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FORM 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

For the quarterly period ended March 31, 2004

Commission File Number 005-62335

HAMPTON ROADS BANKSHARES, INC.

(Exact name of registrant as specified in its charter)

201 Volvo Parkway, Chesapeake, VA 23320

(Address of principal executive offices) (Zip Code)

Registrant’s telephone number, including area code: (757) 436-1000

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 the number of shares outstanding of each of the issuer’s classes of common stock as of March 31, 2004.

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HAMPTON ROADS BANKSHARES, INC.

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HAMPTON ROADS BANKSHARES, INC.

Consolidated Balance Sheets

See accompanying notes to the consolidated financial statements (unaudited).

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HAMPTON ROADS BANKSHARES, INC.

Consolidated Statements of Income (Unaudited)

See accompanying notes to the consolidated financial statements (unaudited).

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HAMPTON ROADS BANKSHARES, INC.

Consolidated Statements of Shareholders’ Equity

Three Months ended March 31, 2004 and the Year ended December 31, 2003

See accompanying notes to the consolidated financial statements (unaudited).

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HAMPTON ROADS BANKSHARES, INC.

Consolidated Statements of Cash Flows (Unaudited)

See accompanying notes to the consolidated financial statements (unaudited).

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HAMPTON ROADS BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

March 31, 2004

NOTE A - BASIS OF PRESENTATION

Hampton Roads Bankshares, Inc., a Virginia corporation (the Company), was incorporated under the laws of the Commonwealth of Virginia on February 28, 2001, primarily to serve as a holding company for Bank of Hampton Roads (the Bank). The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary, the Bank. All significant intercompany balances and transactions have been eliminated in consolidation.

Bank of Hampton Roads was organized in March of 1987 and commenced banking operations in December of 1987. The Bank engages in a general community and commercial banking business, emphasizing the needs of individuals as well as small and medium sized businesses in its primary service area.

The accompanying unaudited financial statements have been prepared in accordance with generally accepted accounting principles in the United States 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 generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. For further information, refer to the financial statements and footnotes thereto included in the Company’s annual report on Form 10-K for the year ended December 31, 2003.

NOTE B - SECURITIES

The amortized cost and estimated fair market values of securities available-for-sale were:

NOTE C - LOANS

Major classifications of loans are summarized as follows:

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Non-performing assets are as follows:

NOTE D - ALLOWANCE FOR LOAN LOSSES

Transactions affecting the allowance for loan losses during the three months ended March 31, 2004 and 2003 were as follows:

NOTE E - PREMISES AND EQUIPMENT

Premises and equipment consisted of the following:

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

The following discussion provides information about the important factors affecting the consolidated results of operations, financial condition, capital resources and liquidity of the Company. In addition to identifying trends and material changes that occurred during the reporting periods, the report depicts the consistent success achieved by the organization. This discussion and analysis should be read in conjunction with the Company’s 2003 Annual Report.

Financial Condition

Total average assets, a benchmark used by banks when comparing size, is the strongest indicator of our continuous growth. Average assets increased by $21.9 million, or 7.5%, to a new high of $314.0 million for the three months ended March 31, 2004 compared to the three months ended March 31, 2003. Total assets at March 31, 2004 were $332.2 million, an increase of $15.7 million, or 5.0%, over December 31, 2003 total assets of $316.5 million. This significant growth is attributable to increases in deposits which were utilized by the Company in funding growth in interest earning assets.

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As a community bank, the Company has a primary objective of meeting the business and consumer credit needs within its market where standards of profitability, client relationships and credit quality can be met. The overall loan portfolio grew $8.4 million, or 4.0%, to $219.2 million as of March 31, 2004 compared to December 31, 2003. This growth can be attributed to the high loan demand experienced in the construction and commercial real estate categories of the loan portfolio. The Company continuously reviews its loan portfolio and maintains an allowance for loan losses sufficient to absorb losses inherent in the portfolio. In addition to the review of credit quality through ongoing credit review processes, the Company conducts an independent and comprehensive allowance analysis for its loan portfolio at least quarterly. The allowance for loan losses was $2.9 million, or 1.3% of outstanding loans, as of March 31, 2004 compared with $2.9 million, or 1.4% of outstanding loans, as of December 31, 2003. Management considers the allowance for loan losses to be adequate.

Deposits are the most significant source of the Company’s funds for use in lending and general business purposes. The Company’s balance sheet growth is largely determined by the availability of deposits in its markets, the cost of attracting the deposits, and the prospects of profitably utilizing the available deposits by increasing the loan or investment portfolios. Total deposits at March 31, 2004 increased $13.6 million, or 5.3%, to $271.1 million compared to December 31, 2003. Significant changes in the deposit categories include a $7.8 million, or 10.0% increase in noninterest bearing demand accounts and a $9.5 million, or 13.6%, increase in interest bearing demand accounts from December 31, 2003 to March 31, 2004. This positive trend in deposits can be attributed to the high quality commercial accounts which are generating larger balances in the demand deposit accounts.

The Company’s investment portfolio consists of available-for-sale U.S. Agency and mortgage-backed securities. At March 31, 2004, the estimated market value of investment securities held by the Company was $62.9 million, down $7.7 million, or 10.9%, from $70.5 million at December 31, 2003. The decline was the result of the sale of investment securities with a market value of $10.7 million netted against the purchase of an investment security with a market value of $2.1 million and the change in unrealized gains and unamortized premiums on the remaining investment securities. A gain of $385,847 was recognized on the sale of investment securities. The decision to sell the investment securities was made to improve the Company’s liquidity position at the beginning of January 2004 and to enable the Company to accommodate the growing loan portfolio. After an initial drop in January 2004, overnight funds increased $13.7 million from December 31, 2003 to March 31, 2004 due to the strong growth in deposits experienced by the Company during the first quarter of 2004.

Results of Operations

During the first three months of 2004, the Company had net income of $1.2 million, resulting in a return of 1.48% on average total assets and 11.28% on average equity. During the comparable period in 2003, the Company earned $970 thousand resulting in a return of 1.35% on average total assets and 10.37% on average equity. Diluted earnings per share increased 16.7% to $0.14 per share for the first three months of 2004 compared to $0.12 per share for the first three months of 2003. These increases were caused primarily by the gain on sale of investment securities recognized during the first quarter of 2004.

Net interest income, the principal source of the Company’s earnings, represents the difference between interest and fees earned from lending and investment activities and the interest paid to fund these activities. Variations in the volume and mix of assets and liabilities and their relative sensitivity to interest rate movements impact net interest income. Net interest income for the first three months of 2004 was $3.2 million, a $40 thousand increase over the first three months of 2003.

The Company’s interest earning assets consist of loans, investment securities, and overnight funds sold. Interest income on loans, including loan fees, decreased $164 thousand, or 4.2%, to $3.7 million for the three months ended March 31, 2004 compared to the same time period during 2003. This decline resulted from the 65 basis point decrease experienced in the average interest yield, partially offset by the $7.9 million increase in the average loan balance. Interest income on investment securities increased $9 thousand, or 1.9%, to $476 thousand for the three months ended March 31, 2004 compared to the same time period during 2003. The $6.8 million increase in the average investment securities balance, partially offset by the 33 basis point decrease in the average interest yield produced this slight increase. Interest income on overnight funds sold increased $3 thousand, or 8.8%, to $32 thousand for the three month ended March 31, 2004 compared to the same time period during 2003. This increase was due to the $3.6 million increase in the average overnight funds sold balance, partially offset by the 23 basis point decline experienced in the average interest yield.

The Company’s interest bearing liabilities consist of deposit accounts and other borrowings. Interest expense from deposits decreased $211 thousand, or 19.4%, to $874 thousand for the three months ended March 31, 2004 compared to the same time period during 2003. This decline resulted from the 50 basis point decrease experienced in the average interest rate, partially offset by the $1.3 million increase in the average deposit balance. Interest expense from other borrowings increased $19 thousand, or 18.6%, to $120 thousand for the three months ended March 31, 2004 compared to the same time period during 2003. The $3.9 million increase in the average other borrowings balance, partially offset by the 44 basis point decrease in the average interest rate, produced this result.

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The net interest margin, which is calculated by expressing net interest income as a percentage of average interest earning assets, is an indicator of the Company’s efficiency in generating income from earning assets. The net interest margin is affected by the structure of the balance sheet as well as by competition and the economy. The Company’s net interest margin decreased from 4.74% during the first three months of 2003 to 4.46% for the same period in 2004. This decrease can be attributed to changes in the balance sheet mix, changes in the yields obtained from interest earning assets and paid on interest bearing liabilities, the falling interest rate environment, and changes in volume.

The Company reported an increase in total noninterest income of $439 thousand, or 53.9%, for the first three months of 2004 compared to the same period in 2003. Service charges on deposit accounts, the Company’s primary source of noninterest income, increased $32 thousand, or 6.3%, for the first three months of 2004 compared to the same period in 2003. This increase is primarily attributable to an increase in check cashing fees. Another significant component of noninterest income is ATM surcharge fees, which remained stable at $50 thousand for the first three months of 2004 compared to $49 thousand for the first three months of 2003. In order to improve liquidity and allow for the growth in the loan portfolio, the Company sold investment securities and recognized a gain of $386 thousand during the first quarter of 2004. There were no sales of investment securities during the first quarter of 2003. Other service charges and fees increased $20 thousand, or 7.6%, for the first quarter of 2004 compared to the first quarter of 2003. An increase in late charges on loans is responsible for this increase.

Noninterest expense represents the overhead expenses of the Company. One of the core operating principles of management continues to be the careful monitoring and control of these expenses. Total noninterest expense increased $195 thousand, or 8.0%, for the first three months of 2004 compared to the first three months of 2003. This increase was primarily attributable to a 14.1% increase in salaries and employee benefits resulting from the addition of several new positions late in 2003 and during the first quarter of 2004, normal annual salary adjustments, and higher costs of benefits. Data processing expense, another category of noninterest expense, posted a slight increase of 2.7% during this time frame and occupancy and other noninterest expenses posted decreases of 2.2% and .8%, respectively.

Capital Resources and Liquidity

Total shareholders’ equity increased $983 thousand, or 2.4%, to $42.3 million at March 31, 2004 compared to $41.3 million at December 31, 2003. As of March 31, 2004, the Company and the Bank were considered “well-capitalized”, the highest category of capitalization defined by the Federal Reserve Bank (FRB). The Company continually monitors current and projected capital adequacy positions of both the Company and the Bank. Maintaining adequate capital levels is integral to providing stability to the Company, resources to achieve the Company’s growth objectives, and returns to the stockholders in the form of dividends. On March 15, 2004, the Company paid a $0.15 per share dividend, totaling $1,187,065. On September 15, 2003, the Company paid its first semi-annual cash dividend of $0.15 per share, totaling $1,171,890. On March 15, 2003, the Company paid a $0.27 per share dividend, totaling $2,096,476.

A key goal of asset/liability management is to maintain an adequate degree of liquidity without impairing long-term earnings. Liquidity represents the Company’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. Short-term liquidity is primarily provided by access to the federal funds market through established correspondent banking relationships. Funds can also be obtained through the Company’s borrowing privileges at the Federal Reserve Bank and Federal Home Loan Bank of Atlanta. Additional liquidity is available through loan repayments and maturities of the Company’s investment portfolio. The Company maintains a very liquid portfolio of both assets and liabilities and attempts to mitigate the risk inherent in changing rates in this manner. Management believes that the Company maintains overall liquidity sufficient to satisfy its depositors’ requirements and to meet its customers’ credit needs.

Critical Accounting Policies

Certain critical accounting policies affect the more significant judgements and estimates used in the preparation of the consolidated financial statements. The Company’s most critical accounting policy relates to the Company’s allowance for loan losses, which reflects the estimated losses resulting from the inability of the Company’s borrowers to make required loan payments. If the financial condition of the Company’s borrowers were to deteriorate, resulting in an impairment of their ability to make payments, the Company’s estimates would be updated, and additional provisions for loan losses may be required.

Forward Looking Statements

Certain statements in this report may constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements that include projections, predictions, expectations, or beliefs about events

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or results or otherwise are not statements of historical fact. Although the Company believes that its expectations with respect to certain forward-looking statements are based upon reasonable assumptions within the bounds of its existing knowledge of its business and operations, there can be no assurance that actual results, performance or achievements of the Company will not differ materially from any future results, performance or achievements expressed or implied by such forward-looking statements. Actual future results and trends may differ materially from historical results or those anticipated depending on a variety of factors, including, but not limited to, the effects of and changes in: general economic conditions, the interest rate environment, legislative and regulatory requirements, competitive pressures, new products and delivery systems, and inflation.

ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company’s primary market risk is exposure to interest rate volatility. Fluctuations in interest rates will impact both the level of interest income and interest expense and the market value of the Company’s interest earning assets and interest bearing liabilities.

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

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

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

The interest sensitivity gap is defined as the difference between the amount of interest earning assets anticipated, based upon certain assumptions, to mature or re-price within a specific time period and the amount of interest bearing liabilities anticipated, based upon certain assumptions, to mature or re-price within that time period. At March 31, 2004, the Company’s one year “positive gap” (interest earning assets maturing or re-pricing within a defined period exceed interest bearing liabilities maturing or re-pricing within the same period) was approximately $18.5 million, or 5.56% of total assets. Thus, during periods of rising interest rates, this implies that the Company’s net interest income would be positively affected because the yield of the Company’s interest earning assets is likely to rise more quickly than the cost of its interest bearing liabilities. At December 31, 2003, the Company’s one year “positive gap” was approximately $1.1 million, or 0.34% of total assets.

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The following tables set forth the amounts of interest earning assets and interest bearing liabilities outstanding at March 31, 2004 and December 31, 2003 that are subject to re-pricing or that mature in each of the future time periods shown. Loans and securities with call or balloon provisions are included in the period in which they balloon or may first be called. Except as stated above, the amount of assets and liabilities shown that re-price or mature during a particular period were determined in accordance with the contractual terms of the asset or liability.

Interest Sensitivity Analysis

March 31, 2004

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Interest Sensitivity Analysis

December 31, 2003