Xenith Bankshares (HMPR) 10-Q 2012 Q3 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended September 30, 2012

Commission File Number: 001-32968

HAMPTON ROADS BANKSHARES, INC.

(Exact name of registrant as specified in its charter)

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

(757) 217-1000

(Registrant’s telephone number, including area code)

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

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

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

Large accelerated filer	¨	Accelerated filer	x
Non-accelerated filer	¨  (do not check if smaller reporting company)	Smaller reporting company	¨

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

The number of shares outstanding of the issuer’s common stock as of October 31, 2012 was 170,278,452 shares, par value $0.01.

TABLE OF CONTENTS

	Page
ITEM 1 – FINANCIAL STATEMENTS
Consolidated Balance Sheets		3
September 30, 2012
December 31, 2011
Consolidated Statements of Operations		4
Three and nine months ended September 30, 2012 and 2011
Consolidated Statements of Comprehensive Loss		5
Three and nine months ended September 30, 2012 and 2011
Consolidated Statement of Changes in Shareholders’ Equity		6
Nine months ended September 30, 2012
Consolidated Statements of Cash Flows		7
Nine months ended September 30, 2012 and 2011
Notes to Consolidated Financial Statements		8
ITEM  2 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION		35
ITEM 3 – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK		52
ITEM 4 – CONTROLS AND PROCEDURES		53
PART II – OTHER INFORMATION
ITEM 1 – LEGAL PROCEEDINGS		54
ITEM 1A – RISK FACTORS		54
ITEM 2 – UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS		60
ITEM 3 – DEFAULTS UPON SENIOR SECURITIES		60
ITEM 4 – MINE SAFETY DISCLOSURES		60
ITEM 5 – OTHER INFORMATION		61
ITEM 6 – EXHIBITS		61
SIGNATURES		62

2

HAMPTON ROADS BANKSHARES, INC.

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

CONSOLIDATED BALANCE SHEETS

(in thousands, except share data) (unaudited)	September 30, 2012			December 31, 2011
Assets:
Cash and due from banks	$	15,316		$	18,241
Interest-bearing deposits in other banks		694			1,295
Overnight funds sold and due from Federal Reserve Bank		119,242			118,531
Investment securities available for sale, at fair value		293,335			284,470
Restricted equity securities, at cost		17,769			20,057
Loans held for sale		60,360			63,171
Loans		1,416,933			1,504,733
Allowance for loan losses		(54,444	)		(74,947	)
Net loans		1,362,489			1,429,786
Premises and equipment, net		78,975			87,565
Interest receivable		5,589			6,329
Foreclosed real estate and repossessed assets, net of valuation allowance		44,061			63,613
Intangible assets, net		2,745			3,751
Bank-owned life insurance		52,840			51,579
Other assets		18,018			18,472
Totals assets	$	2,071,433		$	2,166,860
Liabilities and Shareholders’ Equity:
Deposits:
Noninterest-bearing demand	$	252,093		$	225,458
Interest-bearing:
Demand		527,214			540,262
Savings		60,610			61,218
Time deposits:
Less than $100		402,457			525,291
$100 or more		388,569			445,805
Total deposits		1,630,943			1,798,034
Federal Home Loan Bank borrowings		195,280			195,941
Other borrowings		40,903			40,617
Interest payable		4,590			3,751
Other liabilities		11,757			14,849
Total liabilities		1,883,473			2,053,192
Commitments and contingencies
Shareholders’ equity:
Preferred stock, 1,000,000 shares authorized; none issued and outstanding		—			—
Common stock, $0.01 par value; 1,000,000,000 shares authorized; 170,278,452 and 34,561,145 shares issued and outstanding on September 30, 2012 and December 31, 2011, respectively		1,703			346
Capital surplus		582,644			492,998
Retained deficit		(405,788	)		(386,295	)
Accumulated other comprehensive income, net of tax		8,301			6,377
Total shareholders’ equity before non-controlling interest		186,860			113,426
Non-controlling interest		1,100			242
Total shareholders’ equity		187,960			113,668
Total liabilities and shareholders’ equity	$	2,071,433		$	2,166,860

See accompanying notes to the consolidated financial statements.

3

HAMPTON ROADS BANKSHARES, INC.

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except share and per share data)	Three Months Ended						Nine Months Ended
(unaudited)	September 30, 2012			September 30, 2011			September 30, 2012			September 30, 2011
Interest Income:
Loans, including fees	$	17,904		$	21,945		$	56,026		$	69,898
Investment securities		1,986			2,284			5,992			7,381
Overnight funds sold and due from FRB		43			220			189			634
Interest-bearing deposits in other banks		—			—			1			2
Total interest income		19,933			24,449			62,208			77,915
Interest Expense:
Deposits:
Demand		549			826			1,499			2,991
Savings		19			28			61			104
Time deposits:
Less than $100		1,168			2,276			4,145			7,705
$100 or more		1,187			2,125			4,210			7,402
Interest on deposits		2,923			5,255			9,915			18,202
Federal Home Loan Bank borrowings		562			905			1,728			3,474
Other borrowings		611			737			1,830			2,228
Total interest expense		4,096			6,897			13,473			23,904
Net interest income		15,837			17,552			48,735			54,011
Provision for loan losses		2,476			17,679			14,124			53,733
Net interest income (expense) after provision for loan losses		13,361			(127	)		34,611			278
Noninterest Income:
Service charges on deposit accounts		1,276			1,483			3,883			4,458
Mortgage banking revenue		5,186			2,734			12,299			5,923
Gain on sale of investment securities available for sale		218			1,222			479			1,414
Gain (loss) on sale of premises and equipment		—			12			(47	)		(30	)
Losses on foreclosed real estate and repossessed assets		(6,445	)		(8,843	)		(14,357	)		(15,612	)
Other-than-temporary impairment of securities (includes total other-than-temporary impairment losses of $0 and $309, net of $0 and $0 recognized in other comprehensive income for the nine months ended September 30, 2012 and 2011, respectively, before taxes)		—			(218	)		—			(309	)
Insurance revenue		—			395			—			2,656
Brokerage revenue		33			76			147			212
Gain on sale of insurance company		—			1,251			—			1,251
Income from bank-owned life insurance		399			524			1,261			1,442
Other		1,533			1,193			3,636			3,932
Total noninterest income		2,200			(171	)		7,301			5,337
Noninterest Expense:
Salaries and employee benefits		10,117			10,429			28,973			34,041
Occupancy		1,928			2,287			5,483			7,549
Professional and consultant fees		1,514			2,670			4,852			7,441
Problem loan and repossessed asset costs		1,245			1,612			2,761			4,164
FDIC insurance		1,129			1,291			3,530			9,856
Data processing		970			1,283			2,986			3,489
Equipment		667			931			2,101			2,580
Other		2,824			3,583			8,386			11,161
Total noninterest expense		20,394			24,086			59,072			80,281
Loss before provision for income taxes		(4,833	)		(24,384	)		(17,160	)		(74,666	)
Provision for income taxes		—			2,110			—			2,154
Net loss		(4,833	)		(26,494	)		(17,160	)		(76,820	)
Net income attributable to non-controlling interest		1,088			247			2,333			382
Net loss attributable to Hampton Roads Bankshares, Inc.	$	(5,921	)	$	(26,741	)	$	(19,493	)	$	(77,202	)
Per Share:
Cash dividends declared	$	—		$	—		$	—		$	—
Basic loss	$	(0.05	)	$	(0.77	)	$	(0.32	)	$	(2.28	)
Diluted loss	$	(0.05	)	$	(0.77	)	$	(0.32	)	$	(2.28	)
Basic and diluted weighted average shares outstanding		108,785,717			34,561,090			60,349,261			33,792,679

See accompanying notes to the consolidated financial statements.

4

HAMPTON ROADS BANKSHARES, INC.

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(in thousands)	Three Months Ended										Nine Months Ended
(unaudited)	September 30, 2012					September 30, 2011					September 30, 2012					September 30, 2011
Net loss				(4,833	)				(26,494	)				(17,160	)				(76,820	)
Other comprehensive income, net of tax
Change in unrealized gain on securities available for sale		555					2,422					2,403					8,275
Reclassification adjustment for securities gain included in net income		(218	)				(1,222	)				(479	)				(1,414	)
Other comprehensive income				337					1,200					1,924					6,861
Comprehensive loss				(4,496	)				(25,294	)				(15,236	)				(69,959	)
Comprehensive income attributable to non-controlling interest				1,088					247					2,333					382
Comprehensive loss attributable to Hampton Roads Bankshares, Inc.				(5,584	)				(25,541	)				(17,569	)				(70,341	)

See accompanying notes to the consolidated financial statements.

5

HAMPTON ROADS BANKSHARES, INC.

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY

										Accumulated
										Other					Total
(in thousands, except share data)	Common Stock						Retained			Comprehensive		Non-controlling			Shareholders’
(unaudited)	Shares		Amount		Capital Surplus		Deficit			Income		Interest			Equity
Balance at December 31, 2011		34,561,145	$	346	$	492,998	$	(386,295	)	$	6,377	$	242		$	113,668
Net income (loss)		—		—		—		(19,493	)		—		2,333			(17,160	)
Other comprehensive income		—		—		—		—			1,924		—			1,924
Shares issued related to:
Stock offering, net of issuance costs		71,429,459		714		46,421		—			—		—			47,135
Rights offering and standby purchase, net of issuance costs		64,287,848		643		43,191		—			—		—			43,834
Share-based compensation expense		—		—		34		—			—		—			34
Distributed non-controlling interest		—		—		—		—			—		(1,475	)		(1,475	)
Balance at September 30, 2012		170,278,452	$	1,703	$	582,644	$	(405,788	)	$	8,301	$	1,100		$	187,960

See accompanying notes to the consolidated financial statements.

6

HAMPTON ROADS BANKSHARES, INC.

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)	Nine Months Ended
(unaudited)	September 30, 2012			September 30, 2011
Operating Activities:
Net loss	$	(17,160	)	$	(76,820	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization		3,082			3,393
Amortization of intangible assets and fair value adjustments		1,149			84
Provision for loan losses		14,124			53,733
Proceeds from mortgage loans held for sale		443,936			270,651
Originations of mortgage loans held for sale		(441,125	)		(272,139	)
Stock-based compensation expense		34			85
Net amortization of premiums and accretion of discounts on investment securities available for sale		2,950			2,000
Loss on sale of premises and equipment		47			30
Losses on foreclosed real estate and repossessed assets		14,357			15,612
Gain on sale of investment securities available for sale		(479	)		(1,414	)
Gain on sale of insurance company		—			(1,251	)
Income from bank-owned life insurance		(1,261	)		(1,442	)
Other-than-temporary impairment of securities		—			309
Changes in:
Interest receivable		740			929
Other assets		454			16,190
Interest payable		839			(81	)
Other liabilities		(3,092	)		(3,816	)
Net cash provided by operating activities		18,595			6,053
Investing Activities:
Proceeds from maturities and calls of investment securities available for sale		61,946			84,253
Proceeds from sale of investment securities available for sale		55,690			69,591
Purchase of investment securities available for sale		(127,048	)		(92,409	)
Purchase of restricted equity securities		(1,168	)		(298	)
Proceeds from sale of restricted equity securities		3,456			3,152
Net decrease in loans		32,406			157,952
Proceeds from sale of insurance subsidiary		—			5,783
Purchase of premises and equipment		(1,804	)		(2,053	)
Proceeds from sale of foreclosed real estate and repossessed assets		25,065			23,785
Proceeds from sale of premises and equipment		7,542			1,454
Net cash provided by investing activities		56,085			251,210
Financing Activities:
Net decrease in deposits		(166,939	)		(375,495	)
Repayments of Federal Home Loan Bank borrowings		(50	)		(15,050	)
Repayments of other borrowings		—			(10,000	)
Distributed non-controlling interest		(1,475	)		(535	)
Issuance of common shares, net		90,969			15,284
Net cash used in financing activities		(77,495	)		(385,796	)
Decrease in cash and cash equivalents		(2,815	)		(128,533	)
Cash and cash equivalents at beginning of period		138,067			460,912
Cash and cash equivalents at end of period	$	135,252		$	332,379
Supplemental cash flow information:
Cash paid for interest	$	12,634		$	23,985
Cash paid for (refunded from) income taxes		265			(14,666	)
Supplemental non-cash information:
Change in unrealized gain on securities available for sale	$	1,924		$	6,861
Transfer between loans and other real estate owned		19,870			47,081

See accompanying notes to the consolidated financial statements.

7

HAMPTON ROADS BANKSHARES, INC.

PART I. FINANCIAL INFORMATION

Item 1. Notes to Consolidated Financial Statements

NOTE A – BASIS OF PRESENTATION

The accompanying unaudited consolidated financial statements of Hampton Roads Bankshares, Inc. (the “Company,” “we,” “us,” or “our”) have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial reporting and with the instructions to Form 10-Q. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, the financial statements reflect all adjustments (consisting of a normal recurring nature) considered necessary for a fair presentation. The results of operations for the nine months ended September 30, 2012 are not necessarily indicative of the results to be expected for the full year. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company’s annual report on Form 10-K for the year ended December 31, 2011.

Recent Events

On August 24, 2012, the Company announced that it completed the sale of deposits associated with its Wilmington, North Carolina branch to First Bancorp.

On September 21, 2012, the Company announced that it completed the sale of all deposits and selected assets associated with its branches in Preston Corners and Chapel Hill, North Carolina to Bank of North Carolina, a subsidiary of BNC Bancorp.

On September 27, 2012, the Company announced the closing of a public common stock rights offering (the “Rights Offering”). The Company issued 21,000,687 shares of common stock, at a price of $0.70 per share, to holders of its common stock who elected to participate in the Rights Offering. Total proceeds from the Rights Offering were $14.7 million.

In connection with the Rights Offering, the Company was a party to a Standby Purchase Agreement with the following entities or their affiliates or managed funds: The Carlyle Group, L.P. (“Carlyle”), Anchorage Capital Group, L.L.C. (“Anchorage”), and CapGen Capital Group VI LP (“CapGen” and, together with Carlyle and Anchorage, the “Investors”). The Standby Purchase Agreement provided that the Investors would purchase from the Company, at the subscription price, a portion of the shares, if any, up to an aggregate of 53,518,176 shares, not subscribed for in the Rights Offering (the “Standby Purchase”). On September 27, 2012, pursuant to the terms of the Standby Purchase Agreement, the Investors purchased a total of 43,287,161 shares of the Company’s common stock at $0.70 per share in the Standby Purchase. Anchorage purchased 16,007,143 shares, CapGen purchased 11,272,875 shares and Carlyle purchased 16,007,143 shares. Total proceeds from the Standby Purchase were $30.3 million.

The Company is in the process of consolidating the operations of Gateway Investment Services, Inc. into Shore Investments, Inc. The Company expects this process to be complete by the first quarter of 2013.

Recent Accounting Pronouncements

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

In June 2011, the FASB issued ASU 2011-05,Comprehensive Income: Presentation of Comprehensive Incomethat improves the comparability of items reported in other comprehensive income. The amendment requires that all non-owner changes in shareholders’ equity be presented in a single continuous statement of comprehensive income or in two separate but consecutive statements. The amendment is to be applied retrospectively and is effective during the current reporting period. The adoption of the new guidance resulted in the addition of new Consolidated Statements of Comprehensive Loss included in the Company’s consolidated financial statements.

8

HAMPTON ROADS BANKSHARES, INC.

PART I. FINANCIAL INFORMATION

Item 1. Notes to Consolidated Financial Statements

In December 2011, the FASB issued ASU 2011-11,Disclosures About Offsetting Assets and Liabilities that facilitates comparison between GAAP and IFRS by requiring Companies provide enhanced disclosures for financial instruments and derivative instruments to enable users to evaluate the effect or potential effect of netting arrangements. The amendment is to be applied retrospectively for annual reporting periods beginning on or after January 1, 2013 and interim periods within those annual periods. The adoption of the new guidance is expected to result in additional disclosures for the Company.

In December 2011, the FASB issued ASU 2011-12,Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05.The amendment defers changes in ASU 2011-05 that relate to the presentation of reclassification adjustments out of accumulated other comprehensive income. The amendment is to be applied retrospectively and is effective during the current reporting period. The adoption of the new guidance did not have a material impact on the Company’s consolidated financial statements.

NOTE B – REGULATORY MATTERS

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

Written Agreement

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

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

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

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

9

HAMPTON ROADS BANKSHARES, INC.

PART I. FINANCIAL INFORMATION

Item 1. Notes to Consolidated Financial Statements

To date, the Company and BOHR have met all of the deadlines for taking actions required by the FRB and the Bureau of Financial Institutions under the terms of the Written Agreement. A committee has been appointed to oversee the Company’s compliance with the terms of the Written Agreement and has met each month to review compliance. Written plans have been submitted for strengthening board oversight, strengthening credit risk management practices, improving liquidity, reducing the reliance on brokered deposits, improving capital, and curing the technical violations of laws and regulations. The Company has also submitted its written policies and procedures for maintaining an adequate allowance for loan and lease losses and its plans for all foreclosed real estate and nonaccrual and delinquent loans in excess of $2.5 million. Additionally, the Company instituted the required review process for all classified loans. The Company has charged off the assets identified as loss from the previous examination. As of September 30, 2012, the Company exceeded the regulatory capital minimums, and BOHR and Shore were considered “well capitalized” under the risk-based capital standards. As a result, management believes that the Company and BOHR are in full compliance with the terms of the Written Agreement.

NOTE C – CAPITAL RAISE

On September 27, 2012, the Company closed on the remaining two components of its $95.0 million capital raise (the “Capital Raise”): the Rights Offering and the Standby Purchase of shares not purchased in the Rights Offering. The Company previously closed the first component of the Capital Raise on June 27, 2012, a $50.0 million private placement (the “Private Placement”). The Capital Raise resulted in $95.0 million in gross proceeds for which the Company issued, in the aggregate, 135,717,307 shares of Common Stock at a price of $0.70 per share.

As a result of the Capital Raise and resulting contribution from the Company, BOHR now qualifies as “well capitalized” under all regulatory capital ratios. The Capital Raise resulted in an adjustment to the warrant to purchase Common Stock currently held by the United States Treasury Department (the “Treasury”). The Treasury holds a warrant (the “Treasury Warrant”) that, before the Capital Raise, entitled it to purchase 53,034 shares of Common Stock at an exercise price of $10.00 per share. Because the Capital Raise was not excluded from the operation of the anti-dilution provisions of the Treasury Warrant, as a result of the Capital Raise, the number of shares purchasable under the Treasury Warrant were adjusted to 757,643 shares of our Common Stock and the exercise price to purchase such shares was adjusted to $0.70 per share.

NOTE D – STOCK-BASED COMPENSATION

Compensation cost relating to share-based transactions is accounted for in the consolidated financial statements based on the fair value of the share-based award on the date of grant. The Company calculates the fair value of its stock options at the date of grant using a lattice option pricing model. Stock options granted with pro-rata vesting schedules are expensed over the vesting period on a straight-line basis. No options were granted during the nine months ended September 30, 2012 and 2011.

10

HAMPTON ROADS BANKSHARES, INC.

PART I. FINANCIAL INFORMATION

Item 1. Notes to Consolidated Financial Statements

Stock-based compensation expense (in thousands, except share data) recognized in the consolidated statements of operations and the options exercised, including the total intrinsic value and cash received, for the nine months ended September 30, 2012 and 2011 were as follows.

	September 30,
	2012			2011
Expense recognized:
Related to stock options	$	4	��	$	65
Related to share awards		30			20
Related tax benefit		—			—
Number of options exercised:
New shares		—			—
Previously acquired shares		—			—
Total intrinsic value of options exercised	$	—		$	—
Cash received from options exercised		—			—

The Company has granted stock options to its directors and employees under stock compensation plans that have been approved by the Company’s shareholders. All outstanding options have terms that range from five to ten years and are either fully vested and exercisable at the date of grant or vest ratably over periods that range from three to ten years. A summary of the Company’s stock option activity and related information for the nine months ended September 30, 2012 is as follows.

	Options Outstanding			Weighted Average Exercise Price		Average Intrinsic Value
Balance at December 31, 2011		30,556		$	355.37	$	—
Expired		(2,090	)		230.06		—
Balance at September 30, 2012		28,466		$	364.89	$	—
Options exercisable at September 30, 2012		28,059		$	365.74	$	—

11

HAMPTON ROADS BANKSHARES, INC.

PART I. FINANCIAL INFORMATION

Item 1. Notes to Consolidated Financial Statements

Information pertaining to options outstanding and options exercisable as of September 30, 2012 is as follows.

	Options Outstanding						Options Exercisable
Ranges of Exercise Prices	Number of Options Outstanding		Weighted Average Remaining Contractual Life (in years)		Weighted Average Exercise Price		Number of Options Exercisable		Weighted Average Exercise Price
$100.00 - $126.25		893		0.82	$	116.85		893	$	116.85
$177.25 - $219.25		3,465		0.92		200.82		3,465		200.82
$227.75 - $266.25		5,840		2.70		254.36		5,840		254.36
$300.00 - $312.25		5,765		4.34		301.05		5,358		300.65
$491.75 - $546.75		11,324		2.37		497.93		11,324		497.93
$616.75		1,179		2.67		616.75		1,179		616.75
$100.00 - $616.75		28,466		2.62	$	364.89		28,059	$	365.74

On October 4, 2011, the Company’s shareholders approved the 2011 Omnibus Incentive Plan (the “Plan”), which succeeds the Company’s 2006 Stock Incentive Plan and provides for the grant of up to 2,750,000 shares of our Common Stock as awards to employees of the Company and its related entities, members of the Board of Directors of the Company, and members of the board of directors of any of the Company’s related entities. On June 25, 2012, the Company’s shareholders approved an amendment to the Plan that increases the number of shares reserved for issuance under the Plan to 13,675,000. No awards were granted pursuant to the Plan during the nine months ended September 30, 2012. As of September 30, 2012, there was $25 thousand of unrecognized compensation cost related to non-vested stock options. That cost is expected to be recognized over a remaining weighted-average period of 5.1 years.

The Company has granted non-vested shares of Common Stock to certain directors and employees as part of incentive programs. Outstanding non-vested shares have vesting schedules of five years and are expensed over the same time frame. A summary of the Company’s non-vested share activity and related information for the nine months ended September 30, 2012 is as follows.

	Number of Shares		Per Share Weighted-Average Grant Date Fair Value
Balance at December 31, 2011		80	$	306.25
Balance at September 30, 2012		80	$	306.25

As of September 30, 2012, there was $2 thousand of total unrecognized compensation cost related to non-vested share awards. That cost is expected to be recognized over a weighted-average period of 0.1 years. There were no shares vested during the nine months ended September 30, 2012.

12

HAMPTON ROADS BANKSHARES, INC.

PART I. FINANCIAL INFORMATION

Item 1. Notes to Consolidated Financial Statements

NOTE E – INVESTMENT SECURITIES

The amortized cost and estimated fair values of investment securities available for sale (in thousands) at September 30, 2012 and December 31, 2011 were as follows.

	September 30, 2012
Description of Securities	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value
U.S. agency securities	$	32,893	$	1,381	$	—	$	34,274
Mortgage-backed securities		248,295		7,062		340		255,017
State and municipal securities		527		104		—		631
Corporate bonds		2,850		82		—		2,932
Equity securities		466		41		26		481
Total investment securities available for sale	$	285,031	$	8,670	$	366	$	293,335

	December 31, 2011
Description of Securities	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value
U.S. agency securities	$	48,854	$	1,101	$	35	$	49,920
Mortgage-backed securities		224,578		5,688		330		229,936
State and municipal securities		529		79		—		608
Corporate bonds		2,811		—		115		2,696
Equity securities		1,341		1		32		1,310
Total investment securities available for sale	$	278,113	$	6,869	$	512	$	284,470

Unrealized losses

Information pertaining to securities with gross unrealized losses (in thousands) at September 30, 2012 and December 31, 2011, aggregated by investment category and length of time that the individual securities have been in a continuous unrealized loss position is as follows.

	September 30, 2012
	Less than 12 Months				12 Months or More				Total
Description of Securities	Estimated Fair Value		Unrealized Loss		Estimated Fair Value		Unrealized Loss		Estimated Fair Value		Unrealized Loss
Mortgage-backed securities	$	22,366	$	340	$	—	$	—	$	22,366	$	340
Equity securities		50		7		61		19		111		26
	$	22,416	$	347	$	61	$	19	$	22,477	$	366

13

HAMPTON ROADS BANKSHARES, INC.

PART I. FINANCIAL INFORMATION

Item 1. Notes to Consolidated Financial Statements

	December 31, 2011
	Less than 12 Months				12 Months or More				Total
Description of Securities	Estimated Fair Value		Unrealized Loss		Estimated Fair Value		Unrealized Loss		Estimated Fair Value		Unrealized Loss
U.S. agency securities	$	9,599	$	35	$	—	$	—	$	9,599	$	35
Mortgage-backed securities		35,730		281		3,066		49		38,796		330
Corporate bonds		2,696		115		—		—		2,696		115
Equity securities		—		—		89		32		89		32
	$	48,025	$	431	$	3,155	$	81	$	51,180	$	512

Debt securities with unrealized losses totaling $340 thousand at September 30, 2012 included 15 mortgage-backed securities. The severity and duration of this unrealized loss will fluctuate with interest rates in the economy.

The Company’s unrealized losses on equity securities were caused by what management deems to be transitory fluctuations in market valuation. At September 30, 2012, seven equity securities experienced an unrealized loss of $26 thousand. All identified impairments on equity securities were taken in the periods discussed below.

Other-than-temporary impairment (“OTTI”)

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

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

During the first nine months of 2012, no equity securities were determined to be other-than-temporarily impaired. However, during the first nine months of 2011, equity securities with an amortized cost basis prior to impairment of $443 thousand were determined to be other-than-temporarily impaired, and impairment losses of $309 thousand were recognized through noninterest income. The Company had a net gain of $479 thousand on the sale of investment securities during the first nine months of 2012. Of that gain, $233 thousand had previously been recognized as an other-than-temporary impairment. Management has evaluated the unrealized losses associated with the remaining equity securities as of September 30, 2012 and, in management’s opinion, the unrealized losses are temporary, and it is our intention to hold these securities until their value recovers.

14

HAMPTON ROADS BANKSHARES, INC.

PART I. FINANCIAL INFORMATION

Item 1. Notes to Consolidated Financial Statements

A rollforward of the cumulative OTTI losses (in thousands) recognized in earnings for all securities for the nine months ended September 30, 2012 for securities still held is as follows.

Balance, December 31, 2011	$	1,120
Less: Realized gains from securities sales		(233	)
Add: Loss where impairment was not previously recognized		—
Add: Loss where impairment was previously recognized		—
Balance, September 30, 2012	$	887

Maturities of investment securities

The amortized cost and estimated fair value by contractual maturity of investment securities available for sale (in thousands) that are not determined to be other-than-temporarily impaired at September 30, 2012 and December 31, 2011 are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Equity securities do not have contractual maturities.

	September 30, 2012				December 31, 2011
	Amortized Cost		Estimated Fair Value		Amortized Cost		Estimated Fair Value
Due less than one year	$	1,094	$	1,132	$	—	$	—
Due after one year but less than five years		5,190		5,341		7,300		7,386
Due after five years but less than ten years		22,702		23,711		26,183		26,679
Due after ten years		255,579		262,670		243,289		249,095
Equity securities		466		481		1,341		1,310
Total available-for-sale securities	$	285,031	$	293,335	$	278,113	$	284,470

Federal Home Loan Bank (“FHLB”)

The Company’s investment in FHLB stock totaled $12.0 million at September 30, 2012. FHLB stock is generally viewed as a long-term investment and as a restricted investment security because it is required to be held in order to receive FHLB advances (i.e. borrowings). It is carried at cost as there is no market for the stock other than the FHLB or member institutions. Therefore, when evaluating FHLB stock for impairment, its value is based on ultimate recoverability of the par value rather than by recognizing temporary declines in value. The Company does not consider this investment to be other-than-temporarily impaired at September 30, 2012, and no impairment has been recognized.

15

HAMPTON ROADS BANKSHARES, INC.

PART I. FINANCIAL INFORMATION

Item 1. Notes to Consolidated Financial Statements

NOTE F – LOANS AND ALLOWANCE FOR LOAN LOSSES

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

	September 30, 2012			December 31, 2011
Commercial and industrial	$	247,125		$	256,058
Construction		233,194			284,984
Real estate - commercial mortgage		532,884			522,052
Real estate - residential mortgage		379,558			414,957
Installment		24,302			26,525
Deferred loan fees and related costs		(130	)		157
Total loans	$	1,416,933		$	1,504,733

Allowance for Loan Losses

The purpose of the allowance for loan losses is to provide for potential losses inherent in our loan portfolio. Management considers several factors in determining the allowance for loan losses, including historical loan loss experience, the size and composition of the portfolio, and the estimated value of collateral and guarantees securing the loans. Management regularly reviews the loan portfolio to determine whether adjustments are necessary to maintain an allowance for loan losses sufficient to absorb losses. Our review takes into consideration changes in the nature and volume of the loan portfolio, overall portfolio quality, review of specific problem loans, and review of current economic conditions that may affect the borrower’s ability to repay. Some of the tools used in the credit review process to identify potential problem loans include past due reports, collateral valuations (primarily from third parties), cash flow analyses of borrowers, and risk ratings of loans. In addition to the review of credit quality through ongoing credit review processes, we perform a comprehensive allowance analysis for our loan portfolio at least quarterly. This analysis includes specific allowances for individual loans; general allowances for loan pools that factor in our historical loan loss experience, loan portfolio growth and trends, and economic conditions; and unallocated allowances predicated upon both internal and external factors.

Loss factors are calculated using qualitative data and then are applied to each of the loan segments to determine a reserve level for various subsets of each of the five segments of loans. While portions of the allowance are attributed to specific portfolio segments, the entire allowance is available to absorb credit losses inherent in the total loan portfolio. In addition, specific allocations may be assigned to nonaccrual or other problem credits.

16

HAMPTON ROADS BANKSHARES, INC.

PART I. FINANCIAL INFORMATION

Item 1. Notes to Consolidated Financial Statements

A rollforward of the activity (in thousands) within the allowance for loan losses by loan type for the nine months ended September 30, 2012 and 2011 is as follows.

September 30, 2012							Real Estate -
	Commercial						Commercial			Residential
	and Industrial			Construction			Mortgage			Mortgage			Installment			Unallocated			Total
Allowance for credit losses:
Beginning balance	$	13,605		$	24,826		$	17,101		$	12,060		$	2,067		$	5,288		$	74,947
Charge-offs		(15,505	)		(9,498	)		(7,810	)		(7,692	)		(428	)					(40,933	)
Recoveries		1,048			2,773			1,556			755			174						6,306
Provision		9,812			(3,228	)		1,652			5,348			(745	)		1,285			14,124
Ending balance	$	8,960		$	14,873		$	12,499		$	10,471		$	1,068		$	6,573		$	54,444
Ending balance: attributable to loans collectively evaluated for impairment	$	4,351		$	10,245		$	6,687		$	5,968		$	840		$	6,573		$	34,664
Recorded investment: loans collectively evaluated for impairment	$	218,848		$	194,515		$	475,802		$	340,263		$	23,748
Ending balance: attributable to loans individually evaluated for impairment	$	4,609		$	4,628		$	5,812		$	4,503		$	228					$	19,780
Recorded investment: loans individually evaluated for impairment	$	28,277		$	38,679		$	57,082		$	39,295		$	554
September 30, 2011							Real Estate -
	Commercial						Commercial			Residential
	and Industrial			Construction			Mortgage			Mortgage			Installment			Unallocated			Total
Allowance for credit losses:
Beginning balance	$	18,610		$	83,052		$	25,426		$	17,973		$	3,400		$	8,792		$	157,253
Charge-offs		(14,841	)		(85,788	)		(16,410	)		(13,558	)		(1,303	)					(131,900	)
Recoveries		1,127			1,540			589			462			232						3,950
Provision		6,878			31,277			8,691			7,970			409			(1,492	)		53,733
Ending balance	$	11,774		$	30,081		$	18,296		$	12,847		$	2,738		$	7,300		$	83,036
Ending balance: attributable to loans collectively evaluated for impairment	$	8,051		$	15,626		$	11,607		$	6,982		$	2,694		$	7,300		$	52,260
Recorded investment: loans collectively evaluated for impairment	$	235,125		$	221,836		$	479,997		$	396,891		$	27,286
Ending balance: attributable to loans individually evaluated for impairment	$	3,723		$	14,455		$	6,689		$	5,865		$	44					$	30,776
Recorded investment: loans individually evaluated for impairment	$	23,634		$	96,969		$	105,828		$	37,226		$	495

17

HAMPTON ROADS BANKSHARES, INC.

PART I. FINANCIAL INFORMATION

Item 1. Notes to Consolidated Financial Statements

Impaired Loans

A loan is considered impaired when it is probable that all amounts due will not be collected according to the contractual terms. Impaired loans are measured based on the present value of payments expected to be received using the historical effective loan rate as the discount rate. For collateral dependent impaired loans, impairment is measured based upon the fair value of the underlying collateral. Management considers a loan to be collateral dependent when repayment of the loan is expected solely from the sale or liquidation of the underlying collateral. The Company’s policy is to charge off collateral dependent impaired loans at the time of foreclosure, repossession, or liquidation or at such time any portion of the loan is deemed to be uncollectible and in no case later than 180 days in nonaccrual status. The Company will reduce the carrying value of the loan to the estimated fair value of the collateral less estimated selling costs through a charge off to the allowance for loan losses. For loans that are not collateral dependent, impairment is measured using discounted cash flows. Total impaired loans were $163.9 million and $211.6 million at September 30, 2012 and December 31, 2011, respectively, the majority of which were considered collateral dependent, and therefore, measured at the fair value of the underlying collateral.

Impaired loans for which no allowance is provided totaled $93.8 million and $115.0 million at September 30, 2012 and December 31, 2011, respectively. Loans written down to their estimated fair value of collateral less the costs to sell account for $52.4 million and $52.9 million of the impaired loans for which no allowance has been provided as of September 30, 2012 and December 31, 2011, respectively. The average age of appraisals for these loans is 0.68 years at September 30, 2012. The remaining impaired loans for which no allowance is provided are fully covered by the value of the collateral, and therefore, no additional loss is expected on these loans.

18

HAMPTON ROADS BANKSHARES, INC.

PART I. FINANCIAL INFORMATION

Item 1. Notes to Consolidated Financial Statements

The following charts show impaired loans (in thousands) by class as of September 30, 2012 and December 31, 2011.

			Unpaid				Average		Interest
	Recorded		Principal		Related		Recorded		Income
September 30, 2012	Investment		Balance		Allowance		Investment		Recognized
With no related allowance recorded:
Commercial & Industrial	$	17,805	$	22,832	$	—	$	18,166	$	29
Construction
1-4 family residential construction		2,572		3,745		—		2,586		—
Commercial construction		21,503		48,289		—		23,543		119
Real estate
Commercial Mortgage
Owner occupied		23,967		26,470		—		24,561		195
Non-owner occupied		6,904		16,187		—		7,056		119
Residential Mortgage
Secured by 1-4 family, 1st lien		14,747		18,393		—		15,260		23
Secured by 1-4 family, junior lien		6,073		11,451		—		6,274		3
Installment		204		456		—		201		4
	$	93,775	$	147,823	$	—	$	97,647	$	492
With an allowance recorded:
Commercial & Industrial	$	10,472	$	11,992	$	4,609	$	10,633	$	36
Construction
1-4 family residential construction		390		419		45		391		—
Commercial construction		14,214		18,222		4,583		14,278		178
Real estate
Commercial Mortgage
Owner occupied		19,292		19,292		5,283		19,718		310
Non-owner occupied		6,919		6,919		529		6,921		155
Residential Mortgage
Secured by 1-4 family, 1st lien		16,413		16,478		3,255		16,521		570
Secured by 1-4 family, junior lien		2,062		2,062		1,248		2,056		18
Installment		350		350		228		352		4
	$	70,112	$	75,734	$	19,780	$	70,870	$	1,271
Total:
Commercial & Industrial	$	28,277	$	34,824	$	4,609	$	28,799	$	65
Construction		38,679		70,675		4,628		40,798		297
Real estate-commercial mortgage		57,082		68,868		5,812		58,256		779
Real estate-residential mortgage		39,295		48,384		4,503		40,111		614
Installment		554		806		228		553		8
Total	$	163,887	$	223,557	$	19,780	$	168,517	$	1,763

19

HAMPTON ROADS BANKSHARES, INC.

PART I. FINANCIAL INFORMATION

Item 1. Notes to Consolidated Financial Statements

			Unpaid				Average		Interest
	Recorded		Principal		Related		Recorded		Income
December 31, 2011	Investment		Balance		Allowance		Investment		Recognized
With no related allowance recorded:
Commercial & Industrial	$	29,281	$	36,244	$	—	$	30,249	$	1,491
Construction
1-4 family residential construction		3,774		5,146		—		3,890		—
Commercial construction		34,441		73,369		—		35,229		187
Real estate
Commercial Mortgage
Owner occupied		17,663		21,225		—		18,213		380
Non-owner occupied		11,312		24,170		—		11,716		305
Residential Mortgage
Secured by 1-4 family, 1st lien		13,705		15,524		—		14,238		131
Secured by 1-4 family, junior lien		4,580		6,828		—		4,709		3
Installment		242		627		—		250		—
	$	114,998	$	183,133	$	—	$	118,494	$	2,497
With an allowance recorded:
Commercial & Industrial	$	10,233	$	10,647	$	6,160	$	10,475	$	34
Construction
1-4 family residential construction		6,454		6,504		2,387		6,722		237
Commercial construction		27,384		60,330		7,250		28,833		168
Real estate
Commercial Mortgage
Owner occupied		27,441		27,503		3,641		27,679		824
Non-owner occupied		4,393		6,008		845		4,432		—
Residential Mortgage
Secured by 1-4 family, 1st lien		18,617		19,061		4,225		18,756		767
Secured by 1-4 family, junior lien		2,063		2,171		1,157		2,150		10
Installment		50		49		38		54		—
	$	96,635	$	132,273	$	25,703	$	99,101	$	2,040
Total:
Commercial & Industrial	$	39,514	$	46,891	$	6,160	$	40,724	$	1,525
Construction		72,053		145,349		9,637		74,674		592
Real estate-commercial mortgage		60,809		78,906		4,486		62,040		1,509
Real estate-residential mortgage		38,965		43,584		5,382		39,853		911
Installment		292		676		38		304		—
Total	$	211,633	$	315,406	$	25,703	$	217,595	$	4,537

20

HAMPTON ROADS BANKSHARES, INC.

PART I. FINANCIAL INFORMATION

Item 1. Notes to Consolidated Financial Statements

Non-performing Assets

Non-performing assets consist of loans 90 days past due and still accruing interest, nonaccrual loans, and foreclosed real estate and repossessed assets. Total non-performing assets were $159.2 million or 8% of total assets at September 30, 2012 compared with $196.9 million or 9% of total assets at December 31, 2011. Non-performing assets (in thousands) were as follows.

	September 30, 2012		December 31, 2011
Loans 90 days past due and still accruing interest	$	—	$	84
Nonaccrual loans, including nonaccrual impaired loans		115,093		133,161
Foreclosed real estate and repossessed assets		44,061		63,613
Non-performing assets	$	159,154	$	196,858

Nonaccrual and Past Due Loans

The Company generally places loans on nonaccrual status when the collection of interest or principal becomes uncertain, part of the balance has been charged off and no restructuring has occurred, or the loans reach 90 days past due, whichever occurs first. When loans are placed on nonaccrual status, interest receivable is reversed against interest income recognized in the current period, and any prior year unpaid interest is charged off against the allowance for loan losses. Interest payments received thereafter are applied as a reduction of the remaining principal balance so long as doubt exists as to the ultimate collection of the principal. Loans are removed from nonaccrual status when they become current as to both principal and interest and when the collection of principal or interest is no longer doubtful. A reconciliation of non-performing loans to impaired loans (in thousands) for the periods ended September 30, 2012 and December 31, 2011 is as follows.

	September 30, 2012		December 31, 2011
Loans 90 days past due and still accruing interest	$	—	$	84
Nonaccrual loans, including nonaccrual impaired loans		115,093		133,161
Total non-performing loans		115,093		133,245
TDRs on accrual		16,933		21,168
Impaired loans on accrual		31,861		57,220
Total impaired loans	$	163,887	$	211,633

Nonaccrual loans were $115.1 million at September 30, 2012 compared to $133.2 million at December 31, 2011. If income on nonaccrual loans had been recorded under original terms, $5.7 million of additional interest income would have been recorded for the nine months ended September 30, 2012.

21

HAMPTON ROADS BANKSHARES, INC.

PART I. FINANCIAL INFORMATION

Item 1. Notes to Consolidated Financial Statements

Age Analysis of Past Due Loans

An age analysis of past due loans (in thousands) as of September 30, 2012 and December 31, 2011 is as follows.

															Recorded
					Greater										Investment
	30-59 Days		60-89 Days		Than		Total					Total			>90 Days and
September 30, 2012	Past Due		Past Due		90 Days		Past Due		Current			Loans			Accruing
Commercial & Industrial	$	1,766	$	633	$	26,820	$	29,219	$	217,906		$	247,125		$	—
Construction
1-4 family residential construction		245		—		2,962		3,207		13,432			16,639			—
Commercial construction		466		901		26,515		27,882		188,673			216,555			—
Real estate
Commercial Mortgage
Owner occupied		844		174		26,694		27,712		276,265			303,977			—
Non-owner occupied		811		426		6,061		7,298		221,609			228,907			—
Residential Mortgage
Secured by 1-4 family, 1st lien		1,222		391		18,436		20,049		207,595			227,644			—
Secured by 1-4 family, junior lien		396		466		7,233		8,095		143,819			151,914			—
Installment		397		—		372		769		23,533			24,302			—
Deferred loan fees and related costs		—		—		—		—		(130	)		(130	)		—
Total	$	6,147	$	2,991	$	115,093	$	124,231	$	1,292,703		$	1,416,933		$	—

													Recorded
					Greater								Investment
	30-59 Days		60-89 Days		Than		Total				Total		>90 Days and
December 31, 2011	Past Due		Past Due		90 Days		Past Due		Current		Loans		Accruing
Commercial & Industrial	$	1,715	$	2,179	$	17,097	$	20,991	$	235,067	$	256,058	$	—
Construction
1-4 family residential construction		594		—		4,415		5,009		18,522		23,531		—
Commercial construction		2,490		2,069		54,593		59,152		202,301		261,453		—
Real estate
Commercial Mortgage
Owner occupied		1,145		861		23,250		25,256		280,745		306,001		—
Non-owner occupied		3,647		193		9,076		12,916		203,135		216,051		—
Residential Mortgage
Secured by 1-4 family, 1st lien		8,979		1,698		18,185		28,862		222,148		251,010		—
Secured by 1-4 family, junior lien		1,069		228		6,337		7,634		156,313		163,947		—
Installment		78		56		292		426		26,099		26,525		84
Deferred loan fees and related costs		—		—		—		—		157		157		—
Total	$	19,717	$	7,284	$	133,245	$	160,246	$	1,344,487	$	1,504,733	$	84

22

HAMPTON ROADS BANKSHARES, INC.

PART I. FINANCIAL INFORMATION

Item 1. Notes to Consolidated Financial Statements

Credit Quality

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

The internal rating system is a series of grades reflecting management’s risk assessment, based on its analysis of the borrower’s financial condition. The “pass” category consists of a range of loan grades that reflect increasing, though still acceptable, risk. Movement of risk through the various grade levels in the “pass” category is monitored for early identification of credit deterioration. The “special mention” rating is attached to loans where the borrower exhibits material negative financial trends due to company specific or systematic conditions that, if left uncorrected, threaten its capacity to meet its debt obligations and the borrower is believed to have sufficient financial flexibility to react to and resolve its negative financial situation. It is a transitional grade that is closely monitored for improvement or deterioration. The “substandard” rating is applied to loans where the borrower exhibits well-defined weaknesses that jeopardize its continued performance and are of a severity that the distinct possibility of default exists. Loans are placed on “nonaccrual” when management does not expect to collect payments consistent with acceptable and agreed upon terms of repayment. The following tables provide information (in thousands) on September 30, 2012 and December 31, 2011 about the credit quality of the loan portfolio using the Company’s internal rating system as an indicator.

								Nonaccrual
September 30, 2012	Pass			Special Mention		Substandard		Loans		Total
Commercial & Industrial	$	198,721		$	14,115	$	7,469	$	26,820	$	247,125
Construction
1-4 family residential construction		10,053			1,569		2,055		2,962		16,639
Commercial construction		109,933			36,035		44,072		26,515		216,555
Real estate
Commercial Mortgage
Owner occupied		210,799			45,801		20,683		26,694		303,977
Non-owner occupied		169,288			42,841		10,717		6,061		228,907
Residential Mortgage
Secured by 1-4 family, 1st lien		166,481			24,898		17,829		18,436		227,644
Secured by 1-4 family, junior lien		135,939			4,940		3,802		7,233		151,914
Installment		16,937			2,119		4,874		372		24,302
Deferred loan fees and related costs		(130	)		—		—		—		(130	)
Total	$	1,018,021		$	172,318	$	111,501	$	115,093	$	1,416,933

23

HAMPTON ROADS BANKSHARES, INC.

PART I. FINANCIAL INFORMATION

Item 1. Notes to Consolidated Financial Statements

							Nonaccrual
December 31, 2011	Pass		Special Mention		Substandard		Loans		Total
Commercial & Industrial	$	177,347	$	27,916	$	33,698	$	17,097	$	256,058
Construction
1-4 family residential construction		9,483		482		9,151		4,415		23,531
Commercial construction		119,885		53,660		33,315		54,593		261,453
Real estate
Commercial Mortgage
Owner occupied		203,974		44,669		34,108		23,250		306,001
Non-owner occupied		152,829		41,636		12,510		9,076		216,051
Residential Mortgage
Secured by 1-4 family, 1st lien		183,243		30,424		19,158		18,185		251,010
Secured by 1-4 family, junior lien		145,495		4,695		7,420		6,337		163,947
Installment		17,913		3,881		4,523		208		26,525
Deferred loan fees and related costs		157		—		—		—		157
Total	$	1,010,326	$	207,363	$	153,883	$	133,161	$	1,504,733

Modifications

All restructured loans are not necessarily considered Troubled Debt Restructurings (“TDRs”). A restructured loan results in a TDR when two conditions are present 1) a borrower is experiencing financial difficulty and 2) a creditor grants a concession, such as a reduction of stated interest rate less than the current market interest rate for the remaining original life of the debt, extension of maturity date and/or dates at a stated interest rate lower than the current market rate for new debt with similar risk, reduction of face amount or maturity amount of the debt as stated in the instrument or other agreement, or reduction of accrued interest. A concession may also include a transfer from the debtor to the creditor of receivables from third parties, real estate, or other assets to satisfy fully or partially a debt or an issuance or other granting of an equity interest to the creditor by the debtor to satisfy fully or partially a debt unless the equity interest is granted pursuant to existing terms for converting the debt into an equity interest. Additionally, it is necessary for the Company to expect to collect all amounts due.

As of September 30, 2012 and December 31, 2011, loans classified as TDRs were $37.0 million and $45.3 million, respectively. All of these were included in the impaired loan disclosure. Of this amount, $16.9 million was accruing and $20.1 million was nonaccruing at September 30, 2012 and $21.1 million was accruing and $24.2 million was nonaccruing at December 31, 2011. Loans that are on nonaccrual status at the time of the restructuring generally remain on nonaccrual status for approximately six months before management considers whether such loans may return to accrual status. TDRs in nonaccrual status are returned to accrual status after a period of performance under which the borrower demonstrates the ability and willingness to repay the loan in accordance with the modified terms. There were no nonaccrual TDRs that were returned to accrual status during the nine months ended September 30, 2012 and $316 thousand were returned to accrual status during the year ended December 31, 2011.

At a minimum, TDRs are reported as such during the calendar year in which the restructuring or modification takes place. In subsequent years, troubled debt restructured loans may be removed from this disclosure classification if the loan did not involve a below market rate concession and the loan is not deemed to be impaired based on the terms specified in the restructuring agreement. The Company had one commercial construction loan for $1.1 million that met these qualifications and, therefore, was removed from TDR status during the third quarter of 2012.

24

HAMPTON ROADS BANKSHARES, INC.

PART I. FINANCIAL INFORMATION

Item 1. Notes to Consolidated Financial Statements

The following table shows the loans (in thousands, except number of contracts) that were determined by management to be TDRs at September 30, 2012 and December 31, 2011.

	September 30, 2012
			Pre-Modification		Post-Modification
			Outstanding Recorded		Outstanding Recorded
Troubled Debt Restructurings	Number of Contracts		Investment		Investment
Commercial & Industrial		7	$	1,228	$	1,090
Construction
1-4 family residential construction		1		2,128		1,582
Commercial construction		16		15,666		9,380
Real estate
Commercial Mortgage
Owner occupied		13		12,435		11,574
Non-owner occupied		4		7,695		7,533
Residential Mortgage
Secured by 1-4 family, 1st lien		25		6,309		5,631
Secured by 1-4 family, junior lien		1		181		181
Installment		—		—		—
Total		67	$	45,642	$	36,971

	December 31, 2011
			Pre-Modification		Post-Modification
			Outstanding Recorded		Outstanding Recorded
Troubled Debt Restructurings	Number of Contracts		Investment		Investment
Commercial & Industrial		6	$	360	$	222
Construction
1-4 family residential construction		1		2,128		1,598
Commercial construction		18		23,079		13,551
Real estate
Commercial Mortgage
Owner occupied		14		15,235		15,193
Non-owner occupied		3		7,413		7,251
Residential Mortgage
Secured by 1-4 family, 1st lien		29		7,631		7,343
Secured by 1-4 family, junior lien		1		190		190
Installment		—		—		—
Total		72	$	56,036	$	45,348

25

HAMPTON ROADS BANKSHARES, INC.

PART I. FINANCIAL INFORMATION

Item 1. Notes to Consolidated Financial Statements

NOTE G – 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 as of and for the nine months ended September 30, 2012 and 2011 is as follows.

	September 30, 2012			September 30, 2011
Balance at beginning of year	$	20,022		$	9,533
Provision for losses		7,262			11,792
Charge-offs		(8,995	)		(2,731	)
Balance at end of period	$	18,289		$	18,594

Expenses (in thousands) applicable to foreclosed real estate and repossessed assets for the three and nine months ended September 30, 2012 and 2011 include the following.

	For the three months ended				For the nine months ended
	September 30, 2012		September 30, 2011		September 30, 2012		September 30, 2011
Losses on sale of foreclosed real estate	$	3,751	$	1,690	$	7,095	$	3,820
Provision for losses		2,694		7,153		7,262		11,792
Operating expenses		1,115		1,241		2,222		3,105
Total	$	7,560	$	10,084	$	16,579	$	18,717

NOTE H – BUSINESS SEGMENT REPORTING

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

The accounting policies of the reportable segments are the same as those described in the summary of significant accounting policies in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011 (“2011 Form 10-K”). Segment profit and loss is measured by net income prior to corporate overhead allocation. Intersegment transactions are recorded at cost and eliminated as part of the consolidation process. Because of the interrelationships between the segments, the information is not indicative of how the segments would perform if they operated as independent entities. The following tables show certain financial information (in thousands) for the three and nine months ended September 30, 2012 and September 30, 2011 and as of September 30, 2012 and December 31, 2011 for each segment and in total.

26

HAMPTON ROADS BANKSHARES, INC.

PART I. FINANCIAL INFORMATION

Item 1. Notes to Consolidated Financial Statements

	Total			Elimination			BOHR			Shore		Mortgage		Other
Total Assets at September 30, 2012	$	2,071,433		$	(316,654	)	$	1,769,862		$	318,549	$	68,670	$	231,006
Total Assets at December 31, 2011	$	2,166,860		$	(258,739	)	$	1,912,912		$	277,267	$	68,117	$	167,303
Three Months Ended
September 30, 2012	Total			Elimination			BOHR			Shore		Mortgage		Other
Net interest income (loss)	$	15,837		$	—		$	13,391		$	2,819	$	101	$	(474	)
Provision for loan losses		2,476			—			2,455			21		—		—
Net interest income (expense) after provision for loan losses		13,361			—			10,936			2,798		101		(474	)
Noninterest income (loss)		2,200			(61	)		(3,067	)		102		5,186		40
Noninterest expense		20,394			(61	)		15,301			2,019		3,094		41
Income (loss) before provision for income taxes		(4,833	)		—			(7,432	)		881		2,193		(475	)
Provision for income taxes		—			—			—			—		—		—
Net income (loss)		(4,833	)		—			(7,432	)		881		2,193		(475	)
Net income attributable to non-controlling interest		1,088			—			—			—		1,088		—
Net income (loss) attributable to Hampton Roads Bankshares, Inc.	$	(5,921	)	$	—		$	(7,432	)	$	881	$	1,105	$	(475	)
Three Months Ended
September 30, 2011	Total			Elimination			BOHR			Shore		Mortgage		Other
Net interest income (loss)	$	17,552		$	—		$	15,537		$	2,577	$	3	$	(565	)
Provision for loan losses		17,679			—			17,600			79		—		—
Net interest income (expense) after provision for loan losses		(127	)		—			(2,063	)		2,498		3		(565	)
Noninterest income (loss)		(171	)		(250	)		(5,165	)		548		2,734		1,962
Noninterest expense		24,086			(250	)		18,382			2,465		2,152		1,337
Income (loss) before provision for income taxes		(24,384	)		—			(25,610	)		581		585		60
Provision for income taxes		2,110			—			2,107			3		—		—
Net income (loss)		(26,494	)		—			(27,717	)		578		585		60
Net income attributable to non-controlling interest		247			—			—			—		247		—
Net income (loss) attributable to Hampton Roads Bankshares, Inc.	$	(26,741	)	$	—		$	(27,717	)	$	578	$	338	$	60

27

HAMPTON ROADS BANKSHARES, INC.

PART I. FINANCIAL INFORMATION

Item 1. Notes to Consolidated Financial Statements

Nine Months Ended September 30, 2012	Total			Elimination			BOHR			Shore		Mortgage			Other
Net interest income (loss)	$	48,735		$	—		$	41,554		$	8,207	$	383		$	(1,409	)
Provision for loan losses		14,124			—			13,975			149		—			—
Net interest income (expense) after provision for loan losses		34,611			—			27,579			8,058		383			(1,409	)
Noninterest income (loss)		7,301			(186	)		(5,652	)		467		12,299			373
Noninterest expense		59,072			(186	)		44,310			6,406		7,978			564
Income (loss) before provision for income taxes		(17,160	)		—			(22,383	)		2,119		4,704			(1,600	)
Provision for income taxes		—			—			—			—		—			—
Net income (loss)		(17,160	)		—			(22,383	)		2,119		4,704			(1,600	)
Net income attributable to non-controlling interest		2,333			—			—			—		2,333			—
Net income (loss) attributable to Hampton Roads Bankshares, Inc.	$	(19,493	)	$	—		$	(22,383	)	$	2,119	$	2,371		$	(1,600	)
Nine Months Ended September 30, 2011	Total			Elimination			BOHR			Shore		Mortgage			Other
Net interest income (loss)	$	54,011		$	—		$	49,033		$	6,546	$	97		$	(1,665	)
Provision for loan losses		53,733			—			53,140			593		—			—
Net interest income (expense) after provision for loan losses		278			—			(4,107	)		5,953		97			(1,665	)
Noninterest income (loss)		5,337			(250	)		(6,646	)		1,961		5,923			4,349
Noninterest expense		80,281			(250	)		62,270			7,210		6,510			4,541
Income (loss) before provision for income taxes		(74,666	)		—			(73,023	)		704		(490	)		(1,857	)
Provision for income taxes		2,154			—			2,107			47		—			—
Net income (loss)		(76,820	)		—			(75,130	)		657		(490	)		(1,857	)
Net income attributable to non-controlling interest		382			—			—			—		382			—
Net income (loss) attributable to Hampton Roads Bankshares, Inc.	$	(77,202	)	$	—		$	(75,130	)	$	657	$	(872	)	$	(1,857	)

NOTE I – DERIVATIVE FINANCIAL INSTRUMENTS

Derivatives are a financial instrument whose value is based on one or more underlying assets. Beginning in September 2012, the Company began using derivative instruments to manage interest rate risk in its mortgage business. These derivatives are entered into as balance sheet risk management instruments, and therefore, are not designated as a hedge.

The Company originates mortgage loans for sale into the secondary market on both a “best efforts” and a “mandatory delivery” basis. Under the mandatory delivery program, mortgage loans held for sale and commitments to borrowers to originate loans at agreed upon interest rates expose the Company to changes in market rates and conditions subsequent to the interest rate lock and funding date. The Company’s risk management strategy related to its interest rate lock commitment derivatives and loans held for sale includes using mortgage-based derivatives such as forward delivery commitments and To-Be-Announced securities in order to mitigate market risk. For the nine months ended September 30, 2012, the Company recorded a loss totaling $102 thousand related to these derivatives which was offset by an increase in the carrying value of the underlying loans and interest rate lock commitments totaling $175 thousand.

28

HAMPTON ROADS BANKSHARES, INC.

PART I. FINANCIAL INFORMATION

Item 1. Notes to Consolidated Financial Statements

NOTE J – FAIR VALUE MEASUREMENTS

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The Company groups financial assets and liabilities measured at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value. The majority of instruments fall into the Level 1 or 2 fair value hierarchy. Valuation methodologies for the fair value hierarchy are as follows:

Level 1	Quoted prices in active markets for identical assets or liabilities. Level 1 assets and liabilities include debt and equity securities and derivative contracts that are traded in an active exchange market, as well as certain United States Department of the Treasury (the “Treasury”) securities that are highly liquid and are actively traded in over-the-counter markets.
Level 2	Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. Level 2 assets and liabilities include debt securities with quoted prices that are traded less frequently than exchange-traded instruments and derivative contracts whose values are determined using a pricing model with inputs that are observable in the market or can be derived principally from or corroborated by observable market data.
Level 3	Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Level 3 assets and liabilities include financial instruments whose values are determined using pricing models, discounted cash flow methodologies, or similar techniques as well as instruments for which the determination of fair value requires significant management judgment or estimation.

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

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

(a) Cash and Cash Equivalents

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

(b) Investment Securities Available for Sale

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

(c) Loans Held for Sale

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

(d) Loans

To determine the fair values of loans other than those listed as nonaccrual, we use discounted cash flow analyses. In these analyses, we use discount rates that are similar to the interest rates and terms currently being offered to borrowers of similar terms and credit quality. We believe our disclosures provide fair values that are more indicative of an entry price. This technique does not contemplate an exit price. We do not record loans at fair value on a recurring basis. We record fair value adjustments to loans on a nonrecurring basis to reflect full and partial charge-offs due to impairment. For nonaccrual loans, we use a variety of techniques to measure fair value, such as using the current appraised value of the collateral, discounting the contractual cash flows, and analyzing market data that we may adjust due to the specific characteristics of the loan or collateral.

29

HAMPTON ROADS BANKSHARES, INC.

PART I. FINANCIAL INFORMATION

Item 1. Notes to Consolidated Financial Statements

(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-bearing and noninterest-bearing 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 rates currently offered for borrowings of similar remaining maturities and collateral requirements. These include other borrowings and FHLB borrowings.

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

The only amounts recorded for commitments to extend credit and standby letters of credit are the deferred fees arising from these unrecognized financial instruments. These deferred fees are not deemed significant at September 30, 2012 and December 31, 2011, and as such, the related fair values have not been estimated.

The estimated fair value (in thousands) of the Company’s financial instruments at September 30, 2012 and December 31, 2011 were as follows.

	September 30, 2012				December 31, 2011
	Carrying		Fair		Carrying		Fair
	Value		Value		Value		Value
Assets:
Cash and due from banks	$	15,316	$	15,316	$	18,241	$	18,241
Interest-bearing deposits in other banks		694		694		1,295		1,295
Overnight funds sold and due from FRB		119,242		119,242		118,531		118,531
Investment securities available for sale		293,335		293,335		284,470		284,470
Loans held for sale		60,360		60,360		63,171		63,171
Loans, net		1,362,489		1,373,943		1,429,786		1,464,121
Interest receivable		5,589		5,589		6,329		6,329
Bank-owned life insurance		52,840		52,840		51,579		51,579
Liabilities:
Deposits		1,630,943		1,683,593		1,798,034		1,769,449
FHLB borrowings		195,280		195,678		195,941		196,038
Other borrowings		40,903		41,374		40,617		40,617
Interest payable		4,590		4,590		3,751		3,751

Recurring Basis

The Company measures or monitors certain of its assets and liabilities on a fair value basis. Fair value is used on a recurring basis for those assets and liabilities that were elected as well as for certain assets and liabilities in which fair value is the primary basis of accounting. The following tables reflect the fair value (in thousands) of assets measured and recognized at fair value on a recurring basis in the consolidated balance sheets at September 30, 2012 and December 31, 2011.

30

HAMPTON ROADS BANKSHARES, INC.

PART I. FINANCIAL INFORMATION

Item 1. Notes to Consolidated Financial Statements

			Fair Value Measurements at September 30, 2012 Using
Description	Assets Measured at Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Investment securities available for sale:
U.S. agency securities	$	34,274	$	—	$	34,274	$	—
Mortgage-backed securities		255,017		—		255,017		—
State and municipal securities		631		—		631		—
Corporate bonds		2,932		—		2,932		—
Equity securities		481		247		—		234
Total investment securities available for sale		293,335		247		292,854		234
Derivative loan commitments		1,677		—		—		1,677
			Fair Value Measurements at December 31, 2011 Using
Description	Assets Measured at Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Investment securities available for sale:
U.S. agency securities	$	49,920	$	—	$	49,920	$	—
Mortgage-backed securities		229,936		—		229,936		—
State and municipal securities		608		—		608		—
Corporate bonds		2,696		—		2,696		—
Equity securities		1,310		200		—		1,110
Total investment securities available for sale		284,470		200		283,160		1,110
Derivative loan commitments		549		—		—		549

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HAMPTON ROADS BANKSHARES, INC.

PART I. FINANCIAL INFORMATION

Item 1. Notes to Consolidated Financial Statements

The following table shows a reconciliation of fair value (in thousands) by level and category for the nine months ended September 30, 2012.

	Activity in Fair Value Measurements Nine Months Ended September 30, 2012
	Investment Securities Available for Sale								Derivative Loan Commitments
Description	Level 1		Level 2			Level 3			Level 3
Balance, December 31, 2011	$	200	$	283,160		$	1,110		$	549
Unrealized gains included in:
Earnings		—		259			220			—
Other comprehensive income		47		1,877			—			—
Purchases		—		127,048			—			—
Sales		—		(54,594	)		(1,096	)		—
Issuances		—		—			—			1,128
Settlements		—		(64,896	)		—			—
Transfers in		—		—			—			—
Transfers out		—		—			—			—
Balance, September 30, 2012	$	247	$	292,854		$	234		$	1,677

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

Investment Securities Available for Sale. Where quoted prices are available in an active market, securities are classified within Level 1 of the valuation hierarchy. Level 1 securities would include highly liquid government bonds, mortgage products, and exchange traded equities. If quoted market prices are not available, then fair values are estimated by using pricing models or quoted prices of securities with similar characteristics. Level 2 securities would include U.S. agency securities, mortgage-backed securities, obligations of states and political subdivisions, and certain corporate, asset-backed, and other securities valued using third party quoted prices in markets that are not active. In certain cases where there is limited activity or less transparency around inputs to the valuation, securities are classified within Level 3 of the valuation hierarchy.

Derivative Loan Commitments. The Company enters into commitments to originate mortgage loans whereby the interest rate is fixed prior to funding. These commitments, in which the Company intends to sell in the secondary market, are considered freestanding derivatives. These are carried at fair value and are included in other assets at September 30, 2012 and December 31, 2011.

Non-recurring Basis

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

To assist in the discounting process, a valuation matrix was developed to provide valuation guidance for collateral dependent loans and foreclosed real estate where it was deemed that an existing appraisal was outdated as to current market conditions. The matrix applies discounts to external appraisals depending on the type of real estate and age of the appraisal. The discounts are generally specific point estimates; however in some cases, the matrix allows for a small range of values. The discounts were based in part upon externally derived statistical data. The discounts were

32

HAMPTON ROADS BANKSHARES, INC.

PART I. FINANCIAL INFORMATION

Item 1. Notes to Consolidated Financial Statements

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 3.85 years as of September 30, 2012. Management periodically reviews the discounts in the matrix as compared to valuations from updated appraisals and modifies the discounts accordingly should updated appraisals reflect valuations significantly different than those derived utilizing the matrix. To date, management believes the appraisal discount matrix has resulted in appropriate adjustments to existing appraisals thereby providing management with reasonable valuations for the collateral underlying the loan portfolio, however, while appraisals are indicators of fair value, the amount realized upon sale of these assets could be significantly different. The following tables represent the carrying amount (in thousands) for impaired loans at September 30, 2012 and December 31, 2011.

	Assets		Fair Value Measurements at
	Measured at		September 30, 2012 Using
Description	Fair Value		Level 1		Level 2		Level 3
Impaired loans	$	102,754	$	—	$	79,469	$	23,285
	Assets		Fair Value Measurements at
	Measured at		December 31, 2011 Using
Description	Fair Value		Level 1		Level 2		Level 3
Impaired loans	$	123,806	$	—	$	107,659	$	16,147

Our nonfinancial assets that are recognized or disclosed at fair value on a nonrecurring basis relate to foreclosed real estate and repossessed assets. The amounts below represent the carrying values (in thousands) for our foreclosed real estate and repossessed assets at September 30, 2012 and December 31, 2012.

	Assets		Fair Value Measurements at
	Measured at		September 30, 2012 Using
Description	Fair Value		Level 1		Level 2		Level 3
Foreclosed real estate and repossessed assets	$	44,061	$	—	$	44,006	$	55
	Assets		Fair Value Measurements at
	Measured at		December 31, 2011 Using
Description	Fair Value		Level 1		Level 2		Level 3
Foreclosed real estate and repossessed assets	$	63,613	$	—	$	63,613	$	—

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

33

HAMPTON ROADS BANKSHARES, INC.

PART I. FINANCIAL INFORMATION

Item 1. Notes to Consolidated Financial Statements

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

NOTE K – CONTINGENCIES

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

34

HAMPTON ROADS BANKSHARES, INC.

PART I. FINANCIAL INFORMATION

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

Forward-Looking Statements

This Form 10-Q contains “forward-looking statements” within the meaning of the U.S. Private Securities Litigation Reform Act of 1995. When or if used in this quarterly report or any Securities and Exchange Commission filings, other public or shareholder communications, or in oral statements made with the approval of an authorized executive officer, the words or phrases “anticipate,” “would be,” “will allow,” “intends to,” “will likely result,” “are expected to,” “will continue,” “is anticipated,” “is estimated,” “is projected,” or similar expressions are intended to identify “forward-looking statements.”

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

For a discussion of the risks, uncertainties, and assumptions that could affect our future events, developments, or results, you should carefully review the risk factors summarized below and the more detailed discussion in the “Risk Factors” section in our 2011 Form 10-K. Our risks include, without limitation, the following:

• We incurred significant losses in 2009, 2010, 2011, and expect to incur significant losses in 2012, although at a lower level than in the previous years. While we expect to return to profitability in 2013, we can make no assurances to that effect;

• Our capital needs could dilute your investment or otherwise affect your rights as a shareholder.

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

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

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

• An inability to maintain our regulatory capital position could adversely affect our operations;

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

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

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

• FDIC insurance assessments could increase from our prior inability to maintain a “well-capitalized” status, which will further decrease earnings;

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

• A significant amount of our loan portfolio contains loans used to finance construction and land development, and these types of loans subject our loan portfolio to a higher degree of credit risk;

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

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

35

HAMPTON ROADS BANKSHARES, INC.

PART I. FINANCIAL INFORMATION

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

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

Overview

Throughout the first nine months of 2012, economic activity in the markets in which our borrowers operate remained at historically low levels; however, the levels of loan delinquencies and rates of default continue to improve. The Company reported a net loss for the nine month period ended September 30, 2012, primarily resulting from additions to our provision for loan losses, the impact of nonaccrual loans on interest income, losses on foreclosed real estate and repossessed assets, and other expenses related to the resolution of problem loans. In light of past performance and the current economic environment, additional provisions for loan losses may be necessary to supplement the allowance for loan losses in the future. As a result, while we expect that slowly improving economic conditions will continue to reduce the rate of additional provisions for loan losses and impairments of foreclosed real estate, we may continue to incur significant credit costs, which may continue to adversely impact our financial condition and results of operations throughout 2012. As of September 30, 2012, the Company exceeded the regulatory capital minimums and BOHR and Shore were considered “well capitalized” under the risk-based capital standards.

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

The following is a summary of our financial condition as of September 30, 2012 and our financial performance for the three and nine month periods then ended.

• Assets were $2.1 billion. Total assets decreased by $95.4 million or 4% from $2.2 billion at December 31, 2011. The decrease in assets was primarily associated with an $87.8 million or 6% decrease in gross loans and a $19.6 million or 31% decrease in foreclosed real estate and repossessed assets partially offset by an $8.8 million or 3% increase in investment securities available for sale.

• Investment securities available for sale increased $8.8 million to $293.3 million during the first nine months of 2012 from $284.5 million at December 31, 2011. The increase was primarily a result of purchases of mortgage-backed securities.

• Gross loans decreased by $87.8 million or 6% during the nine months ended September 30, 2012 from $1.5 billion at December 31, 2011. The decrease in gross loans was attributed to charge-offs of nonperforming loans as well as pay downs and maturities of loans that exceeded new loans originated.

• Allowance for loan losses at September 30, 2012 decreased $20.5 million to $54.4 million from $74.9 million at December 31, 2011 as net charge-offs, primarily on credits with specific reserves, exceeded additional provisions for loan losses. Both the absolute and relative levels of non-performing loans, particularly newly identified problem credits, decreased during the nine months ended September 30, 2012.

• Deposits decreased $167.1 million or 9% from $1.8 billion at December 31, 2011 as a result of decreases of $122.8 million in time deposits under $100 thousand and $57.2 million in time deposits over $100 thousand offset by a $26.6 million increase in noninterest-bearing demand deposits. Declines in deposits resulted from the Company’s strategy of reducing interest rates in an effort to improve earnings, increasing net interest margin, and reducing excess liquidity.

36

HAMPTON ROADS BANKSHARES, INC.

PART I. FINANCIAL INFORMATION

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

• Net loss attributable to Hampton Roads Bankshares, Inc. for the three and nine months ended September 30, 2012 was $5.9 million or $0.05 per common diluted share and $19.5 million or $0.32 per common diluted share, respectively, as compared with net loss attributable to Hampton Roads Bankshares, Inc. of $26.7 million or $0.77 per common diluted share and $77.2 million or $2.28 per common diluted share for the three and nine months, respectively, ended September 30, 2011. The net loss for the nine months ended September 30, 2012 was primarily attributable to provision for loan losses expense of $14.1 million, the impact of nonaccrual loans on interest income, and losses on foreclosed real estate and repossessed assets of $14.4 million.

• Net interest income decreased $1.7 million and $5.3 million for the three and nine months, respectively, ended September 30, 2012 as compared to the same period in 2011. The decrease was due primarily to the decreases in interest-earning assets during those time periods, partially offset by a decline in our funding costs.

• Provision for loan losses for the three and nine months, respectively, ended September 30, 2012 was $2.5 million and $14.1 million, an 86% and 74% decrease over the comparable periods in 2011. The decrease was due to a reduction in newly identified problem loans and continuing declines in loans outstanding.

• Noninterest income for the three and nine months, respectively, ended September 30, 2012 was $2.2 million and $7.3 million, a 1387% and 37% increase over the comparative periods in 2011. This was largely due to increases in mortgage banking revenue offset by the loss of insurance revenue resulting from the sale of our insurance subsidiary in August 2011 and lower amounts of losses on foreclosed real estate.

• Noninterest expense was $20.4 million and $59.1 million for the three and nine months, respectively, ended September 30, 2012, which was a decrease of 15% and 26% over the comparable periods for 2011, as a result of cost saving initiatives throughout the operations of the Company, a one-time adjustment to our FDIC insurance expense that affected the first quarter of 2011, and a decrease in salaries and employee benefits.

• Our effective tax rate was 0% for the nine months ended September 30, 2012 compared to (2.88)% for the comparable period in 2011. These rates differ from the statutory rate due to the valuation allowance against the Company’s deferred tax assets.

During 2011 and the first nine months of 2012, we have been focused on reducing operating expenses. As part of these efforts, we have sold or consolidated 18 branches since December 31, 2010, reducing our branch total to 40 at September 30, 2012.

Critical Accounting Policies

GAAP is complex and requires management to apply significant judgment to various accounting, reporting, and disclosure matters. Management must use assumptions, judgments, and estimates when applying these principles where precise measurements are not possible or practical. These policies are critical because they are highly dependent upon subjective or complex judgments, assumptions, and estimates. Our judgments, assumptions, and estimates may be incorrect and changes in such judgments, assumptions, and estimates may have a significant impact on the consolidated financial statements and the accompanying footnotes. Actual results, in fact, could differ materially from those estimates. We consider our policies on allowance for loan losses, deferred income taxes, and estimates of fair value on financial instruments to be critical accounting policies. Refer to our 2011 Form 10-K for further discussion of these policies.

Material Trends and Uncertainties

Currently, the U.S. economy appears to be slowly recovering from one of its longest and most severe economic recessions in recent history. It is not clear at this time how quickly the economy will recover. In addition, the U.S. housing market continues to struggle with excess inventory (both completed houses and available lots) and the effects of home price depreciation.

37

HAMPTON ROADS BANKSHARES, INC.

PART I. FINANCIAL INFORMATION

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

We experienced a significant deterioration in credit quality throughout 2009 and 2010. Problem loans and non-performing assets rose and led to significant increases to the allowance for loan losses. During 2011 the Company had a significant reduction in newly identified problem loans and continued declines in loans outstanding due to pay downs and charge offs, and, as a result, we decreased the provision for loan losses significantly. This trend continued into the first nine months of 2012, and the Company decreased its provision for loan losses by $39.6 million during the first nine months of 2012 compared to the same period in 2011. In light of continued economic weakness, previously current borrowers have and may continue to default and real estate values have and may continue to decline; therefore, significant additional provisions for loan losses may be necessary to supplement the allowance for loan losses in the future. As a result, we may incur significant credit costs throughout the remainder of 2012, which would continue to adversely impact our financial condition, our results of operations, and the value of our Common Stock.

While we expect continued improvements in our results of operations for the remainder of 2012, we still expect a net loss for the year although a smaller loss than in previous years. We do not expect to return to profitability on an annual basis until at least 2013.

Impaired loans have decreased by $47.7 million since December 31, 2011. At September 30, 2012, the Company had $163.9 million in impaired loans and at December 31, 2011, we had $211.6 million. The majority of the decrease is from an $11.2 million decrease in impaired commercial and industrial loans and a $33.4 million decrease in impaired construction loans.

Our net interest income declined during the first nine months of 2012 compared to the same time period in 2011 as a result of a decline in the levels of earning assets and the related reduction of interest income, partially offset by declines in our funding costs. Our net interest margin increased to 3.61% for the nine months ended September 30, 2012 compared to 3.14% for the nine months ended September 30, 2011.

The Company determined that a valuation allowance on its deferred tax asset should be recognized beginning December 31, 2009. It remains uncertain whether we will realize this asset. Internal Revenue Code Section 382 (“Section 382”) limitations related to the capital raised and resulting change in control for tax purposes during the third quarter of 2010 add further uncertainty as to the realizability of the deferred tax assets in future periods. While net operating losses incurred after our 2010 change in control (for tax purposes) are not limited, we have not recognized any benefit in our consolidated financial statements due to the continued uncertainty of our ability to realize such deferred tax assets and our lack of profitability.

The value of the collateral underlying our loans has been falling due to the continued deterioration of economic conditions in the markets we serve. This decline diminishes our ability to recover on defaulted loans by selling the collateral, making it more likely that we would suffer additional losses on defaulted loans. Additionally, our decrease in asset quality and collateral value has required additions to our allowance for loan losses through increased provisions for loan losses as well as impairments of foreclosed real estate, which negatively impacts our operating results. We expect this trend to continue until economic conditions significantly improve. Further, the Company expects that losses on the sale of foreclosed real estate will continue to be elevated in the fourth quarter of 2012.

On November 2, 2010, the Company received from the DOJ a grand jury subpoena to produce information principally relating to the merger of Gateway Financial Holdings, Inc. (“GFH”) into the Company on December 31, 2008 and to loans made by GFH and its wholly-owned subsidiary, Gateway Bank & Trust Co. before GFH’s merger with the Company. The DOJ has informed the Company that it is not a target of the investigation at this time, and we are fully cooperating. Although we do not believe this matter will have a material adverse affect on the Company, we can give no assurances as to the timing or eventual outcome of this investigation.

In April 2011, the SEC informed the Company that it is conducting a formal investigation related to certain accounting matters. For a further discussion of this matter, see “Risk Factors – The formal investigation by the SEC may result in penalties, sanctions, or a restatement of our previously issued financial statements” in our 2011 Form 10-K.

On August 24, 2012, the Company announced that it completed the sale of deposits associated with the Company’s Wilmington, North Carolina branch to First Bancorp.

38

HAMPTON ROADS BANKSHARES, INC.

PART I. FINANCIAL INFORMATION

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

On September 21, 2012, the Company announced that it completed the sale of all deposits and selected assets associated with its branches in Preston Corners and Chapel Hill, North Carolina to Bank of North Carolina, a subsidiary of BNC Bancorp.

On September 27, 2012, the Company announced the closing of a public common stock rights offering (the “Rights Offering”). The Company issued 21,000,687 shares of common stock, at a price of $0.70 per share, to holders of its common stock who elected to participate in the Rights Offering. Total proceeds from the Rights Offering were $14.7 million.

In connection with the Rights Offering, the Company was a party to a Standby Purchase Agreement with the following entities or their affiliates or managed funds: The Carlyle Group, L.P. (“Carlyle”), Anchorage Capital Group, L.L.C. (“Anchorage”), and CapGen Capital Group VI LP (“CapGen” and, together with Carlyle and Anchorage, the “Investors”). The Standby Purchase Agreement provided that the Investors would purchase from the Company, at the subscription price, a portion of the shares, if any, up to an aggregate of 53,518,176 shares, not subscribed for in the Rights Offering (the “Standby Purchase”). On September 27, 2012, pursuant to the terms of the Standby Purchase Agreement, the Investors purchased a total of 43,287,161 shares of the Company’s common stock at $0.70 per share in the Standby Purchase. Anchorage purchased 16,007,143 shares, CapGen purchased 11,272,875 shares and Carlyle purchased 16,007,143 shares. Total proceeds from the Standby Purchase were $30.3 million.

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

ANALYSISOF RESULTSOF OPERATIONS

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

Net interest income for the nine months ended September 30, 2012 was $48.7 million, a decrease of $5.3 million from $54.0 million for the nine months ended September 30, 2011. The decrease in net interest income for the nine months was primarily the result of a decrease of $13.9 million in interest income from loans partially offset by the decrease in interest expense on deposits of $8.3 million for the nine months ended September 30, 2012 compared to the nine months ended September 30, 2011. Our net interest margin increased to 3.61% for the nine months ended September 30, 2012 from 3.14% during the nine months ended September 30, 2011. The increase in net interest margin from the prior period is due primarily to an overall reduction in the cost of funds and a change in the mix of interest-earning assets out of overnight funds sold and due from FRB into loans and investments.

Net interest income for the three months ended September 30, 2012 was $15.8 million, a decrease of $1.8 million from $17.6 million for the three months ended September 30, 2011. The decrease in net interest income for the three months was primarily the result of a decrease of $4.0 million in interest income from loans partially offset by the decrease in interest expense on deposits of $2.3 million for the three months ended September 30, 2012 compared to the three months ended September 30, 2011. Our net interest margin increased to 3.56% for the three months ended September 30, 2012 from 3.19% during the three months ended September 30, 2011.

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 $4.0 million and $13.9 million to $17.9 million and $56.0 million for the three and nine months, respectively, ended September 30, 2012 compared to the same periods during 2011. This decrease was predominantly a result of a $235.5 million decrease in average loan balance (excluding average nonaccrual loans) as well as the 36-basis point decrease in average yield during the nine months ended September 30, 2012 compared to the same time period during 2011. Interest income on

39

HAMPTON ROADS BANKSHARES, INC.

PART I. FINANCIAL INFORMATION

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

investment securities decreased $298 thousand and $1.4 million to $2.0 million and $6.0 million for the three and nine months, respectively, ended September 30, 2012 compared to the same periods during 2011. This decrease was due to a $28.8 million decrease in average investment securities as well as a 33-basis point decrease in average yield during the nine months ended September 30, 2012 compared to the same time period during 2011. Interest income on overnight funds sold and due from FRB decreased $177 thousand and $445 thousand for the three and nine months, respectively, ended September 30, 2012 compared to the same periods during 2011. The decrease for the nine months ended September 30, 2012 was largely due to the $235.1 million decrease in average overnight funds sold and due from FRB and a 2-basis point decrease in the average interest yield on overnight funds sold and due from FRB.

Our interest-bearing liabilities consist of deposit accounts and borrowings. Interest expense on deposits decreased $2.3 million and $8.3 million to $2.9 million and $9.9 million for the three and nine months, respectively, ended September 30, 2012 compared to the same periods during 2011. This decrease resulted from a $493.5 million decrease in average interest-bearing deposits and a 34-basis point decrease in the average interest rate paid on interest-bearing deposits for the nine months ended September 30, 2012 compared to the nine months ended September 30, 2011. A reduction in the average rate paid on interest-bearing demand deposits to 0.41% and 0.38% for the first three and nine months, respectively, of 2012 from 0.54% and 0.63% for the first three and nine months, respectively, of 2011 as well as the reduction of the average rate paid on time deposits to 1.16% and 1.25% for the first three and nine months, respectively, of 2012 from 1.45% and 1.58% for the first three and nine months, respectively, of 2011 contributed significantly toward the decrease in overall deposit rates. Our average rate on savings deposits decreased from 0.17% and 0.21% during the three and nine months, respectively, ended September 30, 2011 to 0.12% and 0.13% during the three and nine months, respectively, ended September 30, 2012. Interest expense on borrowings, which consisted of FHLB borrowings and other borrowings, decreased $469 thousand and $2.1 million to $1.2 million and $3.6 million for the three and nine months, respectively, ended September 30, 2012 compared to the same periods during 2011. The 100-basis point decrease in the nine month average interest rate paid on borrowings and the $17.0 million decrease in the nine month average borrowings produced this result. To promote liquidity and enhance current earnings by way of reduction in interest expense and after a review of the Company’s current level of assumed interest rate risk, during the third quarter of 2011, the Company modified certain advances with the FHLB. A majority of the Company’s existing fixed-rate advances were restructured as floating rate obligations at a fixed spread to three month LIBOR with maturities ranging from 2.75 to 4 years.

40

HAMPTON ROADS BANKSHARES, INC.

PART I. FINANCIAL INFORMATION

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

The table below represents the average interest-earning assets and average interest-bearing liabilities (in thousands), the average yields earned on such assets and rates paid on such liabilities, the net interest margin, and the variance in interest income and expense caused by differences in average balances and rates for the three and nine months ended September 30, 2012 and 2011.

	Three Months Ended							Three Months Ended
	September 30, 2012							September 30, 2011							2012 Compared to 2011
															Interest
			Interest		Average					Interest		Average			Income/			Variance
	Average		Income/		Yield/			Average		Income/		Yield/			Expense			Attributable to
	Balance		Expense		Rate			Balance		Expense		Rate			Variance			Rate			Volume
Assets:
Interest-earning assets
Loans	$	1,361,612	$	17,904		5.22	%	$	1,512,513	$	21,945		5.76	%	$	(4,041	)	$	(1,958	)	$	(2,083	)
Investment securities		322,306		1,986		2.44	%		311,067		2,284		2.91	%		(298	)		(778	)		480
Overnight funds sold and due from FRB		85,853		43		0.20	%		357,585		220		0.24	%		(177	)		(33	)		(144	)
Interest-bearing deposits in other banks		793		—		0.23	%		3,793		—		0.08	%		—			3			(3	)
Total interest-earning assets		1,770,564		19,933		4.47	%		2,184,958		24,449		4.44	%		(4,516	)		(2,766	)		(1,750	)
Noninterest-earning assets		283,816							346,692
Total assets	$	2,054,380						$	2,531,650
Liabilities and Shareholders’ Equity:
Interest-bearing liabilities
Interest-bearing demand deposits	$	534,234	$	549		0.41	%	$	602,591	$	826		0.54	%	$	(277	)	$	(189	)	$	(88	)
Savings deposits		61,056		19		0.12	%		65,461		28		0.17	%		(9	)		(7	)		(2	)
Time deposits		807,792		2,355		1.16	%		1,202,121		4,401		1.45	%		(2,046	)		(775	)		(1,271	)
Total interest-bearing deposits		1,403,082		2,923		0.83	%		1,870,173		5,255		1.11	%		(2,332	)		(971	)		(1,361	)
Borrowings		236,238		1,173		1.97	%		242,241		1,642		2.69	%		(469	)		(429	)		(40	)
Total interest-bearing liabilities		1,639,320		4,096		0.99	%		2,112,414		6,897		1.30	%		(2,801	)		(1,400	)		(1,401	)
Noninterest-bearing liabilities
Demand deposits		248,890							238,052
Other liabilities		17,151							23,340
Total noninterest-bearing liabilities		266,041							261,392
Total liabilities		1,905,361							2,373,806
Shareholders’ equity		149,019							157,844
Total liabilities and shareholders’ equity	$	2,054,380						$	2,531,650
Net interest income			$	15,837						$	17,552
Net interest spread						3.48	%						3.14	%
Net interest margin						3.56	%						3.19	%

Note: Interest income from loans included fees of $229 thousand at September 30, 2012 and $150 thousand at September 30, 2011. Average nonaccrual loans of $113.5 million and $178.6 million are excluded from average loans at September 30, 2012 and 2011, respectively. The change in interest due to both rate and volume has been allocated to variance attributable to rate and variance attributable to volume in proportion to the relationship for the absolute amount of change in each.

41

HAMPTON ROADS BANKSHARES, INC.

PART I. FINANCIAL INFORMATION

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

	Nine Months Ended							Nine Months Ended
	September 30, 2012							September 30, 2011							2012 Compared to 2011
															Interest
			Interest		Average					Interest		Average			Income/			Variance
	Average		Income/		Yield/			Average		Income/		Yield/			Expense			Attributable to
	Balance		Expense		Rate			Balance		Expense		Rate			Variance			Rate			Volume
Assets:
Interest-earning assets
Loans	$	1,367,989	$	56,026		5.47	%	$	1,603,518	$	69,898		5.83	%	$	(13,872	)	$	(4,106	)	$	(9,766	)
Investment securities		318,853		5,992		2.51	%		347,613		7,381		2.84	%		(1,389	)		(811	)		(578	)
Overnight funds sold and due from FRB		113,574		189		0.22	%		348,638		634		0.24	%		(445	)		(49	)		(396	)
Interest-bearing deposits in other banks		912		1		0.20	%		2,635		2		0.12	%		(1	)		1			(2	)
Total interest-earning assets		1,801,328		62,208		4.61	%		2,302,404		77,915		4.52	%		(15,707	)		(4,965	)		(10,742	)
Noninterest-earning assets		298,688							352,293
Total assets	$	2,100,016						$	2,654,697
Liabilities and Shareholders’ Equity:
Interest-bearing liabilities
Interest-bearing demand deposits	$	532,617	$	1,499		0.38	%	$	637,544	$	2,991		0.63	%	$	(1,492	)	$	(1,055	)	$	(437	)
Savings deposits		61,992		61		0.13	%		66,232		104		0.21	%		(43	)		(37	)		(6	)
Time deposits		893,632		8,355		1.25	%		1,277,921		15,107		1.58	%		(6,752	)		(2,767	)		(3,985	)
Total interest-bearing deposits		1,488,241		9,915		0.89	%		1,981,697		18,202		1.23	%		(8,287	)		(3,859	)		(4,428	)
Borrowings		236,371		3,558		2.01	%		253,419		5,702		3.01	%		(2,144	)		(1,783	)		(361	)
Total interest-bearing liabilities		1,724,612		13,473		1.04	%		2,235,116		23,904		1.43	%		(10,431	)		(5,642	)		(4,789	)
Noninterest-bearing liabilities
Demand deposits		234,191							230,474
Other liabilities		18,514							23,090
Total noninterest-bearing liabilities		252,705							253,564
Total liabilities		1,977,317							2,488,680
Shareholders’ equity		122,699							166,017
Total liabilities and shareholders’ equity	$	2,100,016						$	2,654,697
Net interest income			$	48,735						$	54,011
Net interest spread						3.57	%						3.09	%
Net interest margin						3.61	%						3.14	%

Note: Interest income from loans included fees of $666 thousand at September 30, 2012 and $627 thousand at September 30, 2011. Average nonaccrual loans of $127.5 million and $197.0 million are excluded from average loans at September 30, 2012 and 2011, respectively. The change in interest due to both rate and volume has been allocated to variance attributable to rate and variance attributable to volume in proportion to the relationship for the absolute amount of change in each.

Noninterest Income.For the quarter ended September 30, 2012, total noninterest income was $2.2 million, an increase of $2.4 million as compared to negative $171 thousand for the third quarter of 2011. For the nine months ended September 30, 2012, we reported total noninterest income of $7.3 million, a $2.0 million or 37% increase over $5.3 million for the comparative period of 2011. Noninterest income comprised 13% and 10% of total revenue for the first nine months of 2012 and 2011, respectively.

42

HAMPTON ROADS BANKSHARES, INC.

PART I. FINANCIAL INFORMATION

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

The following table provides a summary of noninterest income (in thousands) for the three and nine months ended September 30, 2012 and 2011.

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2012			2011			2012			2011
Service charges on deposit accounts	$	1,276		$	1,483		$	3,883		$	4,458
Mortgage banking revenue		5,186			2,734			12,299			5,923
Gain on sale of investment securities		218			1,222			479			1,414
Gain (loss) on sale of premises and equipment		—			12			(47	)		(30	)
Losses on foreclosed real estate and repossessed assets		(6,445	)		(8,843	)		(14,357	)		(15,612	)
Other-than-temporary impairment of securities		—			(218	)		—			(309	)
Insurance revenue		—			395			—			2,656
Brokerage revenue		33			76			147			212
Income from bank-owned life insurance		399			524			1,261			1,442
Gain on sale of insurance company		—			1,251			—			1,251
Visa check card income		624			571			1,782			1,694
ATM surcharge and network fees		121			202			448			616
Rental income		118			166			307			593
Other		670			254			1,099			1,029
Total noninterest income (loss)	$	2,200		$	(171	)	$	7,301		$	5,337

Service charges on deposit accounts decreased $207 thousand and $575 thousand to $1.3 million and $3.9 million for the three and nine months, respectively, ended September 30, 2012 compared to $1.5 million and $4.5 million for the same periods in 2011 due to reduced overdraft activity. Mortgage banking revenue increased to $5.2 million and $12.3 million in the three and nine month periods, respectively, ended September 30, 2012 compared to $2.7 million and $5.9 million in the prior year periods due to a 42% increase in origination activity. The deteriorating economy and continued declines in certain real estate values caused losses on foreclosed real estate and repossessed assets of $6.4 million and $14.4 million during the three and nine months, respectively, ended September 30, 2012. During the same periods in 2011, losses on foreclosed real estate and repossessed assets were $8.8 million and $15.6 million. In August 2011 we sold our insurance subsidiary and, accordingly, recorded no insurance revenue for the three and nine month periods ended September 30, 2012; we recorded $395 thousand and $2.7 million of insurance revenue for the three and nine month periods, respectively, ended September 30, 2011. Additionally, we had revenue from our brokerage subsidiary of $33 thousand and $147 thousand for the three and nine months, respectively, ended September 30, 2012 compared to $76 thousand and $212 thousand for comparative 2011.

Noninterest Expense.Noninterest expense represents our operating and overhead expenses.Total noninterest expense decreased $3.7 million and $21.2 million or 15% and 26% for the three and nine months, respectively, ended September 30, 2012 compared to $24.1 million and $80.3 million for the three and nine months, respectively, ended September 30, 2011. This decrease was partially attributed to a $5.1 million decrease in salaries and employee benefits and a $6.3 million decrease in FDIC insurance during the first nine months of 2012. The efficiency ratio, calculated by dividing noninterest expense by the sum of net interest income and noninterest income excluding securities gains was 114% and 106% for the first three and nine months of 2012 compared to 149% and 139% for the first three and nine months, respectively, of 2011.

43

HAMPTON ROADS BANKSHARES, INC.

PART I. FINANCIAL INFORMATION

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

The following table provides a summary of total noninterest expense (in thousands) for the three and nine months ended September 30, 2012 and 2011.

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2012		2011		2012		2011
Salaries and employee benefits	$	10,117	$	10,429	$	28,973	$	34,041
Occupancy		1,928		2,287		5,483		7,549
Professional and consultant fees		1,514		2,670		4,852		7,441
Problem loan and repossessed asset costs		1,245		1,612		2,761		4,164
FDIC insurance		1,129		1,291		3,530		9,856
Data processing		970		1,283		2,986		3,489
Equipment		667		931		2,101		2,580
Other		2,824		3,583		8,386		11,161
Total noninterest expense	$	20,394	$	24,086	$	59,072	$	80,281

Salaries and employee benefits expense in the three and nine months, respectively, ended September 30, 2012 decreased $312 thousand and $5.1 million to $10.1 million and $28.9 million compared to $10.4 million and $34.0 million for the same periods in 2011 as a direct result of a reduction in personnel. Occupancy expense decreased $359 thousand and $2.1 million for the first three and nine months of 2012 compared to the same periods in 2011 due to the closure and sale of select branches during 2012. Professional and consultant fees were $1.5 million and $4.9 million for the three and nine months, respectively, ended September 30, 2012 compared to $2.7 million and $7.4 million for comparative 2011; these fees decreased primarily due to lower legal fees associated with loan collection activities and a reduction in the Company’s use of third party consultants. Problem loan and repossessed asset costs decreased $367 thousand and $1.4 million to $1.2 million and $2.8 million for the three and nine months, respectively, ended September 30, 2012 compared to the same periods during 2011 due to the shrinking portfolio of foreclosed assets. FDIC insurance was $1.1 million and $3.5 million for the three and nine months, respectively, ended September 30, 2012 as compared with $1.3 million and $9.9 million for the same period in 2011; the first quarter of 2011 included a one-time adjustment to FDIC insurance assessment expense of $5.4 million. Data processing expense decreased $313 thousand and $503 thousand for the three and nine months ended September 30, 2012 over the $1.3 million and $3.5 million for the three and nine months ended September 30, 2011 due to renegotiations on certain data processing contracts. For the three and nine months, respectively, ended September 30, 2012, equipment expense was $667 thousand and $2.1 million compared to $931 thousand and $2.6 million for the same periods in 2011.

Income Tax Provision.The Company had no income tax expense for the first nine months of 2012 compared to an income tax expense of $2.2 million for comparative period 2011. The 2011 expense is a result of the additional valuation allowance required after the sale of the insurance subsidiary and the decrease in the related deferred tax liability associated with the intangible book of business. Management assesses the realizability of the deferred tax asset on a quarterly basis, considering both positive and negative evidence in determining whether it is more likely than not that some portion or all of the net deferred tax asset including its net operating loss carryforward would not be realized. A valuation allowance for the entire net deferred tax asset has been established. Section 382 limitations related to the Company’s recapitalization during the quarter ended September 30, 2010 add further uncertainty as to the realizability of the deferred tax assets in future periods.

ANALYSISOF FINANCIAL CONDITION

Cash and Cash Equivalents.Cash and cash equivalents includes cash and due from banks, interest-bearing deposits in other banks, and overnight funds sold and due from FRB. Cash and cash equivalents are used for daily cash management purposes, management of short-term interest rate opportunities, and liquidity. Cash and cash equivalents as of September 30, 2012 were $135.3 million compared to $138.1 million at December 31, 2011 and consisted mainly of deposits with the FRB. Because the Company had raised significant deposits in prior years and additional capital through the issuance of Common Stock as well as loan demand being weak, it is in a highly liquid position. In the future, the Company expects to utilize its cash on hand to support loan origination activity.

44

HAMPTON ROADS BANKSHARES, INC.

PART I. FINANCIAL INFORMATION

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

Securities.Our investment portfolio at September 30, 2012 consisted primarily of available-for-sale U.S. agency and mortgage-backed securities. Our available-for-sale securities are reported at estimated fair value. They are used primarily for liquidity, earnings, and asset/liability management purposes and are reviewed quarterly for possible impairment. At September 30, 2012, the estimated fair value of our available-for-sale investment securities was $293.3 million, an increase of $8.8 million or 3% from $284.5 million at December 31, 2011. The increase was primarily the result of an increase in purchases of mortgage-backed securities.

Loan Portfolio. As a holding company of two community banks, we have a primary objective of meeting the business and consumer credit needs within our markets where standards of profitability, client relationships, and credit quality can be met. Our loan portfolio is comprised of commercial and industrial, construction, real estate-commercial mortgage, real estate-residential mortgage, and installment loans. Lending decisions are based upon an evaluation of the repayment 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 $87.8 million or 6% to $1.4 billion as of September 30, 2012. Commercial and industrial loans decreased 3% to $247.1 million at September 30, 2012 compared with $256.1 million at December 31, 2011. Construction loans decreased 18% to $233.2 million at September 30, 2012 as compared to $285.0 million at December 31, 2011, thus lowering the concentration of construction loans to 16% of the total loan portfolio at September 30, 2012 compared with 19% at December 31, 2011. Real estate commercial mortgages increased 2% to $532.9 million at September 30, 2012 compared to $522.1 million at December 31, 2011. Real estate residential mortgages decreased 9% to $379.6 million at September 30, 2012 as compared with $415.0 million at December 31, 2011. Installment loans decreased 8% to $24.3 million at September 30, 2012 compared with $26.5 million at December 31, 2011. The contraction seen in the overall loan portfolio stems from the write-off and resolution of problem credits and payments in excess of new loan growth partially offset by new loan demand from credit-worthy borrowers that continues to remain at relatively low levels. Our continued focus will be on managing the entire loan portfolio through the current challenging economic conditions. Additionally, our prudent business practices and internal guidelines and underwriting standards will continue to be followed in making lending decisions in order to manage exposure to loan losses.

Allowance for Loan Losses.The purpose of the allowance for loan losses is to provide for probable and reasonably estimable losses inherent in our loan portfolio. Management regularly reviews the loan portfolio to determine whether adjustments are necessary to maintain an allowance for loan losses sufficient to absorb losses in the portfolio. Our review takes into consideration changes in the nature and volume of the loan portfolio, overall portfolio quality, review of specific problem loans, and review of current economic conditions that may affect the borrower’s ability to repay. Some of the tools used in the credit review process to identify potential problem loans include past due reports, collateral valuations, cash flow analyses of borrowers, and risk rating of loans. 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 analysis includes specific allowances for individual loans, general allowance for loan pools that factor in our historical loan loss experience, loan portfolio growth and trends, economic conditions, and unallocated allowances predicated upon both internal and external factors.

The allowance for loan losses was $54.4 million or 3.84% of outstanding loans as of September 30, 2012 compared with $74.9 million or 4.98% of outstanding loans as of December 31, 2011. Pooled loan allocations decreased to $28.1 million at September 30, 2012 from $44.0 million at December 31, 2011 primarily due to decreases in the size of the overall loan portfolio. The general component of the allowance is based on several factors, including historical loan loss experience in accordance with our existing charge-off policy as well as economic and other qualitative considerations. Historical loss rates are based on a three-year weighted average with recent period loss rates weighted more heavily. An adjustment is then applied to each loss rate based on assessments of loss trends, collateral values, and economic and business influences impacting expected losses. Specific loan allocations decreased to $19.8 million at September 30, 2012 from $25.7 million at December 31, 2011, primarily due to decreased charge-offs and a slowing rate of additional loan defaults. Unallocated allowances increased to $6.6 million at September 30, 2012 from $5.3 million at December 31, 2011. The following table provides a breakdown of the allowance for loan losses and other related information (in thousands) at September 30, 2012 and December 31, 2011.

45

HAMPTON ROADS BANKSHARES, INC.

PART I. FINANCIAL INFORMATION

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

	September 30, 2012			December 31, 2011
Allowance for loan losses:
Pooled component	$	28,091		$	43,956
Specific component		19,780			25,703
Unallocated component		6,573			5,288
Total	$	54,444		$	74,947
Impaired loans	$	163,887		$	211,633
Non-impaired loans		1,253,046			1,293,100
Total loans	$	1,416,933		$	1,504,733
Pooled component as % of non-impaired loans		2.24	%		3.40	%
Specific component as % of impaired loans		12.07	%		12.15	%
Allowance as % of loans		3.84	%		4.98	%
Allowance as % of nonaccrual loans		47.30	%		56.28	%

Notwithstanding these allocations, the entire allowance for loan losses is available to absorb charge-offs in any loan category. Net charge-offs were $34.6 million for the nine months ended September 30, 2012 as compared with $127.9 million for the nine months ended September 30, 2011. Net charge-offs in the construction category account for $6.7 million or 19% of these net charge-offs in 2012 and $84.2 million or 66% in 2011. Construction loans, particularly land acquisition and development loans, tend to be riskier than other categories, and we have been steadily decreasing our exposure to this type of loan. Net commercial and industrial charge-offs were $14.5 million with two loans comprising approximately $8.9 million of the total. Net charge-offs $6.3 million for commercial mortgage, $6.9 million for residential mortgage, and $254 thousand for installment loans for the nine months ended September 30, 2012.

46

HAMPTON ROADS BANKSHARES, INC.

PART I. FINANCIAL INFORMATION

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

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 fair value 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. Therefore, the following ratios are used by management in assessing the adequacy of the allowance for loan losses at September 30, 2012 and December 31, 2011.

	September 30, 2012			December 31, 2011
Non-performing loans for which full loss has been charged off to total loans		3.70	%		3.51	%
Non-performing loans for which full loss has been charged off to non-performing loans		45.55	%		39.71	%
Charge off rate for non-performing loans for which the full loss has been charged off		50.93	%		60.38	%
Coverage ratio net of non-performing loans for which the full loss has been charged off		86.87	%		93.35	%
Total allowance divided by total loans less non-performing loans for which the full loss has been charged off		3.99	%		5.16	%
Allowance for individually impaired loans divided by impaired loans for which an allowance has been provided		28.21	%		26.60	%

There was a decrease in the coverage ratio net of non-performing loans for which the full loss has been charged off to 86.87% at September 30, 2012 from 93.35% at December 31, 2011 due to the $20.5 million decrease in the allowance for loan losses as well as the $18.2 million decrease in non-performing loans. The decrease in the coverage ratio is the result of the more rapid decline in the overall allowance for loan losses than the decline in non-performing loans since year end 2011. The reduction in the allowance for loan losses is the result of declining historical losses over the last three years that have acted to steadily reduce the general reserve component of the consolidated allowance and an overall decrease in the size of the loan portfolio.

At September 30, 2012, management believed the level of the allowance for loan losses to be commensurate with the risk existing in our loan portfolio. However, the allowance is subject to regulatory examinations and determination as to adequacy, which may take into account such factors as the methodology used to calculate the allowance and the size of the allowance in comparison to peer banks identified by regulatory agencies. Such agencies may require us to recognize additions to the allowance for loan losses based on their judgments about information available at the time of the examinations.

Deposits.Deposits are the primary source of funds for use in lending and general business purposes. Our balance sheet growth is largely determined by the availability of deposits in our markets and the prospects of profitably utilizing the available deposits by increasing the loan or investment portfolios. Total deposits at September 30, 2012 were $1.6 billion, a decrease of 9% from $1.8 billion at December 31, 2011. This decrease is a result of declines in brokered deposits and the Company’s decision to consolidate or sell a number of bank branches as a way to reduce operating expenses and improve efficiency. Changes in the deposit categories include an increase of $26.6 million in noninterest-bearing demand deposits, a decrease of $13.0 million in interest-bearing demand deposits, and a decrease of $608 thousand in savings accounts from December 31, 2011 to September 30, 2012. Total time deposits under $100 thousand decreased $122.8 million to $402.5 million at September 30, 2012 from $525.3 million at December 31, 2011.

47

HAMPTON ROADS BANKSHARES, INC.

PART I. FINANCIAL INFORMATION

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

Time deposits over $100 thousand decreased $57.2 million to $388.6 million at September 30, 2012 from $445.8 million at December 31, 2011. The changes in time deposits was primarily due to lower rates offered on certificates of deposit resulting in run-off as maturity dates were reached, particularly in the national market time deposit portfolio.

Total brokered deposits were $52.2 million or 3% of deposits at September 30, 2012, which was a decrease of $45.3 million from the total brokered deposits of $97.5 million at December 31, 2011. During the first six months of 2012, BOHR did not qualify as “well capitalized” and was, therefore, restricted from accepting new brokered deposits. While BOHR qualifies as “well capitalized” at September 30, 2012 and is no longer completely restricted from accepting new brokered deposits, according to the Written Agreement, it may only accept new brokered deposits up to the level maintained at the time the Written Agreement was entered into. Interest-bearing demand deposits included $9.5 million brokered money market funds at September 30, 2012, which was $5.7 million lower than the $15.2 million balance of brokered money market funds outstanding at December 31, 2011. Brokered CDs represented $42.7 million, which was a decrease of $39.6 million from the $82.3 million of brokered CDs outstanding at December 31, 2011.

The Company continues to focus on core deposit growth as its primary source of funding. Core deposits typically are non-brokered and consist of noninterest-bearing demand accounts, interest-bearing checking accounts, money market accounts, savings accounts, and time deposits of less than $100 thousand. Core deposits totaled $1.2 billion or 73% of total deposits at September 30, 2012 and $1.3 billion or 70% at December 31, 2011.

Borrowings. We use short-term and long-term borrowings from various sources including the FHLB, reverse repurchase agreements, and trust preferred securities. We manage the level of our borrowings to ensure that we have adequate sources of liquidity. Our FHLB borrowings on September 30, 2012 were $195.3 million compared to $195.9 million at December 31, 2011.

Liquidity Management. Liquidity represents an institution’s ability to meet present and future financial obligations through either the sale or maturity of existing assets or the acquisition of additional funds through liability management. It is used by management to provide continuous access to sufficient, reasonably priced funds. Funding requirements are impacted by loan originations and refinancing, deposit growth, liability issuances and settlements, and off-balance sheet funding commitments. We consider and comply with various regulatory guidelines regarding required liquidity levels and periodically monitor our liquidity position in light of the changing economic environment and customer activity. Based on periodic liquidity assessments, we may alter our asset, liability, and off-balance sheet positions. The asset/liability committee monitors sources and uses of funds and modifies asset and liability positions as liquidity requirements change. This process, combined with our ability to raise funds in money and capital markets and through private placements, provides flexibility in managing the exposure to liquidity risk.

In an effort to satisfy our liquidity needs, we actively manage our assets and liabilities. We have immediate liquid resources in cash, interest-bearing deposits, and overnight funds sold. The potential sources of short-term liquidity include interest-bearing deposits as well as the ability to pledge or sell certain assets including available-for-sale investment securities. Short-term liquidity is further enhanced by our ability to pledge or sell loans in the secondary market and to secure borrowings from the FRB and FHLB. Short-term liquidity is also generated from securities sold under agreements to repurchase, funds purchased, and short-term borrowings. Deposits have historically provided us with a long-term source of stable and relatively lower cost funding. Additional funding may be available through the issuance of long-term debt.

We continued to maintain a strong liquidity position during the first nine months of 2012. Cash and cash equivalents were $135.3 million and available-for-sale investment securities were $293.3 million as of September 30, 2012. At September 30, 2012, our Banks had credit lines in the amount of $221.5 million at the FHLB with advances of $195.3 million currently utilized. At December 31, 2011, our Banks had credit lines in the amount of $228.3 million at the FHLB with advances of $195.9 million utilized. These lines may be utilized for short- and/or long-term borrowing. At September 30, 2012 and December 31, 2011, all our FHLB borrowings were long-term. We also possess additional sources of liquidity through a variety of borrowing arrangements. The Banks maintain federal funds lines with one regional banking institution and through the FRB Discount Window. These available lines totaled approximately $37.0 million and $58.1 million at September 30, 2012 and December 31, 2011, respectively; these lines were not utilized for borrowing purposes.

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PART I. FINANCIAL INFORMATION

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

Capital Resources.Total shareholders’ equity increased $74.3 million or 65% to $188.0 million at September 30, 2012 compared to $113.7 million at December 31, 2011.This increase in shareholders’ equity was primarily a result of the Capital Raise offset by net losses through the first nine months of the year.

The Company and the Banks are subject to regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can cause certain mandatory and discretionary actions by regulators that, if undertaken, could have a material effect on our consolidated financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the Bank must meet specific capital guidelines that involve quantitative and qualitative measures. These measures were established by regulation to ensure capital adequacy. Tier I capital is comprised of shareholders’ equity, net of unrealized gains or losses on available-for-sale securities, less intangible assets, while total risk-based capital adds certain debt instruments and qualifying allowances for loan losses. As of September 30, 2012, our consolidated regulatory capital ratios are Tier 1 Leverage Ratio of 10.07%, Tier 1 Risk-Based Capital Ratio of 12.88%, and Total Risk-Based Capital Ratio of 14.16%. As of September 30, 2012, the Company exceeded the regulatory capital minimums, and BOHR and Shore were considered “well capitalized” under the risk-based capital standards. Their Tier 1 Leverage Ratio, Tier 1 Risk-Based Capital Ratio, and Total Risk-Based Capital Ratio were as follows: 8.37%, 10.48%, and 11.76%, respectively, for BOHR and 9.97%, 14.93%, and 16.04%, respectively, for Shore.

On September 27, 2012, the Company closed on the remaining two components of its $95.0 million Capital Raise: the Rights Offering and the Standby Purchase of shares not purchased in the Rights Offering. The Company previously closed the first component of the Capital Raise on June 27, 2012, the Private Placement. The Capital Raise resulted in $95.0 million in gross proceeds for which the Company issued, in the aggregate, 135,717,307 shares of Common Stock at a price of $0.70 per share.

The Capital Raise resulted in an adjustment to the warrant to purchase Common Stock currently held by the Treasury. The Treasury holds a Treasury Warrant that, before the Capital Raise, entitled it to purchase 53,034 shares of Common Stock at an exercise price of $10.00 per share. Because the Capital Raise was not excluded from the operation of the anti-dilution provisions of the Treasury Warrant, as a result of the Capital Raise, the number of shares purchasable under the Treasury Warrant were adjusted to 757,643 shares of our Common Stock and the exercise price to purchase such shares was adjusted to $0.70 per share.

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.

	Carrying Amount (in thousands)		Par Amount (in thousands)		Interest Rate			Redeemable On Or After	Mandatory Redemption
Gateway Capital Statutory Trust I	$	5,397	$	8,000		LIBOR + 3.10	%	September 17, 2008	September 17, 2033
Gateway Capital Statutory Trust II		4,430		7,000		LIBOR + 2.65	%	July 17, 2009	June 17, 2034
Gateway Capital Statutory Trust III		7,882		15,000		LIBOR + 1.50	%	May 30, 2011	May 30, 2036
Gateway Capital Statutory Trust IV		13,106		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 $3.8 million at September 30, 2012. 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.

Contractual Obligations.We have contractual obligations to make future payments on debt and lease agreements. Additionally, in the normal course of business, we enter into contractual arrangements whereby we commit to future

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PART I. FINANCIAL INFORMATION

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

purchases of products and services from unaffiliated parties. Our contractual obligations consist of time deposits, borrowings, and operating lease obligations. There have not been any material changes in our contractual obligations from those disclosed in the 2011 Form 10-K.

Off-Balance Sheet Arrangements. We are a party to financial instruments with off-balance sheet risk in the normal course of business to meet our customers’ financing needs. For more information on our off-balance sheet arrangements, see Note 14,Financial Instruments with Off-Balance-Sheet Risk, of the Notes to the Consolidated Financial Statements contained in the 2011 Form 10-K.

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PART I. FINANCIAL INFORMATION

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

USEOF NON-GAAP FINANCIAL MEASURES

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

	September 30, 2012			December 31, 2011
Shareholders’ equity	$	187,960		$	113,668
Less: intangible assets		2,745			3,751
Shareholders’ equity - tangible	$	185,215		$	109,917
Common shareholders’ equity	$	187,960		$	113,668
Less: intangible assets		2,745			3,751
Common shareholders’ equity - tangible	$	185,215		$	109,917
Shareholders’ equity (average)	$	122,699		$	157,408
Less: intangible assets (average)		3,234			8,137
Shareholders’ equity - tangible (average)	$	119,465		$	149,271
Common shareholders’ equity (average)	$	122,699		$	157,408
Less: intangible assets (average)		3,234			8,137
Common shareholders’ equity - tangible (average)	$	119,465		$	149,271
Return on average common equity		(21.22	%)		(62.65	%)
Impact of excluding intangible assets		(0.58	%)		(3.41	%)
Return on average common equity - tangible		(21.80	%)		(66.06	%)
Book value per common share	$	1.10		$	3.29
Impact of excluding intangible assets		(0.01	)		(0.11	)
Book value per common share - tangible	$	1.09		$	3.18

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PART I. FINANCIAL INFORMATION

Item 3. Quantitative and Qualitative Disclosures About Market Risk

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

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

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

The expected effect on net interest income for the twelve months following September 30, 2012 and December 31, 2011 due to an immediate change in interest rates is shown below. These estimates are dependent on material assumptions, such as those previously discussed.

	September 30, 2012						December 31, 2011
(in thousands)	Change in Net Interest Income						Change in Net Interest Income
	Amount			%			Amount			%
Change in Interest Rates:
+200 basis points	$	1,364			2.19	%	$	(2,074	)		(2.95	)%
+100 basis points		666			1.07	%		(1,118	)		(1.59	)%
-100 basis points		(1,477	)		(2.37	)%		(762	)		(1.08	)%
-200 basis points		N/A			N/A			N/A			N/A

At September 30, 2012, we projected a decrease in net interest income in a decreasing interest rate environment and an increase in net interest income in increasing rate environments. At December 31, 2011, we projected a decrease in net interest income in both increasing and decreasing interest rate environments with a more profound effect occurring during a period of increasing 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.

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PART I. FINANCIAL INFORMATION

Item 4. Controls and Procedures

As of September 30, 2012, the Company’s management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the Company’s disclosure controls and procedures as of the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures as of the end of the period covered by this report were designed and functioning effectively to provide assurance that the information required to be disclosed by the Company in reports filed under the Securities Exchange Act of 1934, as amended, is (i) recorded, processed, summarized, and reported within the time periods specified in the 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.

In addition, no change in its internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) occurred during the nine months ended September 30, 2012 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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PART II. OTHER INFORMATION

ITEM 1 – LEGAL PROCEEDINGS

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

In April 2011, the Securities and Exchange Commission informed the Company that it is conducting a formal investigation related to certain accounting matters. For a further discussion of this matter, see “Risk Factors – The formal investigation by the Securities and Exchange Commission may harm our business.”

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

ITEM 1A – RISK FACTORS

For information regarding factors that could affect the Company’s results of operations, financial condition, or liquidity, see the risk factors discussed in the Company’s 2011 Form 10-K. Except as and to the extent disclosed below, there have been no material changes to the risk factors as previously disclosed in the 2011 Form 10-K.

Risks Related to our Business

We incurred significant losses in 2009, 2010, 2011, and expect to incur significant losses in 2012, although at a lower level than in the previous years. While we expect to return to profitability in 2013, we can make no assurances to that effect.

Throughout 2009, 2010, 2011, and in the first nine months of 2012, our loan customers continued to operate in an economically stressed environment. Economic conditions in the markets in which we operate remain constrained and the levels of loan delinquencies and defaults that we experienced were substantially higher than historical levels and our net interest income did not grow significantly.

As a result, our net loss attributable to Hampton Roads Bankshares, Inc. for the nine months ended September 30, 2012 was $19.5 million or $0.32 per common diluted share compared to our net loss attributable to Hampton Roads Bankshares, Inc. for the nine months ended September 30, 2011 of $77.2 million or $2.28 per common diluted share. The net loss for the nine months ended September 30, 2012 was primarily attributable to a significant provision for loan losses, the impact of nonaccrual loans on interest income, and losses on foreclosed real estate and repossessed assets. Our net interest income decreased $5.3 million for the nine months ended September 30, 2012 as compared to the same period in 2011. This trend may continue for the remainder of 2012 and could adversely impact our ability to become profitable. In light of the current economic environment, significant additional provisions for loan losses also may be necessary to supplement the allowance for loan losses in the future. As a result, we may continue to incur significant credit costs and net losses for the remainder of 2012, which would continue to adversely impact our financial condition, results of operations, and the value of our Common Stock. We expect to incur a net loss for the 2012 year taken as a whole, and we can make no assurances as to when we will be profitable. Additional losses could cause us to incur future net losses and could adversely affect the price of, and market for, our Common Stock.

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PART II. OTHER INFORMATION

Our capital needs could dilute your investment or otherwise affect your rights as a shareholder.

In the Written Agreement, the Bureau of Financial Institutions and the FRB require us to significantly exceed the capital level required to be classified as “well capitalized.” The Written Agreement does not provide, and we do not otherwise know, what constitutes significantly exceeding the “well-capitalized” regulatory threshold.

We may seek to raise additional capital through offerings of our Common Stock, preferred stock, securities convertible into Common Stock, or rights to acquire such securities of our Common Stock. Under our articles of incorporation, we have additional authorized shares of Common Stock that we can issue from time to time at the discretion of our Board of Directors, without further action by shareholders, except where shareholder approval is required by law. The issuance of any additional shares of Common Stock or convertible securities in a subsequent offering could be substantially dilutive to shareholders of our Common Stock. Dilution is the difference between what you pay for your stock and the net tangible book value per share immediately after the additional shares are sold by us. Holders of our shares of Common Stock have no preemptive rights as a matter of law that entitle them to purchase their pro-rata share of any offering or shares of any class or series. The market price of our Common Stock could decline as a result of additional sales of shares of our Common Stock or the perception that such sales could occur.

New investors, particularly with respect to subordinated debt securities, also may have rights, preferences, and privileges that are senior to, and that could adversely affect, our then current shareholders. For example, subordinated debt securities would be senior to shares of our Common Stock. As a result, we would be required to make interest payments on such subordinated debt before any dividends can be paid on our Common Stock, and in the event of our bankruptcy, dissolution, or liquidation, the holders of debt securities must be paid in full prior to any distributions being made to the holders of our Common Stock.

We cannot predict or estimate the amount, timing, or nature of our future offerings. Thus, our shareholders bear the risk of our future offerings diluting their stock holdings, adversely affecting their rights as shareholders, and/or reducing the market price of our Common Stock.

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

We maintain an allowance for loan losses, which is a reserve established through a provision for loan losses charged to our expenses that represents management’s best estimate of probable losses within our existing portfolio of loans. Our allowance for loan losses was $54.4 million at September 30, 2012, which represented 3.84% of our total loans, as compared to $74.9 million, or 4.98% of total loans, at December 31, 2011. The level of the allowance reflects management’s estimates and judgments as to specific credit risks, evaluation of industry concentrations, loan loss experience, current loan portfolio quality, present economic, political, and regulatory conditions, and unidentified losses inherent in the current loan portfolio. For further discussion on the impact continued weak economic conditions have on the collateral underlying our loan portfolio, see “If the value of real estate in the markets we serve were to further decline materially, a significant portion of our loan portfolio could become further under-collateralized, which could result in a material increase in our allowance for loan losses and have a material adverse effect on us.”

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

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HAMPTON ROADS BANKSHARES, INC.

PART II. OTHER INFORMATION

We have had, and may continue to have, large numbers of problem loans and difficulties with our loan administration, which could increase our losses related to loans.

Our non-performing assets as a percentage of total assets were at 11% at September 30, 2012. On September 30, 2012, less than 1% of our loans were 30 to 89 days delinquent and were treated as performing assets. Based on these delinquencies, more loans may become non-performing. The administration of non-performing loans is an important function in attempting to mitigate any future losses related to our non-performing assets.

In the past, our management of non-performing loans was, at times, not as strong as we would prefer. In 2009, we hired an independent third party to review a significant portion of our loans. The independent third party discovered several deficiencies with our loan management that we have since taken steps to remedy. The following deficiencies were identified at that time: updated appraisals on problem loans and large loans secured by real estate were not always being obtained; better organized credit files were needed; additional resources were needed to manage problem loans; and we lacked well-defined internal workout policies and procedures.

We have taken a variety of actions to remedy the conditions noted above and made other enhancements to our credit review and collection processes. Initiatives and procedures that augmented the credit administration function included acquisition and development loan reviews, interest reserve loan reviews, past due loan reviews, forecasting reviews, standard loan reviews, loans presented for approval and renewal, relationship reviews, and global cash flow analyses. We have improved the organization of our credit files and have made efforts to attain appraisal updates in a timelier manner. We also increased staffing in credit administration and established and staffed a separate special assets function to manage problem assets.

Although we have made significant enhancements to our loan administration processes to address these issues, we can give you no assurances that we will be able to successfully manage our problem loans, our loan administration, and origination process. If we are unable to do so in a timely manner, our loan losses could increase significantly and this could have a material adverse effect on our results of operations and the value of, or market for, our Common Stock.

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

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

An inability to maintain our regulatory capital position could adversely affect our operations.

At September 30, 2012, BOHR and Shore were classified as “well capitalized” for regulatory capital purposes. However, impairments to our loan or securities portfolio, declines in our earnings, or a combination of these or other factors could change our capital position in a relatively short period of time. Further BOHR may not accept new brokered deposits in excess of the level it had at the time it entered into the June 17, 2010 Written Agreement with the FRB and the Bureau of Financial Institutions until it is no longer subject to the Written Agreement. Additionally, if it

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PART II. OTHER INFORMATION

is unable to remain “well capitalized,” it will not be able to renew or accept brokered deposits without prior regulatory approval or offer interest rates on deposit accounts that are significantly higher than the average rates in its market area. As a result, it would be more difficult for us to attract new deposits as our existing brokered deposits mature and do not rollover and to retain or increase non-brokered deposits. If we are not able to attract new deposits, our ability to fund our loan portfolio may be adversely affected. In addition, we might be subject to higher FDIC insurance premiums, which will reduce our earnings.

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

Effective June 17, 2010, the Company and BOHR entered into the Written Agreement with the FRB and the Bureau of Financial Institutions. Shore is not a party to the Written Agreement.

Under the terms of the Written Agreement, BOHR has agreed to develop and submit for approval within the time periods specified in the Written Agreement written plans to:

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

• strengthen credit risk management policies;

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

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

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

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

• reduce BOHR’s reliance on brokered deposits; and

• improve BOHR’s earnings and overall condition.

In addition, BOHR has agreed that it will:

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

• eliminate all assets or portions of assets classified as “loss”, and thereafter, charge off all assets classified as “loss” in a federal or state report of examination, unless otherwise approved by the FRB;

• only accept brokered deposits up to the level maintained at the time the Written Agreement was entered into;

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

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

In addition, the Company has agreed that it will:

• not make any other form of payment representing a reduction in BOHR’s capital or make any distributions of interest, principal, or other sums on subordinated debentures or trust preferred securities absent prior regulatory approval;

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

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

• refrain from purchasing or redeeming any shares of its stock without the prior written consent of the FRB or the Bureau of Financial Institutions.

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PART II. OTHER INFORMATION

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

This description of the Written Agreement is qualified in its entirety by reference to the copy of the Written Agreement filed with the Company’s Current Report on Form 8-K, filed June 17, 2010. To date, the Company and BOHR have met all of the deadlines for taking actions required by the FRB and the Bureau of Financial Institutions under the terms of the Written Agreement. The Board of Directors oversees the Company’s compliance with the terms of the Written Agreement and has met each month to review compliance. Written plans have been submitted for strengthening board oversight, strengthening credit risk management practices, improving liquidity, reducing the reliance on brokered deposits, improving capital, and curing the technical violations of laws and regulations. The Company has also submitted its written policies and procedures for maintaining an adequate allowance for loan losses and its plans for all foreclosed real estate and nonaccrual and delinquent loans in excess of $2.5 million. Additionally, the Company instituted the required review process for all classified loans. Previously, the Company charged off the assets identified as loss from the previous examination. Moreover, the Company raised $295.0 million in the closings of several related capital transactions in the third and fourth quarters of 2010 and $95.0 million in the Capital Raise that closed in the third quarter of 2012. As of September 30, 2012, BOHR and Shore were above the “well-capitalized” threshold with respect to their Tier 1 Risk-Based Capital Ratio, Leverage Ratio, and Total Risk-Based Capital Ratio. As a result, management believes that, except for our significant level of loan losses, the Company and BOHR are in full compliance with the terms of the Written Agreement.

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

In April 2011, the SEC’s Division of Enforcement notified the Company that the Division is conducting a formal investigation into the Company’s deferred tax asset valuation allowances, provision and allowance for loan losses, and other matters contained in its annual and quarterly reports for years 2008 through 2010. The Company intends to cooperate fully with the Division and believes its provisions and allowances will be determined to be appropriate. However, the formal investigation has not been completed, and we cannot predict the timing or eventual outcome of this investigation. The investigation could possibly result in penalties, sanctions, or a restatement of our previously issued consolidated financial statements.

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

On November 2, 2010, the Company received from the United States Department of Justice, Criminal Division, a grand jury subpoena to produce information principally relating to the merger of Gateway Financial Holdings, Inc. into the Company on December 31, 2008 and to loans made by Gateway Financial Holdings, Inc. and its wholly owned subsidiary, Gateway Bank & Trust Co., before Gateway Financial Holdings, Inc.’s merger with the Company. The United States Department of Justice, Criminal Division has informed us that we are not a target of the investigation at this time, and we are fully cooperating. We can give you no assurances as to the timing or eventual outcome of this investigation.

FDIC insurance assessments could increase from our prior inability to maintain a “well-capitalized” status, which will further decrease earnings.

The Dodd-Frank Act permanently lifted the FDIC coverage limit to $250,000. The Dodd-Frank Act also revised the assessment methodology for funding the Deposit Insurance Fund (“DIF”) requiring that assessments be based on an institution’s average consolidated total assets minus average tangible equity, rather than the institution’s deposits. In addition, in May 2009, the FDIC announced that it had voted to levy a special assessment on insured institutions in order to facilitate the rebuilding of the DIF. The assessment was equal to five-basis points of the Company’s total assets minus Tier 1 capital as of June 30, 2009. The FDIC has indicated that future special assessments are possible.

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HAMPTON ROADS BANKSHARES, INC.

PART II. OTHER INFORMATION

In addition, under the FDIC’s risk-based deposit insurance assessment system, an institution’s assessment rate varies according to certain financial ratios, its supervisory evaluations, and other factors. Our inability to maintain a “well-capitalized” status during the first half of 2012 could impact our risk category and could cause our assessment to increase significantly in 2012 compared to 2011, which could decrease our earnings.

These developments have caused, and may cause in the future, an increase to our assessments, and the FDIC may be required to make additional increases to the assessment rates and levy additional special assessments on us. Higher insurance premiums and assessments increase our costs and may limit our ability to pursue certain business opportunities. We also may be required to pay even higher FDIC premiums than the recently increased level because financial institution failures resulting from the depressed market conditions have depleted and may continue to deplete the DIF and reduce its ratio of reserves to insured deposits.

Our commercial real estate and equity line lending may expose us to a greater risk of loss and hurt our earnings and profitability.

Our business strategy centers, in part, on offering commercial and equity line loans secured by real estate in order to generate interest income. These types of loans generally have higher yields and shorter maturities than traditional one-to-four family residential mortgage loans. At September 30, 2012, commercial real estate and equity line lending totaled approximately $675.2 million, which represented 48% of total loans. Such loans increase our credit risk profile relative to other financial institutions that have lower concentrations of commercial real estate and equity line loans.

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

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

A significant amount of our loan portfolio contains loans used to finance construction and land development, and these types of loans subject our loan portfolio to a higher degree of credit risk.

A significant amount of our loan portfolio contains loans used to finance construction and land development. Construction financing typically involves a higher degree of credit risk than financing on improved, owner-occupied real estate. Risk of loss on a construction loan is largely dependent upon the accuracy of the initial estimate of the property’s value at completion of construction, the marketability of the property, and the bid price and estimated cost (including interest) of construction. If the estimate of construction costs proves to be inaccurate, we may be required to advance funds beyond the amount originally committed to permit completion of the project. If the estimate of the value proves to be inaccurate, we may be confronted, at or prior to the maturity of the loan, with a project whose value is insufficient to assure full repayment. When lending to builders, the cost of construction breakdown is provided by the builder, as well as supported by an appraisal. Although our underwriting criteria were designed to evaluate and minimize the risks of each construction loan, there can be no guarantee that these practices will have safeguarded against material delinquencies and losses to our operations.

At September 30, 2012, we had loans of $233.2 million or 16% of total loans outstanding to finance construction and land development. Construction and land development loans are dependent on the successful completion of the projects they finance, however, in many cases such construction and development projects in our primary market areas are not being completed in a timely manner, if at all.

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HAMPTON ROADS BANKSHARES, INC.

PART II. OTHER INFORMATION

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

We paid cash dividends on our Common Stock prior to the third quarter of 2009. During the third quarter of 2009, we suspended dividend payments. We are prevented by our regulators from paying dividends until our financial position improves. In addition, the retained deficit of BOHR, our principal banking subsidiary, is approximately $469.0 million as of September 30, 2012. Absent permission from the Virginia State Corporation Commission, BOHR may pay dividends to us only to the extent of positive accumulated retained earnings. It is unlikely in the foreseeable future that we would be able to pay dividends if BOHR cannot pay dividends to us. Although we can seek to obtain a waiver of this prohibition, our regulators may choose not to grant such a waiver, and we would not expect to be granted a waiver or be released from this obligation until our financial performance and retained earnings improve significantly. As a result, there is no assurance if or when we will be able to resume paying cash dividends.

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

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

The market price of our Common Stock could drop if our existing shareholders decide to sell their shares. As of September 30, 2012, Carlyle, Anchorage, CapGen, and affiliates of Fir Tree, Inc. owned 24.9%, 24.9%, 30.0%, and 9.6%, respectively, of the outstanding shares of our Common Stock. Pursuant to various definitive investment agreements that we have entered into with these shareholders, each of the shareholders listed above received certain registration rights covering the resale of shares of our Common Stock. In addition, the shares of certain of these shareholders may be traded, subject to certain volume limitations in some cases, pursuant to Rule 144 under the Securities Act. If any of these shareholders sell large amounts of our Common Stock, or other investors perceive such sales to be imminent, the market price of our Common Stock could drop significantly.

In addition, as of September 30, 2012, the U.S. Treasury owned 1% of the outstanding shares of our Common Stock plus a warrant to purchase an additional 757,629 shares of our Common Stock, which represents the share adjustment triggered by the Private Placement. In connection with the issuance of such shares of Common Stock and the warrant, we entered into an Exchange Agreement with the Treasury, under the terms of which the Treasury received certain registration rights covering the resale of such shares of Common Stock or the warrant, and the shares are freely transferable pursuant to Rule 144 under the Securities Act. The sale of the shares of Common Stock owned by the Treasury, the exercise of the warrant, and sale of the underlying shares of Common Stock, or the perception by other investors that such sales are imminent, could adversely affect the market for our Common Stock.

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

The Company announced an open ended program on August 13, 2003, by which management was authorized to repurchase an unlimited number of shares of the Company’s Common Stock in the open market and through privately negotiated transactions. There were no share repurchase transactions conducted during the third quarter of 2012.

ITEM 3 – DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4 – MINE SAFETY DISCLOSURES

None.

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HAMPTON ROADS BANKSHARES, INC.

PART II. OTHER INFORMATION

ITEM 5 - OTHER INFORMATION

None.

ITEM 6 – EXHIBITS

3.1	Amended and Restated Articles of Incorporation of Hampton Roads Bankshares, Inc. (as electronically amended and restated, effective June 25, 2012), incorporated by reference to Exhibit 4.1 to the Registrant’s Registration Statement on Form S-8 dated July 13, 2012.
31.1	The Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer.*
31.2	The Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer.*
32.1	Statement of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350.*
101	The following materials from the Hampton Roads Bankshares, Inc. Quarterly Report on Form 10-Q for the quarter ended September 30, 2012 formatted in eXtensible Business Reporting Language: (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Operations, (iii) Consolidated Statements of Comprehensive Loss, (iv) Consolidated Statement of Changes in Shareholders’ Equity, (v) Consolidated Statements of Cash Flows, and (vi) Notes to Consolidated Financial Statements.*

* Filed herewith

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SIGNATURES

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

	HAMPTON ROADS BANKSHARES, INC.
	(Registrant)
DATE: November 8, 2012	/s/ Stephen P. Theobald
	Stephen P. Theobald
	Chief Financial Officer

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