Edgar Filing: HAMPTON ROADS BANKSHARES INC

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Form 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2012

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.)

999 Waterside Drive, Suite 200, Norfolk, Virginia		23510
(Address of principal executive offices)		(Zip Code)

(757) 217-1000

(Registrant’s telephone number, including area code)

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

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x

The number of shares outstanding of the issuer’s common stock as of April 30, 2012 was 34,561,145 shares, par value $0.01.

TABLE OF CONTENTS


PART I – FINANCIAL INFORMATION
	Page
ITEM 1 – FINANCIAL STATEMENTS

Consolidated Balance Sheets		3

March 31, 2012
December 31, 2011

Consolidated Statements of Operations		4

Three months ended March 31, 2012 and 2011

Consolidated Statements of Comprehensive Loss		5

Three months ended March 31, 2012 and 2011

Consolidated Statement of Changes in Shareholders’ Equity		6

Three months ended March 31, 2012

Consolidated Statements of Cash Flows		7

Three months ended March 31, 2012 and 2011

Notes to Consolidated Financial Statements		8

ITEM 2 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS		33

ITEM 3 – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK		48

ITEM 4 – CONTROLS AND PROCEDURES		49

PART II – OTHER INFORMATION

ITEM 1 – LEGAL PROCEEDINGS		50

ITEM 1A – RISK FACTORS		50

ITEM 2 – UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS		57

ITEM 3 – DEFAULTS UPON SENIOR SECURITIES		58

ITEM 4 – MINE SAFETY DISCLOSURES		58

ITEM 5 – OTHER INFORMATION		58

ITEM 6 – EXHIBITS		59

SIGNATURES		60

HAMPTON ROADS BANKSHARES, INC.

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

CONSOLIDATED BALANCE SHEETS


	(Unaudited)
(in thousands, except share and per share data)	March 31, 2012			December 31, 2011
Assets:
Cash and due from banks	$	12,935		$	18,241
Interest-bearing deposits in other banks		1,070			1,295
Overnight funds sold and due from Federal Reserve Bank		113,395			118,531
Investment securities available for sale, at fair value		315,203			284,470
Restricted equity securities, at cost		19,419			20,057

Loans held for sale		40,562			63,171

Loans		1,471,998			1,504,733
Allowance for loan losses		(68,917	)		(74,947	)

Net loans		1,403,081			1,429,786
Premises and equipment, net		86,877			87,565
Interest receivable		6,197			6,329
Foreclosed real estate and repossessed assets, net of valuation allowance		61,028			63,613
Intangible assets, net		3,415			3,751
Bank-owned life insurance		51,978			51,579
Other assets		17,867			18,472

Totals assets	$	2,133,027		$	2,166,860

Liabilities and Shareholders’ Equity:
Deposits:
Noninterest-bearing demand	$	234,882		$	225,458
Interest-bearing:
Demand		535,597			540,262
Savings		63,833			61,218
Time deposits:
Less than $100		477,721			525,291
$100 or more		460,089			445,805

Total deposits		1,772,122			1,798,034
Federal Home Loan Bank borrowings		195,721			195,941
Other borrowings		40,710			40,617
Interest payable		4,041			3,751
Other liabilities		15,135			14,849

Total liabilities		2,027,729			2,053,192

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; 34,561,145 shares issued and outstanding on March 31, 2012 and on December 31, 2011		346			346
Capital surplus		493,006			492,998
Retained deficit		(394,201	)		(386,295	)
Accumulated other comprehensive income, net of tax		5,633			6,377

Total shareholders’ equity before non-controlling interest		104,784			113,426
Non-controlling interest		514			242

Total shareholders’ equity		105,298			113,668

Total liabilities and shareholders’ equity	$	2,133,027		$	2,166,860

See accompanying notes to the consolidated financial statements.

HAMPTON ROADS BANKSHARES, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS


(in thousands, except share and per share data)	Three Months Ended
(unaudited)	March 31, 2012			March 31, 2011
Interest Income:
Loans, including fees	$	19,521		$	24,539
Investment securities		2,008			2,418
Overnight funds sold and due from FRB		77			225
Interest-bearing deposits in other banks		—			1

Total interest income		21,606			27,183

Interest Expense:
Deposits:
Demand		460			1,165
Savings		22			42
Time deposits:
Less than $100		1,617			2,904
$100 or more		1,607			2,787

Interest on deposits		3,706			6,898
Federal Home Loan Bank borrowings		587			1,320
Other borrowings		613			741

Total interest expense		4,906			8,959


Net interest income		16,700			18,224
Provision for loan losses		7,302			21,314

Net interest income (expense) after provision for loan losses		9,398			(3,090	)

Noninterest Income:
Service charges on deposit accounts		1,342			1,446
Mortgage banking revenue		3,258			1,250
Losses on foreclosed real estate and repossessed assets		(2,964	)		(3,682	)
Loss on sale of investment securities available for sale		(13	)		—
Insurance revenue		—			1,153
Brokerage revenue		63			70
Income from bank-owned life insurance		399			481
Other		1,024			1,407

Total noninterest income		3,109			2,125

Noninterest Expense:
Salaries and employee benefits		9,712			12,355
Occupancy		1,746			2,326
Professional and consultant fees		1,393			2,185
FDIC insurance		1,227			6,709
Data processing		1,085			1,007
Problem loan and repossessed asset costs		893			1,416
Equipment		705			806
Other		3,150			3,838

Total noninterest expense		19,911			30,642

Loss before provision for income taxes		(7,404	)		(31,607	)
Provision for income taxes		—			44

Net loss		(7,404	)		(31,651	)
Net income attributable to non-controlling interest		502			17

Net loss attributable to Hampton Roads Bankshares, Inc.	$	(7,906	)	$	(31,668	)


Per Share: ⁽¹⁾
Cash dividends declared	$	—		$	—

Basic loss	$	(0.23	)	$	(0.95	)

Diluted loss	$	(0.23	)	$	(0.95	)

Basic weighted average shares outstanding		34,561,145			33,389,949
Effect of dilutive stock options		—			—

Diluted weighted average shares outstanding		34,561,145			33,389,949

⁽¹⁾	As restated to give retroactive effect to the 1 for 25 shares reverse stock split that occurred on April 27, 2011.

See accompanying notes to the consolidated financial statements.

HAMPTON ROADS BANKSHARES, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS


(in thousands, except share data)	For the Three Months Ended					For the Three Months Ended
	March 31, 2012					March 31, 2011

Net loss				(7,404	)			(31,651	)

Other comprehensive income, net of tax
Change in unrealized gain on securities available for sale		(757	)				1,089
Reclassification adjustment for securities losses included in net income		13		(744	)		—	1,089

Other comprehensive income (loss)				(744	)			1,089


Comprehensive loss				(8,148	)			(30,562	)

Less: comprehensive income attributable to the noncontrolling interest				502				17


Comprehensive loss attributable to Hampton Roads Bankshares, Inc.				(8,650	)			(30,579	)

See accompanying notes to the consolidated financial statements.

HAMPTON ROADS BANKSHARES, INC.

CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY


					Capital Surplus		Retained Deficit			Accumulated Other Comprehensive Income (Loss)			Non-controlling Interest			Total Shareholders’ Equity

(in thousands, except share data)	Common Stock
(unaudited)	Shares		Amount
Balance at December 31, 2011		34,561,145	$	346	$	492,998	$	(386,295	)	$	6,377		$	242		$	113,668

Net income (loss)		—		—		—		(7,906	)		—			502			(7,404	)
Other comprehensive loss		—		—		—		—			(744	)		—			(744	)
Share-based compensation expense		—		—		8		—			—			—			8
Distributed non-controlling interest		—		—		—		—			—			(230	)		(230	)

Balance at March 31, 2012		34,561,145	$	346	$	493,006	$	(394,201	)	$	5,633		$	514		$	105,298

See accompanying notes to the consolidated financial statements.

HAMPTON ROADS BANKSHARES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS


(in thousands)	Three Months Ended
(unaudited)	March 31, 2012			March 31, 2011
Operating Activities:
Net loss	$	(7,404	)	$	(31,651	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization		1,050			1,171
Amortization of intangible assets and fair value adjustments		370			(33	)
Provision for loan losses		7,302			21,314
Proceeds from mortgage loans held for sale		139,210			101,900
Originations of mortgage loans held for sale		(116,601	)		(91,562	)
Stock-based compensation expense		8			30
Net amortization of premiums and accretion of discounts on investment securities available for sale		866			711
Losses on foreclosed real estate and repossessed assets		2,964			3,682
Loss on sale of investment securities available for sale		13			—
Income from bank-owned life insurance		(399	)		(481	)
Changes in:
Interest receivable		132			(262	)
Other assets		605			4,652
Interest payable		290			85
Other liabilities		286			(2,123	)

Net cash provided by operating activities		28,692			7,433

Investing Activities:
Proceeds from maturities and calls of investment securities available for sale		27,031			14,242
Proceeds from sale of investment securities available for sale		96			—
Purchase of investment securities available for sale		(59,483	)		(28,887	)
Purchase of restricted equity securities		(783	)		—
Proceeds from sale of restricted equity securities		1,421			354
Net decrease in loans		13,885			59,341
Purchase of premises and equipment		(333	)		(260	)
Proceeds from sale of foreclosed real estate and repossessed assets		4,914			9,127

Net cash provided by (used in) investing activities		(13,252	)		53,917

Financing Activities:
Net decrease in deposits		(25,861	)		(149,069	)
Repayments of Federal Home Loan Bank borrowings		(16	)		(16	)
Distributed non-controlling interest		(230	)		(400	)

Net cash used in financing activities		(26,107	)		(149,485	)

Decrease in cash and cash equivalents		(10,667	)		(88,135	)
Cash and cash equivalents at beginning of period		138,067			460,912

Cash and cash equivalents at end of period	$	127,400		$	372,777


Supplemental cash flow information:
Cash paid for interest	$	4,616		$	8,874
Cash paid for income taxes		265			20

Supplemental non-cash information:
Change in unrealized gain (loss) on securities	$	(744	)	$	1,089
Transfer between loans and other real estate owned		5,293			24,176

See accompanying notes to the consolidated financial statements.

HAMPTON ROADS BANKSHARES, INC.

PART I. FINANCIAL INFORMATION

Item 1. Notes to Consolidated Financial Statements

NOTE A – BASIS OF PRESENTATION

The accompanying unaudited consolidated financial statements of Hampton Roads Bankshares, Inc. (the “Company,” “we,” “us,” or “our”) have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial reporting and with the instructions to Form 10-Q. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, the financial statements reflect all adjustments (consisting of a normal recurring nature) considered necessary for a fair presentation. The results of operations for the three months ended March 31, 2012 are not necessarily indicative of the results to be expected for the full year. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company’s annual report on Form 10-K for the year ended December 31, 2011.

On March 18, 2011, the Board of Directors of the Company unanimously adopted resolutions approving an amendment to the Articles to effect a 1-for-25 reverse stock split of all outstanding shares of the Common Stock on 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 if, as a result of the Reverse Stock Split, the number of shares owned by any shareholder would not be a 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.

Recent Accounting Pronouncements

In May 2011, the FASB issued ASU 2011-04, Fair Value Measurement: Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs that improves the comparability of fair value measurements presented and disclosed by aligning GAAP and IFRSs. The amendments explain how to measure fair value. They do not require additional fair value measurements and are not intended to establish valuation standards or affect valuation practices outside of financial reporting. The amendments are to be applied prospectively and are effective during interim and annual periods beginning after December 15, 2011. Early application is not permitted. The adoption of the new guidance did not have a material impact on the Company’s consolidated financial statements.

In June 2011, the FASB issued ASU 2011-05, Comprehensive Income: Presentation of Comprehensive Income that improves the comparability of items reported in other comprehensive income. The amendment requires that all non-owner changes in shareholders’ equity be presented in a single continuous statement of comprehensive income or in two separate but consecutive statements. The amendment is to be applied retrospectively and is effective for fiscal years and interim periods within those years beginning after December 15, 2011. Early adoption is permitted. The adoption of the new guidance resulted in the addition of a new Consolidated Statement of Comprehensive Loss included in these financial statements.

In December 2011, the FASB issued ASU 2011-12, Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05. The amendment defers changes in ASU 2011-05 that relate to the presentation of reclassification adjustments out of accumulated other comprehensive income. The amendment is to be applied retrospectively and is effective for fiscal years and interim periods within those years beginning after December 15, 2011. The adoption of the new guidance did not have a material impact on our consolidated financial statements.

HAMPTON ROADS BANKSHARES, INC.

PART I. FINANCIAL INFORMATION

Item 1. Notes to Consolidated Financial Statements

NOTE B – REGULATORY MATTERS

Effective June 17, 2010, the Company and its banking subsidiary, Bank of Hampton Roads (“BOHR”), entered into a written agreement (herein called the “Written Agreement”) with the Federal Reserve Bank of Richmond (“FRB”) and the Bureau of Financial Institutions of the Virginia State Corporation Commission (“Bureau of Financial Institutions”). The Company’s other banking subsidiary, Shore Bank (“Shore”), is not a party to the Written Agreement.

Written Agreement

Under the terms of the Written Agreement, BOHR agreed to develop and submit for approval, within the time periods specified, plans to (a) strengthen board oversight of management and BOHR’s operations, (b) strengthen credit risk management policies, (c) improve BOHR’s position with respect to loans, relationships, or other assets in excess of $2.5 million which are now, or may in the future become, past due more than 90 days, are on BOHR’s problem loan list, or adversely classified in any report of examination of BOHR, (d) review and revise, as appropriate, current policy and maintain sound processes for determining, documenting, and recording an adequate allowance for loan and lease losses, (e) improve management of BOHR’s liquidity position and funds management policies, (f) provide contingency planning that accounts for adverse scenarios and identifies and quantifies available sources of liquidity for each scenario, (g) reduce BOHR’s reliance on brokered deposits, and (h) improve BOHR’s earnings and overall condition.

In addition, BOHR has agreed that it will (a) not extend, renew, or restructure any credit that has been criticized by the FRB or the Bureau of Financial Institutions absent prior board of directors approval in accordance with the restrictions in the Written Agreement, (b) eliminate all assets or portions of assets classified as “loss” and thereafter charge off all assets classified as “loss” in a federal or state report of examination, unless otherwise approved by the FRB, (c) comply with legal and regulatory limitations on indemnification payments and severance payments, and (d) appoint a committee to monitor compliance with the terms of the Written Agreement.

In addition, the Company has agreed that it will (a) not take any other form of payment representing a reduction in BOHR’s capital or make any distributions of interest, principal, or other sums on subordinated debentures or trust preferred securities absent prior regulatory approval, (b) take all necessary steps to correct certain technical violations of law and regulation cited by the FRB, (c) refrain from guaranteeing any debt without the prior written approval of the FRB and the Bureau of Financial Institutions, and (d) refrain from purchasing or redeeming any shares of its stock without the prior written consent of the FRB or the Bureau of Financial Institutions.

Under the terms of the Written Agreement, both the Company and BOHR agreed to submit for approval capital plans to maintain sufficient capital at the Company, on a consolidated basis, and to refrain from declaring or paying dividends absent prior regulatory approval.

To date, the Company and BOHR have met all of the deadlines for taking actions required by the FRB and the Bureau of Financial Institutions under the terms of the Written Agreement. A committee has been appointed to oversee the Company’s compliance with the terms of the agreement and has met each month to review compliance. Written plans have been submitted for strengthening board oversight, strengthening credit risk management practices, improving liquidity, reducing the reliance on brokered deposits, improving capital, and curing the technical violations of laws and regulations. The Company has also submitted its written policies and procedures for maintaining an adequate allowance for loan and lease losses and its plans for all foreclosed real estate and nonaccrual and delinquent loans in excess of $2.5 million. Additionally, the Company instituted the required review process for all classified loans. The Company has charged off the assets identified as loss from the previous examination. As of March 31, 2012, the Company exceeded the regulatory capital minimums, Shore was considered “well capitalized,” and BOHR was “adequately capitalized” under the risk-based capital standards. As a result, management believes that, except for BOHR’s capital status as “adequately capitalized” and our significant level of loan losses, the Company and BOHR are in full compliance with the terms of the Written Agreement.

On February 13, 2012, the Company announced that it intends to offer shares of its Common Stock in a public offering that we expect will raise between $54.0 million and $95.0 million in gross proceeds and anticipate will settle during the second or third quarter of 2012. Depending on the timing and/or the consummation of this capital raise, continued

HAMPTON ROADS BANKSHARES, INC.

PART I. FINANCIAL INFORMATION

Item 1. Notes to Consolidated Financial Statements

losses may result in either the Company or BOHR falling below the minimum required capital levels during 2012. If this occurs, our regulators would be required to take certain actions to resolve these capital deficiencies. These actions may include increased supervisory monitoring, restrictions on asset growth, requirements to sell certain assets or businesses, or requiring our multi-bank holding company investor to contribute additional capital into BOHR.

NOTE C – STOCK-BASED COMPENSATION

Compensation cost relating to share-based transactions is accounted for in the consolidated financial statements based on the fair value of the share-based award on the date of grant. The Company calculates the fair value of its stock options at the date of grant using a lattice option pricing model. Stock options granted with pro-rata vesting schedules are expensed over the vesting period on a straight-line basis. No options were granted during the three months ended March 31, 2012 and 2011. Stock-based compensation expense (in thousands, except share data) recognized in the consolidated statements of operations and the options exercised, including the total intrinsic value and cash received, for the three months ended March 31, 2012 and 2011 were as follows.


	March 31,
	2012		2011
Expense recognized:
Related to stock options	$	2	$	22
Related to share awards		6		8
Related tax benefit		—		—

Number of options exercised:
New shares		—		—
Previously acquired shares		—		—

Total intrinsic value of options exercised	$	—	$	—
Cash received from options exercised		—		—

The Company has granted stock options to its directors and employees under stock compensation plans that have been approved by the Company’s shareholders. All outstanding options have terms that range from five to ten years and are either fully vested and exercisable at the date of grant or vest ratably over periods that range from three to ten years. A summary of the Company’s stock option activity and related information for the three months ended March 31, 2012 is as follows.


	Options Outstanding			Weighted Average Exercise Price			Average Intrinsic Value

Balance at December 31, 2011		30,556		$	355.37		$	—
Expired		(991	)		(219.57	)		—


Balance at March 31, 2012		29,565		$	359.92		$	—


Options exercisable at March 31, 2012		29,118		$	360.74		$	—

HAMPTON ROADS BANKSHARES, INC.

PART I. FINANCIAL INFORMATION

Item 1. Notes to Consolidated Financial Statements

Information pertaining to options outstanding and options exercisable as of March 31, 2012 is as follows.


	Options Oustanding						Options Exercisable
Ranges of Exercise Prices	Number of Options Outstanding		Weighted Average Remaining Contractual Life (in years)		Weighted Average Exercise Price		Number of Options Exercisable		Weighted Average Exercise Price

$100.00 - $126.25		893		1.32	$	116.85		893	$	116.85
$177.25 - $219.25		3,942		1.53		201.29		3,942		201.29
$227.75 - $266.25		6,462		3.03		254.09		6,462		254.09
$300.00 - $312.25		5,765		4.84		301.05		5,318		300.61
$491.75 - $546.75		11,324		2.87		497.93		11,324		497.93
$616.75		1,179		3.17		616.75		1,179		616.75


$100.00 - $616.75		29,565		3.08	$	359.92		29,118	$	360.74

On October 4, 2011, the Company’s shareholders approved the 2011 Omnibus Incentive Plan, which succeeds the Company’s 2006 Stock Incentive Plan and provides 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. No such awards were granted during the three months ended March 31, 2012. As of March 31, 2012, there was $28 thousand of unrecognized compensation cost related to non-vested stock options. That cost is expected to be recognized over a weighted-average period of 5.6 years.

The Company has granted non-vested shares of Common Stock to certain directors and employees as part of incentive programs. Outstanding non-vested shares have vesting schedules of five years and are expensed over the same time frame. A summary of the Company’s non-vested share activity and related information for the three months ended March 31, 2012 is as follows.


	Number of Shares		Per Share Weighted-Average Grant Date Fair Value

Balance at December 31, 2011		80	$	306.25


Balance at March 31, 2012		80	$	306.25

As of March 31, 2012, there was $14 thousand of total unrecognized compensation cost related to non-vested share awards. That cost is expected to be recognized over a weighted-average period of 0.6 years. There were no shares vested during the three months ended March 31, 2012.

HAMPTON ROADS BANKSHARES, INC.

PART I. FINANCIAL INFORMATION

Item 1. Notes to Consolidated Financial Statements

NOTE D – INVESTMENT SECURITIES

The amortized cost and estimated fair values of investment securities available for sale (in thousands) at March 31, 2012 and December 31, 2011 were as follows.


	March 31, 2012
Description of Securities	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value

U.S. agency securities	$	35,372	$	1,162	$	15	$	36,519
Mortgage-backed securities		269,613		4,950		585		273,978
State and municipal securities		528		85		—		613
Corporate securities		2,824		10		—		2,834
Equity securities		1,233		48		22		1,259

Total investment securities available for sale	$	309,570	$	6,255	$	622	$	315,203


	December 31, 2011
Description of Securities	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value

U.S. agency securities	$	48,854	$	1,101	$	35	$	49,920
Mortgage-backed securities		224,578		5,688		330		229,936
State and municipal securities		529		79		—		608
Corporate bonds		2,811		—		115		2,696
Equity securities		1,341		1		32		1,310

Total investment securities available for sale	$	278,113	$	6,869	$	512	$	284,470

Unrealized losses

Information pertaining to securities with gross unrealized losses (in thousands) at March 31, 2012 and December 31, 2011, aggregated by investment category and length of time that the individual securities have been in a continuous unrealized loss position is as follows.


	March 31, 2012
	Less than 12 Months				12 Months or More				Total
Description of Securities	Estimated Fair Value		Unrealized Loss		Estimated Fair Value		Unrealized Loss		Estimated Fair Value		Unrealized Loss

U.S. agency securities	$	7,429	$	15	$	—	$	—	$	7,429	$	15
Mortgage-backed securities		51,222		560		2,758		25		53,980		585
Equity securities		—		—		62		22		62		22


	$	58,651	$	575	$	2,820	$	47	$	61,471	$	622


	December 31, 2011
	Less than 12 Months				12 Months or More				Total
Description of Securities	Estimated Fair Value		Unrealized Loss		Estimated Fair Value		Unrealized Loss		Estimated Fair Value		Unrealized Loss

U.S. agency securities	$	9,599	$	35	$	—	$	—	$	9,599	$	35
Mortgage-backed securities		35,730		281		3,066		49		38,796		330
Corporate bonds		2,696		115		—		—		2,696		115
Equity securities		—		—		89		32		89		32


	$	48,025	$	431	$	3,155	$	81	$	51,180	$	512

HAMPTON ROADS BANKSHARES, INC.

PART I. FINANCIAL INFORMATION

Item 1. Notes to Consolidated Financial Statements

Debt securities with unrealized losses totaling $600 thousand at March 31, 2012 included two U.S. agency securities and twenty mortgage-backed securities. The severity and duration of this unrealized loss will fluctuate with interest rates in the economy.

The Company’s unrealized losses on equity securities were caused by what management deems to be transitory fluctuations in market valuation. At March 31, 2012, seven equity securities experienced an unrealized loss of $22 thousand. All identified impairments on equity securities were taken in the periods identified.

Other-than-temporary impairment (“OTTI”)

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 debt security or it is more likely than not that it will be required to sell the debt 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.

During the first three months of 2012 and 2011, no equity securities were determined to be other-than-temporarily impaired. No impairment losses were recognized through noninterest income during the first three months of 2012 or 2011. There was nothing included in accumulated other comprehensive loss in the equity section of the balance sheet as of March 31, 2012 or 2011. Management has evaluated the unrealized losses associated with the remaining equity securities as of March 31, 2012 and, in management’s opinion, the unrealized losses are temporary, and it is our intention to hold these securities until their value recovers. A rollforward of the cumulative OTTI losses (in thousands) recognized in earnings for all securities for the three months ended March 31, 2012 for securities still held is as follows.


Balance, December 31, 2011	$	1,120
Less: Realized gains for securities sales		—
Add: Loss where impairment was not previously recognized		—
Add: Loss where impairment was previously recognized		—

Balance, March 31, 2012	$	1,120

Maturities of investment securities

The amortized cost and estimated fair value of investment securities available for sale (in thousands) that are not determined to be other-than-temporarily impaired by contractual maturity at March 31, 2012 and December 31, 2011 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. Equity securities do not have contractual maturities.

HAMPTON ROADS BANKSHARES, INC.

PART I. FINANCIAL INFORMATION

Item 1. Notes to Consolidated Financial Statements


	March 31, 2012
	Amortized Cost		Estimated Fair Value

Due after one year but less than five years	$	6,740	$	6,917
Due after five years but less than ten years		23,867		24,345
Due after ten years		277,730		282,682
Equity securities		1,233		1,259


Total available-for-sale securities	$	309,570	$	315,203


	December 31, 2011
	Amortized Cost		Estimated Fair Value

Due after one year but less than five years	$	7,300	$	7,386
Due after five years but less than ten years		26,183		26,679
Due after ten years		243,289		249,095
Equity securities		1,341		1,310


Total available-for-sale securities	$	278,113	$	284,470

Federal Home Loan Bank (“FHLB”)

The Company’s investment in FHLB stock totaled $14.5 million at March 31, 2012. 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 receive FHLB advances (i.e. borrowings). It is carried at cost as there is no market 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 March 31, 2012, and no impairment has been recognized.

NOTE E – LOANS AND ALLOWANCE FOR LOAN LOSSES

The Company grants commercial, real estate, and consumer loans to customers throughout its lending areas. Although the Company has a diversified loan portfolio, a substantial portion of the Company’s debtors’ abilities to honor their contracts is dependent upon the economic environment of the lending area. The major segments of loans (in thousands) are summarized as follows.


	March 31, 2012			December 31, 2011

Commercial and Industrial	$	244,619		$	256,058
Construction		271,623			284,984
Real estate - commercial mortgage		531,734			522,052
Real estate - residential mortgage		400,451			414,957
Installment loans		23,591			26,525
Deferred loan fees and related costs		(20	)		157


Total loans	$	1,471,998		$	1,504,733

HAMPTON ROADS BANKSHARES, INC.

PART I. FINANCIAL INFORMATION

Item 1. Notes to Consolidated Financial Statements

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 several 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 third-party agreements), cash flow analyses 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 monthly. This analysis includes specific allowances for individual loans; general allowances 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.

Loss factors are calculated using 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 attributed to specific portfolio segments, the entire allowance is available to absorb credit losses inherent in the total loan portfolio. In addition, specific allocations may be assigned to nonaccrual or other problem credits. A rollforward of the activity (in thousands) within the allowance for loan losses by loan type for the three months ended March 31, 2012 and 2011 is as follows.


March 31, 2012							Real Estate -
	Commercial and Industrial			Construction			Commercial Mortgage			Residential Mortgage			Installment			Unallocated		Total
Allowance for credit losses:

Beginning balance	$	13,605		$	24,826		$	17,101		$	12,060		$	2,067		$	5,288	$	74,947
Charge-offs		(4,662	)		(5,235	)		(2,774	)		(2,450	)		(164	)				(15,285	)
Recoveries		182			836			675			205			55					1,953
Provision		2,015			(305	)		(30	)		3,008			(379	)		2,993		7,302

Ending balance	$	11,140		$	20,122		$	14,972		$	12,823		$	1,579		$	8,281	$	68,917


Ending balance: collectively evaluated for impairment	$	8,161		$	15,406		$	8,741		$	6,406		$	1,482		$	8,281	$	48,477


Ending balance: individually evaluated for impairment	$	2,979		$	4,716		$	6,231		$	6,417		$	97				$	20,440

HAMPTON ROADS BANKSHARES, INC.

PART I. FINANCIAL INFORMATION

Item 1. Notes to Consolidated Financial Statements


March 31, 2011							Real Estate -
	Commercial						Commercial			Residential
	and Industrial			Construction			Mortgage			Mortgage			Installment			Unallocated			Total
Allowance for credit losses:

Beginning balance	$	18,610		$	83,052		$	25,426		$	17,973		$	3,400		$	8,792		$	157,253
Charge-offs		(9,059	)		(46,190	)		(7,232	)		(5,994	)		(676	)					(69,151	)
Recoveries		327			53			60			57			77						574
Provision		4,206			7,144			6,537			5,007			385			(1,965	)		21,314

Ending balance	$	14,084		$	44,059		$	24,791		$	17,043		$	3,186		$	6,827		$	109,990


Ending balance: collectively evaluated for impairment	$	8,064		$	16,385		$	15,459		$	8,519		$	2,782		$	6,827		$	58,036


Ending balance: individually evaluated for impairment	$	6,020		$	27,674		$	9,332		$	8,524		$	404					$	51,954

Impaired Loans

A loan is considered impaired when it is probable that all amounts due will not be collected according to the contractual terms. 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 from the sale or liquidation of the underlying collateral. The Company’s policy is to charge off collateral dependent 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 180 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. For certain loans when the Company determines a loan is impaired, the estimated impairment is directly charged-off to the loan rather than creating a specific reserve for inclusion in the allowance for loan losses. Total impaired loans were $181.6 million and $211.6 million at March 31, 2012 and December 31, 2011, respectively, the majority of which were considered collateral dependent, and therefore, measured at the fair value of the underlying collateral.

Impaired loans for which no allowance is provided totaled $95.8 million and $115.0 million at March 31, 2012 and December 31, 2011, respectively. Loans written down to their estimated fair value of collateral less the costs to sell account for $48.3 million and $52.9 million of the impaired loans for which no allowance has been provided as of March 31, 2012 and December 31, 2011, respectively. The average age of appraisals for these loans is 0.96 years at March 31, 2012. The remaining impaired loans for which no allowance is provided are fully covered by the value of the collateral, and therefore, no additional loss is expected on these loans. The following charts show impaired loans (in thousands) by class as of March 31, 2012 and December 31, 2011.

HAMPTON ROADS BANKSHARES, INC.

PART I. FINANCIAL INFORMATION

Item 1. Notes to Consolidated Financial Statements


			Unpaid				Average		Interest
	Recorded		Principal		Related		Recorded		Income
March 31, 2012	Investment		Balance		Allowance		Investment		Recognized

With no related allowance recorded:
Commercial & Industrial	$	5,766	$	10,971	$	—	$	6,140	$	14
Construction
1-4 family residential construction		1,918		2,759		—		1,967		—
Commercial construction		37,823		87,636		—		44,598		66
Real estate
Commercial Mortgage
Owner occupied		23,390		25,911		—		24,027		117
Non-owner occupied		10,027		20,843		—		11,574		53
Residential Mortgage
Secured by 1-4 family, 1st lien		12,630		14,201		—		13,090		47
Secured by 1-4 family, junior lien		4,018		6,147		—		4,167		2
Installment		209		551		—		215		2

With an allowance recorded:
Commercial & Industrial		8,102		11,753		2,979		8,682		3
Construction
1-4 family residential construction		7,901		8,632		2,149		7,912		48
Commercial construction		16,211		34,305		2,567		16,812		17
Real estate
Commercial Mortgage
Owner occupied		24,274		25,337		3,788		24,632		68
Non-owner occupied		5,943		5,943		2,443		5,948		—
Residential Mortgage
Secured by 1-4 family, 1st lien		16,767		18,762		3,217		17,202		214
Secured by 1-4 family, junior lien		6,476		7,050		3,200		6,504		5
Installment		150		150		97		153		—

Total:
Commercial & Industrial	$	13,868	$	22,724	$	2,979	$	14,822	$	17
Construction		63,853		133,332		4,716		71,289		131
Real estate-commercial mortgage		63,634		78,034		6,231		66,181		238
Real estate-residential mortgage		39,891		46,160		6,417		40,963		268
Installment		359		701		97		368		2


Total	$	181,605	$	280,951	$	20,440	$	193,623	$	656

HAMPTON ROADS BANKSHARES, INC.

PART I. FINANCIAL INFORMATION

Item 1. Notes to Consolidated Financial Statements


			Unpaid				Average		Interest
	Recorded		Principal		Related		Recorded		Income
December 31, 2011	Investment		Balance		Allowance		Investment		Recognized

With no related allowance recorded:
Commercial & Industrial	$	29,281	$	36,244	$	—	$	30,249	$	1,491
Construction
1-4 family residential construction		3,774		5,146		—		3,890		—
Commercial construction		34,441		73,369		—		35,229		187
Real estate
Commercial Mortgage
Owner occupied		17,663		21,225		—		18,213		380
Non-owner occupied		11,312		24,170		—		11,716		305
Residential Mortgage
Secured by 1-4 family, 1st lien		13,705		15,524		—		14,238		131
Secured by 1-4 family, junior lien		4,580		6,828		—		4,709		3
Installment		242		627		—		250		—

With an allowance recorded:
Commercial & Industrial		10,233		10,647		6,160		10,475		34
Construction
1-4 family residential construction		6,454		6,504		2,387		6,722		237
Commercial construction		27,384		60,330		7,250		28,833		168
Real estate
Commercial Mortgage
Owner occupied		27,441		27,503		3,641		27,679		824
Non-owner occupied		4,393		6,008		845		4,432		—
Residential Mortgage
Secured by 1-4 family, 1st lien		18,617		19,061		4,225		18,756		767
Secured by 1-4 family, junior lien		2,063		2,171		1,157		2,150		10
Installment		50		49		38		54		—

Total:
Commercial & Industrial	$	39,514	$	46,891	$	6,160	$	40,724	$	1,525
Construction		72,053		145,349		9,637		74,674		592
Real estate-commercial mortgage		60,809		78,906		4,486		62,040		1,509
Real estate-residential mortgage		38,965		43,584		5,382		39,853		911
Installment		292		676		38		304		—


Total	$	211,633	$	315,406	$	25,703	$	217,595	$	4,537

HAMPTON ROADS BANKSHARES, INC.

PART I. FINANCIAL INFORMATION

Item 1. Notes to Consolidated Financial Statements

Non-performing Assets

Non-performing assets consist of loans 90 days past due and still accruing interest, nonaccrual loans, and foreclosed real estate and repossessed assets. Total non-performing assets were $189.8 million or 9% of total assets at March 31, 2012 compared with $196.9 million or 9% of total assets at December 31, 2011. Non-performing assets (in thousands) were as follows.


	March 31, 2012		December 31, 2011

Loans 90 days past due and still accruing interest	$	—	$	84
Nonaccrual loans, including nonaccrual impaired loans		128,805		133,161
Foreclosed real estate and repossessed assets		61,028		63,613


Non-performing assets	$	189,833	$	196,858

Nonaccrual and Past Due Loans

The Company generally places loans on nonaccrual status when the collection of interest or principal 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 on nonaccrual status, interest receivable is reversed against interest income recognized in the current period, 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 (in thousands) for the periods ended March 31, 2012 and December 31, 2011 is as follows.


	March 31, 2012		December 31, 2011

Loans 90 days past due and still accruing interest	$	—	$	84
Nonaccrual loans, including nonaccrual impaired loans		128,805		133,161

Total non-performing loans		128,805		133,245
TDRs on accrual		14,182		21,168
Impaired loans on accrual		38,618		57,220


Total impaired loans	$	181,605	$	211,633

Nonaccrual loans were $128.8 million at March 31, 2012 compared to $133.2 million at December 31, 2011. If income on nonaccrual loans had been recorded under original terms, $3.4 million of additional interest income would have been recorded for the three months ended March 31, 2012.

Age Analysis of Past Due Loans

An age analysis of past due loans (in thousands) as of March 31, 2012 and December 31, 2011 is as follows.

HAMPTON ROADS BANKSHARES, INC.

PART I. FINANCIAL INFORMATION

Item 1. Notes to Consolidated Financial Statements


March 31, 2012	30-59 Days Past Due		60-89 Days Past Due		Greater Than 90 Days		Total Past Due		Current			Total Loans			Recorded Investment >90 Days and Accruing

Commercial & Industrial	$	1,653	$	832	$	13,005	$	15,490	$	229,129		$	244,619		$	—
Construction
1-4 family residential construction		150		40		4,005		4,195		23,327			27,522			—
Commercial construction		1,571		—		48,127		49,698		194,403			244,101			—
Real estate
Commercial Mortgage
Owner occupied		2,985		1,366		29,209		33,560		281,501			315,061			—
Non-owner occupied		88		—		9,977		10,065		206,608			216,673			—
Residential Mortgage
Secured by 1-4 family, 1st lien		6,598		551		14,605		21,754		217,407			239,161			—
Secured by 1-4 family, junior lien		1,411		128		9,601		11,140		150,150			161,290			—
Installment		47		76		276		399		23,192			23,591			—
Deferred loan fees and related costs		—		—		—		—		(20	)		(20	)		—


Total	$	14,503	$	2,993	$	128,805	$	146,301	$	1,325,697		$	1,471,998		$	—


December 31, 2011	30-59 Days Past Due		60-89 Days Past Due		Greater Than 90 Days		Total Past Due		Current		Total Loans		Recorded Investment >90 Days and Accruing

Commercial & Industrial	$	1,715	$	2,179	$	17,097	$	20,991	$	235,067	$	256,058	$	—
Construction
1-4 family residential construction		594		—		4,415		5,009		18,522		23,531		—
Commercial construction		2,490		2,069		54,593		59,152		202,301		261,453		—
Real estate
Commercial Mortgage
Owner occupied		1,145		861		23,250		25,256		280,745		306,001		—
Non-owner occupied		3,647		193		9,076		12,916		203,135		216,051		—
Residential Mortgage
Secured by 1-4 family, 1st lien		8,979		1,698		18,185		28,862		222,148		251,010		—
Secured by 1-4 family, junior lien		1,069		228		6,337		7,634		156,313		163,947		—
Installment		78		56		292		426		26,099		26,525		84
Deferred loan fees and related costs		—		—		—		—		157		157		—


Total	$	19,717	$	7,284	$	133,245	$	160,246	$	1,344,487	$	1,504,733	$	84

Credit Quality

The Company has continued to experience challenging credit conditions. The pace of deterioration, however, has moderated noticeably as evidenced by the declines in both non-performing and past due loans. In conjunction with these declines, the provision for loan losses decreased to $7.3 million for the first quarter of 2012 compared to $21.3 million for the first quarter of 2011.

HAMPTON ROADS BANKSHARES, INC.

PART I. FINANCIAL INFORMATION

Item 1. Notes to Consolidated Financial Statements

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 monthly. This allowance includes specific allowances for individual loans; a 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. 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 on “nonaccrual” when management does not expect to collect payments consistent with acceptable and agreed upon terms of repayment. The following tables provide information (in thousands) on March 31, 2012 and December 31, 2011 about the credit quality of the loan portfolio using the Company’s internal rating system as an indicator.


March 31, 2012	Pass			Special Mention		Substandard		Nonaccrual Loans		Total

Commercial & Industrial	$	171,768		$	26,285	$	33,561	$	13,005	$	244,619
Construction
1-4 family residential construction		13,557			501		9,459		4,005		27,522
Commercial construction		115,301			45,314		35,359		48,127		244,101
Real estate
Commercial Mortgage
Owner occupied		217,073			42,427		26,352		29,209		315,061
Non-owner occupied		153,954			42,350		10,392		9,977		216,673
Residential Mortgage
Secured by 1-4 family, 1st lien		173,994			31,172		19,390		14,605		239,161
Secured by 1-4 family, junior lien		143,791			4,601		3,297		9,601		161,290
Installment		17,830			3,866		1,619		276		23,591
Deferred loan fees and related costs		(20	)		—		—		—		(20	)


Total	$	1,007,248		$	196,516	$	139,429	$	128,805	$	1,471,998

HAMPTON ROADS BANKSHARES, INC.

PART I. FINANCIAL INFORMATION

Item 1. Notes to Consolidated Financial Statements


December 31, 2011	Pass		Special Mention		Substandard		Nonaccrual Loans		Total

Commercial & Industrial	$	177,347	$	27,916	$	33,698	$	17,097	$	256,058
Construction
1-4 family residential construction		9,483		482		9,151		4,415		23,531
Commercial construction		119,885		53,660		33,315		54,593		261,453
Real estate
Commercial Mortgage
Owner occupied		203,974		44,669		34,108		23,250		306,001
Non-owner occupied		152,829		41,636		12,510		9,076		216,051
Residential Mortgage
Secured by 1-4 family, 1st lien		183,243		30,424		19,158		18,185		251,010
Secured by 1-4 family, junior lien		145,495		4,695		7,420		6,337		163,947
Installment		17,913		3,881		4,523		208		26,525
Deferred loan fees and related costs		157		—		—		—		157


Total	$	1,010,326	$	207,363	$	153,883	$	133,161	$	1,504,733

Modifications

All restructured loans are not necessarily considered Troubled Debt Restructurings (“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 a reduction of stated 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 March 31, 2012 and December 31, 2011, loans classified as TDRs were $35.7 million and $45.3 million, respectively. All of these were included in the impaired loan disclosure. Of this amount, $14.2 million was accruing and $21.5 million was non-accruing at March 31, 2012 and $21.1 million was accruing and $24.2 million was non-accruing at December 31, 2011. The following table shows the loans (in thousands, except number of contracts) that were determined by management to be TDRs at March 31, 2012 and December 31, 2011.

HAMPTON ROADS BANKSHARES, INC.

PART I. FINANCIAL INFORMATION

Item 1. Notes to Consolidated Financial Statements


	March 31, 2012
Troubled Debt Restructurings	Number of Contracts		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment

Commercial & Industrial		5	$	347	$	209
Construction
1-4 family residential construction		1		2,129		1,599
Commercial construction		19		21,719		11,317
Real estate
Commercial Mortgage
Owner occupied		13		8,464		8,422
Non-owner occupied		4		7,696		7,534
Residential Mortgage
Secured by 1-4 family, 1st lien		27		6,984		6,391
Secured by 1-4 family, junior lien		1		186		186
Installment		—		—		—


Total		70	$	47,525	$	35,658


	December 31, 2011
Troubled Debt Restructurings	Number of Contracts		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment

Commercial & Industrial		6	$	360	$	222
Construction
1-4 family residential construction		1		2,128		1,598
Commercial construction		18		23,079		13,551
Real estate
Commercial Mortgage
Owner occupied		14		15,235		15,193
Non-owner occupied		3		7,413		7,251
Residential Mortgage
Secured by 1-4 family, 1st lien		29		7,631		7,343
Secured by 1-4 family, junior lien		1		190		190
Installment		—		—		—


Total		72	$	56,036	$	45,348

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. There were no nonaccrual TDRs that were returned to accrual status during the three months ended March 31, 2012 and $316 thousand were returned to accrual status during the year ended December 31, 2011.

HAMPTON ROADS BANKSHARES, INC.

PART I. FINANCIAL INFORMATION

Item 1. Notes to Consolidated Financial Statements

NOTE F – PREMISES AND EQUIPMENT

Premises and equipment (in thousands) at March 31, 2012 and December 31, 2011 are summarized as follows.


	March 31, 2012			December 31, 2011

Land	$	29,433		$	29,433
Buildings and improvements		57,426			58,640
Leasehold improvements		2,186			2,384
Equipment, furniture, and fixtures		16,408			15,374
Construction in process		919			967


		106,372			106,798
Less accumulated depreciation and amortization		(19,495	)		(19,233	)


Premises and equipment, net	$	86,877		$	87,565

NOTE G – 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 (in thousands) as of March 31, 2012 and December 31, 2011 is as follows.


	March 31, 2012				December 31, 2011
	Carrying		Accumulated		Carrying		Accumulated
	Amount		Amortization		Amount		Amortization
Intangible assets:

Core deposit intangible	$	8,037	$	4,644	$	8,105	$	4,381
Employment contract intangibles		1,130		1,108		1,130		1,103


Total intangible assets	$	9,167	$	5,752	$	9,235	$	5,484

The weighted-average amortization period for core deposit intangibles is 78.9 months and employment contract intangibles is 38.0 months.

NOTE H – FORECLOSED REAL ESTATE AND REPOSSESSED ASSETS

Foreclosed assets are presented net of an allowance for losses. An analysis of the allowance for losses (in thousands) on foreclosed assets at March 31, 2012 and 2011 is as follows.

HAMPTON ROADS BANKSHARES, INC.

PART I. FINANCIAL INFORMATION

Item 1. Notes to Consolidated Financial Statements


	March 31, 2012			March 31, 2011

Balance at beginning of year	$	20,022		$	9,533
Provision for losses		2,777			2,547
Charge-offs		(1,027	)		(1,632	)

Balance at end of period	$	21,772		$	10,448

Expenses (in thousands) applicable to foreclosed real estate and repossessed assets for the three months ended March 31, 2012 and 2011 include the following.


	For the three months ended
	March 31, 2012		March 31, 2011

Losses on sale of foreclosed real estate	$	187	$	1,135
Provision for losses		2,777		2,547
Operating expenses		673		992

Total	$	3,637	$	4,674

NOTE I – BUSINESS SEGMENT REPORTING

The Company defines its operating segments by product. The Company has two community banks, BOHR and Shore, which provide loan and deposit services through branches located in Virginia, North Carolina, and Maryland. In addition to its banking operations, the Company has two additional reportable segments: Mortgage, which encompasses the Company’s mortgage banking business, and Other. At the end of the third quarter of 2011, the Company sold Gateway Insurance Services, Inc., a wholly-owned subsidiary. Results for 2011 for Gateway Insurance Services, Inc. are combined with the investment segment and reported in the segment “Other.”

The accounting policies of the reportable segments are the same as those described in the summary of significant accounting policies in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011 (“2011 Form 10-K”). 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. The following tables show certain financial information (in thousands) as of and for the periods ending March 31, 2012, December 31, 2011, and March 31, 2011 for each segment and in total.

HAMPTON ROADS BANKSHARES, INC.

PART I. FINANCIAL INFORMATION

Item 1. Notes to Consolidated Financial Statements


	Total			Elimination			BOHR			Shore			Mortgage			Other

*Total Assets at March 31, 2012*	$	2,133,027		$	(211,291	)	$	1,853,770		$	294,058		$	46,281		$	150,208


*Total Assets at December 31, 2011*	$	2,166,860		$	(258,739	)	$	1,912,912		$	277,267		$	68,117		$	167,303


Three Months Ended March 31, 2012	Total			Elimination			BOHR			Shore			Mortgage			Other

Net interest income	$	16,700		$	—		$	14,331		$	2,671		$	166		$	(468	)
Provision for loan losses		7,302			—			7,450			(148	)		—			—

Net interest income (expense) after provision for loan losses		9,398			—			6,881			2,819			166			(468	)
Noninterest income		3,109			(74	)		(3,799	)		116			3,258			3,608
Noninterest expense		19,911			(74	)		14,955			2,405			2,431			194

Income (loss) before provision for income taxes		(7,404	)		—			(11,873	)		530			993			2,946
Provision for income taxes		—			—			—			—			—			—

Net income (loss)		(7,404	)		—			(11,873	)		530			993			2,946
Net income attributable to non-controlling interest		502			—			—			—			502			—

Net income (loss) attributable to Hampton Roads Bankshares, Inc.	$	(7,906	)	$	—		$	(11,873	)	$	530		$	491		$	2,946


Three Months Ended March 31, 2011	Total			Elimination			BOHR			Shore			Mortgage			Other

Net interest income	$	18,224		$	—		$	16,870		$	1,843		$	51		$	(540	)
Provision for loan losses		21,314			—			21,440			(126	)		—			—

Net interest income (expense) after provision for loan losses		(3,090	)		—			(4,570	)		1,969			51			(540	)
Noninterest income		2,125			—			(1,051	)		702			1,250			1,224
Noninterest expense		30,642			—			24,120			2,625			2,345			1,552

Income (loss) before provision for income taxes		(31,607	)		—			(29,741	)		46			(1,044	)		(868	)
Provision for income taxes		44			—			—			44			—			—

Net income (loss)		(31,651	)		—			(29,741	)		2			(1,044	)		(868	)
Net income attributable to non-controlling interest		17			—			—			—			17			—

Net income (loss) attributable to Hampton Roads Bankshares, Inc.	$	(31,668	)	$	—		$	(29,741	)	$	2		$	(1,061	)	$	(868	)

NOTE J – 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 groups 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. The majority of instruments fall into the Level 1 or 2 fair value hierarchy. 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 United States Department of the Treasury (the “Treasury”) securities that are highly liquid and are actively traded in over-the-counter markets.

HAMPTON ROADS BANKSHARES, INC.

PART I. FINANCIAL INFORMATION

Item 1. Notes to Consolidated Financial Statements


Level 2		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 assets and liabilities include debt securities with quoted prices that are traded less 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 financial instruments whose values are determined using pricing models, discounted cash flow methodologies, or similar techniques as well as instruments for which the determination of fair value requires significant management judgment or estimation.

A financial instrument’s categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement.

The aggregate fair value amounts presented below do not represent the underlying fair value of the Company. The following methods and assumptions were used by the Company in estimating fair value for its financial instruments.

(a)

Cash and Cash Equivalents

Cash and cash equivalents include cash and due from banks, overnight funds sold and due from FRB, and interest-bearing deposits in other banks. 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)

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.

(d)

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. We believe our disclosures provide fair values that are more indicative of an entry price. This technique does not contemplate an exit price. We do not record loans at fair value on a recurring basis. We record fair value adjustments to loans on a nonrecurring basis to reflect full and partial charge-offs due to impairment. 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.

(e)

Interest Receivable and Interest Payable

The carrying amount approximates fair value.

(f)

Bank-Owned Life Insurance

The carrying amount approximates fair value.

(g)

Deposits

The fair values disclosed for demand deposits (for example, interest and noninterest demand and savings accounts) are, by definition, 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.

HAMPTON ROADS BANKSHARES, INC.

PART I. FINANCIAL INFORMATION

Item 1. Notes to Consolidated Financial Statements

(h)

Borrowings

The fair value of borrowings is estimated using discounted cash flow analysis based on the rates currently offered for borrowings of similar remaining maturities and collateral requirements. These include other borrowings and FHLB borrowings.

(i)

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 March 31, 2012 and December 31, 2011, and as such, the related fair values have not been estimated.

The estimated fair value (in thousands) of the Company’s financial instruments at March 31, 2012 and December 31, 2011 were as follows.


	March 31, 2012				December 31, 2011
	Carrying		Fair		Carrying		Fair
	Value		Value		Value		Value
Assets:
Cash and due from banks	$	12,935	$	12,935	$	18,241	$	18,241
Interest-bearing deposits in other banks		1,070		1,070		1,295		1,295
Overnight funds sold and due from FRB		113,395		113,395		118,531		118,531
Investment securities available for sale		315,203		315,203		284,470		284,470
Loans held for sale		40,562		40,562		63,171		63,171
Loans, net		1,403,081		1,431,607		1,429,786		1,464,121
Interest receivable		6,197		6,197		6,329		6,329
Bank-owned life insurance		51,978		51,978		51,579		51,579

Liabilities:
Deposits		1,772,122		1,768,118		1,798,034		1,769,449
FHLB borrowings		195,721		194,286		195,941		196,038
Other borrowings		40,710		41,422		40,617		40,617
Interest payable		4,041		4,041		3,751		3,751

Recurring Basis

The Company measures or monitors certain of its assets and liabilities on a fair value basis. Fair value is used on a recurring basis for those assets and liabilities that were elected 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 (in thousands) of assets and liabilities measured and recognized at fair value on a recurring basis in the consolidated balance sheets at March 31, 2012 and December 31, 2011.

HAMPTON ROADS BANKSHARES, INC.

PART I. FINANCIAL INFORMATION

Item 1. Notes to Consolidated Financial Statements


			Fair Value Measurements at March 31, 2012 Using
Description	Assets / Liabilities Measured at Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)

Investment securities available for sale:
U.S. agency securities	$	36,519	$	—	$	36,519	$	—
Mortgage-backed securities		273,978		—		273,978		—
State and municipal securities		613		—		613		—
Corporate securities		2,834		—		2,834		—
Equity securities		1,259		258		—		1,001

Total investment securities available for sale		315,203		258		313,944		1,001

Derivative loan commitments		701		—		—		701
Loans held for sale		40,562		—		40,562		—


			Fair Value Measurements at December 31, 2011 Using
Description	Assets / Liabilities Measured at Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)

Investment securities available for sale:
U.S. agency securities	$	49,920	$	—	$	49,920	$	—
Mortgage-backed securities		229,936		—		229,936		—
State and municipal securities		608		—		608		—
Corporate securities		2,696		—		2,696		—
Equity securities		1,310		200		—		1,110

Total investment securities available for sale		284,470		200		283,160		1,110

Derivative loan commitments		549		—		—		549
Loans held for sale		63,171		—		63,171		—

The following table shows a reconciliation of fair value (in thousands) by level and category for the three months ended March 31, 2012.

HAMPTON ROADS BANKSHARES, INC.

PART I. FINANCIAL INFORMATION

Item 1. Notes to Consolidated Financial Statements


	Activity in Fair Value Measurements Three Months Ended March 31, 2012
	Investment Securities Available for Sale								Derivative Loan Commitments		Loans Held for Sale
Description	Level 1		Level 2			Level 3			Level 3		Level 2

Balance, December 31, 2011	$	200	$	283,160		$	1,110		$	549	$	63,171
Unrealized gains (losses) included in:
Earnings		—		—			(13	)		—		—
Other comprehensive income (loss)		58		(802	)		—			—		—
Purchases		—		59,483			—			—		116,601
Sales		—		—			(96	)		—		(139,210	)
Issuances		—		—			—			—		—
Settlements		—		(27,897	)		—			152		—
Transfers in		—		—			—			—		—
Transfers out		—		—			—			—		—

Balance, March 31, 2012	$	258	$	313,944		$	1,001		$	701	$	40,562

The following describes the valuation techniques used to measure 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 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 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. These are carried at fair value and are included in other assets at March 31, 2012 and December 31, 2011.

Loans Held For Sale. The Company sells loans to outside investors. Fair value of mortgage loans held for sale is estimated based on the commitments into which individual loans will be delivered. Carrying value of loans held for sale approximates fair value.

Non-recurring Basis

Certain assets, specifically impaired loans, 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). 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 a current appraisal, 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 foreclosed real estate 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

HAMPTON ROADS BANKSHARES, INC.

PART I. FINANCIAL INFORMATION

Item 1. Notes to Consolidated Financial Statements

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 foreclosed real estate. 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. In the case where an appraisal is greater than two years old for collateral dependent impaired loans and foreclosed real estate, it is the Company’s policy to classify these as Level 3 within the fair value hierarchy; otherwise, they are classified as Level 2. The average age of appraisals for Level 3 valuations of collateral dependent loans was 3.52 years as of March 31, 2012. 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. The following tables represent the carrying amount (in thousands) for impaired loans and adjustments made to fair value during the respective reporting periods.


	Assets Measured at Fair Value		Fair Value Measurements at March 31, 2012 Using
			Fair Value Measurements at March 31, 2012 Using
Description			Level 1		Level 2		Level 3		Total Losses

Impaired loans	$	65,382	$	—	$	45,426	$	19,956	$	—


	Assets Measured at Fair Value		Fair Value Measurements at December 31, 2011 Using
			Fair Value Measurements at December 31, 2011 Using
Description			Level 1		Level 2		Level 3		Total Losses

Impaired loans	$	70,932	$	—	$	54,785	$	16,147	$	—

Our nonfinancial assets that are recognized or disclosed at fair value on a nonrecurring basis relate to foreclosed real estate and repossessed assets. The amounts below represent the carrying values (in thousands) for our foreclosed real estate and repossessed assets and impairment adjustments made to fair value during the respective reporting periods.


	Assets Measured at Fair Value		Fair Value Measurements at March 31, 2012 Using
			Fair Value Measurements at March 31, 2012 Using						Total
Description			Level 1		Level 2		Level 3		Losses

Foreclosed real estate and repossessed assets	$	61,028	$	—	$	61,028	$	—	$	2,964


	Assets Measured at Fair Value		Fair Value Measurements at December 31, 2011 Using
			Fair Value Measurements at December 31, 2011 Using						Total
Description			Level 1		Level 2		Level 3		Losses

Foreclosed real estate and repossessed assets	$	63,613	$	—	$	63,613	$	—	$	22,096

The following describes the valuation techniques used to measure fair value for our nonfinancial assets classified as nonrecurring.

Foreclosed Real Estate and Repossessed Assets. The adjustments to foreclosed real estate 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 current market conditions, and, as such, may include significant management assumptions and input with respect to the determination of fair value. As described above, we utilize a valuation matrix to assist in this process.

HAMPTON ROADS BANKSHARES, INC.

PART I. FINANCIAL INFORMATION

Item 1. Notes to Consolidated Financial Statements

NOTE K – 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.

NOTE L – SUBSEQUENT EVENTS

The Company has evaluated subsequent events through the date and time the consolidated financial statements were issued and determined there are no other items to disclose except as follows.

On April 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.

HAMPTON ROADS BANKSHARES, INC.

PART I. FINANCIAL INFORMATION

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

Forward-Looking Statements

This Form 10-Q contains “forward-looking statements” within the meaning of the U.S. Private Securities Litigation Reform Act of 1995. When or if used in this quarterly report or any Securities and Exchange Commission 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 three 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 announced offering of Common Stock, we will 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 announced offering, 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 improve 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%;

•

If our Common Stock was no longer included in the Russell 2000 or Russell 3000 Indices, there could be a reduction in liquidity and prices for our stock;

•

The Company has restated its financial statements, which may have a future adverse effect;

•

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, and it 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;

HAMPTON ROADS BANKSHARES, INC.

PART I. FINANCIAL INFORMATION

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

•

FDIC insurance assessments will 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;

•

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;

•

Our lending on vacant land may expose us to a greater risk of loss and may have an adverse effect on operations;

•

Difficult market conditions have adversely affected our industry;

•

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 ability to maintain adequate sources of funding may be negatively impacted by the current economic environment, which may, among other things, impact our ability to pay dividends or satisfy our obligations;

•

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

•

The current economic environment may negatively impact our ability to maintain required capital levels or otherwise negatively impact our financial condition, which may, among other things, limit our access to certain sources of funding and liquidity;

•

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

•

We may incur additional losses if we are unable to successfully manage interest rate risk;

•

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

•

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

•

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

•

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;

•

If we do not comply with the continued listing requirements of the NASDAQ Global Select Market, our Common Stock could be delisted;

•

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

•

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;

•

The recently enacted Dodd-Frank Act may adversely affect our business, financial condition, and results of operations; and

•

The soundness of other financial institutions could adversely affect us.

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

Overview

Throughout the first three 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 three month period ended March 31, 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

HAMPTON ROADS BANKSHARES, INC.

PART I. FINANCIAL INFORMATION

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

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 would continue to adversely impact our financial condition and results of operations throughout 2012. As of March 31, 2012, the Company exceeded the regulatory capital minimums, Shore was considered “well capitalized” and BOHR was considered “adequately 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 three 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 income (loss) available to common shareholders are the provision for loan losses, noninterest expense, and the provision for income taxes.

The following is a summary of our financial condition as of March 31, 2012 and our financial performance for the three month period then ended.

•

Assets were $2.1 billion. Total assets decreased by $33.8 million or 2% from December 31, 2011. The decrease in assets was primarily associated with a $32.7 million or 2% decrease in gross loans and a $22.6 million or 36% decrease in loans held for sale offset by a $30.7 million or 11% increase in investment securities available for sale.

•

Investment securities available for sale increased $30.7 million to $315.2 million during the first three months of 2012. The increase was primarily a result of purchases of mortgage-backed securities using the proceeds from loan reductions and pay-offs.

•

Gross loans decreased by $32.7 million or 2% during the three months ended March 31, 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.

•

Allowance for loan losses at March 31, 2012 decreased $6.0 million to $68.9 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 three months ended March 31, 2012.

•

Deposits decreased $25.9 million or 1% from December 31, 2011 as a result of decreases in time deposits under $100 thousand of $47.6 million partially offset by an increase in time deposits over $100 thousand of $14.3 million. 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 available to common shareholders for the three months ended March 31, 2012 was $7.9 million or $0.23 per common diluted share as compared with net loss available to common shareholders of $31.7 million or $0.95 per common diluted share for the three months ended March 31, 2011. This net loss was primarily attributable to provision for loan losses expense of $7.3 million, the impact of nonaccrual loans on interest income, and losses on foreclosed real estate and repossessed assets of $3.0 million.

•

Net interest income decreased $1.5 million to $16.7 million for the three months ended March 31, 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 declines in our funding costs.

HAMPTON ROADS BANKSHARES, INC.

PART I. FINANCIAL INFORMATION

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

•

Provision for loan losses for the three months ended March 31, 2012 was $7.3 million, a 66% decrease over the comparable period 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 months ended March 31, 2012 was $3.1 million, a 46% increase over the comparative period in 2011. This was largely due to an increase in mortgage banking revenue and a decrease in losses on foreclosed real estate and repossessed assets offset by the loss of insurance revenue resulting from the sale of our insurance subsidiary in August 2011.

•

Noninterest expense was $19.9 million for the three months ended March 31, 2012, which was a decrease of $10.7 million or 35% over the comparable period for 2011, 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 decreased to 0% for the three months ended March 31, 2012 compared to 0.14% 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 three months of 2012, we have been focused on reducing operating expenses. As part of these efforts, we have sold or consolidated 13 branches since December 31, 2010, reducing our branch total to 45 at March 31, 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.

Material Trends and Uncertainties

Currently, the U.S. economy has emerged and 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, and, as a result, we decreased the provision for loan losses significantly. This trend continued into the first three months of 2012, and the Company decreased its provision for loan losses $14.0 million during the first quarter 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.

HAMPTON ROADS BANKSHARES, INC.

PART I. FINANCIAL INFORMATION

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

Impaired loans have decreased by $30.0 million since December 31, 2011. At March 31, 2012, the Company had $181.6 million in impaired loans and at December 31, 2011, we had $211.6 million. The majority of the decrease is from a $25.6 million decrease in impaired commercial and industrial loans. Additionally, the Company experienced a $718 thousand decrease in losses on foreclosed real estate and repossessed assets to $3.0 million at March 31, 2012.

Our net interest income declined during the first three 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 3.62% for the three months ended March 31, 2012 compared to 2.98% for the three months ended March 31, 2011.

The Company determined that a valuation all

Large accelerated filer

Accelerated filer

Non-accelerated filer

¨ (do not check if smaller reporting company)

Smaller reporting company