Forward-Looking Statements
This Form 10-Q contains "forward-looking statements" within the meaning of the
U.S. Private Securities Litigation Reform Act of 1995. When or if used in this
quarterly report or any Securities and Exchange Commission 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 our 2011 Form 10-K. Our risks include, without limitation,
the following:
• We incurred significant losses in 2009, 2010, 2011, and in the first six
months of 2012, although at a lower level than in the previous years.
While we expect to return to profitability in 2013, we can make no
assurances to that effect;
• Our capital needs could dilute your investment or otherwise affect your
rights as a shareholder. If we do not generate the desired level of
capital from our Rights Offering and the Standby Purchase, we may try to
raise additional capital and can give no assurance as to what the cost of
that capital may be;
• As a result of our intended issuance of additional shares of Common Stock
in the Capital Raise, your investment could be subject to substantial
dilution;
• 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
value of our Common Stock could be materially adversely affected;
• We have had, and may continue to have, large numbers of problem loans and difficulties with our loan administration, which could increase our losses
related to loans;
• If the value of real estate in the markets we serve were to further decline materially, a significant portion of our loan portfolio could
become further under-collateralized, which could have a material adverse
effect on our loan losses, results of operations, and financial
conditions;
• An inability to maintain our regulatory capital position could adversely
affect our operations;
• We may be subject to prompt corrective action by our regulators if our
total risk-based capital ratio declines below 8%;
• We have entered into a Written Agreement with the FRB and the Bureau of Financial Institutions that subjects us to significant restrictions and
requires us to designate a significant amount of our resources to
complying with the agreement. The Written Agreement may have a material
adverse effect on our operations and the value of our securities;
• The formal investigation by the SEC may result in penalties, sanctions, or
a restatement of our previously issued financial statements;
• The Company has received a grand jury subpoena from the United States
Department of Justice, Criminal Division. The Company has been advised
that it is not a target at this time, and we do not believe we will become
a target, but there can be no assurances as to the timing or eventual
outcome of the related investigation;
• Insurance assessments from the Federal Deposit Insurance Corporation (the
"FDIC") could increase from our prior inability to maintain a
"well-capitalized" status, which will further decrease earnings;
• Our commercial real estate and equity line lending may expose us to a
greater risk of loss and hurt our earnings and profitability;
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HAMPTON ROADS BANKSHARES, INC.
PART I. FINANCIAL INFORMATION
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition
• A significant amount of our loan portfolio contains loans used to finance
construction and land development, and these types of loans subject our
loan portfolio to a higher degree of credit risk;
• We are not paying dividends on our Common Stock and are currently prevented from doing so. The failure to resume paying dividends on our
Common Stock may adversely affect the value of our Common Stock;
• Sales, or the perception that sales could occur, of large amounts of our
Common Stock may depress our stock price.
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.
Overview
Throughout the first six months of 2012, economic conditions in the markets in
which our borrowers operate remained depressed; however, the levels of loan
delinquencies and rates of default began to improve. The Company reported a net
loss for the six month period ended June 30, 2012, primarily resulting from
additions to our provision for loan losses, the impact of nonaccrual loans on
interest income, losses on foreclosed real estate and repossessed assets, and
other expenses related to the resolution of problem loans. In light of past
performance and the current economic environment, additional provisions for loan
losses may be necessary to supplement the allowance for loan losses in the
future. As a result, while we expect that slowly improving economic conditions
will reduce the rate of additional provisions for loan losses and impairments of
foreclosed real estate, we may continue to incur significant credit costs, which
may continue to adversely impact our financial condition and results of
operations throughout 2012. As of June 30, 2012, the Company exceeded the
regulatory capital minimums, BOHR and Shore were considered "well capitalized"
under the risk-based capital standards.
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. Our net
interest income during the first six months of 2012 was negatively impacted by
the level of non-performing 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 fees earned from bank
services. Fees earned from investment and mortgage activities also represent a
significant component of noninterest income. In addition, gains and losses on
the sale or impairment of our foreclosed real estate and repossessed assets are
recognized in noninterest income. Other factors that impact net loss
attributable to Hampton Roads Bankshares, Inc. are the provision for loan
losses, noninterest expense, and the provision for income taxes, if applicable.
The following is a summary of our financial condition as of June 30, 2012 and
our financial performance for the three and six month periods then ended.
• Assets were $2.1 billion. Total assets decreased by $95.9 million or 4%
from December 31, 2011. The decrease in assets was primarily associated
with a $67.1 million or 4% decrease in gross loans, a $15.5 million or 25%
decrease in loans held for sale, and a $22.6 million or 19% decrease in
overnight funds sold and due from FRB partially offset by a $25.1 million
or 9% increase in investment securities available for sale and a $12.0
million or 16% decrease in allowance for loan losses.
• Investment securities available for sale increased $25.1 million to $309.6
million during the first six months of 2012. The increase was primarily a
result of purchases of U.S. agency and mortgage-backed securities.
• Gross loans decreased by $67.1 million or 4% during the six months ended
June 30, 2012. The decrease in gross loans was attributed to charge-offs
of nonperforming loans as well as pay downs and maturities of loans that
exceeded new loans originated.
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HAMPTON ROADS BANKSHARES, INC.
PART I. FINANCIAL INFORMATION
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition
• Allowance for loan losses at June 30, 2012 decreased $12.0 million to
$62.9 million from $74.9 million at December 31, 2011 as net charge-offs,
primarily on credits with specific reserves, exceeded additional
provisions for loan losses. Both the absolute and relative levels of
non-performing loans, particularly newly identified problem credits,
decreased during the six months ended June 30, 2012.
• Deposits decreased $130.0 million or 7% from December 31, 2011 as a result
of decreases of $94.1 million in time deposits under $100 thousand and
$40.9 million in time deposits over $100 thousand. Declines in deposits
resulted from the Company's strategy of reducing interest rates in an
effort to improve earnings, increasing net interest margin, and reducing
excess liquidity.
• Net loss attributable to Hampton Roads Bankshares, Inc. for the three and six months ended June 30, 2012 was $5.7 million or $0.15 per common
diluted share and $13.6 million or $0.38 per common diluted share,
respectively, as compared with net loss attributable to Hampton Roads
Bankshares, Inc. of $18.8 million or $0.56 per common diluted share and
$50.5 million or $1.51 per common diluted share for the three and six
months, respectively, ended June 30, 2011. The net loss for the six months
ended June 30, 2012 was primarily attributable to provision for loan
losses expense of $11.6 million, the impact of nonaccrual loans on
interest income, and losses on foreclosed real estate and repossessed
assets of $7.9 million.
• Net interest income decreased $2.0 million and $3.6 million for the three and six months, respectively, ended June 30, 2012 as compared to the same
period in 2011. The decrease was due primarily to the decreases in
interest-earning assets during those time periods, partially offset by a
decline in our funding costs.
• Provision for loan losses for the three and six months, respectively,
ended June 30, 2012 was $4.3 million and $11.6 million, a 71% and 68%
decrease over the comparable periods in 2011. The decrease was due to a
reduction in newly identified problem loans and continuing declines in
loans outstanding.
• Noninterest income for the three and six months, respectively, endedJune 30, 2012 was $2.0 million and $5.1 million, a 41% and 7% decrease
over the comparative periods in 2011. This was largely due to increases in
losses on foreclosed real estate and repossessed assets and the loss of
insurance revenue resulting from the sale of our insurance subsidiary in
August 2011 partially offset by an increase in mortgage banking revenue.
• Noninterest expense was $18.8 million and $38.7 million for the three and
six months, respectively, ended June 30, 2012, which was a decrease of 27%
and 31% over the comparable periods for 2011, as a result of cost saving
initiatives throughout the operations of the Company but primarily due to
a one-time adjustment to our FDIC insurance expense that affected the
first quarter of 2011 and a decrease in salaries and employee benefits.
• Our effective tax rate was 0% for the six months ended June 30, 2012 compared to (0.09)% for the comparable period in 2011. These rates differ
from the statutory rate due to the valuation allowance against the
Company's deferred tax assets.
During 2011 and the first six months of 2012, we have been focused on reducing
operating expenses. As part of these efforts, we have sold or consolidated 14
branches since December 31, 2010, reducing our branch total to 44 at June 30,
2012.
Critical Accounting Policies
GAAP is complex and requires management to apply significant judgment to various
accounting, reporting, and disclosure matters. Management must use assumptions,
judgments, and estimates when applying these principles where precise
measurements are not possible or practical. These policies are critical because
they are highly dependent upon subjective or complex judgments, assumptions, and
estimates. Our judgments, assumptions, and estimates may be incorrect and
changes in such judgments, assumptions, and estimates may have a significant
impact on the consolidated financial statements and the accompanying footnotes.
Actual results, in fact, could differ materially from those estimates. We
consider our policies on allowance for loan losses, deferred income taxes, and
estimates of fair value on financial instruments to be critical accounting
policies. Refer to our 2011 Form 10-K for further discussion of these policies.
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Table of Contents
HAMPTON ROADS BANKSHARES, INC.
PART I. FINANCIAL INFORMATION
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition
Material Trends and Uncertainties
Currently, the U.S. economy appears to be slowly recovering from one of its
longest and most severe economic recessions in recent history. It is not clear
at this time how quickly the economy will recover. In addition, the U.S. housing
market continues to struggle with excess inventory (both completed houses and
available lots) and the effects of home price depreciation.
We experienced a significant deterioration in credit quality throughout 2009 and
2010. Problem loans and non-performing assets rose and led to significant
increases to the allowance for loan losses. During 2011 the Company had a
significant reduction in newly identified problem loans and continued declines
in loans outstanding due to pay downs and charge offs, and, as a result, we
decreased the provision for loan losses significantly. This trend continued into
the first six months of 2012, and the Company decreased its provision for loan
losses by $24.4 million during the first half of 2012 compared to the same
period in 2011. In light of continued economic weakness, previously current
borrowers have and may continue to default and real estate values have and may
continue to decline; therefore, significant additional provisions for loan
losses may be necessary to supplement the allowance for loan losses in the
future. As a result, we may incur significant credit costs throughout the
remainder of 2012, which would continue to adversely impact our financial
condition, our results of operations, and the value of our Common Stock.
While we expect continued improvements in general economic conditions and our
results of operations throughout 2012, we still expect a net loss for the year
ended 2012 although a smaller loss than in previous years. We do not expect to
return to profitability on an annual basis until 2013.
Impaired loans have decreased by $31.4 million since December 31, 2011. At
June 30, 2012, the Company had $180.2 million in impaired loans and at
December 31, 2011, we had $211.6 million. The majority of the decrease is from a
$12.8 million decrease in impaired commercial and industrial loans and a $15.3
million decrease in impaired construction loans.
Our net interest income declined during the first six months of 2012 compared to
the same time period in 2011 as a result of a decline in the levels of
performing assets and the related reduction of interest income, partially offset
by declines in our funding costs. Our net interest margin increased to 3.64% for
the six months ended June 30, 2012 compared to 3.08% for the six months ended
June 30, 2011.
The Company determined that a valuation allowance on its deferred tax asset
should be recognized beginning December 31, 2009. It remains uncertain whether
we will realize this asset. Internal Revenue Code Section 382 ("Section 382")
limitations related to the capital raised and resulting change in control for
tax purposes during the third quarter of 2010 add further uncertainty as to the
realizability of the deferred tax assets in future periods. While net operating
losses incurred after our 2010 change in control (for tax purposes) 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 and our lack of profitability.
The value of the collateral underlying our loans has been falling due to the
continued deterioration of economic conditions in the markets we serve. This
decline diminishes our ability to recover on defaulted loans by selling the
collateral, making it more likely that we would suffer additional losses on
defaulted loans. Additionally, our decrease in asset quality and collateral
value has required additions to our allowance for loan losses through increased
provisions for loan losses as well as impairments of foreclosed real estate,
which negatively impacts our operating results. We expect this trend to continue
until economic conditions significantly improve.
On November 2, 2010, the Company received from the DOJ a grand jury subpoena to
produce information principally relating to the merger of Gateway Financial
Holdings, Inc. ("GFH") into the Company on December 31, 2008 and to loans made
by GFH and its wholly-owned subsidiary, Gateway Bank & Trust Co. before GFH's
merger with the Company. The DOJ has informed the Company that it is not a
target of the investigation at this time, and we are fully cooperating. Although
we do not believe this matter will have a material adverse affect on the
Company, we can give you no assurances as to the timing or eventual outcome of
this investigation.
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Table of Contents
HAMPTON ROADS BANKSHARES, INC.
PART I. FINANCIAL INFORMATION
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition
In April 2011, the SEC informed the Company that it is conducting a formal
investigation related to certain accounting matters. For a further discussion of
this matter, see "Risk Factors - The formal investigation by the SEC may result
in penalties, sanctions, or a restatement of our previously issued financial
statements" in our 2011 Form 10-K.
OnApril 30, 2012, the Company announced that it entered into a definitive
agreement with Bank of North Carolina to sell all deposits and selected assets
associated with Gateway Bank branches in Preston Corners and Chapel Hill, North
Carolina. The Company expects that this transaction will be completed in the
third quarter of 2012, subject to regulatory approval and other customary
closing conditions. The Company also announced its plan to consolidate the two
Raleigh, North Carolina Gateway Bank branches that will remain following the
sale at a single location.
On April 30, 2012, the Company announced that it entered into a definitive
agreement with First Bancorp for the sale of deposits and certain loans
associated with BOHR's branch located at 901 Military Cutoff Road in Wilmington,
North Carolina. The Company expects that this transaction will be completed in
the third quarter of 2012, subject to regulatory approval and other customary
closing conditions.
On June 27, 2012, the Company announced that it had closed the $50.0 million
Private Placement. The Company issued an aggregate 71,429,448 common shares at a
price of $0.70 per share to the Investors pursuant to the terms of the Standby
Purchase Agreement between the Investors and the Company. The Company plans to
raise an additional $30.0 million to $45.0 million in capital by issuing common
shares in the Rights Offering that it anticipates will settle during the third
quarter of 2012. On July 23, 2012, the Company filed a registration statement on
Form S-1 covering the 64,285,715 shares offered in the Rights Offering.
The Company was removed from the Russell 3000 Index and the Russell Global Index
as of June 22, 2012. The Russell 3000 Index measures the performance of the
largest 3,000 U.S. companies representing approximately 98% of the investable
U.S. equity market. The Russell Global Index measures the performance of the
global equity market based on all investable equity securities. The Russell
Global Index includes approximately 10,000 securities in 48 countries and covers
98% of the investable global market.
For further discussion of the material trends and uncertainties that may affect
our results and financial condition, refer to the risk factors contained in this
report.
ANALYSIS OF RESULTS OF OPERATIONS
Overview. Our net loss attributable to Hampton Roads Bankshares, Inc. for the
three and six months ended June 30, 2012 was $5.7 million and $13.6 million,
respectively, as compared with a net loss attributable to Hampton Roads
Bankshares, Inc. of $18.8 million and $50.5 million for the three and six
months, respectively, ended June 30, 2011. The net loss attributable to Hampton
Roads Bankshares, Inc. for the six months ended June 30, 2012 was driven
primarily by provision for loan losses expense of $11.6 million necessary to
maintain the allowance for loan losses at a level adequate to cover expected
losses inherent in the loan portfolio, the impact of nonaccrual loans on
interest income, and $7.9 million in losses on foreclosed real estate and
repossessed assets. Diluted loss per common share for the six months ended
June 30, 2012 was $0.38, an improvement of $1.13 over the diluted loss per
common share of $1.51 for the six months ended June 30, 2011.
Net Interest Income. Net interest income, a major component of our earnings, is
the difference between the income generated by interest-earning assets reduced
by the cost of interest-bearing liabilities. Net interest margin, which is
calculated by expressing annualized net interest income as a percentage of
average interest-earning assets, is an indicator of effectiveness in generating
income from earning assets. Net interest income and net interest margin may be
significantly impacted by the market interest rates (rate) and the mix 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, maintaining appropriate risk levels as determined
by our Asset / Liability Committee and the Board of Directors. Net interest
income for the six months ended June 30,
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HAMPTON ROADS BANKSHARES, INC.
PART I. FINANCIAL INFORMATION
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition
2012 was $32.9 million, a decrease of $3.6 million from the six months ended
June 30, 2011. The decrease in net interest income was primarily the result of a
decrease of $9.8 million in interest income from loans partially offset by the
decrease in interest expense on deposits of $6.0 million for the six months
ended June 30, 2012 compared to the six months ended June 30, 2011. Net interest
income for the three months ended June 30, 2012 was $16.2 million, a decrease of
$2.0 million from the three months ended June 30, 2011. The decrease in net
interest income was primarily the result of a decrease of $4.8 million in
interest income from loans partially offset by the decrease in interest expense
on deposits of $2.8 million for the three months ended June 30, 2012 compared to
the three months ended June 30, 2011. Our net interest margin increased to 3.66%
for the three months ended June 30, 2012 from 3.20% during the three months
ended June 30, 2011. The increase in net interest margin from prior periods is
due primarily to an overall reduction in the cost of funds and a change in the
mix of interest-earning assets towards loans and investments.
Our interest-earning assets consist of loans, investment securities, overnight
funds sold and due from FRB, and interest-bearing deposits in other banks.
Interest income on loans, including fees, decreased $4.8 million and $9.8
million to $18.6 million and $38.1 million for the three and six months,
respectively, ended June 30, 2012 compared to the same periods during 2011. This
decrease was predominantly a result of a $305.1 million decrease in average loan
balance (excluding average nonaccrual loans) as well as the 18-basis point
decrease in average yield during the six months ended June 30, 2012 compared to
the same time period during 2011. Interest income on investment securities
decreased $681 thousand and $1.1 million to $2.0 million and $4.0 million for
the three and six months, respectively, ended June 30, 2012 compared to the same
periods during 2011. This decrease was due to a $49.1 million decrease in
average investment securities as well as a 27-basis point decrease in average
yield during the six months ended June 30, 2012 compared to the same time period
during 2011. Interest income on overnight funds sold and due from FRB decreased
$120 thousand and $268 thousand for the three and six months, respectively,
ended June 30, 2012 compared to the same periods during 2011. The decrease for
the six months ended June 30, 2012 was largely due to the $216.6 million
decrease in average overnight funds sold and due from FRB and a 1-basis point
decrease in the average interest yield on overnight funds sold and due from FRB.
Our interest-bearing liabilities consist of deposit accounts and borrowings.
Interest expense on deposits decreased $2.8 million and $6.0 million to $3.3
million and $7.0 million for the three and six months, respectively, ended
June 30, 2012 compared to the same periods during 2011. This decrease resulted
from a $507.1 million decrease in average interest-bearing deposits and a
36-basis point decrease in the average interest rate paid on interest-bearing
deposits for the six months ended June 30, 2012 compared to the six months ended
June 30, 2011. A reduction in the average rate paid on interest-bearing demand
deposits to 0.37% and 0.36% for the first three and six months, respectively, of
2012 from 0.64% and 0.67% for the first three and six months, respectively, of
2011 as well as the reduction of the average rate paid on time deposits to 1.24%
and 1.29% for the first three and six months, respectively, of 2012 from 1.59%
and 1.64% for the first three and six months, respectively, of 2011 contributed
significantly toward the decrease in overall deposit rates. Our average rate on
savings deposits decreased from 0.20% and 0.23% during the three and six months,
respectively, ended June 30, 2011 to 0.13% and 0.14% during the three and six
months, respectively, ended June 30, 2012. Interest expense on borrowings, which
consisted of FHLB borrowings and other borrowings, decreased $814 thousand and
$1.7 million to $1.2 million and $2.4 million for the three and six months,
respectively, ended June 30, 2012 compared to the same periods during 2011. The
113-basis point decrease in the six month average interest rate paid on
borrowings and the $22.7 million decrease in the six month average borrowings
produced this result. 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, during the third quarter of 2011, the
Company modified certain advances with the FHLB. 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 years.
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Table of Contents
HAMPTON ROADS BANKSHARES, INC.
PART I. FINANCIAL INFORMATION
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition
The table below represents the average interest-earning assets and average
interest-bearing liabilities (in thousands), the average yields earned on such
assets and rates paid on such liabilities, the net interest margin, and the
variance in interest income and expense caused by differences in average
balances and rates for the three and six months ended June 30, 2012 and 2011.
Three Months Ended Three Months Ended
June 30, 2012 June 30, 2011 2012 Compared to 2011
Interest
Interest Average Interest Average Income/ Variance
Average Income/ Yield/ Average Income/ Yield/ Expense Attributable to
Balance Expense Rate Balance Expense Rate Variance Rate Volume
Assets:
Interest-earning assets
Loans $ 1,347,433 $ 18,601
5.54 % $ 1,606,211$ 23,414 5.85 % $ (4,813 )
$ (1,191 ) $ (3,622 )
Investment securities 328,361 1,998
2.44 % 365,839 2,679 2.94 % (681 )
(425 ) (256 )
Overnight funds sold and due from FRB 104,283 69 0.27 % 303,626 189 0.25 % (120 ) 95 (215 )
Interest-bearing deposits in other banks 1,208 1 0.21 % 7,380 1 0.02 % - 2 (2 )
Total interest-earning assets 1,781,285 20,669
4.65 % 2,283,056 26,283 4.62 % (5,614 )
(1,519 ) (4,095 )
Noninterest-earning assets 305,650 341,754
Total assets $ 2,086,935 $ 2,624,810
Liabilities and Shareholders' Equity:
Interest-bearing liabilities
Interest-bearing demand deposits $ 531,663 $ 489
0.37 % $ 626,300$ 1,000 0.64 % $ (511 )
$ (376 ) $ (135 )
Savings deposits 62,945 21 0.13 % 66,836 34 0.20 % (13 ) (11 ) (2 )
Time deposits 899,757 2,777
1.24 % 1,263,688 5,015 1.59 % (2,238 )
(969 ) (1,269 )
Total interest-bearing deposits 1,494,365 3,287 0.88 % 1,956,824 6,049 1.24 % (2,762 ) (1,356 ) (1,406 )
Borrowings 236,352 1,185 2.01 % 255,350 1,999 3.14 % (814 ) (674 ) (140 )
Total interest-bearing liabilities 1,730,717 4,472
1.04 % 2,212,174 8,048 1.46 % (3,576 )
(2,030 ) (1,546 )
Noninterest-bearing liabilities
Demand deposits 230,443 232,598
Other liabilities 19,216 23,200
Total noninterest-bearing liabilities 249,659 255,798
Total liabilities 1,980,376 2,467,972
Shareholders' equity 106,559 156,838
Total liabilities and shareholders' equity $ 2,086,935 $ 2,624,810
Net interest income $ 16,197 $ 18,235
Net interest spread 3.61 % 3.16 %
Net interest margin 3.66 % 3.20 %
Note: Interest income from loans included fees of $257 thousand at June 30, 2012
and $165 thousand at June 30, 2011. Average nonaccrual loans of $135.0 million
and $179.7 million are excluded from average loans at June 30, 2012 and 2011,
respectively. The change in interest due to both rate and volume has been
allocated to variance attributable to rate and variance attributable to volume
in proportion to the relationship for the absolute amount of change in each.
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Table of Contents
HAMPTON ROADS BANKSHARES, INC.
PART I. FINANCIAL INFORMATION
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition
Six Months Ended Six Months Ended
June 30, 2012 June 30, 2011 2012 Compared to 2011
Interest
Interest Average Interest Average Income/ Variance
Average Income/ Yield/ Average Income/ Yield/ Expense Attributable to
Balance Expense Rate Balance Expense Rate Variance Rate Volume
Assets:
Interest-earning assets
Loans $ 1,371,290 $ 38,122 5.59 % $ 1,676,411$ 47,953 5.77 % $ (9,831 )
$ (1,438 ) $ (8,393 )
Investment securities 317,108 4,006
2.54 % 366,189 5,097 2.81 % (1,091 )
(456 ) (635 )
Overnight funds sold and due from FRB 127,485 146 0.23 % 344,072 414 0.24 % (268 ) (17 ) (251 )
Interest-bearing deposits in other banks 1,073 1 0.17 % 2,066 2 0.17 % (1 ) - (1 )
Total interest-earning assets 1,816,956 42,275
4.68 % 2,388,738 53,466 4.51 % (11,191 )
(1,911 ) (9,280 )
Noninterest-earning assets 306,080 328,509
Total assets $ 2,123,036 $ 2,717,247
Liabilities and Shareholders' Equity:
Interest-bearing liabilities
Interest-bearing demand deposits $ 531,801 $ 950
0.36 % $ 655,309$ 2,165 0.67 % $ (1,215 )
$ (863 ) $ (352 )
Savings deposits 62,465 42 0.14 % 66,624 76 0.23 % (34 ) (29 ) (5 )
Time deposits 937,024 6,000
1.29 % 1,316,449 10,706 1.64 % (4,706 )
(2,002 ) (2,704 )
Total interest-bearing deposits 1,531,290 6,992 0.92 % 2,038,382 12,947 1.28 % (5,955 ) (2,894 ) (3,061 )
Borrowings 236,438 2,385 2.03 % 259,100 4,060 3.16 % (1,675 ) (1,346 ) (329 )
Total interest-bearing liabilities 1,767,728 9,377
1.07 % 2,297,482 17,007 1.49 % (7,630 )
(4,240 ) (3,390 )
Noninterest-bearing liabilities
Demand deposits 226,711 226,622
Other liabilities 19,199 22,964
Total noninterest-bearing liabilities 245,910 249,586
Total liabilities 2,013,638 2,547,068
Shareholders' equity 109,398 170,179
Total liabilities and shareholders' equity $ 2,123,036 $ 2,717,247
Net interest income $ 32,898 $ 36,459
Net interest spread 3.61 % 3.02 %
Net interest margin 3.64 % 3.08 %
Note: Interest income from loans included fees of $508 thousand at June 30, 2012
and $319 thousand at June 30, 2011. Average nonaccrual loans of $134.5 million
and $179.7 million are excluded from average loans at June 30, 2012 and 2011,
respectively. The change in interest due to both rate and volume has been
allocated to variance attributable to rate and variance attributable to volume
in proportion to the relationship for the absolute amount of change in each.
Noninterest Income. For the quarter ended June 30, 2012, total noninterest
income was $2.0 million, a decrease of $1.4 million or 41% as compared to the
second quarter of 2011. For the six months ended June 30, 2012, we reported
total noninterest income of $5.1 million, a $407 thousand or 7% decrease over
the same period in 2011. Noninterest income comprised 13% of total revenue for
the first half of 2012 and 13% for comparative 2011.
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Table of Contents
HAMPTON ROADS BANKSHARES, INC.
PART I. FINANCIAL INFORMATION
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition
The following table provides a summary of noninterest income (in thousands) for
the three and six months ended June 30, 2012 and 2011.
Three Months Ended Six Months Ended
June 30, June 30,
2012 2011 2012 2011
Service charges on deposit accounts $ 1,264 $ 1,529 $ 2,607 $ 2,975
Mortgage banking revenue 3,855 1,939 7,113 3,189
Gain on sale of investment securities 274 192 261 192
Loss on sale of premises and equipment (47 ) (42 ) (47 ) (42 )
Losses on foreclosed real estate and
repossessed assets (4,947 ) (3,087 ) (7,912 ) (6,769 )
Other-than-temporary impairment of
securities - (91 ) - (91 )
Insurance revenue - 1,108 - 2,261
Brokerage revenue 52 66 114 136
Income from bank-owned life insurance 463 437 862 918
Visa check card income 659 593 1,158 1,123
ATM surcharge and network fees 110 214 327 413
Rental income 76 117 189 346
Other 234 408 429 857
Total noninterest income $ 1,993 $ 3,383 $ 5,101 $ 5,508
Service charges on deposit accounts decreased $265 thousand and $368 thousand to
$1.3 million and $2.6 million for the three and six months, respectively, ended
June 30, 2012 compared to the same periods in 2011 due to reduced overdraft
activity. Mortgage banking revenue increased to $3.9 million and $7.1 million in
the three and six month periods, respectively, ended June 30, 2012 compared to
$1.9 million and $3.2 million in the prior year periods due to increased
origination activity. The deteriorating economy and continued declines in
certain real estate values caused losses on foreclosed real estate and
repossessed assets of $4.9 million and $7.9 million during the three and six
months ended June 30, 2012. During the same periods in 2011, losses on
foreclosed real estate and repossessed assets were $3.1 million and $6.8
million. In August 2011 we sold our insurance subsidiary and, accordingly,
recorded no insurance revenue for the three and six month periods ended June 30,
2012; we recorded $1.1 million and $2.3 million of insurance revenue for the
three and six month periods ended June 30, 2011. Additionally, we had revenue
from our brokerage subsidiary of $52 thousand and $114 thousand for the three
and six months, respectively, ended June 30, 2012 compared to $66 thousand and
$136 thousand for comparative 2011.
Noninterest Expense. Noninterest expense represents our operating and overhead
expenses. Total noninterest expense decreased $6.8 million and $17.5 million or
27% and 31% for the three and six months, respectively, ended June 30, 2012
compared to the three and six months, respectively, ended June 30, 2011. This
decrease was partially attributed to a $4.8 million decrease in salaries and
employee benefits and a $6.2 million decrease in FDIC insurance during the first
six months of 2012. The efficiency ratio, calculated by dividing noninterest
expense by the sum of net interest income and noninterest income excluding
securities gains was 105% and 102% for the first three and six months of 2012
compared to 119% and 135% for the first three and six months, respectively, of
2011.
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HAMPTON ROADS BANKSHARES, INC.
PART I. FINANCIAL INFORMATION
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition
The following table provides a summary of total noninterest expense (in
thousands) for the three and six months ended June 30, 2012 and 2011.
Three Months Ended Six Months Ended
June 30, June 30,
2012 2011 2012 2011
Salaries and employee benefits $ 9,144 $ 11,257 $ 18,856 $ 23,612
Occupancy 1,808 2,936
3,555 5,262
Professional and consultant fees 1,747 2,586 3,338 4,771
FDIC insurance 1,174 1,856 2,401 8,565
Data processing 930 1,199 2,016 2,206
Problem loan and repossessed asset costs 623 1,136 1,516 2,552
Equipment 729 843 1,434 1,649
Other 2,612 3,740 5,562 7,578
Total noninterest expense $ 18,767 $ 25,553 $ 38,678 $ 56,195
Salaries and employee benefits expense in the three and six months,
respectively, ended June 30, 2012 decreased $2.1 million and $4.8 million to
$9.1 million and $18.9 million compared to the same periods in 2011 as a direct
result of a reduction in personnel. Occupancy expense decreased $1.1 million and
$1.7 million for the first three and six months of 2012 compared to the same
periods in 2011 due to the closure of select branches during 2011. Professional
and consultant fees were $1.7 million and $3.3 million for the three and six
months, respectively, ended June 30, 2012 compared to $2.6 million and $4.8
million for comparative 2011; these fees decreased primarily due to lower legal
fees associated with loan collection activities and a reduction in the Company's
use of third party consultants. FDIC insurance was $1.2 million and $2.4 million
for the three and six months, respectively, ended June 30, 2012 as compared with
$1.9 million and $8.6 million for the same period in 2011; the first quarter of
2011 included a one-time adjustment to FDIC insurance assessment expense of $5.4
million. Data processing expense decreased $269 thousand and $190 thousand for
the three and six months ended June 30, 2012 over the $1.2 million and $2.2
million for the three and six months ended June 30, 2011 due to renegotiations
on certain data processing contracts. Problem loan and repossessed asset costs
decreased $513 thousand and $1.0 million to $623 thousand and $1.5 million for
the three and six months, respectively, ended June 30, 2012 compared to the same
periods during 2011 due to the shrinking portfolio of foreclosed assets. For the
three and six months, respectively, ended June 30, 2012, equipment expense was
$729 thousand and $1.4 million compared to $843 thousand and $1.6 million for
the same periods in 2011.
Income Tax Provision. The Company had no income tax expense for the first six
months of 2012 compared to an income tax expense of $44 thousand for comparative
period 2011. Management assesses the realizability of the deferred tax asset on
a quarterly basis, considering both positive and negative evidence in
determining whether it is more likely than not that some portion or all of the
net deferred tax asset including its net operating loss carryforward would not
be realized. A valuation allowance for the entire net deferred tax asset has
been established. Section 382 limitations related to the Company's
recapitalization during the quarter ended September 30, 2010 add further
uncertainty as to the realizability of the deferred tax assets in future
periods.
ANALYSIS OF FINANCIAL CONDITION
Total assets at June 30, 2012 were $2.1 billion, a decrease of $95.9 million or
4% over December 31, 2011 total assets. This decrease was primarily associated
with a $67.1 million decrease in gross loans, a decrease of $15.5 million in
loans held for sale and a $22.6 million decrease in overnight funds sold and due
from FRB, partially offset by a $25.1 million increase in investment securities
available for sale and a $12.0 million or 16% decrease in allowance for loan
losses.
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Table of Contents
HAMPTON ROADS BANKSHARES, INC.
PART I. FINANCIAL INFORMATION
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition
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 June 30, 2012 were $110.0 million compared to
$138.1 million at December 31, 2011 and consisted mainly of deposits with the
FRB.
Because the Company had raised significant deposits in prior years and loan
demand has been weak, it is in a highly liquid position. The Company does not
expect to continue to retain an equally high level of cash on hand in the future
as loan origination activity picks up and deposit sales are completed.
Securities. Our investment portfolio at June 30, 2012 consisted primarily of
available-for-sale U.S. agency and mortgage-backed securities. Our
available-for-sale securities are reported at estimated fair value. They are
used primarily for liquidity, earnings, and asset/liability management purposes
and are reviewed quarterly for possible impairment. At June 30, 2012, the
estimated fair value of our available-for-sale investment securities was $309.6
million, an increase of $25.1 million or 9% from $284.5 million at December 31,
2011. The increase was primarily the result of an increase in purchases of U.S.
agency and mortgage-backed securities.
Loan Portfolio. 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 can
be met. 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 an evaluation of the
repayment capacity, financial strength, and credit history of the borrower, the
quality and value of the collateral securing each loan, and the financial
strength of guarantors. With few exceptions, personal guarantees are required on
loans.
Our loan portfolio decreased $67.1 million or 4% to $1.4 billion as of June 30,
2012. Commercial and industrial loans decreased 8% to $236.0 million at June 30,
2012 compared with $256.1 million at December 31, 2011. Construction loans
decreased 10% to $257.8 million at June 30, 2012 as compared to $285.0 million
at December 31, 2011, thus lowering the concentration of construction loans to
18% of the total loan portfolio at June 30, 2012 compared with 19% at
December 31, 2011. Real estate commercial mortgages increased 2% to $532.6
million at June 30, 2012 compared to $522.1 million at December 31, 2011. Real
estate residential mortgages decreased 7% to $387.7 million at June 30, 2012 as
compared with $415.0 million at December 31, 2011. Installment loans decreased
11% to $23.6 million at June 30, 2012 compared with $26.5 million at
December 31, 2011. The contraction seen in the overall loan portfolio stems from
the write-off and resolution of problem credits and payments in excess of new
loan growth partially offset by new loan demand from credit-worthy borrowers
that continues to remain at relatively low levels. Our continued focus will be
on managing the entire loan portfolio through the current challenging economic
conditions. 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 loan losses.
Allowance for Loan Losses. The purpose of the allowance for loan losses is to
provide for probable and reasonably estimable 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 in the portfolio. 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, cash flow analyses of borrowers, and risk rating of
loans. In addition to the review of credit quality through ongoing credit review
processes, we construct a comprehensive allowance analysis for our loan
portfolio 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, economic conditions, and
unallocated allowances predicated upon both internal and external factors.
The allowance for loan losses was $62.9 million or 4.38% of outstanding loans as
of June 30, 2012 compared with $74.9 million or 4.98% of outstanding loans as of
December 31, 2011. Pooled loan allocations decreased to $29.1 million at
June 30, 2012 from $44.0 million at December 31, 2011 primarily due to decreases
in the overall loan portfolio. The general component of the allowance is based
on several factors, including historical loan loss
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HAMPTON ROADS BANKSHARES, INC.
PART I. FINANCIAL INFORMATION
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition
experience in accordance with our existing charge-off policy as well as economic
and other qualitative considerations. Historical loss rates are based on a
three-year weighted average with recent period loss rates weighted more heavily.
An adjustment is then applied to each loss rate based on assessments of loss
trends, collateral values, and economic and business influences impacting
expected losses. Specific loan allocations decreased to $25.1 million at
June 30, 2012 from $25.7 million at December 31, 2011, primarily due to
decreased charge-offs and a slowing rate of additional loan defaults.
Unallocated allowances increased to $8.7 million at June 30, 2012 from $5.3
million at December 31, 2011. The following table provides a breakdown of the
allowance for loan losses and other related information (in thousands) at
June 30, 2012 and December 31, 2011.
June 30, December 31,
2012 2011
Allowance for loan losses:
Pooled component $ 29,122 $ 43,956
Specific component 25,053 25,703
Unallocated component 8,732 5,288
Total $ 62,907 $ 74,947
Impaired loans $ 180,187 $ 211,633
Non-impaired loans 1,257,457 1,293,100
Total loans $ 1,437,644 $ 1,504,733
Pooled component as % of non-impaired loans 2.32 %
3.40 %
Specific component as % of impaired loans 13.90 %
12.15 %
Allowance as % of loans 4.38 %
4.98 %
Allowance as % of nonaccrual loans 50.36 %
56.28 %
Notwithstanding these allocations, the entire allowance for loan losses is
available to absorb charge-offs in any loan category. Net charge-offs were $23.7
million for the six months ended June 30, 2012 as compared with $98.7 million
for the six months ended June 30, 2011. Net charge-offs in the construction
category account for $5.7 million or 24% of these net charge-offs in 2012.
Construction loans, particularly land acquisition and development loans, tend to
be riskier than other categories, and we have been steadily decreasing our
exposure to this type of loan. Net charge-offs were $11.0 million for commercial
and industrial, $2.2 million for commercial mortgage, $4.7 million for
residential mortgage, and $177 thousand for installment loans for the six months
ended June 30, 2012.
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HAMPTON ROADS BANKSHARES, INC.
PART I. FINANCIAL INFORMATION
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition
The specific allowance for loan losses necessary for impaired loans is based on
a loan-by-loan analysis and varies between impaired loans largely due to the
fair value of collateral. Additionally, pooled loan allocations vary depending
on a number of assumptions and trends. As a result, the ratio of allowance for
loan losses to nonaccrual loans is not sufficient for measuring the adequacy of
the allowance for loan losses. Therefore, the following ratios are used by
management in assessing the adequacy of the allowance for loan losses at
June 30, 2012 and December 31, 2011.
June 30, December 31,
2012 2011
Non-performing loans for which full loss has been
charged off to total loans 2.00 %
3.51 %
Non-performing loans for which full loss has been
charged off to non-performing loans 23.04 %
39.71 %
Charge off rate for non-performing loans for which
the full loss has been charged off
61.50 %
60.38 %
Coverage ratio net of non-performing loans for
which the full loss has been charged off 65.27 %
93.35 %
Total allowance divided by total loans less
non-performing loans for which the full loss has
been charged off 4.45 %
5.16 %
Allowance for individually impaired loans divided
by impaired loans for which an allowance has been
provided 22.28 %
26.60 %
There was a significant decrease in the coverage ratio net of non-performing
loans for which the full loss has been charged off from 93.35% at December 31,
2011 to 65.27% at June 30, 2012 due to the $12.2 million decrease in the
allowance for loan losses as well as the $15.9 million increase in the
non-performing loans less the loans with a full charge off.
At June 30, 2012, management believed the level of the allowance for loan losses
to be commensurate with the risk existing in 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.
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 June 30, 2012 were $1.7 billion, a decrease of
$130.0 million or 7% at December 31, 2011. This decrease is a result of the
Company decreasing the number of our bank branches as a way to minimize
operating expenses.
Changes in the deposit categories include an increase of $15.2 million in
noninterest-bearing demand deposits, a decrease of $11.2 million in
interest-bearing demand deposits, and an increase of $988 thousand in savings
accounts from December 31, 2011 to June 30, 2012. Total time deposits under $100
thousand decreased $94.1 million from $525.3 million at December 31, 2011 to
$431.2 million at June 30, 2012. Time deposits over $100 thousand decreased
$40.9 million from $445.8 million at December 31, 2011 to $404.9 million at
June 30, 2012. The changes in time deposits was primarily due to lower rates
offered on certificates of deposit resulting in run-off as maturity dates were
reached, particularly in the national market time deposit portfolio.
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HAMPTON ROADS BANKSHARES, INC.
PART I. FINANCIAL INFORMATION
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition
Total brokered deposits were $50.1 million or 3% of deposits at June 30, 2012,
which was a decrease of $47.4 million from the total brokered deposits of $97.5
million at December 31, 2011. During the first six months of 2012, BOHR did not
qualify as "well capitalized" and was, therefore, restricted from accepting new
brokered deposits. While BOHR qualifies as "well capitalized" at June 30, 2012
and is no longer completely restricted from accepting new brokered deposits,
according to the Written Agreement, it may only accept new brokered deposits up
to the level maintained at the time the Written Agreement was entered into.
Interest-bearing demand deposits included $9.9 million brokered money market
funds at June 30, 2012, which was $5.3 million lower than the $15.2 million
balance of brokered money market funds outstanding at December 31, 2011.
Brokered CDs represented $40.2 million, which was a decrease of $42.1 million
from the $82.3 million of brokered CDs outstanding at December 31, 2011.
The Company continues to focus on core deposit growth as its primary source of
funding. Core deposits typically 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 73% of total deposits at June 30, 2012 and
$1.3 billion or 70% at December 31, 2011.
Borrowings. We use short-term and long-term borrowings from various sources
including the FRB discount window, FHLB, reverse repurchase agreements, and
trust preferred securities. We manage the level of our borrowings to ensure that
we have adequate sources of liquidity. Our FHLB borrowings on June 30, 2012 were
$195.5 million compared to $195.9 million at December 31, 2011.
Liquidity Management. 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 periodically
monitor our liquidity position in light of the changing economic environment and
customer activity. Based on periodic liquidity assessments, we may alter our
asset, liability, and off-balance sheet positions. The asset/liability committee
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 and through private placements, provides
flexibility in managing the exposure to liquidity risk.
In an effort to satisfy our liquidity needs, we actively manage our assets and
liabilities. We have immediate liquid resources in cash, interest-bearing
deposits, and overnight funds sold. 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 may be available through the issuance of
long-term debt.
We continued to maintain a strong liquidity position during the first six months
of 2012. Cash and cash equivalents were $110.0 million and available-for-sale
investment securities were $309.6 million as of June 30, 2012. At June 30, 2012,
our Banks had credit lines in the amount of $228.6 million at the FHLB with
advances of $195.5 million currently utilized. At December 31, 2011, our Banks
had credit lines in the amount of $228.3 million at the FHLB with advances of
$195.9 million utilized. These lines may be utilized for short- and/or long-term
borrowing. At June 30, 2012 and December 31, 2011, all our FHLB borrowings were
long-term. We also possess additional sources of liquidity through a variety of
borrowing arrangements. The Banks maintain federal funds lines with one regional
banking institution and through the FRB Discount Window. These available lines
totaled approximately $52.2 million and $58.1 million at June 30, 2012 and
December 31, 2011, respectively; these lines were not utilized for borrowing
purposes.
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HAMPTON ROADS BANKSHARES, INC.
PART I. FINANCIAL INFORMATION
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition
Capital Resources. Total shareholders' equity increased $35.6 million or 31% to
$149.3 million at June 30, 2012 compared to $113.7 million at December 31, 2011.
This increase in shareholders' equity was primarily a result of the Private
Placement offset by net losses through the first six months of the year.
The Company and the Banks are subject to regulatory capital requirements
administered by the federal banking agencies. 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 Company and the Bank must meet specific capital
guidelines that involve quantitative and qualitative measures. These measures
were established by regulation 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 June 30, 2012, our consolidated regulatory capital ratios are Tier 1
Leverage Ratio of 8.07%, Tier 1 Risk-Based Capital Ratio of 10.54%, and Total
Risk-Based Capital Ratio of 11.83%. As of June 30, 2012, 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: 7.63%, 9.90%, and 11.19%, respectively, for BOHR and 10.36%, 14.50%,
and 15.75%, respectively, for Shore.
On June 27, 2012, the Company announced that it had closed a $50.0 million
Private Placement. The Company issued an aggregate 71,428,572 common shares at a
price of $0.70 per share to the Investors pursuant to the terms of the Standby
Purchase Agreement between the Investors and the Company. The Company plans to
raise an additional $30.0 million to $45.0 million in capital by issuing common
shares in the Rights Offering and Standby Purchase that it anticipates will
settle during the third quarter of 2012. The ultimate size of the Capital Raise
will depend on the outcome of the Rights Offering. If the Rights Offering is
fully subscribed, the Capital Raise will result in $95.0 million in gross
proceeds for which the Company will issue, in the aggregate, 135,714,286 shares
of Common Stock. If no one subscribes to the Rights Offering, approximately
$30.0 million will be raised from the Investors in the Standby Purchase and the
Capital Raise will result in approximately $80.0 million in gross proceeds for
which the Company will issue, in the aggregate, 114,265,032 shares of Common
Stock.
On June 25, 2012, the Company's shareholders approved certain matters related to
the Capital Raise, including the issuance of up to 135,714,286 shares of the
Company's Common Stock in the Capital Raise and an amendment to the Company's
Articles of Incorporation that was a condition to the Capital Raise.
In connection with the sale, 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 million in cash, for a total payment of $3 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 expenses.
The Private Placement also resulted in an adjustment to the warrant to purchase
Common Stock currently held by the Treasury. The Treasury holds a Treasury
Warrant that, before the Private Placement, entitled it to purchase 53,034
shares of Common Stock at an exercise price of $10.00 per share. Because the
Private Placement was not a transaction excluded from the operation of the
anti-dilution provisions of the Treasury Warrant, as of the closing of the
Private Placement the number of shares purchasable under the Treasury Warrant
were adjusted to 757,629 shares of our Common Stock and the exercise price to
purchase such shares was adjusted to $0.70 per share.
In January 2010, the Company exercised its right to defer all quarterly
distributions on the trust preferred securities (in thousands) it assumed in
connection with its merger with GFH (collectively, the "Trust Preferred
Securities"), which are identified below.
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HAMPTON ROADS BANKSHARES, INC.
PART I. FINANCIAL INFORMATION
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition
Carrying
Amount Par Amount Redeemable On Or
(in thousands) (in thousands) Interest Rate After Mandatory Redemption
Gateway Capital Statutory
Trust I $ 5,381 $ 8,000 LIBOR + 3.10% September 17, 2008September 17, 2033
Gateway Capital Statutory
Trust II
4,415 7,000 LIBOR + 2.65% July 17, 2009 June 17, 2034
Gateway Capital Statutory
Trust III 7,845 15,000 LIBOR + 1.50% May 30, 2011 May 30, 2036
Gateway Capital Statutory
Trust IV 13,049 25,000 LIBOR + 1.55% July 30, 2012 July 30, 2037
Interest payable under the Trust Preferred Securities continues to accrue during
the deferral period and interest on the deferred interest also accrues, both of
which must be paid at the end of the deferral period and totaled $3.5 million at
June 30, 2012. Prior to the expiration of the deferral period, the Company has
the right to further defer interest payments, provided that no deferral period,
together with all prior deferrals, exceeds 20 consecutive quarters and that no
event of default (as defined by the terms of the applicable Trust Preferred
Securities) has occurred and is continuing at the time of the deferral. The
Company was not in default with respect to the terms of the Trust Preferred
Securities at the time the quarterly payments were deferred and such deferrals
did not cause an event of default under the terms of the Trust Preferred
Securities.
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 and services from unaffiliated parties. Our contractual obligations
consist of time deposits, borrowings, and operating lease obligations. There
have not been any material changes in our contractual obligations from those
disclosed in the 2011 Form 10-K.
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, see
Note 14, Financial Instruments with Off-Balance-Sheet Risk, of the Notes to the
Consolidated Financial Statements contained in the 2011 Form 10-K.
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Table of Contents
HAMPTON ROADS BANKSHARES, INC.
PART I. FINANCIAL INFORMATION
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition
USE OF NON-GAAP FINANCIALMEASURES
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 for
investors, regulators, management, and others to evaluate capital adequacy and
to compare against other financial institutions. The following is a
reconciliation (in thousands) of these non-GAAP financial measures with
financial measures defined by GAAP.
June 30, December 31,
2012 2011
Shareholders' equity $ 149,347 $ 113,668
Less: intangible assets 3,080 3,751
Shareholders' equity - tangible $ 146,267 $ 109,917
Common shareholders' equity $ 149,347 $
113,668
Less: intangible assets 3,080
3,751
Common shareholders' equity - tangible $ 146,267 $
109,917
Shareholders' equity (average) $ 109,398 $
157,408
Less: intangible assets (average) 3,400
8,137
Shareholders' equity - tangible (average) $ 105,998 $ 149,271
Common shareholders' equity (average) $ 109,398 $
157,408
Less: intangible assets (average) 3,400
8,137
Common shareholders' equity - tangible (average) $ 105,998 $ 149,271
Return on average common equity (24.95 %)
(62.65 %)
Impact of excluding intangible assets (0.80 %)
(3.41 %)
Return on average common equity - tangible (25.75 %) (66.06 %)
Book value per common share $ 1.41 $ 3.29
Impact of excluding intangible assets (0.03 )
(0.11 )
Book value per common share - tangible $ 1.38 $ 3.18
50
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Table of Contents
HAMPTON ROADS BANKSHARES, INC.
PART I. FINANCIAL INFORMATION
