Form 10-Q

Large accelerated filer

Accelerated filer

Non-accelerated filer

¨ (do not check if smaller reporting company)

Smaller reporting company

10-Q 1 d10q.htm FORM 10-Q Form 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2010

Commission File Number: 001-32968

HAMPTON ROADS BANKSHARES, INC.

(Exact name of registrant as specified in its charter)


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

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

(757) 217-1000

(Registrant’s telephone number, including area code)

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

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

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

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

The number of shares outstanding of the issuer’s Common Stock as of August 10, 2010 was 22,153,445 shares, par value $0.625.

TABLE OF CONTENTS


PART I – FINANCIAL INFORMATION

	ITEM 1 – FINANCIAL STATEMENTS	Page

	Consolidated Balance Sheets June 30, 2010 December 31, 2009	3

	Consolidated Statements of Operations Three months ended June 30, 2010 and 2009 Six months ended June 30, 2010 and 2009	4

	Consolidated Statement of Changes in Shareholders’ Equity Six months ended June 30, 2010	5

	Consolidated Statements of Cash Flows Six months ended June 30, 2010 and 2009	6

	Notes to Consolidated Financial Statements	8

	ITEM 2 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	30

	ITEM 3 – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	46

	ITEM 4 – CONTROLS AND PROCEDURES	47

PART II – OTHER INFORMATION

	ITEM 1 – LEGAL PROCEEDINGS	48

	ITEM 1A – RISK FACTORS	48

	ITEM 2 – UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	50

	ITEM 3 – DEFAULTS UPON SENIOR SECURITIES	50

	ITEM 4 – REMOVED AND RESERVED	50

	ITEM 5 – OTHER INFORMATION	50

	ITEM 6 – EXHIBITS	50

SIGNATURES		51

HAMPTON ROADS BANKSHARES, INC.

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

CONSOLIDATED BALANCE SHEETS


(in thousands, except share and per share data)	(Unaudited) June 30, 2010			As Restated (Audited) December 31, 2009

Assets:
Cash and due from banks	$	18,813		$	16,995
Interest-bearing deposits in other banks		1,255			43,821
Overnight funds sold and due from Federal Reserve Bank		306,812			139,228
Investment securities available for sale, at fair value		175,282			161,062
Restricted equity securities, at cost		26,397			29,779

Loans held for sale		27,734			12,615

Loans		2,251,937			2,426,692
Allowance for loan losses		(173,226	)		(132,697	)

Net loans		2,078,711			2,293,995

Premises and equipment, net		95,206			97,512
Interest receivable		7,749			8,788
Foreclosed real estate and repossessed assets, net of valuation allowance		30,307			8,867
Deferred tax asset, net		—			397
Intangible assets, net		11,848			12,839
Bank-owned life insurance		49,179			48,355
Other assets		47,818			45,323


Total assets	$	2,877,111		$	2,919,576


Liabilities and Shareholders’ Equity:
Deposits:
Noninterest-bearing demand	$	249,102		$	248,682
Interest-bearing:
Demand		871,265			916,865
Savings		75,840			82,860
Time deposits:
Less than $100		768,960			889,788
$100 or more		583,214			356,845

Total deposits		2,548,381			2,495,040

Federal Home Loan Bank borrowings		225,013			228,215
Other borrowings		49,553			49,254
Interest payable		3,658			3,573
Other liabilities		16,259			18,481


Total liabilities		2,842,864			2,794,563


Commitments and contingencies		—			—

Shareholders’ equity:
Preferred stock - 1,000,000 shares authorized:
Series A non-convertible, non-cumulative perpetual preferred stock, $1,000 liquidation value, 23,266 shares issued and outstanding on June 30, 2010 and December 31, 2009		20,733			19,919
Series B non-convertible, non-cumulative perpetual preferred stock, $1,000 liquidation value, 37,550 shares issued and outstanding on June 30, 2010 and December 31, 2009		39,117			39,729
Series C fixed rate, cumulative preferred stock, $1,000 liquidation value, 80,347 shares issued and outstanding on June 30, 2010 and December 31, 2009		75,867			75,322
Common stock, $0.625 par value, 100,000,000 shares authorized; 22,149,594 shares issued and outstanding on June 30, 2010 and 22,154,320 on December 31, 2009		13,843			13,846
Capital surplus		165,475			165,391
Retained deficit		(283,013	)		(188,448	)
Noncontrolling interest		151			—
Accumulated other comprehensive income (loss), net of tax		2,074			(746	)


Total shareholders’ equity		34,247			125,013


Total liabilities and shareholders’ equity	$	2,877,111		$	2,919,576

See accompanying notes to the consolidated financial statements.

HAMPTON ROADS BANKSHARES, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS


(in thousands, except share and per share data)	Three Months Ended						Six Months Ended
(unaudited)	June 30, 2010			June 30, 2009			June 30, 2010			June 30, 2009

Interest Income:
Loans, including fees	$	28,168		$	36,150		$	60,422		$	73,885
Investment securities		1,705			1,561			3,422			3,341
Overnight funds sold and due from Federal Reserve Bank		152			12			276			22
Interest-bearing deposits in other banks		—			5			—			11

Total interest income		30,025			37,728			64,120			77,259


Interest Expense:
Deposits:
Demand		3,865			1,557			7,666			3,222
Savings		125			295			254			722
Time deposits:
Less than $100		3,693			3,785			7,643			8,717
$100 or more		2,494			3,420			4,732			6,720

Interest on deposits		10,177			9,057			20,295			19,381
Federal Home Loan Bank borrowings		1,406			1,672			2,719			3,381
Other borrowings		745			966			1,476			2,185
Overnight funds purchased		—			134			—			339

Total interest expense		12,328			11,829			24,490			25,286


Net interest income		17,697			25,899			39,630			51,973
Provision for loan losses		54,638			33,706			100,251			34,895

Net interest income (expense) after provision for loan losses		(36,941	)		(7,807	)		(60,621	)		17,078

Noninterest Income:
Service charges on deposit accounts		1,755			2,073			3,420			4,132
Mortgage banking revenue		2,604			1,397			4,359			3,039
Gain on sale of investment securities available for sale		390			—			469			—
Gain (loss) on sale of premises and equipment		18			(11	)		43			(6	)
Losses on foreclosed real estate and repossessed assets		(2,476	)		(337	)		(3,214	)		(339	)
Other-than-temporary impairment of securities (includes total other-than-temporary impairment losses of $0 and $166, net of $0 and $34 recognized in other comprehensive income for the six months ended June 30, 2010 and 2009, respectively, before taxes)		—			(114	)		(44	)		(132	)
Insurance revenue		1,279			1,339			2,599			2,651
Brokerage revenue		79			85			153			131
Income from bank-owned life insurance		424			405			824			805
Other		1,258			818			2,323			1,814

Total noninterest income		5,331			5,655			10,932			12,095

Noninterest Expense:
Salaries and employee benefits		10,955			10,546			20,705			21,780
Occupancy		2,150			2,165			4,448			4,084
Data processing		1,169			1,295			2,649			2,493
Impairment of goodwill		—			27,976			—			27,976
FDIC insurance		1,169			2,661			2,225			3,301
Equipment		932			1,462			2,023			2,491
Other		6,711			4,225			11,985			8,053

Total noninterest expense		23,086			50,330			44,035			70,178

Loss before provision for income tax benefit		(54,696	)		(52,482	)		(93,724	)		(41,005	)
Provision for income tax benefit		(2,196	)		(9,253	)		(2,134	)		(5,143	)

Net loss before noncontrolling interest		(52,500	)		(43,229	)		(91,590	)		(35,862	)

Noncontrolling interest		(139	)		—			(170	)		—

Net loss		(52,639	)		(43,229	)		(91,760	)		(35,862	)
Preferred stock dividend and accretion of discount		1,423			2,995			2,798			5,959

Net loss available to common shareholders	$	(54,062	)	$	(46,224	)	$	(94,558	)	$	(41,821	)


Per Common Share:
Cash dividends declared	$	—		$	0.11		$	—		$	0.22

Basic loss	$	(2.44	)	$	(2.13	)	$	(4.27	)	$	(1.92	)

Diluted loss	$	(2.44	)	$	(2.13	)	$	(4.27	)	$	(1.92	)


Basic weighted average shares outstanding		22,154,594			21,741,879			22,154,557			21,746,505
Effect of dilutive stock options and non-vested stock		—			—			—			—

Diluted weighted average shares outstanding		22,154,594			21,741,879			22,154,557			21,746,505

See accompanying notes to the consolidated financial statements.

HAMPTON ROADS BANKSHARES, INC.

CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY


(in thousands, except share data)	Preferred Stock			Common Stock							Retained			Noncontrolling		Accumulated Other Comprehensive			Total Stockholders’
(unaudited)	Shares	Amount		Shares		Amount			Capital Surplus		Deficit			Interest		Gain (Loss)			Equity

Balance at December 31, 2009 (as restated)	141,163	$	134,970	22,154,320		$	13,846		$	165,391	$	(188,448	)	$	—	$	(746	)	$	125,013

Comprehensive loss:
Net loss	—		—	—			—			—		(91,760	)		—		—			(91,760	)
Change in unrealized gain on securities available for sale, net of taxes of 1,675	—		—	—			—			—		—			—		3,125			3,125
Reclassification adjustment for securities gains included in net income, net of taxes of $(164)	—		—	—			—			—		—			—		(305	)		(305	)

Total comprehensive loss																				(88,940	)
Stock-based compensation	—		—	(4,726	)		(3	)		84		—			—		—			81
Noncontrolling interest	—		—	—			—			—		(7	)		151		—			144
Amortization of fair market value adjustment	—		201	—			—			—		(201	)		—		—			—
Preferred stock dividend declared and amortization of preferred stock discount	—		546	—			—			—		(2,597	)		—		—			(2,051	)


Balance at June 30, 2010	141,163	$	135,717	22,149,594		$	13,843		$	165,475	$	(283,013	)	$	151	$	2,074		$	34,247

See accompanying notes to the consolidated financial statements.

HAMPTON ROADS BANKSHARES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS


(in thousands)	Six Months Ended
(unaudited)	June 30, 2010			June 30, 2009

Operating Activities:
Net loss	$	(91,760	)	$	(35,862	)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation and amortization		2,612			2,822
Amortization of intangible assets and fair value adjustments		(64	)		(4,005	)
Provision for loan losses		100,251			34,895
Proceeds from mortgage loans held for sale		143,647			190,651
Originations of mortgage loans held for sale		(158,765	)		(196,696	)
Stock-based compensation expense		81			271
Net amortization of premiums and accretion of discounts on investment securities		631			268
(Gain) loss on sale of premises and equipment		(43	)		6
Losses on foreclosed real estate and repossessed assets		3,214			339
Gain on sale of investment securities available for sale		(469	)		—
Gain on sale of loans		—			(15	)
Earnings on bank-owned life insurance		(824	)		(805	)
Other-than-temporary impairment of securities		44			132
Other-than-temporary impairment of goodwill		—			27,976
Deferred income tax benefit		(35,128	)		(1,159	)
Deferred tax asset valuation allowance		34,014			—
Noncontrolling interest		144			—
Changes in:
Interest receivable		1,039			607
Other assets		(2,495	)		(10,396	)
Interest payable		85			(892	)
Other liabilities		(5,020	)		(4,605	)


Net cash provided by (used in) operating activities		(8,806	)		3,532


Investing Activities:
Proceeds from maturities and calls of debt securities available for sale		10,697			26,351
Proceeds from sale of investment securities available for sale		1,802			—
Purchase of debt securities available for sale		(22,601	)		—
Purchase of equity securities available for sale		—			(6	)
Purchase of restricted equity securities		(28	)		(11,783	)
Proceeds from sales of restricted equity securities		3,410			9,535
Proceeds from the sale of loans		—			697
Net decrease in loans		86,572			5,279
Purchase of premises and equipment		(343	)		(2,252	)
Proceeds from sale of premises and equipment		140			139
Proceeds from sale of repossessed assets		3,118			537


Net cash provided by investing activities		82,767			28,497


Financing Activities:
Net increase (decrease) in deposits		53,862			(8,681	)
Proceeds from Federal Home Loan Bank borrowings		—			11,500
Repayments of Federal Home Loan Bank borrowings		(1,533	)		(28,534	)
Net increase in overnight funds borrowed		—			65,400
Net decrease in other borrowings		—			(28,000	)
Common stock repurchased		—			(545	)
Proceeds from exercise of stock options		—			82
Preferred stock dividends paid and amortization of preferred stock discount		546			(2,964	)
Common stock dividends paid, net of reinvestment		—			(3,731	)


Net cash provided by financing activities		52,875			4,527


Increase in cash and cash equivalents		126,836			36,556
Cash and cash equivalents at beginning of period		200,044			48,312


Cash and cash equivalents at end of period	$	326,880		$	84,868

HAMPTON ROADS BANKSHARES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS


	Six Months Ended
	June 30, 2010		June 30, 2009

Supplemental cash flow information:
Cash paid for interest	$	24,405	$	26,178
Cash paid for income taxes		343		9,214

Supplemental non-cash information:
Dividends reinvested	$	—	$	531
Change in unrealized gain on securities		4,331		15
Transfer between loans and other real estate owned		27,772		3,564

See accompanying notes to the consolidated financial statements.

HAMPTON ROADS BANKSHARES, INC.

PART I. FINANCIAL INFORMATION

Item 1. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE A – BASIS OF PRESENTATION

The accompanying unaudited consolidated financial statements of Hampton Roads Bankshares, Inc. (the “Company,” “we,” “us,” or “our”) have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial reporting and with the instructions to Form 10-Q. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, the financial statements reflect all adjustments (consisting of a normal recurring nature) considered necessary for a fair presentation. The results of operations for the six months ended June 30, 2010 are not necessarily indicative of the results to be expected for the full year. For further information, refer to the consolidated financial statements and footnotes, as restated, thereto included in the Company’s restated annual report on Form 10-K for the year ended December 31, 2009, as amended, (the “2009 Form 10-K”) filed August 13, 2010.

Recent Accounting Pronouncements

In June 2009, the Financial Accounting Standards Board (“FASB”) issued new guidance relating to the accounting for transfers of financial assets. The new guidance, which was issued as Statement of Financial Accounting Standards (“SFAS”) No. 166, Accounting for Transfers of Financial Assets, an amendment to SFAS No. 140, was adopted into Codification in December 2009 through the issuance of Accounting Standards Update (“ASU”) 2009-16. The new standard provides guidance to improve the relevance, representational faithfulness, and comparability of the information that an entity provides in its financial statements about a transfer of financial assets; the effects of a transfer on its financial position, financial performance, and cash flows; and a transferor’s continuing involvement, if any, in transferred financial assets. The adoption of the new guidance did not have a material impact on the Company’s consolidated financial statements.

In June 2009, the FASB issued new guidance relating to variable interest entities. The new guidance, which was issued as SFAS No. 167, Amendments to FASB Interpretation No. 46(R), was adopted into Codification in December 2009. The objective of the guidance is to improve financial reporting by enterprises involved with variable interest entities and to provide more relevant and reliable information to users of financial statements. SFAS No. 167 is effective as of January 1, 2010. The adoption of the new guidance did not have a material impact on the Company’s consolidated financial statements.

In October 2009, the FASB issued ASU 2009-15, Accounting for Own-Share Lending Arrangements in Contemplation of Convertible Debt Issuance or Other Financing. ASU 2009-15 amends Subtopic 470-20 to expand accounting and reporting guidance for own-share lending arrangements issued in contemplation of convertible debt issuance. ASU 2009-15 is effective for fiscal years beginning on or after December 15, 2009 and interim periods within those fiscal years for arrangements outstanding as of the beginning of those fiscal years. The adoption of the new guidance did not have a material impact on the Company’s consolidated financial statements.

In January 2010, the FASB issued ASU 2010-04, Accounting for Various Topics – Technical Corrections to SEC Paragraphs. ASU 2010-04 makes technical corrections to existing Security Exchange Commission (“SEC”) guidance including the following topics: accounting for subsequent investments, termination of an interest rate swap, issuance of financial statements - subsequent events, use of residual method to value acquired assets other than goodwill, adjustments in assets and liabilities for holding gains and losses, and selections of discount rate used for measuring defined benefit obligation. The adoption of the new guidance did not have a material impact on the Company’s consolidated financial statements.

In January 2010, the FASB issued ASU 2010-06, Fair Value Measurements and Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements. ASU 2010-06 amends Subtopic 820-10 to clarify existing disclosures, require new disclosures, and includes conforming amendments to guidance on employers’ disclosures about postretirement benefit plan assets. ASU 2010-06 is effective for interim and annual periods beginning after December 15, 2009, except for disclosures about purchases, sales, issuances, and settlements in the roll forward of activity in Level 3 fair value measurements. Those disclosures are effective for fiscal years beginning after December 15, 2010 and for interim periods within those fiscal years. The adoption of the new guidance did not have a material impact on the Company’s consolidated financial statements.

HAMPTON ROADS BANKSHARES, INC.

PART I. FINANCIAL INFORMATION

Item 1. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

In February 2010, the FASB issued ASU 2010-08, Technical Corrections to Various Topics. ASU 2010-08 clarifies guidance on embedded derivatives and hedging. ASU 2010-08 is effective for interim and annual periods beginning after December 15, 2009. The adoption of the new guidance did not have a material impact on the Company’s consolidated financial statements.

In February 2010, the FASB issued ASU 2010-09, Subsequent Events (Topic 855): Amendments to Certain Recognition and Disclosure Requirements. ASU 2010-09 addresses both the interaction of the requirements of Topic 855 with the SEC’s reporting requirements and the intended breadth of the reissuance disclosures provisions related to subsequent events. An entity that is an SEC filer is not required to disclose the date through which subsequent events have been evaluated. ASU 2010-09 is effective immediately. The adoption of the new guidance did not have a material impact on the Company’s consolidated financial statements.

In April 2010, the FASB issued ASU 2010-18, Effect of a Loan Modification When the Loan Is Part of a Pool That Is Accounted for as a Single Asset. ASU 2010-18 states that modifications of loans that are accounted for within a pool under ASC 310-30 do not result in the removal of those loans from the pool even if the modification of those loans would otherwise be considered a troubled debt restructuring. An entity will continue to be required to consider whether the pool of assets in which the loan is included is impaired if expected cash flows for the pool change. The amendments do not affect the accounting for loans under the scope of ASC 310-30 that are not accounted for within pools. Loans accounted for individually under ASC 310-30 continue to be subject to the troubled debt restructuring accounting provisions within ASC 310-40, Receivables – Troubled Debt Restructurings by Creditors. The amendments are effective for modifications of loans accounted for within pools under Subtopic 310-30 occurring in the first interim or annual period ending on or after July 15, 2010. The Company does not expect that the adoption of this pronouncement will have a material impact on the Company’s consolidated financial statements.

In July 2010, the FASB issued ASU 2010-20, Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses. The new disclosure guidance will significantly expand the existing requirements and will lead to greater transparency into a company’s exposure to credit losses from lending arrangements. The extensive new disclosures of information as of the end of a reporting period will become effective for both interim and annual reporting periods ending after December 15, 2010. Specific items regarding activity that occurred before the issuance of the ASU, such as the allowance rollforward and modification disclosures, will be required for periods beginning after December 15, 2010. The Company is currently assessing the impact that ASU 2010-20 will have on its consolidated financial statements.

NOTE B – REGULATORY MATTERS AND GOING CONCERN CONSIDERATIONS

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

Written Agreement

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

HAMPTON ROADS BANKSHARES, INC.

PART I. FINANCIAL INFORMATION

Item 1. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

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

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

Going Concern Considerations

The consolidated financial statements of Hampton Roads Bankshares, Inc. as of and for the year ended December 31, 2009, as restated, and its Form 10-Q as of and for the three and six month periods ended June 30, 2010 have been prepared on a going concern basis, which contemplates the realization of assets and the discharge of liabilities in the normal course of business for the foreseeable future. Due to the Company’s financial results, the substantial uncertainty throughout the U.S. banking industry, the Written Agreement the Company and BOHR have entered into and described above and BOHR’s “significantly undercapitalized” status, doubt exists regarding the Company’s ability to continue as a going concern. This concern is mitigated by the capital raise expected to close in the third quarter of 2010. With this new capital the Company and BOHR are expected to return to “well capitalized” status.

Operating Losses

The Company incurred a net loss of $52.6 million and $91.8 million for the three and six months, respectively, ended June 30, 2010. This loss was largely the result of dramatic increases in non-performing assets. Additionally, due to these recent significant losses, the Company was unable to ascertain it would generate sufficient net income in the near term to realize its deferred tax assets, and therefore, established a deferred tax valuation allowance as reported in the December 31, 2009 restated Annual Report filed August 13, 2010.

Capital Adequacy

As of June 30, 2010, the Company was considered “critically undercapitalized” and BOHR was considered “significantly

undercapitalized” under regulatory guidelines and must improve its capital in accordance with the Written Agreement.

In connection with this, the Company and affiliates of The Carlyle Group, Anchorage Advisors, L.L.C., CapGen Financial Group, and other financial institutions have entered into a binding agreement (the “Investment Agreement”), which is anticipated to close on or before September 30, 2010, to purchase common stock of the Company, as part of an expected aggregate $255.0 million capital raise by the Company from institutional investors in a private placement. The private placement is fully subscribed and will include the opportunity to raise an additional $20 to $40 million in common stock through a rights offering to the Company’s existing shareholders.

Prior to the Closing, the Company is required to conduct exchange offers for each outstanding share of Series A and Series B Preferred Stock for Common Stock (collectively, the “Exchange Offers”) pursuant to which each share of Series A and B Preferred Stock will be exchanged for 375 shares of Common Stock (reflecting an exchange value of $150.00 per share or 15% of its liquidation preference and a conversion price of $0.40 per share).

Additionally, the Company has entered into an agreement with the Treasury pursuant to which Treasury will exchange all of the cumulative preferred stock it purchased from the Company in 2008 under Treasury‘s Capital Purchase program for a new series of mandatorily convertible preferred stock, which will convert into the Company’s common stock upon closing of the capital raise discussed above.

The above capital transactions require shareholder approval.

Management believes the capital raise will greatly strengthen its balance sheet and return the Company to “well capitalized” status under the regulatory capital standards.

HAMPTON ROADS BANKSHARES, INC.

PART I. FINANCIAL INFORMATION

Item 1. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Liquidity

Our primary sources of liquidity are our deposits, the scheduled repayments on our loans, and interest and maturities of our investments. All securities have been classified as available for sale, which means they are carried at fair value, and we have the ability to sell or pledge a portion of our unpledged investment securities to manage liquidity. Due to BOHR’s “significantly undercapitalized” status, we are unable to accept, rollover, or renew any brokered deposits. At June 30, 2010, the Company had approximately $326.9 million in available cash on hand and unpledged investment securities of approximately $58.1 million.

NOTE C – STOCK-BASED COMPENSATION

Accounting Standards Codification (“ASC”) 718, Compensation – Stock Compensation, requires the use of the fair-value method, which requires that compensation cost relating to stock-based transactions be recognized in the financial statements, to account for stock-based compensation. Fair value of stock options is estimated at the date of grant using a lattice option pricing model. It requires recognition of the cost of employee services received in exchange for an award of equity instruments in the financial statements over the period the employee is required to perform the services in exchange for the award. Stock options granted with pro-rata vesting schedules are expensed over the vesting period on a straight-line basis.

Stock-based compensation expense recognized in the consolidated statements of operations and the options exercised, including the total intrinsic value and cash received, for the six months ended June 30, 2010 and 2009 were as follows.


	June 30,
	2010		2009
Expense recognized:
Related to stock options	$	60,551	$	130,803
Related to share awards		20,212		139,736
Related tax benefit		19,286		49,872

Number of options exercised:
New shares		—		13,841
Previously acquired shares		—		—

Total intrinsic value of options exercised	$	—	$	31,048
Cash received from options exercised		—		81,540

The Company has granted stock options to its directors and employees under stock compensation plans that have been approved by the Company’s shareholders. All outstanding options have terms that range from five to ten years and are either fully vested and exercisable at the date of grant or vest ratably over periods that range from one to ten years. A summary of the Company’s stock option activity and related information for the six months ended June 30, 2010 is as follows.

HAMPTON ROADS BANKSHARES, INC.

PART I. FINANCIAL INFORMATION

Item 1. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


	Options Outstanding		Weighted Average Exercise Price		Average Intrinsic Value

Balance at December 31, 2009	1,420,213		$	12.60	$	—
Granted	—			—		—
Exercised	—			—		—
Expired	(100,605	)		11.50		—
Forfeited	—			—		—


Balance at June 30, 2010	1,319,608		$	12.68	$	—


Options exercisable at June 30, 2010	1,230,818		$	12.50	$	—

Information pertaining to options outstanding and options exercisable as of June 30, 2010 is as follows.


	Options Outstanding				Options Exercisable
Ranges of Exercise Prices	Number of Options Outstanding	Weighted Average Remaining Contractual Life	Weighted Average Exercise Price		Number of Options Exercisable	Weighted Average Exercise Price
$3.09 - $5.05	61,751	1.97	$	4.13	61,751	$	4.13
$6.53 - $8.84	297,255	1.96		8.02	297,255		8.02
$9.11 - $10.65	379,990	3.36		9.77	378,200		9.77
$12.00 - $12.49	184,128	6.57		12.03	126,195		12.03
$19.43 - $22.07	343,051	4.70		20.02	313,984		19.86
$23.60 - $24.67	53,433	5.09		24.22	53,433		24.22

$3.09 - $24.67	1,319,608	3.85	$	12.68	1,230,818	$	12.50

The Company may issue new shares to satisfy stock option grants. As of June 30, 2010, there were 765.5 thousand shares available under the existing stock incentive plan. Shares may be repurchased in the open market or, under certain circumstances, through privately negotiated transactions. As of June 30, 2010, there was $270 thousand of unrecognized compensation cost related to non-vested stock options. That cost is expected to be recognized over a weighted-average period of 3.1 years.

The Company has granted non-vested shares of common stock to certain directors and employees as part of incentive programs and to those directors who elected to use deferred directors’ fees to purchase non-vested shares of common stock. Non-vested shares of common stock awarded to employees and directors as part of incentive programs have vesting schedules that range from one to nine years and are expensed over the same schedules. Non-vested shares of common stock issued to directors as a method of deferring their directors’ fees are expensed at the time the fees are earned by the director. A summary of the Company’s non-vested share activity and related information for the six months ended June 30, 2010 is as follows:


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

Balance at December 31, 2009	21,917		$	10.12
Granted	—			—
Vested	(2,000	)		8.54
Forfeited	(4,000	)		8.30


Balance at June 30, 2010	15,917		$	10.78

HAMPTON ROADS BANKSHARES, INC.

PART I. FINANCIAL INFORMATION

Item 1. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

As of June 30, 2010, there was $120 thousand of total unrecognized compensation cost related to non-vested shares of common stock. That cost is expected to be recognized over a weighted-average period of 3.2 years.

NOTE D – INVESTMENT SECURITIES

The amortized cost and estimated fair values of investment securities (in thousands) available for sale at June 30, 2010 and December 31, 2009 were as follows.


	June 30, 2010
Description of Securities	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value

Agency securities	$	15,172	$	257	$	55	$	15,374
Mortgage-backed securities		153,804		3,016		—		156,820
State and municipal securities		1,006		8		—		1,014
Equity securities		2,103		36		65		2,074


Total securities available for sale	$	172,085	$	3,317	$	120	$	175,282


	December 31, 2009
Description of Securities	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value

Agency securities	$	11,376	$	173	$	105	$	11,444
Mortgage-backed securities		146,583		482		1,339		145,726
State and municipal securities		1,279		27		—		1,306
Equity securities		2,966		3		383		2,586


Total securities available for sale	$	162,204	$	685	$	1,827	$	161,062

Information pertaining to securities with gross unrealized losses (in thousands) at June 30, 2010 and December 31, 2009, aggregated by investment category and length of time that the individual securities have been in a continuous unrealized loss position is as follows.

HAMPTON ROADS BANKSHARES, INC.

PART I. FINANCIAL INFORMATION

Item 1. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


	June 30, 2010
	Less than 12 Months				12 Months or More				Total
Description of Securities	Estimated Fair Value		Unrealized Loss		Estimated Fair Value		Unrealized Loss		Estimated Fair Value		Unrealized Loss

Agency securities	$	4,737	$	55	$	—	$	—	$	4,737	$	55
Equity securities		—		—		159		65		159		65


	$	4,737	$	55	$	159	$	65	$	4,896	$	120


	December 31, 2009
	Less than 12 Months				12 Months or More				Total
Description of Securities	Estimated Fair Value		Unrealized Loss		Estimated Fair Value		Unrealized Loss		Estimated Fair Value		Unrealized Loss

Agency securities	$	4,711	$	105	$	—	$	—	$	4,711	$	105
Mortgage-backed securities		69,078		1,339		—		—		69,078		1,339
Equity securities		32		13		1,097		370		1,129		383


	$	73,821	$	1,457	$	1,097	$	370	$	74,918	$	1,827

Management evaluates securities for other-than-temporary impairment (“OTTI”) at least on a quarterly basis, and more frequently when economic or market conditions warrant such an evaluation. Investment securities classified as available for sale are generally evaluated for OTTI in accordance with ASC 320, Investment – Debt and Equity Securities.

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

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

The unrealized loss positions on debt securities at June 30, 2010 were considered to be directly related to interest rate movements as there is minimal credit risk exposure in these investments. At June 30, 2010 one agency security was in an unrealized loss position. Management does not believe that this debt security was other-than-temporarily impaired at June 30, 2010.

For equity securities, our impairment analysis considered all available evidence including the length of time and the extent to which the market value of each security was less than cost, the financial condition of the issuer of each

HAMPTON ROADS BANKSHARES, INC.

PART I. FINANCIAL INFORMATION

Item 1. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

equity security (based upon financial statements of the issuers), and the near term prospects of each issuer, as well as our intent and ability to retain these investments for a sufficient period of time to allow for any anticipated recovery in their respective market values. During the first six months of 2010 and 2009, equity securities with an amortized cost basis of $91 thousand and $267 thousand, respectively, were determined to be other-than-temporarily impaired. Impairment losses of $44 thousand and $132 thousand were recognized through noninterest income during the first six months of 2010 and 2009, respectively. An additional $34 thousand was included in accumulated other comprehensive loss in the equity section of the balance sheet as of June 30, 2009. Management has evaluated the unrealized losses associated with the remaining equity securities as of June 30, 2010 and, in management’s opinion, the unrealized losses are temporary, and it is our intention to hold these securities until their value recovers. A rollforward of the cumulative other-than-temporary impairment losses (in thousands) recognized in earnings for all securities is as follows.


December 31, 2009	$	3,030
Less: Realized gains for securities sales		(2,351	)
Add: Loss where impairment was not previously recognized		30
Add: Loss where impairment was previously recognized		14

June 30, 2010	$	723

The Company’s investment in Federal Home Loan Bank (“FHLB”) stock totaled $19.7 million at June 30, 2010. FHLB stock is generally viewed as a long-term investment and as a restricted investment security and is carried at cost as there is no market for the stock other than the FHLB or member institutions. Therefore, when evaluating FHLB stock for impairment, its value is based on ultimate recoverability of the par value rather than by recognizing temporary declines in value. The FHLB has reinstated dividends and the repurchase of its stock thereby improving the value. The Company does not consider this investment to be other-than-temporarily impaired at June 30, 2010, and no impairment has been recognized.

NOTE E – ACCOUNTING FOR CERTAIN LOANS ACQUIRED IN A TRANSFER

ASC 310-30, Loans and Debt Securities Acquired with Deteriorated Credit Quality, requires acquired loans to be recorded at fair value and prohibits carrying over valuation allowances in the initial accounting period for acquired impaired loans. Loans carried at fair value, mortgage loans held for sale, and loans to borrowers in good standing under revolving credit agreements are excluded from the scope of this pronouncement. It limits the yield that may be accreted to the excess of the undiscounted expected cash flows over the investor’s initial investment in the loan. The excess of the contractual cash flows over expected cash flows may not be recognized as an adjustment of yield. Subsequent increases in cash flows expected to be collected are recognized prospectively through an adjustment of the loan’s yield over its remaining life. Decreases in expected cash flows are recognized as impairments.

The Company acquired loans pursuant to the acquisition of Gateway Financial Holdings (“GFH”) in December 2008. The Company reviewed the loan portfolio at acquisition to determine whether there was evidence of deterioration of credit quality since origination and if it was probable that it will be unable to collect all amounts due according to the loan’s contractual terms. When both conditions existed, the Company accounted for each loan individually, considered expected prepayments, and estimated the amount and timing of discounted expected principal, interest, and other cash flows (expected at acquisition) for each loan. The Company determined the excess of the loan’s scheduled contractual principal and contractual interest payments over all cash flows expected at acquisition as an amount that should not be accreted into interest income (non-accretable difference). The remaining amount, representing the excess of the loan’s cash flows expected to be collected over the amount paid, is accreted into interest income over the remaining life of the loan (accretable yield).

Over the life of the loan, the Company continues to estimate cash flows expected to be collected. The Company evaluates at the balance sheet date whether the present value of its loans determined using the effective interest rates

HAMPTON ROADS BANKSHARES, INC.

PART I. FINANCIAL INFORMATION

Item 1. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

has decreased, and if so, the Company establishes a valuation allowance for the loan. Valuation allowances for acquired loans reflect only those losses incurred after acquisition; that is, the present value of cash flows expected at acquisition that are not expected to be collected. Valuation allowances are established only subsequent to acquisition of the loans.

Loans that were acquired in the GFH acquisition for which there was evidence of deterioration of credit quality since acquisition date and for which it was probable that all contractually required payments would not be made as scheduled had an outstanding balance of $67.4 million and a carrying amount of $61.2 million at June 30, 2010. The carrying amount of these loans is included in the balance sheet amount of loans receivable at June 30, 2010. Of these loans, $44.2 million have experienced further deterioration since the acquisition date and are included in the impaired loan amounts disclosed in Note G. The following table depicts the accretable yield (in thousands) at the beginning and end of the period.


	Accretable Yield

Balance, December 31, 2009	$	1,042
Accretion		(335	)
Disposals		(426	)
Additions		528

Balance, June 30, 2010	$	809

NOTE F – LOANS

The Company grants commercial, construction, real estate, and consumer loans to customers throughout its lending areas. A substantial portion of debtors’ abilities to honor their contracts is dependent upon the real estate and general economic environment of the lending area. The major classifications of loans (in thousands) are summarized as follows.


	June 30, 2010			December 31, 2009

Commercial	$	330,717		$	361,256
Construction		653,184			757,702
Real estate-commercial mortgage		709,428			740,570
Real estate-residential mortgage		523,357			524,853
Installment loans (to individuals)		35,727			42,858
Deferred loan fees and related costs		(476	)		(547	)


Total loans	$	2,251,937		$	2,426,692

Loans are made to the Company’s executive officers and directors and their associates during the ordinary course of business. In management’s opinion, these loans are made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable loans with other persons and do not involve more than normal risk of collectability or present other unfavorable features. At June 30, 2010 and December 31, 2009, loans to executive officers, directors, and their associates were $80.0 million and $90.9 million, respectively. Of these loans, $7.5 million were made for the purpose of purchasing preferred stock in the Company and have been eliminated from both the loan and equity balances in the consolidated balance sheet.

BOHR and Shore had loans outstanding to the Company with aggregate balances of $21.5 million and $2.0 million, respectively, as of June 30, 2010 which are eliminated in consolidation. The loan from BOHR was inadequately secured in violation of Regulation W promulgated by the Federal Reserve. The Company has been in discussions with banking regulators regarding the potential for curing this violation.

HAMPTON ROADS BANKSHARES, INC.

PART I. FINANCIAL INFORMATION

Item 1. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE G – ALLOWANCE FOR LOAN LOSSES AND NON-PERFORMING ASSETS

The purpose of the allowance for loan losses is to provide for potential losses inherent in the loan portfolio. Management considers several factors, including historical loan loss experience, the size and composition of the portfolio, and the value of collateral agreements, in determining the allowance for loan loss.

Transactions (in thousands) affecting the allowance for loan losses during the six months ended June 30, 2010 and 2009 were as follows.


	2010			2009

Balance at beginning of period	$	132,697		$	51,218
Provision for loan losses		100,251			34,895
Loans charged off		(61,890	)		(1,897	)
Recoveries		2,168			275

Balance at end of period	$	173,226		$	84,491

Non-performing assets consist of loans 90 days past due and still accruing interest, nonaccrual loans, and foreclosed real estate and repossessed assets. Total non-performing assets were $335.9 million or 12% of total assets at June 30, 2010 compared with $257.2 million or 9% of total assets at December 31, 2009. Non-performing assets (in thousands) were as follows.


	June 30, 2010		December 31, 2009

Loans 90 days past due and still accruing interest	$	—	$	—
Nonaccrual loans		305,609		248,303
Foreclosed real estate and repossessed assets		30,307		8,867


Total non-performing assets	$	335,916	$	257,170

Estimated gross interest income that would have been recorded during the six months ended June 30, 2010 if the foregoing nonaccrual loans had remained current in accordance with their contractual terms totaled $6.2 million. Information (in thousands) on impaired loans is as follows.


	June 30, 2010		December 31, 2009

Impaired loans for which an allowance has been provided	$	364,705		331,532
Impaired loans for which no allowance has been provided		108,437		137,536


Total impaired loans	$	473,142	$	469,068


Allowance provided for impaired loans, included in the allowance for loan losses	$	115,552	$	91,488


Average balance in impaired loans	$	474,520	$	215,363


Interest income recognized from impaired loans	$	4,529	$	17,440

The following table provides information (in thousands) related to the loan category and method used to measure impairment at June 30, 2010 and December 31, 2009.

HAMPTON ROADS BANKSHARES, INC.

PART I. FINANCIAL INFORMATION

Item 1. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


Loan Category	Method Used to Measure Impairment	Impaired Loans
Loan Category	Method Used to Measure Impairment	June 30, 2010		December 31, 2009

1-4 family residential construction	Estimated fair market value	$	16,219	$	20,851
Other construction and development	Estimated fair market value		247,075		237,313
Secured by farm land	Estimated fair market value		4,959		1,318
Secured by 1-4 family, revolving	Estimated fair market value		5,217		6,018
Secured by 1-4 family, 1st lien	Estimated fair market value		36,346		32,532
Secured by 1-4 family, junior lien	Estimated fair market value		1,851		1,502
Secured by multifamily	Estimated fair market value		15,097		8,137
Secured by nonfarm nonresidential (owner occupied)	Estimated fair market value		29,377		29,309
Secured by nonfarm nonresidential (non-owner occupied)	Estimated fair market value		81,681		75,947
Commercial and industrial	Estimated fair market value		35,006		56,081
Other consumer loans to individuals	Estimated fair market value		62		60
Other	Estimated fair market value		252		—

Total impaired loans		$	473,142	$	469,068

As of June 30, 2010 and December 31, 2009, loans classified as troubled debt restructurings and included in impaired loans in the disclosure above totaled $94.0 million and $73.5 million, respectively. Of these amounts, $94.0 million and $56.6 million were on accrual status at June 30, 2010 and December 31, 2009, respectively, and $16.9 million were on nonaccrual status at December 31, 2009. There were no troubled debt restructurings in nonaccrual status at June 30, 2010. Troubled debt restructurings in nonaccrual status are returned to accrual status after a period of performance under which the borrower demonstrates the ability and willingness to repay the loan. None of the nonaccrual troubled debt restructurings were returned to accrual status during the quarter ended June 30, 2010.

A loan is considered impaired when it is probable that all amounts due will not be collected according to the contractual terms. For collateral dependent impaired loans, impairment is measured based upon the fair value of the underlying collateral. Management considers a loan to be collateral dependent when repayment of the loan is expected solely from the sale or liquidation of the underlying collateral. The Company’s policy is to charge off collateral dependent impaired loans at the earlier of foreclosure, repossession, or liquidation at the point it becomes 180 days past due. The Company’s policy is to reduce the carrying value of the loan to the estimated fair value of the collateral less estimated selling costs through a charge off to the allowance for loan losses. For loans that are not collateral dependent, impairment is measured using discounted cash flows. Total impaired loans were $473.1 million and $469.1 million at June 30, 2010 and December 31, 2009, respectively, the majority of which were considered collateral dependent, and therefore, measured at the fair value of the underlying collateral.

Impaired loans for which no allowance is provided totaled $108.4 million and $137.5 million at June 30, 2010 and December 31, 2009. Loans written down to their estimated fair value of collateral less the costs to sell account for $46.9 and $22.1 of the impaired loans for which no allowance has been provided as of June 30, 2010 and December 31, 2009, respectively. The average age of appraisals for these loans is 1.16 years at June 30, 2010. The remaining impaired loans for which no allowance is provided are fully covered by the value of the collateral, and therefore, no loss is expected on these loans.

HAMPTON ROADS BANKSHARES, INC.

PART I. FINANCIAL INFORMATION

Item 1. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

In the opinion of management, based on conditions reasonably known to them, the allowance was adequate at June 30, 2010. The allowance may be increased or decreased in the future based on loan balances outstanding, changes in internally generated credit quality ratings of the loan portfolio, changes in general economic conditions, or other risk factors.

NOTE H – PREMISES AND EQUIPMENT

Premises and equipment (in thousands) at June 30, 2010 and December 31, 2009 are summarized as follows.


	June 30, 2010			December 31, 2009

Land	$	31,248		$	31,335
Buildings and improvements		58,255			58,177
Leasehold improvements		3,411			3,411
Equipment, furniture, and fixtures		14,885			14,828
Construction in process		95			7

		107,894			107,758

Less accumulated depreciation and amortization		(12,688	)		(10,246	)


Premises and equipment, net	$	95,206		$	97,512

NOTE I – SUPPLEMENTAL RETIREMENT AGREEMENTS

The Company has entered into supplemental retirement agreements with several key officers and recognizes expense each year related to these agreements based on the present value of the benefits expected to be provided to the employees and any beneficiaries. The expense recognized during the first six months of 2010 and 2009 was $331 thousand and $603 thousand, respectively.

NOTE J – INTANGIBLE ASSETS

Intangible assets with an indefinite life are subject to impairment testing at least annually or more often if events or circumstances suggest potential impairment. Other acquired intangible assets determined to have a finite life are amortized over their estimated useful life in a manner that best reflects the economic benefits of the intangible asset. Intangible assets with a finite life are periodically reviewed for other-than-temporary impairment. The gross carrying amount and accumulated amortization (in thousands) for the Company’s intangible assets follows.


	June 30, 2010				December 31, 2009
	Carrying Amount		Accumulated Amortization		Carrying Amount		Accumulated Amortization
Intangible assets:

Core deposit intangible	$	8,105	$	2,381	$	8,105	$	1,703
Employment contract intangibles		1,130		811		1,130		713
Insurance book of business intangible		6,450		645		6,450		430


Total intangible assets	$	15,685	$	3,837	$	15,685	$	2,846

HAMPTON ROADS BANKSHARES, INC.

PART I. FINANCIAL INFORMATION

Item 1. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE K – FORECLOSED REAL ESTATE AND REPOSSESSED ASSETS

Foreclosed assets are presented net of an allowance for losses. An analysis of the allowance for losses (in thousands) on foreclosed assets is as follows.


	June 30, 2010			June 30, 2009

Balance at beginning of year	$	356		$	—
Provision for losses		2,992			—
Charge-offs		(785	)		—

Balance at end of year	$	2,563		$	—

Expenses (in thousands) applicable to foreclosed assets include the following.


	Six Months Ended June 30, 2010

Expenses incurred for foreclosed assets	$	747
Net loss on sales of real estate		222
Provision for losses		2,992

Total	$	3,961

NOTE L – BUSINESS SEGMENT REPORTING

The Company has two community banks, BOHR and Shore, which provide loan and deposit services throughout 60 locations in Virginia, North Carolina, and Maryland. In addition to its banking operations, the Company has three other reportable segments: Mortgage, Investment, and Insurance. The accounting policies of the reportable segments are the same as those described in the summary of significant accounting policies in the Company’s 2009 Form 10-K/A. Segment profit and loss is measured by net income prior to corporate overhead allocation. Intersegment transactions are recorded at cost and eliminated as part of the consolidation process. Because of the interrelationships between the segments, the information is not indicative of how the segments would perform if they operated as independent entities. The following table shows certain financial information (in thousands) at June 30, 2010, December 31, 2009, and June 30, 2009 for each segment and in total.


	Total		Elimination			Banking		Mortgage		Investment		Insurance

*Total Assets at June 30, 2010*	$	2,877,111	$	(266,845	)	$	3,103,131	$	29,681	$	1,108	$	10,036


*Total Assets at December 31, 2009 (as restated)*	$	2,919,576	$	(303,100	)	$	3,197,510	$	13,599	$	1,163	$	10,404

HAMPTON ROADS BANKSHARES, INC.

PART I. FINANCIAL INFORMATION

Item 1. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


Three Months Ended June 30, 2010	Total			Elimination		Banking			Mortgage			Investment			Insurance

Net interest income	$	17,697		$	—	$	17,584		$	109		$	—		$	4
Provision for loan losses		54,638			—		54,638			—			—			—

Net interest income (loss) after provision for loan losses		(36,941	)		—		(37,054	)		109			—			4
Noninterest income		5,331			—		1,411			2,604			37			1,279
Noninterest expense		23,086			—		20,183			1,735			42			1,126

Net income (loss) before income taxes (benefit)		(54,696	)		—		(55,826	)		978			(5	)		157
Income tax expense (benefit)		(2,196	)		—		(2,601	)		352			(2	)		55

Net income (loss) before noncontrolling interest		(52,500	)		—		(53,225	)		626			(3	)		102
Noncontrolling interest		(139	)		—		(139	)		—			—			—

Net income (loss)	$	(52,639	)	$	—	$	(53,364	)	$	626		$	(3	)	$	102


Three Months Ended June 30, 2009	Total			Elimination		Banking			Mortgage			Investment			Insurance

Net interest income	$	25,899		$	—	$	25,776		$	118		$	—		$	5
Provision for loan losses		33,706			—		33,706			—			—			—

Net interest income (loss) after provision for loan losses		(7,807	)		—		(7,930	)		118			—			5
Noninterest income		5,655			—		2,839			1,397			85			1,334
Noninterest expense		50,330			—		47,959			1,058			115			1,198

Net income (loss) before income taxes (benefit)		(52,482	)		—		(53,050	)		457			(30	)		141
Income tax expense (benefit)		(9,253	)		—		(9,451	)		160			(11	)		49

Net income (loss)	$	(43,229	)	$	—	$	(43,599	)	$	297		$	(19	)	$	92


Six Months Ended June 30, 2010	Total			Elimination		Banking			Mortgage			Investment			Insurance

Net interest income	$	39,630		$	—	$	39,429		$	194		$	—		$	7
Provision for loan losses		100,251			—		100,251			—			—			—

Net interest income (loss) after provision for loan losses		(60,621	)		—		(60,822	)		194			—			7
Noninterest income		10,932			—		3,898			4,359			76			2,599
Noninterest expense		44,035			—		38,618			3,071			94			2,252

Net income (loss) before income taxes (benefit)		(93,724	)		—		(95,542	)		1,482			(18	)		354
Income tax expense (benefit)		(2,134	)		—		(2,771	)		519			(6	)		124

Net income (loss) before noncontrolling interest		(91,590	)		—		(92,771	)		963			(12	)		230
Noncontrolling interest		(170	)		—		(170	)		—			—			—

Net income (loss)	$	(91,760	)	$	—	$	(92,941	)	$	(963	)	$	(12	)	$	230

HAMPTON ROADS BANKSHARES, INC.

PART I. FINANCIAL INFORMATION

Item 1. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


Six Months Ended June 30, 2009	Total			Elimination		Banking			Mortgage		Investment			Insurance

Net interest income	$	51,973		$	—	$	51,777		$	188	$	—		$	8
Provision for loan losses		34,895			—		34,895			—		—			—

Net interest income after provision for loan losses		17,078			—		16,882			188		—			8
Noninterest income		12,095			—		6,274			3,039		131			2,651
Noninterest expense		70,178			—		65,614			2,053		142			2,369

Net income (loss) before income taxes (benefit)		(41,005	)		—		(42,458	)		1,174		(11	)		290
Income tax expense (benefit)		(5,143	)		—		(5,652	)		411		(4	)		102

Net income (loss)	$	(35,862	)	$	—	$	(36,806	)	$	763	$	(7	)	$	188

NOTE M – FAIR VALUE MEASUREMENTS

ASC 820, Fair Value Measurements and Disclosures, establishes a framework for measuring fair value. It defines fair value as 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. It also permits the measurement of transactions between market participants at the measurement date and the measurement of selected eligible financial instruments at fair value at specified election dates.

The Company groups our financial assets and liabilities measured at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value. The majority of instruments fall into the Level 1 or 2 fair value hierarchy. Valuation methodologies for the fair value hierarchy are as follows:


Level 1		Quoted prices in active markets for identical assets or liabilities. Level 1 assets and liabilities include debt and equity securities and derivative contracts that are traded in an active exchange market, as well as certain U.S. 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 or liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. Level 2 assets and liabilities include debt securities with quoted prices that are traded less frequently than exchange-traded instruments and derivative contracts whose value is determined using a pricing model with inputs that are observable in the market or can be derived principally from or corroborated by observable market data.

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

Recurring Basis

The Company measures or monitors certain of its assets and liabilities on a fair value basis. Fair value is used on a recurring basis for those assets and liabilities that were elected as well as for certain assets and liabilities in which fair value is the primary basis of accounting. The following table reflects the fair value (in thousands) of assets and liabilities measured and recognized at fair value on a recurring basis in the consolidated balance sheets at June 30, 2010 and December 31, 2009.

HAMPTON ROADS BANKSHARES, INC.

PART I. FINANCIAL INFORMATION

Item 1. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


			Fair Value Measurements at June 30, 2010 Using
Description	Assets / Liabilities Measured at Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)

Investment securities available for sale:
Agency securities	$	15,374	$	—	$	15,374	$	—
Mortgage-backed securities		156,820		—		156,820		—
State and municipal securities		1,014		—		1,014		—
Equity securities		2,074		656		—		1,418

Total investment securities available for sale		175,282		656		173,208		1,418

Derivative loan commitments		1,099		—		—		1,099
Loans held for sale		27,734		—		27,734		—

			Fair Value Measurements at December 31, 2009 Using
Description	Assets / Liabilities Measured at Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)

Investment securities available for sale:
Agency securities	$	11,444	$	—	$	11,444	$	—
Mortgage-backed securities		145,726		—		145,726		—
State and municipal securities		1,306		—		1,306		—
Equity securities		2,586		1,358		—		1,228

Total investment securities available for sale		161,062		1,358		158,476		1,228

Derivative loan commitments		201		—		—		201
Loans held for sale		12,615		—		12,615		—


	Fair Value Measurements Using Significant Unobservable Inputs Six Months Ended June 30, 2010
	Investment Securities Available for Sale							Derivative Loan Commitments		Loans Held for Sale
Description	Level 1			Level 2		Level 3		Level 3		Level 2

Balance, December 31, 2009	$	1,358		$	158,476	$	1,228	$	201	$	12,615
Unrealized (gains) losses included in:
Earnings		(44	)		—		—		—		—
Other comprehensive gain (loss)		77			3,295		190		—		—
Purchases, issuances, and settlements, net		(735	)		11,437		—		898		15,119
Transfers in and/or out, net		—			—		—		—		—

Balance, June 30, 2010	$	656		$	173,208	$	1,418	$	1,099	$	27,734

HAMPTON ROADS BANKSHARES, INC.

PART I. FINANCIAL INFORMATION

Item 1. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The following describes the valuation techniques used to measure fair value for our assets and liabilities classified as recurring.

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 agency securities, obligations of states and political subdivisions, and certain corporate, asset backed, and other securities valued using third party quoted prices in markets that are not active. In certain cases where there is limited activity or less transparency around inputs to the valuation, securities are classified within Level 3 of the valuation hierarchy.

Derivative Loan Commitments. The Company enters into commitments to originate mortgage loans whereby the interest rate is fixed prior to funding. These commitments, in which the Company intends to sell in the secondary market, are considered freestanding derivatives.

Loans Held For Sale. The Company sells loans to outside investors. Fair value of mortgage loans held for sale is estimated based on the commitments into which individual loans will be delivered. As of June 30, 2010, mortgage loans held for sale had a net carrying value of $27.7 million which approximated its fair value. On December 31, 2009, mortgage loans held for sale had a net carrying value of $12.6 million which approximated its fair value.

Non-recurring Basis

Certain assets are measured at fair value on a nonrecurring basis; that is, the instruments are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances (for example, when there is evidence of impairment). The adjustments are based on appraisals of underlying collateral or other observable market prices when current appraisals or observable market prices are available. Where we do not have a current appraisal, an existing appraisal or other valuation would be utilized after discounting it to reflect current market conditions, and, as such, may include significant management assumptions and input with respect to the determination of fair value.

To assist in the discounting process, a valuation matrix was developed to provide valuation guidance for collateral dependent loans and foreclosed real estate where it was deemed that an existing appraisal was outdated as to current market conditions. The matrix applies discounts to external appraisals depending on the type of real estate and age of the appraisal. The discounts are generally specific point estimates; however in some cases, the matrix allows for a small range of values. The discounts were based in part upon externally derived data including but not limited to Case-Shiller composite indices, Moody’s REAL Commercial Property Prices Indices, and information from Zillow.com. The discounts were also based upon management’s knowledge of market conditions and prices of sales of foreclosed real estate. In addition, matrix value adjustments may be made by our independent appraisal group to reflect property value trends within specific markets as well as actual sales data from market transactions and/or foreclosed real estate sales. In the case where an appraisal is greater than two years old for collateral dependent impaired loans and foreclosed real estate, it is the Company’s policy to classify these as Level 3 within the fair value hierarchy; otherwise, they are classified as Level 2. The average age of appraisals for Level 3 valuations of collateral dependent loans was 3.93 years as of June 30, 2010. Management periodically reviews the discounts in the matrix as compared to valuations from updated appraisals and modifies the discounts 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. The following table presents the carrying amount (in thousands) for impaired loans and adjustments made to fair value during the respective reporting periods.

HAMPTON ROADS BANKSHARES, INC.

PART I. FINANCIAL INFORMATION

Item 1. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


Description	Assets / Liabilities Measured at Fair Value		Fair Value Measurements at June 30, 2010 Using						Total Losses
Description	Assets / Liabilities Measured at Fair Value		Level 1		Level 2		Level 3		Total Losses

Impaired loans	$	249,153	$	—	$	219,159	$	29,994	$	—

Description	Assets / Liabilities Measured at Fair Value		Fair Value Measurements at December 31, 2009 Using						Total Losses
Description	Assets / Liabilities Measured at Fair Value		Level 1		Level 2		Level 3		Total Losses

Impaired loans	$	240,044	$	—	$	149,346	$	90,698	$	—

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


Description	Assets / Liabilities Measured at Fair Value		Fair Value Measurements at June 30, 2010 Using						Total Losses
Description	Assets / Liabilities Measured at Fair Value		Level 1		Level 2		Level 3		Total Losses

Foreclosed real estate and repossessed assets	$	30,307	$	—	$	30,307	$	—	$	3,214

Description	Assets / Liabilities Measured at Fair Value		Fair Value Measurements at December 31, 2009 Using						Total Losses
Description	Assets / Liabilities Measured at Fair Value		Level 1		Level 2		Level 3		Total Losses

Foreclosed real estate and repossessed assets	$	8,867	$	—	$	8,867	$	—	$	1,043
Goodwill		—		—		—		—		84,837

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

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

Goodwill. The adjustments to goodwill are made in accordance with ASC 320-20-35 and ASC 320-20-35-30 in which the prescribed two-step impairment testing was performed on goodwill arising from mergers with SFC and GFH.

ASC 820 requires disclosure of fair value information about financial instruments, whether or not recognized in the balance sheet, for which it is practical to estimate that value. It excludes certain financial instruments and all nonfinancial instruments from its disclosure requirements. Accordingly, the aggregate fair value amounts presented do not represent the underlying fair value of the Company. The following methods and assumptions were used by the Company in estimating fair value for its financial instruments.

HAMPTON ROADS BANKSHARES, INC.

PART I. FINANCIAL INFORMATION

Item 1. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(a)

Cash and Cash Equivalents

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

(b)

Investment Securities Available for Sale

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

(c)

Loans Held for Sale

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

(d)

Loans

The fair value of other loans is estimated by discounting the future cash flows using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality.

(e)

Interest Receivable and Interest Payable

The carrying amount approximates fair value.

(f)

Bank-Owned Life Insurance

The carrying amount approximates fair value.

(g)

Deposits

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

(h)

Borrowings

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

(i)

Commitments to Extend Credit and Standby Letters of Credit

The only amounts recorded for commitments to extend credit and standby letters of credit are the deferred fees arising from these unrecognized financial instruments. These deferred fees are not deemed significant at June 30, 2010 and December 31, 2009, and as such, the related fair values have not been estimated.

The estimated fair value (in thousands) of the Company’s financial instruments required to be disclosed by ASC 825, Financial Instruments, at June 30, 2010 and December 31, 2009 were as follows.

HAMPTON ROADS BANKSHARES, INC.

PART I. FINANCIAL INFORMATION

Item 1. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


	June 30, 2010				December 31, 2009
	Carrying Value		Fair Value		Carrying Value		Fair Value
Assets:
Cash and due from banks	$	18,813	$	18,813	$	16,995	$	16,995
Overnight funds sold and due from FRB		306,812		306,812		139,228		139,228
Interest-bearing deposits in other banks		1,255		1,255		43,821		43,821
Investment securities available for sale		175,282		175,282		161,062		161,062
Loans held for sale		27,734		27,734		12,615		12,615
Loans, net		2,078,711		2,110,758		2,293,995		2,364,702
Interest receivable		7,749		7,749		8,788		8,788
Bank-owned life insurance		49,179		49,179		48,354		48,354

Liabilities:
Deposits		2,548,381		2,561,476		2,495,040		2,486,449
FHLB borrowings		225,013		237,835		228,215		233,356
Other borrowings		49,553		51,462		49,254		50,316
Interest payable		3,658		3,658		3,572		3,572

NOTE N – TROUBLED ASSET RELIEF PROGRAM (“TARP”)

On December 31, 2008, the Company entered into a Letter Agreement and Securities Purchase Agreement (collectively, the “Purchase Agreement”) with the U.S. Treasury, pursuant to which the Company sold 80,347 shares of the Company’s Fixed-Rate Cumulative Perpetual Preferred Stock, Series C, no par value per share, having a liquidation preference of $1,000 per share (the “Series C Preferred Stock”) and a warrant (the “Warrant”) to purchase 1,325,858 shares of the Company’s common stock, $0.625 par value per share (the “Common Stock”), at an initial exercise price of $9.09 per share, subject to certain anti-dilution and other adjustments, for an aggregate purchase price of $80.3 million in cash. This preferred stock is redeemable at par plus accrued and unpaid dividends subject to the approval of the Company’s primary banking regulators. In the fourth quarter of 2009, the Company began to defer dividends on its Series C Preferred Stock.

The Warrant is immediately exercisable. The Warrant provides for the adjustment of the exercise price and the number of shares of Common Stock issuable upon exercise pursuant to customary anti-dilution provisions, such as upon stock splits or distributions of securities or other assets to holders of Common Stock, and upon certain issues of Common Stock at or below a specified price relative to the then-current market price of Common Stock. The Warrant expires ten years from the issuance date. Pursuant to the Purchase Agreement, the Treasury has agreed not to exercise voting power with respect to any shares of Common Stock issued upon exercise of the Warrant.

The American Recovery and Reinvestment Act of 2009 (“ARRA”), enacted on February 17, 2009, imposes certain executive compensation and corporate governance obligations on TARP recipients during the period of time any obligations arising from financial assistance provided under the TARP remains outstanding. The ARRA restricts golden parachute payments to senior executive officers and the next five most highly compensated employees. It also prohibits paying and accruing bonuses for certain senior executive officers and employees, requires that TARP participants provide the recovery of any bonus or incentive compensation paid to senior executive officers and the next 20 most highly compensated employees based on statements of earnings, revenues, gains, or other criteria later found to be materially inaccurate, and requires a review by the Secretary of all bonuses and other compensation paid by TARP participants to certain senior executive officers and employees before the date of enactment of the ARRA to determine whether such payments were inconsistent with the purposes of ARRA.

The Treasury has consented to an exchange of its Series C Preferred Stock which would result in the issuance to the Treasury of 650 shares of Common Stock valued at $0.40 per share for each such share of Series C Preferred

HAMPTON ROADS BANKSHARES, INC.

PART I. FINANCIAL INFORMATION

Item 1. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Stock (the “TARP Exchange”), reflecting an exchange value of $260.00 per share of Series C preferred stock or 26% of its liquidation preference. Treasury has also agreed to adjust its warrant to reduce the warrant exercise price to $0.40 per share but Treasury has agreed that it will not increase the number of shares subject to the warrant (as would be required under the original terms of the warrant).

NOTE O – NONINTEREST EXPENSE


(in thousands)	Three Months Ended June 30,				Six Months Ended June 30,
	2010		2009		2010		2009

Salaries and employee benefits	$	10,955	$	10,546	$	20,705	$	21,780
Occupancy		2,150		2,266		4,448		4,280
Data processing		1,169		1,295		2,649		2,493
Impairment of goodwill		—		27,976		—		27,976
FDIC insurance		1,169		2,661		2,225		3,301
Equipment		932		1,361		2,023		2,295
Professional fees		1,227		688		2,543		963
Problem loan and repossessed asset costs		1,390		96		2,003		160
Amortization of intangible assets		442		747		937		1,081
Bank franchise tax		439		329		949		773
Telephone and postage		412		477		803		917
Advertising and marketing		238		64		386		207
Directors’ and regional board fees		223		298		360		582
Stationary, printing, and office supplies		148		217		387		359
Other		2,192		1,309		3,617		3,011

Total noninterest expense	$	23,086	$	50,330	$	44,035	$	70,178

NOTE P – SUBSEQUENT EVENTS

The Company established a valuation allowance against the deferred tax asset on its balance sheet as of December 31, 2009, which resulted in the restatement of its financial statements for the fiscal year ended December 31, 2009 and the fiscal quarter ended March 31, 2010 (the “Restatements”). The Restatements were filed August 13, 2010.

LOGO

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Shareholders

Hampton Roads Bankshares, Inc.

Norfolk, Virginia

We have reviewed the accompanying consolidated balance sheet of Hampton Roads Bankshares, Inc. and subsidiaries as of June 30, 2010, the related consolidated statements of operations for the three-month and six-month periods ended June 30, 2010 and 2009, consolidated statement of changes in shareholders’ equity for the six-month period ended June 30, 2010 and consolidated statements of cash flows for the six-month periods ended June 30, 2010 and 2009. These consolidated financial statements are the responsibility of the Company’s management.

We conducted our reviews in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

Based on our reviews, we are not aware of any material modifications that should be made to the accompanying financial statements referred to above for them to be in conformity with U.S. generally accepted accounting principles.

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note B to the consolidated financial statements, quantitative measures established by regulation to ensure capital adequacy require the Company and its subsidiary banks to maintain minimum amounts and ratios of total and Tier I capital (as defined in the regulations) to risk-weighted assets (as defined), and Tier I capital (as defined) to average assets (as defined). The Company has suffered recurring losses from operations and declining levels of capital that raise substantial doubt about the ability to continue as a going concern. The Company is in the process of implementing a capital plan, including receipt of definitive agreements for the purchase of common shares that are contingent on certain shareholder approvals. Management’s plans and the status of the capital raise are described in Note B. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board, the consolidated balance sheet of Hampton Roads Bankshares, Inc. and subsidiaries as of December 31, 2009, and the related consolidated statements of operations, shareholders’ equity, and cash flows for the year then ended (not presented herein); and in our report dated April 22, 2010, except for Notes 2 and 3, as to which the date is August 13, 2010, we expressed an unqualified opinion on those financial statements and included an explanatory paragraph concerning matters that raise substantial doubt about the Company’s ability to continue as a going concern. In our opinion, the information set forth in the accompanying balance sheet as of December 31, 2009, is fairly stated, in all material respects, in relation to the balance sheet from which it has been derived.

LOGO

Winchester, Virginia

August 16, 2010

HAMPTON ROADS BANKSHARES, INC.

PART I. FINANCIAL INFORMATION

Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS

Forward-Looking Statements

Where appropriate, statements in this report may contain the insights of management into known events and trends that have or may be expected to have a material effect on our operations and financial condition. The information presented may also contain certain forward-looking statements regarding future financial performance, which are not historical facts and involve various risks and uncertainties.

When or if used in this quarterly report or any Securities and Exchange Commission filings, other public or shareholder communications, or in oral statements made with the approval of an authorized executive officer, the words or phrases “anticipate,” “would be,” “will allow,” “intends to,” “will likely result,” “are expected to,” “will continue,” “is anticipated,” “is estimated,” “is projected,” or similar expressions are intended to identify “forward-looking statements.”

For a discussion of the risks, uncertainties, and assumptions that could affect these statements and our future events, developments, or results, you should carefully review the risk factors contained in our 2009 Form 10-K/A and this Form 10-Q, which are summarized below. Our risks include, without limitation, the following:

•

We incurred significant losses in 2009 and in the first half of 2010 and may continue to do so in the future, and we can make no assurances as to when we will be profitable;

•

We may be unable to close on our previously announced capital raising transactions or carry out our recapitalization plan.

•

We need to raise additional capital that may not be available to us;

•

We have entered into a written agreement with the FRB and the Bureau of Financial Institutions, which requires us to dedicate a significant amount of resources to complying with the agreement and may have a material adverse effect on our operations and the value of our securities.

•

BOHR may be subject to additional regulatory restrictions or be placed in receivership in the event that its regulatory capital levels continue to decline.

•

We may not be able to successfully increase our regulatory capital, which may adversely affect our results of operations and financial condition;

•

BOHR is restricted from accepting brokered deposits and offering interest rates on deposits that are substantially higher than the prevailing rates in our market;

•

We may become subject to additional regulatory restrictions in the event that our regulatory capital levels continue to decline;

•

The uncertainty regarding our ability to continue as a going concern may affect our business relationships.

•

The company has restated its financial statements, which may have a future adverse affect.

•

Our estimate for losses in our loan portfolio may be inadequate, which would cause our results of operations and financial condition to be adversely affected;

•

We have had and may continue to have large numbers of problem loans, which could increase our losses related to loans;

•

Our lack of eligibility to continue to use a short form registration statement on Form S-3 may affect our short-term ability to access the capital markets;

•

We did not undergo a “stress test” under the Federal Reserve’s Supervisory Capital Assessment Program; our self-administered stress test differed from the Supervisory Capital Assessment Program and the results of our test may be inaccurate;

•

We have had significant turnover in our senior management team;

•

Government regulation and regulatory actions against us may impair our operations or restrict our growth;

•

If the value of real estate in our core market areas were to further decline materially, a significant portion of our loan portfolio could become further under-collateralized;

•

Our construction and land development, commercial real estate, and equity line lending may expose us to a greater risk of loss and hurt our earnings and profitability;

•

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

•

Difficult market conditions may continue to adversely affect our industry;

•

A significant part of Gateway’s loan portfolio is unseasoned;

•

We are not paying dividends on our preferred stock or Common Stock and are deferring distributions on our Trust Preferred Securities, and we are prevented in otherwise paying cash dividends on our Common Stock. The failure to resume paying dividends on our Series C Preferred Stock and Trust Preferred Securities may adversely affect us;

HAMPTON ROADS BANKSHARES, INC.

PART I. FINANCIAL INFORMATION

Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS

•

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

•

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

•

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

•

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

•

Certain built-in losses could be limited if we experience an ownership change as defined in the Internal Revenue Code;

•

A substantial decline in the value of our equity investments including our FHLB Common Stock may result in an other-than-temporary impairment charge;

•

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

•

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

•

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

•

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

•

Our directors and officers have significant voting power;

•

We may be unable to recruit, motivate, and retain qualified employees;

•

Current levels of market volatility are unprecedented;

•

The Company has issued three series of preferred stock that have rights that are senior to those of its common shareholders;

•

Because of our participation in TARP, we are subject to several restrictions including restrictions on compensation paid to our executives;

•

Because of our financial condition and the compensation restrictions due to our participation in TARP, we have had and may continue to have difficulties recruiting and retaining qualified employees;

•

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

•

Current and future increases in FDIC insurance premiums, including the FDIC special assessment imposed on all FDIC-insured institutions, will decrease our earnings. In addition, FDIC insurance assessments for BOHR will likely increase from not maintaining a “well capitalized” status, which would further decrease earnings;

•

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;

•

There can be no assurance that recently enacted legislation will stabilize the U.S. financial system;

•

The impact on us of recently enacted legislation, in particular Emergency Economic Stabilization Act of 2008 (“EESA”) and ARRA and their implementing regulations, and actions by the FDIC, cannot be predicted at this time; and

•

The soundness of other financial institutions could adversely affect us.

Our forward-looking statements could be incorrect in light of these and other 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 quarterly report and you should not expect us to do so.

HAMPTON ROADS BANKSHARES, INC.

PART I. FINANCIAL INFORMATION

Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS

Overview

Throughout 2009 and into the first half of 2010, economic conditions in the markets in which our borrowers operate continued to deteriorate and the levels of loan delinquency and defaults that we experienced were substantially higher than historical levels. Our loan customers continue to operate in an economically stressed environment. The Company reported a net loss for the six-month period ended June 30, 2010, primarily as a result of a significant increase to our provision for loan losses.

As of June 30, 2010, we believe Shore remained “well capitalized” under applicable banking regulations while BOHR was “significantly undercapitalized” and the consolidated Company was “critically undercapitalized.” The Company continues to evaluate additional capital management strategies, including infusions of additional capital, with the intention of enabling it and BOHR to return to “well capitalized” status.

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 interest-earning assets, and the level of noninterest-bearing liabilities available to support earning assets. Our net interest income was negatively impacted by increasing levels of non-performing loans. In addition to net interest income, noninterest income is another important source of revenue. Noninterest income is derived primarily from service charges on deposits and fees earned from bank services, investment, mortgage, and insurance activities. Other factors that impact net income are the provision for loan losses, noninterest expense, and the provision for income taxes.

The following is a summary of our condition as of June 30, 2010 and our financial performance for the three and six month period then ended.

•

Assets were $2.9 billion. They decreased by $42.4 million or 1% for the first six months of 2010 from December 31, 2009. This was primarily the result of a decrease in average loans of 15% during that period.

•

Investment securities available for sale increased $14.2 million to $175.3 million for the first six months of 2010. The increase was driven by the reinvestment of the funds obtained from deposit growth and the decline in our loan portfolio.

•

Loans decreased by $174.8 million or 7% for the six months ended June 30, 2010 as loan paydowns and charge-offs exceeded the volume of new originations. New loan activity continues to be low as a result of our tighter underwriting criteria and economic conditions.

•

Deposits increased $53.3 million or 2% as new customer deposit activity more than offset the decline in brokered deposits.

•

Net loss available to common shareholders for the three and six months ended June 30, 2010 was $54.1 million or $2.44 per common diluted share and $94.6 million or $4.27 per common diluted share, respectively, as compared with net loss available to common shareholders of $46.2 million or $2.13 per common diluted share and $41.8 million or $1.92 per common diluted share for the three and six months, respectively, ended June 30, 2009. The net loss for 2010 was primarily attributable to provision for loan losses expense of $100.3 million.

•

Net interest income decreased $8.2 million and $12.3 million for the three and six months, respectively, ended June 30, 2010 as compared to the same period 2009. This was primarily the result of the decrease in interest income from loans.

HAMPTON ROADS BANKSHARES, INC.

PART I. FINANCIAL INFORMATION

Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS

•

Noninterest income for the three and six months ended June 30, 2010 was $5.3 million and $10.9 million, respectively, a 6% and 10% decrease over the comparative periods in 2009. An increase in mortgage banking revenue partially offset this decrease.

•

Noninterest expense was $23.1 million and $44.0 million for the three and six months ended June 30, 2010, which was a decrease of $27.3 million or 54% and a decrease of $26.1 million or 37% over the comparable periods for 2009. In second quarter 2009, we had a $28.0 million impairment to our goodwill.

Critical Accounting Policies

GAAP requires management to apply significant judgment to various accounting, reporting, and disclosure matters. Management must use assumptions, judgments, and estimates when applying these principles where precise measurements are not possible or practical. These policies are critical because they are highly dependent upon subjective or complex judgments, assumptions, and estimates. Changes in such judgments, assumptions, and estimates may have a significant impact on the consolidated financial statements and the accompanying footnotes. Actual results, in fact, could differ from those estimates. We consider our policies on allowance for loan losses, deferred income taxes, and estimates of fair value on financial instruments to be critical accounting policies. Refer to our 2009 Form 10-K for further discussion of these policies.

Material Trends

The global and U.S. economies have experienced a protracted slowdown in business activity, including high levels of unemployment, resulting in a lack of confidence in the worldwide credit markets and in the financial system. Currently, the U.S. economy appears to be slowly recovering from one of its longest economic recessions in recent history. It is not clear at this time how quickly the economy will recover and whether regulatory and legislative efforts to stimulate job growth and spending will be successful.

We experienced a significant deterioration in credit quality in 2009 that continues into 2010. Problem loans and non-performing assets rose and led us to significantly increase the allowance for loan losses. To bolster our allowance, we increased the provision for loan losses to $100.3 million in the first half of 2010 from $34.9 million in the first half of 2009. The increased expense contributed to a net loss available to common shareholders of $94.6 million for the first half of 2010. In light of continued economic weakness, problem credits may continue to rise and significant additional provisions for loan losses may be necessary to supplement the allowance for loan losses in the future. As a result, we may incur significant credit costs throughout 2010, which would continue to adversely impact our financial condition, our results of operations, and the value of our common stock.

The Company determined that a valuation allowance on its deferred tax assets should be recognized as of December 31, 2009. The Company decided to establish a valuation allowance against the deferred tax asset because it is uncertain when it will realize this asset.

ANALYSIS OF FINANCIAL CONDITION

Cash and Cash Equivalents. Cash and cash equivalents includes cash and due from banks, interest-bearing deposits in other banks, and overnight funds sold and due from the FRB. Cash and cash equivalents are used for daily cash management purposes, management of short-term interest rate opportunities, and liquidity. Cash and cash equivalents as of June 30, 2010 were $326.9 million and consisted mainly of deposits with the FHLB and the FRB. These deposits increased $126.9 million in the first half of 2010, from $200.0 million at December 31, 2009.

Securities. Our investment portfolio consists primarily of available-for-sale U.S. Agency mortgage-backed securities. Our available-for-sale securities are reported at estimated fair value. They are used primarily for liquidity, pledging,

HAMPTON ROADS BANKSHARES, INC.

PART I. FINANCIAL INFORMATION

Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS

earnings, and asset/liability management purposes and are reviewed quarterly for possible impairment. The mortgage-backed securities consisted of Government National Mortgage Association pass-through securities or collateralized mortgage obligations.

At June 30, 2010, the estimated fair value of our investment securities was $175.3 million, an increase of $14.2 million or 9% from $161.1 million at December 31, 2009. The increase during first six months of 2010 was driven by the reinvestment of loan paydowns and the increase in deposits. Our investment portfolio was restructured during late 2009 to increase regulatory capital ratios by selling high risk-weighted securities and reinvesting the proceeds into lower risk-weighted securities.

Loan Portfolio. Our loan portfolio is comprised of commercial, construction, real estate-commercial mortgage, real estate-residential mortgage, and installment loans to individuals. Lending decisions are based upon an evaluation of the repaying capacity, financial strength, and credit history of the borrower, the quality and value of the collateral securing each loan, and the financial strength of guarantors. With few exceptions, personal guarantees are required on loans. Our loan portfolio decreased $174.8 million or 7% to $2.3 billion as of June 30, 2010 compared to December 31, 2009. Commercial loans decreased 8% to $330.7 million at June 30, 2010 compared with $361.3 million at December 31, 2009. Real estate commercial mortgages decreased 4% to $709.4 million at June 30, 2010 compared to $740.6 million at December 31, 2009. Real estate residential mortgages decreased $1.5 million to $523.4 million at June 30, 2010 as compared with $524.9 million at December 31, 2009. Installment loans to individuals decreased 17% to $35.7 million at June 30, 2010 compared with $42.9 million at December 31, 2009. Construction loans also decreased 14% to $653.2 million at June 30, 2010 as compared with $757.7 million at December 31, 2009, thus lowering the concentration of construction loans to 29% of the total loan portfolio at June 30, 2010 compared with 31% at December 31, 2009.

Within the construction segment of the loan portfolio, BOHR has exposure to $70.1 million of loans in which interest payments are satisfied through the use of a reserve that was funded by BOHR upon origination and represents a portion of the borrower’s total liability to BOHR. In the instance of commercial construction, ultimate repayment is dependent upon stabilization of the funded project; whereas, in residential development, BOHR is assigned a certain percentage of each sale to retire a commensurate portion of the outstanding debt. Each interest reserve transaction is monitored by the account officer, a senior credit officer, and credit administration to verify the continuation of project viability as it relates to remaining interest reserve and additional financial capacity of the project sponsor. In certain instances, where either or both criteria have been deemed unsatisfactory, the borrower’s access to any remaining interest reserve has been curtailed on at least a temporary basis until the BOHR’s special assets department has been engaged to further evaluate possible resolutions.

We have a high concentration of construction and real estate, both commercial and residential, loans. Construction loans are made to individuals and businesses for the purpose of construction of single family residential properties, multi-family properties, and commercial projects such as the development of residential neighborhoods and commercial office parks. Risk is reduced on these loans by limiting lending for speculative building of both residential and commercial properties based upon the borrower’s history with us, financial strength, and the loan-to-value ratio of such speculative property. We generally require new and renewed variable-rate commercial loans to have interest rate floors. Residential loans represent smaller dollar loans to more customers, and therefore, have lower credit risk than other types of loans. The majority of our fixed-rate residential mortgage loans, which represent increased interest rate risk, are sold in the secondary market, as well as some variable rate mortgage loans. The remainder of the variable-rate mortgage loans and a small number of fixed-rate mortgage loans are retained.

Allowance for Loan Losses. The purpose of the allowance for loan losses is to provide for potential losses inherent in our loan portfolio. Management regularly reviews our loan portfolio to determine whether adjustments are necessary. Our review takes into consideration changes in the nature and volume of the loan portfolio, overall portfolio quality, review of specific problem loans, and review of current economic conditions that may affect the borrower’s ability to repay. In addition to the review of credit quality through ongoing credit review processes, we construct a comprehensive allowance analysis for our loan portfolio at least quarterly. This allowance includes specific allowances for individual loans; general allowance for loan pools, which factor in our historical loan loss experience, loan portfolio growth and trends, and economic conditions; and unallocated allowances predicated upon both internal and external factors.

HAMPTON ROADS BANKSHARES, INC.

PART I. FINANCIAL INFORMATION

Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS

The allowance for loan losses was $173.2 million or 7.69% of outstanding loans as of June 30, 2010 compared with $132.7 million or 5.47% of outstanding loans as of December 31, 2009. We increased the allowance for loan losses $40.5 million (net of charge-offs and recoveries) during the first six months of 2010. Pooled loan allocations increased to $52.1 million at June 30, 2010 from $34.1 million at December 31, 2009. Allowance coverage for the non-impaired portfolio is determined using a methodology that incorporates historical loss rates and risk ratings by loan category. Loss rates are based on a three-year weighted average with recent period loss rates weighted more heavily. We then apply an adjustment factor to each loss rate based on assessments of loss trends, collateral values, and economic and business influences impacting expected losses. During the quarter, the weighted historical loss rates for most loan categories increased due to recent charge-off activity. Qualitative adjustment factors for most loan categories decreased due to analyses of nonaccrual loan trends and other factors and reflect management’s view that charge-offs used to calculate pooled reserves better reflect expected loss experience. In addition, based on third party review, management believes the quality of its risk rating system has improved and requires less qualitative adjustment. The effect of these changes was an increase in the loss factors for most loan types and an increase in pooled loan allocations. Specific loan allocations increased $24.2 million to $115.7 million at June 30, 2010 from $91.5 million at December 31, 2009. Specific loan allocations increased due to a decrease in collateral values of certain collateral dependent loans and due to the estimated losses of new impaired loans. Unallocated allowances decreased $1.8 million. The following table provides a breakdown of the allowance for loan losses and other related information (in thousands) at June 30, 2010 and December 31, 2009.


	June 30, 2010			December 31, 2009

Allowance for loan losses:
Pooled component	$	52,100		$	34,050
Specific component		115,730			91,488
Unallocated component		5,396			7,159

Total	$	173,226		$	132,697


Impaired loans	$	473,142		$	469,068
Non-impaired loans		1,778,795			1,957,624

Total loans	$	2,251,937		$	2,426,692


Pooled component as % of non-impaired loans		2.93	%		1.74	%
Specific component as % of impaired loans		24.46	%		19.50	%

Allowance as of % of loans		7.69	%		5.47	%
Allowance as of % of nonaccrual loans		56.68	%		53.44	%

The specific allowance for loan losses necessary for impaired loans is based on a loan-by-loan analysis and varies between impaired loans largely due to the level of collateral. Additionally, pooled loan allocations vary depending on a number of assumptions and trends. As a result, the ratio of allowance for loan losses to nonaccrual loans is not sufficient for measuring the adequacy of the allowance for loan losses. The following table provides additional ratios that measure our allowance for loan losses.

HAMPTON ROADS BANKSHARES, INC.

PART I. FINANCIAL INFORMATION

Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS


	June 30, 2010		December 31, 2009
Non-performing loans for which full loss has been charged off to total loans	2.08	%	0.91	%

Non-performing loans for which full loss has been charged off to non-performing loans	15.36	%	8.91	%

Charge off rate for nonperforming loans which the full loss has been charged off	43.83	%	42.46	%

Coverage ratio net of nonperforming loans for which the full loss has been charged off	66.97	%	58.67	%

Total allowance divided by total loans less nonperforming loans for which the full loss has been charged off	7.86	%	5.52	%

Allowance for individually impaired loans divided by impaired loans for which an allowance has been provided	31.68	%	27.60	%

A loan is considered impaired when it is probable that all amounts due will not be collected according to the contractual terms. Subsequent recoveries, if any, are credited to the allowance. Impairment is evaluated in the aggregate for smaller balance loans of similar nature and on an individual loan basis for other loans. If a loan is considered impaired, it is measured based on the present value of expected future cash flows discounted at the loan’s effective interest rate or at the loan’s observable market price or the fair value of the collateral if the loan is collateral dependent. Total impaired loans were $473.1 million at June 30, 2010, an increase of $4.1 million or 1% over December 31, 2009. Of these loans, $305.6 million were on nonaccrual status at June 30, 2010. Net charge-offs were $59.7 million for the six months ended June 30, 2010 as compared with $1.6 million for the six months ended June 30, 2009.

Non-Performing Assets. Non-performing assets as a percentage of total assets increased to 12% at June 30, 2010 from 9% at December 31, 2009 and March 31, 2010. Total nonaccrual loans aggregated $305.6 million at June 30, 2010 as compared with $248.3 million at December 31, 2009.

The following chart summarizes our nonaccrual loans by loan type as of June 30, 2010 and December 31, 2009 (in thousands).


	June 30, 2010		December 31, 2009

Commercial	$	34,794	$	24,803
Construction		167,530		150,325
Real estate - commercial mortgage		71,938		50,858
Real estate - residential mortgage		30,867		22,146
Installment loans (to individuals)		480		171


Total nonaccrual loans	$	305,609	$	248,303

Loans Acquired with Deteriorated Credit Quality. Loans acquired with evidence of credit quality deterioration since origination and for which it is probable at purchase that we will be unable to collect all contractually required payments are accounted for under ASC 310-30, Receivables – Loans and Debt Securities Acquired with Deteriorated Credit Quality. Evidence of credit quality deterioration as of the purchase date may include statistics such as past due status and refreshed borrower credit scores, some of which were not immediately available as of the purchase date. ASC 310-30 addresses accounting for differences between contractual and expected cash flows to be collected from our initial investment in loans if those differences are attributable, at least in part, to credit quality. ASC 310-30 requires that acquired impaired loans be recorded at fair value and prohibits “carrying over” or the creation of valuation allowances in the initial accounting for loans acquired that are within the scope of ASC 310-30.

HAMPTON ROADS BANKSHARES, INC.

PART I. FINANCIAL INFORMATION

Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS

In accordance with ASC 310-30, certain acquired loans of GFH that were considered impaired were written down to fair value at the acquisition date. As of June 30, 2010, the carrying value of these loans was $61.2 million and the unpaid principal balance on these loans was $67.4 million. ASC 310-30 does not apply to loans GFH previously securitized as they are not held on our balance sheet. During 2009 and into 2010, the ASC 310-30 portfolio experienced further credit deterioration due to weakness in the housing markets and the impacts of a slowing economy. For further information regarding loans accounted for in accordance with ASC 310-30, see Note E, Accounting for Certain Loans Acquired in a Transfer, of the Notes to the Consolidated Financial Statements.

Deposits. Deposits are the primary source of funding for the Company. Total deposits at June 30, 2010 increased $53.3 million or 2% to $2.5 billion as compared with December 31, 2009. Total brokered deposits were $205.8 million or 8% of deposits at June 30, 2010, which was a decrease of $180.6 million from the total brokered deposits of $386.4 million at December 31, 2009.

Changes in the deposit categories include an increase of $420 thousand or 0.17% in noninterest-bearing demand deposits, a decrease of $45.6 million or 5% in interest-bearing demand deposits, and a decrease of $7.0 million or 8% in savings accounts from December 31, 2009 to June 30, 2010. Interest-bearing demand deposits included $18.2 million brokered money market funds at June 30, 2010, which was $29.4 million lower than the balance of brokered money market funds outstanding at December 31, 2009. Therefore, core bank interest-bearing demand deposits increased by $16.2 million over the last six months. Of this increase $17.1 million was related to a decrease in our NOW accounts; this was offset by a $19.1 million increase in MMDA accounts. Total time deposits under $100 thousand decreased $120.8 million from $889.8 million at December 31, 2009 to $769.0 million at June 30, 2010. Brokered CDs represented $205.8 million, which was a decrease of $133.0 million over the $338.8 million of brokered CDs outstanding at December 31, 2009. Therefore, core bank CDs increased $12.2 million over the last six months. Time deposits over $100 thousand increased $226.4 million from $356.8 million at December 31, 2009 to $583.2 million at June 30, 2010. Going forward, management intends to focus on core deposit growth as our primary source of funding.

Borrowings. We use short-term and long-term borrowings from various sources including the FHLB, funds purchased from correspondent banks, reserve repurchase accounts, and trust preferred securities. Our FHLB borrowings on June 30, 2010 were $225.0 million compared to $228.2 million at December 31, 2009.

Capital Resources. Total shareholders’ equity decreased $90.8 million or 73% to $34.2 million at June 30, 2010 compared to $125.0 million at December 31, 2009. The decrease in shareholders’ equity was primarily a result of the $91.8 million net loss for the six months ended June 30, 2010 and accrual of Series C Preferred dividends (including amortization of preferred stock discount) of approximately $2.8 million.

During 2009, we paid two quarterly cash dividends of $0.11 per share on our common stock to shareholders of record as of February 27, 2009 and May 15, 2009. To preserve capital, on July 30, 2009 the Board of Directors voted to suspend the quarterly dividend on the Company’s common stock. Our ability to distribute cash dividends in the future may be limited by regulatory restrictions and the need to maintain sufficient consolidated capital.

We have taken additional actions to preserve capital. On October 30, 2009, we announced suspension of dividend payments on our Series A and B Preferred Stock. We notified the U.S. Department of the Treasury (“Treasury”) of our intent to defer the third consecutive quarterly cash dividend on our Series C Preferred Stock issued to the Treasury in connection with our participation in the TARP CPP. The total amount deferred as of June 30, 2010 was $3.0 million.

In January 2010, the Company exercised its right to defer all quarterly distributions on the trust preferred securities (in thousands) it assumed in connection with its merger with GFH (collectively, the “Trust Preferred Securities”), which are identified below.

HAMPTON ROADS BANKSHARES, INC.

PART I. FINANCIAL INFORMATION

Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS


	Amount (in thousands)		Interest Rate	Redeemable On Or After	Mandatory Redemption

Gateway Capital Statutory Trust I	$	8,000	LIBOR + 3.10%	September 17, 2008	September 17, 2033
Gateway Capital Statutory Trust II		7,000	LIBOR + 2.65%	July 17, 2009	June 17, 2034
Gateway Capital Statutory Trust III		15,000	LIBOR + 1.50%	May 30, 2011	May 30, 2036
Gateway Capital Statutory Trust IV		25,000	LIBOR + 1.55%	July 30, 2012	July 30, 2037

Interest payable under the Trust Preferred Securities continues to accrue during the deferral period and interest on the deferred interest also accrues, both of which must be paid at the end of the deferral period and totaled $737 thousand at June 30, 2010. Prior to the expiration of the deferral period, the Company has the right to further defer interest payments, provided that no deferral period, together with all prior deferrals, exceeds 20 consecutive quarters and that no event of default (as defined by the terms of the applicable Trust Preferred Securities) has occurred and is continuing at the time of the deferral. The Company was not in default with respect to the terms of the Trust Preferred Securities at the time the quarterly payments were deferred and such deferrals did not cause an event of default under the terms of the Trust Preferred Securities.

On May 23, 2010, the Company and affiliates of The Carlyle Group, Anchorage Advisors, L.L.C., CapGen Financial Group, and other financial institutions entered into binding agreements (the “Investment Agreements”) to purchase common stock of the Company, par value $0.625 (“Common Stock”), as part of an expected aggregate $255 million capital raise by the Company from institutional investors in a private placement.

The exchange or conversion of the shares of Series A and Series B Preferred Stock is required by the Investment Agreements. The Investment Agreements require either conversion of 100% of the shares or conversion of a majority of the shares and the amendment to the designations of the Series A and Series B Preferred Stock to, among other things, make it mandatorily convertible at the Company’s option into Common Stock. Holders of Series A and Series B Preferred Stock tendering it he Exchange Offers will be required to vote for amendments to the Series A and / or Series B Preferred Stock (the “Preferred Stock Amendments”), as applicable. Among other things, the Preferred Stock Amendments will eliminate all dividend rights, reduce the liquidation preference from $1,000 to $100 per share, and, at the option of the Company, provide for the mandatory conversion at the Company’s option of all Series A and Series B Preferred Stock not voluntarily exchanged in the Exchange Offers. The Preferred Stock Amendments require approval by a majority of the common shareholders as well as a majority of the holders of Series A and Series B Preferred Stock.

The Investment Agreements also require that following the closing, the Company will commence a rights offering providing holders of Common Stock with a non-transferable right to purchase newly issued shares of Common Stock at $0.40 per share, the same price paid by the Investors and Treasury. The rights offering is expected to raise an additional $20-$40 million.

HAMPTON ROADS BANKSHARES, INC.

PART I. FINANCIAL INFORMATION

Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS

We are subject to regulatory risk-based capital guidelines that measure capital relative to risk-weighted assets and off-balance sheet financial instruments. Tier I capital is comprised of shareholders’ equity, net of unrealized gains or losses on available-for-sale securities, less intangible assets, while total risk-based capital adds certain debt instruments and qualifying allowances for loan losses. As of June 30, 2010, our consolidated regulatory capital ratios are Tier 1 Leverage Ratio of 1.05%, Tier 1 Risk-Based Capital Ratio of 1.52%, and Total Risk-Based Capital of 2.86%.

As of June 30, 2010, we believe Shore remained “well capitalized” under applicable banking regulations while BOHR was “significantly undercapitalized” and the consolidated Company was “critically undercapitalized.” Although there can be no assurance that we will be successful, the Board and management are continuing to explore options for raising additional capital and improving the capital adequacy of the Company and BOHR. BOHR could become critically undercapitalized if the Company’s expected capital raising transactions do not close by September 30, 2010.

Off-Balance Sheet Arrangements. We are a party to financial instruments with off-balance sheet risk in the normal course of business to meet our customers’ financing needs. For more information on our off-balance sheet arrangements, see Note 15, Financial Instruments with Off-Balance-Sheet Risk, of the Notes to Consolidated Financial Statements contained in the 2009 Form 10-K.

Contractual Obligations. Our contractual obligations consist of time deposits, borrowings, and operating lease obligations. There have not been any significant changes in our contractual obligations from those disclosed in the 2009 Form 10-K.

ANALYSIS OF RESULTS OF OPERATIONS

Overview. Our net loss available to common shareholders for the three months ended June 30, 2010 was $54.0 million as compared with net loss available to common shareholders of $46.2 million for the three months ended June 30, 2009. During the first six months of 2010, we incurred a net loss available to common shareholders of $94.6 million, compared to the net loss available to common shareholders of $41.8 million for the first six months of 2009. The loss for the six months ended June 30, 2010 was driven by provision for loan losses expense of $100.3 million necessary to maintain the allowance for loan losses at a level necessary to cover expected losses inherent in the loan portfolio. Diluted loss per common share was $2.44 and $4.27 for the three and six months ended June 30, 2010, an increased loss of $0.31 and $2.35 over the diluted loss per common share of $2.13 and $1.92 for the three and six months, respectively, ended June 30, 2009.

Net Interest Income. Net interest income, a major component of our earnings, is the difference between the income generated by interest-earning assets reduced by the cost of interest-bearing liabilities. Net interest income for the three months ended June 30, 2010 was $17.7 million, a decrease of $8.2 million from the three months ended June 30, 2009. Net interest income for the six months ended June 30, 2010 was $39.6 million, a decrease of $12.3 million from the six months ended June 30, 2009. The decrease in net interest income was primarily the result of a decrease in interest income from loans of $13.5 million for the six months ended June 30, 2009 compared to the six months ended June 30, 2010 and an increase in nonaccrual loans. The net interest margin, which is calculated by expressing annualized net interest income as a percentage of average interest-earning assets, is an indicator of effectiveness in generating income from earning assets. Our net interest margin decreased to 3.16% for the first six months ended June 30, 2010 from 3.75% during the first six months of 2009. The net interest margin was 2.84% for the three months ended June 30, 2010 compared to 3.39% and 3.71% for the three months ended March 31, 2010 and June 30, 2009, respectively. The decline in net interest margin from prior periods is due primarily to increased levels of nonaccrual loans, an increase in low yielding balances at the FRB during the first quarter of 2010, and the effect of purchase accounting adjustments.

Our interest-earning assets consist of loans, investment securities, overnight funds sold and due from FRB, and interest-bearing deposits in other banks. Interest income on loans, including fees, decreased $8.0 million and $13.5 million to $28.2 million and $60.4 million for the three and six months, respectively, ended June 30, 2010, as compared to the same time periods during 2009. This decrease was a result of a decrease in average loan balances and an increase in nonaccrual loans. Interest income on investment securities increased $144 thousand and $81

HAMPTON ROADS BANKSHARES, INC.

PART I. FINANCIAL INFORMATION

Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS

thousand for the three and six months, respectively, ended June 30, 2010 compared to the same time period during 2009. Interest income on interest-bearing deposits in other banks decreased $5 thousand and $11 thousand for the three and six month periods, respectively, ended June 30, 2010 compared to the same time period during 2009. Interest income on overnight funds sold and due from FRB increased $140 thousand and $254 thousand for the three and six months, respectively, ended June 30, 2010 compared to the same time period during 2009.

Our interest-bearing liabilities consist of deposit accounts and borrowings. Interest expense on deposits increased $1.1 million and $914 thousand to $10.2 million and $20.3 million for the three and six months, respectively, ended June 30, 2010 compared to the same time periods during 2009. This increase resulted from a $299.5 million increase in average interest-bearing deposits, offset by a 17 basis point decrease in the average interest rate on deposits for the six months ended June 30, 2010 compared to the six months ended June 30, 2009. This decrease in our average deposit rates resulted in large part from declining rates on certificates of deposits and savings deposits. A reduction of our average rate on time deposits to 1.93% for the first half of 2010 from 2.49% for the first half of 2009 contributed significantly toward the decrease in overall deposit rates. Interest expense on borrowings, which consisted of FHLB borrowings, other borrowings, and overnight funds purchased decreased $621 thousand and $1.7 million for the three and six months, respectively, ended June 30, 2010 compared to the same time periods during 2009. The $200.7 million decrease in the six month average borrowings netted against a 57 basis point increase in the average interest rate on borrowings produced this result.

The tables below present the average interest-earning assets and average interest-bearing liabilities, the average yields earned on such assets and rates paid on such liabilities, and the net interest margin for the three months ended June 30, 2010, March 31, 2010, and June 30, 2009 and six months ended June 30, 2010 and 2009.

HAMPTON ROADS BANKSHARES, INC.

PART I. FINANCIAL INFORMATION

Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS


	Three Months Ended June 30, 2010						Three Months Ended March 31, 2010						Three Months Ended June 30, 2009
(in thousands)	Average Balance		Annualized Interest Income/ Expense		Average Yield/ Rate		Average Balance		Annualized Interest Income/ Expense		Average Yield/ Rate		Average Balance		Annualized Interest Income/ Expense		Average Yield/ Rate

Assets:
Interest-earning assets
Loans	$	2,005,022	$	112,981	5.63	%	$	2,173,606	$	130,809	6.02	%	$	2,609,810	$	144,999	5.56	%
Investment securities		204,998		6,838	3.34	%		206,203		6,964	3.38	%		159,740		6,260	3.92	%
Interest-bearing deposits in other banks		54,877		133	0.24	%		48,178		117	0.24	%		11,229		20	0.18	%
Overnight funds sold and due from FRB		236,675		477	0.20	%		198,947		384	0.19	%		21,790		48	0.22	%

Total interest-earning assets		2,501,572		120,429	4.81	%		2,626,934		138,274	5.26	%		2,802,569		151,327	5.40	%
Noninterest-earning assets		503,058						417,358						284,323

Total assets		3,004,630						3,044,292						3,086,892


Liabilities and Shareholders’ Equity:
Interest-bearing liabilities
Interest-bearing demand deposits		918,835		15,501	1.69	%		954,939		15,416	1.61	%		642,179		6,245	0.97	%
Savings deposits		77,812		502	0.64	%		80,221		525	0.65	%		118,979		1,181	0.99	%
Time deposits		1,304,485		24,816	1.90	%		1,284,574		25,095	1.95	%		1,268,661		28,900	2.28	%

Total interest-bearing deposits		2,301,132		40,819	1.77	%		2,319,734		41,036	1.77	%		2,029,819		36,326	1.79	%
Borrowings		274,946		8,626	3.14	%		276,890		8,290	2.99	%		434,208		11,120	2.56	%

Total interest-bearing liabilities		2,576,078		49,445	1.92	%		2,596,624		49,326	1.90	%		2,464,027		47,446	1.93	%
Noninterest-bearing liabilities
Demand deposits		249,272						236,947						259,754
Other liabilities		22,350						21,082						32,804

Total noninterest-bearing liabilities		271,622						258,029						292,558

Total liabilities		2,847,700						2,854,653						2,756,585
Shareholders’ equity		156,930						189,639						330,307

Total liabilities and shareholders’ equity	$	3,004,630					$	3,044,292					$	3,086,892

Net interest income			$	70,984					$	88,948					$	103,881

Net interest spread					2.89	%					3.36	%					3.47	%
Net interest margin					2.84	%					3.39	%					3.71	%

Note: Interest income from loans included fees of $57 at June 30, 2010, $206 at March 31, 2010, and $1,456 at June 30, 2009. Average nonaccrual loans of $269,284 and $251,421 are excluded from average loans at June 30, 2010 and March 31, 2010, respectively. Average nonaccrual loans for June 30, 2009 were not material and are included in average loans above.

HAMPTON ROADS BANKSHARES, INC.

PART I. FINANCIAL INFORMATION

Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS


	Three Months Ended June 30, 2010 Compared to Three Months Ended March 31, 2010									Three Months Ended June 30, 2010 Compared to Three Months Ended June 30, 2009
				Variance Attributable to									Variance Attributable to
	Total			Rate			Volume			Total			Rate			Volume
Interest-Earning Assets:
Loans	$	(17,828	)	$	(8,114	)	$	(9,714	)	$	(32,018	)	$	1,840		$	(33,858	)
Investment securities		(126	)		(84	)		(42	)		578			(631	)		1,209
Interest-bearing deposits in other banks		16			—			16			113			8			105
Overnight funds sold and due from FRB		93			21			72			429			(5	)		434

Total interest-earning assets		(17,845	)		(8,177	)		(9,668	)		(30,898	)		1,212			(32,110	)
Interest-Bearing Liabilities:
Deposits		(217	)		—			(217	)		4,493			(409	)		4,902
Borrowings		336			390			(54	)		(2,494	)		4,031			(6,525	)

Total interest-bearing liabilities		119			390			(271	)		1,999			3,622			(1,623	)

Net interest income	$	(17,964	)	$	(8,567	)	$	(9,397	)	$	(32,897	)	$	(2,410	)	$	(30,487	)

Note: The change in interest due to both rate and volume has been allocated to variance attributable to rate and variance attributable to volume in proportion to the relationship for the absolute amounts of change in each.

HAMPTON ROADS BANKSHARES, INC.

PART I. FINANCIAL INFORMATION

Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS


	Six Months Ended June 30, 2010						Six Months Ended June 30, 2009						2010 Compared to 2009
(in thousands)	Average Balance		Annualized Interest Income/ Expense		Average Yield/ Rate		Average Balance		Annualized Interest Income/ Expense		Average Yield/ Rate		Interest Income/ Expense Variance			Variance Attributable to
(in thousands)	Average Balance		Annualized Interest Income/ Expense		Average Yield/ Rate		Average Balance		Annualized Interest Income/ Expense		Average Yield/ Rate		Interest Income/ Expense Variance			Rate			Volume
Assets:
Interest-earning assets
Loans	$	2,051,213	$	121,846	5.94	%	$	2,601,379	$	148,995	5.73	%	$	(27,149	)	$	5,692		$	(32,841	)
Investment securities		205,652		6,901	3.36	%		168,041		6,738	4.01	%		163			(428	)		591
Interest-bearing deposits in other banks		51,546		125	0.24	%		5,563		22	0.39	%		103			(5	)		108
Overnight funds sold and due from FRB		217,915		431	0.20	%		20,849		45	0.22	%		386			(4	)		390

Total interest-earning assets		2,526,326		129,303	5.12	%		2,795,832		155,800	5.57	%		(26,497	)		5,255			(31,752	)
Noninterest-earning assets		498,026						321,309

Total assets		3,024,352						3,117,141


Liabilities and Shareholders’ Equity:
Interest-bearing liabilities
Interest-bearing demand deposits		936,787		15,459	1.65	%		639,103		6,497	1.02	%		8,962			5,109			3,853
Savings deposits		79,010		513	0.65	%		121,180		1,455	1.20	%		(942	)		(535	)		(407	)
Time deposits		1,294,584		24,955	1.93	%		1,250,628		31,130	2.49	%		(6,175	)		(7,319	)		1,144

Total interest-bearing deposits		2,310,381		40,927	1.77	%		2,010,911		39,082	1.94	%		1,845			(2,746	)		4,590
Borrowings		275,913		8,459	3.07	%		476,621		11,909	2.50	%		(3,450	)		4,076			(7,525	)

Total interest-bearing liabilities		2,586,294		49,386	1.91	%		2,487,532		50,991	2.05	%		(1,605	)		1,330			(2,935	)
Noninterest-bearing liabilities
Demand deposits		243,144						245,588
Other liabilities		21,720						40,689

Total noninterest-bearing liabilities		264,864						286,277

Total liabilities		2,851,158						2,773,809
Shareholders’ equity		173,194						343,332

Total liabilities and shareholders’ equity	$	3,024,352					$	3,117,141

Net interest income			$	79,917					$	104,809

Net interest spread					3.21	%					3.52	%
Net interest margin					3.16	%					3.75	%

Note: Interest income from loans included fees of $363 at June 30, 2010 and $2,116 at June 30, 2009. Average nonaccrual loans of $319,673 are excluded from average loans at June 30, 2010. Average nonaccrual loans for June 30, 2009 were not material and are included in average loans above.

Noninterest Income. For the quarter ended June 30, 2010, total noninterest income was $5.3 million, a decrease of $324 thousand or 6% as compared to second quarter 2009. Noninterest income comprised 15% of total revenue for the second quarter of 2010 and 13% for the second quarter of 2009. For the six months ended June 30, 2010, we reported total noninterest income of $10.9 million, a $1.2 million or 10% decrease over the same period in 2009. Service charges on deposit accounts decreased $712 thousand or 17% to $3.4 million for the first six months of 2010 compared to the same period in 2009 due to reduced overdraft activity along with a change in policy reducing the number of overdraft charges a customer can incur on any given day. Mortgage banking revenue, which is primarily the income associated with originating and selling first lien residential real estate loans, was $4.4 million in the six month period ended June 30, 2010 compared to $3.0 million in the prior year period. This increase was driven by the higher levels of loan originations in 2010.

HAMPTON ROADS BANKSHARES, INC.

PART I. FINANCIAL INFORMATION

Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS

We generated gains on sales of investment securities of $469 thousand during the first half of 2010 and none for comparative 2009. The deteriorating economy during 2009 and 2010 caused losses on foreclosed real estate. Losses on foreclosed real estate for the first half of 2010 and 2009 were $3.2 million and $339 thousand, respectively, and were included as a reduction to noninterest income. The following tables provide an analysis of noninterest income (in thousands).


	Three Months Ended June 30,						Six Months Ended June 30,
	2010			2009			2010			2009

Service charges on deposit accounts	$	1,755		$	2,073		$	3,420		$	4,132
Mortgage banking revenue		2,604			1,397			4,359			3,039
Gain on sale of investment securities		390			—			469			—
Gain on sale of premises and equipment		18			(11	)		43			(6	)
Losses on foreclosed real estate		(2,476	)		(337	)		(3,214	)		(339	)
Other-than-temporary impairment of securities		—			(114	)		(44	)		(132	)
Insurance revenue		1,279			1,339			2,599			2,651
Brokerage revenue		79			85			153			131
Income from bank-owned life insurance		424			405			824			805
Visa check card income		590			243			1,019			658
ATM surcharge fee		99			121			185			179
Wire fees		49			36			86			72
Rental income		48			41			84			107
Other		472			377			949			798

Total noninterest income	$	5,331		$	5,655		$	10,932		$	12,095

Noninterest Expense. Noninterest expense represents our overhead expenses. Total noninterest expense decreased $27.3 million or 54% for the three months ended June 30, 2010 compared to the three months ended June 30, 2009. During the second quarter of 2009, we incurred a non-cash impairment charge associated with the goodwill created from the Shore acquisition of $28.0 million. Salaries and employee benefits expense increased $409 thousand for the second quarter of 2010 from the second quarter of 2009. Occupancy expense decreased $15 thousand for the second quarter of 2010 compared to the second quarter of 2009. Data processing expense decreased $126 thousand for the second quarter of 2010 compared to the second quarter of 2009. FDIC insurance was $1.2 million for the second quarter ended June 30, 2010 as compared with $2.7 million for the same period in 2009; the decrease was due to the special assessment charged during the second quarter of 2009. Equipment expense decreased 36% to $932 thousand for the three months ended June 30, 2010 as compared to the same period in 2009. For the second quarter of 2010, professional fees were $1.2 million compared to $688 thousand for comparative 2009. Professional fees increased primarily due to legal and consultant fees associated with loan collection activities. The following table provides an analysis of total noninterest expense (in thousands) by line item for the three and six months ended June 30, 2010 and 2009.

HAMPTON ROADS BANKSHARES, INC.

PART I. FINANCIAL INFORMATION

Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS


	Three Months Ended June 30,				Six Months Ended June 30,
	2010		2009		2010		2009

Salaries and employee benefits	$	10,955	$	10,546	$	20,705	$	21,780
Occupancy		2,150		2,266		4,448		4,280
Data processing		1,169		1,295		2,649		2,493
Impairment of goodwill		—		27,976		—		27,976
FDIC insurance		1,169		2,661		2,225		3,301
Equipment		932		1,361		2,023		2,295
Professional fees		1,227		688		2,543		963
Amortization of intangible assets		442		747		937		1,081
Problem loan and repossessed asset costs		1,390		96		2,003		160
Bank franchise tax		439		329		949		773
Telephone and postage		412		477		803		917
Advertising and marketing		238		64		386		207
Directors’ and regional board fees		223		298		360		582
Stationary, printing, and office supplies		148		217		387		359
Other		2,192		1,309		3,617		3,011

Total noninterest expense	$	23,086	$	50,330	$	44,035	$	70,178

Total noninterest expense decreased $26.1 million or 37% for the first six months of 2010 compared to the first six months of 2009. During the second quarter of 2009, we incurred a non-cash impairment charge associated with the goodwill created from the Shore acquisition of $28.0 million. Salaries and employee benefits expense decreased $1.1 million for the first six months of 2010 from the first six months of 2009. Salaries and employee benefits expense in the first half of 2010 was positively impacted by the natural attrition in our workforce. Occupancy expense increased $168 thousand for the first six months of 2010 compared to the first six months of 2009 as a result of rental increases on existing leases and one new lease entered into during the first quarter of 2010. Data processing expense increased $156 thousand for the first six months of 2010 compared to the first six months of 2009 due to an increase in outsourced data processing fees charged from the outsource provider. FDIC insurance was $2.2 million for the six months ended June 30, 2010 as compared with $3.3 million for the same period in 2009; the decrease was due to the special assessment charged in 2009. Equipment expense decreased $272 thousand to $2.0 million for the six months ended June 30, 2010 as compared to the same period in 2009. For the first six months of 2010, professional fees were $2.5 million compared to $963 thousand for comparative 2009. Professional fees increased primarily due to legal and consultant fees associated with loan collection activities.

The efficiency ratio, calculated by dividing noninterest expense by the sum of net interest income and noninterest income excluding securities gains was 88% for the first six months of 2010 compared to 110% for the first half of 2009. Excluding the goodwill impairment charge, the efficiency ratio for the six months ended June 30, 2009 was 66%.

Income Tax Provision. Income tax benefit for the second quarter of 2010 was $2.2 million. We recorded a provision for income tax benefit of $2.1 million for the first six months of 2010. Management assesses the realizability of the deferred tax asset on a quarterly basis, considering both positive and negative evidence in determining whether it is more likely than not that some portion or all of the gross deferred tax asset would not be realized. A valuation allowance for the entire net deferred tax asset has been established as of June 30, 2010.

HAMPTON ROADS BANKSHARES, INC.

PART I. FINANCIAL INFORMATION

Item 3. Quantitative and Qualitative Disclosures About Market Risk

The Company’s primary market risk is exposure to interest rate volatility. 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 the Company’s asset/liability management strategy is to optimize net interest income while limiting exposure to fluctuations caused by changes in the interest rate environment. The Company’s ability to manage its interest rate risk depends generally on the Company’s ability to manage the maturities and re-pricing characteristics of its 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.

The Company’s management, guided by the Asset/Liability Committee, 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 the Company uses to quantify and manage interest rate risk is simulation analysis, which is used to model net interest income from assets and liabilities over a specified time period under various interest rate scenarios and balance sheet structures. This analysis measures the sensitivity of net interest income over a relatively short time horizon. Key assumptions in the simulation analysis relate to the behavior of interest rates and spreads, the changes in product balances, and the behavior of loan and deposit customers in different rate environments.

The expected effect on net interest income for the twelve months following June 30, 2010 and December 31, 2009 due to an immediate change in interest rates is shown below. These estimates are dependent on material assumptions, such as those previously discussed.


	June 30, 2010				December 31, 2009
(in thousands)	Change in Net Interest Income				Change in Net Interest Income
	Amount		%		Amount			%
Change in Interest Rates:
+200 basis points	$	4,778	6.34	%	$	(4,861	)	(5.07	)%
+100 basis points		1,566	2.08	%		(2,129	)	(2.22	)%
-100 basis points		N/A	N/A			N/A		N/A
-200 basis points		N/A	N/A			N/A		N/A

The above analysis suggests that we project an increase in net interest income assuming an immediate increase in interest rates. It should be noted, however, that the simulation analysis is based upon equivalent changes in interest rates for all categories of assets and liabilities. In normal operating conditions, interest rate changes rarely occur in such a uniform manner. Many factors affect the timing and magnitude of interest rate changes on financial instruments. In addition, management may deploy strategies that offset some of the impact of changes in interest rates. Consequently, variations should be expected from the projections resulting from the controlled conditions of the simulation analysis. Management maintains a simulation model where it is assumed that interest rate changes occur gradually, that rate increases for interest-bearing liabilities lag behind the rate increases of interest-earning assets, and that the level of deposit rate increases will be less than the level of rate increases for interest-earning assets. In this model, we project an increase in net interest income due to rising rates, during the twelve months following June 30, 2010.

HAMPTON ROADS BANKSHARES, INC.

PART I. FINANCIAL INFORMATION

Item 4. Controls and Procedures

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

The status of the Company’s internal controls over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) under the Exchange Act) have changed materially from their status as of March 31, 2010. As of March 31, 2010, the Company’s management concluded that its internal controls over financial reporting were not effective as a whole, and that all of the significant deficiencies reported as of December 31, 2009 continued to exist, except for the deficiency related to inadequate controls over the accounting for income taxes. As of June 30, 2010, however, the Company had implemented new procedures that remediated all of the remaining significant deficiencies and the material weakness that previously existed.

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 conditions, or results of operations.

ITEM 1A – RISK FACTORS

Except as discussed below, there have been no material changes to the risk factors disclosed in our Annual Report on Form 10-K/A for the year ended December 31, 2009 or Quarterly Report on Form 10-Q/A for the quarter ended March 31, 2010.

We may be unable to close on our previously announced capital raising transactions or carry out our recapitalization plan.

Regulatory authorities require us to maintain certain levels of capital to support our operations. As of June 30, 2010, the Company is “critically undercapitalized” and BOHR is “significantly undercapitalized.” Accordingly, we have an immediate need to raise capital. We believe that our previously-announced capital infusion of at least $275 million, which is expected to close in the third quarter of this year, will restore BOHR to “well capitalized” status. However, we may be unable to close on our previously-announced capital raising transactions, which are vital to our recapitalization plan. We may be unable to close these transactions in a timely manner, or at all, because of the failure to obtain required regulatory approvals, shareholder approvals or satisfy other closing requirements, which would adversely affect our financial position, results of operations and ability to restore our capital ratios.

BOHR may become subject to additional regulatory restrictions or be placed in receivership in the event that its regulatory capital levels continue to decline.

As of June 30, 2010, BOHR was “significantly undercapitalized” under the prompt corrective action provision of the Federal Deposit Insurance Act (the “FDI Act”) and related regulations. However, if we are unable to raise capital, BOHR is at risk of becoming “critically undercapitalized” in the near future. Under the FDI Act, depository institutions that are “critically undercapitalized” must be placed into conservatorship or receivership within 90 days of becoming critically undercapitalized, unless the institution’s primary federal regulator (in our case, the Federal Reserve) determines and documents that “other action” would better achieve the purposes of FDI Act. If an institution remains critically undercapitalized on average during the calendar quarter beginning 270 days after it became critically undercapitalized, the FDI Act requires the appointment of a receiver unless the Federal Reserve and the FDIC can certify that the institution is viable and not expected to fail and also affirmatively can determine that the institution has positive net worth, is in compliance with an approved capital restoration plan, is profitable or shows a sustainable upward trend in earnings and is reducing its ratio of nonperforming loans to total loans. We believe that our previously-announced capital infusion, will prevent BOHR from being placed into conservatorship or receivership. However, if this transaction does not close, it is possible that BOHR we will be placed into conservatorship or receivership. If BOHR is placed into conservatorship or receivership, the Company would suffer a complete loss of the value of its ownership interest in BOHR. Further, if one of our subsidiary banks fails and is placed into receivership, it is highly likely the FDIC will exercise its “cross guarantee” rights and close the other subsidiary banks in order to reduce any loss or cost to the FDIC. Such a course of events could cause the Company to file for bankruptcy or become subject to an involuntary bankruptcy filing and could result in a loss of all of the value of the Company’s outstanding securities.

We have entered into a written agreement with the FRB and the Bureau of Financial Institutions. The Agreement could, among other things, inhibit our ability to grow our assets and further inhibit our ability pay dividends.

In addition, the written agreement requires us to implement plans to improve our credit risk management, operating and financial management and capital plans. While subject to the written agreement, we expect that our management and board of directors will be required to focus considerable time and attention on taking corrective actions to comply with its terms. There can be no assurance that we will be able to successfully address the regulators’ concerns in the written agreement or that we will be able to comply with the terms of the written agreement. If we do not comply with the written agreement, we could be subject to the assessment of civil money penalties, further regulatory sanctions, or other regulatory enforcement actions.

For more information regarding our written agreement with the FRB and the Bureau of Financial Institutions, see “Note B – Regulatory Matters and Going Concern Considerations—Written Agreement.”

HAMPTON ROADS BANKSHARES, INC.

PART II. OTHER INFORMATION

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

The Company may continue to suffer adverse effects from the restatement of its previously issued financial statements that were included in its annual report on Form 10-K for the year ended December 31, 2009, as amended, and its quarterly report on Form 10-Q for the quarter ended March 31, 2010.

As a result of this matter, the Company may become subject to civil litigation or regulatory actions. Any of these matters may contribute to further ratings downgrades, negative publicity and difficulties in attracting and retaining customers, employees and management personnel.

HAMPTON ROADS BANKSHARES, INC.

PART II. OTHER INFORMATION

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. The Company did not repurchase any shares of common stock other than through this publicly announced plan. There were no share repurchase transactions conducted during the second quarter of 2010.

ITEM 3 – DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4 – REMOVED AND RESERVED

None.

ITEM 5 – OTHER INFORMATION

None.

ITEM 6 – EXHIBITS


3.1		Amended and Restated Articles of Incorporation of Hampton Roads Bankshares, Inc., attached as Exhibit 3.1 to the Registrant’s Current Report on Form 8-K dated December 16, 2009, incorporated herein by reference.

3.2		Bylaws of Hampton Roads Bankshares, Inc., as amended, incorporated by reference from the Registrant’s Form 8-K, filed September 24, 2009.

4.1		Specimen of Common Stock Certificate, incorporated by reference from the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2005.

10.1		Amended and Restated Investment Agreement, dated June 30, 2010, incorporated by reference from the Registrant’s Form 8-K, filed July 7, 2010

10.2		CapGen Investment Agreement, dated June 30, 2010, incorporated by reference from the Registrant’s Form 8-K, filed July 7, 2010

10.3		Form of Amended and Restated Securities Purchase Agreement, incorporated by reference from the Registrant’s Form 8-K, filed July 7, 2010

10.4		Securities Purchase Agreement, dated June 30, 2010, incorporated by reference from the Registrant’s Form 8-K, filed July 7, 2010

10.5		Carlyle Investor Letter, dated June 30, 2010, incorporated by reference from the Registrant’s Form 8-K, filed July 7, 2010

10.6		Anchorage Investor Letter, dated June 30, 2010, incorporated by reference from the Registrant’s Form 8-K, filed July 7, 2010

10.7		CapGen Investor Letter, dated June 30, 2010, incorporated by reference from the Registrant’s Form 8-K, filed July 7, 2010

10.8		Consent Letter with affiliate of Davidson Kempner, dated June 30, 2010, incorporated by reference from the Registrant’s Form 8-K, filed July 7, 2010

10.9		Consent Letter with affiliates of Fir Tree, dated June 30, 2010, incorporated by reference from the Registrant’s Form 8-K, filed July 7, 2010

10.10		Material Definitive Agreement between Hampton Roads Bankshares, Inc. and Bank of Hampton Roads and Federal Reserve Bank of Richmond and Virginia Bureau of Financial Institutions, filed June 17, 2010 and incorporated by reference.

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

31.2		The Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer is filed herewith.

32.1		Statement of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350 is filed herewith.

SIGNATURES

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


				HAMPTON ROADS BANKSHARES, INC.
				(Registrant)

DATE: August 16, 2010				/s/ Lorelle Fritsch
				Lorelle Fritsch
				Chief Financial Officer
				(On behalf of the Registrant and as Principal Financial Officer)