDER MATTERS
 
The information required by this item will be provided by being incorporated herein by reference to the Company’s definitive proxy statement for the 2015 Annual Meeting of Shareholders.



113
HAMPTON ROADS BANKSHARES, INC.

ITEM 13 - CERTAIN RELATIONSHIPS, RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE
 
The information required by this item will be provided by being incorporated herein by reference to the Company’s definitive proxy statement for the 2015 Annual Meeting of Shareholders.

ITEM 14 - PRINCIPAL ACCOUNTING FEES AND SERVICES
 
The information required by this item will be provided by being incorporated herein by reference to the Company’s definitive proxy statement for the 2015 Annual Meeting of Shareholders.


114
HAMPTON ROADS BANKSHARES, INC.

PART IV 

ITEM 15 - EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
 
The following documents are filed as part of this report.
 
(a)(1)Financial Statements – included in Part II, Item 8:
 
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Comprehensive Income (Loss)
Consolidated Statements of Changes in Shareholders’ Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
 
(a)(2)The response to this portion of Item 15 is included in Part II, Item 8 above.
 
(a)(3)Exhibits – See Exhibit Index, which is incorporated in this item by reference.


115
HAMPTON ROADS BANKSHARES, INC.

SIGNATURES
 
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
Hampton Roads Bankshares, Inc.
 
March 25, 2015
 
/s/ Douglas J. Glenn
 
 
Douglas J. Glenn
 
 
President and Chief Executive Officer

 
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and the capacities and on the date indicated.
 
SIGNATURE
 
CAPACITY
 
DATE
 
 
 
 
 
/s/ Douglas J. Glenn
 
President, Chief Executive Officer,
 
March 25, 2015
Douglas J. Glenn
 
and Director
 
 
 
 
(Principal Executive Officer)
 
 
 
 
 
 
 
/s/ Thomas B. Dix III
 
Executive Vice President, Chief Financial Officer,
 
March 25, 2015
Thomas B. Dix III
 
and Treasurer
 
 
 
 
(Principal Financial Officer)
 
 
 
 
 
 
 
/s/ Myra Maglalang Langston
 
Senior Vice President, Controller,
 
March 25, 2015
Myra Maglalang-Langston
 
and Chief Accounting Officer
 
 
 
 
(Principal Accounting Officer)
 
 
 
 
 
 
 
/s/ Charles M. Johnston
 
Chairman of the Board
 
March 25, 2015
Charles M. Johnston
 
 
 
 
 
 
 
 
 
/s/ James F. Burr
 
Director
 
March 25, 2015
James F. Burr
 
 
 
 
 
 
 
 
 
/s/ Patrick E. Corbin
 
Director
 
March 25, 2015
Patrick E. Corbin
 
 
 
 
 
 
 
 
 
/s/ Henry P. Custis, Jr.
 
Director
 
March 25, 2015
Henry P. Custis, Jr.
 
 
 
 
 
 
 
 
 
/s/ Robert B. Goldstein
 
Director
 
March 25, 2015
Robert B. Goldstein
 
 
 
 
 
 
 
 
 
/s/ Hal F. Goltz
 
Director
 
March 25, 2015
Hal F. Goltz
 
 
 
 
 
 
 
 
 

116
HAMPTON ROADS BANKSHARES, INC.

/s/ William A. Paulette
 
Director
 
March 25, 2015
William A. Paulette
 
 
 
 
 
 
 
 
 
/s/ John S. Poelker
 
Director
 
March 25, 2015
John S. Poelker
 
 
 
 
 
 
 
 
 
/s/ Billy G. Roughton
 
Director
 
March 25, 2015
Billy G. Roughton
 
 
 
 
 
 
 
 
 
/s/ W. Lewis Witt
 
Director
 
March 25, 2015
W. Lewis Witt
 
 
 
 


117
HAMPTON ROADS BANKSHARES, INC.

Exhibit Index
Hampton Roads Bankshares, Inc.

3.1

 
Amended and Restated Articles of Incorporation of Hampton Roads Bankshares, Inc., incorporated by reference to Exhibit 3.1 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 2012, filed March 25, 2013.
3.2

 
Bylaws of Hampton Roads Bankshares, Inc., as amended, attached as Exhibit 3.2 to the Registrant's Current Report on Form 8-K dated September 24, 2009, incorporated herein by reference.
4.1

 
Specimen of Common Stock Certificate, incorporated by reference from Exhibit 4.1 to the Registrant's Form 10-Q for the quarter ended September 30, 2010, filed November 9, 2010.
4.2

 
Amended and Restated Warrant for Purchase of Shares of Common Stock issued to the United States Department of the Treasury, incorporated by reference from Exhibit 10.2 to the Registrant's Form 8-K, filed August 18, 2010.
4.3

 
Letter Agreement, dated December 31, 2008, by and between Hampton Roads Bankshares, Inc. and the United States Department of the Treasury, incorporated by reference from Exhibit 10.1 to the Registrant's Form 8-K, filed January 5, 2009.
4.4

 
Exchange Agreement, dated August 12, 2010, by and between Hampton Roads Bankshares, Inc. and the United States Department of the Treasury,  incorporated by reference form Exhibit 10.1 to the Registrant's Form 8-K, filed August 18, 2010.
4.5

 
Standby Purchase Agreement, dated May 21, 2012, by and between Hampton Roads Bankshares, Inc., Anchorage, Carlyle, and CapGen incorporated by reference from Exhibit 10.1 to the Registrant's Form 8-K, filed May 24, 2012.
10.1

 
Second Amended and Restated Investment Agreement, dated August 11, 2010, incorporated by reference from Exhibit 10.1 to the Registrant's Form 8-K, filed August 17, 2010.
10.2

 
Amended and Restated CapGen Investment Agreement, dated August 11, 2010, incorporated by reference from Exhibit 10.2 to the Registrant's Form 8-K, filed August 17, 2010.
10.3

 
Form of Second Amended and Restated Securities Purchase Agreement, incorporated by reference from Exhibit 10.3 to the Registrant's Form 8-K, filed August 17, 2010.
10.4

 
Amended and Restated Securities Purchase Agreement, dated August 11, 2010, incorporated by reference from Exhibit 10.4 to the Registrant's Form 8-K, filed August 17, 2010.
10.5

 
Carlyle Investor Letter, dated August 11, 2010, incorporated by reference from Exhibit 10.5 to the Registrant's Form 8-K, filed August 17, 2010.
10.6

 
Anchorage Investor Letter, dated August 11, 2010, incorporated by reference from Exhibit 10.6 to the Registrant's Form 8-K, filed August 17, 2010.
10.7

 
CapGen Investor Letter, dated August 11, 2010, incorporated by reference from Exhibit 10.7 to the Registrant's Form 8-K, filed August 17, 2010.
10.8

 
Consent Letter with affiliate of Davidson Kempner, dated August 11, 2010, incorporated by reference from Exhibit 10.8 to the Registrant's Form 8-K, filed August 17, 2010.
10.9

 
Consent Letter with affiliates of Fir Tree, dated August 11, 2010, incorporated by reference from Exhibit 10.9 to the Registrant's Form 8-K, filed August 17, 2010.
10.10

 
Assignment and Assumption Agreement, among Goldman, Sachs, & Co., CapGen Capital Group VI LP, and C12 Protium Value Opportunities Ltd, dated September 23, 2010, incorporated by reference from Exhibit 10.10 to the Registrant's Form 8-K, filed September 23, 2010.
10.11

 
Director Retirement Plan, dated as of November 28, 2006, attached as Exhibit 10.28 to the Registrant's Annual Report on Form 10-K dated March 11, 2008, incorporated herein by reference.
10.12

 
Supplemental Retirement Agreement (as electronically amended and restated), dated May 27, 2008, between The Bank of Hampton Roads and Douglas J. Glenn, attached as Exhibit 10.13 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 2011, incorporated herein by reference.
10.13

 
Hampton Roads Bankshares, Inc. 2011 Omnibus Incentive Plan, attached as Exhibit 4.13 to the Registrant's Registration Statement on Form S-8, filed December 20, 2011, incorporated herein by reference.
10.14

 
Bank of Hampton Roads Supplemental Executive Retirement Plan, dated as of January 1, 2005, attached as Exhibit 99.5 to the Registrant's Current Report on Form 8-K dated June 27, 2006, incorporated herein by reference.
10.15

 
First Amendment to Bank of Hampton Roads Supplemental Executive Retirement Plan, dated as of December 30, 2008, attached as Exhibit 10.38 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 2008, incorporated herein by reference.

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10.16

 
Second Amendment to Bank of Hampton Roads Supplemental Executive Retirement Plan, dated as of December 30, 2008, attached as Exhibit 10.39 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 2008, incorporated herein by reference.
10.17

 
Hampton Roads Bankshares, Inc. 2006 Stock Incentive Plan, dated as of March 14, 2006, attached as Exhibit 10.1 to the Registrant's Registration Statement on Form S-8 (Registration No. 333-134583) dated May 31, 2006, incorporated herein by reference.
10.18

 
First Amendment to Hampton Roads Bankshares, Inc. 2006 Stock Incentive Plan, dated as of December 26, 2008 attached as Exhibit 10.47 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 2008, incorporated herein by reference.
10.19

 
Non-Qualified Limited Stock Option Plan for Directors and Employees, dated March 31, 1994, attached as Exhibit 10.6 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1994, incorporated herein by reference.
10.20

 
Gateway Financial Holdings, Inc. 2005 Omnibus Stock Ownership and Long-Term Incentive Plan, attached as Exhibit 4.2 to Gateway Financial Holdings, Inc.'s Registration Statement on Form S-8 (Registration No. 333-127978) dated August 31, 2005, incorporated herein by reference.
10.21

 
Gateway Financial Holdings, Inc. 2001 Non-statutory Stock Option Plan, attached as Exhibit 4.2 to Gateway Financial Holdings, Inc.'s Registration Statement on Form S-8 (Registration No. 333-98021) dated August 13, 2002,  incorporated herein by reference.
10.22

 
Gateway Financial Holdings, Inc. 1999 Incentive Stock Option Plan, attached as Exhibit 4.2 to Gateway Financial Holdings, Inc.'s Registration Statement on Form S-8 (Registration No. 333-98025) dated August 13, 2002, incorporated herein by reference.
10.23

 
Gateway Financial Holdings, Inc. 1999 Non-statutory Stock Option Plan, attached as Exhibit 4.2 to Gateway Financial Holdings, Inc.'s Registration Statement on Form S-8 (Registration No. 333-98027) dated August 13, 2002, incorporated herein reference.
10.24

 
Gateway Financial Holdings, Inc. 1999 BOR Stock Option Plan, attached as Exhibit 4.2 to Gateway Financial Holdings, Inc.'s Registration Statement on Form S-8 (Registration No. 333-144841) dated July 25, 2007, incorporated herein by reference.
10.25

 
Shore Financial Corporation 2001 Stock Incentive Plan, attached as Exhibit 99 to Shore Financial Corporation's Registration Statement on Form S-8 (Registration No. 333-82838) dated February 15, 2002, incorporated herein by reference.
10.26

 
Shore Savings Bank, F.S.B. 1992 Stock Option Plan dated November 10, 1992, attached as Exhibit 10 to Shore Financial Corporation's Registration Statement on Form S-4EF dated September 15, 1997, incorporated herein by reference.
10.27

 
Employment Agreement (as amended), dated January 8, 2008, between Shore Bank and Robert J. Bloxom, attached as Exhibit 10.34 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 2011, incorporated herein by reference.
10.28

 
Amended Omnibus Plan, dated June 25, 2012, incorporated by reference from Exhibit 10.1 to the Registrant's Form 8-K, filed June 25, 2012.
10.29

 
Form of Restricted Stock Unit Award Agreement, incorporated by reference from Exhibit 10.1 to the Registrant's Form 8-K, filed January 2, 2013.
10.30

 
Employment Agreement, dated May 22, 2013, between Donna W. Richards and The Bank of Hampton Roads, Inc. incorporated by reference from Exhibit 10.1 to the Registrant's Form 10-Q for the quarter ended June 30, 2013, filed August 14, 2013.
10.40

 
Memorandum of Understanding, effective March 27, 2014, by and among Hampton Roads Bankshares, Inc., The Bank of Hampton Roads, the Federal Reserve Bank of Richmond, and the Bureau of Financial Institutions of the Virginia State Corporation Commission, incorporated by reference from Exhibit 10.1 to the Registrant's Form 8-K, filed March 27, 2014.
10.41

 
Employment Agreement, dated August 19, 2014, between Douglas A. Glenn and Hampton Roads Bankshares, Inc., incorporated by reference from Exhibit 10.1 to the Registrant's Form 8-K, filed August 22, 2014.
10.42

 
Employment Agreement, dated August 19, 2014, between Thomas B. Dix, III and Hampton Roads Bankshares, Inc., incorporated by reference from Exhibit 10.2 to the Registrant's Form 8-K, filed August 22, 2014.
10.43

 
Amendment No. 1 to Employment Agreement, dated August 21, 2014, between Donna W. Richards and The Bank of Hampton Roads, incorporated by reference from Exhibit 10.3 to the Registrant's Form 8-K, filed August 22, 2014.
10.44

 
Restricted Stock Unit Award Agreement, dated August 22, 2014, incorporated by reference from Exhibit 10.4 to the Registrant's Form 8-K, filed August 22, 2014.

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HAMPTON ROADS BANKSHARES, INC.

10.45

 
Nonqualified Stock Option Agreement, dated August 22, 2014, incorporated by reference from Exhibit 10.5 to the Registrant's Form 8-K, filed August 22, 2014.
10.46

 
Employment Agreement, dated August 20, 2014, between Herve Bonnet and Hampton Roads Bankshares, Inc., filed herewith.
10.47

 
Employment Agreement, dated August 19, 2014, between Denise D. Hinkle and Hampton Roads Bankshares, Inc., filed herewith.
10.48

 
Employment Agreement, dated October 25, 2014, between John F. Marshall, Jr. and Hampton Roads Bankshares, Inc., filed herewith.
10.49

 
Employment Agreement, dated August 22, 2014, between W. Thomas Mears and Hampton Roads Bankshares, Inc., filed herewith.
21.1

 
A list of the subsidiaries of Hampton Roads Bankshares, Inc., filed herewith.
23.1

 
Consent of KPMG LLP, filed herewith.
31.1

 
The Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer, filed herewith.
31.2

 
The Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer, filed herewith.
32.1

 
Statement of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, filed herewith.
99.1

 
TARP Certification of Chief Executive Officer and Chief Financial Officer, filed herewith.
101

 
The following materials from the Hampton Roads Bankshares, Inc. Annual Report on Form 10-K for the year ended December 31, 2014 formatted in eXtensible Business Reporting Language: (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Operations, (iii) Consolidated Statements of Comprehensive Income (Loss), (iv) Consolidated Statements of Changes in Shareholders’ Equity, (v) Consolidated Statements of Cash Flows, and (vi) Notes to Consolidated Financial Statements, filed herewith.



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