Xenith Bankshares (HMPR) 10-Q 2014 Q1 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 March 31, 2014

Commission File Number: 001-32968

HAMPTON ROADS BANKSHARES, INC.

(Exact name of registrant as specified in its charter)

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

641 Lynnhaven Parkway, Virginia Beach, 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 ☒No ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  

Yes☒No ☐

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

Large accelerated filer ☐	Accelerated filer ☐
Non-accelerated filer ☐	Smaller reporting company ☒
(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 ☐    No ☒

The number of shares outstanding of the issuer’s common stock as of April  30, 2014 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
March 31, 2014
December 31, 2013
Consolidated Statements of Operations	4
Three months ended March 31, 2014 and 2013
Consolidated Statements of Comprehensive Income	5
Three months ended March 31, 2014 and 2013
Consolidated Statement of Changes in Shareholders’ Equity	6
Three months ended March 31, 2014
Consolidated Statements of Cash Flows	7
Three months ended March 31, 2014 and 2013
Notes to Consolidated Financial Statements	8
ITEM 2 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION	33
ITEM 3 – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	47
ITEM 4 – CONTROLS AND PROCEDURES	48
PART II – OTHER INFORMATION
ITEM 1 – LEGAL PROCEEDINGS	49
ITEM 1A – RISK FACTORS	49
ITEM 2 – UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	58
ITEM 3 – DEFAULTS UPON SENIOR SECURITIES	58
ITEM 4 – MINE SAFETY DISCLOSURES	58
ITEM 5 – OTHER INFORMATION	59
ITEM 6 – EXHIBITS	59
SIGNATURES	60

2

HAMPTON ROADS BANKSHARES, INC.

PART I.  FINANCIAL INFORMATION

Item 1.  Financial Statements

CONSOLIDATED BALANCE SHEETS

(in thousands, except share data)
(unaudited)	March 31, 2014		December 31, 2013
Assets:
Cash and due from banks	$	17,568	$	18,806
Interest-bearing deposits in other banks		698		654
Overnight funds sold and due from Federal Reserve Bank ("FRB")		89,866		42,841
Investment securities available for sale, at fair value		318,374		325,484
Restricted equity securities, at cost		16,419		17,356
Loans held for sale		20,544		25,087
Loans		1,349,743		1,384,531
Allowance for loan losses		(31,260)		(35,031)
Net loans		1,318,483		1,349,500
Premises and equipment, net		66,565		67,146
Interest receivable		4,567		4,811
Other real estate owned and repossessed assets,
net of valuation allowance		27,619		36,665
Intangible assets, net		1,288		1,437
Bank-owned life insurance		49,773		50,802
Other assets		13,848		9,683
Totals assets	$	1,945,612	$	1,950,272
Liabilities and Shareholders' Equity:
Deposits:
Noninterest-bearing demand	$	241,748	$	245,409
Interest-bearing:
Demand		605,697		600,315
Savings		58,873		62,283
Time deposits:
Less than $100		325,357		324,635
$100 or more		286,236		290,686
Total deposits		1,517,911		1,523,328
Federal Home Loan Bank borrowings		188,958		194,178
Other borrowings		29,086		28,983
Interest payable		6,341		6,025
Other liabilities		13,524		13,912
Total liabilities		1,755,820		1,766,426
Commitments and contingencies
Shareholders' equity:
Preferred stock, 1,000,000 shares authorized; none issued
and outstanding		-		-
Common stock, $0.01 par value; 1,000,000,000 shares
authorized; 170,263,264 and 170,263,264 shares issued
and outstanding on March 31, 2014 and December 31, 2013,
respectively		1,703		1,703
Capital surplus		587,786		587,424
Retained deficit		(401,005)		(404,864)
Accumulated other comprehensive income (loss), net of tax		1,130		(865)
Total shareholders' equity before non-controlling interest		189,614		183,398
Non-controlling interest		178		448
Total shareholders' equity		189,792		183,846
Total liabilities and shareholders' equity	$	1,945,612	$	1,950,272
See accompanying notes to consolidated financial statements.

3

HAMPTON ROADS BANKSHARES, INC.

PART I.  FINANCIAL INFORMATION

Item 1.  Financial Statements

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share data)	Three Months Ended
(unaudited)	March 31, 2014		March 31, 2013
Interest Income:
Loans, including fees	$	15,692	$	17,673
Investment securities		2,234		1,815
Overnight funds sold and due from FRB		32		42
Total interest income		17,958		19,530
Interest Expense:
Deposits:
Demand		623		509
Savings		8		10
Time deposits:
Less than $100		772		1,000
$100 or more		737		1,008
Interest on deposits		2,140		2,527
Federal Home Loan Bank borrowings		422		486
Other borrowings		441		587
Total interest expense		3,003		3,600
Net interest income		14,955		15,930
Provision for loan losses		100		-
Net interest income
after provision for loan losses		14,855		15,930
Noninterest Income:
Mortgage banking revenue		1,811		5,964
Service charges on deposit accounts		1,159		1,217
Income from bank-owned life insurance		3,216		373
Gain on sale of investment securities available for sale
(includes $67 and $0 accumulated other
comprehensive income reclassifications for unrealized
net gains on available for sale securities during the three months ended
March 31, 2014, and March 31, 2013, respectively)		67		-
Loss on sale of premises and equipment		(13)		(127)
Impairment of premises and equipment		-		(2,825)
Gain (loss) on sale of other real estate owned and repossessed assets		221		(234)
Other than temporary impairment of other real estate owned and repossessed assets		(336)		(670)
Visa check card income		593		596
Rental Income		153		152
Other		431		982
Total noninterest income		7,302		5,428
Noninterest Expense:
Salaries and employee benefits		9,567		10,956
Professional and consultant fees		1,232		893
Occupancy		1,719		1,802
FDIC insurance		901		1,018
Data processing		1,147		797
Problem loan and repossessed asset costs		433		480
Equipment		373		464
Directors' and regional board fees		387		241
Advertising and marketing		254		260
Other		2,504		2,521
Total noninterest expense		18,517		19,432
Income before provision for income taxes		3,640		1,926
Provision for income taxes		7		-
Net income		3,633		1,926
Net income (loss) attributable to non-controlling interest		(226)		1,294
Net income attributable to
Hampton Roads Bankshares, Inc.	$	3,859	$	632
Per Share:
Cash dividends declared	$	-	$	-
Basic income	$	0.02	$	0.00
Diluted income	$	0.02	$	0.00
See accompanying notes to consolidated financial statements.

4

HAMPTON ROADS BANKSHARES, INC.

PART I.  FINANCIAL INFORMATION

Item 1.  Financial Statements

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(in thousands)		Three Months Ended
(unaudited)		March 31, 2014				March 31, 2013
Net income			$	3,633			$	1,926
Other comprehensive income (loss),
net of tax
Change in unrealized gain (loss)
on securities available for sale	$	2,062			$	(239)
Reclassification adjustment for
securities gain included in
net income		(67)				-
Other comprehensive income (loss),
net of tax				1,995				(239)
Comprehensive income				5,628				1,687
Comprehensive income (loss) attributable
to non-controlling interest				(226)				1,294
Comprehensive income attributable to
Hampton Roads Bankshares, Inc.			$	5,854			$	393
See accompanying notes to consolidated financial statements.

5

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, 2013	170,263,264	$	1,703	$	587,424	$	(404,864)	$	(865)	$	448	$	183,846
Net income	-		-		-		3,859		-		(226)		3,633
Other comprehensive income	-		-		-		-		1,995		-		1,995
Share-based compensation expense	-		-		362		-		-		-		362
Distributed non-controlling interest	-		-		-		-		-		(44)		(44)
Balance at March 31, 2014	170,263,264	$	1,703	$	587,786	$	(401,005)	$	1,130	$	178	$	189,792
See accompanying notes to consolidated financial statements.

6

HAMPTON ROADS BANKSHARES, INC.

PART I.  FINANCIAL INFORMATION

Item 1.  Financial Statements

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)	Three Months Ended
(unaudited)	March 31, 2014		March 31, 2013
Operating Activities:
Net income	$	3,633	$	1,926
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation and amortization		833		901
Amortization of intangible assets and fair value adjustments		46		600
Provision for loan losses		100		-
Proceeds from mortgage loans held for sale		86,389		209,850
Originations of mortgage loans held for sale		(81,846)		(177,628)
Share-based compensation expense		362		161
Net amortization of premiums and accretion of discounts
on investment securities available for sale		526		718
Income from bank-owned life insurance		(3,216)		(373)
Gain on sale of investment securities available for sale		(67)		-
Loss on sale of premises and equipment		13		127
Impairment of premises and equipment		-		2,825
(Gain) loss on sale of other real estate owned and repossessed assets		(221)		234
Other-than-temporary impairment of other real estate owned and repossessed assets		336		670
Changes in:
Interest receivable		244		(294)
Other assets		(2,146)		7,803
Interest payable		316		299
Other liabilities		(388)		42
Net cash provided by operating activities		4,914		47,861
Investing Activities:
Proceeds from maturities and calls of investment
securities available for sale		8,405		18,747
Proceeds from sale of investment securities available for sale		16,526		-
Purchase of investment securities available for sale		(16,285)		(35,918)
Purchase of restricted equity securities		(25)		(55)
Purchase of premises and equipment		(332)		(279)
Net decrease in loans		30,993		12,074
Proceeds from bank-owned life insurance death benefit		2,226		-
Proceeds from sale of restricted equity securities		962		798
Proceeds from sale of other real estate owned
and repossessed assets, net		8,855		3,305
Proceeds from sale of premises and equipment		70		305
Net cash provided by (used in) investing activities		51,395		(1,023)
Financing Activities:
Net decrease in deposits		(5,417)		(22,607)
Repayments of Federal Home Loan Bank borrowings		(5,017)		(17)
Distributed non-controlling interest		(44)		(1,209)
Net cash used in financing activities		(10,478)		(23,833)
Increase in cash and cash equivalents		45,831		23,005
Cash and cash equivalents at beginning of period		62,301		101,217
Cash and cash equivalents at end of period	$	108,132	$	124,222
Supplemental cash flow information:
Cash paid for interest	$	2,687	$	3,301
Cash (refunded) from income taxes		-		(5,224)
Supplemental non-cash information:
Change in unrealized gain (loss) on securities available for sale	$	1,995	$	(239)
Transfer from other real estate owned and
repossessed assets to loans		901		-
Transfer from loans to other real estate owned
and repossessed assets		825		5,828
Transfers from premises and equipment to other real
estate owned and repossessed assets		-		3,352
See accompanying notes to consolidated financial statements.

7

HAMPTON ROADS BANKSHARES, INC.

PART I.  FINANCIAL INFORMATION

Item 1.  Notes to Consolidated Financial Statements

NOTE A – BASIS OF PRESENTATION

The accompanying unaudited consolidated financial statements of Hampton Roads Bankshares, Inc., (the “Company,” “we,” “us,” or “our”), have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial reporting and with the instructions to Form 10-Q.  Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements.  In the opinion of management, the financial statements reflect all adjustments (consisting of a normal recurring nature) considered necessary for a fair presentation.  The results of operations for the three months ended March 31, 2014 are not necessarily indicative of the results to be expected for the full year.  The Company has two banking subsidiaries, Bank of Hampton Roads (“BOHR”) and Shore Bank (“Shore”, collectively the “Banks”). 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, 2013 (“2013 Form 10-K”). 

Use of Estimates in the Preparation of Financial Statements

The preparation of consolidated financial statements in conformity with U.S. generally accepted accounting principles (“GAAP”) requires management to make assumptions, judgments, and estimates that affect the reported amounts of assets and liabilities, disclosures of contingent assets and liabilities at the date of the consolidated financial statements, and the reported amounts of revenues and expenses during the periods presented.  Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near term are the determination of the allowance for loan losses, the valuation of other real estate owned, determination of fair value for financial instruments, and tax assets, liabilities, and expenses.

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 carryforward, a similar tax loss, or a tax credit carryforward.  This update is effective for years and interim periods within those years beginning after December 15, 2013.  Early adoption is permitted.  The adoption of the new guidance did not have a material impact on the Company’s consolidated financial statements.

In February 2013, the FASB issued ASU 2013-02, Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income.  This update requires 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.  For other 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 update was required 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.

In January 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 Liabilities 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 update was required 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.

In January 2014, the FASB issued ASU 2014-04, Receivables – Troubled Debt Restructurings by Creditors (Subtopic 310-40): Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon a Foreclosure, which clarifies when banks and similar institutions (creditors) should reclassify mortgage loans collateralized by residential real estate properties from the loan portfolio to other real estate owned (OREO). The ASU defines when an in-substance repossession or foreclosure has occurred and when a creditor is considered to

8

HAMPTON ROADS BANKSHARES, INC.

PART I.  FINANCIAL INFORMATION

Item 1.  Notes to Consolidated Financial Statements

have received physical possession of residential real estate property collateralizing a consumer mortgage loan. This ASU allows for prospective or modified retrospective application. The effective date for public business entities is for annual periods, and interim periods within those annual periods, beginning after December 15, 2014. Early adoption is permitted.

NOTE B - Regulatory Matters

Effective June 9, 2010, the Company and its banking subsidiary, 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” or ”BFI”).  The Written Agreement was terminated on February 20, 2014 and the Company and BOHR are no longer subject to its terms and conditions.  Shore was not subject to the Written Agreement.

On March 26, 2014 the Company and BOHR entered into a Memorandum of Understanding (the “MOU”) with the FRB and the BFI. Under the MOU, the Company and BOHR have agreed that they will receive the prior written approval of the FRB and the BFI before, (i) either the Company or BOHR declares or pays dividends of any kind; (ii) the Company makes any payments on its trust preferred securities; (iii) the Company incurs or guarantees any debt; or (iv) the Company purchases or redeems any shares of its stock. In addition, the MOU institutes certain reporting requirements and addresses ongoing regulatory requirements. Shore is not a party to the MOU and is not subject to its restrictions or requirements.

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

NOTE C - Earnings Per Share

The following table shows the basic and diluted earnings (loss) per share calculations for the three months ended March 31, 2014 and 2013.

(in thousands, except share and per share data)	March 31, 2014		March 31, 2013
Net income attributable to
Hampton Roads Bankshares, Inc.	$	3,859	$	632
Shares:
Weighted average number
of common shares outstanding		170,477,548		170,390,149
Dilutive stock awards and warrants		751,215		391,254
Diluted weighted average number of
common shares outstanding		171,228,763		170,781,403
Basic income per share	$	0.02	$	0.00
Diluted income per share	$	0.02	$	0.00

9

HAMPTON ROADS BANKSHARES, INC.

PART I.  FINANCIAL INFORMATION

Item 1.  Notes to Consolidated Financial Statements

NOTE D - Investment Securities

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

	March 31, 2014
			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
(in thousands)	Cost		Gains		Losses		Value
U.S. agency securities	$	20,237	$	578	$	4	$	20,811
State and municipal securities		525		32		-		557
Corporate bonds		14,483		320		14		14,789
Mortgage-backed securities -
Agency		222,844		2,567		2,619		222,792
Non-agency		7,840		112		6		7,946
Asset-backed securities		50,346		150		489		50,007
Equity securities		969		503		-		1,472
Total investment securities
available for sale	$	317,244	$	4,262	$	3,132	$	318,374

	December 31, 2013
			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
(in thousands)	Cost		Gains		Losses		Value
U.S. agency securities	$	21,500	$	573	$	75	$	21,998
State and municipal securities		525		12		-		537
Corporate bonds		17,212		338		8		17,542
Mortgage-backed securities -
Agency		227,662		2,367		4,184		225,845
Non-agency		8,150		62		32		8,180
Asset-backed securities		50,330		129		588		49,871
Equity securities		970		541		-		1,511
Total investment securities
available for sale	$	326,349	$	4,022	$	4,887	$	325,484

10

HAMPTON ROADS BANKSHARES, INC.

PART I.  FINANCIAL INFORMATION

Item 1.  Notes to Consolidated Financial Statements

Unrealized losses

The following tables reflect the fair values and gross unrealized losses aggregated by investment category and length of time that the individual securities have been in a continuous unrealized loss position at March 31, 2014 and December 31, 2013.

		March 31, 2014
(in thousands)		Less than 12 Months				12 Months or More				Total
				Unrealized				Unrealized				Unrealized
Description of Securities		Fair Value		Loss		Fair Value		Loss		Fair Value		Loss
U.S. agency securities	$	3,315	$	4	$	-	$	-	$	3,315	$	4
Corporate bonds		3,687		14		-		-		3,687		14
Mortgage-backed securities -
Agency		98,333		2,423		3,180		196		101,513		2,619
Non-agency		1,066		6		-		-		1,066		6
Asset-backed securities		32,465		489		-		-		32,465		489
	$	138,866	$	2,936	$	3,180	$	196	$	142,046	$	3,132

		December 31, 2013
(in thousands)		Less than 12 Months				12 Months or More				Total
				Unrealized				Unrealized				Unrealized
Description of Securities		Fair Value		Loss		Fair Value		Loss		Fair Value		Loss
U.S. agency securities	$	5,793	$	75	$	-	$	-	$	5,793	$	75
Corporate bonds		3,706		8		-		-		3,706		8
Mortgage-backed securities -
Agency		118,921		3,946		3,221		238		122,142		4,184
Non-agency		2,127		32		-		-		2,127		32
Asset-backed securities		36,244		588		-		-		36,244		588
	$	166,791	$	4,649	$	3,221	$	238	$	170,012	$	4,887

Debt securities with unrealized losses totaling $3.1 million at March 31, 2014 included one U.S. agency security,  two corporate securities, thirty-eight mortgage-backed agency securities, three mortgage-backed non-agency securities, and twelve asset-backed securities, compared with unrealized losses totaling $4.9 million at December 31, 2013 which included two U.S. agency securities, two corporate securities, forty-five mortgage-backed agency securities, six mortgage-backed non-agency securities, and thirteen asset-backed securities. The severity and duration of unrealized losses is expected to fluctuate with market interest rates.

Other-than-temporary impairment (“OTTI”)

During the three months ended March 31, 2014 and 2013, no securities were determined to be other-than-temporarily impaired and no impairment losses were recognized through noninterest income.

Management evaluates securities for OTTI at least on a quarterly basis, and more frequently when economic or market conditions warrant such an evaluation.  In determining OTTI, management considers many factors, including (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, (3) whether the market decline was affected by macroeconomic conditions, and (4) whether the Company has the intent to sell the security or it is more likely than not that it will be required to sell the security before its anticipated recovery.  The assessment of whether an other-than-temporary decline exists involves a high degree of subjectivity and judgment and is based on the information available to management at a point in time.

When OTTI occurs, the amount of the OTTI recognized in earnings depends on whether an entity intends to sell the security or it is more likely than not it will be required to sell the security before recovery of its amortized cost basis,

11

HAMPTON ROADS BANKSHARES, INC.

PART I.  FINANCIAL INFORMATION

Item 1.  Notes to Consolidated Financial Statements

less any current period credit loss.  If an entity intends to sell or it is more likely than not that it will be required to sell the security before recovery of its amortized cost basis, less any current period credit loss, the OTTI shall be recognized in earnings equal to the entire difference between the investment’s amortized cost basis and its fair value at the balance sheet date.  If an entity does not intend to sell the security and it is not more likely than not that the entity will be required to sell the security before recovery of its amortized cost basis less any current period loss, the OTTI shall be separated into the amount representing the credit loss and the amount related to all other factors.  The amount of the total OTTI related to the credit loss is determined based on the present value of cash flows expected to be collected and is recognized in earnings.  The amount of the total OTTI related to other factors is recognized in other comprehensive income, net of applicable taxes.  The previous amortized cost basis less the OTTI recognized in earnings becomes the new amortized cost basis of the investment.

Maturities of investment securities

The amortized cost and fair value by contractual maturity of investment securities available for sale that are not determined to be other-than-temporarily impaired at March  31, 2014 and December 31, 2013  are shown below. 

Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.  Mortgage-backed and asset-backed securities, which are not due at a single maturity date, and equity securities, which do not have contractual maturities, are shown separately. 

	March 31, 2014				December 31, 2013
	Amortized				Amortized
(in thousands)	Cost		Fair Value		Cost		Fair Value
Due in one year or less	$	-	$	-	$	-	$	-
Due after one year
but less than five years		12,952		13,198		13,187		13,440
Due after five years
but less than ten years		6,078		6,372		9,311		9,659
Due after ten years		16,215		16,587		16,739		16,978
Mortgage-backed securities -
Agency		222,844		222,792		227,662		225,845
Non-agency		7,840		7,946		8,150		8,180
Asset-backed securities		50,346		50,007		50,330		49,871
Equity securities		969		1,472		970		1,511
Total available-for-sale securities	$	317,244	$	318,374	$	326,349	$	325,484

Federal Home Loan Bank (“FHLB”)

The Company’s investment in FHLB stock totaled $10.2 million at March 31, 2014 and $11.1 million at December 31, 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 no active market or exchange for the stock other than the FHLB or member institutions.  Therefore, when evaluating FHLB stock for impairment, its value is based on ultimate recoverability of the par value rather than by recognizing temporary declines in value.  The Company does not consider this investment to be other-than-temporarily impaired at March 31, 2014 and December 31, 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 March 31, 2014 and December 31, 2013.  FRB stock comprises the majority of this amount and is generally viewed as a long-term investment and as a restricted investment security as it is required to be held to effect membership in the Federal Reserve System.  It is carried at cost as there is not an active market or exchange for the stock other than the FRB or member institutions.  The Company does not consider these investments to be other-than-temporarily impaired at March 31, 2014 and December 31, 2013, and no impairment has been recognized.

12

HAMPTON ROADS BANKSHARES, INC.

PART I.  FINANCIAL INFORMATION

Item 1.  Notes to Consolidated Financial Statements

NOTE E - Loans and Allowance for Loan Losses

The Company offers a full range of commercial, real estate, and consumer loans.  Our loan portfolio is comprised of the following categories:  commercial and industrial, construction, real estate-commercial mortgage, real estate-residential mortgage, and installment.  Our primary lending objective is to meet business and consumer needs in our market areas while maintaining our standards of profitability and credit quality and enhancing client relationships.  All lending decisions are based upon a thorough evaluation of the financial strength and credit history of the borrower and the quality and value of the collateral securing the loan.  Personal guarantees are required on most loans; however, prudent exceptions are made on occasion based upon the financial viability of the borrowing entity or the underlying project that is being financed.

The total of our loans by segment at March 31, 2014 and December 31, 2013 are as follows.

(in thousands)	March 31, 2014		December 31, 2013
Commercial and Industrial	$	206,130	$	225,492
Construction		149,067		158,473
Real estate - commercial mortgage		588,480		590,475
Real estate - residential mortgage		355,074		354,035
Installment		52,439		57,623
Deferred loan fees and related costs		(1,447)		(1,567)
Total loans	$	1,349,743	$	1,384,531

Allowance for Loan Losses

A rollforward of the activity within the allowance for loan losses by loan type and recorded investment in loans for the three months ended March 31, 2014, and 2013 is as follows.

	March 31, 2014
					Real Estate
	Commercial				Commercial		Residential
(in thousands)	and Industrial		Construction		Mortgage		Mortgage			Installment		Unallocated		Total
Allowance for loan losses:
Beginning balance	$	2,404	$	9,807	$	10,135	$	7,914		$	521	$	4,250	$	35,031
Charge-offs		(132)		(2,824)		(1,630)		(501)			(80)		-		(5,167)
Recoveries		97		664		217		250	-		68		-		1,296
Provision		587		(1,176)		(715)		800			961		(357)		100
Ending balance	$	2,956	$	6,471	$	8,007	$	8,463		$	1,470	$	3,893	$	31,260
Ending balance:  attributable to
loans individually evaluated
for impairment	$	1,364	$	3,108	$	2,979	$	3,753		$	507			$	11,711
Recorded investment: loans
individually evaluated for
impairment	$	3,567	$	11,454	$	30,561	$	24,052		$	1,256
Ending balance:  attributable to
loans collectively evaluated
for impairment	$	1,592	$	3,363	$	5,028	$	4,710		$	963	$	3,893	$	19,549
Recorded investment: loans
collectively evaluated for
impairment	$	202,563	$	137,613	$	557,919	$	331,022		$	51,183

13

HAMPTON ROADS BANKSHARES, INC.

PART I.  FINANCIAL INFORMATION

Item 1.  Notes to Consolidated Financial Statements

		March 31, 2013
					Real Estate
	Commercial				Commercial		Residential
(in thousands)	and Industrial		Construction		Mortgage		Mortgage		Installment		Unallocated		Total
Allowance for loan losses:
Beginning balance	$	6,253	$	15,728	$	9,862	$	9,953	$	887	$	5,699	$	48,382
Charge-offs		(2,199)		(1,087)		(423)		(2,129)		(185)		-		(6,023)
Recoveries		674		226		273		84		93		-		1,350
Provision		114		2		(2,397)		1,355		243		683		-
Ending balance	$	4,842	$	14,869	$	7,315	$	9,263	$	1,038	$	6,382	$	43,709
Ending balance:  attributable to
loans individually evaluated
for impairment	$	2,271	$	5,384	$	1,678	$	3,729	$	53			$	13,115
Recorded investment: loans
individually evaluated for
impairment	$	16,542	$	29,370	$	37,428	$	27,952	$	310
Ending balance:  attributable to
loans collectively evaluated
for impairment	$	2,571	$	9,485	$	5,637	$	5,534	$	985	$	6,382	$	30,594
Recorded investment: loans
collectively evaluated for
impairment	$	223,021	$	170,412	$	515,922	$	336,791	$	55,986

Impaired Loans

Total impaired loans were $70.9 million and $67.6 million at March 31, 2014, and December 31, 2013, respectively. Impaired loans increased by $3.3 million in the quarter primarily as a result of three credit relationships that became impaired and subsequently designated as nonperforming loans during the quarter.

Collateral dependent impaired loans were $65.3 million and $61.9 million at March 31, 2014, and December 31, 2013, respectively, and are measured at the fair value of the underlying collateral less costs to sell. Impaired loans for which no allowance is provided totaled $38.2 million and $34.7 million at March 31, 2014, and December 31, 2013. 

Loans written down to their estimated fair value of collateral less the costs to sell account for $8.6 million and $9.4 million of the impaired loans for which no allowance has been provided as of March 31, 2014, and December 31, 2013, respectively, and the weighted average age of appraisals for these loans is 0.63 years at March 31, 2014. 

The remaining impaired loans for which no allowance is provided are expected to be fully covered by the fair value of the collateral, and therefore, no loss is expected on these loans. 

The following charts show recorded investment, unpaid balance, and related allowance, as of March 31, 2014 and December 31, 2013, as well as average investment and interest recognized for the three months ended March 31, 2014 and 2013, for impaired loans by major segment and class.

14

HAMPTON ROADS BANKSHARES, INC.

PART I.  FINANCIAL INFORMATION

Item 1.  Notes to Consolidated Financial Statements

							Three Months Ended
	March 31, 2014						March 31, 2014
	Recorded		Unpaid		Related		Average		Interest
(in thousands)	Investment		Balance		Allowance		Investment		Recognized
With no related
allowance recorded:
Commercial & Industrial	$	1,766	$	2,654	$	-	$	1,911	$	3
Construction
1-4 family residential
construction		-		-		-		-		-
Commercial construction		6,365		11,537		-		6,946		13
Real estate
Commercial Mortgage
Owner occupied		16,170		17,277		-		16,590		94
Non-owner occupied		2,822		5,591		-		2,927		13
Residential Mortgage
Secured by 1-4 family
1st lien		8,924		10,227		-		9,557		27
Junior lien		2,086		3,235		-		2,319		3
Installment		62		127		-		65		-
	$	38,195	$	50,648	$	-	$	40,315	$	153
With an allowance recorded:
Commercial & Industrial	$	1,801	$	1,933	$	1,364	$	1,840	$	-
Construction
1-4 family residential
construction		-		-		-		-		-
Commercial construction		5,089		5,089		3,108		5,097		18
Real estate
Commercial Mortgage
Owner occupied		7,072		7,072		1,011		7,100		56
Non-owner occupied		4,497		4,517		1,968		5,471		-
Residential Mortgage
Secured by 1-4 family
1st lien		10,195		10,299		2,232		10,217		50
Junior lien		2,847		2,858		1,521		2,865		3
Installment		1,194		1,194		507		1,193		2
	$	32,695	$	32,962	$	11,711	$	33,783	$	129
Total:
Commercial & Industrial	$	3,567	$	4,587	$	1,364	$	3,751	$	3
Construction		11,454		16,626		3,108		12,043		31
Real estate
Commercial mortgage		30,561		34,457		2,979		32,088		163
Residential mortgage		24,052		26,619		3,753		24,958		83
Installment		1,256		1,321		507		1,258		2
Total	$	70,890	$	83,610	$	11,711	$	74,098	$	282

15

HAMPTON ROADS BANKSHARES, INC.

PART I.  FINANCIAL INFORMATION

Item 1.  Notes to Consolidated Financial Statements

								Three Months Ended
	December 31, 2013						March 31, 2013
		Recorded		Unpaid		Related		Average		Interest
(in thousands)		Investment		Balance		Allowance		Investment		Recognized
With no related
allowance recorded:
Commercial & Industrial	$	2,049	$	3,108	$	-	$	4,695	$	4
Construction
1-4 family residential
construction		-		-		-		2,328		-
Commercial construction		6,437		9,398		-		16,338		1
Real estate
Commercial Mortgage
Owner occupied		13,565		14,784		-		15,408		77
Non-owner occupied		2,998		5,767		-		3,633		14
Residential Mortgage
Secured by 1-4 family
1st lien		7,931		9,372		-		16,044		5
Junior lien		1,598		2,805		-		3,947		2
Installment		80		175		-		197		1
	$	34,658	$	45,409	$	-	$	62,590	$	104
With an allowance recorded:
Commercial & Industrial	$	932	$	932	$	505	$	11,955	$	9
Construction
1-4 family residential
construction		-		-		-		-		-
Commercial construction		7,306		7,305		5,108		11,706		52
Real estate
Commercial Mortgage
Owner occupied		6,868		6,945		849		15,377		85
Non-owner occupied		5,609		5,627		3,231		3,234		1
Residential Mortgage
Secured by 1-4 family
1st lien		9,695		9,779		2,221		8,999		89
Junior lien		2,332		2,332		1,178		1,766		6
Installment		158		295		49		115		1
	$	32,900	$	33,215	$	13,141	$	53,152	$	243
Total:
Commercial & Industrial	$	2,981	$	4,040	$	505	$	16,650	$	13
Construction		13,743		16,703		5,108		30,372		53
Real estate
Commercial mortgage		29,040		33,123		4,080		37,652		177
Residential mortgage		21,556		24,288		3,399		30,756		102
Installment		238		470		49		312		2
Total	$	67,558	$	78,624	$	13,141	$	115,742	$	347

16

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.  Our non-performing assets ratio, defined as the ratio of loans 90 days past due and still accruing interest plus nonaccrual loans plus other real estate owned and repossessed assets to gross loans plus loans held for sale plus other real estate owned and repossessed assets was 5.16% and 5.29% at March 31, 2014 and December 31, 2013, respectively. Non-performing assets as of March 31, 2014 and December 31, 2013, were as follows.

(in thousands)	March 31, 2014		December 31, 2013
Loans 90 days past due and still accruing interest	$	298	$	-
Nonaccrual loans, including nonaccrual impaired loans		44,242		39,854
Other real estate owned and repossessed assets		27,619		36,665
Non-performing assets	$	72,159	$	76,519

Nonaccrual Loans

A reconciliation of nonaccrual loans to impaired loans for the three months ended March 31, 2014 and the year ended December 31, 2013 is as follows.

(in thousands)	March 31, 2014		December 31, 2013
Nonaccrual loans, including nonaccrual impaired loans	$	44,242	$	39,854
TDRs on accrual		22,918		23,282
Impaired loans on accrual		3,730		4,422
Total impaired loans	$	70,890	$	67,558

Nonaccrual loans were $44.2 million at March 31, 2014 compared to $39.9 million at December 31, 2013.  If income on nonaccrual loans had been recorded under original terms, $551 thousand and $2.0 million of additional interest income would have been recorded for the three months ended March 31, 2014, and 2013 respectively. 

The following table provides a rollforward of nonaccrual loans for the three months ended March 31, 2014.

					Real Estate
(in thousands)	Commercial & Industrial		Construction		Commercial Mortgage		Residential Mortgage		Installment		Total
Balance at December 31, 2013	$	2,794	$	10,614	$	12,633	$	13,679	$	134	$	39,854
Transfers in		797		1,173		4,169		4,632		1,090		11,861
Transfers to OREO		-		(45)		(143)		(637)		-		(825)
Charge-offs		(132)		(2,824)		(1,630)		(501)		(80)		(5,167)
Payments		(45)		(376)		(324)		(358)		8		(1,095)
Return to accrual		-		-		-		(386)		-		(386)
Loan type reclassification		-		-		-		-		-		-
Balance at March 31, 2014	$	3,414	$	8,542	$	14,705	$	16,429	$	1,152	$	44,242

17

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 as of March 31, 2014 and December 31, 2013 is as follows.

	March 31, 2014
													90 Days or
													More Past
	30-59 Days		60-89 Days		90 Days		Total				Total		Due and
(in thousands)	Past Due		Past Due		Past Due		Past Due		Current		Loans		Accruing
Commercial & Industrial	$	924	$	-	$	3,414	$	4,338	$	201,792	$	206,130	$	-
Construction
1-4 family residential
construction		-		-		-		-		15,968		15,968		-
Commercial construction		409		-		8,542		8,951		124,148		133,099		-
Real estate
Commercial Mortgage
Owner occupied		-		479		8,154		8,633		267,103		275,736		-
Non-owner occupied		287		-		6,551		6,838		305,906		312,744		-
Residential Mortgage
Secured by 1-4 family
1st lien		1,972		49		12,269		14,290		215,339		229,629		-
Junior lien		695		37		4,458		5,190		120,255		125,445		298
Installment		123		119		1,152		1,394		51,045		52,439		-
Deferred loan fees
and related costs		-		-		-		-		(1,447)		(1,447)		-
Total	$	4,410	$	684	$	44,540	$	49,634	$	1,300,109	$	1,349,743	$	298

	December 31, 2013
													90 Days or
													More Past
	30-59 Days		60-89 Days		90 Days		Total				Total		Due and
(in thousands)	Past Due		Past Due		Past Due		Past Due		Current		Loans		Accruing
Commercial & Industrial	$	317	$	-	$	2,794	$	3,111	$	222,381	$	225,492	$	-
Construction
1-4 family residential
construction		298		-		-		298		17,879		18,177		-
Commercial construction		1,031		132		10,614		11,777		128,519		140,296		-
Real estate
Commercial Mortgage
Owner occupied		1,961		360		4,932		7,253		266,661		273,914		-
Non-owner occupied		200		517		7,701		8,418		308,143		316,561		-
Residential Mortgage
Secured by 1-4 family
1st lien		2,983		237		10,877		14,097		209,564		223,661		-
Junior lien		367		2		2,802		3,171		127,203		130,374		-
Installment		1		-		134		135		57,488		57,623		-
Deferred loan fees
and related costs		-		-		-		-		(1,567)		(1,567)		-
Total	$	7,158	$	1,248	$	39,854	$	48,260	$	1,336,271	$	1,384,531	$	-

18

HAMPTON ROADS BANKSHARES, INC.

PART I.  FINANCIAL INFORMATION

Item 1.  Notes to Consolidated Financial Statements

Credit Quality

The following tables provide information on March 31, 2014 and December 31, 2013 about the credit quality of the loan portfolio using the Company’s internal rating system as an indicator. 

	March 31, 2014
			Special				Nonaccrual
(in thousands)	Pass		Mention		Substandard		Loans		Total
Commercial & Industrial	$	181,064	$	19,664	$	1,988	$	3,414	$	206,130
Construction
1-4 family residential
construction		15,545		-		423		-		15,968
Commercial construction		86,450		35,011		3,096		8,542		133,099
Real estate
Commercial Mortgage
Owner occupied		226,422		31,831		9,329		8,154		275,736
Non-owner occupied		287,025		13,952		5,216		6,551		312,744
Residential Mortgage
Secured by 1-4 family
1st lien		182,759		27,554		7,047		12,269		229,629
Junior lien		114,421		4,826		2,038		4,160		125,445
Installment		50,064		1,000		223		1,152		52,439
Deferred loan fees
and related costs		(1,447)		-		-		-		(1,447)
Total	$	1,142,303	$	133,838	$	29,360	$	44,242	$	1,349,743

	December 31, 2013
			Special				Nonaccrual
(in thousands)	Pass		Mention		Substandard		Loans		Total
Commercial & Industrial	$	202,490	$	17,371	$	2,837	$	2,794	$	225,492
Construction
1-4 family residential
construction		17,288		277		612		-		18,177
Commercial construction		87,237		39,298		3,147		10,614		140,296
Real estate
Commercial Mortgage
Owner occupied		224,261		31,615		13,106		4,932		273,914
Non-owner occupied		278,124		23,924		6,812		7,701		316,561
Residential Mortgage
Secured by 1-4 family
1st lien		177,649		26,695		8,440		10,877		223,661
Junior lien		120,143		4,790		2,639		2,802		130,374
Installment		56,289		1,096		104		134		57,623
Deferred loan fees
and related costs		(1,567)		-		-		-		(1,567)
Total	$	1,161,914	$	145,066	$	37,697	$	39,854	$	1,384,531

19

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 March 31, 2014 and December 31, 2013, loans classified as TDRs were $27.8 million and $31.0 million, respectively. The following table shows the loans classified as TDRs at March 31, 2014 and December 31, 2013.

(in thousands except number of contracts)	March 31, 2014			December 31, 2013
		Recorded			Recorded
Troubled Debt Restructurings	Number of Contracts	Investment		Number of Contracts	Investment
Commercial & Industrial	1	$	118	2	$	180
Construction
1-4 family residential construction	-		-	-		-
Commercial construction	13		5,272	14		8,192
Real estate
Commercial Mortgage
Owner occupied	13		15,237	14		15,466
Non-owner occupied	1		270	1		272
Residential Mortgage
Secured by 1-4 family, 1st lien	14		6,504	14		6,561
Secured by 1-4 family, junior lien	5		358	5		361
Installment	1		4	1		4
Total	48	$	27,763	51	$	31,036

Of total TDRs, $22.9 million was accruing and $4.8 million was nonaccruing at March 31, 2014 and $23.3 million was accruing and $7.8 million was nonaccruing at December 31, 2013.  Loans that are on nonaccrual status at the time of the restructuring generally remain on nonaccrual status for approximately six months before management considers whether such loans may return to accrual status.  TDRs in nonaccrual status are returned to accrual status after a period of performance under which the borrower demonstrates the ability and willingness to repay the loan in accordance with the modified terms.  For the three months ended March 31, 2014 $0 of the nonaccrual TDRs were returned to accrual status and for the year ended December 31, 2013, $647 thousand of the nonaccrual TDRs were returned to accrual status. 

The following table shows a rollforward of accruing and nonaccruing TDRs for the three months ended March 31, 2014.

(in thousands)	Accruing		Nonaccruing		Total
Balance at December 31, 2013	$	23,282	$	7,754	$	31,036
Charge-offs		-		(2,727)		(2,727)
Payments		(364)		(410)		(774)
New TDR designation		-		228		228
Release TDR designation		-		-		-
Transfer		-		-		-
Balance at March 31, 2014	$	22,918	$	4,845	$	27,763

The allowance for loan losses allocated to TDRs was $1.8 million and $4.2 million at March 31, 2014 and December 31, 2013, respectively.  The total of TDRs charged off and the allocated portion of allowance for loan losses associated with TDRs charged off were $2.7 million and $2.7 million, respectively, during the three months ended March 31, 2014, and $970 thousand and $632 thousand, respectively, during the year ended December 31, 2013.

At a minimum, TDRs are reported as such during the calendar year in which the restructuring or modification takes place.  In subsequent years, troubled debt restructured loans may be removed from this disclosure classification if

20

HAMPTON ROADS BANKSHARES, INC.

PART I.  FINANCIAL INFORMATION

Item 1.  Notes to Consolidated Financial Statements

the loan did not involve a below market rate concession and the loan is not deemed to be impaired based on the terms specified in the restructuring agreement.

The following table shows a summary of the primary reason and pre- and post-modification outstanding recorded investment for loan modifications that were classified as TDRs during the three months ended March 31, 2014 and March 31, 2013.  These tables include modifications made to existing TDRs as well as new modifications that are considered TDRs for the periods presented.  TDRs made with a below market rate that also include a modification of loan structure are included under rate change.

	March 31, 2014
(in thousands except number of contracts)	Rate					Structure
		Pre-		Post-			Pre-		Post-
		Modification		Modification			Modification		Modification
	Number	Outstanding		Outstanding		Number	Outstanding		Outstanding
	of	Recorded		Recorded		of	Recorded		Recorded
Troubled Debt Restructurings	Contracts	Investment		Investment		Contracts	Investment		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	-		-		-	2		408		226
Secured by 1-4 family, junior lien	-		-		-	1		2		2
Installment	-		-		-	-		-		-
Total	-	$	-	$	-	3	$	410	$	228

	March 31, 2013
(in thousands except number of contracts)	Rate					Structure
		Pre-		Post-			Pre-		Post-
		Modification		Modification			Modification		Modification
	Number	Outstanding		Outstanding		Number	Outstanding		Outstanding
	of	Recorded		Recorded		of	Recorded		Recorded
Troubled Debt Restructurings	Contracts	Investment		Investment		Contracts	Investment		Investment
Commercial & Industrial	-	$	-	$	-	-	$	-	$	-
Construction
1-4 family residential construction	-		-		-	-		-		-
Commercial construction	-		-		-	-		-		-
Real estate
Commercial Mortgage
Owner occupied	-		-		-	2		4,721		4,721
Non-owner occupied	-		-		-	-		-		-
Residential Mortgage
Secured by 1-4 family, 1st lien	-		-		-	1		875		875
Secured by 1-4 family, junior lien	-		-		-	2		51		51
Installment	-		-		-	-		-		-
Total	-	$	-	$	-	5	$	5,647	$	5,647

21

HAMPTON ROADS BANKSHARES, INC.

PART I.  FINANCIAL INFORMATION

Item 1.  Notes to Consolidated Financial Statements

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

(in thousands except number of contracts)	March 31, 2014			March 31, 2013
Troubled Debt Restructurings	Number of	Recorded		Number of	Recorded
That Subsequently Defaulted	Contracts	Investment		Contracts	Investment
Commercial & Industrial	-	$	-	-	$	-
Construction
1-4 family residential construction	-		-	-		-
Commercial construction	-		-	6		1,740
Real estate
Commercial Mortgage
Owner occupied	-		-	-		-
Non-owner occupied	-		-	-		-
Residential Mortgage
Secured by 1-4 family, 1st lien	-		-	1		650
Secured by 1-4 family, junior lien	-		-	-		-
Installment	-		-	-		-
Total	-	$	-	7	$	2,390

Loans that are considered TDRs are considered specifically impaired and the primary consideration for measurement of impairment is the present value of the expected cash flows.  However, given the prevalence of real estate secured loans in the Company’s portfolio of troubled assets, the majority of the Company’s TDR loans are ultimately considered collateral-dependent.  As a practical expedient, impairments are, therefore, calculated based upon the estimated fair value of the underlying collateral and observable market prices for the sale of the respective notes are not considered as a basis for impairment for any of the Company’s loans.

In determining the estimated fair valueof collateral dependent impaired loans, the Company uses third party appraisals and, if necessary, utilizes a proprietary database of its own historical property appraisals in conjunction with external data and applies a relevant discount derived from analysis of appraisals of similar property type, vintage, and geographic location (for example, in situations where the most recent available appraisal is aged and an updated appraisal has not yet been received).

The Company does not participate in any government or company sponsored TDR programs and holds no corresponding assets.  Rather, loans are individually modified in situations where the Company believes it will minimize the probability of losses to the Company.  Additionally, the Company had no commitments to lend additional funds to debtors owing receivables whose terms have been modified in TDRs at March 31, 2014.

NOTE F - Other Real Estate Owned and Repossessed Assets

The following table shows a rollforward of other real estate owned and repossessed assets for the three months ended March 31, 2014.

(in thousands)		Amount
Balance at December 31, 2013	$	36,665
Transfers in (via foreclosure)		825
Sales		(9,756)
Gain on sales		221
Impairments		(336)
Balance at March 31, 2014	$	27,619

22

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 on these assets as of and for the three months ended March 31, 2014 and 2013 is as follows.

(in thousands)	March 31, 2014		March 31, 2013
Balance at beginning of year	$	12,776	$	19,100
Impairments		336		670
Charge-offs		(2,791)		(657)
Balance at end of period	$	10,321	$	19,113

Expenses applicable to other real estate owned and repossessed assets for the three months ended March 31, 2014, and 2013 include the following.

(in thousands)	March 31, 2014		March 31, 2013
(Gains) losses on sale of other real estate owned	$	(221)	$	234
Impairments		336		670
Operating expenses		359		247
Total	$	474	$	1,151

NOTE G - Share-Based Compensation Plans

On October 4, 2011, the Company’s shareholders approved the 2011 Omnibus Incentive Plan (the “Plan”), which 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 11,461,967 remain to be granted as of March 31, 2014.

Stock Options

Outstanding stock options consist of grants made to the Company’s directors and employees under share-based compensation plans that have been approved by the Company’s shareholders.  All outstanding options 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 three months ended March 31, 2014.  A summary of the Company’s stock option activity and related information for the three months ended March 31, 2014 is as follows.

		Weighted			Average
	Options	Average			Intrinsic
	Outstanding	Exercise Price			Value
Balance at December 31, 2013	24,183		392.44		-
Expired	(1,340)		355.41		-
Balance at March 31, 2014	22,843	$	394.62	$	-
Options exercisable at
March 31, 2014	22,556	$	395.74	$	-

Restricted Stock Units

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

23

HAMPTON ROADS BANKSHARES, INC.

PART I.  FINANCIAL INFORMATION

Item 1.  Notes to Consolidated Financial Statements

A summary of the Company’s restricted stock unit activity and related information for the three months ended March 31, 2014 is as follows.

	Number of		Weighted-Average
	Non-Vested		Grant Date
	Stock Awards		Fair Value
Balance at December 31, 2013	1,860,930		1.32
Granted	69,639		1.62
Vested	-		-
Forfeited	-		-
Balance at March 31, 2014	1,930,569	$	1.33

As of March 31, 2014, there was $1.3 million of total unrecognized compensation cost related to restricted stock units.  That cost is expected to be recognized over a weighted-average period of 1.8 years.

Compensation cost relating to share-based awards is accounted for in the consolidated financial statements based on the fair value of the share-based award.  Share-based compensation expense recognized in the consolidated statements of operations for the years ended March 31, 2014, and 2013 was as follows.

(in thousands)	March 31, 2014		March 31, 2013
Expense recognized:
Related to stock options	$	-	$	1
Related to restricted stock units		362		160
Related tax benefit		-		-

NOTE H - Business Segment Reporting

The Company has identified its operating segments by product and subsidiary bank.  The Company’s two community bank subsidiaries, BOHR and Shore, provide loan and deposit services through branches located in Virginia, North Carolina, and Maryland.  In addition to its banking operations, the Company has two additional reportable segments:  Mortgage and Corporate.

The accounting policies of the reportable segments are the same as those described in the summary of significant accounting policies in the 2013 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. 

24

HAMPTON ROADS BANKSHARES, INC.

PART I.  FINANCIAL INFORMATION

Item 1.  Notes to Consolidated Financial Statements

The following tables show certain financial information as of and for the three months ended March 31, 2014 and 2013 for each segment and in total.

(in thousands)	Total		Elimination		BOHR		Shore		Mortgage		Corporate
Three Months Ended March 31, 2014
Net interest income (loss)	$	14,955	$	-	$	12,385	$	2,921	$	89	$	(440)
Provision for loan losses		100	-			(200)		300	-		-
Net interest income (loss)
after provision for loan losses		14,855		-		12,185		3,221		89		(440)
Noninterest income		7,302		(60)		4,933		618		1,810		1
Noninterest expense		18,517		(61)		12,357		2,974		2,360		887
Income (loss) before provision
for income taxes (benefit)		3,640		1		4,761		865		(461)		(1,326)
Provision for income taxes		7		-		-		7		-		-
Net income (loss)		3,633		1		4,761		858		(461)		(1,326)
Net income attributable to
non-controlling interest		(226)		-		-		-		(226)		-
Net income (loss) attributable to
Hampton Roads Bankshares, Inc.	$	3,859	$	1	$	4,761	$	858	$	(235)	$	(1,326)
Total assets at March 31, 2014	$	1,945,612	$	(273,765)	$	1,635,861	$	325,914	$	31,980	$	225,622

(in thousands)
Three Months Ended March 31, 2013	Total		Elimination		BOHR		Shore		Mortgage		Corporate
Net interest income (loss)	$	15,930	$	-	$	13,279	$	2,889	$	200	$	(438)
Provision for loan losses		-		-		(145)		145		-		-
Net interest income (loss)
after provision for loan losses		15,930		-		13,424		2,744		200		(438)
Noninterest income		5,428		(62)		(828)		(22)		5,963		377
Noninterest expense		19,432		(62)		12,616		2,849		3,533		496
Income (loss) before provision
for income taxes (benefit)		1,926		-		(20)		(127)		2,630		(557)
Provision for income taxes		-		-		-		-		-		-
Net income (loss)		1,926		-		(20)		(127)		2,630		(557)
Net income attributable to
non-controlling interest		1,294		-		-		-		1,294		-
Net income (loss) attributable to
Hampton Roads Bankshares, Inc.	$	632	$	-	$	(20)	$	(127)	$	1,336	$	(557)
Total assets at March 31, 2013	$	2,032,342	$	(302,330)	$	1,731,451	$	317,404	$	62,806	$	223,011

NOTE I - Derivative Instruments

Derivatives are a financial instrument whose value is based on one or more underlying assets.  The Company originated residential mortgage loans for sale into the secondary market on both a best efforts and (from September 2012 to December 2013) on a mandatory delivery basis.  In connection with the underwriting process, the Company enters into commitments to lock-in the interest rate of the loan with the borrower prior to funding (“interest rate lock commitments”).  Generally, such interest rate lock commitments are for periods less than 60 days.  These interest rate lock commitments are considered derivatives.  The Company manages its exposure to changes in fair value associated with these interest rate lock commitments by entering into simultaneous agreements to sell the residential loans to third party investors shortly after their origination and funding.  At March 31, 2014 and at December 31, 2013 the Company had loans held for sale of $20.5 million and $25.1 million, respectively.

25

HAMPTON ROADS BANKSHARES, INC.

PART I.  FINANCIAL INFORMATION

Item 1.  Notes to Consolidated Financial Statements

Under the contractual relationship in the best efforts method, the Company is obligated to sell the loans only if the loans close.  As a result of the terms of these contractual relationships, the Company is not exposed tochanges in fair value nor will it realize gains related to its rate-lock commitments due to subsequent changes in interest rates.  At March 31, 2014 and at December 31, 2013, the Company had rate-lock commitments to originate residential mortgage loans (unfunded par amount of loans) on a best efforts basis in the amounts of $49.8 million and $35.6 million, respectively. 

From September 2012to December 2013, the Company sold some of its mortgage loan production on a mandatory delivery basis and using derivative instruments (essentially forward delivery commitments and To-Be-Announced securities) to manage the resulting interest rate risk.  These derivatives were entered into as balance sheet risk management instruments, and therefore, were not designated as an accounting hedge.  Under the mandatory delivery approach, residential mortgage loans held for sale and commitments to borrowers to originate loans at agreed upon interest rates exposed the Company to changes in market rates and conditions subsequent to the interest rate lock commitment until the loans are delivered to the investor.    Also, the decrease in the carrying value of the underlying loans and interest rate lock commitments totaled $247 thousand. Gains and losses on the Company’s derivative instruments are included within mortgage banking revenue on the Consolidated Statements of Operations. 

Additionally, to meet the needs of its commercial customers, the Company uses interest rate swaps to manage its interest rate risk.  Derivative contracts are executed between the Company and certain commercial loan customers with offsetting positions to dealers under a back-to-back swap program enabling the commercial loan customers to effectively exchange variable-rate interest payments under their existing obligations for fixed-rate interest payments.  For the three months ended March 31, 2014 and 2013, the Company recorded a gain totaling $79 thousand and $203 thousand, respectively, related to trading income on the interest rate swaps included in the back-to-back swap program that was included within other noninterest income on the Consolidated Statements of Operations.

NOTE J - Fair Value Measurements

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

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

Level 2 – Observable inputs other than Level 1 prices, such as quoted prices for similar assets and liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.  Level 2 assets and liabilities include debt securities with quoted prices that are traded less frequently than exchange-traded instruments and derivative contracts whose values are determined using a pricing model with inputs that are observable in the market or can be derived principally from or corroborated by observable market data. 

Level 3 – Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.  Level 3 assets and liabilities include values that are determined using pricing models, discounted cash flow methodologies, or similar techniques as well as assets and liabilities for which the determination of fair value requires significant management judgment or estimation. 

The categorization of an asset or liability within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement.

Recurring Basis

The Company measures or monitors certain of its assets on a fair value basis.  Fair value is used on a recurring basis for those assets and liabilities for which an election was made as well as for certain assets and liabilities in which fair value is the primary basis of accounting.

26

HAMPTON ROADS BANKSHARES, INC.

PART I.  FINANCIAL INFORMATION

Item 1.  Notes to Consolidated Financial Statements

The following tables reflect the fair value of assets measured and recognized at fair value on a recurring basis in the consolidated balance sheets at March 31, 2014 and December 31, 2013.

(in thousands)			Fair Value Measurements at Reporting Date Using
Assets	March 31, 2014		Level 1		Level 2		Level 3
Investment securities available for sale
U.S. agency securities	$	20,811	$	-	$	20,811	$	-
State and municipal securities		557		-		557		-
Corporate bonds		14,789		-		14,789		-
Mortgage-backed securities -
Agency		222,792		-		222,792		-
Non-agency		7,946		-		7,946		-
Asset-backed securities		50,007		-		50,007		-
Equity securities		1,472		1,183		-		289
Total investment securities
available for sale		318,374		1,183		316,902		289
Other assets
Interest rate lock commitments		597		-		-		597
Interest rate swaps		897		-		897		-
Total assets	$	319,868	$	1,183	$	317,799	$	886
Other Liabilities
Interest rate swaps	$	897	$	-	$	897	$	-
Total liabilities	$	897	$	-	$	897	$	-

(in thousands)			Fair Value Measurements at Reporting Date Using
Assets	December 31, 2013		Level 1		Level 2		Level 3
Investment securities available for sale
U.S. agency securities	$	21,998	$	-	$	21,998	$	-
State and municipal securities		537		-		537		-
Corporate bonds		17,542		-		17,542		-
Mortgage-backed securities -
Agency		225,845		-		225,845		-
Non-agency		8,180		-		8,180		-
Asset-backed securities		49,871		-		49,871		-
Equity securities		1,511		1,222		-		289
Total investment securities
available for sale		325,484		1,222		323,973		289
Other assets
Interest rate lock commitments		844		-		-		844
Interest rate swaps		986		-		986		-
Total assets	$	327,314	$	1,222	$	324,959	$	1,133
Other Liabilities
Interest rate swaps	$	986	$	-	$	986	$	-
Total liabilities	$	986	$	-	$	986	$	-

27

HAMPTON ROADS BANKSHARES, INC.

PART I.  FINANCIAL INFORMATION

Item 1.  Notes to Consolidated Financial Statements

The following table shows a rollforward of recurring fair value measurements categorized with Level 3 of the fair value hierarchy for the three months ended March 31, 2014 and 2013.

	Activity in Level 3				Activity in Level 3
	Fair Value Measurements				Fair Value Measurements
(in thousands)	Three Months Ended March 31, 2014				Three Months Ended March 31, 2013
	Investment		Derivative		Investment		Derivative
	Securities		Loan		Securities		Loan
Description	Available for Sale		Commitments		Available for Sale		Commitments
Beginning of period balance	$	289	$	844	$	289	$	2,040
Unrealized gains included in:
Earnings		-		-		-		-
Other comprehensive income		-		-		-		-
Purchases		-		-		-		-
Sales		-		-		-		-
Issuances		-		-		-		-
Settlements		-		(247)		-		(458)
End of period balance	$	289	$	597	$	289	$	1,582

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

The following describes the valuation techniques used to estimate fair value for our assets and liabilities that are measured on a recurring basis.

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

28

HAMPTON ROADS BANKSHARES, INC.

PART I.  FINANCIAL INFORMATION

Item 1.  Notes to Consolidated Financial Statements

ongoing basis but are subject to fair value adjustments in certain circumstances (for example, when there is evidence of impairment and an allowance is established to adjust the asset to its estimated fair value).  The adjustments are based on appraisals of underlying collateral or other observable market prices when current appraisals or observable market prices are available.  Where we do not have an appraisal that is less than 12 months old, an existing appraisal or other valuation would be utilized after discounting it to reflect current market conditions, and, as such, may include significant management assumptions and input with respect to the determination of fair value. 

To assist in the discounting process, a valuation matrix was developed to provide valuation guidance for collateral dependent loans and other real estate owned where it was deemed that an existing appraisal was outdated as to current market conditions.  The matrix applies discounts to external appraisals depending on the type of real estate and age of the appraisal.  The discounts are generally specific point estimates; however in some cases, the matrix allows for a small range of values.  The discounts were based in part upon externally derived statistical data.  The discounts were also based upon management’s knowledge of market conditions and prices of sales of other real estate owned.  In addition, matrix value adjustments may be made by our independent appraisal group to reflect property value trends within specific markets as well as actual sales data from market transactions and/or foreclosed real estate sales.  It is the Company’s policy to classify these as Level 3 assets within the fair value hierarchy.  The weighted average age of appraisals for valuations of collateral dependent impaired loans was 0.63 years as of March 31, 2014.  Management periodically reviews the discounts in the matrix as compared to valuations from updated appraisals and modifies the discounts accordingly should updated appraisals reflect valuations significantly different than those derived utilizing the matrix.  To date, management believes the appraisal discount matrix has resulted in appropriate adjustments to existing appraisals thereby providing management with reasonable valuations for the collateral underlying the loan portfolio; however, while appraisals are indicators of fair value, the amount realized upon sale of these assets could be significantly different. 

The following tables reflect the fair value of assets measured and recognized at fair value on a nonrecurring basis in the consolidated balance sheets at March 31, 2014 and December 31, 2013. 

	Assets		Fair Value Measurements at
	Measured at		March 31, 2014 Using
(in thousands)	Fair Value		Level 1		Level 2		Level 3
Impaired loans	$	54,115	$	-	$	-	$	54,115
Other real estate owned
and repossessed assets		27,619		-		-		27,619

		Assets		Fair Value Measurements at
		Measured at		December 31, 2013 Using
		Fair Value		Level 1		Level 2		Level 3
Impaired loans	$	49,319	$	-	$	-	$	49,319
Other real estate owned
and repossessed assets		36,665		-		-		36,665

The following describes the valuation techniques used to estimate fair value for our assets that are required to be measured on a nonrecurring basis.

Impaired Loans.  The majority of the Company’s impaired loans are considered collateral dependent.  For collateral dependent impaired loans, impairment is measured based upon the estimated fair value of the underlying collateral.

Other Real Estate Owned and Repossessed Assets.  The adjustments to other real estate owned and repossessed assets are based primarily on appraisals of the real estate or other observable market prices.  Our policy is that fair values for these assets are based on current appraisals.  In most cases, we maintain current appraisals for these items.  Where we do not have a current appraisal, an existing appraisal would be utilized after discounting it to reflect

29

HAMPTON ROADS BANKSHARES, INC.

PART I.  FINANCIAL INFORMATION

Item 1.  Notes to Consolidated Financial Statements

changes in market conditions from the date of the existing appraisal, and, as such, may include significant management assumptions and input with respect to the determination of fair value. 

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

Significant Unobservable Inputs

The following table presents the ranges of significant unobservable inputs used to value the Company’s material Level 3 assets; these ranges represent the significant unobservable inputs that were used in measurement of fair value.

				Range of
(in thousands except for percentages)				Significant Unobservable
		Fair Value at	Significant Unobservable Inputs	Inputs as of
Type		March 31, 2014	by Valuation Technique	March 31, 2014
Derivative loan commitments	$	597	Pull through rate	74%
			Percentage of loans that will
			ultimately close
Impaired loans		54,115	Appraised value	0 - 100%
			Discounts to reflect current market
			conditions, ultimate collectability,
			and estimated costs to sell
Other real estate owned		27,619	Appraised value	0 - 73%
			Discounts to reflect current market
			conditions, abbreviated holding
			period, and estimated costs to sell

Other Fair Value Measurements

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

(a)  Cash and Cash Equivalents

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

(b)   Investment Securities Available for Sale

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

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Item 1.  Notes to Consolidated Financial Statements

(c) Restricted Equity Securities

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

(d)    Loans Held For Sale

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

(e)   Loans

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

(f)   Interest Receivable and Interest Payable

The carrying amount approximates fair value.

(g)   Bank-Owned Life Insurance

The carrying amount approximates fair value.

(h)   Deposits

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

(i)   Borrowings

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

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

The only amounts recorded for commitments to extend credit and standby letters of credit are the deferred fees arising from these unrecognized financial instruments.  These deferred fees are not deemed significant at March 31, 2014 and December 31, 2013, and as such, the related fair values have not been estimated.

The carrying amounts and fair values of those financial instruments that are not recorded at fair value at March 31, 2014 and December 31, 2013 were as follows.

		March 31, 2014
		Carrying		Fair		Fair Value Measurements at Reporting Date Using
(in thousands)		Amount		Value		Level 1		Level 2		Level 3
Financial Assets:
Loans, net(1)	$	1,318,483	$	1,333,590	$	-	$	-	$	1,333,590
Financial Liabilities:
Deposits		1,517,911		1,488,517		-		1,488,517		-
FHLB borrowings		188,958		189,045		-		189,045		-
Other borrowings		29,086		29,086		-		29,086		-

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PART I.  FINANCIAL INFORMATION

Item 1.  Notes to Consolidated Financial Statements

	December 31, 2013
	Carrying		Fair		Fair Value Measurements at Reporting Date Using
(in thousands)	Amount		Value		Level 1		Level 2		Level 3
Financial Assets:
Loans, net(1)	$	1,349,500	$	1,367,103	$	-	$	-	$	1,367,103
Financial Liabilities:
Deposits		1,523,328		1,485,554		-		1,485,554		-
FHLB borrowings		194,178		194,191		-		194,191		-
Other borrowings		28,983		28,983		-		28,983		-
(1)Carrying amount and fair value includes impaired loans.  Carrying amount is net of the allowance for loan losses.

NOTE K - Contingencies

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

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

Forward-looking statements are based on our current expectations and assumptions regarding our business, the economy, and other future conditions.  Because forward-looking statements relate to the future, they are subject to inherent uncertainties, risks, and changes in circumstances that are difficult to predict.  Our actual results may differ materially from those contemplated by the forward-looking statements.  They are neither statements of historical fact nor guarantees or assurances of future performance.  Therefore, we caution you against relying on any of these forward-looking statements. 

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

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

· We are not paying dividends on our Common Stock 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 have elected to defer payment of interest on our outstanding trust preferred securities issued by trust subsidiaries of our holding company and we expect to continue to defer the payment of interest until we receive approval to pay the deferred interest;

· The Volcker Rule collateralized loan obligation provisions could result in adverse consequences for us, including lower earnings, lower tangible capital and/or lower regulatory capital;

· We incurred significant losses from 2009 to 2012.  While we returned to profitability in 2013, and continued to be profitable during the three months ended March 31, 2014, we can make no assurances that will continue.  An inability to improve our profitability could adversely affect our operations and our capital levels;

· 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 real estate – commercial mortgage, equity line lending, and construction, 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 results of operations and financial condition;

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

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PART I.  FINANCIAL INFORMATION

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

· 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;

· 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;

· Proposed and final regulations could restrict our ability to originate loans and/or attract certain types of deposits; 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

U.S. generally accepted accounting principles (“GAAP”) are complex and require management to apply significant judgment to various accounting, reporting, and disclosure matters. Management must use assumptions, judgments, and estimates when applying these principles where precise measurements are not possible or practical. These policies are critical because they are highly dependent upon subjective or complex assumptions, judgments, and estimates.  Our assumptions, judgments, and estimates may be incorrect, and changes in such assumptions, judgments, and estimates may have a material impact on the consolidated financial statements.  Actual results, in fact, could differ materially from those estimates.  We consider our policies on allowance for loan losses, the valuation of deferred taxes, and the valuation of other real estate owned to be critical accounting policies.Refer to our 2013 Form 10-K for further discussion of these policies.

Material Trends and Uncertainties

General economic conditions in our major markets continue on a path of slow recovery. According to a recent Bureau of Labor Statistics report, it was estimated that the Hampton Roads region lost 4,000 jobs between December 2013 and January 2014, resulting in the largest decline since April 2009. Additionally, this employment report included the annual "benchmark revision," which revealed that regional employment in December 2013 was actually 10,400 less than previously estimated, meaning that the Hampton Roads region started the first quarter of 2014 with 14,400 fewer jobs than originally reported at the end of 2013.  The impact caused the regional unemployment rate to be at 5.7% in March 2014, compared to the 5.3% unemployment rate in December 2013.

During the first quarter of 2014, we have experienced soft overall loan growth, with originations not keeping pace with normal loan pay downs and charge offs, resulting in our balance of gross loans declining since December 31, 2013. Based on recent reports, the Federal Reserve’s intention is to continue to maintain a low interest rate environment at least into 2015.  This will certainly continue to place downward pressure on our net interest income

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

and our overall operating net income.  Due to the continued improvement in the credit quality of our portfolio, non-performing assets as a percentage of total assets improved during the first three months of 2014 compared to the same period in 2013. The elevation of mortgage interest rates which began in late summer 2013, has caused a dramatic decline in refinancing activity, and will continue to put downward pressure on overall mortgage banking revenue. Due to cost reduction initiatives implemented over the last few years, noninterest expense has declined improving our overall efficiency.

For further discussion of the material trends and uncertainties that may affect our results and financial condition, refer to the risk factors contained Part II Item 1A “Risk Factors” in this report.

Company Overview

Hampton Roads Bankshares, Inc. (the “Company”) is a multi-bank holding company headquartered in Virginia Beach, Virginia.  The Company’s primary subsidiaries are Bank of Hampton Roads (“BOHR”) and Shore Bank (“Shore” collectively the “Banks”).  The Banks engage in general community and commercial banking business, targeting the needs of individuals and small- to medium-sized businesses in our primary service areas.  Currently, BOHR operates 17 full-service offices in the Hampton Roads region of southeastern Virginia and 10 full-service offices throughout Richmond, Virginia and the Northeastern and Research Triangle regions of North Carolina that do business as Gateway Bank & Trust Co. (“Gateway”).  Shore operates 6 full-service offices in the Eastern Shore of Virginia and Maryland.  Through various affiliates, the Banks also offer mortgage banking and investment services.  Our largest investor shareholders include Anchorage Capital Group, L.L.C. (“Anchorage”), CapGen Capital Group VI LP (“CapGen”), and The Carlyle Group, L.P. (“Carlyle”).  Anchorage, CapGen, and Carlyle own 24.90%, 29.97%, and 24.90%, respectively, of the outstanding shares of our Common Stock as of March 31, 2014. 

Our primary source of revenue is net interest income earned by our bank subsidiaries.  Net interest income represents interest and fees earned from lending and investment activities less the interest paid on deposits and borrowings.  Net interest income may be impacted by variations in the volume and mix of interest-earning assets and interest-bearing liabilities, changes in the yields earned and the rates paid, level of non-performing assets, and the level of noninterest-bearing liabilities available to support earning assets.  In addition to net interest income, noninterest income is another important source of revenue.  Noninterest income is derived primarily from service charges on deposits and mortgage banking revenue.  Gains and losses on the sale or impairment of our other real estate owned and repossessed assets are recognized in noninterest income.  Other significant factors that impact net income (loss) attributable to Hampton Roads Bankshares, Inc. are the provision for loan losses, and noninterest expense.

The direct lending activities in which the Company engages carry the risk that the borrowers will be unable to perform on their obligations. As such, interest rate policies of the Board of Governors of the Federal Reserve System (the "Federal Reserve") and general economic conditions, nationally and in the Company's primary market areas, have a significant impact on the Company's results of operations. To the extent that economic conditions deteriorate, business and individual borrowers may be less able to meet their obligations to the Company in full, in a timely manner, resulting in decreased earnings or losses to the Company. Regarding net interest margin, the Company makes fixed rate loans, whereby general increases in interest rates will tend to reduce the Company's spread as the interest rates the Company must pay for deposits may increase while interest income may be unchanged. Economic conditions may also adversely affect the value of property pledged as security for loans and the ability to liquidate that property to satisfy a loan if necessary.

The Company's goal is to mitigate risks in the event of unforeseen threats to the loan portfolio as a result of economic downturn or other negative influences. Plans for mitigating inherent risks in managing loan assets include: carefully enforcing loan policies and procedures and modifying those policies on occasion to account for changing or emerging risks or changing market conditions, evaluating each borrower's business plan and financial condition during the underwriting process and throughout the loan term, identifying and monitoring primary and alternative sources for loan repayment, and maintaining sufficient collateral to mitigate economic loss in the event of liquidation. An allowance for loan losses has been established which consists of general, specific, and unallocated components. A risk rating system is employed to estimate loss exposure and provide a measuring system for setting general reserve allocations.  The general component relates to groups of homogeneous loans not designated for specific impairment analysis and are collectively evaluated for potential loss.  The specific component relates to loans that are determined to be impaired and, therefore, individually evaluated for impairment.  The specific allowance for loan losses is based on a loan-by-loan analysis and varies between impaired loans largely due to the

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HAMPTON ROADS BANKSHARES, INC.

PART I.  FINANCIAL INFORMATION

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

value of the loan’s underlying collateral.  An unallocated component is maintained to cover uncertainties that could affect management’s estimate of probable losses and considers internal portfolio management effectiveness and external macroeconomic factors.

Overview

The following commentary provides information about the major components of our results of operations, financial condition, liquidity, and capital resources.  This discussion and analysis should be read in conjunction with the Consolidated Financial Statements and Notes to Consolidated Financial Statements.

Since 2008, our loan customers have operated in an economically stressed environment.  While broader economic conditions have begun to gradually improve, economic conditions in the markets in which we operate remain somewhat constrained.  Consequently, the levels of loan delinquencies and defaults that we experienced continue to be higher than historical levels and our net interest income, before the provision for loan losses, has not grown over this period.

The Company reported net income for the three months ended March 31, 2014, as it did for the year ended December 31, 2013. The improvement, compared to the net operating losses for 2009 to 2012, primarily resulted from improved general economic conditions and credit performance of the Company’s loan portfolio. There is no guarantee that we will be able to maintain this improvement in our net income. In addition to the risk that the broader economic conditions will stagnate or reverse their improvements, our mortgage banking earnings are particularly volatile due to their dependence upon the direction and level of mortgage interest rates, which increased in 2013, resulting in significantly lower revenue in our Mortgage segment. The Company also recognized $3.2 million in income from bank-owned life insurance for the quarter ended March 31, 2014, which is significantly higher than the Company’s historic or expected bank-owned life insurance income.  As of March 31, 2014, the Company exceeded the regulatory capital minimums and BOHR and Shore were considered “well capitalized” under the risk-based capital standards.

The following is a summary of our financial condition as of March 31, 2014 and our financial performance for the three months then ended.

· Assets were $1.9 billion at March 31, 2014.  Total assets decreased by $4.7 million or 0.2% from December 31, 2013.  The decrease in assets was primarily associated with a $4.5 million or 18.1% decrease in loans held for sale, a $34.8 million or 2.5% decrease in gross loans, a $9.0 million or 24.7% decrease in other real estate owned and foreclosed real estate, a $7.1 million or 2.2% decrease in investment securities available for sale, partially offset by $47.0 million or 109.8% increase in overnight funds sold and due from FRB, and a $4.2 million or 43.0% increase in other assets.

· Investment securities available for sale decreased $7.1 million or 2.2% to $318.4 million as of March 31, 2014 from $325.5 million at December 31, 2013.  The decrease primarily resulted from maturities, calls, and sales of our mortgage-backed securities and corporate securities, offset by an increase in the net unrealized gains in our total portfolio and purchases of mortgage-backed securities.

· Gross loans decreased by $34.8 million or 2.5% during the three months ended March 31, 2014, primarily due to normal loan pay down and charge off activity which exceeded new loan origination volume.

· Impaired loans increased by $3.3 million during the three months ended March 31, 2014 to $70.9 million at March 31, 2014, up from $67.6 million at December 31, 2013, primarily as a result of three credit relationships that became impaired and subsequently designated as nonperforming loans during the quarter.  Based on current projections, management expects impaired loans to resume a downward trend for the second quarter of 2014.

· Allowance for loan losses at March 31, 2014 decreased 10.8% to $31.3 million from $35.0 million at December 31, 2013 as net charge-offs exceeded additional provisions for loan losses.

· Deposits at March 31, 2014 decreased $5.4 million or 0.4% from December 31, 2013 as a result of decreases of $4.5 million or 1.5% in time deposits over $100 thousand, decreases of $3.7 million or 1.5% in non-interest bearing demand deposits, decreases of $3.4 million or 5.5% in savings deposits, partially offset by increases of $5.4 million in interest-bearing demand deposits.  The decline in time deposits is primarily 36  

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PART I.  FINANCIAL INFORMATION

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

the result of the attrition of certain national market time deposits and reflects the Company’s efforts to improve its mix of funds.

· Net income attributable to Hampton Roads Bankshares, Inc. for the three months ended March 31, 2014 was $3.9 million, as compared with net income of $632 thousand for the same period in 2013.

· Net interest income decreased $975 thousand in the three months ended March 31, 2014 compared to the same period in 2013. The decrease was due primarily to the decreases in average interest-earning assets, and a slight decline in net interest margin.

· As a result of net charge-off volume and newly impaired loans, the impact of which was predominantly offset by a reduction in loans outstanding and a lower required pooled (general) and unallocated component of the loan loss allowance, a loan loss provision of $100 thousand was required during the first quarter of 2014.

· Noninterest income for the three months ended March 31, 2014 was $7.3 million, a 34.5% increase over the same period in 2013. This increase was largely due to a decline in losses on premises and equipment associated with certain branch closings in the prior year; a decline in losses on other real estate owned and repossessed assets; and an increase in income from bank-owned life insurance.  Offsetting these improvements was the continued decline in mortgage banking revenue which decreased $4.2 million or 69.6% during the three months ended March 31, 2014 compared to the same period in 2013 due to declines in both origination volume and margin, driven by rising market interest rates which had dramatic negative impact on refinance demand.

· Income from bank-owned life insurance increased $2.8 million during for the three months ended March 31, 2014 to $3.2 million compared to $373 thousand for the first three months of 2013.  The increase was due to life insurance benefits received in excess of cash surrender value from the deaths of one current employee and one former employee.

· Noninterest expense during the three months ended March 31, 2014 declined 4.7% compared to the same period in 2013, finishing at $18.5 million, primarily due to lower salary and employee benefits.

· Our effective tax rate was 0.2% for the three months ended March 31, 2014 compared to 0.0% for the same period in 2013.  The small amount of tax expense recognized 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.  Refer to our 2013 Form 10-K for additional information relating to deferred tax assets.

ANALYSIS OF RESULTS OF OPERATIONS

Net income attributable to Hampton Roads Bankshares, Inc. for the three months ended March 31, 2014 was $3.9 million, as compared with net income of $632 thousand for the same period in 2013.

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 annualized net interest income as a percentage of average interest-earning assets, is an indicator of effectiveness in generating income from earning assets.

Net interest income and net interest margin may be significantly impacted by the market interest rates (rate); 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. 

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HAMPTON ROADS BANKSHARES, INC.

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

Table 1 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 months ended March 31, 2014 and 2013.

Table 1:  Average Balance Sheet and Net Interest Margin Analysis

	Three Months Ended						Three Months Ended
	March 31, 2014						March 31, 2013						2014 Compared to 2013
														Interest
				Interest	Average					Interest	Average			Income/	Variance
(in thousands, except				Income/	Yield/					Income/	Yield/			Expense	Attributable to
average yield/rate data)	Average Balance			Expense	Rate		Average Balance			Expense	Rate			Variance	Rate		Volume
Assets:
Interest-earning assets
Loans	$	1,377,921	$	15,692	4.62	%	$	1,487,384	$	17,673	4.82	%	$	(1,981)	$	(680)	$	(1,301)
Investment and restricted equity securities		333,798		2,234	2.71			303,947		1,815	2.42			419		240		179
Interest-bearing deposits
in other banks		741		-	-			823		-	-			-		-		-
Overnight funds sold
and due from FRB		72,581		32	0.18			82,592		42	0.21			(10)		(5)		(5)
Total interest-earning assets		1,785,041		17,958	4.08			1,874,746		19,530	4.22			(1,572)		(445)		(1,127)
Noninterest-earning assets		150,986						156,513
Total assets	$	1,936,027					$	2,031,259
Liabilities and Shareholders' Equity:
Interest-bearing liabilities
Interest-bearing demand deposits	$	606,268	$	623	0.42	%	$	545,891	$	509	0.38	%		114		58		56
Savings deposits		59,510		8	0.05			60,882		10	0.07			(2)		(2)		-
Time deposits		601,891		1,509	1.02			749,786		2,008	1.09			(499)		(103)		(396)
Total interest-bearing deposits		1,267,669		2,140	0.68			1,356,559		2,527	0.76			(387)		(47)		(340)
Borrowings		218,783		863	1.60			236,003		1,073	1.84			(210)		(132)		(78)
Total interest-bearing liabilities		1,486,452		3,003	0.82			1,592,562		3,600	0.92			(597)		(179)		(418)
Noninterest-bearing liabilities
Demand deposits		241,905						238,309
Other liabilities		20,462						15,027
Total noninterest-bearing liabilities		262,367						253,336
Total liabilities		1,748,819						1,845,898
Shareholders' equity		187,208						185,361
Total liabilities and shareholders' equity	$	1,936,027					$	2,031,259
Net interest income			$	14,955					$	15,930
Net interest spread					3.26	%					3.30	%
Net interest margin					3.40	%					3.45	%
Note:  Interest income from loans includes fees of $164 for the three months ending March 31, 2014, and $434 for the three months ending March 31, 2013.

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PART I.  FINANCIAL INFORMATION

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

Interest-earning assets consist of loans, investment and restricted equity securities, overnight funds sold and due from FRB, and interest-bearing deposits in other banks.  Net interest income for the three months ended March 31, 2014 was $15.0 million, a decrease of $975 thousand or 6.0% as compared to the same period in 2013. Net interest margin for the three months ended March 31, 2014 was 3.40%, down from 3.45% for the comparable period in 2013.  In the current low interest rate environment, the Company expects to continue to experience downward pressure on net interest margin, as rates on interest earning assets decline at a faster pace than that of our interest-bearing liabilities.

Interest income on loans, including fees, decreased $2.0 million to $15.7 million for the three months ended March 31, 2014 compared to $17.7 million for the same period in 2013.  This decrease was predominantly the result of a decline in the average yield on loans from 4.82% in 2013 to 4.62% in 2014, and the decline in average loan balances year over year by $109.5 million.  Interest income on investment securities increased $419 thousand to $2.2 million for the three months ended March 31, 2014 compared to $1.8 million for the same period in 2013.  This increase was due to a $29.9 million increase in average investment securities, and a 29-basis point increase in the average yield on investment securities to 2.71% in 2014 from 2.42% during 2013.  Interest income on overnight funds sold and due from FRB decreased modestly to $32 thousand for the three months ended March 31, 2014 compared to $42 thousand for the same period in 2013.  This decrease was largely due to the $10.0 million decrease in average overnight funds sold and due from FRB and a 3-basis point decrease in the average yield on average overnight funds sold and due from FRB.

Interest-bearing liabilities consist of deposit accounts and borrowings.  Interest expense on deposits decreased $387 thousand to $2.1 million for the three months ended March 31, 2014 compared to $2.5 million for the same period in 2013. This decrease resulted from an $88.9 million decrease in average interest-bearing deposits and an 8-basis point decrease in the average interest rate paid on interest-bearing deposits for the three months ended March 31, 2014 compared to the same period in 2013.  A reduction in the average rate paid on time deposits to 1.02% for the three months ended March 31, 2014 from 1.09% for the same period in 2013, coupled with a $147.9 million decrease in average time deposits, contributed significantly toward the decrease in overall interest expense on deposits.

Interest expense on borrowings, which consisted of FHLB borrowings and other borrowings, decreased $210 thousand to $863 thousand for the three months ended March 31, 2014 compared to $1.1 million for the same period in 2013. The 24-basis point decrease in the average interest rate paid on borrowings and the $17.2 million decrease in average borrowings produced this result.  In 2011, following a review of the Company’s current level of assumed interest rate risk and to promote liquidity and enhance current earnings, the Company modified certain advances with the FHLB. A majority of the Company’s existing fixed-rate advances were restructured as floating rate obligations at a fixed spread to three month LIBOR with maturities ranging from 2.75 to 4 years. 

Noninterest Income

For the three months ended March 31, 2014 total noninterest income was $7.3 million, an increase of $1.9 million or 34.5% as compared to $5.4 million for the same period in 2013. Noninterest income comprised 28.9% of total revenue in the three months ended March 31, 2014 and 21.7% for the same period in 2013.  We define total revenue as the sum of interest income and non-interest income. This increase was largely due to a decline in losses on premises and equipment; a decline in losses on other real estate owned and repossessed assets, and an increase in income from bank-owned life insurance, offset by a decline in mortgage banking revenue.

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HAMPTON ROADS BANKSHARES, INC.

PART I.  FINANCIAL INFORMATION

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

Table 2 provides a summary of noninterest income for the three months ended March 31, 2014 and 2013.

Table 2:  Noninterest Income

	Three Months Ended
	March 31,				2014 compared to 2013
(in thousands)	2014		2013		$		%
Mortgage banking revenue	$	1,811	$	5,964	$	(4,153)	(69.6)	%
Service charges on deposit accounts		1,159		1,217		(58)	(4.8)
Income from bank-owned life insurance		3,216		373		2,843	762.2
Gain on sale of investment securities available for sale		67		-		67	100.0
Gain (loss) on sale of premises and equipment		(13)		(127)		114	(89.8)
Other than temporary impairment of premises & equipment		-		(2,825)		2,825	(100.0)
Gain (loss) on sale of other real estate owned &  repossessed assets		221		(234)		455	(194.4)
Other than temporary impairment of other real estate owned and repossessed assets		(336)		(670)		334	(49.9)
Visa check card income		593		596		(3)	(0.5)
Rental Income		153		152		1	0.7
Other		431		982		(551)	(56.1)
Total noninterest income	$	7,302	$	5,428	$	1,874	34.5	%

Mortgage banking revenue declined due to decreases in both origination volume and margin, driven by rising market interest rates which had dramatic negative impact to refinance demand.

Income from bank-owned life insurance increased due to life insurance benefits received in excess of cash surrender value from the deaths of one current employee and one former employee.

As the Company closed down certain branches in the first three months of 2013, it recorded impairments to premises and equipment as those properties were transferred to other real estate owned and repossessed assets.  Similar branch closings did not occur in the three months ended March 31, 2014.

Losses and other than temporary impairment of other real estate owned declined as market values continued to either stabilize or improve.

Noninterest Expense

Noninterest expense represents our operating and overhead expenses.  Total noninterest expense for the three months ended March 31, 2014 was $18.5 million, a decline of $915 thousand or 4.7% compared to the same period in 2013. 

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HAMPTON ROADS BANKSHARES, INC.

PART I.  FINANCIAL INFORMATION

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

Table 3 provides a summary of noninterest expense for the three months ended March 31, 2014 and 2013. 

Table 3:  Noninterest Expense

	Three Months Ended
	March 31,				2014 compared to 2013
(in thousands)	2014		2013		$		%
Salaries and employee benefits	$	9,567	$	10,956	$	(1,389)	(12.7)	%
Professional and consultant fees		1,232		893		339	38.0
Occupancy		1,719		1,802		(83)	(4.6)
FDIC insurance		901		1,018		(117)	(11.5)
Data processing		1,147		797		350	43.9
Problem loan and repossessed asset costs		433		480		(47)	(9.8)
Equipment		373		464		(91)	(19.6)
Directors' and regional board		387		241		146	60.6
Advertising and marketing		254		260		(6)	(2.3)
Other		2,504		2,521		(17)	(0.7)
Total noninterest expense	$	18,517	$	19,432	$	(915)	(4.7)	%

Salaries and employee benefits expense declined mainly driven by a lower employee headcount and decreases in commission expense.  Data processing increased driven mainly by implementation costs and operating expenses associated with the Company’s additional products and services.  In addition, during 2013, approximately $5.0 million of depreciable equipment was reclassified from Furniture and Fixtures to Data Processing Hardware asset category.  These asset transfers caused an increase in depreciation expense year over year in the data processing expense category. And finally, a vendor credit was received in 2013 that reduced expenses; however, a similar credit was not received in 2014.

Professional and consultant fees increased due to a number of factors, including legal and professional costs related to the launch of new products and services, legal costs related to SEC and Treasury matters, and legal costs related to settlement of disputes in the normal course of business. Directors’ and regional board fees increased mainly due to the election of additional directors to the Company’s board as well as an overall increase in individual board member compensation.

ANALYSIS OF FINANCIAL CONDITION

Assets were $1.9 billion at March 31, 2014.  Total assets decreased by $4.7 million or 0.2% from December 31, 2013.  The decrease in assets was primarily associated with a $4.5 million or 18.1% decrease in loans held for sale, a $34.8 million or 2.5% decrease in gross loans, a $9.0 million or 24.7% decrease in other real estate owned and foreclosed real estate, a $7.1 million or 2.2% decrease in investment securities available for sale, partially offset by $47.0 million or 109.8% increase in overnight funds sold and due from FRB, and a $4.2 million or 43.0% increase in other assets.  This increase in other assets is mainly attributed to bank owned life insurance proceeds due to the Company.

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 March 31, 2014 were $108.1 million compared to $62.3 million at December 31, 2013 and consisted mainly of deposits with FRB.  Primarily due to normal loan pay down and charge off activity which exceeded new loan origination volume, the Company experienced an increase in the overall level of cash and cash equivalents.  In the future, the Company expects to utilize its cash on hand to support future loan origination activity.

Investment Securities.  Our investment portfolio at March 31, 2014 consisted primarily of U.S. agency, mortgage-backed, and asset-backed securities.  The allocation to asset-backed securities, which began in 2013, provides the Company with a floating rate asset, which mitigates the interest rate risk inherent in certain other asset classes, e.g., Mortgage Backed Securities (“MBS”).  Repayment of principal and interest of the ABS security is dependent upon

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HAMPTON ROADS BANKSHARES, INC.

PART I.  FINANCIAL INFORMATION

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

the performance of the underlying loan collateral.  The Company performs due diligence of each security on a pre- and post-purchase basis to evaluate the underlying collateral and invests in the investment grade tranches of securitizations.  However, should defaults or loss severities exceed the credit enhancement in the structure, payment of principal or interest may be impacted.

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.  At March 31, 2014 the fair value of our available-for-sale investment securities declined $7.1 million or 2.2% to $318.4 million compared to $325.5 million at December 31, 2013.  It was determined that none of this decline in fair value was attributable to other than temporary impairment.

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

Overall our loan trends during the three months ended March 31, 2014 have been influenced by decreased demand for loans in nearly all our loan categories.  Our commercial and industrial loan portfolio decreased $19.4 million to the March 31, 2014 balance of $206.1 million from the December 31, 2013 balance of $225.5 million.  Construction loans decreased $9.4 million to the March 31, 2014 balance of $149.1 million from the December 31, 2013 balance of $158.5 million.  Our real estate-commercial mortgage loan portfolio decreased $2.0 million to the March 31, 2014 balance of $588.5 million from the December 31, 2013 balance of $590.5 million.  The real estate-residential mortgage loan portfolio showed a minor increase to the $355.1 million from the December 31, 2013 balance of $354.0 million. The installment loan portfolio decreased $5.2 million to the March 31, 2014 balance of $52.4 million from the December 31, 2013 balance of $57.6 million.

In addition to the aforementioned weaker demand for credit, the contraction seen in loans stems from the continued resolution of problem loans.  Origination volumes were also 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 ongoing challenging economic conditions.  Additionally, our prudent business practices and internal guidelines and underwriting standards will continue to be followed in making lending decisions in order to manage exposure to credit-related losses.

Allowance for Loan Losses and Provision for Loan Losses.The allowance for loan losses was $31.3 million or 2.32% of outstanding loans as of March 31, 2014 compared with $35.0 million or 2.53% of outstanding loans as of December 31, 2013.

The allowance for loan losses decreased $3.8 million (net of charge-offs and recoveries) during the three months ended March 31, 2014 as a result of net charge-offs exceeding additional provisions for loan losses.  Net charge-offs were $3.9 million during the three months ended March 31, 2014 compared with $4.7 million during the same period in 2013.  Our provision for loan losses was $100 thousand during the three months ended March 31, 2014 compared to no provision for loan losses being recorded during the same period in 2013. We did not change our methodology or model for estimating the allowance for loan losses during any of the past three years.

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HAMPTON ROADS BANKSHARES, INC.

PART I.  FINANCIAL INFORMATION

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

The allowance consists of specific, pooled (general), and unallocated components.  Table 4 provides an allocation of the allowance for loan losses and other related information at March 31, 2014 and December 31, 2013.

Table 4:  Allowance for Loan Losses Components and Related Data

(in thousands, except for percentages)	March 31, 2014			December 31, 2013
Allowance for loan losses:
Specific component	$	11,711		$	13,141
Pooled component		15,656			17,640
Unallocated component		3,893			4,250
Total	$	31,260		$	35,031
Impaired loans	$	70,890		$	67,558
Non-impaired loans		1,278,853			1,316,973
Total loans	$	1,349,743		$	1,384,531
Specific component as % of
impaired loans		16.52	%		19.45	%
Pooled component as % of
non-impaired loans		1.22			1.34
Allowance as % of loans		2.32			2.53
Allowance as % of nonaccrual loans		70.66			87.90

The specific component of our allowance for loan losses relates to loans that are determined to be impaired and, therefore, are individually evaluated for impairment.  The specific component decreased during the three months ended March 31, 2014, primarily due to the charge-off of loans with specific reserves.  Specific loan loss allocations decreased $1.4 million to $11.7 million at March 31, 2014 from $13.1 million at December 31, 2013.

The general or pooled component relates to groups of homogeneous loans not designated for a specific allowance and are collectively evaluated for impairment.  The pooled component of the allowance decreased $2.0 million during the three months ended March 31, 2014, from $17.6 million at December 31, 2013 to $15.6 million at March 31, 2014. The decrease in the pooled component is the result of (i) lower historical loss factors applied in our models, as higher charge-offs in older periods are replaced with lower charge-offs in more recent periods, (ii) changes in portfolio mix, as categories with higher pooled reserve levels such as construction loans have continued to decline, and (iii) continued improvement in credit quality as evidenced by improved internal weighted average loan grades.

An unallocated component is maintained to cover uncertainties that could affect management’s estimate of probable losses.  The unallocated portion of the loan loss allowance decreased $357 thousand to $3.9 million at March 31, 2014, due to a combination of factors, compared to $4.3 million at December 31, 2013.  Macroeconomic indicators such as GDP, unemployment, and housing prices trended negatively during the first quarter of 2014, resulting in an increase in the portion of the unallocated component that considers external variables.  However, the portion of the unallocated component that considers internal variables declined as a reflection of management’s assessment of the improved health of the portfolio and the credit processes of the Company. Additionally, the continued resolution of troubled assets led to a reduction in the overall size of the loan portfolio and an improvement in the quality of the existing portfolio.   

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HAMPTON ROADS BANKSHARES, INC.

PART I.  FINANCIAL INFORMATION

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

Table 5 displays certain ratios used by management in assessing the adequacy of the allowance for loan losses at March 31, 2014 and December 31, 2013.

Table 5:  Adequacy of the Allowance for Loan Losses

	March 31, 2014		December 31, 2013
Non-performing loans for which full loss
has been charged off to total loans	0.63	%	0.68	%
Non-performing loans for which full loss
has been charged off to non-performing
loans	19.36		23.54
Charge off rate for non-performing loans for
which the full loss has been charged off	59.25		53.40
Coverage ratio net of non-performing loans for
which the full loss has been charged off	87.62		114.97
Total allowance divided by total loans less
non-performing loans for which the full loss
has been charged off	2.33		2.55
Allowance for individually impaired loans
divided by impaired loans for which an
allowance has been provided	35.82		39.94

At March 31, 2014, management believed the level of the allowance for loan losses to be commensurate with the risk existing in our portfolio.  However, the allowance is subject to regulatory examinations and determination as to adequacy, which may take into account such factors as the methodology used to calculate the allowance and the size of the allowance in comparison to peer banks identified by regulatory agencies.  Such agencies may require us to recognize additions to the allowance for loan losses based on their judgments about information available at the time of the examinations. Notwithstanding these allocations, the entire allowance for loan losses is available to absorb charge-offs in any loan category.

Non-Performing Assets.  Management classifies non-performing assets as those loans on which payments have been delinquent 90 days and are still accruing interest, nonaccrual loans, and foreclosed real estate and repossessed assets.  Our non-performing assets ratio, defined as the ratio of loans 90 days past due and still accruing interest plus nonaccrual loans plus other real estate owned and repossessed assets to gross loans plus loans held for sale plus other real estate owned and repossessed assets was 5.16% and 5.29% at March 31, 2014 and December 31, 2013, respectively. At March 31, 2014 and December 31, 2013 we had loans totaling $298 thousand and $0, respectively, categorized as 90 days or more past due and still accruing interest.  Loans in non-accrual status totaled $44.2 million and $39.9 million at March 31, 2014 and December 31, 2013, respectively.  Loans are placed in nonaccrual status when the collection of principal or interest becomes uncertain, part of the balance has been charged off and no restructuring has occurred, or the loans reach 90 days past due, whichever occurs first, unless there are extenuating circumstances. We had $27.6 million and $36.7 million of other real estate owned and repossessed assets at March 31, 2014 and December 31, 2013, respectively.  This decline was mainly due to sales of real estate owned outpacing inflows.

Deposits.  Total deposits at March 31, 2014 were $1.5 billion, a decrease of $5.4 million or 0.4% from the $1.5 billion at December 31, 2013.  In recent years, our deposit composition has improved as a result of strategies to grow demand deposits, while de-emphasizing higher rate and non-core certificates of deposit. 

At March 31, 2014, noninterest-bearing demand deposits were $241.8 million, a decrease of $3.7 million from $245.4 million at December 31, 2013. Interest-bearing demand deposits at March 31, 2014 were $605.7 million, an increase of $5.4 million from $600.3 million at December 31, 2013.  Interest-bearing demand deposits included $7.5 million of brokered money market funds at March 31, 2014, which was a $200 thousand decrease from the balance of brokered money market funds of $7.7 million outstanding at December 31, 2013.

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HAMPTON ROADS BANKSHARES, INC.

PART I.  FINANCIAL INFORMATION

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

At March 31, 2014 savings accounts were $58.9 million, a decrease of $3.4 million from $62.3 million at December 31, 2013.

Time deposits less than $100 thousand remained relatively flat decreasing $722 thousand or 0.2% to $325.4 million at March 31, 2014 from $324.6 million at December 31, 2013.  Time deposits $100 thousand or more decreased $4.5 million or 1.5% to $286.2 million at March 31, 2014 from $290.7 million at December 31, 2013.  Brokered Certificate of Deposits (“CDs”) represented $42.6 million or 2.8% of the March 31, 2014 balance of total deposits, which was a decrease of $1.0 million from the $43.6 million balance of brokered CDs outstanding at December 31, 2013.  The decrease in total time deposits was primarily due to run-off as maturity dates were reached and CDs were not renewed due to lower rates offered, particularly in the national market time deposit category.

The Company continues to focus on core deposit growth as its primary source of funding.  Core deposits are non-brokered and consist of noninterest-bearing demand accounts, interest-bearing checking accounts, money market accounts, savings accounts, and time deposits of less than $100 thousand.  Core deposits remained unchanged at March 31, 2014 totaling $1.2 billion or 80.0% of total deposits compared to December 31, 2013.

Borrowings.  We use short-term and long-term borrowings from various sources including the FRB discount window, FHLB, and trust preferred securities.  We manage the level of our borrowings to ensure that we have adequate sources of liquidity.  Refer to our 2013 Form 10-K for further discussion about our borrowings.

Liquidity.  Liquidity represents an institution’s ability to meet present and future financial obligations through either the sale or maturity of existing assets or the acquisition of additional funds through liability management.  It is used by management to provide continuous access to sufficient, reasonably priced funds.  We continued to maintain a strong liquidity position during the three months ended March 31, 2014. At March 31, 2014, cash and cash equivalents were $108.1 million and investment securities available for sale at fair value were $318.4 million. 

At March 31, 2014, our Banks had credit lines in the amount of $227.6 million at the FHLB with advances of $189.0 million utilized.  These lines may be utilized for short- and/or long-term borrowing.  At March 31, 2014, 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 $38.1 million at March 31, 2014 and none of these lines were utilized for borrowing purposes at March 31, 2014.

Capital Resources.  Total shareholders’ equity increased $6.0 million or 3.2% from December 31, 2014 to $189.8 million at March 31, 2014. The Company and the Banks are subject to regulatory capital guidelines that measure capital relative to risk-weighted assets and off-balance sheet financial instruments.  Failure to meet minimum capital requirements can cause certain mandatory and discretionary actions by regulators that, if undertaken, could have a material effect on our consolidated financial statements.  Under capital adequacy guidelines and the regulatory framework for prompt correction action, the Banks must meet specific capital guidelines that involve quantitative and qualitative measures to ensure capital adequacy.

Tier I capital is comprised of shareholders’ equity, net of unrealized gains or losses on available-for-sale securities, less intangible assets, while total risk-based capital adds certain debt instruments and qualifying allowances for loan losses.  As of March 31, 2014, our consolidated regulatory capital ratios were Tier 1 Leverage Ratio of 11.18%, Tier 1 Risk-Based Capital Ratio of 14.72%, and Total Risk-Based Capital of 15.98%.  As of March 31, 2014, the Company exceeded the regulatory capital minimums, and BOHR and Shore were considered “well capitalized” under the risk-based capital standards.  Their Tier 1 Leverage Ratio, Tier 1 Risk-Based Capital Ratio, and Total Risk-Based Capital Ratio were as follows: 10.01%, 13.08%, and 14.34%, respectively for BOHR and 10.42%, 14.40%, and 15.65%, 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 or services from unaffiliated parties.  Our contractual obligations consist of time deposits, borrowings, and operating lease obligations.

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

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

arrangements, refer to Note 14, Financial Instruments with Off-Balance-Sheet Risk, of the Notes to Consolidated Financial Statements contained in the 2013 Form 10-K.

Use of Non-GAAP Financial Measures

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

(in thousands, except for percentages and per share data)	March 31, 2014			December 31, 2013
Total assets	$	1,945,612		$	1,950,272
Less:  intangible assets		1,288			1,437
Tangible assets	$	1,944,324		$	1,948,835
Shareholders' equity before
non-controlling interest	$	189,614		$	183,398
Less:  intangible assets		1,288			1,437
Shareholders' equity before
non-controlling interest - tangible	$	188,326		$	181,961
Shareholders' equity before
non-controlling interest (average)	$	188,252		$	185,810
Less:  intangible assets (average)		1,375			1,824
Shareholders' equity before
non-controlling interest - tangible (average)	$	186,877		$	183,986
Return on average equity		8.31	%		2.19	%
Impact of excluding intangible assets		0.06			0.02
Return on average equity - tangible		8.37	%		2.21	%
Shareholders' equity before
non-controlling interest to total assets		9.75	%		9.40	%
Impact of excluding intangible assets		0.06			0.07
Tangible common equity to tangible assets		9.69	%		9.34	%
Book value per share	$	1.11		$	1.08
Impact of excluding intangible assets		0.00			(0.01)
Book value per share - tangible	$	1.11		$	1.07

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HAMPTON ROADS BANKSHARES, INC.

PART I.  FINANCIAL INFORMATION

Item 3.  Quantitative and Qualitative Disclosures About Market Risk

Interest Rate Sensitivity

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

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

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

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

The table below illustrates the expected effect on net interest income for the twelve months following March 31, 2014 and December 31, 2013 due to an immediate change in interest rates.  Estimated changes set forth below are dependent on material assumptions, such as those previously discussed.

Effect on Net Interest Income

	March 31, 2014				December 31, 2013
	Change in Net Interest Income					Change in Net Interest Income
(in thousands, except for percentages)	Amount		%		Amount		%
Change in Interest Rates:
+200 basis points	$	738	1.26	%	$	(1,114)	(1.82)	%
+100 basis points		299	0.51			(593)	(0.97)
-100 basis points		(1,596)	(2.73)			(1,265)	(2.07)
-200 basis points		N/A	N/A			N/A	N/A

As of March 31, 2014, we project an increase in net interest income in an increasing rate environment and a decrease in net interest income in a decreasing interest rate environment.  As of December 31, 2013, we projected a decrease in net interest income in both increasing and decreasing interest rate environments.  Dependent upon timing and shifts in the interest rate term structure, certain rising rate scenarios are less favorable due to lower levels of assets with short-term re-pricing characteristics, as well as due to the variable rate structure on the majority of our borrowings and the floors on many loans that will cause a delay in any interest income improvement.  

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

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HAMPTON ROADS BANKSHARES, INC.

PART I.   FINANCIAL INFORMATION

Item 4.  Controls and Procedures

As of March 31, 2014, the Company’s management, with the participation of the Company’s Chief Executive Officer and 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 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 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 three months ended March 31, 2014 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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PART II.   OTHER INFORMATION

ITEM 1 - LEGAL PROCEEDINGS

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

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 section “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 section “Risk Factors – Risks Relating to our Business – 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 the eventual outcome of the related investigation.”

On November 6, 2013, the Company received a notice of violation and intent to seek civil money penalty from the U.S. Department of Housing and Urban Development (“HUD”) stating that HUD is considering taking administrative action against and imposing civil money penalties on Gateway Mortgage for certain asserted violations of HUD and Federal Housing Administration requirements. The Company and HUD have negotiated the terms of a settlement agreement regarding this matter, under which the Company would agree to pay $98,500 in civil penalties and provide indemnification for four specific loans, totaling approximately $748,000, for a period of five years from endorsement.  The Company currently expects that it will enter into a fully executed settlement agreement with HUD during the second quarter of 2014 and that such a settlement agreement will have no admission of wrongdoing, and no material impact on our business, financial condition, cash flows, or results of operations. 

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 2013 Form 10-K, Part I, Item 1A “Risk Factors”.  Except as and to the extent disclosed below, there have been no material changes to the risk factors as previously disclosed in the 2013 Form 10-K.

Risks Relating to our Business

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

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

We are not paying dividends on our Common Stock 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 and, even once our financial condition improves, so long as we are subject to the MOU we will need the prior consent of the FRB and the BFI before the Company may pay any dividend.  BOHR is subject to the same MOU restriction on paying dividends to us. In addition, the retained deficit of BOHR, our principal banking subsidiary, was $463.7 million as of March 31, 2014. Absent permission from the Virginia State Corporation Commission, BOHR may pay dividends to us only to the extent of positive accumulated retained earnings.  It is unlikely in the foreseeable future that we would be able to pay dividends if BOHR cannot pay dividends to us. 

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PART II.   OTHER INFORMATION

Although we can seek to obtain a waiver of this prohibition and consent under the MOU, our regulators may choose not to grant such a waiver and consent, and we would not expect to be granted a waiver or consent, or to be released from these obligations, 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. 

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

We have elected to defer the payment of interest on our outstanding trust preferred securities issued by trust subsidiaries of our holding company and expect to continue to defer the payment of interest until we receive approval to pay the deferred interest.

Beginning in January 2010, we exercised our right to defer all quarterly distributions on our trust preferred securities.  Our deferral of interest payments for up to 20 consecutive quarters (through various dates during the first quarter of 2015 depending on the series of debt securities) does not constitute an event of default.  During the deferral period, the debt securities continue to accrue interest. To the extent applicable law permits interest on interest, the deferred interest payments also accrue interest at the rates specified in the corresponding indentures, compounded quarterly. At March 31, 2014 total accrued interest equaled $5.9 million. All of the deferred interest, including compounded interest, as to each series of debt securities is due in full at the end of the applicable deferral period. If we fail to pay the deferred and compounded interest at the end of the deferral period, the trustee of the corresponding trust, or in most cases the holders of as little as 25% of the aggregate liquidation amount of preferred securities, would have the right, after any applicable grace period, to exercise various remedies, including demanding immediate payment in full of the entire outstanding principal amount of such series of debt securities.  The aggregate principal amount of all such series of debt securities is $56.7 million.

Under the MOU we are prevented from making payments on our trust preferred securities without the prior consent of the FRB and BFI. The MOU also prevents BOHR from paying dividends to us without the same consents. Additionally, the retained deficit of BOHR, our principal banking subsidiary, was $463.7 million as of March 31, 2014.  Absent permission from the Virginia State Corporation Commission, BOHR may pay dividends to us only to the extent of positive accumulated retained earnings.  It is unlikely in the foreseeable future that we would be able to pay the interest accrued on our outstanding debt securities if BOHR cannot pay dividends to us.  Although we will seek to obtain the required consents and a waiver of the retained earnings prohibition, our regulators may choose not to grant such consents and waiver.  If by January 17, 2015 we do not achieve sufficient financial stability and profitability for BOHR so that our regulators would grant approval for BOHR to pay dividends and for the Company to make payments on the trust preferred securities, it is unlikely we will resume the payment of interest on the debt securities. Even if BOHR is able to resume paying dividends, we cannot be assured that the amount of dividends would be sufficient to pay the entire amount of interest due on the debt securities at the end of the deferral period.

The Volcker Rule collateralized loan obligation provisions could result in adverse consequences for us, including lower earnings, lower tangible capital and/or lower regulatory capital

The so-called “Volcker Rule” provisions of the Dodd-Frank Act restrict the ability of affiliates of insured depository institutions, such as the Banks, to sponsor or invest in private funds or to engage in certain types of proprietary trading. The Federal Reserve adopted final rules implementing the Volcker Rule in December 2013. We are continuing to evaluate the impact of the Volcker Rule and the final rules adopted thereunder. We own $26.9 million of CLO securities with a weighted average yield of 2.34% that are subject to the Volcker Rule. If we decide to sell or are required to sell these securities, our future net interest income could be adversely impacted if our alternative use for these funds yields a lower rate.

While there is a potential for additional regulatory guidance or a legislative ruling that would enable banks to continue to hold CLO securities under the Volcker Rule, to the extent this does not materialize nor do the regulators accept any structural solutions put forth by the financial services industry, we are currently subject to potentially significant price movements in these securities which could adversely impact our tangible capital. For instance, a hypothetical 10% reduction in current CLO market prices would result in a $5.0 million reduction to our current

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PART II.   OTHER INFORMATION

CLO securities valuation. Since these securities are currently held as available for sale, the resulting change in other comprehensive income (loss) would be approximately $5.0 million. Further, if we decide to sell these securities or if it is more likely than not that we will be required to sell such securities before recovery, we may recognize losses that could adversely impact our regulatory capital ratios. A loss of $5.0 million would lower regulatory capital by 23 basis points.

We incurred significant losses from 2009 to 2012.  While we returned to profitability in 2013, and continued to be profitable during the three months ended March 31, 2014, we can make no assurances that will continue.  An inability to improve our profitability could adversely affect our operations and our capital levels.

Since 2008, our loan customers have operated in an economically stressed environment.  While broader economic conditions have begun to gradually improve, economic conditions in the markets in which we operate remain somewhat constrained.  Consequently, the levels of loan delinquencies and defaults that we have experienced continue to be higher than historical levels and our net interest income, before the provision for loan losses, has not grown over this period. 

Our net income attributable to Hampton Roads Bankshares, Inc. for the three months ended March 31, 2014 was $3.9 million, and was $4.1 million for the year ended December 31, 2013 but our net loss attributable to Hampton Roads Bankshares, Inc. for the years ended December 31, 2012 and December 31, 2011 was $25.1 million and $97.6 million, respectively.  There is no guarantee that we will be able to maintain this improvement in our net income. In addition to the risk that the broader economic conditions will stagnate or reverse their improvements, our mortgage banking earnings are particularly volatile due to their dependence upon the direction and level of mortgage interest rates, which have recently increased.

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 the interest rate environment returns to more typical levels, mortgage loan refinancing activity has 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.

Since April 2011, 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 and intends to continue to do so. However, the formal investigation continues.  At this time, we cannot predict when this investigation will be resolved or what form the eventual outcome will take.  It 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.

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

At March 31, 2014, BOHR and Shore were classified as “well capitalized” for regulatory capital purposes.  However, impairments to our loan or securities portfolio, declines in our earnings or a combination of these or other factors could change our capital position in a relatively short period of time.  If BOHR or Shore is unable to remain “well capitalized,” it will not be able to renew or accept brokered deposits without prior regulatory approval or offer interest rates on deposit accounts that are significantly higher than the average rates in its market area. As a result, it would be more difficult for us to attract new deposits as our existing brokered deposits mature and do not rollover

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PART II.   OTHER INFORMATION

and to retain or increase non-brokered deposits.  If we are not able to attract new deposits, our ability to fund our loan portfolio may be adversely affected.  In addition, we would 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.

The management of liquidity risk is critical to the management of our business and to our ability to service our customer base.  Our access to funding sources in amounts adequate to finance our activities on terms which are acceptable to us could be impaired by factors that affect us specifically or the financial services industry or economy in general.  In managing our balance sheet, a primary source of funding is customer deposits. Our ability to continue to attract these deposits and other funding sources is subject to variability based upon a number of factors including volume and volatility in the securities markets and the relative interest rates that we are prepared to pay for these liabilities. Our potential inability to maintain adequate sources of funding may, among other things, impact our ability to resume the payment of dividends or satisfy our obligations.

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

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

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 servicesthat 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

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PART II.   OTHER INFORMATION

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 March 31, 2014, Anchorage, CapGen, and Carlyle owned 24.90%, 29.97%, and 24.90%, respectively, of the outstanding shares of our Common Stock.  Pursuant to the various definitive investment agreements that we have entered into with these shareholders, the Company has an effective registration statement covering the resale of shares of our Common Stock by each of the shareholders listed above. In connection with the sale of our Common Stock by the Treasury, Anchorage, CapGen, Carlyle agreed, for 90 days from April 8, 2014 (subject to extension in certain circumstances), that they will not sell shares of our common stock. However, at the end of that period these shareholders could utilize this registration statement to sell their shares. If any of these shareholders sell large amounts of our Common Stock, or other investors perceive such sales to be imminent, the market price of our Common Stock could drop significantly.  In addition, sale of our Common Stock by Anchorage, CapGen, and Carlyle could adversely impact our ability to realize certain deferred tax benefits relating to prior losses, thereby increasing our effective tax rate in the future.

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

Our business strategy centers, in part, on offering real estate - commercial mortgage and equity line loans secured by real estate in order to generate interest income.  These types of loans generally have higher yields due to an elevated risk profile compared to traditional one-to-four family residential mortgage loans.  At March 31, 2014 real estate – commercial mortgage, and equity line lending (which includes junior lien mortgage loans) totaled $588.5 million, and $125.4 million, respectively. These loan categories combined represented approximately 52.9% of total loans.  Such loans increase our credit risk profile relative to other financial institutions that have lower concentrations of real estate - commercial mortgage and equity line loans.

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

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

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

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PART II.   OTHER INFORMATION

At March 31, 2014 we had loans of $149.1 million or 11.0% of total loans outstanding to finance construction and land development.  Construction and land development loans are dependent on the successful completion of the projects they finance, however, in many cases such construction and development projects in our primary market areas are not being completed in a timely manner, if at all.  A portion of our residential and real estate – commercial mortgage lending is secured by vacant or unimproved land.  Loans secured by vacant or unimproved land are generally more risky than loans secured by improved property for one-to-four family residential mortgage loans. Since vacant or unimproved land is generally held by the borrower for investment purposes or future use, payments on loans secured by vacant or unimproved land will typically rank lower in priority to the borrower than a loan the borrower may have on their primary residence or business.  These loans are more susceptible to adverse conditions in the real estate market and local economy.

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 results of operations and financial condition.

With approximately three-fourths of our loans concentrated in the regions of Hampton Roads, Richmond, the Eastern Shore of Virginia, and the Research 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.

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

Our non-performing assets ratio, defined as the ratio of loans 90 days past due and still accruing interest plus nonaccrual loans plus other real estate owned and repossessed assets to gross loans plus loans held for sale plus other real estate owned and repossessed assets was 5.16% and 5.29% at March 31, 2014 and December 31, 2013, respectively.  On March 31, 2014, 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.

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

We maintain an allowance for loan losses, which is a reserve established through a provision for loan losses charged to our expenses that represents management’s best estimate of probable losses within our existing portfolio of loans.  Our allowance for loan losses was $31.3 million at March 31, 2014, which represented 2.32% of our total loans, as compared to $35.0 million, or 2.53% of total loans, at December 31, 2013.  The level of the allowance reflects management’s estimates and judgments as to specific credit risks, evaluation of industry concentrations, loan loss experience, current loan portfolio quality, present economic, political, and regulatory conditions, and incurred but unidentified losses inherent in the current loan portfolio.  For further discussion on the impact continued weak economic conditions have on the collateral underlying our loan portfolio, see “If the value of real estate in the markets we serve were to further 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 results of operations and financial condition.”

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PART II.   OTHER INFORMATION

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

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

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

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

Deposit pricing pressures may result from competition as well as changes to the interest rate environment. Under current conditions, pricing pressures also may arise from depositors who demand premium interest rates from whatthey 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, Delaware, 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

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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. 

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 effect 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.  The Company has not had contact with the DOJ related to the grand jury subpoena since April 2011.

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 Treasury’s 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 who 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 will 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.  On March 26, 2014 the Company and BOHR entered into the MOU with the FRB and the BFI. Under the MOU, the Company and BOHR have agreed that they will receive the prior written approval of the FRB and the BFI before:

· either the Company or BOHR declares or pays dividends of any kind;

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· the Company makes any payments on its trust preferred securities;

· the Company incurs or guarantees any debt; or

· the Company purchases or redeems any shares of its stock.

In addition, the MOU institutes certain reporting requirements and addresses ongoing regulatory requirements. Shore is not a party to the MOU and is not subject to its restrictions or requirements.

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

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

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

In addition, as a public company we are subject to securities laws and standards imposed by the Sarbanes-Oxley Act of 2002. Because we are a relatively small company, the costs of compliance are disproportionate compared with much larger organizations.  Continued growth of legal and regulatory compliance mandates could adversely affect our expenses, future results of operations, and the market price of our Common Stock.  In addition, the government and regulatory authorities have the power to impose rules or other 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.  The full impact of the Volcker Rule, a component of the Dodd-Frank Act, is yet to be determined.  However, should the Company have to divest itself of any investments deemed covered funds under the final rule, this may cause the recognition of current unrealized losses and negatively impact current operating results.

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

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minimum Tier 1 capital requirement, changes in the treatment of unrealized gains and losses on available-for-sale securities in the calculation of regulatory capital, and assigns higher risk weightings (150%) to exposures that are more than 90 days past due or are on nonaccrual status and certain commercial real estate facilities that finance the acquisition, development, or construction of real property.  The rules also limit a banking organization’s capital distributions and certain discretionary bonus payments if the banking organization does not hold a “capital conservation buffer” consisting of a specified amount of common equity Tier 1 capital in addition to the amount necessary to meet its minimum risk-based capital requirements.  For community banking organizations, the rules will be phased in beginning in 2015 and 2016.  The Company is diligently assessing the impact of this rule making on our capital and the amount of capital required to support our business, which could adversely affect our results of operations and financial condition.

For further discussion of these issues, see the “Government Supervision and Regulation”section found in“Part I, Item 1 – Business” of our Annual Report on Form 10-K for the year ended December 31, 2013, and incorporated by reference herein.

Proposed and final regulations could restrict our ability to originate loans.

The CFPB has issued a rule designed to clarify how lenders can avoid legal liability under the Dodd-Frank Act, which would hold lenders accountable for ensuring a borrower’s ability to repay a mortgage. Loans that meet this definition of “qualified mortgage” will be presumed to have complied with the new ability-to-repay standard. Under the CFPB’s rule, a “qualified mortgage” loan must not contain certain specified features, including:

· excessive upfront points and fees (those exceeding 3% of the total loan amount, less “bona fide discount points” for prime loans);

· interest-only payments;

· negative-amortization; and

· terms longer than 30 years.

Also, to qualify as a “qualified mortgage,” a borrower’s total monthly debt-to-income ratio may not exceed 43%. Lenders must also verify and document the income and financial resources relied upon to qualify the borrower for the loan and underwrite the loan based on a fully amortizing payment schedule and maximum interest rate during the first five years, taking into account all applicable taxes, insurance and assessments. The CFPB’s rule on qualified mortgages and similar rules could limit our ability to make certain types of loans or loans to certain borrowers, or could make it more expensive and time-consuming to make these loans, which could limit our growth or profitability.

The soundness of other financial institutions could adversely affect us.

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

ITEM 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 first quarter of 2014.

ITEM 3 - DEFAULTS UPON SENIOR SECURITIES

None.

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ITEM 4 - MINE SAFETY DISCLOSURES

None.

ITEM 5 - OTHER INFORMATION

None.

ITEM 6 - EXHIBITS

Exhibit Number	Description
10.1	Memorandum of Understanding, effective March 26, 2014, by and among Hampton Roads Bankshares, Inc., The Bank of Hampton Roads, the Federal Reserve Bank of Richmond, and Virginia State Corporation Commission Bureau of Financial Institutions, incorporated by reference from Exhibit 10.1 to the Registrant's Form 8-K, filed March 26, 2014.
10.2	Underwriting Agreement, dated April 9, 2014, among Hampton Roads Bankshares, Inc., the United States Department of the Treasury, Sandler O’Neill & Partners, L.P. and Keefe, Bruyette & Woods, Inc., incorporated by reference from Exhibit 1.1 to the Registrant's Form 8-K, filed April 9, 2014.
31.1	The Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer, filed herewith.
31.2	The Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer, filed herewith.
32.1	Statement of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, filed herewith.
101	The following materials from the Hampton Roads Bankshares, Inc. Quarterly Report on Form 10-Q for the three months ended March 31, 2014 formatted in eXtensible Business Reporting Language: (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Operations, (iii) Consolidated Statements of Comprehensive Income, (iv) Consolidated Statements of Changes in Shareholders Equity, (v) Consolidated Statements of Cash Flows, and (vi) Notes to Consolidated Financial Statements, filed herewith.

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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:  May 9, 2014	/s/ Thomas B. Dix III
	Thomas B. Dix III
	Chief Financial Officer

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