Xenith Bankshares (HMPR) 10-Q 2015 Q3 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 September 30, 2015

Commission File Number:  001-32968

Hampton Roads Bankshares, Inc.

(Exact name of registrant as specified in its charter)

Virginia	54-2053718
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
641 Lynnhaven Parkway Virginia Beach, Virginia	23452
(Address of principal executive offices)	(Zip Code)

(757) 217-1000

(Registrant's telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.

Yes x No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes x No ¨

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

Large accelerated filer        ¨    Accelerated filer        ¨

Non-accelerated filer        ¨    Smaller reporting company    x

(Do not check if a smaller reporting company)

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

Yes ¨ No x

The number of shares outstanding of the issuer's Common Stock as of October 30, 2015 was 170,954,480 shares, par value $0.01 per share.

HAMPTON ROADS BANKSHARES, INC.

Table of Contents

PART I	FINANCIAL INFORMATION
ITEM 1	FINANCIAL STATEMENTS
	Consolidated Balance Sheets	3
	September 30, 2015
	December 31, 2014
	Consolidated Statements of Operations	4
	Three and nine months ended September 30, 2015 and 2014
	Consolidated Statements of Comprehensive Income	5
	Three and nine months ended September 30, 2015 and 2014
	Consolidated Statement of Changes in Shareholders' Equity	6
	Nine months ended September 30, 2015
	Consolidated Statements of Cash Flows	7
	Nine months ended September 30, 2015 and 2014
	Notes to Consolidated Financial Statements	8
ITEM 2	MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION	44
	AND RESULTS OF OPERATIONS
ITEM 3	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	57
ITEM 4	CONTROLS AND PROCEDURES	58
PART II	OTHER INFORMATION
ITEM 1	LEGAL PROCEEDINGS	59
ITEM 1A	RISK FACTORS	59
ITEM 2	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	59
ITEM 3	DEFAULTS UPON SENIOR SECURITIES	59
ITEM 4	MINE SAFETY DISCLOSURES	59
ITEM 5	OTHER INFORMATION	59
ITEM 6	EXHIBITS	59
	SIGNATURES	61
	EXHIBIT INDEX	62

2

HAMPTON ROADS BANKSHARES, INC

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

CONSOLIDATED BALANCE SHEETS

(in thousands, except share data)
(unaudited)	September 30, 2015			December 31, 2014
Assets:
Cash and due from banks	$	17,616		$	16,684
Interest-bearing deposits in other banks	1,035			1,349
Overnight funds sold and due from Federal Reserve Bank	46,110			85,586
Investment securities available for sale, at fair value	204,034			302,221
Restricted equity securities, at cost	10,398			15,827
Loans held for sale	46,476			22,092
Loans	1,534,596			1,422,935
Allowance for loan losses	(22,874		)	(27,050		)
Net loans	1,511,722			1,395,885
Premises and equipment, net	61,706			63,519
Interest receivable	4,149			4,503
Other real estate owned and repossessed assets,
net of valuation allowance	12,450			21,721
Bank-owned life insurance	50,406			49,536
Other assets	11,510			9,683
Totals assets	$	1,977,612		$	1,988,606
Liabilities and Shareholders' Equity:
Deposits:
Noninterest-bearing demand	$	330,514		$	266,921
Interest-bearing:
Demand	625,128			621,066
Savings	63,651			56,221
Time deposits:
Less than $100	344,142			342,794
$100 or more	323,373			294,346
Total deposits	1,686,808			1,581,348
Federal Home Loan Bank borrowings	40,000			165,847
Other borrowings	29,569			29,224
Interest payable	483			560
Other liabilities	16,313			14,130
Total liabilities	1,773,173			1,791,109
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; 170,954,480 and 170,572,217 shares issued
and outstanding on September 30, 2015 and December 31, 2014,
respectively	1,709			1,706
Capital surplus	590,120			588,692
Accumulated deficit	(391,171		)	(395,535		)
Accumulated other comprehensive income, net of tax	2,944			2,134
Total shareholders' equity before non-controlling interest	203,602			196,997
Non-controlling interest	837			500
Total shareholders' equity	204,439			197,497
Total liabilities and shareholders' equity	$	1,977,612		$	1,988,606
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 share and per share data)	Three Months Ended						Nine Months Ended
(unaudited)	September 30, 2015			September 30, 2014			September 30, 2015			September 30, 2014
Interest Income:
Loans, including fees	$	17,296		$	15,967		$	50,908		$	47,243
Investment securities	1,436			2,331			4,733			6,864
Overnight funds sold and due from FRB	28			45			126			128
Total interest income	18,760			18,343			55,767			54,235
Interest Expense:
Deposits:
Demand	661			697			2,005			1,978
Savings	15			8			39			24
Time deposits:
Less than $100	968			868			2,821			2,450
$100 or more	991			830			2,932			2,346
Interest on deposits	2,635			2,403			7,797			6,798
Federal Home Loan Bank borrowings	95			357			668			1,185
Other borrowings	439			411			1,281			1,088
Total interest expense	3,169			3,171			9,746			9,071
Net interest income	15,591			15,172			46,021			45,164
Provision for loan losses	—			16			600			116
Net interest income
after provision for loan losses	15,591			15,156			45,421			45,048
Noninterest Income:
Mortgage banking revenue	5,722			3,215			15,444			8,169
Service charges on deposit accounts	1,273			1,196			3,713			3,550
Income from bank-owned life insurance	302			278			956			3,823
Gain on sale of investment securities available for sale (1)	—			58			238			243
Loss on sale of premises and equipment	—			(82		)	(14		)	(113		)
Gain on sale of other real estate owned and repossessed assets	34			173			53			317
Impairment of other real estate owned and repossessed assets	(259		)	(426		)	(1,524		)	(1,852		)
Visa check card income	677			710			1,994			1,957
Other	666			1,012			2,032			2,863
Total noninterest income	8,415			6,134			22,892			18,957
Noninterest Expense:
Salaries and employee benefits	13,688			10,210			35,604			28,886
Professional and consultant fees	1,542			1,146			3,810			4,296
Occupancy	1,664			1,712			4,919			4,933
FDIC insurance	339			601			1,361			1,755
Data processing	1,516			1,248			4,554			3,414
Problem loan and repossessed asset costs	538			489			1,150			1,296
Equipment	349			490			1,034			1,254
Directors' and regional board fees	433			325			1,028			1,255
Advertising and marketing	386			423			1,090			1,026
Other	2,696			2,505			7,710			7,263
Total noninterest expense	23,151			19,149			62,260			55,378
Income before provision for income taxes	855			2,141			6,053			8,627
Provision for income taxes (benefit)	51			(45		)	126			(1		)
Net income	804			2,186			5,927			8,628
Net income attributable to non-controlling interest	501			190			1,563			297
Net income attributable to
Hampton Roads Bankshares, Inc.	$	303		$	1,996		$	4,364		$	8,331
Per Share:
Basic and diluted income per share	$	—		$	0.01		$	0.03		$	0.05
(1) Includes $0, $58, $238 and $243 accumulated other comprehensive income reclassifications for unrealized net gains on available for sale securities during the three months ended September 30, 2015 and 2014 and the nine months ended September 30, 2015 and 2014, respectively.
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										Nine Months Ended
(unaudited)	September 30, 2015				September 30, 2014						September 30, 2015					September 30, 2014
Net income			$	804				$	2,186					$	5,927				$	8,628
Other comprehensive income (loss),
net of tax
Change in unrealized gain (loss)
on securities available for sale	$	350			$	(1,922	)				$	1,048				$	2,506
Reclassification adjustment for
securities gains included in
net income	—				(58		)				(238		)			(243		)
Other comprehensive income (loss),
net of tax			350					(1,980		)				810					2,263
Comprehensive income			1,154					206						6,737					10,891
Comprehensive income
attributable to non-controlling interest			501					190						1,563					297
Comprehensive income
attributable to
Hampton Roads Bankshares, Inc.			$	653				$	16					$	5,174				$	10,594
See accompanying notes to consolidated financial statements.

5

HAMPTON ROADS BANKSHARES, INC

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

									Accumulated
									Other		Non-			Total
(in thousands, except share data)	Common Stock			Capital		Accumulated			Comprehensive		controlling			Shareholders'
(unaudited)	Shares	Amount		Surplus		Deficit			Income		Interest			Equity
Balance at December 31, 2014	170,572,217	$	1,706	$	588,692	$	(395,535	)	$	2,134	$	500		$	197,497
Net income	—	—		—		4,364			—		1,563			5,927
Other comprehensive income	—	—		—		—			810		—			810
Share-based compensation expense	—	—		1,428		—			—		—			1,428
Net settlement of restricted stock units	382,263	3		—		—			—		—			3
Distributed non-controlling interest	—	—		—		—			—		(1,226		)	(1,226		)
Balance at September 30, 2015	170,954,480	$	1,709	$	590,120	$	(391,171	)	$	2,944	$	837		$	204,439
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)	Nine Months Ended
(unaudited)	September 30, 2015			September 30, 2014
Operating Activities:
Net income	$	5,927		$	8,628
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation and amortization	2,387			2,554
Amortization of intangible assets and fair value adjustments	444			(33		)
Provision for loan losses	600			116
Proceeds from mortgage loans held for sale	528,079			329,611
Originations of mortgage loans held for sale	(552,463		)	(330,337		)
Share-based compensation expense	1,428			843
Net amortization of premiums and accretion of discounts on investment securities available for sale	1,712			1,537
Income from bank-owned life insurance	(956		)	(3,823		)
Gain on sale of investment securities available for sale	(238		)	(243		)
Loss on sale of premises and equipment	14			113
Gain on sale of other real estate owned and repossessed assets	(53		)	(317		)
Impairment of other real estate owned and repossessed assets	1,524			1,852
Changes in:
Interest receivable	354			322
Other assets	(1,818		)	142
Interest payable	(77		)	(5,498		)
Other liabilities	2,183			(490		)
Net cash provided by (used in) operating activities	(10,953		)	4,977
Investing Activities:
Proceeds from maturities and calls of investment securities available for sale	25,670			30,853
Proceeds from sale of investment securities available for sale	82,695			115,756
Purchase of investment securities available for sale	(10,842		)	(172,255		)
Proceeds from sale of restricted equity securities	8,916			1,975
Purchase of restricted equity securities	(3,487		)	(427		)
Proceeds from sale of premises and equipment	—			1,550
Purchase of premises and equipment	(588		)	(1,174		)
Net increase in loans	(119,807		)	(5,410		)
Proceeds from bank-owned life insurance death benefit	80			5,341
Proceeds from sale of other real estate owned and repossessed assets, net	10,721			14,981
Net cash used in investing activities	(6,642		)	(8,810		)
Financing Activities:
Net increase in deposits	105,460			89,313
Repayments of Federal Home Loan Bank borrowings	(165,500		)	(27,516		)
Proceeds from Federal Home Loan Bank borrowings	40,000			—
Settlement of restricted stock units	3			(25		)
Distributed non-controlling interest	(1,226		)	(144		)
Net cash provided by (used in) financing activities	(21,263		)	61,628
Increase (decrease) in cash and cash equivalents	(38,858		)	57,795
Cash and cash equivalents at beginning of period	103,619			62,301
Cash and cash equivalents at end of period	$	64,761		$	120,096
Supplemental cash flow information:
Cash paid for interest	$	9,218		$	14,569
Cash paid for income taxes	8			—
Supplemental non-cash information:
Change in unrealized gain (loss) on securities available for sale	$	810		$	2,263
Transfer from other real estate owned and repossessed assets to loans	696			1,661
Transfer from other real estate owned and repossessed assets to other assets	449			—
Transfer from loans to other real estate owned and repossessed assets	4,066			4,286
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 nine months ended September 30, 2015 are not necessarily indicative of the results to be expected for the full year. As of September 30, 2015, the Company had two banking subsidiaries, Bank of Hampton Roads (“BOHR”) and Shore Bank (“Shore”, collectively the “Banks”), which constitute substantially all of the Company’s assets and operations. After receiving regulatory approval, the Company merged BOHR and Shore into one bank subsidiary on October 13, 2015.

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, 2014 (“2014 Form 10-K”).

Use of Estimates in the Preparation of Financial Statements

The preparation of consolidated financial statements in conformity with 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 the valuation of tax assets and liabilities.

Recent Accounting Pronouncements

In January 2014, the FASB issued ASU 2014-04, Receivables - Troubled Debt Restructurings by Creditors (Subtopic 310-40): Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon a Foreclosure, which clarifies when banks and similar institutions (creditors) should reclassify mortgage loans collateralized by residential real estate properties from the loan portfolio to other real estate owned (OREO). The ASU defines when an in-substance repossession or foreclosure has occurred and when a creditor is considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan. This ASU allows for prospective or modified retrospective application. The effective date for public business entities is for annual periods, and interim periods within those annual periods, beginning after December 15, 2014. Early adoption is permitted. The adoption of the new guidance did not have a material impact on the Company’s consolidated financial statements.

During the second quarter of 2014, ASU 2014-09, Revenue from Contracts with Customers (“new revenue standard”), was issued. ASU 2014-09 represents a comprehensive reform of many of the revenue recognition requirements in GAAP. The ASU creates a new topic within the Accounting Standards Codification (“ASC”), Topic 606, Revenue from Contracts with Customers. The new revenue standard will supersede the current revenue recognition requirements in Topic 605, Revenue Recognition, and supersedes or amends much of the industry-specific revenue recognition guidance found throughout the ASC. The core principle of the new revenue standard is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods and services. The ASU creates a five-step process for achieving that core principle: (1) identifying the contract with the customer, (2) identifying the performance obligations in the contract, (3) determining the transaction price, (4) allocating the transaction price to the performance obligations, and (5) recognizing revenue when an entity has completed the performance obligations. The ASU also requires additional disclosures that allow users of the financial statements to understand the nature, timing, and uncertainty of revenue and cash flows resulting from contracts with customers. During the third quarter of 2015, ASU 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date amends the effective date for ASU 2014-09 for the Company to January 1, 2018. The new revenue standard permits the use of retrospective or cumulative effect transition methods. It appears that a majority of the Company’s contracts with customers (i.e., financial instruments) do not fall within the scope of the new revenue standard. Therefore, the Company does not expect the ASU to have a material impact on the Company’s reported financial results.

8

HAMPTON ROADS BANKSHARES, INC

PART I. FINANCIAL INFORMATION

ITEM 1. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE B - Earnings Per Share

The following table shows the basic and diluted earnings per share calculations for the three and nine months ended September 30, 2015 and 2014.  There were 2,425,140 and 4,943,775 stock options not included in the diluted earnings per share calculations for the three and nine months ended September 30, 2015 and September 30, 2014, respectively, because to do so would be antidilutive.

(in thousands, except share and per share data)	Three Months Ended				Nine Months Ended
(unaudited)	September 30, 2015		September 30, 2014		September 30, 2015		September 30, 2014
Net income attributable to Hampton Roads Bankshares, Inc.	$	303	$	1,996	$	4,364	$	8,331
Shares:
Weighted average shares outstanding	170,803,757		170,292,189		170,694,643		170,273,089
Vested restricted stock units	725,381		692,934		725,381		692,934
Weighted average number of common shares outstanding	171,529,138		170,985,123		171,420,024		170,966,023
Dilutive effect of TARP-related warrants	496,782		432,337		474,212		436,348
Dilutive effect of Restricted stock units	484,243		631,817		416,066		651,087
Dilutive effect of Stock options	273,334		—		177,799		—
Total dilutive effect	1,254,359		1,064,154		1,068,077		1,087,435
Diluted weighted average number of common shares outstanding	172,783,497		172,049,277		172,488,101		172,053,458
Basic and diluted income per share	$	—	$	0.01	$	0.03	$	0.05

9

HAMPTON ROADS BANKSHARES, INC

PART I. FINANCIAL INFORMATION

ITEM 1. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE C - Investment Securities

The amortized cost, gross unrealized gains and losses, and fair values of investment securities available for sale at September 30, 2015 and December 31, 2014 were as follows.

	September 30, 2015
			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
(in thousands)	Cost		Gains		Losses		Value
U.S. agency securities	$	13,568	$	644	$	—	$	14,212
Corporate bonds	11,996		—		690		11,306
Mortgage-backed securities -
Agency	150,775		2,950		62		153,663
Asset-backed securities	23,781		7		366		23,422
Equity securities	970		461		—		1,431
Total investment securities
available for sale	$	201,090	$	4,062	$	1,118	$	204,034

	December 31, 2014
			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
(in thousands)	Cost		Gains		Losses		Value
U.S. agency securities	$	17,042	$	611	$	—	$	17,653
Corporate bonds	15,080		23		543		14,560
Mortgage-backed securities -
Agency	212,650		2,991		213		215,428
Asset-backed securities	54,345		—		1,148		53,197
Equity securities	970		422		9		1,383
Total investment securities
available for sale	$	300,087	$	4,047	$	1,913	$	302,221

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 September 30, 2015 and December 31, 2014.

	September 30, 2015
(in thousands)	Less than 12 Months				12 Months or More				Total
			Unrealized				Unrealized				Unrealized
Description of Securities	Fair Value		Loss		Fair Value		Loss		Fair Value		Loss
Corporate bonds	$	—	$	—	$	11,306	$	690	$	11,306	$	690
Mortgage-backed securities -
Agency	7,926		42		1,585		20		9,511		62
Asset-backed securities	14,940		168		5,744		198		20,684		366
	$	22,866	$	210	$	18,635	$	908	$	41,501	$	1,118

10

HAMPTON ROADS BANKSHARES, INC

PART I. FINANCIAL INFORMATION

ITEM 1. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

	December 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
Corporate bonds	11,462		542		2,517		1		13,979		543
Mortgage-backed securities -
Agency	17,881		77		7,895		136		25,776		213
Asset-backed securities	34,896		570		15,379		578		50,275		1,148
Equity securities	181		9		—		—		181		9
	$	64,420	$	1,198	$	25,791	$	715	$	90,211	$	1,913

Debt securities with unrealized losses totaling $1.1 million at September 30, 2015 included four corporate securities, eight mortgage-backed agency securities, and eight asset-backed securities, compared with unrealized losses totaling $1.9 million at December 31, 2014, which included five corporate securities, twelve mortgage-backed agency securities, and eighteen asset-backed securities. In instances where an unrealized loss did occur, there was no indication of an adverse change in credit on any of the underlying securities in the tables above. Management believes no individual unrealized loss represented an other-than-temporary impairment as of those dates. The Company does not intend to sell, and it is not more likely than not that the Company will be required to sell, the securities before the recovery of their amortized cost basis, which may be at maturity.

At September 30, 2015, none of the equity securities experienced unrealized losses compared with one of the equity securities which experienced an unrealized loss totaling $9 thousand at December 31, 2014. The Company’s unrealized losses on equity securities were caused by what management deems to be transitory fluctuations in market valuation.

Other-than-temporary impairment (“OTTI”)

During the nine months ended September 30, 2015 and 2014, none of the investment securities available for sale were determined to be other-than-temporarily impaired; therefore, no losses were recognized through noninterest income.

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

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

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 September 30, 2015 and December 31, 2014 are shown below. 

11

HAMPTON ROADS BANKSHARES, INC

PART I. FINANCIAL INFORMATION

ITEM 1. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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. 

	September 30, 2015				December 31, 2014
	Amortized				Amortized
(in thousands)	Cost		Fair Value		Cost		Fair Value
Due in one year or less	$	—	$	—	$	970	$	982
Due after one year
but less than five years	2,255		2,317		5,670		5,726
Due after five years
but less than ten years	12,731		12,135		13,228		12,806
Due after ten years	10,578		11,066		12,254		12,699
Mortgage-backed securities -
Agency	150,775		153,663		212,650		215,428
Asset-backed securities	23,781		23,422		54,345		53,197
Equity securities	970		1,431		970		1,383
Total available for sale securities	$	201,090	$	204,034	$	300,087	$	302,221

Federal Home Loan Bank (“FHLB”)

The Company’s investment in FHLB stock totaled $3.5 million at September 30, 2015 and $9.2 million at December 31, 2014.  FHLB stock is generally viewed as a long-term investment and as a restricted investment security because it is required to be held in order to access FHLB advances (i.e. borrowings).  It is carried at cost as there is no active market or exchange for the stock other than the FHLB or member institutions.  Therefore, when evaluating FHLB stock for impairment, its value is based on ultimate recoverability of the par value rather than by recognizing temporary declines in value.  The Company does not consider this investment to be other-than-temporarily impaired at September 30, 2015 and December 31, 2014, and no impairment has been recognized.

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

The Company’s investment in FRB and other restricted stock totaled $6.9 million at September 30, 2015 and $6.6 million at December 31, 2014.  FRB stock comprises the majority of this amount and is generally viewed as a long-term investment and as a restricted investment security as it is required to be held to effect membership in the Federal Reserve System.  It is carried at cost as there is not an active market or exchange for the stock other than the FRB or member institutions.  The Company does not consider these investments to be other-than-temporarily impaired at September 30, 2015 and December 31, 2014, except for one restricted equity security, which was determined to be other-than-temporarily impaired at December 31, 2014 for which a $10 thousand impairment was recorded in 2014. No impairment has been recognized for any of the other restricted equity securities, including the investment in FRB.

12

HAMPTON ROADS BANKSHARES, INC

PART I. FINANCIAL INFORMATION

ITEM 1. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE D - Loans and Allowance for Loan Losses

The Company offers a full range of commercial, real estate, and consumer loans described in further detail below.  Our loan portfolio is comprised of the following categories:  commercial and industrial, construction, real estate-commercial mortgage, real estate-residential mortgage, and installment.  Our primary lending objective is to meet business and consumer needs in our market areas while maintaining our standards of profitability and credit quality and enhancing client relationships.  All lending decisions are based upon a thorough evaluation of the financial strength and credit history of the borrower and the quality and value of the collateral securing the loan.  With few exceptions, personal guarantees are required on all loans.

In May 2014, Shore launched Shore Premier Finance ("SPF"), a specialty finance unit that specializes in marine financing for U.S. Coast Guard documented vessels to customers throughout the United States. Through direct marine loan originations, as well as purchases of existing portfolios of marine loans, the Company's intention is to significantly grow the installment loan portion of its loan portfolio. During 2012 and 2013, the Company purchased several portfolios of marine loans totaling $55.7 million that are classified as installment loans and during the first quarter of 2015, SPF arranged a $104.7 million marine loan portfolio purchase, of which $75.3 million were classified as installment loans and $29.4 million were commercial floor plan loans classified as commercial and industrial.

The total of our loans by segment at September 30, 2015 and December 31, 2014 are as follows.

(in thousands)	September 30, 2015			December 31, 2014
Commercial and Industrial	$	231,754		$	219,029
Construction	137,410			136,955
Real estate - commercial mortgage	658,189			639,163
Real estate - residential mortgage	352,345			354,017
Installment	155,423			74,821
Deferred loan fees and related costs	(525		)	(1,050		)
Total loans	$	1,534,596		$	1,422,935

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 and nine months ended September 30, 2015 and 2014 is as follows.

	Three Months Ended September 30, 2015
							Real Estate
	Commercial						Commercial			Residential
(in thousands)	and Industrial			Construction			Mortgage			Mortgage			Installment			Unallocated			Total
Allowance for loan losses:
Beginning balance	$	6,589		$	4,281		$	6,440		$	5,870		$	788		$	3,768		$	27,736
Charge-offs	(3,705		)	(1,557		)	(22		)	(312		)	(42		)	—			(5,638		)
Recoveries	235			126			284			125			6			—			776
Provision	(36		)	210			(507		)	1,161			20			(848		)	—
Ending balance	$	3,083		$	3,060		$	6,195		$	6,844		$	772		$	2,920		$	22,874

13

HAMPTON ROADS BANKSHARES, INC

PART I. FINANCIAL INFORMATION

ITEM 1. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

	Three Months Ended September 30, 2014
							Real Estate
	Commercial						Commercial			Residential
(in thousands)	and Industrial			Construction			Mortgage			Mortgage			Installment			Unallocated			Total
Allowance for loan losses:
Beginning balance	$	1,528		$	3,984		$	7,652		$	7,134		$	1,560		$	4,204		$	26,062
Charge-offs	(200		)	(943		)	(257		)	(1,020		)	(153		)	—			(2,573		)
Recoveries	2,723			1,113			469			883			25			—			5,213
Provision	(1,707		)	(306		)	1,430			335			406			(142		)	16
Ending balance	$	2,344		$	3,848		$	9,294		$	7,332		$	1,838		$	4,062		$	28,718

	Nine Months Ended September 30, 2015
							Real Estate
	Commercial						Commercial			Residential
(in thousands)	and Industrial			Construction			Mortgage			Mortgage			Installment			Unallocated			Total
Allowance for loan losses:
Beginning balance	$	4,605		$	4,342		$	6,854		$	7,142		$	979		$	3,128		$	27,050
Charge-offs	(4,074		)	(2,021		)	(288		)	(782		)	(170		)	—			(7,335		)
Recoveries	875			617			518			507			42			—			2,559
Provision	1,677			122			(889		)	(23		)	(79		)	(208		)	600
Ending balance	$	3,083		$	3,060		$	6,195		$	6,844		$	772		$	2,920		$	22,874
Ending balance:  attributable to
loans individually evaluated
for impairment	$	175		$	715		$	573		$	2,134		$	1					$	3,598
Recorded investment: loans
individually evaluated for
impairment	$	4,236		$	20,983		$	25,638		$	12,405		$	66
Ending balance:  attributable to
loans collectively evaluated
for impairment	$	2,908		$	2,345		$	5,622		$	4,710		$	771		$	2,920		$	19,276
Recorded investment: loans
collectively evaluated for
impairment	$	227,518		$	116,427		$	632,551		$	339,940		$	155,357

14

HAMPTON ROADS BANKSHARES, INC

PART I. FINANCIAL INFORMATION

ITEM 1. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

	Nine Months Ended September 30, 2014
							Real Estate
	Commercial						Commercial			Residential
(in thousands)	and Industrial			Construction			Mortgage			Mortgage			Installment			Unallocated			Total
Allowance for loan losses:
Beginning balance	$	2,404		$	9,807		$	10,135		$	7,914		$	521		$	4,250		$	35,031
Charge-offs	(1,361		)	(6,370		)	(2,466		)	(3,276		)	(678		)	—			(14,151		)
Recoveries	2,993			2,396			737			1,441			155			—			7,722
Provision	(1,692		)	(1,985		)	888			1,253			1,840			(188		)	116
Ending balance	$	2,344		$	3,848		$	9,294		$	7,332		$	1,838		$	4,062		$	28,718
Ending balance:  attributable to
loans individually evaluated
for impairment	$	463		$	602		$	2,096		$	2,244		$	47					$	5,452
Recorded investment: loans
individually evaluated for
impairment	$	2,051		$	6,246		$	27,430		$	17,627		$	115
Ending balance:  attributable to
loans collectively evaluated
for impairment	$	1,881		$	3,246		$	7,198		$	5,088		$	1,791		$	4,062		$	23,266
Recorded investment: loans
collectively evaluated for
impairment	$	203,865		$	125,260		$	607,838		$	329,488		$	62,047

Management believes the allowance for loan losses as of September 30, 2015is adequate to absorb losses inherent in the portfolio.  However, the allowance is subject to regulatory examinations and determination as to adequacy, which may take into account such factors as the methodology used to calculate the allowance and the size of the allowance in comparison to peer banks identified by regulatory agencies.  Such agencies may require us to recognize additions to the allowance for loan losses based on their judgments about information available at the time of the examinations.

Impaired Loans

Total impaired loans were $63.3 million and $48.9 million at September 30, 2015, and December 31, 2014, respectively.  The Company continues to resolve its troubled loans through charge-offs, curtailments, pay offs, and returns of loans to performing status. Collateral dependent impaired loans were $57.9 million and $43.3 million at September 30, 2015, and December 31, 2014, 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 $40.7 million and $29.1 million at September 30, 2015, and December 31, 2014, respectively.  Loans written down to their estimated fair value of collateral less the costs to sell account for $22.0 million and $7.6 million of the impaired loans for which no allowance has been provided as of September 30, 2015, and December 31, 2014, respectively. The weighted average age of appraisals for collateral dependent loans is 0.94 and 0.56 years at September 30, 2015 and December 31, 2014, respectively.  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 September 30, 2015 and December 31, 2014, as well as average investment and interest recognized for the three and nine months ended September 30, 2015 and 2014, for impaired loans by major segment and class.

15

HAMPTON ROADS BANKSHARES, INC

PART I. FINANCIAL INFORMATION

ITEM 1. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

	September 30, 2015						Three Months Ended   September 30, 2015				Nine Months Ended   September 30, 2015
	Recorded		Unpaid		Related		Average		Interest		Average		Interest
(in thousands)	Investment		Balance		Allowance		Investment		Recognized		Investment		Recognized
With no related
allowance recorded:
Commercial & Industrial	$	3,950	$	4,878	$	—	$	4,017	$	4	$	4,063	$	13
Construction
1-4 family residential
construction	—		—		—		—		—		—		—
Commercial construction	15,425		17,055		—		15,528		—		15,611		—
Real estate
Commercial Mortgage
Owner occupied	12,336		12,553		—		12,711		88		12,771		264
Non-owner occupied	4,172		7,971		—		5,324		8		5,355		15
Residential Mortgage
Secured by 1-4 family
1st lien	3,747		4,272		—		4,302		5		4,344		15
Junior lien	1,024		1,513		—		1,241		1		1,272		3
Installment	65		130		—		70		—		70		—
	$	40,719	$	48,372	$	—	$	43,193	$	106	$	43,486	$	310
With an allowance recorded:
Commercial & Industrial	$	286	$	286	$	175	$	304	$	—	$	317	$	—
Construction
1-4 family residential
construction	—		—		—		—		—		—		—
Commercial construction	5,558		5,558		715		5,577		50		5,628		148
Real estate
Commercial Mortgage
Owner occupied	5,526		5,526		524		5,565		50		5,609		145
Non-owner occupied	3,604		3,604		49		3,612		47		3,633		141
Residential Mortgage
Secured by 1-4 family
1st lien	5,933		6,040		1,392		5,965		38		6,216		123
Junior lien	1,701		1,701		742		1,742		11		1,748		34
Installment	1		1		1		1		—		1		—
	$	22,609	$	22,716	$	3,598	$	22,766	$	196	$	23,152	$	591
Total:
Commercial & Industrial	$	4,236	$	5,164	$	175	$	4,321	$	4	$	4,380	$	13
Construction	20,983		22,613		715		21,105		50		21,239		148
Real estate
Commercial mortgage	25,638		29,654		573		27,212		193		27,368		565
Residential mortgage	12,405		13,526		2,134		13,250		55		13,580		175
Installment	66		131		1		71		—		71		—
Total	$	63,328	$	71,088	$	3,598	$	65,959	$	302	$	66,638	$	901

16

HAMPTON ROADS BANKSHARES, INC

PART I. FINANCIAL INFORMATION

ITEM 1. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

	December 31, 2014						Three Months Ended   September 30, 2014				Nine Months Ended   September 30, 2014
	Recorded		Unpaid		Related		Average		Interest		Average		Interest
(in thousands)	Investment		Balance		Allowance		Investment		Recognized		Investment		Recognized
With no related
allowance recorded:
Commercial & Industrial	$	1,082	$	2,245	$	—	$	1,403	$	2	$	1,439	$	5
Construction
1-4 family residential
construction	—		—		—		—		—		—		—
Commercial construction	4,273		6,765		—		4,853		14		4,897		41
Real estate
Commercial Mortgage
Owner occupied	12,319		12,692		—		14,663		102		14,780		302
Non-owner occupied	3,550		8,130		—		4,331		4		4,381		12
Residential Mortgage
Secured by 1-4 family
1st lien	6,447		7,104		—		7,713		16		7,768		47
Junior lien	1,372		2,729		—		2,333		1		2,347		4
Installment	11		32		—		15		—		15		—
	$	29,054	$	39,697	$	—	$	35,311	$	139	$	35,627	$	411
With an allowance recorded:
Commercial & Industrial	$	565	$	564	$	412	$	764	$	1	$	774	$	4
Construction
1-4 family residential
construction	—		—		—		—		—		—		—
Commercial construction	6,379		6,380		887		1,824		13		2,075		46
Real estate
Commercial Mortgage
Owner occupied	5,313		5,313		379		6,259		59		6,314		174
Non-owner occupied	487		487		100		3,886		—		3,906		—
Residential Mortgage
Secured by 1-4 family
1st lien	4,970		4,981		1,009		5,770		50		5,792		150
Junior lien	1,987		2,013		708		2,641		5		2,650		9
Installment	104		104		47		104		2		104		4
	$	19,805	$	19,842	$	3,542	$	21,248	$	130	$	21,615	$	387
Total:
Commercial & Industrial	$	1,647	$	2,809	$	412	$	2,167	$	3	$	2,213	$	9
Construction	10,652		13,145		887		6,677		27		6,972		87
Real estate
Commercial mortgage	21,669		26,622		479		29,139		165		29,381		488
Residential mortgage	14,776		16,827		1,717		18,457		72		18,557		210
Installment	115		136		47		119		2		119		4
Total	$	48,859	$	59,539	$	3,542	$	56,559	$	269	$	57,242	$	798

17

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 non-performing assets to gross loans plus loans held for sale plus other real estate owned and repossessed assets was 2.94% and 2.95% at September 30, 2015 and December 31, 2014, respectively. The Company’s largest borrower, as measured by total exposure, was downgraded to substandard in the third quarter of 2014, and was placed into nonaccrual status during the second quarter of 2015. Non-performing assets as of September 30, 2015 and December 31, 2014, were as follows.

(in thousands)	September 30, 2015		December 31, 2014
Loans 90 days past due and still accruing interest	$	—	$	—
Nonaccrual loans, including nonaccrual impaired loans	34,378		21,507
Other real estate owned and repossessed assets	12,450		21,721
Non-performing assets	$	46,828	$	43,228

A reconciliation of nonaccrual loans to impaired loans as of September 30, 2015 and December 31, 2014 is as follows.

(in thousands)	September 30, 2015		December 31, 2014
Nonaccrual loans, including nonaccrual impaired loans	34,378		21,507
TDRs on accrual	27,523		25,028
Impaired loans on accrual	1,427		2,324
Total impaired loans	$	63,328	$	48,859

Nonaccrual loans were $34.4 million at September 30, 2015 compared to $21.5 million at December 31, 2014.  The large increase in nonaccrual loans was primarily due to the decision by management to move the Company's largest remaining substandard relationship into nonaccrual during the second quarter of 2015. If income on nonaccrual loans had been recorded under original terms, $1.0 million and $918 thousand of additional interest income would have been recorded for the nine months ended September 30, 2015 and 2014 respectively. 

The following table provides a rollforward of nonaccrual loans for the nine months ended September 30, 2015.

							Real Estate
(in thousands)	Commercial & Industrial			Construction			Commercial Mortgage			Residential Mortgage			Installment			Total
Balance at December 31, 2014	$	1,494		$	3,621		$	8,190		$	8,191		$	11		$	21,507
Transfers in	7,255			16,690			2,796			3,991			114			30,846
Transfers to OREO	—			(14		)	(1,384		)	(2,383		)	—			(3,781		)
Charge-offs	(4,074		)	(2,021		)	(288		)	(782		)	(170		)	(7,335		)
Payments	(670		)	(2,309		)	(987		)	(1,780		)	111			(5,635		)
Return to accrual	—			(476		)	(672		)	(76		)	—			(1,224		)
Balance at September 30, 2015	$	4,005		$	15,491		$	7,655		$	7,161		$	66		$	34,378

18

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 ofSeptember 30, 2015 and December 31, 2014is as follows.

	September 30, 2015
															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	$	153	$	—	$	4,005	$	4,158	$	227,596		$	231,754		$	—
Construction
1-4 family residential
construction	—		271		—		271		24,912			25,183			—
Commercial construction	9		—		15,491		15,500		96,727			112,227			—
Real estate
Commercial Mortgage
Owner occupied	1,404		—		4,139		5,543		245,280			250,823			—
Non-owner occupied	—		—		3,516		3,516		403,850			407,366			—
Residential Mortgage
Secured by 1-4 family
1st lien	—		233		5,467		5,700		218,438			224,138			—
Junior lien	126		—		1,694		1,820		126,387			128,207			—
Installment	—		196		66		262		155,161			155,423			—
Deferred loan fees
and related costs	—		—		—		—		(525		)	(525		)	—
Total	$	1,692	$	700	$	34,378	$	36,770	$	1,497,826		$	1,534,596		$	—

	December 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	$	648	$	—	$	1,494	$	2,142	$	216,887		$	219,029		$	—
Construction
1-4 family residential
construction	—		—		—		—		17,989			17,989			—
Commercial construction	66		395		3,621		4,082		114,884			118,966			—
Real estate
Commercial Mortgage
Owner occupied	4,567		364		4,417		9,348		241,426			250,774			—
Non-owner occupied	504		63		3,773		4,340		384,049			388,389			—
Residential Mortgage
Secured by 1-4 family
1st lien	1,905		266		5,940		8,111		217,656			225,767			—
Junior lien	264		—		2,251		2,515		125,735			128,250			—
Installment	—		—		11		11		74,810			74,821			—
Deferred loan fees
and related costs	—		—		—		—		(1,050		)	(1,050		)	—
Total	$	7,954	$	1,088	$	21,507	$	30,549	$	1,392,386		$	1,422,935		$	—

19

HAMPTON ROADS BANKSHARES, INC

PART I. FINANCIAL INFORMATION

ITEM 1. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Credit Quality

The following tables provide information on September 30, 2015 and December 31, 2014 about the credit quality of the loan portfolio using the Company’s internal rating system as an indicator. 

	September 30, 2015
				Special Mention				Nonaccrual Loans
(in thousands)	Pass					Substandard				Total
Commercial & Industrial	$	217,895		$	8,187	$	1,667	$	4,005	$	231,754
Construction
1-4 family residential
construction	24,791			392		—		—		25,183
Commercial construction	89,486			7,182		68		15,491		112,227
Real estate
Commercial Mortgage
Owner occupied	228,188			15,189		3,307		4,139		250,823
Non-owner occupied	387,580			7,482		8,788		3,516		407,366
Residential Mortgage
Secured by 1-4 family
1st lien	201,301			13,433		3,937		5,467		224,138
Junior lien	119,841			4,928		1,744		1,694		128,207
Installment	154,299			1,001		57		66		155,423
Deferred loan fees
and related costs	(525		)	—		—		—		(525		)
Total	$	1,422,856		$	57,794	$	19,568	$	34,378	$	1,534,596

	December 31, 2014
				Special Mention				Nonaccrual Loans
(in thousands)	Pass					Substandard				Total
Commercial & Industrial	$	195,564		$	14,455	$	7,516	$	1,494	$	219,029
Construction
1-4 family residential
construction	17,623			366		—		—		17,989
Commercial construction	88,970			9,077		17,298		3,621		118,966
Real estate
Commercial Mortgage
Owner occupied	218,436			22,289		5,632		4,417		250,774
Non-owner occupied	369,745			9,778		5,093		3,773		388,389
Residential Mortgage
Secured by 1-4 family
1st lien	194,104			20,191		5,532		5,940		225,767
Junior lien	118,061			5,686		2,252		2,251		128,250
Installment	73,700			1,002		108		11		74,821
Deferred loan fees
and related costs	(1,050		)	—		—		—		(1,050		)
Total	$	1,275,153		$	82,844	$	43,431	$	21,507	$	1,422,935

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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 September 30, 2015 and December 31, 2014, loans classified as TDRs were $29.1 million and $28.4 million, respectively.  The following table shows the loans classified as TDRs by management at September 30, 2015 and December 31, 2014.

(in thousands except number of contracts)	September 30, 2015			December 31, 2014
		Recorded Investment			Recorded Investment
Troubled Debt Restructurings	Number of Contracts			Number of Contracts
Commercial & Industrial	3	$	231	2	$	153
Construction
1-4 family residential construction	—	—		—	—
Commercial construction	5	6,400		13	8,905
Real estate
Commercial Mortgage
Owner occupied	13	13,723		11	13,619
Non-owner occupied	4	4,259		1	264
Residential Mortgage
Secured by 1-4 family, 1st lien	10	3,215		10	4,156
Secured by 1-4 family, junior lien	7	1,227		7	1,292
Installment	—	—		1	4
Total	42	$	29,055	45	$	28,393

Of total TDRs, $27.5 million was accruing and $1.5 million was nonaccruing at September 30, 2015 and $25.0 million was accruing and $3.4 million was nonaccruing at December 31, 2014.  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 may be 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 nine months ended September 30, 2015, $22 thousand of the nonaccrual TDRs were returned to accrual status; $576 thousand of the nonaccrual TDRs were returned to accrual status during the year ended December 31, 2014. 

The following table shows a rollforward of accruing and nonaccruing TDRs for the nine months ended September 30, 2015. 

(in thousands)	Accruing			Nonaccruing			Total
Balance at December 31, 2014	$	25,028		$	3,365		$	28,393
Charge-offs	—			(149		)	(149		)
Payments	(1,531		)	(2,353		)	(3,884		)
New TDR designation	4,545			150			4,695
Release TDR designation	—			—			—
Transfer	(519		)	519			—
Balance at September 30, 2015	$	27,523		$	1,532		$	29,055

The allowance for loan losses allocated to TDRs was $1.6 million and $1.9 million at September 30, 2015 and December 31, 2014, respectively.  There were $149 thousand TDRs charged off and there was $144 thousand allocated portion of allowance for loan losses associated with TDRs charged off, during the nine months ended September 30, 2015. The total of TDRs charged off and the allocated portion of allowance for loan losses associated with TDRs charged off were $3.2 million and $2.9 million, respectively, during the year ended December 31, 2014.

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HAMPTON ROADS BANKSHARES, INC

PART I. FINANCIAL INFORMATION

ITEM 1. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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 and nine months ended September 30, 2015 and September 30, 2014.  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.

	Three Months Ended September 30, 2015
(in thousands except number of contracts)	Rate					Structure
	Number of Contracts	Pre- Modification Outstanding Recorded Investment		Post- Modification Outstanding Recorded Investment		Number of Contracts	Pre- Modification Outstanding Recorded Investment		Post- Modification Outstanding Recorded Investment
Troubled Debt Restructurings
Commercial & Industrial	—	$	—	$	—	1	$	123	$	123
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	—	—		—		—	—		—
Secured by 1-4 family, junior lien	—	—		—		—	—		—
Installment	—	—		—		—	—		—
Total	—	$	—	$	—	1	$	123	$	123

	Three Months Ended September 30, 2014
(in thousands except number of contracts)	Rate					Structure
	Number of Contracts	Pre- Modification Outstanding Recorded Investment		Post- Modification Outstanding Recorded Investment		Number of Contracts	Pre- Modification Outstanding Recorded Investment		Post- Modification Outstanding Recorded Investment
Troubled Debt Restructurings
Commercial & Industrial	—	$	—	$	—	—	$	—	$	—
Construction
1-4 family residential construction	—	—		—		—	—		—
Commercial construction	—	—		—		—	—		—
Real estate
Commercial Mortgage
Owner occupied	—	—		—		1	279		241
Non-owner occupied	—	—		—		—	—		—
Residential Mortgage
Secured by 1-4 family, 1st lien	—	—		—		2	375		84
Secured by 1-4 family, junior lien	—	—		—		2	889		795
Installment	—	—		—		—	—		—
Total	—	$	—	$	—	5	$	1,543	$	1,120

22

HAMPTON ROADS BANKSHARES, INC

PART I. FINANCIAL INFORMATION

ITEM 1. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

	Nine Months Ended September 30, 2015
(in thousands except number of contracts)	Rate					Structure
	Number of Contracts	Pre- Modification Outstanding Recorded Investment		Post- Modification Outstanding Recorded Investment		Number of Contracts	Pre- Modification Outstanding Recorded Investment		Post- Modification Outstanding Recorded Investment
Troubled Debt Restructurings
Commercial & Industrial	—	$	—	$	—	1	$	123	$	123
Construction
1-4 family residential construction	—	—		—		—	—		—
Commercial construction	—	—		—		—	—		—
Real estate
Commercial Mortgage
Owner occupied	2	704		391		—	—		—
Non-owner occupied	—	—		—		3	4,606		4,031
Residential Mortgage
Secured by 1-4 family, 1st lien	—	—		—		1	28		28
Secured by 1-4 family, junior lien	—	—		—		1	122		122
Installment	—	—		—		—	—		—
Total	2	$	704	$	391	6	$	4,879	$	4,304

	Nine Months Ended September 30, 2014
(in thousands except number of contracts)	Rate					Structure
	Number of Contracts	Pre- Modification Outstanding Recorded Investment		Post- Modification Outstanding Recorded Investment		Number of Contracts	Pre- Modification Outstanding Recorded Investment		Post- Modification Outstanding Recorded Investment
Troubled Debt Restructurings
Commercial & Industrial	—	$	—	$	—	1	$	68	$	68
Construction
1-4 family residential construction	—	—		—		—	—		—
Commercial construction	—	—		—		—	—		—
Real estate
Commercial Mortgage
Owner occupied	1	451		451		1	279		241
Non-owner occupied	—	—		—		—	—		—
Residential Mortgage
Secured by 1-4 family, 1st lien	—	—		—		4	783		310
Secured by 1-4 family, junior lien	—	—		—		3	891		797
Installment	—	—		—		—	—		—
Total	1	$	451	$	451	9	$	2,021	$	1,416

For the three and nine months ended September 30, 2015 and 2014, the Company had no loans for which there was a payment default and subsequent movement to nonaccrual status, that were modified as TDR’s within the previous twelve months.

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. 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 as of September 30, 2015 and December 31, 2014.

23

HAMPTON ROADS BANKSHARES, INC

PART I. FINANCIAL INFORMATION

ITEM 1. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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 September 30, 2015 and December 31, 2014.

24

HAMPTON ROADS BANKSHARES, INC

PART I. FINANCIAL INFORMATION

ITEM 1. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE E - Other Real Estate Owned and Repossessed Assets

The following table shows a rollforward of other real estate owned and repossessed assets for the nine months ended September 30, 2015. 

(in thousands)	Amount
Balance at December 31, 2014	$	21,721
Transfers in (via foreclosure)	4,066
Sales	(11,866		)
Gain on sales	53
Impairments	(1,524		)
Balance at September 30, 2015	$	12,450

As of September 30, 2015, there were $3.3 million of residential real estate properties included in the balance of other real estate owned and repossessed assets. Also at September 30, 2015, the Company held $1.0 million of real estate - residential mortgage loans secured by residential real estate properties for which formal foreclosure proceedings are in process.

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 nine months ended September 30, 2015 and 2014 is as follows:

(in thousands)	September 30, 2015			September 30, 2014
Balance at beginning of year	$	7,553		$	12,776
Impairments	1,524			1,852
Charge-offs	(1,464		)	(4,403		)
Balance at end of period	$	7,613		$	10,225

Expenses applicable to other real estate owned and repossessed assets for the three and nine months ended September 30, 2015 and 2014 include the following:

	Three Months Ended						Nine Months Ended
(in thousands)	September 30, 2015			September 30, 2014			September 30, 2015			September 30, 2014
Gain on sale	$	(34	)	$	(173	)	$	(53	)	$	(317	)
Impairments	259			426			1,524			1,852
Operating expenses	403			386			835			1,079
Total	$	628		$	639		$	2,306		$	2,614

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HAMPTON ROADS BANKSHARES, INC

PART I. FINANCIAL INFORMATION

ITEM 1. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE F - Share-Based Compensation Plans

On October 4, 2011, the Company’s shareholders approved the 2011 Omnibus Incentive Plan (the “Plan”), which succeeds the Company’s 2006 Stock Incentive Plan and provided for the grant of up to 2,750,000 shares of our Common Stock as awards to employees of the Company and its related entities, members of the Board of Directors of the Company, and members of the board of directors of any of the Company’s related entities.  On June 25, 2012, the Company’s shareholders approved an amendment to the Plan that increased the number of shares reserved for issuance under the Plan to 13,675,000 of which 3,783,797 remain to be granted as of September 30, 2015.

Stock Options

Outstanding stock options consist of grants made to the Company’s directors and employees under share-based compensation plans that have been approved by the Company’s shareholders.  All outstanding options issued prior to 2014 have original terms that range from five to ten years and are either fully vested and exercisable at the date of grant or vest ratably over three to ten years. During 2014, there were 5,510,035 stock options granted to certain Company executive managers. The options granted during 2014 ratably vest over a four year period between 2015 and 2018, and expire in August 2021. There were no stock options granted during the nine-months ended September 30, 2015. There were 1,716,741 stock options forfeited during the three and nine months ended September 30, 2015 due to the transition of the Company's former CEO. A summary of the Company’s stock option activity and related information for the nine months ended September 30, 2015 is as follows:

	Options Outstanding		Weighted Average Exercise Price		Aggregate Intrinsic Value		Weighted-Average Contractual Term in Years
					(in thousands)
Balance at December 31, 2014	5,521,541		$	2.33	$	344	6.67
Granted	—		—
Forfeited and canceled	(1,716,741	)	1.61
Expired	(2,285	)	432.77
Balance at September 30, 2015	3,802,515		$	2.40	$	1,041	5.93
Options exercisable at
September 30, 2015	1,239,288		$	3.95	$	357	5.90

As of September 30, 2015, there was $2.2 million of total unrecognized compensation cost related to stock options. That cost is expected to be recognized over a weighted-average period of 1.98 years.

Restricted Stock Units

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

26

HAMPTON ROADS BANKSHARES, INC

PART I. FINANCIAL INFORMATION

ITEM 1. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

A summary of the Company’s unvested restricted stock unit activity and related information for the nine months ended September 30, 2015 is as follows.

	Number of Unvested Awards		Weighted-Average Grant Date Fair Value
Balance at December 31, 2014	2,122,561		1.57
Granted	326,429		1.97
Vested	(747,581	)	1.58
Forfeited and canceled	(429,185	)	1.61
Balance at September 30, 2015	1,272,224		$	1.65

Since the establishment of the Plan, there are 1,702,828 restricted stock units that have fully vested, of which 977,447 have settled in Common Stock of the Company as of September 30, 2015. There were 429,185 restricted stock units forfeited during the three and nine months ended September 30, 2015 due to the transition of the Company's former CEO.

As of September 30, 2015, there was $1.6 million of total unrecognized compensation cost related to restricted stock units.  That cost is expected to be recognized over a weighted-average period of 1.53 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 nine months ended September 30, 2015 and 2014 was as follows.

(in thousands)	September 30, 2015		September 30, 2014
Expense recognized:
Related to stock options	$	903	$	196
Related to restricted stock units	525		647

27

HAMPTON ROADS BANKSHARES, INC

PART I. FINANCIAL INFORMATION

ITEM 1. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE G - Business Segment Reporting

The Company has identified its operating segments by product and subsidiary bank.  At September 30, 2015, the Company’s two community bank subsidiaries, BOHR and Shore, provide loan and deposit services through full-service branches and loan production offices located in Virginia, North Carolina, Delaware, and Maryland. After receiving regulatory approval, the Company merged BOHR and Shore into one bank subsidiary on October 13, 2015. Beginning with the fourth quarter 2015 Business Segment Reporting, the Company will report BOHR and Shore as one bank subsidiary. Refer to Note L, Subsequent Events, for further discussion of the bank subsidiary merger.

In addition to its banking operations, the Company has two additional reportable segments:  Mortgage and Corporate. Gateway Bank Mortgage, Inc. comprises our Mortgage segment and provides mortgage banking services such as originating and processing mortgage loans for sale to the secondary market.  Our Corporate segment includes the holding company.

The accounting policies of the reportable segments are the same as those described in the summary of significant accounting policies in the 2014 Form 10-K.  Segment profit and loss is measured by net income.  Intersegment transactions are recorded at cost and eliminated as part of the consolidation process.  Because of the interrelationships between the segments, the information is not indicative of how the segments would perform if they operated as independent entities. 

The following tables show certain financial information as of and for the three and nine months ended September 30, 2015 and 2014 for each segment and in total.

(in thousands)	Total		Elimination			BOHR			Shore		Mortgage		Corporate
Three Months Ended September 30, 2015
Net interest income (loss)	$	15,591	$	—		$	12,404		$	3,394	$	197	$	(404	)
Provision for loan losses	—		—			(14		)	—		14		—
Net interest income (loss)
after provision for loan losses	15,591		—			12,418			3,394		183		(404		)
Noninterest income	8,415		(87		)	3,025			471		5,743		(737		)
Noninterest expense	23,151		(87		)	13,932			3,428		4,673		1,205
Income (loss) before provision
for income taxes	855		—			1,511			437		1,253		(2,346		)
Provision for income taxes	51		—			—			27		22		2
Net income (loss)	804		—			1,511			410		1,231		(2,348		)
Net income attributable to
non-controlling interest	501		—			—			—		501		—
Net income (loss) attributable to
Hampton Roads Bankshares, Inc.	$	303	$	—		$	1,511		$	410	$	730	$	(2,348	)
Total assets at September 30, 2015	$	1,977,612	$	(93,172	)	$	1,609,059		$	389,531	$	63,365	$	8,829

28

HAMPTON ROADS BANKSHARES, INC

PART I. FINANCIAL INFORMATION

ITEM 1. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands)	Total			Elimination			BOHR		Shore			Mortgage		Corporate
Three Months Ended September 30, 2014
Net interest income (loss)	$	15,172		$	—		$	12,382	$	3,037		$	163	$	(410	)
Provision for loan losses	16			—			—		—			16		—
Net interest income (loss)
after provision for loan losses	15,156			—			12,382		3,037			147		(410		)
Noninterest income	6,134			(76		)	2,410		790			3,213		(203		)
Noninterest expense	19,149			(76		)	12,311		3,389			2,971		554
Income (loss) before provision
for income taxes	2,141			—			2,481		438			389		(1,167		)
Provision for income taxes	(45		)	—			—		(31		)	2		(16		)
Net income (loss)	2,186			—			2,481		469			387		(1,151		)
Net income attributable to
non-controlling interest	190			—			—		—			190		—
Net income (loss) attributable to
Hampton Roads Bankshares, Inc.	$	1,996		$	—		$	2,481	$	469		$	197	$	(1,151	)
Total assets at September 30, 2014	$	2,017,167		$	(66,852	)	$	1,699,859	$	335,844		$	38,068	$	10,248

(in thousands)	Total		Elimination			BOHR		Shore		Mortgage			Corporate
Nine Months Ended September 30, 2015
Net interest income (loss)	$	46,021	$	—		$	37,019	$	9,640	$	544		$	(1,182	)
Provision for loan losses	600		—			547		75		(22		)	—
Net interest income (loss)
after provision for loan losses	45,421		—			36,472		9,565		566			(1,182		)
Noninterest income	22,892		(250		)	8,179		1,501		15,506			(2,044		)
Noninterest expense	62,260		(250		)	37,989		9,879		12,409			2,233
Income (loss) before provision
for income taxes	6,053		—			6,662		1,187		3,663			(5,459		)
Provision for income taxes	126		—			—		42		82			2
Net income (loss)	5,927		—			6,662		1,145		3,581			(5,461		)
Net income attributable to
non-controlling interest	1,563		—			—		—		1,563			—
Net income (loss) attributable to
Hampton Roads Bankshares, Inc.	$	4,364	$	—		$	6,662	$	1,145	$	2,018		$	(5,461	)
Total assets at September 30, 2015	$	1,977,612	$	(93,172	)	$	1,609,059	$	389,531	$	63,365		$	8,829

29

HAMPTON ROADS BANKSHARES, INC

PART I. FINANCIAL INFORMATION

ITEM 1. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands)	Total			Elimination			BOHR			Shore			Mortgage		Corporate
Nine Months Ended September 30, 2014
Net interest income (loss)	$	45,164		$	—		$	37,007		$	8,855		$	388	$	(1,086	)
Provision for loan losses	116			—			(260		)	300			76		—
Net interest income (loss)
after provision for loan losses	45,048			—			37,267			8,555			312		(1,086		)
Noninterest income	18,957			(207		)	8,708			2,395			8,165		(104		)
Noninterest expense	55,378			(207		)	35,616			9,218			7,871		2,880
Income (loss) before provision
for income taxes	8,627			—			10,359			1,732			606		(4,070		)
Provision for income taxes	(1		)	—			—			(6		)	21		(16		)
Net income (loss)	8,628			—			10,359			1,738			585		(4,054		)
Net income attributable to
non-controlling interest	297			—			—			—			297		—
Net income (loss) attributable to
Hampton Roads Bankshares, Inc.	$	8,331		$	—		$	10,359		$	1,738		$	288	$	(4,054	)
Total assets at September 30, 2014	$	2,017,167		$	(66,852	)	$	1,699,859		$	335,844		$	38,068	$	10,248

30

HAMPTON ROADS BANKSHARES, INC

PART I. FINANCIAL INFORMATION

ITEM 1. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE H - Derivative Instruments

Derivatives are a financial instrument whose value is based on one or more underlying assets.  The Company originates residential mortgage loans for sale into the secondary market on a best efforts 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 September 30, 2015 and December 31, 2014, the Company had loans held for sale of $46.5 million and $22.1 million, respectively.

Under the contractual relationship in the best efforts method, the Company is obligated to sell the loans only if the loans close.  As a result of the terms of these contractual relationships, the Company is not exposed tochanges in fair valuenor will it realize gains related to its rate-lock commitments due to subsequent changes in interest rates.  At September 30, 2015 and December 31, 2014, 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 $80.1 million and $35.6 million, respectively. 

As of September 30, 2015 and December 31, 2014, the Company has derivative financial instruments not included in hedge relationships. 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 nine months ended September 30, 2015 and 2014, the Company recorded gains totaling $175 thousand and $227 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.

Certain financial instruments, including derivatives, may be eligible for offset in the consolidated balance sheet and/or subject to master netting arrangements. The Company’s derivative transactions with financial institution counterparties are generally executed under International Swaps and Derivative Association (ISDA) master agreements which include right of setoff provisions. In such cases there is generally a legally enforceable right to offset recognized amounts and there may be an intention to settle such amounts on a net basis. Nonetheless, the Company does not generally offset financial instruments for financial reporting purposes.

Information about financial instruments that are eligible for offset in the consolidated balance sheet as of September 30, 2015 and December 31, 2014 is presented in the following tables:

Gross

Net Amounts

Gross Amounts

Amounts

of Assets

Not Offset in the

Gross

Offset in

Presented

Consolidated Balance Sheets

Amounts

the

in the

of

Consolidated

Consolidated

Cash

Recognized

Balance

Balance

Financial

Collateral

Net

(in thousands)

Assets

Sheets

Sheets

Instruments

Received

Amount

Derivative assets:

September 30, 2015

Interest rate swap agreements

$

2,212

$

—

$

2,212

$

—

$

—

$

2,212

December 31, 2014

Interest rate swap agreements

913

—

913

197

—

716

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HAMPTON ROADS BANKSHARES, INC

PART I. FINANCIAL INFORMATION

ITEM 1. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Gross

Net Amounts

Gross Amounts

Amounts

of Liabilities

Not Offset in the

Gross

Offset in

Presented

Consolidated Balance Sheets

Amounts

the

in the

of

Consolidated

Consolidated

Cash

Recognized

Balance

Balance

Financial

Collateral

Net

(in thousands)

Liabilities

Sheets

Sheets

Instruments

Pledged

Amount

Derivative liabilities:

September 30, 2015

Interest rate swap agreements

$

2,212

$

—

$

2,212

$

—

$

2,212

$

—

December 31, 2014

Interest rate swap agreements

913

—

913

197

566

150

32

HAMPTON ROADS BANKSHARES, INC

PART I. FINANCIAL INFORMATION

ITEM 1. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE I - 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.  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 September 30, 2015 and December 31, 2014.

(in thousands)	September 30, 2015		Fair Value Measurements at Reporting Date Using
Assets			Level 1		Level 2		Level 3
Investment securities available for sale
U.S. agency securities	$	14,212	$	—	$	14,212	$	—
Corporate bonds	11,306		—		11,306		—
Mortgage-backed securities -
Agency	153,663		—		153,663		—
Asset-backed securities	23,422		—		23,422		—
Equity securities	1,431		1,332		—		99
Total investment securities
available for sale	204,034		1,332		202,603		99
Derivative loan commitments	1,260		—		—		1,260
Interest rate swaps	2,212		—		2,212		—
Total assets	$	207,506	$	1,332	$	204,815	$	1,359
Liabilities
Interest rate swaps	$	2,212	$	—	$	2,212	$	—
Total liabilities	$	2,212	$	—	$	2,212	$	—

33

HAMPTON ROADS BANKSHARES, INC

PART I. FINANCIAL INFORMATION

ITEM 1. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands)	December 31, 2014		Fair Value Measurements at Reporting Date Using
Assets			Level 1		Level 2		Level 3
Investment securities available for sale
U.S. agency securities	$	17,653	$	—	$	17,653	$	—
Corporate bonds	14,560		—		14,560		—
Mortgage-backed securities -
Agency	215,428		—		215,428		—
Asset-backed securities	53,197		—		53,197		—
Equity securities	1,383		1,103		—		280
Total investment securities
available for sale	302,221		1,103		300,838		280
Derivative loan commitments	472		—		—		472
Interest rate swaps	913		—		913		—
Total assets	$	303,606	$	1,103	$	301,751	$	752
Liabilities
Interest rate swaps	$	913	$	—	$	913	$	—
Total liabilities	$	913	$	—	$	913	$	—

The following table shows a rollforward of recurring fair value measurements categorized within Level 3 of the fair value hierarchy for the nine months ended September 30, 2015 and 2014.

	Activity in Level 3					Activity in Level 3
	Fair Value Measurements					Fair Value Measurements
(in thousands)	Nine Months Ended September 30, 2015					Nine Months Ended September 30, 2014
	Investment Securities Available for Sale			Derivative Loan Commitments		Investment Securities Available for Sale			Derivative Loan Commitments
Description
Beginning of period balance	$	280		$	472	$	289		$	844
Unrealized gains included in:
Earnings	—			—		—			—
Other comprehensive income	—			—		(9		)	—
Purchases	—			—		—			—
Sales	—			—		—			—
Reclassification from level 3 to level 1	(181		)	—		—			—
Issuances	—			788		—			—
Settlements	—			—		—			(262		)
End of period balance	$	99		$	1,260	$	280		$	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

34

HAMPTON ROADS BANKSHARES, INC

PART I. FINANCIAL INFORMATION

ITEM 1. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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 a best efforts 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.  The fair values of interest rate lock 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 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 0.94 years as of September 30, 2015 and 0.56 years as of December 31, 2014.  Management periodically reviews the discounts in the matrix as compared to valuations from updated appraisals and modifies the discounts accordingly should updated appraisals reflect valuations significantly different than those derived utilizing the matrix.  To date, management believes the appraisal discount matrix has resulted in appropriate adjustments to existing appraisals thereby providing management with reasonable valuations for the collateral underlying the loan portfolio; however, while appraisals are indicators of fair value, the amount realized upon sale of these assets could be significantly different. 

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 September 30, 2015 and December 31, 2014. 

	Assets Measured at Fair Value		Fair Value Measurements at
			September 30, 2015 Using
(in thousands)			Level 1		Level 2		Level 3
Impaired loans	$	54,542	$	—	$	—	$	54,542
Other real estate owned
and repossessed assets	12,450		—		—		12,450

35

HAMPTON ROADS BANKSHARES, INC

PART I. FINANCIAL INFORMATION

ITEM 1. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

	Assets Measured at Fair Value		Fair Value Measurements at
			December 31, 2014 Using
			Level 1		Level 2		Level 3
Impaired loans	$	40,107	$	—	$	—	$	40,107
Other real estate owned
and repossessed assets	21,721		—		—		21,721

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 valueof the underlying collateral. Due to the nature of real-estate appraisals and the discounts applied by the Company in determining fair value of the underlying collateral as described previously, collateral-dependent loans are considered level 3 financial instruments.

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

Significant Unobservable Inputs

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

(in thousands except for percentages)			Significant Unobservable	Significant Unobservable
	Fair Value at		Inputs by	Inputs as of
Type	September 30, 2015		Valuation Technique	September 30, 2015
Derivative loan commitments	$	1,260	Pull through rate	85%
			Percentage of loans that will
			ultimately close
Impaired loans	54,542		Appraised value	11%
			Average discounts to reflect current
			market conditions, ultimate collectability,
			and estimated costs to sell
Other real estate owned	12,450		Appraised value	13%
			Weighted average 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

36

HAMPTON ROADS BANKSHARES, INC

PART I. FINANCIAL INFORMATION

ITEM 1. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

addition, changes in assumptions could significantly affect these fair value estimates.  The following methods and assumptions were used by the Company in estimating fair value of these financial instruments.

(a)    Cash and Cash Equivalents

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

(b)    Investment Securities Available for Sale

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

(c)    Restricted Equity Securities

These investments are carried at cost as there is no active market or exchange for the stock other than the FHLB, FRB, or member institutions. 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 September 30, 2015 and December 31, 2014, 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 September 30, 2015 and December 31, 2014 were as follows.

37

HAMPTON ROADS BANKSHARES, INC

PART I. FINANCIAL INFORMATION

ITEM 1. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

	September 30, 2015
	Carrying Amount		Fair Value		Fair Value Measurements at Reporting Date Using
(in thousands)					Level 1		Level 2		Level 3
Financial Assets:
Loans, net(1)	$	1,511,722	$	1,525,472	$	—	$	—	$	1,525,472
Financial Liabilities:
Deposits	1,686,808		1,674,494		—		1,674,494		—
FHLB borrowings	40,000		39,903		—		39,903		—
Other borrowings	29,569		56,703		—		56,703		—

	December 31, 2014
	Carrying Amount			Fair Value		Fair Value Measurements at Reporting Date Using
(in thousands)			��			Level 1		Level 2		Level 3
Financial Assets:
Loans, net(1)	$	1,395,885		$	1,406,608	$	—	$	—	$	1,406,608
Financial Liabilities:
Deposits	1,581,348			1,565,278		—		1,565,278		—
FHLB borrowings	165,847			165,963		—		165,963		—
Other borrowings	29,224			56,703		—		56,703		—

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

38

HAMPTON ROADS BANKSHARES, INC

PART I. FINANCIAL INFORMATION

ITEM 1. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE J - 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.

39

HAMPTON ROADS BANKSHARES, INC

PART I. FINANCIAL INFORMATION

ITEM 1. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE K - Correction of Immaterial Error

During the second quarter of 2015, we corrected an immaterial error in footnote (21) Income Taxes as reported in the 2014 Form 10-K. We determined that the gross deferred tax assets, the gross deferred tax liabilities, and the related valuation allowance were overstated by $13.8 million, $48 thousand, and $13.7 million, respectively, as of December 31, 2014. In addition, the gross deferred tax assets, and the related valuation allowance were overstated by $13.6 million, and $14.2 million, respectively, and the gross deferred tax liabilities were understated by $581 thousand, as of December 31, 2013.

As the Company maintains a full valuation allowance on its net deferred tax assets, there is no impact to the consolidated balance sheets, consolidated statements of operations, consolidated statements of comprehensive income, consolidated statements of changes in shareholders' equity, or consolidated statements of cash flows, as presented in the 2014 Form 10-K.

The error is not considered material in relation to the consolidated financial statements. Footnote (21) Income Taxes from the 2014 Form 10-K has been corrected and is presented below in its entirety.

(21) Income Taxes (revised)

The Company files federal income tax returns in the United States and in the states of Virginia, Delaware, Maryland, North Carolina, and Florida.  With few exceptions, the Company is no longer subject to United States federal and state income tax examinations by tax authorities for years prior to 2011. The current and deferred components of income tax expense for the years ended December 31, 2014, 2013, and 2012 were as follows.

(in thousands)	2014				2013				2012
Current	$	6			$	(90	)		$	(2,182	)
Deferred	5,620			(a)	567			(a)	(1,842		)	(a)
Deferred tax asset valuation allowance	(5,620		)	(a)	(567		)	(a)	1,842			(a)
Income tax expense (benefit)	$	6			$	(90	)		$	(2,182	)
(a) Denotes amounts changed from reported amounts in the 2014 Form 10-K, footnote (21) Income Taxes.

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

(in thousands)	2014				2013				2012
Federal income tax expense (benefit), at statutory rate	$	3,432			$	1,983			$	(9,546	)
Change resulting from:
State income tax, net of federal benefit	4				(59		)		(529		)
Minority Interest	(165		)		(588		)		—
Valuation allowance of deferred tax assets	(5,620		)	(a)	(567		)	(a)	1,842			(a)
Dividends and tax-exempt interest	—				—				10
Officers' life insurance	(1,374		)		(1,151		)		(299		)
Benefit from NOL carryback	—				—				(2,182		)
Return to provision adjustments	36				178				—
True-up of deferred assets and liabilities	—				(603		)		—
Write-off of deferred tax assets	2,128				—				—
Loss of deferred tax assets due to Section 382 limitation	1,413			(a)	653			(a)	7,895			(a)
Other	152				64				627
Income tax expense (benefit)	$	6			$	(90	)		$	(2,182	)
(a) Denotes amounts changed from reported amounts in the 2014 Form 10-K, footnote (21) Income Taxes.

40

HAMPTON ROADS BANKSHARES, INC

PART I. FINANCIAL INFORMATION

ITEM 1. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

Significant components of the Company’s deferred tax assets and liabilities as of December 31, 2014 and 2013 were as follows.

(in thousands)	2014				2013
Deferred tax assets:
Allowance for loan losses	$	44,935		(a)	$	56,514		(a)
Federal net operating loss carryforward	100,428			(a)	89,363			(a)
State net operating loss carryforward	5,895			(a)	4,989			(a)
AMT carryforward	502				502
Impairment of other real estate owned, securities and other assets	7,845			(a)	12,503			(a)
Nonaccrual loan interest	6,282			(a)	7,466			(a)
Accrued expenses	1,761				1,593
Nonqualified deferred compensation	1,316				1,393
Other	—				320
Total deferred tax assets before valuation allowance	168,964			(a)	174,643			(a)
Valuation allowance	(155,018		)	(a)	(161,747		)	(a)
Total deferred tax assets	13,946			(a)	12,896			(a)
Deferred tax liabilities:
Prepaid expenses	648			(a)	707
Deferred loan costs	936				749
Fair value adjustment to net assets acquired in business combinations	10,143			(a)	10,114			(a)
Unrealized gain on securities available for sale	789				—
Depreciation	1,390			(a)	1,289
Other	40				37
Total deferred tax liabilities	13,946			(a)	12,896			(a)
Net deferred tax asset	$	—			$	—
(a) Denotes amounts changed from reported amounts in the 2014 Form 10-K, footnote (21) Income Taxes.

At December 31, 2014, the Company had net operating loss carryforwards of $286.9 million, which are available to offset future federal and state taxable income, if any, through 2034, however due to the 20-year carryforward period limitation, they will start to expire in 2029.  In addition, the Company has alternative minimum tax (“AMT”) credit carryforwards of $502 thousand, which are available to reduce federal regular income taxes, if any, over an indefinite period.  

In addition to a net operating loss and AMT carryforwards, our net deferred tax asset consisted primarily of three asset components offset by one liability component:  (1) At December 31, 2014, the timing difference related to the allowance for loan losses was $121.6 million, resulting in a deferred tax asset of $44.9 million.  (2) The timing difference related to impairment of other real estate owned, securities, and other assets was $21.2 million, resulting in a deferred tax asset of $7.8 million.  (3) Interest income related to non-performing loans (referred to as “lost interest”) is recognized as taxable income for tax purposes, but is not recorded as income for book purposes.  Lost interest was $17.0 million at December 31, 2014, resulting in a deferred tax asset of $6.3 million.  The aggregate deferred tax effect of all purchase accounting entries related to the acquisitions of GFH and Shore Financial Corporation resulted in a net deferred tax liability of $10.1 million at December 31, 2014. 

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

41

HAMPTON ROADS BANKSHARES, INC

PART I. FINANCIAL INFORMATION

ITEM 1. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The Company had a $90 thousand net income tax benefit in 2013 relating to state tax refunds from the carryback of net operating losses related to 2008 and 2009 tax years.  Refunds were issued by the North Carolina Department of Taxation.  The Company had a $2.2 million income tax benefit in 2012.  The benefit relates to the carryback of the net operating loss related to the 2006 through 2008 tax years, and refunds that were approved and issued by the Internal Revenue Service.

The Company recognizes interest and penalties related to unrecognized tax benefits as part of the tax provision.  The Company recognized minimal amounts in penalties and fees for the years ended December 31, 2014, 2013, and 2012.  The Company has no uncertain tax positions at December 31, 2014.

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PART I. FINANCIAL INFORMATION

ITEM 1. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE L - Subsequent Events

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

On October 13, 2015, the Company merged its two bank subsidiaries, BOHR and Shore. The Company received regulatory approval from the FRB on June 29, 2015 and from the State Corporation Commission of the Commonwealth of Virginia on August 26, 2015 and September 30, 2015. The merged bank subsidiary will operate under the brand names of Bank of Hampton Roads, Gateway Bank, and Shore Bank in their respective markets. The Company's mortgage banking subsidiary, Gateway Bank Mortgage, and its specialty finance business, Shore Premier Finance, will continue to operate under their respective brand names in all the markets they serve.

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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 Company's 2014 Form 10-K, Part I, Item 1A "Risk Factors".  Our risks include, without limitation, the following:

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

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

• We incurred significant losses from 2009 to 2012. While we returned to profitability in 2013 and 2014 and continued to be profitable during 2015, 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;

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

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

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

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

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

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

• General economic conditions in the markets in which we do business may decline and may have a material adverse effect on our results of operations and financial condition;

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

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

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

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

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

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

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

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

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

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

• Proposed and final regulations could restrict our ability to originate loans; and

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

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

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 2014 Form 10-K for further discussion of these policies and see Note K to the Consolidated Financial Statements for the quarter ended September 30, 2015 filed herewith for additional information regarding our deferred tax assets and the valuation allowance recorded on such assets at December 31, 2014.

Material Trends and Uncertainties

The Company's largest market in which it does business, the Hampton Roads region of Virginia, continues to see an economy that is moving forward at a sluggish pace. In its annual State of the Region Report, the Center for Economic Analysis and Policy at Old Dominion University (the "Center") reported that from 2008 to 2014 the gross regional product grew less than 1% on average compared to a growth rate of close to 4% on average during the period 2000 to 2007. The Center estimates the gross regional product for Hampton Roads will grow by 1.3% in 2015; a slower pace in comparison to the Virginia and U.S. economy. A major driver of the sluggish economy has been the declining U.S. Department of Defense ("DOD") spending. Between 2000 and 2012, direct DOD spending in Hampton Roads increased by an average of 5.6% annually. The Center expects DOD spending in Hampton Roads in 2015 to be 3.2% below the peak observed in 2012. Whereas 40.3% of the Hampton Roads economy was attributed directly and indirectly to DOD spending in 2014, this is down from 44.9% in 2011.

According to the U.S. Bureau of Labor Statistics, the Hampton Roads unemployment rate was 4.8% in August 2015, compared to 5.9% in August 2014, and total non-farm employment rose from 756,200 in September 2014 to 762,200 in September 2015. Home sales in August 2015 climbed 8.1% from August 2014, according to the Virginia Beach-based Real Estate Information Network, the multiple listing service for Hampton Roads, with the median price increasing 5.5%. Distressed home sales declined to below 15.0% of all homes sales for the first time in several years. The area, however, did see an increase in foreclosures of 23.2% during the third quarter of 2015 compared to the same period in 2014.

With the continued underutilization of labor resources and the low level of inflation, and based on recent statements of the Federal Open Market Committee (FOMC) of the FRB, we expect the low interest rate environment that we have been operating in to continue through the remainder of 2015 and into the first part of 2016.

The loan portfolio grew $111.7 million or 7.8% during the nine months ended September 30, 2015, primarily driven by a marine loan portfolio purchase in February 2015, executed by our Shore Premier Finance unit. It is the intent of the Company to continue to grow the loan portfolio in all the markets we serve. Nonaccrual loans significantly increased in the second quarter of 2015 as management made the decision to move the Company's largest remaining substandard relationship into nonaccrual. Classified loans continued to decline, and overall credit quality, as measured by weighted average risk grade, continued the trend of improvement as

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

well. Driven in part by continued favorable market interest rates, mortgage banking revenue was up 89.1% for the nine months ended September 30, 2015, compared to the same period last year. Through specific deposit campaigns implemented by the Company, we saw strong growth in deposits throughout the first nine months of 2015, expanding by $105.5 million, or 6.7%. Almost one-third of the deposit growth came from the addition of one commercial deposit relationship obtained through the Company's expansion into Baltimore, MD. The increased deposits assisted in funding the expansion of the loan portfolio, while reducing the Company's reliance on non-core sources of funding.

On September 16, 2015, Douglas J. Glenn resigned as President and Chief Executive Officer and director of the Company, and the Board of Directors of the Company appointed Charles M. Johnston, Chairman of the Company’s Board of Directors, to serve as the interim Chief Executive Officer of the Company while the Company conducts a search for Mr. Glenn’s replacement. Also on September 16, 2015, the Board of Directors of the Company appointed Donna W. Richards, President of Bank of Hampton Roads, as President and Chief Operating Officer of the Company.

For further discussion of the material trends and uncertainties that may affect our results and financial condition, refer to the risk factors discussed in the Company's 2014 Form 10-K, Part I, Item 1A "Risk Factors".

Company Overview

Hampton Roads Bankshares, Inc. (the “Company”) is a bank holding company headquartered in Virginia Beach, Virginia. The Company’s primary subsidiary is Bank of Hampton Roads (“BOHR”). As of September 30, 2015, the Company had two banking subsidiaries, BOHR and Shore Bank (“Shore”, collectively the “Banks”). After receiving regulatory approval, the Company merged BOHR and Shore into one bank subsidiary on October 13, 2015.

BOHR engages 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, 10 full-service offices throughout Richmond, Virginia and the Northeastern and Research Triangle regions of North Carolina that do business as Gateway Bank (“Gateway”), and 7 full-service offices on the Eastern Shore of Virginia and in Maryland and 3 loan production offices in Maryland and Delaware, all of which do business as Shore Bank. Through various divisions, BOHR also offer mortgage banking and marine financing. Our largest investor shareholders include Anchorage Capital Group, L.L.C. (“Anchorage”), CapGen Capital Group VI LP (“CapGen”), and The Carlyle Group, L.P. (“Carlyle”). Anchorage, CapGen, and Carlyle own 24.80%, 29.85%, and 24.80%, respectively, of the outstanding shares of our Common Stock as of September 30, 2015. 

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

The direct lending activities in which the Company engages carry the risk that the borrowers will be unable to perform on their obligations. As such, interest rate policies of the Board of Governors of the Federal Reserve System (the "Federal Reserve") and general economic conditions, nationally and in the Company's primary market areas, have a significant impact on the Company's results of operations. To the extent that economic conditions deteriorate, business and individual borrowers may be less able to meet their obligations to the Company in full, or 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.

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

A risk rating system is employed to estimate loss exposure and provide a measuring system for setting general reserve allocations. The general component relates to groups of homogeneous loans not designated for specific impairment analysis and are collectively evaluated for potential loss. The specific component relates to loans that are determined to be impaired and, therefore, individually evaluated for impairment. The specific allowance for loan losses is based on a loan-by-loan analysis and varies between impaired loans largely due to the value of the loan’s underlying collateral. An unallocated component is maintained to cover uncertainties that could affect management’s estimate of probable losses and considers internal portfolio management effectiveness and external macroeconomic factors.

Overview of Results of Operations and Financial Condition

The following commentary provides information about the major components of our financial condition, results of operations, 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 the beginning of the "Great Recession", many of our loan customers have operated in an economically challenging business environment, however, the markets in which we operate have begun to experience generally more stable business conditions. Generally, the levels of loan delinquencies and defaults have continued to decline over the last several years, although they continue to be higher than historical levels. We did experience an increase in nonaccrual loans in the second quarter of 2015, due primarily to management's decision to move the Company's largest remaining substandard relationship into nonaccrual. Also during the last several years, our net interest income, before the provision for loan losses, has not grown due to a historically low interest rate environment.

The Company reported net income for the nine months ended September 30, 2015, as it did for all of 2014 and 2013, compared to reporting net operating losses for 2010 to 2012, primarily resulting from improved general economic conditions and credit performance of the Company’s loan portfolio.  There is no guarantee that we 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, which have been a significant source of revenue in 2015, are particularly volatile due to their dependence upon the direction and level of mortgage interest rates.  As of September 30, 2015, 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 September 30, 2015 and our financial performance for the three and nine months then ended.

• Assets were $2.0 billion at September 30, 2015.  Since December 31, 2014, there has been a significant shift out of overnight funds sold and due from FRB and investment securities available for sale into loans held for sale and loans.

• Investment securities available for sale were $204.0 million as of September 30, 2015, down from $302.2 million at December 31, 2014.  The proceeds from investment security sales partially funded the loan portfolio growth during the year. A general decrease in interest rates contributed to an increase in the net unrealized gains in our portfolio.

• Loans have grown 7.8% since December 31, 2014 to $1.5 billion; this growth was primarily driven by a $104.7 million marine loan portfolio purchase which occurred in the first quarter of 2015. In the second quarter of 2015, management made the decision to move the Company's largest remaining substandard relationship into nonaccrual. Therefore, impaired loans increased by $14.4 million, or 29.6% to $63.3 million at September 30, 2015, compared to $48.9 million at December 31, 2014.

• Allowance for loan losses decreased $4.2 million, or 15.4% to $22.9 million at September 30, 2015; down from $27.1 million at December 31, 2014. Lower historical loss rates and improving credit quality led to a reduction in the general reserve. With the increased charge off activity in the third quarter, year-to-date charge-offs surpassed year-to date recoveries. There was no additional loss provision expense recorded in the third quarter.

• Deposits increased $105.5 million or 6.7% from December 31, 2014. The Company has made a concerted effort to attract additional deposits in order to support loan growth. Almost one-third of the deposit growth came from the addition of one commercial deposit relationship obtained through the Company's expansion into Baltimore, MD.

• Net interest income increased $419 thousand and $857 thousand during the three and nine months ended September 30, 2015 as compared to the same periods in 2014.  The growth in net interest income has resulted from the shift away from lower yielding assets into loans for which the Company earns a higher yield.

• Net interest margin was 3.35% and 3.24% for the three months ended September 30, 2015 and September 30, 2014, respectively and 3.27% and 3.32% for the nine months ended September 30, 2015 and September 30, 2014, respectively.

• A provision for loan losses for the nine months ended September 30, 2015 was recorded for $600 thousand, compared to $116 thousand for the same period in 2014.

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• Noninterest income for the three and nine months ended September 30, 2015 was $8.4 million and $22.9 million, respectively, an increase of $2.3 million or 37.2% and $3.9 million or 20.8%, compared to the same periods in 2014. Mortgage banking revenue continues to be the major driver, due in part to favorable mortgage rates which have produced healthy growth in our mortgage services division during the first nine months of 2015 compared to the same period in 2014. Offsetting this growth in mortgage banking revenue is a year-over-year decline in income from bank-owned life insurance related to death benefits received in 2014.

• Noninterest expense for the three and nine months ended September 30, 2015 was $23.2 million and $62.3 million, respectively, an increase of $4.0 million or 20.9% and $6.9 million or 12.4%, compared to the same periods in 2014. The overall increase in noninterest expense was primarily driven by increases in salaries and employee benefits resulting from subsidiary expansions, mortgage-related commissions, one-time separation costs, and increased share-based compensation.

• The Company's return on average assets ratio (ROAA) was 0.29%, and 0.57% for the nine months ended September 30, 2015 and 2014, respectively, and its return on average equity ratio (ROAE) was 2.86% and 5.82% for the nine months ended September 30, 2015 and 2014, respectively.

• Our effective tax rate was 2.08% for the nine months ended September 30, 2015 compared to 0.0% for the same period in 2014.  These taxes related to state income taxes owed.  These rates differ from the statutory rate due primarily due to the full valuation allowance against the Company’s net deferred tax assets.

ANALYSIS OF RESULTS OF OPERATIONS

Net income attributable to Hampton Roads Bankshares, Inc. for the three and nine months ended September 30, 2015 was $303 thousand and $4.4 million, respectively, as compared with net income for the three and nine months ended September 30, 2014 of $2.0 million and $8.3 million, respectively.

Net Interest Income and Net Interest Margin

Net interest income, a major component of our earnings, is the difference between the income generated by interest-earning assets and the cost of interest-bearing liabilities.  Net interest margin, which is calculated by expressing net interest income as a percentage of average interest-earning assets, is an indicator of effectiveness in generating income from earning assets. Interest-earning assets consist of loans, investment securities, overnight funds sold and due from FRB, and interest-bearing deposits in other banks. Interest-bearing liabilities consist of deposit accounts and borrowings.

Net interest income and net interest margin may be significantly impacted by the market interest rates (rate); the mix, duration, and volume of interest-earning assets and interest-bearing liabilities (volume); changes in the yields earned and rates paid; and the level of noninterest-bearing liabilities available to support interest-earning assets.  Our management team strives to maximize net interest income through prudent balance sheet administration and by maintaining appropriate risk levels as determined by our Asset / Liability Committee (“ALCO”) and the Board of Directors.

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

Table 1 presents the average interest-earning assets and liabilities, the average yields earned on such assets and rates paid on such liabilities, net interest margin, and income and expense variances caused by changes in average balances and rates for the indicated periods.

Table 1:  Average Balance Sheet and Net Interest Margin Analysis

	Three Months Ended September 30, 2015						Three Months Ended September 30, 2014						2015 Compared to 2014
													Interest
			Interest		Average				Interest		Average		Income/			Variance
(in thousands, except	Average		Income/		Yield/		Average		Income/		Yield/		Expense			Attributable to
average yield/rate data)	Balance		Expense		Rate		Balance		Expense		Rate		Variance			Rate			Volume
Assets:
Loans	$	1,572,146	$	17,296	4.36	%	$	1,403,229	$	15,967	4.51	%	$	1,329		$	(2,413	)	$	3,742
Investment securities	218,561		1,436		2.61		361,745		2,331		2.56		(895		)	289			(1,184		)
Overnight funds sold
and due from FRB	56,413		28		0.20		90,507		45		0.20		(17		)	2			(19		)
Interest-bearing deposits
in other banks	1,146		—		—		709		—		—		—			—			—
Total interest-earning assets	1,848,266		18,760		4.03		1,856,190		18,343		3.92		417			(2,122		)	2,539
Noninterest-earning assets	127,915						140,600
Total assets	$	1,976,181					$	1,996,790
Liabilities and Shareholders' Equity:
Interest-bearing liabilities
Interest-bearing demand deposits	$	628,307	$	661	0.42	%	$	625,375	$	697	0.44	%	$	(36	)	$	(56	)	$	20
Savings deposits	60,831		15		0.10		57,608		8		0.06		7			7			—
Time deposits	672,285		1,959		1.16		639,034		1,698		1.05		261			179			82
Total interest-bearing deposits	1,361,423		2,635		0.77		1,322,017		2,403		0.72		232			130			102
Borrowings	72,871		534		2.91		198,924		768		1.53		(234		)	1,255			(1,489		)
Total interest-bearing liabilities	1,434,294		3,169		0.88		1,520,941		3,171		0.83		(2		)	1,385			(1,387		)
Noninterest-bearing liabilities
Demand deposits	319,904						266,717
Other liabilities	15,777						14,154
Total noninterest-bearing liabilities	335,681						280,871
Total liabilities	1,769,975						1,801,812
Shareholders' equity	206,206						194,978
Total liabilities and shareholders' equity	$	1,976,181					$	1,996,790
Net interest income			$	15,591					$	15,172
Net interest spread					3.15	%					3.09	%
Net interest margin					3.35	%					3.24	%
Note:  Interest income from loans includes fees of $273 thousand and $443 thousand for the three months ended September 30, 2015 and 2014, respectively.

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	Nine Months Ended September 30, 2015						Nine Months Ended September 30, 2014						2015 Compared to 2014
													Interest
			Interest		Average				Interest		Average		Income/			Variance
(in thousands, except	Average		Income/		Yield/		Average		Income/		Yield/		Expense			Attributable to
average yield/rate data)	Balance		Expense		Rate		Balance		Expense		Rate		Variance			Rate		Volume
Assets:
Loans	$	1,561,655	$	50,908	4.36	%	$	1,387,866	$	47,243	4.55	%	$	3,665		$	2,931	$	734
Investment securities	241,435		4,733		2.62		345,951		6,864		2.65		(2,131		)	1,813		(3,944		)
Overnight funds sold
and due from FRB	78,684		126		0.21		83,735		128		0.20		(2		)	18		(20		)
Interest-bearing deposits
in other banks	1,327		—		—		728		—		—		—			—		—
Total interest-earning assets	1,883,101		55,767		3.96		1,818,280		54,235		3.99		1,532			4,762		(3,230		)
Noninterest-earning assets	132,029						145,138
Total assets	$	2,015,130					$	1,963,418
Liabilities and Shareholders' Equity:
Interest-bearing liabilities
Interest-bearing demand deposits	$	629,406	$	2,005	0.43	%	$	613,127	$	1,978	0.43	%	$	27		$	26	$	1
Savings deposits	59,060		39		0.09		58,597		24		0.05		15			15		—
Time deposits	679,385		5,753		1.13		620,110		4,796		1.03		957			844		113
Total interest-bearing deposits	1,367,851		7,797		0.76		1,291,834		6,798		0.70		999			885		114
Borrowings	131,565		1,949		1.98		210,461		2,273		1.44		(324		)	1,252		(1,576		)
Total interest-bearing liabilities	1,499,416		9,746		0.87		1,502,295		9,071		0.81		675			2,137		(1,462		)
Noninterest-bearing liabilities
Demand deposits	293,791						251,863
Other liabilities	17,976						17,876
Total noninterest-bearing liabilities	311,767						269,739
Total liabilities	1,811,183						1,772,034
Shareholders' equity	203,947						191,384
Total liabilities and shareholders' equity	$	2,015,130					$	1,963,418
Net interest income			$	46,021					$	45,164
Net interest spread					3.09	%					3.18	%
Net interest margin					3.27	%					3.32	%
Note:  Interest income from loans includes fees of $831 thousand and $1.2 million for the nine months ended September 30, 2015 and 2014, respectively.

Interest income earned from interest-earning assets increased predominantly as a result of the Company funding loan growth by utilizing other real estate owned and repossessed asset conversion and lower yielding investment securities and overnight funds.

Interest expense on interest-bearing liabilities increased mainly due to two factors: the Company strategically offered higher rates on certain deposit products in order to attract additional deposits; and as FHLB advances matured, the mix of borrowings was more heavily weighted towards trust preferred securities, which have a higher effective interest rate compared to the FHLB instruments.

Noninterest Income

Noninterest income comprised 31.0% and 29.1% of total revenue during the three and nine months ended September 30, 2015, respectively, compared to 25.1% and 25.9% during the same periods in 2014.  We define total revenue as the sum of interest income and noninterest income.

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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 and nine months ended September 30, 2015 and 2014.

Table 2:  Noninterest Income

	Three Months Ended September 30,						2015 Compared to 2014
(in thousands, except for percentages)	2015			2014			$			%
Mortgage banking revenue	$	5,722		$	3,215		$	2,507		78.0	%
Service charges on deposit accounts	1,273			1,196			77			6.4
Income from bank-owned life insurance	302			278			24			8.6
Gain on sale of investment securities available for sale	—			58			(58		)	(100.0	)
Loss on sale of premises and equipment	—			(82		)	82			(100.0	)
Gain on sale of other real estate owned & repossessed assets	34			173			(139		)	(80.3	)
Impairment of other real estate owned & repossessed assets	(259		)	(426		)	167			39.2
Visa check card income	677			710			(33		)	(4.6	)
Other	666			1,012			(346		)	(34.2	)
Total noninterest income	$	8,415		$	6,134		$	2,281		37.2	%

	Nine Months Ended September 30,						2015 Compared to 2014
(in thousands, except for percentages)	2015			2014			$			%
Mortgage banking revenue	$	15,444		$	8,169		$	7,275		89.1	%
Service charges on deposit accounts	3,713			3,550			163			4.6
Income from bank-owned life insurance	956			3,823			(2,867		)	(75.0	)
Gain on sale of investment securities available for sale	238			243			(5		)	(2.1	)
Loss on sale of premises and equipment	(14		)	(113		)	99			(87.6	)
Gain on sale of other real estate owned & repossessed assets	53			317			(264		)	(83.3	)
Impairment of other real estate owned & repossessed assets	(1,524		)	(1,852		)	328			17.7
Visa check card income	1,994			1,957			37			1.9
Other	2,032			2,863			(831		)	(29.0	)
Total noninterest income	$	22,892		$	18,957		$	3,935		20.8	%

Mortgage banking revenue increased in part due to favorable market interest rates driving an increased demand for mortgage financing. The strong refinancing activity experienced earlier in the year has been supplemented by an increased demand for purchase financing, which accounted for 68% of financings in the third quarter of 2015 compared to 53% in the first quarter of 2015. Income from bank-owned life insurance declined due to death benefits received in excess of cash surrender value in the first quarter of 2014, which were nonrecurring in 2015. The decline in other noninterest income is mainly driven by one-time loan monitoring fees related to the marine financing portfolio that benefited 2014, a decline in rental income related to the decrease in other real estate owned and repossessed assets, and other nonrecurring miscellaneous income.

Noninterest Expense

Noninterest expense represents our operating and overhead expenses.  The efficiency ratio, calculated by dividing noninterest expense by the sum of net interest income and noninterest income excluding securities gains was 90.7% during the nine months ended September 30, 2015 compared to 86.7% for the same period in 2014.

51

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 and nine months ended September 30, 2015 and 2014.

Table 3:  Noninterest Expense

	Three Months Ended September 30,				2015 Compared to 2014
(in thousands, except for percentages)	2015		2014		$			%
Salaries and employee benefits	$	13,688	$	10,210	$	3,478		34.1	%
Professional and consultant fees	1,542		1,146		396			34.6
Occupancy	1,664		1,712		(48		)	(2.8	)
FDIC insurance	339		601		(262		)	(43.6	)
Data processing	1,516		1,248		268			21.5
Problem loan and repossessed asset costs	538		489		49			10.0
Equipment	349		490		(141		)	(28.8	)
Directors' and regional board fees	433		325		108			33.2
Advertising and marketing	386		423		(37		)	(8.7	)
Other	2,696		2,505		191			7.6
Total noninterest expense	$	23,151	$	19,149	$	4,002		20.9	%

	Nine Months Ended September 30,				2015 Compared to 2014
(in thousands, except for percentages)	2015		2014		$			%
Salaries and employee benefits	35,604		$	28,886	$	6,718		23.3	%
Professional and consultant fees	3,810		4,296		(486		)	(11.3	)
Occupancy	4,919		4,933		(14		)	(0.3	)
FDIC insurance	1,361		1,755		(394		)	(22.5	)
Data processing	4,554		3,414		1,140			33.4
Problem loan and repossessed asset costs	1,150		1,296		(146		)	(11.3	)
Equipment	1,034		1,254		(220		)	(17.5	)
Directors' and regional board fees	1,028		1,255		(227		)	(18.1	)
Advertising and marketing	1,090		1,026		64			6.2
Other	7,710		7,263		447			6.2
Total noninterest expense	$	62,260	$	55,378	$	6,882		12.4	%

Salaries and employee benefits expense increased for the nine months ended September 30, 2015, compared to the same period in 2014, mainly driven by subsidiary expansions, growth in commission expense in the mortgage division, increased share-based compensation due to the TARP-related clawback that occurred in the first half of 2014, one-time severance compensation paid out during the first quarter of 2015, and one-time separation costs paid out in the third quarter of 2015. As the Company's credit profile improves and legacy legal issues are resolved, professional and consultant fees have declined for the nine months ended September 30, 2015. FDIC insurance expense has declined, as our assessment rates have decreased due to the Company’s improved risk profile. Data processing expenses increased primarily due to the Company outsourcing the processing and printing of customer statements, as well as fees incurred that were related to revenue enhancement initiatives. Problem loan and repossessed asset costs declined on a year-to-date basis due to the overall decrease in other real estate owned and repossessed assets, and lower levels of classified loans. Directors' and regional board fees are down due to: 1) lower RSU vesting expense mostly attributable to nonrecurring RSU grants and, 2) lower director retirement expense due to acceleration of service costs in 2014 attributable to the retirement of certain Bank directors. The increase in other noninterest expense is mainly driven by higher bank franchise tax due to capital growth, higher online banking fees as more customers shift their banking online, and higher loan-related expenses due to loan portfolio growth.

52

HAMPTON ROADS BANKSHARES, INC

PART I. FINANCIAL INFORMATION

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

ANALYSIS OF FINANCIAL CONDITION

Assets were $2.0 billion at September 30, 2015.  The Company has intentionally made a shift among the asset categories within its balance sheet, growing loans held for sale, and loans, while reducing investment securities available for sale, overnight funds sold and due from FRB, and other real estate owned and repossessed assets, net of valuation allowance.

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 September 30, 2015 were $64.8 million compared to $103.6 million at December 31, 2014 and consisted mainly of deposits with the FRB.  The Company has used its cash and cash equivalents to partially fund loan origination activity.

Investment Securities. Our investment portfolio at September 30, 2015 consisted primarily of U.S. agency, mortgage-backed securities (“MBS”), and asset-backed securities ("ABS"). Repayment of principal and interest of the ABS is dependent upon the performance of the underlying loan collateral. The Company performs due diligence of each security on a pre- and post-purchase basis to evaluate the underlying collateral and invests in the investment grade tranches of securitizations. However, should defaults or loss severities exceed the credit enhancement in the structure, payment of principal or interest may be impacted. The Company currently does not own any collateralized loan obligation securities that would require divestiture under the Volcker Rule of the Dodd-Frank Act. The Volcker Rule generally prohibits banking entities from engaging in short-term proprietary trading of securities, derivatives, commodity futures and options on these instruments for their own account; and from owning, sponsoring, or having certain relationships with hedge funds or private equity funds, referred to as “covered funds”.

Our available for sale securities are reported at fair value and are used primarily for liquidity, pledging, earnings, and asset / liability management purposes and are reviewed quarterly for possible impairment.  Due to portfolio activity, the fair value of our available for sale investment securities at September 30, 2015 decreased $98.2 million or 32.5% to $204.0 million compared to $302.2 million at December 31, 2014. The proceeds from investment security sales partially funded the loan portfolio growth.

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.

Gross loans increased by $111.7 million or 7.8% during the nine months ended September 30, 2015.  This growth was primarily driven by a $104.7 million marine loan portfolio purchase, arranged by the Shore Premier Finance marine lending unit, of which $75.3 million were installment loans and $29.4 million were commercial loans. It is the intent of the Company to continue to grow the loan portfolio in all the markets we serve.

Credit concentrations are measured against internal and prudential regulatory guidelines. Additionally, our 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 $22.9 million or 1.49% of outstanding loans as of September 30, 2015 compared with $27.1 million or 1.90% of outstanding loans as of December 31, 2014. 

The allowance for loan losses declined $4.2 million, or 15.4%, during the nine months ended September 30, 2015 as a result of charge-offs exceeding recoveries and additional provisions for loan losses. Our provision for loan losses was $600 thousand during the nine months ended September 30, 2015, compared to $116 thousand recorded for the same period in 2014. We did not make any significant changes to our methodology or model for estimating the allowance for loan losses during 2015.

53

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, general, and unallocated components.  Table 4 provides an allocation of the allowance for loan losses and other related information at September 30, 2015 and December 31, 2014.

Table 4:  Allowance for Loan Losses Components and Related Data

(in thousands, except for percentages)	September 30, 2015			December 31, 2014
Allowance for loan losses:
Specific component	$	3,598		$	3,542
Pooled component	16,356			20,380
Unallocated component	2,920			3,128
Total	$	22,874		$	27,050
Impaired loans	$	63,328		$	48,859
Non-impaired loans	1,471,268			1,374,076
Total loans	$	1,534,596		$	1,422,935
Specific component as % of impaired loans	5.68		%	7.25		%
Pooled component as % of non-impaired loans	1.11			1.48
Allowance as % of loans	1.49			1.90
Allowance as % of nonaccrual loans	66.54			125.77

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 modestly increased during the nine months ended September 30, 2015, primarily due to the decision by management to move the Company's largest remaining substandard relationship into nonaccrual in the second quarter of 2015 and to charge-off a portion of these loans in the third quarter of 2015. This decision also drove impaired loans to increase to $63.3 million at September 30, 2015 from $48.9 million at December 31, 2014.  Of these loans, $34.4 million were on nonaccrual status at September 30, 2015 as compared with $21.5 million at December 31, 2014, an increase of 59.8%. The general or pooled component relates to groups of homogeneous loans not designated for a specific allowance and collectively evaluated for impairment. The combination of lower historical loss rates and improved credit quality drove a decline in general reserves. Charge-offs exceeded recoveries which contributed to the overall decline. A provision for loan losses of $600 thousand was added to the total reserve during the first nine months of 2015. An unallocated component is maintained to cover uncertainties that could affect management’s estimate of probable losses. The unallocated portion of the allowance for loan losses decreased mainly due to improving credit quality and macroeconomic stability.

Table 5 displays certain ratios used by management in assessing the adequacy of the allowance for loan losses at September 30, 2015 and December 31, 2014.

Table 5:  Adequacy of the Allowance for Loan Losses 

	September 30, 2015		December 31, 2014
Non-performing loans for which full loss has been charged off to total loans	1.43	%	0.55	%
Non-performing loans for which full loss has been charged off to non-performing loans	63.92		35.55
Charge-off rate for non-performing loans for which the full loss has been charged off	25.83		58.19
Coverage ratio net of non-performing loans for which the full loss has been charged off	184.39		195.16
Total allowance divided by total loans less non-performing loans for which the full loss has been charged off	1.51		1.95
Allowance for individually impaired loans divided by impaired loans for which an allowance has been provided	15.91		17.88

54

HAMPTON ROADS BANKSHARES, INC

PART I. FINANCIAL INFORMATION

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

At September 30, 2015, 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.

Non-Performing Assets. Management classifies non-performing assets as those loans on which payments have been delinquent 90 days and are still accruing interest, nonaccrual loans, and other real estate owned and repossessed assets.  Total non-performing assets were $46.8 million and $43.2 million at September 30, 2015 and December 31, 2014, respectively. Our non-performing assets ratio, defined as the ratio of non-performing assets to gross loans plus loans held for sale plus other real estate owned and repossessed assets was 2.94% and 2.95% at September 30, 2015 and December 31, 2014, respectively. At September 30, 2015 and December 31, 2014 there were no loans categorized as 90 days or more past due and still accruing interest.  Loans in nonaccrual status totaled $34.4 million and $21.5 million at September 30, 2015 and December 31, 2014, respectively. The Company’s largest borrower, as measured by total exposure, was downgraded to substandard in the third quarter of 2014, and was placed in nonaccrual status in the second quarter of 2015. 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 $12.5 million and $21.7 million of other real estate owned and repossessed assets at September 30, 2015 and December 31, 2014, respectively.  This decline was mainly due to sales of real estate owned outpacing foreclosure and repossession activity during the nine months ended September 30, 2015.

Deposits. Deposits increased $105.5 million or 6.7% from December 31, 2014. The Company has made a concerted effort to attract additional deposits in order to support planned and anticipated loan growth. Almost one-third of the deposit growth came from the addition of one commercial deposit relationship obtained through the Company's expansion into Baltimore, MD.

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 2014 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 nine months ended September 30, 2015. At September 30, 2015, cash and cash equivalents were $64.8 million, and investment securities available for sale, at fair value were $204.0 million. 

At September 30, 2015, our Banks had credit lines in the amount of $221.7 million at the FHLB.  These lines may be utilized for short- and/or long-term borrowing.  Overnight federal funds purchased through the FHLB amounted to $40.0 million at September 30, 2015. We also possess additional sources of liquidity through a variety of borrowing arrangements.  The Banks also maintain federal funds lines with three regional banking institutions and through the FRB Discount Window.  These available lines totaled approximately $89.0 million at September 30, 2015, and none of these lines were utilized for borrowing purposes at September 30, 2015.

Capital Resources. Total shareholders’ equity increased $6.9 million or 3.5% to $204.4 million at September 30, 2015, from $197.5 million at December 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 1 capital is comprised of total shareholders’ equity before non-controlling interest, plus qualified trust preferred securities, plus net unrealized gains or losses on available for sale securities, less intangible assets. Total risk-based capital adds qualifying allowances for loan losses.  Common equity tier 1 capital is comprised of total shareholders’ equity before non-controlling interest, less intangible assets.

As of September 30, 2015, our consolidated regulatory capital ratios were Common Equity Tier 1 Capital Ratio of 11.58%, Tier 1 Risk-Based Capital Ratio of 13.19%, Total Risk-Based Capital Ratio of 14.44%, and Tier 1 Leverage Ratio of 11.56%.  As of September 30, 2015, the Company exceeded the regulatory capital minimums, and BOHR and Shore were considered “well capitalized” under the risk-based capital standards.  The Banks' Common Equity Tier 1 Capital Ratio, Tier 1 Risk-Based Capital Ratio, Total Risk-Based Capital Ratio, and Tier 1 Leverage Ratio were as follows: 12.42%, 12.42%, 13.67%, and 10.98%, respectively for BOHR and 12.02%, 12.02%, 12.93%, and 9.96%, respectively for Shore.   

55

HAMPTON ROADS BANKSHARES, INC

PART I. FINANCIAL INFORMATION

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

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 arrangements, refer to Note 13, Financial Instruments with Off-Balance Sheet Risk, of the Notes to Consolidated Financial Statements contained in the 2014 Form 10-K.

56

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 market value of the Company’s interest-earning assets and interest-bearing liabilities.

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

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

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

The table below illustrates the expected effect on net interest income for the twelve months following September 30, 2015 and December 31, 2014 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

	September 30, 2015					December 31, 2014
	Change in Net Interest Income					Change in Net Interest Income
(in thousands, except for percentages)	Amount			%		Amount			%
Change in Interest Rates:
+200 basis points	$	(348	)	(0.51	)%	$	3,811		6.08	%
+100 basis points	(119		)	(0.18	)	1,940			3.09
–100 basis points	(1,858		)	(2.73	)	(2,552		)	(4.07	)
–200 basis points	N/A			N/A		N/A			N/A

As of September 30, 2015, we project a decrease 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, 2014, we projected an increase in net interest income in an increasing rate environment and a decrease in net interest income in a decreasing interest rate environment.

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.  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. Consequently, variations should be expected from the projections resulting from the controlled conditions of the simulation analysis.  Management utilizes an earnings simulation model as the primary quantitative tool in measuring the amount of interest rate risk associated with changing market rates. The model quantifies the effects of various interest rate scenarios on projected net interest income over varying time horizons. The model measures the impact on net interest income relative to a flat-rate case scenario of hypothetical fluctuations in interest. These simulations incorporate assumptions regarding balance sheet mix, pricing and the re-pricing and maturity characteristics of the existing and projected balance sheet. 

57

HAMPTON ROADS BANKSHARES, INC.

PART I. FINANCIAL INFORMATION

ITEM4- CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures.  The Company, under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and the Chief Financial Officer, has evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Exchange Act) as of September 30, 2015.  Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures as of September 30, 2015 were effective in providing reasonable assurance that material information is recorded, processed, summarized, and reported by management of the Company on a timely basis in order to comply with the Company’s disclosure obligations under the Exchange Act and the rules and regulations promulgated thereunder. 

Changes in Internal Control over Financial Reporting.  No change in the Company’s internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) occurred during the nine months ended September 30, 2015 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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HAMPTON ROADS BANKSHARES, INC.

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.

On November 21, 2014, in the matter of Scott C. Harvard v. Shore Bank et al (CL13-4525-00), the Circuit Court for the City of Norfolk, Virginia ruled that former Shore Bank President Scott C. Harvard was entitled to $655,495.43 in severance pay, plus interest from May 20, 2014, and $155,000.00 in attorney’s fees, plus additional fees incurred since July 15, 2014.  Mr. Harvard had initiated the claim in June 2013 alleging that the Company and Shore Bank were contractually obligated to make certain severance payments to him following the termination of his employment in 2009. The Company asserts that Mr. Harvard was not entitled to a “golden parachute” severance due to application of a regulation under the TARP program and furthermore, that based upon the legally distinct entity from which Harvard derived his compensation, Shore Bank did not owe Harvard severance compensation.  The judge ruled in favor of Harvard that the prohibition of the payment of his contracted severance compensation was a taking of his private property without just compensation in violation of the Fifth Amendment to the Constitution, and further that the Company was prohibited from making the argument, based upon the doctrine of judicial estoppel, that Shore Bank was legally distinct from the holding company that employed Mr. Harvard. The Company was awarded a petition for appeal on June 10, 2015 in the Supreme Court of Virginia. It is expected arguments will be heard in the fourth quarter of 2015.

On June 25, 2015, in the matter of Julie Anderson v. Bank of Hampton Roads, Inc. and Hampton Roads Bankshares, Inc (CL15-6659), a former employee filed a complaint in Norfolk Circuit Court, alleging a breach of contract for failure to pay severance benefits. The plaintiff is seeking $926,776.46, plus pre- and post-judgment interest and attorney's fees and expenses.  The Company filed a notice of removal of the case to the United States District Court for the Eastern District of Virginia on July 20, 2015 and the federal court assigned it Case No. 2:15cv00323-AWA-DEM.   The Company filed a motion to dismiss the complaint with prejudice. The Company believes the case is meritless and will defend itself vigorously.

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 2014 Form 10-K, Part I, Item 1A "Risk Factors". There have been no material changes to the risk factors as previously disclosed in the 2014 Form 10-K.

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 nine months ended September 30, 2015.

ITEM 3 - DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4-MINE SAFETY DISCLOSURES

None.

ITEM5 – OTHER INFORMATION

None.

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HAMPTON ROADS BANKSHARES, INC.

PART II - OTHER INFORMATION

ITEM6-EXHIBITS

See Exhibit Index, which is incorporated in this item by reference.

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HAMPTON ROADS BANKSHARES, INC.

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:	November 5, 2015	/s/ Thomas B. Dix III
		Thomas B. Dix III
		Chief Financial Officer

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HAMPTON ROADS BANKSHARES, INC.

Exhibit Index

Hampton Roads Bankshares, Inc.

Exhibit Number	Description
10.1	Release and Separation Agreement, dated September 16, 2015, between Douglas J. Glenn, and Hampton Roads Bankshares, Inc., incorporated by reference from Exhibit 10.1 to the Registrant's Form 8-K, filed September 16, 2015.
10.2	Amendment No. 2, dated September 23, 2015, to Employment Agreement, dated May 22, 2013, and amended August 19, 2014, between Donna W. Richards and Hampton Roads Bankshares, Inc., and Bank of Hampton Roads, incorporated by reference from Exhibit 10.1 to Amendment No. 1 to the Registrant’s Form 8-K, filed September 29, 2015.
10.3	Amendment No. 1, dated September 23, 2015, to Employment Agreement, dated August 19, 2014, between Thomas B. Dix III and Hampton Roads Bankshares, Inc., and Bank of Hampton Roads, incorporated by reference from Exhibit 10.1 to the Registrant's Form 8-K, filed September 29, 2015.
10.4	Amendment No. 1, dated September 23, 2015, to Employment Agreement, dated August 19, 2014, between Denise D. Hinkle and Hampton Roads Bankshares, Inc., and Bank of Hampton Roads, filed herewith.
31.1	The Rule 13a-14(a)/15d-14(a) Certification of Interim 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 Interim 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 September 30, 2015 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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