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FORM 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

For the quarterly period ended June 30, 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 June 30, 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

Six Months ended June 30, 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)

June 30, 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.

The Company adopted the disclosure only provision of SFAS No. 123, Accounting for Stock-Based Compensation and SFAS No. 148, Accounting for Stock-Based Compensation - Transition and Disclosure. These statements allow an entity to continue to measure compensation cost for these plans using the intrinsic value-based method of accounting prescribed by Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees. The Company has elected to follow APB No. 25 and related interpretations in accounting for its employee stock options.

Pro forma information regarding net income and earnings per share as required by SFAS No. 123 and SFAS No. 148 has been determined as if the Company had accounted for its employee stock options under the fair-value method. The fair value of all currently outstanding options was estimated at the date of the grant using a minimum value option pricing model. Pro forma results and a summary of the assumptions used for the three and six months ended June 30, 2004 and the same time periods in 2003 are as follows:

Option valuation models require the input of highly subjective assumptions. Because the Company’s employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management’s opinion, the existing models do not necessarily provide a representative single measure of the fair value at which transactions may occur.

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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:

Non-performing assets are as follows:

NOTE D - ALLOWANCE FOR LOAN LOSSES

Transactions affecting the allowance for loan losses during the six months ended June 30, 2004 and 2003 were as follows:

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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. This report identifies trends and material changes that occurred during the reporting periods and 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 $27.0 million, or 9.2%, to a new high of $319.5 million for the six months ended June 30, 2004 compared to the six months ended June 30, 2003. Total assets at June 30, 2004 were $324.3 million, an increase of $7.8 million, or 2.5%, over December 31, 2003 total assets of $316.5 million. This significant growth is attributable primarily to increases in deposits which were utilized by the Company in funding growth in interest earning assets.

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 $22.6 million, or 10.7%, to $233.4 million as of June 30, 2004 compared to December 31, 2003. This growth can be attributed to the strong 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 $3.5 million, or 1.5% of outstanding loans, as of June 30, 2004 compared with $2.9 million, or 1.4% of outstanding loans, as of December 31, 2003. Management increased the allowance for loan losses during the second quarter of 2004 by setting up a specific reserve to ensure adequate coverage of certain nonaccrual loans. The amount of nonaccrual loans increased from the December 31, 2003 balance of $107,601 to the June 30, 2004 balance of $737,324.

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 June 30, 2004 increased $4.8 million, or 1.9%, to $262.2 million compared to December 31, 2003. Significant changes in the deposit categories include an $11.6 million, or 14.8% increase in noninterest bearing demand accounts and a $3.9 million, or 12.4%, decrease in time deposits $100,000 or more from December 31, 2003 to June 30, 2004. These trends in deposits can be attributed to the high quality commercial accounts which are generating larger balances in the demand deposit accounts and the lower interest rates being paid on time deposits which has caused a run off in the time deposit accounts.

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The Company’s investment portfolio consists of available-for-sale U.S. Agency and mortgage-backed securities. At June 30, 2004, the estimated market value of investment securities held by the Company was $60.9 million, down $9.6 million, or 13.7%, from $70.5 million at December 31, 2003. The decline was the result of the sale of investment securities with a par value of $23.6 million netted against the purchases of investment securities with a par value of $17.6 million and the change in unrealized gains and unamortized premiums on the remaining investment securities. A gain of $494,993 was recognized on the sale of investment securities, of which $109,146 was recorded in the second quarter of 2004. The decision to sell investment securities was made to balance the Company’s liquidity position in January 2004 and again in April 2004. The Company experienced large fluctuations in both its loan and deposit portfolios during the first six months of 2004 which precipitated the sales and purchases of investment securities.

Results of Operations

During the first six months of 2004, the Company had net income of $1.8 million, resulting in a return of 1.16% on average total assets and 8.89% on average equity. During the comparable period in 2003, the Company earned $2.0 million resulting in a return of 1.39% on average total assets and 10.49% on average equity. Net income for the three months ended June 30, 2004 was $688 thousand compared to $1.0 million for the three months ended June 30, 2003. Diluted earnings per share decreased 12% to $0.22 per share for the first six months of 2004 compared to $0.26 per share for the first six months of 2003 and 38.5% to $0.08 per share for the three months ended June 30, 2004 compared to $0.13 per share for the three months ended June 30, 2003. These decreases resulted from an additional provision for loan losses recorded during the second quarter of 2004, higher costs associated with salaries and employee benefits, netted against the gain on sale of investment securities recognized during 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 six months of 2004 was $6.6 million, a $115 thousand increase over the first six months of 2003. Net interest income for the three months ended June 30, 2004 was $3.4 million, a $74 thousand increase over the same time period in 2003.

The Company’s interest earning assets consist of loans, investment securities, and overnight funds sold. Interest income on loans, including loan fees, decreased $294 thousand, or 3.8%, to $7.5 million for the six months ended June 30, 2004 compared to the same time period during 2003. This decline resulted from the 66 basis point decrease experienced in the average interest yield, partially offset by the $10.8 million increase in the average loan balance. Interest income on loans, including loan fees, decreased $130 thousand, or 3.3%, to $3.8 million for the three months ended June 30, 2004 compared to the same time period during 2003. Interest income on investment securities increased $38 thousand, or 4.2%, to $951 thousand for the six months ended June 30, 2004 compared to the same time period during 2003. The $9.6 million increase in the average investment securities balance, partially offset by the 37 basis point decrease in the average interest yield produced this slight increase. Interest income on investment securities increased $29 thousand, or 6.6%, to $475 thousand for the three months ended June 30, 2004 compared to the same time period during 2003. Interest income on overnight funds sold increased $5 thousand, or 10.6%, to $47 thousand for the six months ended June 30, 2004 compared to the same time period during 2003. This increase was due to the $2.6 million increase in the average overnight funds sold balance, partially offset by the 21 basis point decline experienced in the average interest yield. Interest income on overnight funds sold increased $2 thousand, or 14.6%, to $15 thousand for the three months ended June 30, 2004 compared to the same time period during 2003.

The Company’s interest bearing liabilities consist of deposit accounts and other borrowings. Interest expense from deposits decreased $391thousand, or 18.8%, to $1.7 million for the six months ended June 30, 2004 compared to the same time period during 2003. This decline resulted from the 48 basis point decrease experienced in the average interest rate, partially offset by the $3.3 million increase in the average interest bearing deposit balance. Interest expense from deposits decreased $179 thousand, or 18.0%, to $818 thousand for the three months ended June 30, 2004 compared to the same time period during 2003. Interest expense from other borrowings increased $25 thousand, or 11.1%, to $246 thousand for the six months ended June 30, 2004 compared to the same time period during 2003. The $3.3 million

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increase in the average other borrowings balance, partially offset by the 41 basis point decrease in the average interest rate, produced this result. Interest expense from other borrowings increased $6 thousand, or 4.8%, to $126 thousand for the three months ended June 30, 2004 compared to the same time period during 2003.

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 4.80% during the first six months of 2003 to 4.49% 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’s provision for loan losses for the first six months of 2004 was $683 thousand compared to $169 thousand for the same period in 2003. This increase was due to the additional $500 thousand provision recorded in the second quarter of 2004 as can be seen in the increase in the provision for loan losses in the three months ended June 30, 2004 of $599 thousand compared to $84 thousand in the same time period during 2003.

The Company reported an increase in total noninterest income of $508 thousand, or 30.7%, for the first six months of 2004 compared to the same period in 2003. Total noninterest income increased $69 thousand, or 8.2%, for the three months ended June 30, 2004 compared to the same period in 2003. Service charges on deposit accounts, the Company’s primary source of noninterest income, decreased $20 thousand, or 1.9%, for the first six months of 2004 compared to the same period in 2003. Service charges on deposit accounts decreased $52 thousand, or 9.4%, for the three month period ended June 30, 2004 compared to the same period in 2003. Another significant component of noninterest income is ATM surcharge fees, which remained stable at $104 thousand for the first six months of 2004 compared to $102 thousand for the first six 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 $495 thousand during the first six months of 2004. There were no sales of investment securities during the first six months of 2003. Other service charges and fees increased $31 thousand, or 6.1%, for the first six months of 2004 compared to the first six months of 2003. An increase in late charges on loans is responsible for this increase. Other service charges and fees increased $11 thousand, or 4.5%, for the three month period ended June 30, 2004 compared to the same period in 2003.

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 $338 thousand, or 6.9%, for the first six months of 2004 compared to the first six months of 2003. This increase was primarily attributable to a 10.8% 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 an increase of 7.0% during this time frame. Occupancy expense remained stable at $440 thousand for both time periods ended June 30, 2004 and June 30, 2003. Other noninterest expenses posted a slight increase of 0.5% for the first six months of 2004 compared to the same time period during 2003. Total noninterest expense increased $144 thousand, or 5.8%, for the three month period ended June 30, 2004 compared to the same period in 2003.

Capital Resources and Liquidity

Total shareholders’ equity increased $238 thousand, or 0.6%, to $41.6 million at June 30, 2004 compared to $41.3 million at December 31, 2003. As of June 30, 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

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