Xenith Bankshares 10Q 2013 Q2 Quarterly report

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 June 30, 2013

Commission File Number: 001-32968

______HAMPTON ROADS BANKSHARES, INC._____

(Exact name of registrant as specified in its charter)


Virginia	54-2053718
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)


641 Lynnhaven Parkway, Virginia Beach, VA	23452
(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 o

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 o

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



Large accelerated filer o		Accelerated filer o
Non-accelerated filer o		Smaller reporting company x
(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o No x

The number of shares outstanding of the issuer’s common stock as of July 31, 2013 was 170,263,264 shares, par value $0.01.



TABLE OF CONTENTS

PART I – FINANCIAL INFORMATION

ITEM 1 – FINANCIAL STATEMENTS		Page

Consolidated Balance Sheets		3

June 30, 2013
December 31, 2012

Consolidated Statements of Operations		4

Three and six months ended June 30, 2013 and 2012

Consolidated Statements of Comprehensive Income (Loss)		5

Three and six months ended June 30, 2013 and 2012

Consolidated Statement of Changes in Shareholders’ Equity		6

Six months ended June 30, 2013

Consolidated Statements of Cash Flows		7

Six months ended June 30, 2013 and 2012

Notes to Consolidated Financial Statements		8

ITEM 2 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION		37

ITEM 3 – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK		51

ITEM 4 – CONTROLS AND PROCEDURES		52

PART II – OTHER INFORMATION

ITEM 1 – LEGAL PROCEEDINGS		53

ITEM 1A – RISK FACTORS		53

ITEM 2 – UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS		63

ITEM 3 – DEFAULTS UPON SENIOR SECURITIES		63

ITEM 4 – MINE SAFETY DISCLOSURES		63

ITEM 5 – OTHER INFORMATION		63

ITEM 6 – EXHIBITS		64

SIGNATURES		65

HAMPTON ROADS BANKSHARES, INC.

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

CONSOLIDATED BALANCE SHEETS


(in thousands, except share data)
(unaudited)		June 30, 2013		December 31, 2012
Assets:
Cash and due from banks	$	16,783	$	16,761
Interest-bearing deposits in other banks		648		656
Overnight funds sold and due from Federal Reserve Bank		107,339		83,800
Investment securities available for sale, at fair value		278,386		276,455
Restricted equity securities, at cost		17,351		18,066

Loans held for sale		51,369		84,068

Loans		1,400,250		1,432,275
Allowance for loan losses		(38,234)		(48,382)
Net loans		1,362,016		1,383,893
Premises and equipment, net		69,925		78,657
Interest receivable		5,003		5,077
Other real estate owned and repossessed assets,
net of valuation allowance		32,906		32,215
Intangible assets, net		1,741		2,410
Bank-owned life insurance		54,006		53,199
Other assets		11,465		18,835
Totals assets	$	2,008,938	$	2,054,092
Liabilities and Shareholders' Equity:
Deposits:
Noninterest-bearing demand	$	268,372	$	263,266
Interest-bearing:
Demand		575,615		519,799
Savings		66,751		59,876
Time deposits:
Less than $100		341,193		393,580
$100 or more		324,466		381,253
Total deposits		1,576,397		1,617,774
Federal Home Loan Bank borrowings		194,619		195,060
Other borrowings		41,206		41,002
Interest payable		5,493		4,882
Other liabilities		11,988		10,651
Total liabilities		1,829,703		1,869,369
Commitments and contingencies
Shareholders' equity:
Preferred stock, 1,000,000 shares authorized; none issued
and outstanding		-		-
Common stock, $0.01 par value; 1,000,000,000 shares
authorized; 170,263,264 and 170,265,150 shares issued
and outstanding on June 30, 2013 and December 31, 2012,
respectively		1,703		1,703
Capital surplus		586,745		586,347
Retained deficit		(410,665)		(411,386)
Accumulated other comprehensive income, net of tax		1,028		6,837
Total shareholders' equity before non-controlling interest		178,811		183,501
Non-controlling interest		424		1,222
Total shareholders' equity		179,235		184,723
Total liabilities and shareholders' equity	$	2,008,938	$	2,054,092

See accompanying notes to the unaudited consolidated financial statements.

HAMPTON ROADS BANKSHARES, INC.

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

CONSOLIDATED STATEMENTS OF OPERATIONS


(in thousands, except share and per share data)		Three Months Ended				Six Months Ended
(unaudited)		June 30, 2013		June 30, 2012		June 30, 2013		June 30, 2012
Interest Income:
Loans, including fees	$	17,687	$	18,601	$	35,360	$	38,122
Investment securities		1,839		1,998		3,654		4,006
Overnight funds sold and due from FRB		63		69		105		146
Interest-bearing deposits in other banks		-		1		-		1
Total interest income		19,589		20,669		39,119		42,275
Interest Expense:
Deposits:
Demand		558		489		1,067		950
Savings		9		21		19		42
Time deposits:
Less than $100		921		1,361		1,921		2,977
$100 or more		935		1,416		1,943		3,023
Interest on deposits		2,423		3,287		4,950		6,992
Federal Home Loan Bank borrowings		479		578		965		1,166
Other borrowings		592		607		1,179		1,219
Total interest expense		3,494		4,472		7,094		9,377
Net interest income		16,095		16,197		32,025		32,898
Provision for loan losses		1,000		4,346		1,000		11,648
Net interest income after provision for loan losses		15,095		11,851		31,025		21,250
Noninterest Income:
Mortgage banking revenue		4,250		3,855		10,214		7,113
Service charges on deposit accounts		1,300		1,264		2,517		2,607
Income from bank-owned life insurance		434		463		807		862
Gain (loss) on sale of premises and equipment		7		(47)		(120)		(47)
Impairment of premises and equipment		-		-		(2,825)		-
Losses on other real estate owned and repossessed assets		(774)		(4,947)		(1,678)		(7,912)
Gain on sale of investment securities available for sale
(includes $763, $274, $763, and $261 accumulated other
comprehensive income reclassifications for unrealized
net gains on available-for-sale securities as of three months
ended June 30, 2013 and 2012 and six months ended
June 30, 2013 and 2012, respectively)		763		274		763		261
Visa check card income		662		659		1,258		1,158
Other		942		472		2,076		1,059
Total noninterest income		7,584		1,993		13,012		5,101
Noninterest Expense:
Salaries and employee benefits		10,951		9,144		21,907		18,856
Occupancy		2,517		1,808		4,319		3,555
FDIC insurance		878		1,174		1,896		2,401
Professional and consultant fees		1,639		1,747		2,532		3,338
Data processing		1,129		930		1,926		2,016
Problem loan and repossessed asset costs		530		623		1,010		1,516
Equipment		491		729		955		1,434
Other		4,058		2,612		7,080		5,562
Total noninterest expense		22,193		18,767		41,625		38,678
Income (loss) before provision for income taxes		486		(4,923)		2,412		(12,327)
Provision for income taxes		135		-		135		-
Net income (loss)		351		(4,923)		2,277		(12,327)
Net income attributable to non-controlling interest		262		744		1,556		1,245
Net income (loss) attributable to Hampton Roads Bankshares, Inc.	$	89	$	(5,667)	$	721	$	(13,572)
Per Share:
Cash dividends declared	$	-	$	-	$	-	$	-
Basic loss	$	-	$	(0.15)	$	-	$	(0.38)
Diluted loss	$	-	$	(0.15)	$	-	$	(0.38)

See accompanying notes to the unaudited consolidated financial statements.

HAMPTON ROADS BANKSHARES, INC.

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)


(in thousands)	Three Months Ended						Six Months Ended
(unaudited)	June 30, 2013			June 30, 2012			June 30, 2013			June 30, 2012

Net income (loss)		$	351		$	(4,923)		$	2,277		$	(12,327)
Other comprehensive income (loss),
net of tax
Change in unrealized gain (loss)
on securities available for sale	(4,807)			2,605			(5,046)			1,848
Reclassification adjustment for
securities gain included in
net income (loss)	(763)			(274)			(763)			(261)
Other comprehensive income (loss),
net of tax			(5,570)			2,331			(5,809)			1,587
Comprehensive loss			(5,219)			(2,592)			(3,532)			(10,740)
Comprehensive income attributable
to non-controlling interest			262			744			1,556			1,245
Comprehensive loss attributable
to Hampton Roads Bankshares, Inc.		$	(5,481)		$	(3,336)		$	(5,088)		$	(11,985)

See accompanying notes to the unaudited consolidated financial statements.

HAMPTON ROADS BANKSHARES, INC.

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY



									Accumulated
									Other		Non-		Total
(in thousands, except share data)	Common Stock				Capital		Retained		Comprehensive		controlling		Shareholders'
(unaudited)	Shares		Amount		Surplus		Deficit		Income (Loss)		Interest		Equity
Balance at December 31, 2012	170,265,150	$	1,703	$	586,347	$	(411,386)	$	6,837	$	1,222	$	184,723

Net income	-		-		-		721		-		1,556		2,277
Other comprehensive loss	-		-		-		-		(5,809)		-		(5,809)
Stock-based compensation expense	-		-		401		-		-		-		401
Common stock surrendered	(1,886)		-		(3)		-		-		-		(3)
Distributed non-controlling interest	-		-		-		-		-		(2,354)		(2,354)

Balance at June 30, 2013	170,263,264	$	1,703	$	586,745	$	(410,665)	$	1,028	$	424	$	179,235

See accompanying notes to the unaudited consolidated financial statements.

HAMPTON ROADS BANKSHARES, INC.

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

CONSOLIDATED STATEMENTS OF CASH FLOWS


(in thousands)		Six Months Ended
(unaudited)		June 30, 2013		June 30, 2012
Operating Activities:
Net income (loss)	$	2,277	$	(12,327)
Adjustments to reconcile net income (loss)
to net cash provided by operating activities:
Depreciation and amortization		1,775		2,098
Amortization of intangible assets and fair value adjustments		1,546		708
Provision for loan losses		1,000		11,648
Proceeds from mortgage loans held for sale		392,528		272,639
Originations of mortgage loans held for sale		(359,829)		(257,114)
Stock-based compensation expense		401		15
Net amortization of premiums and accretion of discounts on
investment securities available for sale		1,429		1,990
Income from bank-owned life insurance		(807)		(862)
Loss on sale of premises and equipment		120		47
Impairment of premises and equipment		2,825		-
Losses on other real estate owned and repossessed assets		1,678		7,912
Gain on sale of investment securities available for sale		(763)		(261)
Changes in:
Interest receivable		74		569
Other assets		7,370		1,088
Interest payable		611		510
Other liabilities		1,337		(1,843)
Net cash provided by operating activities		53,572		26,817
Investing Activities:
Proceeds from maturities and calls of investment
securities available for sale		33,330		44,778
Proceeds from sale of investment securities available for sale		27,349		19,162
Purchase of investment securities available for sale		(69,085)		(89,180)
Purchase of restricted equity securities		(87)		(22)
Purchase of premises and equipment		(614)		(664)
Net decrease in loans		14,029		28,852
Proceeds from sale of restricted equity securities		802		2,887
Proceeds from sale of other real estate owned and repossessed assets		7,342		21,178
Proceeds from sale of premises and equipment		674		1,692
Net cash provided by investing activities		13,740		28,683
Financing Activities:
Net decrease in deposits		(41,371)		(129,908)
Repayments of Federal Home Loan Bank borrowings		(34)		(34)
Distributed non-controlling interest		(2,354)		(731)
Issuance of common shares, net		-		47,135
Net cash used in financing activities		(43,759)		(83,538)
Increase (decrease) in cash and cash equivalents		23,553		(28,038)
Cash and cash equivalents at beginning of period		101,217		138,067
Cash and cash equivalents at end of period	$	124,770	$	110,029

Supplemental cash flow information:
Cash paid for interest	$	6,483	$	8,867
Cash paid for (refunded from) income taxes		(5,087)		265
Supplemental non-cash information:
Change in unrealized gain (loss) on securities available for sale		(5,809)		1,587
Transfers from other real estate owned and repossessed assets to loans		2,807		373
Transfers from loans to other real estate owned and repossessed assets		12,518		14,428
Transfers from premises and equipment to other real estate owned
and repossessed assets		3,352		-

See accompanying notes to the unaudited 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 six months ended June 30, 2013 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, 2012 (“2012 Form 10-K”).

Use of Estimates in the Preparation of Financial Statements

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenue and expenses during the reporting periods. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change include the determination of the allowance for loan losses, valuation of other real estate owned, determination of fair value for financial instruments, and tax assets, liabilities, and expense.

Recent Accounting Pronouncements

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

In February 2013, the FASB issued ASU 2013-02, Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income that improves the reporting of reclassifications out of accumulated other comprehensive income by requiring an entity to report the effect of significant reclassifications out of accumulated other comprehensive income on the respective line items in net income if the amount being reclassified is required under GAAP to be reclassified in its entirety to net income or for those amounts that are not required under GAAP to be reclassified in their entirety to net income in the same reporting period, an entity is required to cross-reference other disclosures required under GAAP that provide additional detail about those amounts. This amendment is to be applied prospectively for reporting periods beginning after December 15, 2012. The adoption of the new guidance resulted in additional disclosures within the Company’s consolidated financial statements.

On January 31, 2013, the FASB issued ASU 2013-01, Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities that clarifies the intended scope of the disclosures required by ASU 2011-11, Disclosures About Offsetting Assets and Liaiblities that facilitates comparison between GAAP and International Financial Reporting Standards by requiring companies to provide enhanced disclosures for financial instruments and derivative instruments to enable users to evaluate the effect or potential effect of netting arrangements. This amendment is to be applied retrospectively for annual reporting periods beginning on or after January 1, 2013 and interim periods within those annual periods. The adoption of the new guidance did not have a material impact on the Company’s 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 that 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 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 therefore, 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.

The Company also agreed that it will (a) not make 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) 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.

Under the terms of the Written Agreement, both the Company and BOHR agreed to submit 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 has complied with the actions required by the FRB and the Bureau of Financial Institutions under the terms of the Written Agreement; additionally, BOHR has materially complied with the actions required by the FRB and the Bureau of Financial Institutions under the terms of the Written Agreement. The Risk Committee has been appointed to oversee the Company’s compliance with the terms of the Written Agreement and has met quarterly to review compliance. Written plans have been submitted and implemented 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 also submitted and implemented written policies and procedures for maintaining an adequate allowance for loan losses and its plans for all other real estate owned 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 charged off the assets identified as loss from the previous examination. As of June 30, 2013, the Company exceeded the regulatory capital minimums and BOHR and Shore were both considered “well capitalized” under the risk-based capital standards. The FRB recently modified its interpretation of the Written Agreement and now takes the position that it prohibits BOHR from accepting new brokered deposits. Based on prior guidance, BOHR accepted new brokered deposits after it became well capitalized, which technically did not comply with the Written Agreement under the FRB’s modified interpretation. We do not believe the new interpretation or our earlier actions will have any material adverse effect on the Company or our liquidity, expenses, or financial condition.

HAMPTON ROADS BANKSHARES, INC.

PART I. FINANCIAL INFORMATION

Item 1. Notes to Consolidated Financial Statements

NOTE C- EARNINGS PER SHARE

The following table (in thousands except share data) shows the basic and diluted earnings (loss) per share calculations for the three and six months ended June 30, 2013 and 2012.


	Three Months Ended				Six Months Ended
	June 30, 2013		June 30, 2012		June 30, 2013		June 30, 2012

Net income (loss)	$	89	$	(5,667)	$	721	$	(13,572)
Shares:
Weighted average number
of common shares outstanding		170,391,127		37,700,920		170,390,137		36,131,032
Dilutive stock awards and warrants		1,247,524		-		1,238,967		-
Diluted weighted average number of
common shares outstanding		171,638,651		37,700,920		171,629,104		36,131,032

Basic loss per share		-		(0.15)		-		(0.38)
Diluted loss per share	$	-	$	(0.15)	$	-	$	(0.38)

The Company issued a ten-year warrant to purchase 757,643 common shares at an exercise price of $0.70 per share. These shares were not included in the computation of diluted earnings per share as the effect was anti-dilutive for the three and six month periods ended June 30, 2012 as presented in the table above. Additionally, for the three and six months ended June 30, 2013 and 2012, the number of anti-dilutive awards excluded from the diluted earnings per share calculation was 26 thousand and 29 thousand shares, respectively, consisting of out-of-the-money stock options.

NOTE D – INVESTMENT SECURITIES

The amortized cost, gross unrealized gains and losses, and fair values of investment securities available for sale (in thousands) at June 30, 2013 and December 31, 2012 were as follows.


		June 30, 2013
			Gross		Gross
			Unrealized		Unrealized
	Amortized Cost		Gains		Losses		Fair Value

U.S. agency securities	$	29,626	$	829	$	132	$	30,323
State and municipal securities		526		33		-		559
Corporate bonds		7,673		107		23		7,757
Mortgage-backed securities - agency		199,329		2,927		2,636		199,620
Mortgage-backed securities - non-agency		3,822		-		65		3,757
Asset-backed securities		35,995		106		265		35,836
Equity securities		387		151		4		534
Total investment securities available for sale	$	277,358	$	4,153	$	3,125	$	278,386

HAMPTON ROADS BANKSHARES, INC.

PART I. FINANCIAL INFORMATION

Item 1. Notes to Consolidated Financial Statements


	December 31, 2012
			Gross		Gross
			Unrealized		Unrealized
	Amortized Cost		Gains		Losses		Fair Value

U.S. agency securities	$	31,522	$	1,477	$	11	$	32,988
State and municipal securities		527		104		-		631
Corporate bonds		2,864		89		-		2,953
Mortgage-backed securities - agency		202,024		5,431		261		207,194
Mortgage-backed securities - non-agency		30,703		432		485		30,650
Asset-backed securities		1,458		44		-		1,502
Equity securities		520		44		27		537
Total investment securities available for sale	$	269,618	$	7,621	$	784	$	276,455

Unrealized losses

The following tables reflect the fair values and gross unrealized losses (in thousands) aggregated by investment category and length of time that the individual securities have been in a continuous unrealized loss position at June 30, 2013 and December 31, 2012.


		June 30, 2013
		Less than 12 Months				12 Months or More				Total
			Unrealized				Unrealized				Unrealized
		Fair Value	Loss			Fair Value	Loss			Fair Value	Loss

U.S. agency securities	$	7,381	$	132	$	-	$	-	$	7,381	$	132
Corporate bonds		2,505		23		-		-		2,505		23
Mortgage-backed securities - agency		85,039		2,556		2,688		80		87,727		2,636
Mortgage-backed securities - non-agency		3,757		65		-		-		3,757		65
Asset-backed securities		23,747		265		-		-		23,747		265
Equity securities		-		-		53		4		53		4

	$	122,429	$	3,041	$	2,741	$	84	$	125,170	$	3,125


		December 31, 2012
		Less than 12 Months				12 Months or More				Total
			Unrealized				Unrealized				Unrealized
		Fair Value	Loss			Fair Value	Loss			Fair Value	Loss

U.S. agency securities	$	3,989	$	11	$	-	$	-	$	3,989	$	11
Mortgage-backed securities - agency		16,957		261		-		-		16,957		261
Mortgage-backed securities - non-agency		13,149		485		-		-		13,149		485
Equity securities		66		12		40		15		106		27

	$	34,161	$	769	$	40	$	15	$	34,201	$	784

Debt securities with unrealized losses totaling $3.1 million at June 30, 2013 included three U.S. agency securities, one corporate bond, 35 mortgage-backed securities – agency, nine mortgage-backed securities – non-agency, and 15 asset-backed securities compared with unrealized losses totaling $757 thousand at December 31, 2012, which included two U.S. agency securities and nineteen mortgage-backed securities. The severity and duration of this unrealized loss will fluctuate with interest rates in the economy.

At June 30, 2013, one equity security experienced an unrealized loss totaling $4 thousand compared with five equity securities with an unrealized loss of $27 thousand at December 31, 2012.

HAMPTON ROADS BANKSHARES, INC.

PART I. FINANCIAL INFORMATION

Item 1. Notes to Consolidated Financial Statements

Other-than-temporary impairment (“OTTI”)

During the first six months of 2013 and 2012, no equity securities were determined to be other-than-temporarily impaired and no impairment losses were recognized through noninterest income. No additional amount was included in accumulated other comprehensive income in the equity section of the balance sheet for other-than-temporarily impaired securities as of June 30, 2013 or 2012. Management has evaluated the unrealized losses associated with the remaining equity securities as of June 30, 2013 and does not intend to sell and will not be required to sell before recovery of their amortized cost basis, therefore, in management’s opinion, the unrealized losses are temporary.

Maturities of investment securities

The amortized cost and fair value by contractual maturity of investment securities available for sale (in thousands) that are not determined to be other-than-temporarily impaired at June 30, 2013 and December 31, 2012 are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Mortgage-backed and asset-backed securities, which are not due at a single maturity date, and equity securities, which do not have contractual maturities, are shown separately.


		June 30, 2013
		Amortized Cost		Fair Value

Due in one year or less	$	1,000	$	1,001
Due after one year but less than five years		9,952		10,100
Due after five years but less than ten years		8,803		8,979
Due after ten years		18,070		18,559
Mortgage-backed securities - agency		199,329		199,620
Mortgage-backed securities - non-agency		3,822		3,757
Asset-backed securities		35,995		35,836
Equity securities		387		534

Total available-for-sale securities	$	277,358	$	278,386

		December 31, 2012
		Amortized Cost		Fair Value

Due in one year or less	$	998	$	1,024
Due after one year but less than five years		5,196		5,359
Due after five years but less than ten years		9,372		9,759
Due after ten years		19,347		20,430
Mortgage-backed securities - agency		202,024		207,194
Mortgage-backed securities - non-agency		30,703		30,650
Asset-backed securities		1,458		1,502
Equity securities		520		537

Total available-for-sale securities	$	269,618	$	276,455

HAMPTON ROADS BANKSHARES, INC.

PART I. FINANCIAL INFORMATION

Item 1. Notes to Consolidated Financial Statements

Federal Home Loan Bank (“FHLB”)

The Company’s investment in FHLB stock totaled $11.2 million at June 30, 2013. FHLB stock is generally viewed as a long-term investment and as a restricted investment security because it is required to be held in order to access FHLB advances (i.e. borrowings). It is carried at cost as there is not an active market or exchange for the stock other than the FHLB or member institutions. Therefore, when evaluating FHLB stock for impairment, its value is based on ultimate recoverability of the par value rather than by recognizing temporary declines in value. The Company does not consider this investment to be other-than-temporarily impaired at June 30, 2013, and no impairment has been recognized.

Federal Reserve Bank (“FRB”) and Other Restricted Stock

The Company’s investment in FRB and other restricted stock totaled $6.2 million at June 30, 2013. FRB stock comprises the majority of this amount and is generally viewed as a long-term investment and as a restricted investment security. It is carried at cost as there is not an active market or exchange for the stock other than the FRB or member institutions.

NOTE E – LOANS AND ALLOWANCE FOR LOAN LOSSES

The Company grants commercial and industrial, real estate, and installment 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) as of June 30, 2013 and December 31, 2012 are summarized as follows.


		June 30, 2013		December 31, 2012

Commercial and Industrial	$	239,293	$	267,080
Construction		183,513		206,391
Real estate - commercial mortgage		560,235		530,042
Real estate - residential mortgage		355,568		372,591
Installment loans		62,680		56,302
Deferred loan fees and related costs		(1,039)		(131)

Total loans	$	1,400,250	$	1,432,275

Allowance for Loan Losses

A rollforward of the activity (in thousands) within the allowance for loan losses by loan type and recorded investment in loans for the three and six months ended June 30, 2013 and 2012 is as follows.


		Three Months Ended June 30, 2013
					Real Estate -
	Commercial and Industrial		Construction		Commercial Mortgage		Residential Mortgage		Installment		Unallocated		Total
Allowance for loan losses:

Beginning balance	$	4,842	$	14,869	$	7,315	$	9,263	$	1,038	$	6,382	$	43,709
Charge-offs		(2,254)		(2,581)		(331)		(3,276)		(59)				(8,501)
Recoveries		415		507		135		929		40				2,026
Provision		427		(1,572)		981		1,754		(318)		(272)		1,000
Ending balance	$	3,430	$	11,223	$	8,100	$	8,670	$	701	$	6,110	$	38,234

HAMPTON ROADS BANKSHARES, INC.

PART I. FINANCIAL INFORMATION

Item 1. Notes to Consolidated Financial Statements


	Three Months Ended June 30, 2012
					Real Estate -
	Commercial and Industrial		Construction		Commercial Mortgage		Residential Mortgage		Installment		Unallocated		Total
Allowance for loan losses:

Beginning balance	$	11,140	$	20,122	$	14,972	$	12,823	$	1,579	$	8,281	$	68,917
Charge-offs		(6,803)		(1,953)		(732)		(2,775)		(104)				(12,367)
Recoveries		297		657		675		346		36				2,011
Provision		6,816		(2,332)		(458)		530		(661)		451		4,346
Ending balance	$	11,450	$	16,494	$	14,457	$	10,924	$	850	$	8,732	$	62,907


		Six Months Ended June 30, 2013
					Real Estate -
	Commercial and Industrial		Construction		Commercial Mortgage		Residential Mortgage		Installment		Unallocated		Total
Allowance for loan losses:

Beginning balance	$	6,253	$	15,728	$	9,862	$	9,953	$	887	$	5,699	$	48,382
Charge-offs		(4,453)		(3,668)		(753)		(5,405)		(244)				(14,523)
Recoveries		1,089		733		407		1,013		133				3,375
Provision		541		(1,570)		(1,416)		3,109		(75)		411		1,000
Ending balance	$	3,430	$	11,223	$	8,100	$	8,670	$	701	$	6,110	$	38,234

Ending balance: attributable to
loans individually evaluated
for impairment	$	817	$	2,842	$	2,294	$	3,499	$	56			$	9,508
Recorded investment: loans
individually evaluated for
impairment	$	14,155	$	20,666	$	31,709	$	25,584	$	241

Ending balance: attributable to
loans collectively evaluated
for impairment	$	2,613	$	8,381	$	5,806	$	5,171	$	645	$	6,110	$	28,726
Recorded investment: loans
collectively evaluated for
impairment	$	225,138	$	162,847	$	528,526	$	329,984	$	62,439

HAMPTON ROADS BANKSHARES, INC.

PART I. FINANCIAL INFORMATION

Item 1. Notes to Consolidated Financial Statements


	Six Months Ended June 30, 2012
					Real Estate -
	Commercial and Industrial		Construction		Commercial Mortgage		Residential Mortgage		Installment		Unallocated		Total
Allowance for loan losses:

Beginning balance	$	13,605	$	24,826	$	17,101	$	12,060	$	2,067	$	5,288	$	74,947
Charge-offs		(11,465)		(7,188)		(3,506)		(5,225)		(268)				(27,652)
Recoveries		479		1,493		1,350		551		91				3,964
Provision		8,831		(2,637)		(488)		3,538		(1,040)		3,444		11,648
Ending balance	$	11,450	$	16,494	$	14,457	$	10,924	$	850	$	8,732	$	62,907

Ending balance: attributable to loans individually evaluated for impairment	$	4,909	$	7,555	$	6,664	$	5,821	$	104			$	25,053
Recorded investment: loans individually evaluated for impairment	$	26,683	$	56,786	$	57,099	$	39,204	$	415

Ending balance: attributable to loans collectively evaluated for impairment	$	6,541	$	8,939	$	7,793	$	5,103	$	746	$	8,732	$	37,854
Recorded investment: loans collectively evaluated for impairment	$	209,326	$	200,986	$	475,470	$	348,483	$	23,217

Impaired Loans

Total impaired loans were $92.4 million and $141.0 million at June 30, 2013 and December 31, 2012. Collateral dependent impaired loans, which are measured at the fair value of the underlying collateral less costs to sell, were $92.2 million and $134.5 million at June 30, 2013 and December 31, 2012, respectively.

Impaired loans for which no specific allowance is provided totaled $62.7 million and $84.8 million at June 30, 2013 and December 31, 2012, respectively. Loans written down to their estimated fair value of collateral less the costs to sell account for $36.5 million and $54.0 million of the impaired loans for which no allowance has been provided as of June 30, 2013 and December 31, 2012, respectively, and the average age of appraisals for these loans is 0.79 years at June 30, 2013. The remaining impaired loans for which no allowance is provided are expected to be fully covered by the fair value of the collateral, and therefore, no additional loss is expected on these loans.

HAMPTON ROADS BANKSHARES, INC.

PART I. FINANCIAL INFORMATION

Item 1. Notes to Consolidated Financial Statements

The following charts show recorded investment, unpaid balance, and related allowance of impaired loans (in thousands) by major segment and class as of June 30, 2013 and December 31, 2012 as well as average investment and interest recognized for the three and six months ended June 30, 2013 and 2012. Certain amounts within the real estate – residential mortgage segment in the prior period have been reclassified between classes due to the improper description assigned to these loans. These reclassifications did not have a material impact on our allowance for loan losses in any period presented.


							Three Months Ended				Six Months Ended
	June 30, 2013						June 30, 2013				June 30, 2013
	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
	Investment		Balance		Allowance		Investment		Recognized		Investment		Recognized

With no related
allowance recorded:
Commercial & Industrial	$	12,272	$	17,782	$	-	$	8,434	$	-	$	13,444	$	4
Construction
1-4 family residential
construction		792		792		-		1,560		-		796		-
Commercial construction		13,671		26,731		-		14,956		-		15,256		1
Real estate
Commercial Mortgage
Owner occupied		15,877		17,234		-		15,562		2		16,580		79
Non-owner occupied		4,718		14,202		-		4,163		29		4,857		43
Residential Mortgage
Secured by 1-4 family
1st lien		12,599		15,750		-		12,943		25		14,041		33
Junior lien		2,694		5,002		-		3,308		-		2,933		-
Installment		116		327		-		156		-		120		-
	$	62,739	$	97,820	$	-	$	61,082	$	56	$	68,027	$	160

With an allowance recorded:
Commercial & Industrial	$	1,883	$	2,004	$	817	$	6,915	$	9	$	1,927	$	18
Construction
1-4 family residential
construction		140		686		139		70		-		140		-
Commercial construction		6,063		7,003		2,703		8,433		38		6,238		90
Real estate
Commercial Mortgage
Owner occupied		8,610		8,685		1,789		11,976		26		8,831		111
Non-owner occupied		2,504		2,521		505		2,869		18		4,760		19
Residential Mortgage
Secured by 1-4 family
1st lien		8,967		9,093		2,602		8,974		49		6,990		138
Junior lien		1,324		1,374		897		1,544		5		1,331		11
Installment		125		125		56		120		2		125		3
	$	29,616	$	31,491	$	9,508	$	40,901	$	147	$	30,342	$	390
Total:
Commercial & Industrial	$	14,155	$	19,786	$	817	$	15,349	$	9	$	15,371	$	22
Construction		20,666		35,212		2,842		25,019		38		22,430		91
Real estate -
Commercial mortgage		31,709		42,642		2,294		34,570		75		35,028		252
Residential mortgage		25,584		31,219		3,499		26,769		79		25,295		182
Installment		241		452		56		276		2		245		3

Total	$	92,355	$	129,311	$	9,508	$	101,983	$	203	$	98,369	$	550

HAMPTON ROADS BANKSHARES, INC.

PART I. FINANCIAL INFORMATION

Item 1. Notes to Consolidated Financial Statements


							Three Months Ended				Six Months Ended
	December 31, 2012						June 30, 2012				June 30, 2012
	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
	Investment		Balance		Allowance		Investment		Recognized		Investment		Recognized

With no related
allowance recorded:
Commercial & Industrial	$	20,388	$	28,576	$	-	$	6,637		13	$	7,702	$	28
Construction
1-4 family residential
construction		2,328		2,925		-		2,134		-		2,364		-
Commercial construction		17,739		42,591		-		28,386		-		19,517		2
Real estate
Commercial Mortgage
Owner occupied		21,277		26,246		-		20,629		59		18,286		176
Non-owner occupied		7,639		17,426		-		10,635		132		11,429		185
Residential Mortgage
Secured by 1-4 family
1st lien		10,818		13,746		-		10,025		27		7,661		74
Junior lien		4,354		7,817		-		3,101		-		2,253		2
Installment		220		469		-		225		1		225		3
	$	84,763	$	139,796	$	-	$	81,772	$	232	$	69,437	$	470

With an allowance recorded:
Commercial & Industrial	$	3,097	$	3,103	$	2,005	$	13,639		-	$	19,618	$	2
Construction
1-4 family residential
construction		-		-		-		7,405		46		6,995		94
Commercial construction		14,697		16,418		5,318		22,396		161		28,846		242
Real estate
Commercial Mortgage
Owner occupied		13,961		13,998		2,417		23,252		90		24,868		158
Non-owner occupied		6,497		6,497		776		5,852		-		5,773		-
Residential Mortgage
Secured by 1-4 family
1st lien		14,918		15,127		2,964		19,999		182		23,746		396
Junior lien		2,838		2,854		1,148		6,423		7		6,454		12
Installment		216		217		155		162		-		174		-
	$	56,224	$	58,214	$	14,783	$	99,128	$	486	$	116,474	$	904

Total:
Commercial & Industrial	$	23,485	$	31,679	$	2,005	$	20,276	$	13	$	27,320	$	30
Construction		34,764		61,934		5,318		60,321		207		57,722		338
Real estate -
Commercial mortgage		49,374		64,167		3,193		60,368		281		60,356		519
Residential mortgage		32,928		39,544		4,112		39,548		216		40,114		484
Installment		436		686		155		387		1		399		3

Total	$	140,987	$	198,010	$	14,783	$	180,900	$	718	$	185,911	$	1,374

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 other real estate owned and repossessed assets. Total non-performing assets were $96.6 million or 5% of total assets at June 30, 2013 compared with $130.7 million or 6% of total assets at December 31, 2012.

Non-performing assets (in thousands) as of June 30, 2013 and December 31, 2012 were as follows.



	June 30, 2013		December 31, 2012

Loans 90 days past due and still accruing interest	$	-	$	1,024
Nonaccrual loans, including nonaccrual impaired loans		63,739		97,411
Other real estate owned and repossessed assets		32,906		32,215
Non-performing assets	$	96,645	$	130,650

Nonaccrual and Past Due Loans

A reconciliation of non-performing loans to impaired loans (in thousands) for the periods ended June 30, 2013 and December 31, 2012 is as follows.



	June 30, 2013		December 31, 2012

Loans 90 days past due and still accruing interest	$	-	$	1,024
Nonaccrual loans, including nonaccrual impaired loans		63,739		97,411
Total non-performing loans		63,739		98,435
TDRs on accrual		13,027		16,945
Impaired loans on accrual		15,589		25,607

Total impaired loans	$	92,355	$	140,987

Nonaccrual loans were $63.7 million at June 30, 2013 compared to $97.4 million at December 31, 2012. If income on nonaccrual loans had been recorded under original terms, $2.2 million of additional interest income would have been recorded for the six months ended June 30, 2013 compared with $5.9 million for the six months ended June 30, 2012. The following table provides a rollforward of nonaccrual loans (in thousands) for the six months ended June 30, 2013.


					Real Estate
	Commercial & Industrial		Construction		Commercial Mortgage		Residential Mortgage		Installment		Total

Balance at December 31, 2012	$	22,413	$	28,505	$	25,032	$	21,206	$	255	$	97,411
Transfers in		436		2,308		5,672		5,290		25		13,731
Transfers to OREO		(96)		(1,112)		(3,047)		(4,298)		(3)		(8,556)
Charge-offs		(4,350)		(3,428)		(787)		(4,383)		(114)		(13,062)
Payments		(6,052)		(10,392)		(6,406)		(1,506)		(8)		(24,364)
Return to accrual		(8)		(1,017)		(269)		(112)		(15)		(1,421)
Loan type reclassification		830		336		(1,166)		-		-		-

Balance at June 30, 2013	$	13,173	$	15,200	$	19,029	$	16,197	$	140	$	63,739

HAMPTON ROADS BANKSHARES, INC.

PART I. FINANCIAL INFORMATION

Item 1. Notes to Consolidated Financial Statements

Age Analysis of Past Due Loans

An age analysis of past due loans (in thousands) as of June 30, 2013 and December 31, 2012 is as follows.


	June 30, 2013
	30-59 Days Past Due		60-89 Days Past Due		90 Days or More Past Due		Total Past Due		Current		Total Loans		90 Days or More Past Due and Accruing

Commercial & Industrial	$	597	$	885	$	13,173	$	14,655	$	224,638	$	239,293	$	-
Construction
1-4 family residential construction		199		-		933		1,132		18,435		19,567		-
Commercial construction		529		170		14,267		14,966		148,980		163,946		-
Real estate
Commercial Mortgage
Owner occupied		1,211		-		14,694		15,905		268,653		284,558		-
Non-owner occupied		-		-		4,335		4,335		271,342		275,677		-
Residential Mortgage
Secured by 1-4 family, 1st lien		1,627		473		12,948		15,048		202,925		217,973		-
Secured by 1-4 family, junior lien		476		-		3,249		3,725		133,870		137,595		-
Installment		2		-		140		142		62,538		62,680		-
Deferred loan fees and related costs		-		-		-		-		(1,039)		(1,039)		-

Total	$	4,641	$	1,528	$	63,739	$	69,908	$	1,330,342	$	1,400,250	$	-

		December 31, 2012
	30-59 Days Past Due		60-89 Days Past Due		90 Days or More Past Due		Total Past Due		Current		Total Loans		90 Days or More Past Due and Accruing

Commercial & Industrial	$	402	$	141	$	23,436	$	23,979	$	243,101	$	267,080	$	1,024
Construction
1-4 family residential construction		-		-		2,328		2,328		15,181		17,509		-
Commercial construction		973		780		26,177		27,930		160,952		188,882		-
Real estate
Commercial Mortgage
Owner occupied		1,882		87		19,920		21,889		269,863		291,752		-
Non-owner occupied		50		-		5,112		5,162		233,128		238,290		-
Residential Mortgage
Secured by 1-4 family, 1st lien		3,098		3,394		15,918		22,410		202,641		225,051		-
Secured by 1-4 family, junior lien		527		421		5,289		6,237		141,303		147,540		-
Installment		3		11		255		269		56,033		56,302		-
Deferred loan fees and related costs		-		-		-		-		(131)		(131)		-

Total	$	6,935	$	4,834	$	98,435	$	110,204	$	1,322,071	$	1,432,275	$	1,024

HAMPTON ROADS BANKSHARES, INC.

PART I. FINANCIAL INFORMATION

Item 1. Notes to Consolidated Financial Statements

Credit Quality

The following tables provide information (in thousands) on June 30, 2013 and December 31, 2012 about the credit quality of the loan portfolio using the Company’s internal rating system as an indicator.


	June 30, 2013
	Pass		Special Mention		Substandard		Nonaccrual Loans		Total

Commercial & Industrial	$	210,338	$	8,115	$	7,667	$	13,173	$	239,293
Construction
1-4 family residential construction		17,322		744		568		933		19,567
Commercial construction		86,548		31,779		31,352		14,267		163,946
Real estate
Commercial Mortgage
Owner occupied		216,170		41,417		12,277		14,694		284,558
Non-owner occupied		237,755		29,615		3,972		4,335		275,677
Residential Mortgage
Secured by 1-4 family, 1st lien		165,756		25,421		13,848		12,948		217,973
Secured by 1-4 family, junior lien		126,363		6,712		1,271		3,249		137,595
Installment		54,573		1,258		6,709		140		62,680
Deferred loan fees and related costs		(1,039)		-		-		-		(1,039)

Total	$	1,113,786	$	145,061	$	77,664	$	63,739	$	1,400,250


	December 31, 2012
	Pass		Special Mention		Substandard		Nonaccrual Loans			Total
									��
Commercial & Industrial	$	228,441	$	8,560	$	7,667	$	22,412		$	267,080
Construction
1-4 family residential construction		12,613		1,294		1,274		2,328			17,509
Commercial construction		98,084		25,513		39,108		26,177			188,882
Real estate
Commercial Mortgage
Owner occupied		212,589		39,003		20,240		19,920			291,752
Non-owner occupied		181,728		39,622		11,828		5,112			238,290
Residential Mortgage
Secured by 1-4 family, 1st lien		167,068		22,433		19,632		15,918			225,051
Secured by 1-4 family, junior lien		132,248		5,656		4,347		5,289			147,540
Installment		49,975		1,202		4,870		255			56,302
Deferred loan fees and related costs		(131)		-		-		-			(131)

Total	$	1,082,615	$	143,283	$	108,966	$	97,411		$	1,432,275

HAMPTON ROADS BANKSHARES, INC.

PART I. FINANCIAL INFORMATION

Item 1. Notes to Consolidated Financial Statements

Modifications

Loans meeting the criteria to be classified as Troubled Debt Restructurings (“TDRs”) are included in impaired loans. As of June 30, 2013 and December 31, 2012, loans classified as TDRs were $25.7 million and $34.7 million, respectively. The following table shows the loans (in thousands) classified by management as TDRs at June 30, 2013 and December 31, 2012.


		June 30, 2013			December 31, 2012
Troubled Debt Restructurings	Number of Contracts		Recorded Investment		Number of Contracts		Recorded Investment

Commercial & Industrial		2	$	884		6	$	982
Construction
1-4 family residential construction		1		140		1		1,582
Commercial construction		11		6,154		16		8,711
Real estate
Commercial Mortgage
Owner occupied		12		10,907		12		11,118
Non-owner occupied		2		1,390		4		7,001
Residential Mortgage
Secured by 1-4 family, 1st lien		24		6,067		24		5,093
Secured by 1-4 family, junior lien		1		181		1		181
Installment		-		-		-		-

Total		53	$	25,723		64	$	34,668

Of total TDRs, $13.0 million was accruing and $12.7 million was nonaccruing at June 30, 2013 and $16.9 million was accruing and $17.7 million was nonaccruing at December 31, 2012. Loans that are on nonaccrual status at the time of the restructuring generally remain on nonaccrual status for approximately six months before management considers whether such loans may return to accrual status. TDRs in nonaccrual status are returned to accrual status after a period of performance under which the borrower demonstrates the ability and willingness to repay the loan in accordance with the modified terms. There were no nonaccrual TDRs that were returned to accrual status during the six months ended June 30, 2013 and $546 thousand were returned to accrual status during the year ended December 31, 2012. The following table shows a rollforward of accruing and nonaccruing TDRs (in thousands) for the six months ended June 30, 2013.


	Accruing		Non Accruing		Total

Balance at December 31, 2012	$	16,945	$	17,723	$	34,668
Charge-offs		-		(490)		(490)
Payments		(169)		(4,537)		(4,706)
New TDR designation		2,010		-		2,010
Release TDR designation		(5,759)		-		(5,759)

Balance at June 30, 2013	$	13,027	$	12,696	$	25,723

HAMPTON ROADS BANKSHARES, INC.

PART I. FINANCIAL INFORMATION

Item 1. Notes to Consolidated Financial Statements

The allowance for loan losses allocated to TDRs was $1.7 million at June 30, 2013 and December 31, 2012. The total of TDRs charged off were $490 thousand during the six months ended June 30, 2013 and $4.0 million during the year ended December 31, 2012.

At a minimum, TDRs are reported as such during the calendar year in which the restructuring or modification takes place. In subsequent years, TDRs may be removed from this disclosure classification if the loan did not involve a below market rate concession and the loan is not deemed to be impaired based on the terms specified in the restructuring agreement. The Company had two loans totaling $5.8 million that were removed from TDR status during the first half of 2013.

The following table shows a summary of the primary reason and pre- and post-modification outstanding recorded investment (in thousands, except number of contracts) for loan modifications that were classified as TDRs during the three and six month periods ended June 30, 2013 and 2012. This table includes modifications made to existing TDRs as well as new modifications that are considered TDRs for the periods presented. TDRs made with below market rate that also include a modification of loan structure are included under rate change.


	For the Three and Six Months Ended June 30, 2013
	Rate						Structure
Troubled Debt Restructurings	Number of Contracts		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment		Number of Contracts		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment

Commercial & Industrial		-	$	-	$	-		-	$	-	$	-
Construction
1-4 family residential construction		-		-		-		-		-		-
Commercial construction		-		-		-		-		-		-
Real estate
Commercial Mortgage
Owner occupied		-		-		-		-		-		-
Non-owner occupied		-		-		-		-		-		-
Residential Mortgage
Secured by 1-4 family, 1st lien		1		2,010		2,010		-		-		-
Secured by 1-4 family, junior lien		-		-		-		-		-		-
Installment		-		-		-		-		-		-

Total		1	$	2,010	$	2,010		-	$	-	$	-

HAMPTON ROADS BANKSHARES, INC.

PART I. FINANCIAL INFORMATION

Item 1. Notes to Consolidated Financial Statements


	For the Three and Six Months Ended June 30, 2012
	Rate						Structure
Troubled Debt Restructurings	Number of Contracts		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment		Number of Contracts		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment

Commercial & Industrial		-	$	-	$	-		-	$	-	$	-
Construction
1-4 family residential construction		-		-		-		-		-		-
Commercial construction		1		390		390		5		1,350		1,350
Real estate
Commercial Mortgage
Owner occupied		-		-		-		-		-		-
Non-owner occupied		-		-		-		-		-		-
Residential Mortgage
Secured by 1-4 family, 1st lien		-		-		-		1		650		650
Secured by 1-4 family, junior lien		-		-		-		-		-		-
Installment		-		-		-		-		-		-

Total		1	$	390	$	390		6	$	2,000	$	2,000

The following table shows the balances (in thousands, except number of contracts) for the three and six months ended June 30, 2012 for loans modified as TDRs within the previous twelve months and for which there was a payment default and subsequent movement of the TDR to nonaccrual status, during the period. There were no TDRs that experienced the movement to nonaccrual status during the same periods in 2013.


	Three Months Ended			Six Months Ended
	June 30, 2012			June 30, 2012
Troubled Debt Restructurings That	Number of	Recorded		Number of	Recorded
Subsequently Defaulted	Contracts	Investment		Contracts	Investment

Commercial & Industrial	-	$	-	-	$	-
Construction
1-4 family residential construction	-		-	-		-
Commercial construction	6		1,740	6		1,740
Real estate
Commercial Mortgage
Owner occupied	-		-	-		-
Non-owner occupied	-		-	-		-
Residential Mortgage
Secured by 1-4 family, 1st lien	1		650	1		650
Secured by 1-4 family, junior lien	-		-	-		-
Installment	-		-	-		-

Total	7	$	2,390	7	$	2,390

HAMPTON ROADS BANKSHARES, INC.

PART I. FINANCIAL INFORMATION

Item 1. Notes to Consolidated Financial Statements

Loans that are considered TDRs are considered specifically impaired and the primary consideration for measurement of impairment is the present value of the expected cash flows. However, given the prevalence of real estate secured loans in the Company’s portfolio of troubled assets, the majority of the Company’s TDR loans are ultimately considered collateral-dependent instead. Impairments are, therefore, calculated based upon the fair value of the underlying collateral and observable market prices for the sale of the respective notes are not considered as a basis for impairment for any of the Company’s loans. To determine fair value, the Company utilizes a proprietary database of its own historical property appraisals in conjunction with external data and applies a relevant discount derived from analysis of appraisals of similar property type, vintage, and geographic location.

The Company does not participate in any government or company sponsored TDR programs and holds no corresponding assets. Additionally, the Company had no commitments to lend additional funds to debtors owing receivables whose terms have been modified in TDRs at June 30, 2013 and December 31, 2012.

NOTE F – PREMISES, EQUIPMENT, AND LEASES

During the first quarter of 2013, the Company incurred a $2.8 million charge as a result of a decision to consolidate certain branches. This consolidation also resulted in an additional $3.4 million decrease in premises and equipment from transferring branch buildings and land to other real estate owned. Premises and equipment (in thousands) at June 30, 2013 and December 31, 2012 are summarized as follows.


	June 30, 2013		December 31, 2012

Land	$	24,303	$	26,823
Buildings and improvements		48,977		54,846
Leasehold improvements		1,412		2,187
Equipment, furniture, and fixtures		14,063		16,535
Construction in progress		371		245
		89,126		100,636
Less accumulated depreciation and amortization		(19,201)		(21,979)
Premises and equipment, net	$	69,925	$	78,657

NOTE G – OTHER REAL ESTATE OWNED AND REPOSSESSED ASSETS

The following table shows a rollforward of other real estate owned and repossessed assets (in thousands) for the six months ended June 30, 2013.


Balance at December 31, 2012	$	32,215
Additions		12,518
Sales		(10,149)
Loss on sales		(1)
Impairments		(1,677)

Balance at June 30, 2013	$	32,906

HAMPTON ROADS BANKSHARES, INC.

PART I. FINANCIAL INFORMATION

Item 1. Notes to Consolidated Financial Statements

Other real estate owned and repossessed assets are presented net of an allowance for losses. An analysis of the allowance for losses (in thousands) on these assets as of and for the six months ended June 30, 2013 and 2012 is as follows.


	June 30, 2013		June 30, 2012

Balance at beginning of year	$	19,100	$	20,022
Provision for losses		1,677		4,568
Charge-offs		(4,806)		(8,718)

Balance at end of period	$	15,971	$	15,872

Expenses (in thousands) applicable to other real estate owned and repossessed assets for the three and six months ended June 30, 2013 and 2012 include the following.


	For the three months ended				For the six months ended
		June 30, 2013	June 30, 2012			June 30, 2013	June 30, 2012

(Gains) losses on sale of
other real estate owned	$	(233)	$	3,157	$	1	$	3,344
Provision for losses		1,007		1,791		1,677		4,568
Operating expenses		388		434		635		1,107

Total	$	1,162	$	5,382	$	2,313	$	9,019

NOTE H - STOCK-BASED COMPENSATION

On October 4, 2011, the Company’s shareholders approved the 2011 Omnibus Incentive Plan (the “Plan”), which succeeded the Company’s 2006 Stock Incentive Plan and provided for the grant of up to 2,750,000 shares of our Common Stock as awards to employees of the Company and its related entities, members of the Board of Directors of the Company, and members of the board of directors of any of the Company’s related entities. On June 25, 2012, the Company’s shareholders approved an amendment to the Plan that increased the number of shares reserved for issuance under the Plan to 13,675,000 of which 12,295,298 remain to be granted as of June 30, 2013.

Stock Options

Outstanding stock options consist of grants made to the Company’s directors and employees under stock compensation plans that have been approved by the Company’s shareholders. All outstanding options have original terms that range from five to ten years and are either fully vested and exercisable at the date of grant or vest ratably over three to ten years. No options were granted during the six months ended June 30, 2013 or 2012. A summary of the Company’s stock option activity and related information for the six months ended June 30, 2013 is as follows.


	Options Outstanding	Weighted Average Exercise Price		Average Intrinsic Value

Balance at December 31, 2012	26,658	$	376.76	$	-
Expired	(575)		158.41		-

Balance at June 30, 2013	26,083	$	381.58	$	-

Options exercisable at June 30, 2013	25,736	$	382.60	$	-

HAMPTON ROADS BANKSHARES, INC.

PART I. FINANCIAL INFORMATION

Item 1. Notes to Consolidated Financial Statements

Restricted Stock Units

The Company has granted restricted stock units to certain directors and employees as part of incentive programs. The restricted stock units will generally vest over one year or in certain instances, the later of two years from the date of the grant; the date the Company is no longer subject to the executive compensation and corporate governance requirements of Section 111(b) of the Emergency Economic and Stabilization Act of 2008, as amended; or the date the Company is no longer subject to the Written Agreement. Grants of these awards were valued based on the closing price on the day of grant. Compensation expense for outstanding restricted stock units is recognized ratably over the vesting periods of the awards. The restricted stock units are settled in Company Common Stock and the participants shall have no rights to dividends until the shares are vested; at that time, the participant will be entitled to all the same rights as a shareholder of the Company. A summary of the Company’s restricted stock unit activity and related information for the six months ended June 30, 2013 is as follows.


		Weighted-Average
	Number of Units	Grant Date Fair Value

Balance at December 31, 2012	1,207,939	$	1.12
Granted	236,496		1.34
Forfeited	(189,732)		1.12

Balance at June 30, 2013	1,254,703	$	1.16

The table above does not include 125 thousand restricted stock units that vested but had not reached settlement date as of June 30, 2013.

As of June 30, 2013, there was $1.5 million of total unrecognized compensation cost related to restricted stock units. That cost is expected to be recognized over a weighted-average period of 1.0 years. There were no restricted stock units that vested during the six months ended June 30, 2013.

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. Stock-based compensation expense (in thousands) recognized in the consolidated statements of operations for the six months ended June 30, 2013 and 2012 was as follows.


	June 30,
	2013		2012
Expense recognized:
Related to stock options	$	24	$	3
Related to restricted stock units		377		12
Related tax benefit		-		-

NOTE I – BUSINESS SEGMENT REPORTING

The Company defines its operating segments by product and geography. 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 and Other.

The accounting policies of the reportable segments are the same as those described in the summary of significant accounting policies in the 2012 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.

HAMPTON ROADS BANKSHARES, INC.

PART I. FINANCIAL INFORMATION

Item 1. Notes to Consolidated Financial Statements

The following tables show certain financial information (in thousands) for the three and six months ended June 30, 2013 and 2012 and as of June 30, 2013 and December 31, 2012 for each segment and in total.



	Total		Elimination		BOHR		Shore		Mortgage		Other

Total Assets at June 30, 2013	$	2,008,938	$	(293,837)	$	1,708,017	$	316,374	$	62,377	$	216,007

Total Assets at December 31, 2012	$	2,054,092	$	(325,700)	$	1,750,997	$	312,764	$	93,856	$	222,175

Three Months Ended June 30, 2013	Total		Elimination		BOHR		Shore		Mortgage		Other

Net interest income (loss)	$	16,095	$	-	$	13,464	$	2,979	$	147	$	(495)
Provision for loan losses		1,000		-		645		355		-		-
Net interest income (expense) after
provision for loan losses		15,095		-		12,819		2,624		147		(495)
Noninterest income		7,584		(63)		2,769		532		4,251		95
Noninterest expense		22,193		(63)		14,701		2,787		3,864		904
Income (loss) before provision
for income taxes		486		-		887		369		534		(1,304)
Provision for income taxes		135		-		120		10		-		5
Net income (loss)		351		-		767		359		534		(1,309)
Net income attributable
to non-controlling interest		262		-		-		-		262		-
Net income (loss) attributable
to Hampton Roads Bankshares, Inc.	$	89	$	-	$	767	$	359	$	272	$	(1,309)

Three Months Ended June 30, 2012	Total		Elimination		BOHR		Shore		Mortgage		Other

Net interest income (loss)	$	16,197	$	-	$	13,832	$	2,717	$	116	$	(468)
Provision for loan losses		4,346		-		4,070		276		-		-
Net interest income (expense) after
provision for loan losses		11,851		-		9,762		2,441		116		(468)
Noninterest income		1,993		(51)		(2,351)		249		3,855		291
Noninterest expense		18,767		(51)		14,054		1,982		2,453		329
Income (loss) before provision
for income taxes		(4,923)		-		(6,643)		708		1,518		(506)
Provision for income taxes		-		-		-		-		-		-
Net income (loss)		(4,923)		-		(6,643)		708		1,518		(506)
Net income attributable
to non-controlling interest		744		-		-		-		744		-
Net income (loss) attributable
to Hampton Roads Bankshares, Inc.	$	(5,667)	$	-	$	(6,643)	$	708	$	774	$	(506)

HAMPTON ROADS BANKSHARES, INC.

PART I. FINANCIAL INFORMATION

Item 1. Notes to Consolidated Financial Statements


Six Months Ended June 30, 2013	Total		Elimination		BOHR		Shore		Mortgage		Other

Net interest income (loss)	$	32,025	$	-	$	26,743	$	5,868	$	347	$	(933)
Provision for loan losses		1,000		-		500		500		-		-
Net interest income (expense) after
provision for loan losses		31,025		-		26,243		5,368		347		(933)
Noninterest income		13,012		(125)		1,941		510		10,214		472
Noninterest expense		41,625		(125)		27,317		5,636		7,397		1,400
Income (loss) before provision
for income taxes		2,412		-		867		242		3,164		(1,861)
Provision for income taxes		135		-		120		10		-		5
Net income (loss)		2,277		-		747		232		3,164		(1,866)
Net income attributable
to non-controlling interest		1,556		-		-		-		1,556		-
Net income (loss) attributable
to Hampton Roads Bankshares, Inc.	$	721	$	-	$	747	$	232	$	1,608	$	(1,866)

Six Months Ended June 30, 2012	Total		Elimination		BOHR		Shore		Mortgage		Other

Net interest income (loss)	$	32,898	$	-	$	28,163	$	5,388	$	282	$	(935)
Provision for loan losses		11,648		-		11,520		128		-		-
Net interest income (expense) after
provision for loan losses		21,250		-		16,643		5,260		282		(935)
Noninterest income		5,101		(125)		(2,585)		365		7,113		333
Noninterest expense		38,678		(125)		29,009		4,387		4,884		523
Income (loss) before provision
for income taxes		(12,327)		-		(14,951)		1,238		2,511		(1,125)
Provision for income taxes		-		-		-		-		-		-
Net income (loss)		(12,327)		-		(14,951)		1,238		2,511		(1,125)
Net income attributable
to non-controlling interest		1,245		-		-		-		1,245		-
Net income (loss) attributable
to Hampton Roads Bankshares, Inc.	$	(13,572)	$	-	$	(14,951)	$	1,238	$	1,266	$	(1,125)

NOTE J – DERIVATIVE FINANCIAL INSTRUMENTS

Derivatives are a financial instrument whose value is based on one or more underlying assets. The Company originates mortgage loans for sale into the secondary market on both a best efforts and a mandatory delivery basis. In connection with the underwriting process, the Company enters into commitments to lock-in the interest rate of the loan with the borrower prior to funding (“interest rate lock commitments”). Generally, such interest rate lock commitments are for periods less than 60 days. These interest rate lock commitments are considered derivatives. The Company manages its exposure to changes in fair value associated with these interest rate lock commitments by entering into simultaneous agreements to sell the residential loans to third party investors shortly after their origination and funding. At June 30, 2013 and December 31, 2012, the Company had loans held for sale of $51.4 million and $84.1 million, respectively.

HAMPTON ROADS BANKSHARES, INC.

PART I. FINANCIAL INFORMATION

Item 1. Notes to Consolidated Financial Statements

Under the contractual relationship using the best efforts method, the Company is obligated to sell the loans only if the loans close. As a result of the terms of these contractual relationships, the Company is not exposed to losses nor will it realize gains related to its rate-lock commitments due to subsequent changes in interest rates. At June 30, 2013 and December 31, 2012, the Company had rate-lock commitments to originate residential mortgage loans (unfunded par amount of loans) on a best efforts basis in the amounts of $56.8 million and $84.1 million, respectively.

Beginning in September 2012, the Company began selling some of its residential mortgage loan production on a mandatory delivery basis and using derivative instruments to manage the resulting interest rate risk. These derivatives are entered into as balance sheet risk management instruments, and therefore, are not designated as an accounting hedge. Under the mandatory delivery approach, residential mortgage loans held for sale and commitments to borrowers to originate loans at agreed upon interest rates expose the Company to changes in market rates and conditions subsequent to the interest rate lock commitment until the loans are delivered to the investor. The Company uses mortgage-based derivatives such as forward delivery commitments and To-Be-Announced securities in order to mitigate this market risk. For the six months ended June 30, 2013, the Company recorded a gain totaling $228 thousand related to mandatory delivery derivatives which was netted against the loss on the carrying value of the underlying loans and interest rate lock commitments totaling $264 thousand. Gains and losses on the Company’s derivative instruments are included within mortgage banking revenue on the Consolidated Statement of Operations. Prior to then, the Company only entered into forward sales commitments on a best efforts basis.

Additionally, the Company uses interest rate swaps to manage its interest rate risk. Derivative contracts are executed between the Company and certain commercial loan customers with offsetting positions to dealers under a back-to-back swap program enabling the commercial loan customers to effectively exchange variable rate interest payments under their existing obligations for fixed-rate interest payments. For the period ended June 30, 2013, the Company recorded a gain totaling $514 thousand related to trading income on the interest rate swaps that was included within other noninterest income on the Consolidated Statement of Operations. There was no activity related to these interest rate swaps in 2012.

NOTE K – BRANCH CONSOLIDATION

On March 27, 2013, the Company announced the consolidation of seven BOHR and Shore branch locations, six owned and one leased, into nearby branches. This required an impairment analysis to be performed. In connection with the analysis, five of the branch locations were determined to have carrying amounts that exceeded fair value at March 31, 2013. Accordingly, the related carrying amounts of these branches were reduced to estimated fair value (less costs to sell) and the Company recorded an impairment charge totaling $2.8 million during the quarter ended March 31, 2013. Management estimated the fair value of the branches by utilizing various market-based valuation techniques, including estimates from unrelated brokers, existing purchase offers from unrelated parties, and appraisals available as of the measurement date. Approximately $3.4 million related to the remaining carrying values of the branch related assets was transferred into other real estate owned in accordance with relevant accounting guidance.

NOTE L – FAIR VALUE MEASUREMENTS

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The Company classifies financial assets and liabilities measured at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value. Valuation methodologies for the fair value hierarchy are as follows.

Level 1 Quoted prices in active markets for identical assets or liabilities. Level 1 assets and liabilities include debt and equity securities and derivative contracts that are traded in an active exchange market, as well as certain Treasury securities that are highly liquid and are actively traded in over-the-counter markets.

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.

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 for which an election was made as well as for certain assets and liabilities for which fair value is the primary basis of accounting.

The following tables reflect the fair value (in thousands) of assets measured and recognized at fair value on a recurring basis in the consolidated balance sheets at June 30, 2013 and December 31, 2012.


			Fair Value Measurements at Reporting Date Using
Assets	June 30, 2013		Level 1		Level 2		Level 3

Investment securities available for sale
U.S. agency securities	$	30,323	$	-	$	30,323	$	-
State and municipal securities		559		-		559		-
Corporate bonds		7,757		-		7,757		-
Mortgage-backed securities - agency		199,620		-		199,620		-
Mortgage-backed securities -
non-agency		3,757		-		3,757		-
Asset-backed securities		35,836		-		35,836		-
Equity securities		534		245		-		289
Total investment securities
available for sale		278,386		245		277,852		289

Derivative loan commitments
Interest rate lock commitments		1,167		-		-		1,167
Mandatory delivery commitments		204		-		-		204
Total derivative loan commitments		1,371		-		-		1,371

Interest rate swaps		709		-		709		-

Total assets	$	280,466	$	245	$	278,561	$	1,660

Liabilities

Interest rate swaps	$	709	$	-	$	709	$	-

Total liabilities	$	709	$	-	$	709	$	-

HAMPTON ROADS BANKSHARES, INC.

PART I. FINANCIAL INFORMATION

Item 1. Notes to Consolidated Financial Statements


			Fair Value Measurements at Reporting Date Using
Assets	December 31, 2012		Level 1		Level 2		Level 3

Investment securities available for sale
U.S. agency securities	$	32,988	$	-	$	32,988	$	-
State and municipal securities		631		-		631		-
Corporate bonds		2,953		-		2,953		-
Mortgage-backed securities - agency		207,194		-		207,194		-
Mortgage-backed securities -
non-agency		30,650		-		30,650		-
Asset-backed securities		1,502		-		1,502		-
Equity securities		537		248		-		289
Total investment securities
available for sale		276,455		248		275,918		289

Derivative loan commitments
Interest rate lock commitments		1,571		-		-		1,571
Mandatory delivery commitments		469		-		-		469
Total derivative loan commitments		2,040		-		-		2,040

Total	$	278,495	$	248	$	275,918	$	2,329

The following table shows a rollforward of recurring fair value measurements categorized with Level 3 of the fair value hierarchy (in thousands) for the six months ended June 30, 2013 and 2012.


	Activity in Level 3				Activity in Level 3
	Fair Value Measurements				Fair Value Measurements
	Six Months Ended June 30, 2013				Six Months Ended June 30, 2012
	Investment				Investment
	Securities		Derivative Loan		Securities		Derivative Loan
Description	Available for Sale		Commitments		Available for Sale		Commitments

Beginning of period balance	$	289	$	2,040	$	1,110	$	549
Unrealized gains included in:
Earnings		-		-		220		-
Other comprehensive income		-		-		-		-
Purchases		-		-		-		-
Sales		-		-		(1,096)		-
Issuances		-		-		-		573
Settlements		-		(669)		-		-
Transfers in		-		-		-		-
Transfers out		-		-		-		-

End of period balance	$	289	$	1,371	$	234	$	1,122

The Company’s policy is to recognize transfers between levels of the fair value hierarchy on the date of the event or change in circumstances that caused the transfer.

HAMPTON ROADS BANKSHARES, INC.

PART I. FINANCIAL INFORMATION

Item 1. Notes to Consolidated Financial Statements

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 originates mortgage loans for sale into the secondary market on both a best efforts and a mandatory delivery basis. Under the best efforts basis, the Company enters into commitments to originate mortgage loans whereby the interest rate is fixed prior to funding. These commitments, in which the Company intends to sell in the secondary market, are considered freestanding derivatives. Under the mandatory delivery basis, mortgage loans held for sale and commitments to borrowers to originate loans at agreed upon interest rates expose the Company to changes in market rates and conditions subsequent to the interest rate lock commitment. The fair values of interest rate lock and mandatory delivery commitments, which are related to mortgage loan commitments and are categorized as Level 3, are based on quoted prices adjusted for commitments that the Company does not expect to fund.

Interest Rate Swaps. The Company uses observable inputs to determine fair value of its interest rate swaps. The valuation of these instruments is determined using widely accepted valuation techniques that are based on discounted cash flow analysis using the expected cash flows of each derivative over the contractual terms of the derivatives, including the period to maturity and market-based interest rate curves. For the period ended June 30, 2013, the fair values of the interest rate swaps were determined using a market standard methodology of netting the discounted future fixed cash receipts and the discounted expected variable cash payments. The variable cash payments were based on an expectation of future interest rates (forward curves) derived from observable market interest rate curves. Accordingly, the Company categorizes these financial instruments within Level 2 of the fair value hierarchy.

Nonrecurring Basis

Certain assets, specifically collateral dependent impaired loans and other real estate owned and repossessed assets, are measured at fair value on a nonrecurring basis; that is, the instruments are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances (for example, when there is evidence of impairment). 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. The average age of appraisals of collateral dependent impaired loans was 0.83 years as of June 30, 2013. 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.

HAMPTON ROADS BANKSHARES, INC.

PART I. FINANCIAL INFORMATION

Item 1. Notes to Consolidated Financial Statements

The following tables reflect the fair value (in thousands) of assets measured and recognized at fair value on a nonrecurring basis in the consolidated balance sheets at June 30, 2013 and December 31, 2012.


			Fair Value Measurements
	Assets Measured		at June 30, 2013 Using
Description	at Fair Value		Level 1		Level 2		Level 3

Impaired loans	$	56,581	$	-	$	-	$	56,581

Other real estate owned and repossessed		32,906		-		-		32,906


			Fair Value Measurements
	Assets Measured		at December 31, 2012 Using
Description	at Fair Value		Level 1		Level 2		Level 3

Impaired loans	$	95,426	$	-	$	-	$	95,426

Other real estate owned and repossessed		32,215		-		-		32,215

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

Impaired Loans. Impaired loans are measured at the present value of their expected future cash flows by discounting those cash flows at the loan’s effective interest rate or at the loan’s observable market price. The difference between this discounted amount and the loan balance is recorded as an allowance for loan losses. For collateral dependent impaired loans, impairment is measured based upon the fair value of the underlying collateral. The Company reduces 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.

Other Real Estate Owned and Repossessed Assets. The adjustments to other real estate owned and repossessed assets are based primarily on appraisals of the real estate or other observable market prices. Our policy is that fair values for these assets are based on current appraisals. In most cases, we maintain current appraisals for these items. Where we do not have a current appraisal, an existing appraisal would be utilized after discounting it to reflect changes in market conditions from the date of the existing appraisal, and, as such, may include significant management assumptions and input with respect to the determination of fair value.

HAMPTON ROADS BANKSHARES, INC.

PART I. FINANCIAL INFORMATION

Item 1. Notes to Consolidated Financial Statements

Significant Unobservable Inputs

The following table presents the ranges (in thousands) of significant unobservable inputs used to value the Company’s material level 3 financial instruments; these ranges represent the significant unobservable inputs that were used in the valuation of each type of financial instrument.


				Range of
Level 3		Fair Value	Significant Unobservable Inputs	Significant Unobservable
Financial Instruments		at June 30, 2013	by Valuation Technique	Inputs as of June 30, 2013

Derivative loan commitments	$	1,371	Pull through rate	69 - 75%
			Percentage of loans that will
			ultimately close

Impaired loans		56,581	Appraised value	0 - 23%
			Discounts to reflect current market
			conditions, ultimate collectability,
			and estimated costs to sell

Other real estate owned		32,906	Appraised value	0 - 54%
			Discounts to reflect current market
			conditions, abbreviated holding
			period, and estimated costs to sell

Other Fair Value Measurements

Additionally, accounting standards require the disclosure of the estimated fair value of financial instruments that are not recorded at fair value. For the financial instruments that the Company does not record at fair value, estimates of fair value are made at a point in time based on relevant market data and information about the financial instrument. No readily available market exists for a significant portion of the Company’s financial instruments. Fair value estimates for these instruments are based on current economic conditions, interest rate risk characteristics, and other factors. Many of these estimates involve uncertainties and matters of significant judgment and cannot be determined with precision. Therefore, the calculated fair value estimates in many instances cannot be substantiated by comparison to independent markets and, in many cases, may not be realizable in a current sale of the instrument. In addition, changes in assumptions could significantly affect these fair value estimates. The following methods and assumptions were used by the Company in estimating fair value for its financial instruments.

(a)	Cash and Cash Equivalents

Cash and cash equivalents include cash and due from banks, interest-bearing deposits in other banks, and overnight funds sold and due from FRB. The carrying amount approximates fair value.

(b)	Investment Securities Available for Sale

Fair values are based on published market prices where available. If quoted market prices are not available, then fair values are estimated by using pricing models, quoted prices of securities with similar characteristics, or discounted cash flow. Investment securities available for sale are carried at their aggregate fair value.

(c)	Restricted Equity Securities

These investments are carried at cost. The carrying amount approximates fair value.

(d)	Loans Held for Sale

The carrying value of loans held for sale is a reasonable estimate of fair value since loans held for sale are expected to be sold within a short period.

HAMPTON ROADS BANKSHARES, INC.

PART I. FINANCIAL INFORMATION

Item 1. Notes to Consolidated Financial Statements

(e)

Loans

To determine the fair values of loans other than those listed as nonaccrual, we use discounted cash flow analyses. In these analyses, we use discount rates that are similar to the interest rates and terms currently being offered to borrowers of similar terms and credit quality. For nonaccrual loans, we use a variety of techniques to measure fair value, such as using the current appraised value of the collateral, discounting the contractual cash flows, and analyzing market data that we may adjust due to the specific characteristics of the loan or collateral.

(f)	Interest Receivable and Interest Payable

The carrying amount approximates fair value.

(g)	Bank-Owned Life Insurance

The carrying amount approximates fair value.

(h)

Deposits

The fair values disclosed for transaction deposits such as demand and savings accounts are equal to the amount payable on demand at the reporting date or their carrying values. The carrying amounts of variable-rate, fixed-term money market accounts and certificates of deposit approximate their fair values at the reporting date. Fair values for fixed-rate certificates of deposit are estimated using a discounted cash flow calculation that applies market interest rates on comparable instruments to a schedule of aggregated expected monthly maturities on time deposits.

(i)	Borrowings

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

(j)	Commitments to Extend Credit and Standby Letters of Credit

The only amounts recorded for commitments to extend credit and standby letters of credit are the deferred fees arising from these unrecognized financial instruments. These deferred fees are not deemed significant at June 30, 2013 and December 31, 2012, and as such, the related fair values have not been estimated.

The carrying amounts and fair values (in thousands) of those financial instruments that are not recorded at fair value at June 30, 2013 and December 31, 2012 were as follows.


	June 30, 2013
					Fair Value Measurements
	Carrying				at Reporting Date Using
	Amount		Fair Value		Level 1		Level 2		Level 3

Financial Assets:
Loans, net ⁽¹⁾	$	1,362,016	$	1,375,643	$	-	$	-	$	1,375,643

Financial Liabilities:
Deposits		1,576,397		1,573,350		-		1,573,350		-
FHLB borrowings		194,619		194,244		-		194,244		-
Other borrowings		41,206		41,206		-		41,206		-

	December 31, 2012
					Fair Value Measurements
	Carrying				at Reporting Date Using
	Amount		Fair Value		Level 1		Level 2		Level 3

Financial Assets:
Loans, net ⁽¹⁾	$	1,383,893	$	1,411,831	$	-	$	-	$	1,411,831

Financial Liabilities:
Deposits		1,617,774		1,650,145		-		1,650,145		-
FHLB borrowings		195,060		195,108		-		195,108		-
Other borrowings		41,002		41,472		-		41,472		-

(1) Carrying amount and fair value includes impaired loans. Carrying amount is net of the allowance for loan losses.

HAMPTON ROADS BANKSHARES, INC.

PART I. FINANCIAL INFORMATION

Item 1. Notes to Consolidated Financial Statements

NOTE M – 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.

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 (“SEC”) filings, other public or shareholder communications, or in oral statements made with the approval of an authorized executive officer, the words or phrases “anticipate,” “would be,” “will allow,” “intends to,” “will likely result,” “are expected to,” “will continue,” “is anticipated,” “is estimated,” “is projected,” or similar expressions are intended to identify “forward-looking statements.”

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

HAMPTON ROADS BANKSHARES, INC.

PART I. FINANCIAL INFORMATION

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

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

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

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

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

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

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

·	The soundness of other financial institutions could adversely affect us.

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

Critical Accounting Policies

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

Material Trends and Uncertainties

Currently, the U.S. economy appears to be slowly recovering from one of its longest and most severe economic recessions in recent history. Continued improvements in general economic conditions and credit performance of the Company’s loan portfolio coupled with cost savings initiatives and strong performance from our mortgage subsidiary resulted in $721 thousand in net income attributable to Hampton Roads Bankshares, Inc. for the six months ended June 30, 2013. While the pace of economic growth remains slow and regulatory and legislative friction continues to hamper the recovery, we expect to be profitable for the full year 2013,although such profitability is not assured.

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

HAMPTON ROADS BANKSHARES, INC.

PART I. FINANCIAL INFORMATION

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

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

Overview

Throughout the first six months of 2013, economic conditions in the markets in which our borrowers operate continued their slow recovery and the levels of loan delinquencies and rates of default continued to improve. The Company reported net income for the six month period ended June 30, 2013 primarily resulting from strong mortgage earnings and significant decreases in both the provision for loan losses and losses on other real estate owned and repossessed assets, partially offset by an impairment of premises and equipment that is further described in the notes of this report. As of June 30, 2013, the Company exceeded the regulatory capital minimums and BOHR and Shore were considered “well capitalized” under the risk-based capital standards.

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

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

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

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

Impaired loans decreased by $48.6 million during the six months ended June 30, 2013 from $141.0 million at December 31, 2012. The majority of the decrease is due to charge-offs and resolutions in the overall portfolio, including a $9.3 million decrease in impaired commercial and industrial loans, a $14.1 million decrease in impaired construction loans, a $17.7 million decrease in impaired real estate-commercial mortgage loans, and a $7.3 million decrease in impaired real estate-residential mortgage loans.

Allowance for loan losses at June 30, 2013 decreased 21% to $38.2 million from $48.4 million at December 31, 2012 as net charge-offs exceeded additional provisions for loan losses. Both the absolute and relative levels of non-performing loans, particularly newly identified problem credits, decreased during the six months ended June 30, 2013.

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

HAMPTON ROADS BANKSHARES, INC.

PART I. FINANCIAL INFORMATION

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

Net income attributable to Hampton Roads Bankshares, Inc. for the three and six months ended June 30, 2013 was $89 thousand and $721 thousand, respectively, as compared with net loss attributable to Hampton Roads Bankshares, Inc. of $5.7 million and $13.6 million for the three and six months, respectively, ended June 30, 2012. Net income for the six months ended June 30, 2013 was primarily attributable to strong mortgage earnings and significant decreases in provision for loan losses and losses on other real estate owned and repossessed assets, partially offset by an impairment of premises and equipment related to branch closures.

Net interest income decreased $102 thousand and $873 thousand to $16.1 million and $32.0 million for the three and six months, respectively, ended June 30, 2013 as compared to the same periods in 2012. The decrease was due primarily to the decreases in average interest-earning assets during those time periods, partially offset by an increase in net interest margin. Net interest margin increased 5-basis points to 3.44% for both the three and six month periods ended June 30, 2013 from 3.39% for both the three and six month periods ended June 30, 2012 due to a reduction in funding costs and a decline in non-performing loans.

We had $1.0 million in provision for loan losses for the three and six months ended June 30, 2013 compared to $4.3 million and $11.6 million for the same periods in 2012. The decrease was due to an overall continued improvement in asset quality, a continued reduction in newly identified problem loans, and continuing declines in loans outstanding. The increasing moderation of defaults from better asset quality and stabilized and improved collateral values has resulted in fewer impaired loans and a substantial reduction in specific impairments. Additionally, larger historical losses taken in prior quarters are now rolling off of the weighted loss calculations we use to determine the reserves that are largely based on these historical loss trends.

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

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

·	Our effective tax rate was 5.60% for the six months ended June 30, 2013 compared to 0% for the comparable period in 2012. These taxes related to state income taxes owed. These rates differ from the statutory rate due primarily to the valuation allowance against the Company’s deferred tax assets.

Analysis of Results of Operations

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

HAMPTON ROADS BANKSHARES, INC.

PART I. FINANCIAL INFORMATION

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

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

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

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

HAMPTON ROADS BANKSHARES, INC.

PART I. FINANCIAL INFORMATION

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

The table (in thousands, except percentages) below expresses the average interest-earning assets and average interest-bearing liabilities, the average yields earned on such assets and rates paid on such liabilities, the net interest margin, and the variance in interest income and expense caused by differences in average balances and rates for the three and six months ended June 30, 2013 and 2012.


		Three Months Ended						Three Months Ended
		June 30, 2013						June 30, 2012						2013 Compared to 2012
														Interest
				Interest	Average					Interest	Average			Income/		Variance
		Average		Income/	Yield/			Average		Income/	Yield/			Expense		Attributable to
		Balance		Expense	Rate			Balance		Expense	Rate			Variance		Rate		Volume
Assets:
Interest-earning assets
Loans	$	1,465,714	$	17,687	4.84	%	$	1,482,419	$	18,601	5.03	%	$	(914)	$	(705)	$	(209)
Investment securities		298,100		1,839	2.47			328,361		1,998	2.44			(159)		25		(184)
Interest-bearing deposits
in other banks		952		-	0.06			1,208		1	0.21			(1)		(1)		-
Overnight funds sold
and due from FRB		110,136		63	0.23			104,283		69	0.27			(6)		(10)		4
Total interest-earning assets		1,874,902		19,589	4.19			1,916,271		20,669	4.33			(1,080)		(691)		(389)
Noninterest-earning assets		152,658						170,664
Total assets	$	2,027,560					$	2,086,935

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

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

HAMPTON ROADS BANKSHARES, INC.

PART I. FINANCIAL INFORMATION

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


		Six Months Ended						Six Months Ended
		June 30, 2013						June 30, 2012						2013 Compared to 2012
														Interest
				Interest	Average					Interest	Average			Income/		Variance
		Average		Income/	Yield/			Average		Income/	Yield/			Expense		Attributable to
		Balance		Expense	Rate			Balance		Expense	Rate			Variance		Rate		Volume
Assets:
Interest-earning assets
Loans	$	1,476,489	$	35,360	4.83	%	$	1,505,766	$	38,122	5.09	%	$	(2,762)	$	(2,021)	$	(741)
Investment securities		301,007		3,654	2.45			317,108		4,006	2.54			(352)		(149)		(203)
Interest-bearing deposits
in other banks		888		-	0.08			1,073		1	0.17			(1)		(1)		-
Overnight funds sold
and due from FRB		96,440		105	0.22			127,485		146	0.23			(41)		(6)		(35)
Total interest-earning assets		1,874,824		39,119	4.21			1,951,432		42,275	4.36			(3,156)		(2,177)		(979)
Noninterest-earning assets		154,575						171,604
Total assets	$	2,029,399					$	2,123,036

Liabilities and Shareholders' Equity:
Interest-bearing liabilities
Interest-bearing demand deposits	$	559,266	$	1,067	0.38	%	$	531,801	$	950	0.36	%	$	117	$	68	$	49
Savings deposits		64,146		19	0.06			62,465		42	0.14			(23)		(24)		1
Time deposits		725,216		3,864	1.07			937,024		6,000	1.29			(2,136)		(780)		(1,356)
Total interest-bearing deposits		1,348,628		4,950	0.74			1,531,290		6,992	0.92			(2,042)		(736)		(1,306)
Borrowings		235,943		2,144	1.83			236,438		2,385	2.03			(241)		(236)		(5)
Total interest-bearing liabilities		1,584,571		7,094	0.90			1,767,728		9,377	1.07			(2,283)		(972)		(1,311)
Noninterest-bearing liabilities
Demand deposits		243,846						226,711
Other liabilities		15,466						19,199
Total noninterest-bearing liabilities		259,312						245,910
Total liabilities		1,843,883						2,013,638
Shareholders' equity		185,516						109,398
Total liabilities
and shareholders' equity	$	2,029,399					$	2,123,036
Net interest income			$	32,025					$	32,898
Net interest spread					3.31	%					3.29	%
Net interest margin					3.44	%					3.39	%

Interest income from loans included fees of $1.2 million for the six months ended June 30, 2013 and $508 thousand for the six months ended June 30, 2012. Average nonaccrual loans of $79.1 million and $134.5 million were included in average loans for June 30, 2013 and 2012, respectively. The change in interest due to both rate and volume has been allocated to variance attributable to rate and variance attributable to volume in proportion to the relationship for the absolute amount of change in each.

HAMPTON ROADS BANKSHARES, INC.

PART I. FINANCIAL INFORMATION

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

Our method for calculating net interest margin has been adjusted. In the past, we excluded nonaccrual loans from our calculation. We now include nonaccrual loans in the calculation. A reconciliation of the methods is below for the six months ended June 30, 2013 and 2012.


	Three Months Ended		Six Months Ended
	June 30, 2013	June 30, 2012	June 30, 2013	June 30, 2012

Net interest margin, including nonaccrual loans	3.44%	3.39%	3.44%	3.39%
Impact of excluding nonaccrual loans	0.14%	0.27%	0.16%	0.25%
Net interest margin, excluding nonaccrual loans	3.58%	3.66%	3.60%	3.64%

Noninterest Income. For the three months ended June 30, 2013, total noninterest income was $7.6 million, an increase of $5.6 million as compared to $2.0 million for comparative 2012. For the six months ended June 30, 2013, total noninterest income was $13.0 million, an increase of $7.9 million as compared to $5.1 million for the six months ended June 30, 2012. Noninterest income comprised 29% and 13% of total revenue for the first six months of 2013 and 2012, respectively. The following table provides a summary of noninterest income (in thousands) for the three and six months ended June 30, 2013 and 2012.


		Three Months Ended					Six Months Ended
		June 30,					June 30,
		2013		2012			2013		2012

Mortgage banking revenue	$	4,250	$	3,855		$	10,214	$	7,113
Service charges on deposit accounts		1,300		1,264			2,517		2,607
Income from bank-owned life insurance		434		463			807		862
Gain (loss) on sale of premises and equipment		7		(47)			(120)		(47)
Impairment of premises and equipment (branch closures)		-		-			(2,825)		-
Losses on other real estate owned and repossessed assets		(774)		(4,947)			(1,678)		(7,912)
Gain on sale of investment securities		763		274			763		261
Visa check card income		662		659			1,258		1,158
Other		942		472			2,076		1,059
					��
Total noninterest income	$	7,584	$	1,993		$	13,012	$	5,101

Mortgage banking revenue increased to $4.3 million and $10.2 million in the three and six month periods ended June 30, 2013 compared to $3.9 million and $7.1 million in the prior year period due to a 45% increase in loans sold for the six month period ended June 30, 2013 due in part to the low interest rate environment that continued to exist for much of the first six months of 2013. Service charges on deposit accounts increased $36 thousand and decreased $90 thousand for the three and six months, respectively, ended June 30, 2013 compared to $1.3 million and $2.6 million for the same periods in 2012. Income from bank-owned life insurance remained relatively stable at $434 thousand and $807 thousand for the first three and six months of 2013 compared to $463 thousand and $862 thousand for the comparative period 2012. During the first quarter of 2013, we had impairment of premises and equipment of $2.8 million as a result of consolidating certain branches, which resulted in the write-down of these branches to fair value. We had no such impairments during the comparative period 2012. Losses on other real estate owned and repossessed assets totaled $774 thousand and $1.7 million during the three and six months ended June 30, 2013. During the same periods in 2012, losses on other real estate owned and repossessed assets were $4.9 million and $7.9 million. The lower losses in 2013 are due to an overall stabilized or improved real estate market.

Noninterest Expense. Noninterest expense represents our operating and overhead expenses. Total noninterest expense was $22.2 million for the three months ended June 30, 2013 compared to $18.8 million for the three months ended June 30, 2012 and $41.6 million for the six months ended June 30, 2013 compared to $38.7 million for the six months ended June 30, 2012. The efficiency ratio, calculated by dividing noninterest expense by the sum of net interest income and noninterest income excluding securities gains and impairment of premises and equipment was 88% for the first six months of 2013 compared to 102% for the first six months of 2012.

HAMPTON ROADS BANKSHARES, INC.

PART I. FINANCIAL INFORMATION

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

The following table provides a summary of total noninterest expense (in thousands) for the three and six months ended June 30, 2013 and 2012.


		Three Months Ended				Six Months Ended
		June 30,				June 30,
		2013		2012		2013		2012

Salaries and employee benefits	$	10,951	$	9,144	$	21,907	$	18,856
Occupancy		2,517		1,808		4,319		3,555
FDIC insurance		878		1,174		1,896		2,401
Professional and consultant fees		1,639		1,747		2,532		3,338
Data processing		1,129		930		1,926		2,016
Problem loan and repossessed asset costs		530		623		1,010		1,516
Equipment		491		729		955		1,434
Other		4,058		2,612		7,080		5,562

Total noninterest expense	$	22,193	$	18,767	$	41,625	$	38,678

Salaries and employee benefits expense increased $1.8 million and $3.1 million in the three and six months, respectively, ended June 30, 2013 to $11.0 million and $21.9 million as a direct result of increased commissions associated with mortgage volumes, a cost of living pay adjustment for personnel, and the accrual of incentive compensation and restricted stock grants. Occupancy expense increased $709 thousand and $764 thousand for the first three and six months, respectively, of 2013 compared to the same period in 2012 due to accelerated amortization of leasehold improvements at a closed branch. FDIC insurance was $878 thousand and $1.9 million for the three and six months, respectively, ended June 30, 2013 as compared with $1.2 million and $2.4 million for the same period in 2012; this decrease is a result of the Company’s smaller asset base and the increase in tangible common equity. Professional and consultant fees were $1.6 million and $2.5 million for the three and six months, respectively, ended June 30, 2013 compared to $1.7 million and $3.3 million for comparative 2012; these fees decreased primarily due to lower legal fees associated with loan collection activities. Data processing expense decreased $90 thousand for the six months ended June 30, 2013 compared to the six months ended June 30, 2012 due to renegotiations of our data processing contracts and the consolidation of our banking systems. Problem loan and repossessed asset costs decreased $93 thousand to $530 thousand for the three months ended June 30, 2013 compared to the same period during 2012 and decreased $506 thousand to $1.0 million for the six months ended June 30, 2013 compared to the same period during 2012. This decrease is consistent with the improvement in our overall loan quality. For the three and six months ended June 30, 2013, equipment expense was $491 thousand and $955 thousand compared to $729 thousand and $1.4 million for the same period in 2012. These improvements were due to cost cutting initiatives and our smaller branch network. Other noninterest expenses increased by 27% predominantly due to an increase in expense for our reserve for committed but unfunded credits as well as increases in marketing and business development expenses.

Income Tax Provision. The Company had $135 thousand in income tax expense for the first six months of 2013, and no income tax expense for the same period in 2012. Management assesses the realizability of the deferred tax asset on a quarterly basis, considering both positive and negative evidence in determining whether it is more likely than not that some portion or all of the net deferred tax asset including its net operating loss carryforward would be realized. A valuation allowance for the entire net deferred tax asset has been established. Section 382 limitations related to the Company’s recapitalization during the quarter ended September 30, 2010 add further uncertainty as to the realizability of the certain deferred tax assets in future periods.

HAMPTON ROADS BANKSHARES, INC.

PART I. FINANCIAL INFORMATION

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

Analysis of Financial Condition

Cash and Cash Equivalents. Cash and cash equivalents includes cash and due from banks, interest-bearing deposits in other banks, and overnight funds sold and due from FRB. Cash and cash equivalents are used for daily cash management purposes, management of short-term interest rate opportunities, and liquidity. Cash and cash equivalents as of June 30, 2013 were $124.8 million compared to $101.2 million at December 31, 2012 and consisted mainly of deposits with the FRB. Because the Company generated significant deposits in prior years and raised additional capital through the issuance of Common Stock, it is in a liquid position. In the future, the Company expects to continue to utilize its cash on hand and cash equivalents to support loan origination activity.

Securities. Our investment portfolio at June 30, 2013 consisted primarily of available-for-sale U.S. agency, mortgage-backed, and asset-backed securities. Our available-for-sale securities are reported at fair value and are used primarily for liquidity, pledging, earnings, and asset/liability management purposes and are reviewed quarterly for possible impairment.

Loan Portfolio. As a holding company of two community banks, we have a primary objective of meeting the business and consumer credit needs within our markets where standards of profitability, client relationships, and credit quality can be met. Our loan portfolio is comprised of commercial and industrial, construction, real estate-commercial mortgage, real estate-residential mortgage, and installment loans. Lending decisions are based upon an evaluation of the financial strength and credit history of the borrower and the quality and value of the collateral securing the loan.

Overall our loan trends during the first six months of 2013 have been influenced by decreased demand for loans in nearly all our loan categories with the exception of real estate – commercial mortgage and installment loans. Commercial and industrial loans decreased 10% to $239.3 million at June 30, 2013 compared with $267.1 million at December 31, 2012. Construction loans decreased 11% to $183.5 million at June 30, 2013 as compared to $206.4 million at December 31, 2012, thus reducing the concentration of construction loans to 13% of the total loan portfolio at June 30, 2013. Real estate - commercial mortgages increased 6% to $560.2 million at June 30, 2013 compared to $530.0 million at December 31, 2012. Real estate - residential mortgages decreased 5% to $355.6 million at June 30, 2013 as compared with $372.6 million at December 31, 2012. Installment loans increased 11% to $62.7 million at June 30, 2013.

In addition to the forementioned weaker demand for credit, the contraction seen in loans stems from the continued resolution of problem loans. Origination volumes were offset by principal pay-downs and scheduled amortization in the portfolio. In the future, our continued focus will be on managing the entire loan portfolio through the current challenging economic conditions. Additionally, our prudent business practices and internal guidelines and underwriting standards will continue to be followed in making lending decisions in order to continue to effectively manage our exposure to loan losses.

Allowance for Loan Losses. The allowance for loan losses decreased in the first half of 2013, both in dollars and as a percentage of total loans as credit trends in the loan portfolio showed improvement. The allowance consists of specific, general, and unallocated components. The specific component relates to loans that are determined to be impaired and, therefore, are individually evaluated for impairment. Specific loan allocations decreased to $9.5 million at June 30, 2013 from $14.8 million at December 31, 2012, primarily due to the continued resolution of problem loans and a slowing rate of additional loan defaults. The decrease is commensurate with the significant decrease in impaired loans to $92.4 million at June 30, 2013 from $141.0 million at December 31, 2012. The general or pooled component relates to groups of homogeneous loans not designated for a specific allowance that are collectively evaluated for impairment. As a result of decreases in the size of the overall loan portfolio and improving trends in charge-offs and credit quality, the pooled component decreased by $5.3 million to $22.6 million at June 30, 2013 from $27.9 million at December 31, 2012. An unallocated component is maintained to cover uncertainties that could affect management’s estimate of probable losses. The unallocated portion of the loan loss allowance increased $411 thousand to $6.1 million at June 30, 2013 from $5.7 million at December 31, 2012 due to a decline in the macroeconomic inputs that drive our external unallocated factors.

HAMPTON ROADS BANKSHARES, INC.

PART I. FINANCIAL INFORMATION

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

The following table provides a breakdown (in thousands, except for percentages) of the allowance for loan losses and other related information at June 30, 2013 and December 31, 2012.


		June 30, 2013			December 31, 2012

Allowance for loan losses:
Specific component	$	9,508		$	14,783
Pooled component		22,616			27,900
Unallocated component		6,110			5,699
Total	$	38,234		$	48,382

Impaired loans	$	92,355		$	140,987
Non-impaired loans		1,307,895			1,291,288
Total loans	$	1,400,250		$	1,432,275

Specific component as % of
impaired loans		10.30	%		10.49	%
Pooled component as % of
non-impaired loans		1.73	%		2.16	%

Allowance as % of loans		2.73	%		3.38	%
Allowance as % of nonaccrual loans		59.99	%		49.67	%

Notwithstanding these allocations, the entire allowance for loan losses is available to absorb charge-offs in any loan category. Net charge-offs were $11.1 million for the six months ended June 30, 2013 as compared with $23.7 million for the six months ended June 30, 2012. Net charge-offs in the construction category account for $2.9 million or 26% of these net charge-offs in the first half of 2013 and $5.7 million or 24% in the first half of 2012. Construction loans, particularly land acquisition and development, tend to be riskier than other categories, and we have been steadily decreasing our exposure to this type of loan. Net commercial and industrial charge-offs were $3.4 million for the six months ended June 30, 2013. Net charge-offs were $346 thousand for real estate - commercial mortgage, $4.4 million for real estate - residential mortgage, and $111 thousand for installment loans for the six months ended June 30, 2013.

HAMPTON ROADS BANKSHARES, INC.

PART I. FINANCIAL INFORMATION

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

The following ratios are among those used by management in assessing the adequacy of the allowance for loan losses at June 30, 2013 and December 31, 2012.


	June 30, 2013	December 31, 2012

Non-performing loans for which full loss has been charged off to total loans	2.60%	3.90%

Non-performing loans for which full loss has been charged off to non-performing loans	57.22%	55.42%

Charge off rate for non-performing loans for which the full loss has been charged off	49.44%	50.19%

Coverage ratio net of non-performing loans for which the full loss has been charged off	140.23%	111.41%

Total allowance divided by total loans less non-performing loans for which the full loss has been charged off	2.80%	3.64%

Allowance for individually impaired loans divided by impaired loans for which an allowance has been provided	32.10%	26.29%

There was an increase in the coverage ratio net of non-performing loans for which the full loss has been charged off to 140.23% at June 30, 2013 from 111.41% at December 31, 2012 due to the decrease in non-performing loans less balances with full loss charged off. As a result, the resolution of non-performing loans during the first half of 2013 outpaced the reduction in the loan loss reserve.

Management believes the allowance for loan losses as of June 30, 2013 is adequate to absorb losses inherent in the portfolio and is directionally consistent with the change in the quality of our loan portfolio. However, the allowance is subject to regulatory examinations and determination as to adequacy, which may take into account such factors as the methodology used to calculate the allowance and the size of the allowance in comparison to peer banks identified by regulatory agencies. Such agencies may require us to recognize additions to the allowance for loan losses on their judgments about information available at the time of the examinations.

Deposits. Total brokered deposits were $54.9 million or 3% of deposits at June 30, 2013, which was a decrease of $8.5 million from the total brokered deposits of $63.4 million at December 31, 2012. While BOHR qualifies as “well capitalized” at June 30, 2013, it may not accept new brokered deposits but may continue to rollover existing brokered deposits due to the FRB recently modifying its interpretation of the Written Agreement. Shore is not a party to the Written Agreement, and therefore, not subject to any such restrictions. Interest-bearing demand deposits included $8.3 million in brokered money market funds at June 30, 2013, which was $1.1 million lower than the $9.4 million balance of brokered money market funds outstanding at December 31, 2012. Brokered CDs were $46.5 million at June 30, 2013 compared to $54.0 million at December 31, 2012.

The Company continues to focus on core deposit growth as its primary source of funding. Core deposits typically are non-brokered and consist of noninterest-bearing demand accounts, interest-bearing checking accounts, money market accounts, savings accounts, and time deposits of less than $100 thousand. Core deposits totaled $1.2 billion or 76% of total deposits at June 30, 2013 compared to 73% at December 31, 2012.

Borrowings. We use short-term and long-term borrowings from various sources including the FRB discount window, FHLB, reverse repurchase agreements, and trust preferred securities. We manage the level of our borrowings to ensure that we have adequate sources of liquidity. Refer to our 2012 Form 10-K for further discussion about our borrowings.

HAMPTON ROADS BANKSHARES, INC.

PART I. FINANCIAL INFORMATION

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

Liquidity Management. Liquidity represents an institution’s ability to meet present and future financial obligations through either the sale or maturity of existing assets or the acquisition of additional funds through liability management. We continued to maintain a strong liquidity position during the first six months of 2013. Cash and cash equivalents were $124.8 million and available-for-sale investment securities were $278.4 million as of June 30, 2013. At June 30, 2013, the Banks had credit lines in the amount of $223.3 million at the FHLB with advances of $194.6 million currently utilized. At December 31, 2012, the Banks had credit lines in the amount of $223.1 million at the FHLB with advances of $195.1 million utilized. These lines may be utilized for short- and/or long-term borrowing. At June 30, 2013 and December 31, 2012, all our FHLB borrowings were long-term. We also possess additional sources of liquidity through a variety of borrowing arrangements. The Banks also maintain federal funds lines with two regional banking institutions and through the FRB Discount Window. These available lines totaled approximately $37.7 million and $40.9 million at June 30, 2013 and December 31, 2012, respectively; these lines were not utilized for borrowing purposes at June 30, 2013 or December 31, 2012.

Capital Resources. Total shareholders’ equity decreased $5.5 million to $179.2 million at June 30, 2013 compared to $184.7 million at December 31, 2012. The Company and the Banks are subject to regulatory capital requirements that measure capital relative to risk-weighted assets and off-balance sheet financial instruments. Failure to meet minimum capital requirements can cause certain mandatory and discretionary actions by regulators that, if undertaken, could have a material effect on our consolidated financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Banks must meet specific capital guidelines that involve quantitative and qualitative measures to ensure capital adequacy. Tier I capital is comprised of shareholders’ equity, net of unrealized gains or losses on available-for-sale securities, less intangible assets, while total risk-based capital adds certain debt instruments and qualifying allowances for loan losses. As of June 30, 2013, our consolidated regulatory capital ratios were Tier 1 Leverage Ratio of 10.23%, Tier 1 Risk-Based Capital Ratio of 13.01%, and Total Risk-Based Capital Ratio of 14.28%. As of June 30, 2013, the Company exceeded the regulatory capital minimums, and BOHR and Shore were considered “well capitalized” under the risk-based capital standards. Their Tier 1 Leverage Ratio, Tier 1 Risk-Based Capital Ratio, and Total Risk-Based Capital Ratio were as follows: 8.85%, 11.25%, and 12.52%, respectively, for BOHR and 10.31%, 13.70%, and 14.95%, respectively, for Shore.

Contractual Obligations. We have contractual obligations to make future payments on debt and lease agreements. Additionally, in the normal course of business, we enter into contractual arrangements whereby we commit to future purchases of products and services from unaffiliated parties. Our contractual obligations consist of time deposits, borrowings, and operating lease obligations. There have not been any material changes in our contractual obligations from those disclosed in the 2012 Form 10-K.

Off-Balance Sheet Arrangements. We are a party to financial instruments with off-balance sheet risk in the normal course of business to meet our customers’ financing needs. For more information on our off-balance sheet arrangements, refer to Note 13, Financial Instruments with Off-Balance-Sheet Risk, of the Notes to the Consolidated Financial Statements contained in the 2012 Form 10-K.

HAMPTON ROADS BANKSHARES, INC.

PART I. FINANCIAL INFORMATION

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

Use of Non-GAAP Financial Measures

The ratios “shareholders’ equity-tangible,” “shareholders’ equity-tangible (average”),” “return on average equity-tangible,” and “book value per share-tangible” are non-GAAP financial measures. The Company believes these measurements are useful in our press releases and other correspondence for investors, regulators, management, and others to evaluate capital adequacy and to compare against other financial institutions. The following is a reconciliation (dollars in thousands, except per share data) of these non-GAAP financial measures with financial measures defined by GAAP.


	Six Months Ended		Twelve Months Ended
		June 30, 2013		December 31, 2012

Shareholders' equity	$	179,235	$	184,723
Less: intangible assets		1,741		2,410
Shareholders' equity - tangible	$	177,494	$	182,313

Shareholders' equity (average)	$	185,516	$	139,862
Less: intangible assets (average)		2,068		3,065
Shareholders' equity - tangible (average)	$	183,448	$	136,797

Return on average equity		0.78%		(17.94%)
Impact of excluding intangible assets		0.02%		(0.40%)
Return on average equity - tangible		0.79%		(18.34%)

Book value per share	$	1.05	$	1.08
Impact of excluding intangible assets		(0.01)		(0.01)
Book value per share - tangible	$	1.04	$	1.07

HAMPTON ROADS BANKSHARES, INC.

PART I. FINANCIAL INFORMATION

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Market risk is the potential of loss arising from adverse changes in interest rates and prices. We are exposed to market risk as a consequence of the normal course of conducting our business activities. Management considers interest rate risk to be a significant market risk for the Company. Fluctuations in interest rates will impact both the level of interest income and interest expense and the market value of the Company’s interest earning assets and interest bearing liabilities.

The primary goal of our asset/liability management strategy is to optimize net interest income while limiting exposure to fluctuations caused by changes in the interest rate environment. Our ability to manage our interest rate risk depends generally on our ability to match the maturities and re-pricing characteristics of our assets and liabilities while taking into account the separate goals of maintaining asset quality and liquidity and achieving the desired level of net interest income.

Our management, guided by the ALCO, determines the overall magnitude of interest sensitivity risk and then formulates policies governing asset generation and pricing, funding sources and pricing, and off-balance sheet commitments. These decisions are based on management’s expectations regarding future interest rate movements, the state of the national and regional economy, and other financial and business risk factors.

The primary method that we use to quantify and manage interest rate risk is simulation analysis, which is used to model net interest income from assets and liabilities over a specified time period under various interest rate scenarios and balance sheet structures. This analysis measures the sensitivity of net interest income over a relatively short time horizon. Key assumptions in the simulation analysis relate to the behavior of interest rates and spreads, the changes in product balances, and the behavior of loan and deposit customers in different rate environments.

The expected effect (dollars in thousands) on net interest income for the twelve months following June 30, 2013 and December 31, 2012 due to an immediate change in interest rates is shown below. These estimates are dependent on material assumptions, such as those previously discussed.


	June 30, 2013				December 31, 2012
	Change in Net Interest Income				Change in Net Interest Income
	Amount		%		Amount		%
Change in Interest Rates:
+200 basis points	$	105		0.93%	$	1,305		2.05%
+100 basis points		68		0.60%		498		0.78%
-100 basis points		(267)		(2.36)%		(2,481)		(3.90)%
-200 basis points		N/A		N/A		N/A		N/A

As of June 30, 2013, we projected an increase in net interest income in increasing interest rate environments and a decrease in net interest income in decreasing rate environments consistent with our projections at December 31, 2012.

It should be noted, however, that the simulation analysis is based upon equivalent changes in interest rates for all categories of assets and liabilities. In normal operating conditions, interest rate changes rarely occur in such a uniform manner. Many factors affect the timing and magnitude of interest rate changes on financial instruments. In addition, management may deploy strategies that offset some of the impact of changes in interest rates. Consequently, variations should be expected from the projections resulting from the controlled conditions of the simulation analysis. Management maintains a simulation model where it is assumed that interest rate changes occur gradually, that rate increases for interest-bearing liabilities lag behind the rate increases of interest-earning assets, and that the level of deposit rate increases will be less than the level of rate increases for interest-earning assets.

HAMPTON ROADS BANKSHARES, INC.

PART I. FINANCIAL INFORMATION

Item 4. Controls and Procedures

As of June 30, 2013, the Company’s management, with the participation of the Company’s Chief Executive Officer and Interim Chief Financial Officer, evaluated the effectiveness of the Company’s disclosure controls and procedures as of the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and Interim Chief Financial Officer concluded that the Company’s disclosure controls and procedures as of the end of the period covered by this report were designed and functioning effectively to provide assurance that the information required to be disclosed by the Company in reports filed under the Securities Exchange Act of 1934, as amended, is (i) recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms and (ii) accumulated and communicated to our management, including the Chief Executive Officer and Interim Chief Financial Officer, as appropriate to allow timely decisions regarding disclosure.

In addition, no change in its internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) occurred during the six months ended June 30, 2013 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

HAMPTON ROADS BANKSHARES, INC.

PART II. OTHER INFORMATION

ITEM 1 – LEGAL PROCEEDINGS

In April 2011, the SEC informed the Company that it is conducting a formal investigation related to certain accounting matters. For a further discussion of this matter, see “Risk Factors – Risks Relating to our Business -- The formal investigation by the SEC may result in penalties, sanctions, or a restatement of our previously issued financial statements.”

On November 2, 2010, the Company received a grand jury subpoena from the United States Department of Justice, Criminal Division. For a discussion of this matter, see “Risk Factors – Risks Relating to our Business -- The Company has received a grand jury subpoena from the United States Department of Justice, Criminal Division. Although the Company has been advised that it is not a target or a subject of the investigation at this time and we do not believe we will become a target or a subject of the investigation, there can be no assurances as to the timing or the eventual outcome of the related investigation.”

ITEM 1A – RISK FACTORS

For information regarding factors that could affect the Company’s results of operations, financial condition, or liquidity, see the risk factors discussed in the Company’s 2012 Form 10-K. Except as and to the extent disclosed below, there have been no material changes to the risk factors as previously disclosed in the 2012 Form 10-K.

Risks Relating to our Business

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

We are a customer-focused and relationship-driven organization. Future growth is expected to be driven in large part by the relationships maintained with customers. While we have assembled an experienced and talented senior management team, maintaining this team, while at the same time developing other managers in order that management succession can be achieved, is not assured. The loss of key employees could have a material adverse effect on our business and may result in lower revenues or reduced earnings.

Stephen P. Theobald, the Company’s Executive Vice President and Chief Financial Officer, left the Company effective March 31, 2013 to accept a CFO position with another financial services firm. The Company has named Thomas B. Dix III as Interim Chief Financial Officer to assume the position and has commenced a search for a possible permanent successor.

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

We paid cash dividends on our Common Stock prior to the third quarter of 2009. During the third quarter of 2009, we suspended dividend payments. We are prevented by our regulators from paying dividends until our financial position improves. In addition, the retained deficit of BOHR, our principal banking subsidiary, is approximately $473.8 million as of June 30, 2013. Absent permission from the Virginia State Corporation Commission, BOHR may pay dividends to us only to the extent of positive accumulated retained earnings. It is unlikely in the foreseeable future that we would be able to pay dividends if BOHR cannot pay dividends to us. Although we can seek to obtain a waiver of this prohibition, our regulators may choose not to grant such a waiver, and we would not expect to be granted a waiver or be released from this obligation until our financial performance and retained earnings improve significantly. As a result, there is no assurance if or when we will be able to resume paying cash dividends.

HAMPTON ROADS BANKSHARES, INC.

PART II. OTHER INFORMATION

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

Throughout 2010, 2011, 2012 and the first six months of 2013, our loan customers continued to operate in an economically stressed environment. While broader economic conditions have begun to gradually improve, economic conditions in the markets in which we operate remain somewhat constrained and the levels of loan delinquencies and defaults that we experienced continue to be higher than historical levels and our net interest income did not grow significantly.

As a result, our net income attributable to Hampton Roads Bankshares, Inc. for the six months ended June 30, 2013 was $721 thousand compared to a net loss attributable to Hampton Roads Bankshares, Inc. of $13.6 million for the six months ended June 30, 2012. The net income for the six months ended June 30, 2013 was primarily attributable to strong mortgage earnings and significant decreases in provision for loan losses and losses on other real estate owned and repossessed assets, partially offset by an impairment of premises and equipment related to branch closures. Mortgage banking earnings are dependent upon the direction and level of mortgage interest rates and are, therefore, subject to high volatility during periods of changing rates.

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

Our mortgage banking earnings are dependent upon our ability to originate loans and sell them to investors. Loan production levels are sensitive to changes in the level of interest rates and changes in economic conditions. A significant portion of recent increases in our mortgage banking earnings is due to the recent historically low interest rate environment that resulted in a high volume of mortgage loan refinancing activity. As and when the interest rate environment returns to more typical levels, mortgage loan refinancing activity may be significantly reduced. Loan production levels may also suffer if we experience a slowdown in the local housing market or tightening credit conditions. Any sustained period of decreased activity caused by fewer refinancing transactions, higher interest rates, housing price pressure or loan underwriting restrictions would adversely affect our mortgage originations and, consequently, could significantly reduce our income from mortgage banking activities. As a result, these conditions would also adversely affect our results of operations.

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

The SEC’s Division of Enforcement (the “Division”) has been conducting a formal investigation into the Company’s deferred tax asset valuation allowances, provision and allowance for loan losses, and other matters contained in its annual and quarterly reports for years 2008 through 2010. The Company has fully cooperated with the Division, intends to continue to do so, and believes its provisions and allowances will be determined to be appropriate. However, the formal investigation continues. We cannot predict the timing or eventual outcome of this investigation. The investigation could result in material penalties, sanctions, or a restatement of our previously issued consolidated financial statements and may require significant time and attention from our management.

HAMPTON ROADS BANKSHARES, INC.

PART II. OTHER INFORMATION

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

At June 30, 2013, BOHR and Shore were classified as “well capitalized” for regulatory capital purposes. However, impairments to our loan or securities portfolio, declines in our earnings or a combination of these or other factors could change our capital position in a relatively short period of time. BOHR is currently restricted from accepting new brokered deposits. As a result, our brokered deposit levels will decrease if our existing brokered deposits mature and do not rollover. If we are not able to attract new deposits, our ability to fund our loan portfolio may be adversely affected. In addition, if we are unable to maintain our “well-capitalized” status, we will be required to pay higher insurance premiums to the FDIC, which will reduce our earnings.

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

Our Articles of Incorporation, as well as the Company’s Bylaws (the “Bylaws”), contain provisions that may be deemed to have the effect of discouraging or delaying uninvited attempts by third parties to gain control of the Company. These provisions include the ability of our board to set the price, term, and rights of, and to issue, one or more series of our preferred stock. Our Articles of Incorporation and Bylaws do not provide for the ability of stockholders to call special meetings.

Similarly, the Virginia Stock Corporation Act contains provisions designed to protect Virginia corporations and employees from the adverse effects of hostile corporate takeovers. These provisions reduce the possibility that a third party could affect a change in control without the support of our incumbent directors. These provisions may also strengthen the position of current management by restricting the ability of shareholders to change the composition of the board, to affect its policies generally, and to benefit from actions that are opposed by the current board.

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

Our access to funding sources in amounts adequate to finance our activities on terms which are acceptable to us could be impaired by factors that affect us specifically or the financial services industry or economy in general. In managing our balance sheet, a primary source of funding is customer deposits. Our ability to continue to attract these deposits and other funding sources is subject to variability based upon a number of factors including volume and volatility in the securities markets and the relative interest rates that we are prepared to pay for these liabilities. Further, BOHR is prohibited from accepting new brokered deposits until it is no longer subject to the Written Agreement with the FRB. Our potential inability to maintain adequate sources of funding may, among other things, impact our ability to resume the payment of dividends or satisfy our obligations.

Liquidity is essential to our business. An inability to raise funds through deposits, borrowings, the sale of investments or loans, the issuance of equity and debt securities, and other sources could have a substantial negative effect on our liquidity. Factors that could detrimentally impact our access to liquidity sources include operating losses; rising levels of non-performing assets; a decrease in the level of our business activity as a result of a downturn in the markets in which our loans or deposits are concentrated or as a result of a loss of confidence in us by our customers, lenders, and/or investors; or adverse regulatory action against us. Our ability to borrow could also be impaired by factors that are not specific to us, such as a disruption in the financial markets or negative views and expectations about the prospects for the financial industry. The confidence of depositors, lenders, and investors is critical to our ability to maintain our sources of liquidity.

The management of liquidity risk is critical to the management of our business and to our ability to service our customer base. In managing our balance sheet, a primary source of liquidity is customer deposits. Our ability to continue to attract these deposits and other funding sources is subject to variability based upon a number of factors including volume and volatility in the securities markets and the relative interest rates that we are prepared to pay for these liabilities. The availability and level of deposits and other funding sources, including borrowings and the

HAMPTON ROADS BANKSHARES, INC.

PART II. OTHER INFORMATION

issuance of equity and debt securities, is highly dependent upon the perception of the liquidity and creditworthiness of the financial institution, and such perception can change quickly in response to market conditions or circumstances unique to a particular company. Concerns about our financial condition or concerns about our credit exposure to other persons could adversely impact our sources of liquidity, financial position, regulatory capital ratios, results of operations, and our business prospects.

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

We face vigorous competition from other banks and other financial institutions, including savings and loan associations, savings banks, finance companies, and credit unions for deposits, loans, and other financial services that serve our market area. A number of these banks and other financial institutions are significantly larger than we are and have substantially greater access to capital and other resources, as well as larger lending limits and branch systems, and offer a wider array of banking services. Many of our non-bank competitors are not subject to the same extensive regulations that govern us. As a result, these non-bank competitors have advantages over us in providing certain services. While we believe we compete effectively with these other financial institutions serving our primary markets, we may face a competitive disadvantage to larger institutions. If we have to raise interest rates paid on deposits or lower interest rates charged on loans to compete effectively, our net interest margin and income could be negatively affected. Failure to compete effectively to attract new, or to retain existing, clients may reduce or limit our margins and our market share and may adversely affect our results of operations, financial condition, growth, and the market price of our Common Stock.

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

The market price of our Common Stock could drop if our existing shareholders decide to sell their shares. As of June 30, 2013, Carlyle, Anchorage, and CapGen owned 24.90%, 24.90%, and 29.97%, respectively, of the outstanding shares of our Common Stock. Pursuant to the various definitive investment agreements that we have entered into with these shareholders, each of the shareholders listed above received certain registration rights covering the resale of shares of our Common Stock. In addition, the shares of certain of these shareholders may be traded, subject to certain volume limitations in some cases, pursuant to Rule 144 under the Securities Act. If any of these shareholders sell large amounts of our Common Stock, or other investors perceive such sales to be imminent, the market price of our Common Stock could drop significantly.

In addition, as of June 30, 2013, the U.S. Treasury owned 1% of the outstanding shares of our Common Stock plus a warrant to purchase an additional 757,643 shares of our Common Stock. In connection with the issuance of such shares of Common Stock and the warrant, we entered into an Exchange Agreement with the Treasury, under the terms of which the Treasury received certain registration rights covering the resale of such shares of Common Stock or the warrant, and the shares are freely transferable pursuant to Rule 144 under the Securities Act. Finally as of June 30, 2013, affiliates of Fir Tree, Inc. (“Fir Tree”) owned 9.56% of the outstanding shares of our Common Stock, which were freely transferable pursuant to Rule 144 under the Securities Act. The sale of the shares of Common Stock owned by the Treasury or Fir Tree, the exercise of the Treasury’s warrant, and sale of the warrant’s underlying shares of Common Stock, or the perception by other investors that such sales are imminent, could adversely affect the demand for our Common Stock.

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

A significant amount of our loan portfolio contains loans used to finance construction and land development. Construction financing typically involves a higher degree of credit risk than financing on improved, owner-occupied real estate. Risk of loss on a construction loan is largely dependent upon the accuracy of the initial estimate of the property’s value at completion of construction, the marketability of the property, and the bid price and estimated cost (including interest) of construction. If the estimate of construction costs proves to be inaccurate, we may be required to advance funds beyond the amount originally committed to permit completion of the project. If the estimate of the value proves to be inaccurate, we may be confronted, at or prior to the maturity of the loan, with a project whose value is insufficient to assure full repayment. When lending to builders, the cost of construction breakdown is provided by

HAMPTON ROADS BANKSHARES, INC.

PART II. OTHER INFORMATION

the builder, as well as supported by the appraisal. Although our underwriting criteria were designed to evaluate and minimize the risks of each construction loan, there can be no guarantee that these practices will have safeguarded against material delinquencies and losses to our operations.

At June 30, 2013, we had loans of $183.5 million or 13% of total loans outstanding to finance construction and land development. Construction and land development loans are dependent on the successful completion of the projects they finance, however, in many cases such construction and development projects in our primary market areas are not being completed in a timely manner, if at all. A portion of our residential and commercial lending is secured by vacant or unimproved land. Loans secured by vacant or unimproved land are generally more risky than loans secured by improved property for one-to-four family residential mortgage loans. Since vacant or unimproved land is generally held by the borrower for investment purposes or future use, payments on loans secured by vacant or unimproved land will typically rank lower in priority to the borrower than a loan the borrower may have on their primary residence or business. These loans are susceptible to adverse conditions in the real estate market and local economy.

Our business strategy centers, in part, on offering commercial and equity line loans secured by real estate in order to generate interest income. These types of loans generally have higher yields and shorter maturities, and therefore, involve a greater degree of risk than traditional one-to-four family residential mortgage loans. At June 30, 2013, commercial real estate and equity line lending totaled $689.0 million, which represented 49% of total loans. Such loans increase our credit risk profile relative to other financial institutions that have lower concentrations of commercial real estate and equity line loans.

Loans secured by commercial real estate properties are generally for larger amounts than one-to-four family residential mortgage loans. Payments on loans secured by these properties generally are dependent on the income produced by the underlying properties which, in turn, depends on the successful operation and management of the properties. Accordingly, repayment of these loans is subject to adverse conditions in the real estate market or the local economy. While we seek to minimize these risks in a variety of ways, there can be no assurance that these measures will protect against credit-related losses.

Equity line lending allows a customer to access an amount up to their line of credit for the term specified in their agreement. At the expiration of the term of an equity line, a customer may have the entire principal balance outstanding as opposed to a one-to-four family residential mortgage loan where the principal is disbursed entirely at closing and amortizes throughout the term of the loan. We cannot predict when and to what extent our customers will access their equity lines. While we seek to minimize this risk in a variety of ways, including attempting to employ conservative underwriting criteria, there can be no assurance that these measures will protect against credit-related losses.

With approximately three-fourths of our loans concentrated in the regions of Hampton Roads, Richmond, the Eastern Shore of Virginia, and the Triangle region of North Carolina, a decline in local economic conditions could adversely affect the value of the real estate collateral securing our loans. A decline in property values could diminish our ability to recover on defaulted loans by selling the real estate collateral, making it more likely that we would suffer additional losses on defaulted loans and/or foreclosed properties by requiring additions to our allowance for loan losses through increased provisions for loan losses. Also a decline in local economic conditions may have a greater effect on our earnings and capital than on the earnings and capital of financial institutions whose real estate portfolios are more geographically diverse. The local economies where the Company does business are heavily reliant on military spending and may be adversely impacted by significant cuts to such spending that might result from recent Congressional budgetary enactments. Real estate values are affected by various factors in addition to local economic conditions, including, among other things, changes in general or regional economic conditions, government rules or policies, and natural disasters. While our policy is to obtain updated appraisals on a periodic basis, there are no assurances that we may be able to realize the amount indicated in the appraisal upon disposition of the underlying property.

HAMPTON ROADS BANKSHARES, INC.

PART II. OTHER INFORMATION

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

Our non-performing assets as a percentage of total assets remained at 4.81% at June 30, 2013. On June 30, 2013, less than 1% of our loans was 30 to 89 days delinquent and treated as performing assets. The administration of non-performing loans is an important function in attempting to mitigate any future losses related to our non-performing assets.

We maintain an allowance for loan losses, which is a reserve established through a provision for loan losses charged to our expenses that represents management’s best estimate of probable losses within our existing portfolio of loans. Our allowance for loan losses was $38.2 million at June 30, 2013, which represented 2.73% of our total loans, as compared to $48.4 million, or 3.38% of total loans, at December 31, 2012. The level of the allowance reflects management’s estimates and judgments as to specific credit risks, evaluation of industry concentrations, loan loss experience, current loan portfolio quality, present economic, political, and regulatory conditions, and incurred but unidentified losses inherent in the current loan portfolio. For further discussion on the impact continued weak economic conditions have on the collateral underlying our loan portfolio, see “If the value of real estate in the markets we serve were to decline materially, the value of our other real estate owned could decline or a significant portion of our loan portfolio could become under-collateralized, which could have a material adverse effect on our loan losses, results of operations, and financial condition.”

The determination of the appropriate level of the allowance for loan losses inherently involves a high degree of subjectivity and requires management to make significant estimates of current credit risks and future trends, all of which may undergo material changes. In addition, regulatory agencies, as an integral part of their examination process, periodically review the estimated losses of loans. Such agencies may require us to recognize additional losses based on their judgments about information available to them at the time of their examination. Furthermore, certain proposed changes to GAAP, if implemented as proposed, may require us to increase our estimate for losses embedded in our loan portfolio, resulting in an adverse impact to our results of operations and level of regulatory capital. Accordingly, the allowance for loan losses may not be adequate to cover loan losses or significant increases to the allowance for loan losses may be required in the future if economic conditions should worsen. Any such increases in the allowance for loan losses may have a material adverse effect on our results of operations, financial condition, and the market price of our Common Stock.

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

Our profitability depends in substantial part upon the spread between the interest rates earned on investments and loans and the interest rates paid on deposits and other interest-bearing liabilities. These rates are normally in line with general market rates and rise and fall based on management’s view of our needs. Changes in interest rates will affect our operating performance and financial condition in diverse ways including the pricing of securities, loans and deposits, and the volume of loan originations in our mortgage banking business, and could result in decreases to our earnings. Our net interest income will be adversely affected if market interest rates change so that the interest we pay on deposits and borrowings increases faster than the interest we earn on loans and investments. This could, in turn, have a material adverse affect on the market price of our Common Stock.

HAMPTON ROADS BANKSHARES, INC.

PART II. OTHER INFORMATION

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

Deposit pricing pressures may result from competition as well as changes to the interest rate environment. Under current conditions, pricing pressures also may arise from depositors who demand premium interest rates from what they perceive to be a troubled financial institution. There is intense competition for deposits. The competition has had an impact on interest rates paid to attract deposits as well as fees charged on deposit products. In addition to the competitive pressures from other depository institutions, we face heightened competition from non-depository financial products such as securities and other alternative investments.

Furthermore, technology and other market changes have made it more convenient for bank customers to transfer funds for investing purposes. Bank customers also have greater access to deposit vehicles that facilitate spreading deposit balances among different depository institutions to maximize FDIC insurance coverage. In addition to competitive forces, we also are at risk from market forces as they affect interest rates. It is not uncommon when interest rates transition from a low interest rate environment to a rising rate environment for deposit and other funding costs to rise in advance of yields on earning assets. In order to keep deposits required for funding purposes, it may be necessary to raise deposit rates without commensurate increases in asset pricing in the short term. Finally, we may see interest rate pricing pressure from depositors concerned about our financial condition and levels of non-performing assets.

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

Financial institutions are a prime target of criminal activities through various channels of information technology. We attempt to mitigate risk from such activities through policies, procedures, and preventative and detective measures. In addition, we maintain insurance coverage designed to provide a level of financial protection to our business. However, risks posed by business interruption, fraud losses, business recovery expenses, and other potential losses or expenses that may be experienced from a significant event are not readily predictable and, therefore, could have an impact on our results of operations.

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

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

Effective June 17, 2010, the Company and BOHR entered into the Written Agreement with the FRB and the Bureau of Financial Institutions. Shore is not a party to the Written Agreement. Under the terms of the Written Agreement, BOHR has agreed to develop and submit for approval within the time periods specified in the Written Agreement written plans to:

·	strengthen board oversight of management and BOHR’s operations;

·	strengthen credit risk management policies;

·	improve BOHR’s position with respect to loans, relationships, or other assets in excess of $2.5 million that are now or in the future may become past due more than 90 days, are on BOHR’s problem loan list, or adversely classified in any report of examination of BOHR;

·	review and revise, as appropriate, current policy and maintain sound processes for determining, documenting, and recording an adequate allowance for loan losses;

HAMPTON ROADS BANKSHARES, INC.

PART II. OTHER INFORMATION

·	improve management of BOHR’s liquidity position and funds management policies;

·	provide contingency planning that accounts for adverse scenarios and identifies and quantifies available sources of liquidity for each scenario;

·	reduce BOHR’s reliance on brokered deposits; and

·	improve BOHR’s earnings and overall condition.

In addition, BOHR has agreed that it will:

·	not extend, renew, or restructure any credit that has been criticized by the FRB or Bureau of Financial Institutions absent prior Board of Directors approval in accordance with the restrictions in the Written Agreement;

·	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;

·	only accept brokered deposits that are rolled over or renewed;

·	comply with legal and regulatory limitations on indemnification payments and severance payments; and

·	appoint a committee to monitor compliance with the terms of the Written Agreement.

In addition, the Company has agreed that it will:

·	not make 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;

·	take all necessary steps to correct certain technical violations of law and regulation cited by the FRB;

·	refrain from guaranteeing any debt without the prior written approval of the FRB and the Bureau of Financial Institutions; and

·	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, the Company and BOHR have submitted capital plans to maintain sufficient capital at the Company on a consolidated basis and at BOHR on a stand-alone basis and to refrain from declaring or paying dividends absent prior regulatory approval.

To date, the Company has complied with the actions required by the FRB and the Bureau of Financial Institutions under the terms of the Written Agreement; additionally, BOHR has materially complied with the actions required by the FRB and the Bureau of Financial Institutions under the terms of the Written Agreement. The Risk Committee has been appointed to oversee the Company’s compliance with the terms of the Written Agreement and has met quarterly to review compliance. Written plans have been submitted and implemented 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 also submitted and implemented written policies and procedures for maintaining an adequate allowance for loan 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 charged off the assets identified as loss from the previous examination. As of June 30, 2013, the Company exceeded the regulatory capital minimums and BOHR and Shore were both considered “well capitalized” under the risk-based capital standards. The FRB recently modified its interpretation of our Written Agreement and now takes the position that it prohibits BOHR from accepting new brokered deposits. Based on prior guidance, BOHR accepted new brokered deposits after it became well capitalized, which technically did not comply with the Written Agreement under the FRB’s modified interpretation. We do not believe the new interpretation or our earlier actions will have any material adverse effect on the Company or our liquidity, expenses, or financial condition.

HAMPTON ROADS BANKSHARES, INC.

PART II. OTHER INFORMATION

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

On November 2, 2010, the Company received from the DOJ a grand jury subpoena to produce information principally relating to the merger of GFH into the Company on December 31, 2008 and to loans made by GFH and its wholly owned subsidiary, Gateway, before GFH’s merger with the Company. The DOJ has informed the Company that it is not a target or a subject of the investigation at this time, and we are fully cooperating. Although we do not believe this matter will have a material adverse affect on the Company, we can give you no assurances as to the timing or eventual outcome of this investigation. The Company is not aware of any recent developments in this matter and has not been notified of any developments in over a year.

Risks Relating to Market, Legislative, and Regulatory Events

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

Current economic conditions, particularly in the financial markets, have resulted in government regulatory agencies placing increased focus and scrutiny on the financial services industry. The U.S. Government has intervened on an unprecedented scale, responding to what has been commonly referred to as the financial crisis. In addition to participating in the TARP CPP, the U.S. Government has taken steps that include enhancing the liquidity support available to financial institutions, establishing a commercial paper funding facility, temporarily guaranteeing money market funds and certain types of debt issuances, and increasing insured deposits. These programs subject us and other financial institutions that have participated in these programs to additional restrictions, oversight and/or costs that may have an impact on our business, financial condition, results of operations, and the price of our Common Stock.

Compliance with such regulation and scrutiny may significantly increase our costs, impede the efficiency of our internal business processes, require us to increase our regulatory capital, and limit our ability to pursue business opportunities in an efficient manner. We also may be required to pay significantly higher FDIC premiums because market developments have significantly depleted the insurance fund of the FDIC and reduced the ratio of reserves to insured deposits. The increased costs associated with anticipated regulatory and political scrutiny could adversely impact our results of operations.

New proposals for legislation continue to be introduced in the U.S. Congress that could further substantially increase regulation of the financial services industry. Federal and state regulatory agencies also frequently adopt changes to their regulations and/or change the manner in which existing regulations are applied. We cannot predict whether any pending or future legislation will be adopted or the substance and impact of any such new legislation on us. Additional regulation could affect us in a substantial way and could have an adverse effect on our business, financial condition, and results of operations.

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

We are subject to supervision by several governmental regulatory agencies. The regulators’ interpretation and application of relevant regulations, are beyond our control, may change rapidly and unpredictably, and can be expected to influence our earnings and growth. In addition, if we do not comply with regulations that are applicable to us, we could be subject to regulatory penalties, which could have an adverse effect on our business, financial condition, and results of operations. We have also entered into a Written Agreement with the FRB and Bureau of Financial Institutions. For a discussion regarding risks related to the Written Agreement, see “The Company and BOHR have entered into a Written Agreement with the FRB and the Bureau of Financial Institutions that subjects the Company and BOHR to significant restrictions and requires us to designate a significant amount of our resources to complying with the agreement, and it may have a material adverse effect on our operations and the value of our Common Stock.”

HAMPTON ROADS BANKSHARES, INC.

PART II. OTHER INFORMATION

All such government regulations may limit our growth and the return to our investors by restricting activities such as the payment of dividends, mergers with, or acquisitions by, other institutions, investments, loans and interest rates, interest rates paid on deposits, the use of brokered deposits, and the creation of financial centers. Although these regulations impose costs on us, they are intended to protect depositors. The regulations to which we are subject may not always be in the best interests of investors.

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

The Board of Governors of the Federal Reserve System regulates the supply of money and credit in the United States. Its policies determine, in large part, the cost of funds for lending and investing and the return earned on those loans and investments, both of which affect our net interest margin. It also can materially decrease the value of financial assets we hold, such as debt securities. Its policies also can adversely affect borrowers, potentially increasing the risk that they may fail to repay their loans.

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

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

On July 21, 2010, President Obama signed the Dodd-Frank Act into law. The Dodd-Frank Act makes extensive changes to the laws regulating financial services firms and requires significant rule-making. In addition, the law mandates multiple studies, which could result in additional legislative or regulatory action. The Dodd-Frank Act has and will continue to have a broad impact on the financial services industry, including significant regulatory and compliance changes designed to improve supervision and oversight of and strengthen safety and soundness for the financial services sector. Many of the provisions of the Dodd-Frank Act have begun to be or will be implemented over the next few years and will be subject to further rulemaking and the discretion of applicable regulatory bodies. Because the ultimate impact of the Dodd-Frank Act will depend on future regulatory rulemaking and interpretation, we cannot predict the full effect of this legislation on our business, financial condition, or results of operations.

Although management does not expect the Dodd-Frank Act to have a material adverse effect on the Company, it is not possible to predict at this time all the effects the Dodd-Frank Act will have on the Company and the rest of our industry. It is possible that the Company’s interest expense could increase and deposit insurance premiums could change and steps may need to be taken to increase qualifying capital.

HAMPTON ROADS BANKSHARES, INC.

PART II. OTHER INFORMATION

On June 6, 2012, the federal bank regulatory agencies issued a series of proposed rules to revise the risk-based and leverage capital requirements and the method for calculating risk-weighted assets to make them consistent with the agreements that were reached by the Basel Committee in Basel III. These federal bank regulatory agencies approved final rules on July 2, 2013. The rules apply to all depository institutions, top-tier bank holding companies with total consolidated assets of $500.0 million or more, and top-tier savings and loan holding companies (“banking organizations”). Although the final rules contain significant revisions from the proposed rules intended to provide relief to community banks, such as BOHR and Shore, many of the Basel III rules will apply to these institutions. Among other things, the rules establish a new common equity Tier 1 minimum capital requirement and a higher minimum Tier 1 capital requirement, changes the treatment of unrealized gains and losses on available-for-sale securities in the calculation of regulatory capital, and assigns higher risk weightings (150%) to exposures that are more than 90 days past due or are on nonaccrual status and certain commercial real estate facilities that finance the acquisition, development, or construction of real property. The rules also limit a banking organization’s capital distributions and certain discretionary bonus payments if the banking organization does not hold a “capital conservation buffer” consisting of a specified amount of common equity Tier 1 capital in addition to the amount necessary to meet its minimum risk-based capital requirements. For community banking organizations, the rules will be phased in beginning in 2015 and 2016. The Company is diligently assessing the impact of this rulemaking on our capital and the amount of capital required to support our business, which could adversely affect our results of operations and financial condition.

The soundness of other financial institutions could adversely affect us.

Our ability to engage in routine funding transactions could be adversely affected by the actions and commercial soundness of other financial institutions. Financial services institutions are interrelated as a result of trading, clearing, counterparty, or other relationships. As a result, defaults by, or even rumors or questions about, one or more financial services institutions, or the financial services industry, generally, have led to market-wide liquidity problems and could lead to losses or defaults by us or by other institutions. Many of these transactions expose us to credit risk in the event of default of our counterparty or client. In addition, our credit risk may be exacerbated when the collateral held by us cannot be liquidated at prices sufficient to recover the full amount of the financial instrument exposure due to us. There is no assurance that any such losses would not materially and adversely affect our results of operations and the value of, or market for, our Common Stock.

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

The Company announced an open ended program on August 13, 2003, by which management was authorized to repurchase an unlimited number of shares of the Company’s Common Stock in the open market and through privately negotiated transactions. There were no share repurchase transactions conducted during the second quarter of 2013.

ITEM 3 – DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4 – MINE SAFETY DISCLOSURES

None.

ITEM 5 - OTHER INFORMATION

None.

HAMPTON ROADS BANKSHARES, INC.

PART II. OTHER INFORMATION

ITEM 6 – EXHIBITS

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

10.1 Employment Agreement, dated May 22, 2013, between Donna W. Richards and Bank of Hampton Roads, Inc.*

31.1 The Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer.*

31.2 The Rule 13a-14(a)/15d-14(a) Certification of Interim Chief Financial Officer.*

32.1 Statement of Chief Executive Officer and Interim Chief Financial Officer Pursuant to 18 U.S.C. Section 1350.*

101 The following materials from the Hampton Roads Bankshares, Inc. Quarterly Report on Form 10-Q for the quarter ended June 30, 2013 formatted in eXtensible Business Reporting Language: (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Operations, (iii) Consolidated Statements of Comprehensive Income (Loss), (iv) Consolidated Statement of Changes in Shareholders’ Equity, (v) Consolidated Statements of Cash Flows, and (vi) Notes to Consolidated Financial Statements.*

*Filed herewith

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.



	HAMPTON ROADS BANKSHARES, INC.
	(Registrant)


DATE: August 14, 2013	/s/ Thomas B. Dix III________________________
	Thomas B. Dix III
	Interim Chief Financial Officer

Positive
Negative
Uncertain
Constraining
Legalese
Litigous
Readability	H.S. freshman Avg

Xenith Bankshares (HMPR) Inactive 10-Q2013 Q2 Quarterly report

Content analysis