##### Table of Contents





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, 2008

Commission File Number: 001-32968





HAMPTON ROADS BANKSHARES,
INC.

(Exact name of registrant as specified in its charter)







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



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

(757) 217-1000

(Registrants telephone number, including area code)





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

Indicate by check mark whether the registrant 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

Indicate the number of shares outstanding of each of the issuers classes of common stock as of October 31, 2008.



|                               |  |                  
|------------------------------ |  | -----------------
|Common Stock, $0.625 Par Value |  | 13,223,776 Shares









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##### Table of Contents

HAMPTON ROADS BANKSHARES, INC.

TABLE OF CONTENTS



|                                                                                               |  |     
|---------------------------------------------------------------------------------------------- |  | ----
|                                                                                               |  | Page
|PART I  FINANCIAL INFORMATION                                                                 |  |     
|                                                                                               | 
|ITEM  1 FINANCIAL STATEMENTS                                                                  |  |     
|                                                                                               | 
|Consolidated Balance Sheets                                                                    |  | 3   
|                                                                                               | 
|September 30, 2008                                                                             |  |     
|December 31, 2007                                                                              |  |     
|                                                                                               | 
|Consolidated Statements of Income                                                              |  | 4   
|                                                                                               | 
|Three months ended September 30, 2008 and 2007                                                 |  |     
|Nine months ended September 30, 2008 and 2007                                                  |  |     
|                                                                                               | 
|Consolidated Statements of Changes in Shareholders Equity                                     |  | 5   
|                                                                                               | 
|Nine months ended September 30, 2008                                                           |  |     
|Year ended December 31, 2007                                                                   |  |     
|                                                                                               | 
|Consolidated Statements of Cash Flows                                                          |  | 6   
|                                                                                               | 
|Nine months ended September 30, 2008 and 2007                                                  |  |     
|                                                                                               | 
|Notes to Consolidated Financial Statements                                                     |  | 8   
|                                                                                               | 
|ITEM 2  MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS |  | 14  
|                                                                                               | 
|ITEM 3  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                            |  | 22  
|                                                                                               | 
|ITEM 4  CONTROLS AND PROCEDURES                                                               |  | 23  
|                                                                                               | 
|PART II  OTHER INFORMATION                                                                    |  |     
|                                                                                               | 
|ITEM 1  LEGAL PROCEEDINGS                                                                     |  | 23  
|                                                                                               | 
|ITEM 1A  RISK FACTORS                                                                         |  | 23  
|                                                                                               | 
|ITEM 2  UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS                           |  | 24  
|                                                                                               | 
|ITEM 3  DEFAULTS UPON SENIOR SECURITIES                                                       |  | 24  
|                                                                                               | 
|ITEM 4  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS                                   |  | 24  
|                                                                                               | 
|ITEM 5  OTHER INFORMATION                                                                     |  | 24  
|                                                                                               | 
|ITEM 6  EXHIBITS                                                                              |  | 24  
|                                                                                               | 
|SIGNATURES                                                                                     |  | 25  



2



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##### Table of Contents

PART I  FINANCIAL INFORMATION

ITEM 1  FINANCIAL STATEMENTS

HAMPTON ROADS BANKSHARES, INC.

Consolidated Balance Sheets



|                                                                                                                                             |  |                               |             |   |                   |   |             |  
|-------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------------------------- | ----------- | - | ----------------- | - | ----------- | -
|                                                                                                                                             |  | (Unaudited)September 30, 2008 |             |   | December 31, 2007 |  
|Assets:                                                                                                                                      |  |                               |             |   |                   |   |             |  
|Cash and due from banks                                                                                                                      |  | $                             | 17,940,684  |   |                   | $ | 19,757,428  |  
|Overnight funds sold                                                                                                                         |  |                               | 480,784     |   |                   |   | 182,906     |  
|Interest-bearing deposits in other banks                                                                                                     |  |                               | 1,102,885   |   |                   |   | 5,623,271   |  
|Investment securities available-for-sale, at fair value                                                                                      |  |                               | 33,509,087  |   |                   |   | 42,377,325  |  
|Federal Home Loan Bank stock                                                                                                                 |  |                               | 6,034,900   |   |                   |   | 3,330,000   |  
|Federal Reserve Bank stock                                                                                                                   |  |                               | 2,364,400   |   |                   |   | 1,374,000   |  
|                                                                                                                                             |  |                              
|Loans                                                                                                                                        |  |                               | 796,874,608 |   |                   |   | 477,149,232 |  
|Allowance for loan losses                                                                                                                    |  |                               | (8,692,083  | ) |                   |   | (5,042,583  | )
|                                                                                                                                             |  |                               |             |   |                   |   |             |  
|Net loans                                                                                                                                    |  |                               | 788,182,525 |   |                   |   | 472,106,649 |  
|                                                                                                                                             |  |                              
|Premises and equipment, net                                                                                                                  |  |                               | 24,686,827  |   |                   |   | 11,967,151  |  
|Interest receivable                                                                                                                          |  |                               | 3,181,827   |   |                   |   | 2,431,347   |  
|Other real estate owned                                                                                                                      |  |                               | 1,126,514   |   |                   |   |            |  
|Deferred tax assets, net                                                                                                                     |  |                               | 778,320     |   |                   |   | 2,658,404   |  
|Intangible assets                                                                                                                            |  |                               | 31,097,453  |   |                   |   |            |  
|Other assets                                                                                                                                 |  |                               | 7,338,412   |   |                   |   | 2,019,647   |  
|                                                                                                                                             |  |                               |             |   |                   |   |             |  
|Total assets                                                                                                                                 |  | $                             | 917,824,618 |   |                   | $ | 563,828,128 |  
|                                                                                                                                             |  |                               |             |   |                   |   |             |  
|Liabilities and Shareholders Equity:                                                                                                        |  |                               |             |   |                   |   |             |  
|Deposits:                                                                                                                                    |  |                               |             |   |                   |   |             |  
|Noninterest bearing demand                                                                                                                   |  | $                             | 125,031,482 |   |                   | $ | 100,553,404 |  
|Interest bearing:                                                                                                                            |  |                               |             |   |                   |   |             |  
|Demand                                                                                                                                       |  |                               | 107,361,442 |   |                   |   | 40,298,614  |  
|Savings                                                                                                                                      |  |                               | 89,335,471  |   |                   |   | 82,092,848  |  
|Time deposits:                                                                                                                               |  |                               |             |   |                   |   |             |  
|Less than $100,000                                                                                                                           |  |                               | 231,930,118 |   |                   |   | 114,832,724 |  
|$100,000 or more                                                                                                                             |  |                               | 121,740,635 |   |                   |   | 93,679,157  |  
|                                                                                                                                             |  |                               |             |   |                   |   |             |  
|Total deposits                                                                                                                               |  |                               | 675,399,148 |   |                   |   | 431,456,747 |  
|Federal Home Loan Bank borrowings                                                                                                            |  |                               | 99,263,095  |   |                   |   | 53,000,000  |  
|Other borrowings                                                                                                                             |  |                               | 28,000,000  |   |                   |   |            |  
|Interest payable                                                                                                                             |  |                               | 2,044,671   |   |                   |   | 1,636,231   |  
|Other liabilities                                                                                                                            |  |                               | 4,597,901   |   |                   |   | 4,075,136   |  
|                                                                                                                                             |  |                               |             |   |                   |   |             |  
|Total liabilities                                                                                                                            |  |                               | 809,304,815 |   |                   |   | 490,168,114 |  
|                                                                                                                                             |  |                               |             |   |                   |   |             |  
|Shareholders equity:                                                                                                                        |  |                               |             |   |                   |   |             |  
|Preferred stock, no par value. Authorized 1,000,000 shares; none issued and outstanding                                                      |  |                               |            |   |                   |   |            |  
|Common stock, $0.625 par value. Authorized 40,000,000 shares; issued and outstanding 13,220,945 shares in 2008 and 10,314,899 shares in 2007 |  |                               | 8,263,090   |   |                   |   | 6,446,812   |  
|Capital surplus                                                                                                                              |  |                               | 74,895,724  |   |                   |   | 42,677,083  |  
|Retained earnings                                                                                                                            |  |                               | 25,592,152  |   |                   |   | 24,486,335  |  
|Accumulated other comprehensive income (loss), net of tax                                                                                    |  |                               | (231,163    | ) |                   |   | 49,784      |  
|                                                                                                                                             |  |                               |             |   |                   |   |             |  
|Total shareholders equity                                                                                                                   |  |                               | 108,519,803 |   |                   |   | 73,660,014  |  
|                                                                                                                                             |  |                               |             |   |                   |   |             |  
|Total liabilities and shareholders equity                                                                                                   |  | $                             | 917,824,618 |   |                   | $ | 563,828,128 |  
|                                                                                                                                             |  |                               |             |   |                   |   |             |  

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



3



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##### Table of Contents

HAMPTON ROADS BANKSHARES, INC.

Consolidated Statements of Income (Unaudited)



|                                                      |  |                    |            |                    |   |                    |  |                    |            |  |   |           
|----------------------------------------------------- |  | ------------------ | ---------- | ------------------ | - | ------------------ |  | ------------------ | ---------- |  | - | ----------
|                                                      |  | Three Months Ended |            | Nine Months Ended 
|                                                      |  | September 30, 2008 |            | September 30, 2007 |   | September 30, 2008 |  | September 30, 2007
|Interest Income:                                      |  |                    |            |                    |   |                    |  |                    |            |  |   |           
|Loans, including fees                                 |  | $                  | 11,915,218 |                    | $ | 9,279,311          |  | $                  | 29,831,542 |  | $ | 26,151,149
|Investment securities                                 |  |                    | 439,733    |                    |   | 570,540            |  |                    | 1,346,912  |  |   | 1,782,797 
|Overnight funds sold                                  |  |                    | 4,025      |                    |   | 4,715              |  |                    | 50,440     |  |   | 33,771    
|Interest-bearing deposits in other banks              |  |                    | 11,298     |                    |   | 86,488             |  |                    | 234,528    |  |   | 235,980   
|                                                      |  |                    |            |                    |   |                    |  |                    |            |  |   |           
|Total interest income                                 |  |                    | 12,370,274 |                    |   | 9,941,054          |  |                    | 31,463,422 |  |   | 28,203,697
|                                                      |  |                    |            |                    |   |                    |  |                    |            |  |   |           
|Interest Expense:                                     |  |                    |            |                    |   |                    |  |                    |            |  |   |           
|Deposits:                                             |  |                    |            |                    |   |                    |  |                    |            |  |   |           
|Demand                                                |  |                    | 391,947    |                    |   | 174,277            |  |                    | 705,984    |  |   | 511,173   
|Savings                                               |  |                    | 382,400    |                    |   | 753,221            |  |                    | 1,416,517  |  |   | 2,118,228 
|Time deposits:                                        |  |                    |            |                    |   |                    |  |                    |            |  |   |           
|Less than $100,000                                    |  |                    | 1,692,278  |                    |   | 1,061,393          |  |                    | 4,662,535  |  |   | 2,903,280 
|$100,000 or more                                      |  |                    | 1,221,531  |                    |   | 1,029,512          |  |                    | 3,613,256  |  |   | 2,936,763 
|                                                      |  |                    |            |                    |   |                    |  |                    |            |  |   |           
|Interest on deposits                                  |  |                    | 3,688,156  |                    |   | 3,018,403          |  |                    | 10,398,292 |  |   | 8,469,444 
|Federal Home Loan Bank borrowings                     |  |                    | 915,963    |                    |   | 614,591            |  |                    | 2,141,235  |  |   | 1,640,220 
|Other borrowings                                      |  |                    | 237,995    |                    |   |                   |  |                    | 322,328    |  |   |          
|Overnight funds purchased                             |  |                    | 5,763      |                    |   | 2,377              |  |                    | 16,122     |  |   | 14,745    
|                                                      |  |                    |            |                    |   |                    |  |                    |            |  |   |           
|Total interest expense                                |  |                    | 4,847,877  |                    |   | 3,635,371          |  |                    | 12,877,977 |  |   | 10,124,409
|                                                      |  |                    |            |                    |   |                    |  |                    |            |  |   |           
|Net interest income                                   |  |                    | 7,522,397  |                    |   | 6,305,683          |  |                    | 18,585,445 |  |   | 18,079,288
|Provision for loan losses                             |  |                    | 279,824    |                    |   | 270,000            |  |                    | 824,150    |  |   | 738,000   
|                                                      |  |                    |            |                    |   |                    |  |                    |            |  |   |           
|Net interest income after provision for loan losses   |  |                    | 7,242,573  |                    |   | 6,035,683          |  |                    | 17,761,295 |  |   | 17,341,288
|                                                      |  |                    |            |                    |   |                    |  |                    |            |  |   |           
|Noninterest Income:                                   |  |                    |            |                    |   |                    |  |                    |            |  |   |           
|Service charges on deposit accounts                   |  |                    | 1,016,418  |                    |   | 502,041            |  |                    | 2,157,191  |  |   | 1,486,385 
|Gain on sale of debt securities                       |  |                    |           |                    |   |                   |  |                    | 457,399    |  |   |          
|Other service charges and fees                        |  |                    | 784,084    |                    |   | 322,004            |  |                    | 2,030,822  |  |   | 1,091,252 
|                                                      |  |                    |            |                    |   |                    |  |                    |            |  |   |           
|Total noninterest income                              |  |                    | 1,800,502  |                    |   | 824,045            |  |                    | 4,645,412  |  |   | 2,577,637 
|                                                      |  |                    |            |                    |   |                    |  |                    |            |  |   |           
|Noninterest Expense:                                  |  |                    |            |                    |   |                    |  |                    |            |  |   |           
|Salaries and employee benefits                        |  |                    | 3,135,668  |                    |   | 2,546,738          |  |                    | 8,190,538  |  |   | 7,692,997 
|Occupancy                                             |  |                    | 936,959    |                    |   | 419,954            |  |                    | 1,969,912  |  |   | 1,234,571 
|Data processing                                       |  |                    | 427,456    |                    |   | 143,222            |  |                    | 840,650    |  |   | 454,068   
|Other                                                 |  |                    | 2,040,433  |                    |   | 943,107            |  |                    | 4,140,407  |  |   | 2,788,254 
|                                                      |  |                    |            |                    |   |                    |  |                    |            |  |   |           
|Total noninterest expense                             |  |                    | 6,540,516  |                    |   | 4,053,021          |  |                    | 15,141,507 |  |   | 12,169,890
|                                                      |  |                    |            |                    |   |                    |  |                    |            |  |   |           
|Income before provision for income taxes              |  |                    | 2,502,559  |                    |   | 2,806,707          |  |                    | 7,265,200  |  |   | 7,749,035 
|Provision for income taxes                            |  |                    | 806,531    |                    |   | 970,214            |  |                    | 2,434,750  |  |   | 2,651,529 
|                                                      |  |                    |            |                    |   |                    |  |                    |            |  |   |           
|Net income                                            |  | $                  | 1,696,028  |                    | $ | 1,836,493          |  | $                  | 4,830,450  |  | $ | 5,097,506 
|                                                      |  |                    |            |                    |   |                    |  |                    |            |  |   |           
|Earnings Per Share:                                   |  |                    |            |                    |   |                    |  |                    |            |  |   |           
|                                                      |  |                    |            |                   
|Basic earnings per share                              |  | $                  | 0.13       |                    | $ | 0.18               |  | $                  | 0.42       |  | $ | 0.50      
|                                                      |  |                    |            |                    |   |                    |  |                    |            |  |   |           
|Diluted earnings per share                            |  | $                  | 0.13       |                    | $ | 0.18               |  | $                  | 0.41       |  | $ | 0.49      
|                                                      |  |                    |            |                    |   |                    |  |                    |            |  |   |           
|Basic weighted average shares outstanding             |  |                    | 13,143,464 |                    |   | 10,236,941         |  |                    | 11,545,825 |  |   | 10,229,282
|Effect of dilutive stock options and non-vested stock |  |                    | 179,394    |                    |   | 221,456            |  |                    | 125,008    |  |   | 210,179   
|                                                      |  |                    |            |                    |   |                    |  |                    |            |  |   |           
|Diluted weighted average shares outstanding           |  |                    | 13,322,858 |                    |   | 10,458,397         |  |                    | 11,670,833 |  |   | 10,439,461
|                                                      |  |                    |            |                    |   |                    |  |                    |            |  |   |           

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



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##### Table of Contents

HAMPTON ROADS BANKSHARES, INC.

Consolidated Statements of Changes in Shareholders Equity

Nine months ended September 30, 2008 and year ended December 31, 2007



|                                                                                                    |  |              |   |  |        |           |   |                 |   |            |               |  |   |                  |   |  |       |          |   |  |   |             |  
|--------------------------------------------------------------------------------------------------- |  | ------------ | - |  | ------ | --------- | - | --------------- | - | ---------- | ------------- |  | - | ---------------- | - |  | ----- | -------- | - |  | - | ----------- | -
|                                                                                                    |  |              |   |  |        |           |   |                 |   |            |               |  |   | AccumulatedOther |   |  |       |         
|                                                                                                    |  | Common Stock |   |  |        |           |   | Retained        |   |            | Comprehensive |  |   |                  |  
|                                                                                                    |  | Shares       |   |  | Amount |           |   | Capital Surplus |   |            | Earnings      |  |   | Income (Loss)    |   |  | Total |         
|Balance at December 31, 2006                                                                        |  | 10,251,336   |   |  | $      | 6,407,085 |   |                 | $ | 42,105,666 |               |  | $ | 22,091,191       |   |  | $     | (441,399 | ) |  | $ | 70,162,543  |  
|                                                                                                    |  |              |   |  |        |          
|Comprehensive income:                                                                               |  |              |   |  |        |           |   |                 |   |            |               |  |   |                  |   |  |       |          |   |  |   |             |  
|Net income                                                                                          |  |             |   |  |        |          |   |                 |   |           |               |  |   | 6,810,613        |   |  |       |         |   |  |   | 6,810,613   |  
|Change in unrealized gain (loss) on securities available-for-sale, net of taxes of $253,033         |  |             |   |  |        |          |   |                 |   |           |               |  |   |                 |   |  |       | 491,183  |   |  |   | 491,183     |  
|                                                                                                    |  |              |   |  |        |           |   |                 |   |            |               |  |   |                  |   |  |       |          |   |  |   |             |  
|Total comprehensive income                                                                          |  |              |   |  |        |           |   |                 |   |            |               |  |   |                  |   |  |       |          |   |  |   | 7,301,796   |  
|Shares issued related to:                                                                           |  |              |   |  |        |           |   |                 |   |            |               |  |   |                  |   |  |       |          |   |  |   |             |  
|401(k) plan                                                                                         |  | 11,020       |   |  |        | 6,888     |   |                 |   | 130,311    |               |  |   |                 |   |  |       |         |   |  |   | 137,199     |  
|Executive savings plan                                                                              |  | 11,686       |   |  |        | 7,304     |   |                 |   | 138,187    |               |  |   |                 |   |  |       |         |   |  |   | 145,491     |  
|Regional board fees                                                                                 |  | 1,893        |   |  |        | 1,183     |   |                 |   | 22,807     |               |  |   |                 |   |  |       |         |   |  |   | 23,990      |  
|Exercise of stock options                                                                           |  | 93,599       |   |  |        | 58,499    |   |                 |   | 648,108    |               |  |   |                 |   |  |       |         |   |  |   | 706,607     |  
|Dividend reinvestment                                                                               |  | 165,991      |   |  |        | 103,744   |   |                 |   | 2,145,935  |               |  |   |                 |   |  |       |         |   |  |   | 2,249,679   |  
|Stock-based compensation expense                                                                    |  | 11,864       |   |  |        | 7,415     |   |                 |   | 329,835    |               |  |   |                 |   |  |       |         |   |  |   | 337,250     |  
|Common stock repurchased                                                                            |  | (232,490     | ) |  |        | (145,306  | ) |                 |   | (2,961,937 | )             |  |   |                 |   |  |       |         |   |  |   | (3,107,243  | )
|Tax benefit of stock option exercises                                                               |  |             |   |  |        |          |   |                 |   | 118,171    |               |  |   |                 |   |  |       |         |   |  |   | 118,171     |  
|Cash dividends ($0.43 per share)                                                                    |  |             |   |  |        |          |   |                 |   |           |               |  |   | (4,415,469       | ) |  |       |         |   |  |   | (4,415,469  | )
|                                                                                                    |  |              |   |  |        |           |   |                 |   |            |               |  |   |                  |   |  |       |          |   |  |   |             |  
|Balance at December 31, 2007                                                                        |  | 10,314,899   |   |  | $      | 6,446,812 |   |                 | $ | 42,677,083 |               |  | $ | 24,486,335       |   |  | $     | 49,784   |   |  | $ | 73,660,014  |  
|                                                                                                    |  |              |   |  |        |           |   |                 |   |            |               |  |   |                  |   |  |       |          |   |  |   |             |  
|(Unaudited)                                                                                         |  |              |   |  |        |           |   |                 |   |            |               |  |   |                  |   |  |       |          |   |  |   |             |  
|Comprehensive income:                                                                               |  |              |   |  |        |           |   |                 |   |            |               |  |   |                  |   |  |       |          |   |  |   |             |  
|Net income                                                                                          |  |             |   |  | $      |          |   |                 | $ |           |               |  | $ | 4,830,450        |   |  | $     |         |   |  | $ | 4,830,450   |  
|Change in unrealized gain (loss) on securities available-for-sale, net of taxes of $5,912           |  |             |   |  |        |          |   |                 |   |           |               |  |   |                 |   |  |       | 20,933   |   |  |   | 20,933      |  
|Reclassification adjustment for securities gains included in net income, net of taxes of ($155,519) |  |             |   |  |        |          |   |                 |   |           |               |  |   |                 |   |  |       | (301,880 | ) |  |   | (301,880    | )
|                                                                                                    |  |              |   |  |        |           |   |                 |   |            |               |  |   |                  |   |  |       |          |   |  |   |             |  
|Total comprehensive income                                                                          |  |              |   |  |        |           |   |                 |   |            |               |  |   |                  |   |  |       |          |   |  |   | 4,549,503   |  
|Shares issued related to:                                                                           |  |              |   |  |        |           |   |                 |   |            |               |  |   |                  |   |  |       |          |   |  |   |             |  
|Executive savings plan                                                                              |  | 11,582       |   |  |        | 7,239     |   |                 |   | 114,432    |               |  |   |                 |   |  |       |         |   |  |   | 121,671     |  
|Regional board fees                                                                                 |  | 8,510        |   |  |        | 5,319     |   |                 |   | 104,670    |               |  |   |                 |   |  |       |         |   |  |   | 109,989     |  
|Exercise of stock options                                                                           |  | 102,470      |   |  |        | 64,043    |   |                 |   | 448,713    |               |  |   |                 |   |  |       |         |   |  |   | 512,756     |  
|Dividend reinvestment                                                                               |  | 142,746      |   |  |        | 89,216    |   |                 |   | 1,595,863  |               |  |   |                 |   |  |       |         |   |  |   | 1,685,079   |  
|Acquisition of Shore Financial Corporation                                                          |  | 2,713,425    |   |  |        | 1,695,891 |   |                 |   | 29,508,497 |               |  |   |                 |   |  |       |         |   |  |   | 31,204,388  |  
|Common stock repurchased                                                                            |  | (72,687      | ) |  |        | (45,430   | ) |                 |   | (850,839   | )             |  |   |                 |   |  |       |         |   |  |   | (896,269    | )
|Stock-based compensation expense                                                                    |  |             |   |  |        |          |   |                 |   | 111,121    |               |  |   |                 |   |  |       |         |   |  |   | 111,121     |  
|Options acquired in merger                                                                          |  |             |   |  |        |          |   |                 |   | 1,164,292  |               |  |   |                 |   |  |       |         |   |  |   | 1,164,292   |  
|Tax benefit of stock option exercises                                                               |  |             |   |  |        |          |   |                 |   | 21,892     |               |  |   |                 |   |  |       |         |   |  |   | 21,892      |  
|Cash dividends ($0.33 per share)                                                                    |  |             |   |  |        |          |   |                 |   |           |               |  |   | (3,724,633       | ) |  |       |         |   |  |   | (3,724,633  | )
|                                                                                                    |  |              |   |  |        |           |   |                 |   |            |               |  |   |                  |   |  |       |          |   |  |   |             |  
|Balance at September 30, 2008                                                                       |  | 13,220,945   |   |  | $      | 8,263,090 |   |                 | $ | 74,895,724 |               |  | $ | 25,592,152       |   |  | $     | (231,163 | ) |  | $ | 108,519,803 |  
|                                                                                                    |  |              |   |  |        |           |   |                 |   |            |               |  |   |                  |   |  |       |          |   |  |   |             |  

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



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HAMPTON ROADS BANKSHARES, INC.

Consolidated Statements of Cash Flows (Unaudited)



|                                                                                  |  |                    |             |   |                    |   |             |  
|--------------------------------------------------------------------------------- |  | ------------------ | ----------- | - | ------------------ | - | ----------- | -
|                                                                                  |  | Nine Months Ended  |            
|                                                                                  |  | September 30, 2008 |             |   | September 30, 2007 |  
|Operating Activities:                                                             |  |                    |             |   |                    |   |             |  
|Net income                                                                        |  | $                  | 4,830,450   |   |                    | $ | 5,097,506   |  
|Adjustments to reconcile net income to net cash provided by operating activities: |  |                    |             |   |                    |   |             |  
|Depreciation and amortization                                                     |  |                    | 952,184     |   |                    |   | 664,427     |  
|Provision for loan losses                                                         |  |                    | 824,150     |   |                    |   | 738,000     |  
|Regional board fees                                                               |  |                    | 109,989     |   |                    |   | 19,591      |  
|Stock-based compensation expense                                                  |  |                    | 111,121     |   |                    |   | 293,191     |  
|Net amortization of premiums and accretion of discounts on investment securities  |  |                    | (59,353     | ) |                    |   | 1,313       |  
|Amortization of intangible assets                                                 |  |                    | 381,506     |   |                    |   |            |  
|Gain on sale of premises and equipment                                            |  |                    | (519,390    | ) |                    |   | (531        | )
|Gain on sale of debt securities                                                   |  |                    | (457,399    | ) |                    |   |            |  
|Other than temporary impairment of investments                                    |  |                    | 396,594     |   |                    |   |            |  
|Deferred income tax benefit                                                       |  |                    | (803,068    | ) |                    |   | (721,191    | )
|Changes in:                                                                       |  |                    |             |   |                    |   |             |  
|Interest receivable                                                               |  |                    | 287,668     |   |                    |   | (268,179    | )
|Other assets                                                                      |  |                    | (455,045    | ) |                    |   | (260,795    | )
|Interest payable                                                                  |  |                    | (242,761    | ) |                    |   | 434,190     |  
|Other liabilities                                                                 |  |                    | (2,047,373  | ) |                    |   | 2,050,117   |  
|                                                                                  |  |                    |             |   |                    |   |             |  
|Net cash provided by operating activities                                         |  |                    | 3,309,273   |   |                    |   | 8,047,639   |  
|                                                                                  |  |                    |             |   |                    |   |             |  
|Investing Activities:                                                             |  |                    |             |   |                    |   |             |  
|Proceeds from maturities and calls of debt securities available-for-sale          |  |                    | 9,126,801   |   |                    |   | 11,154,693  |  
|Proceeds from sale of debt securities                                             |  |                    | 18,457,399  |   |                    |   |            |  
|Purchase of debt securities available-for-sale                                    |  |                    | (2,000,000  | ) |                    |   | (1,242,107  | )
|Purchase of equity securities available-for-sale                                  |  |                    | (812,896    | ) |                    |   |            |  
|Proceeds from sales of Federal Home Loan Bank stock                               |  |                    | 3,683,500   |   |                    |   | 405,000     |  
|Purchase of Federal Home Loan Bank stock                                          |  |                    | (4,252,700  | ) |                    |   | (1,047,100  | )
|Proceeds from sales of Federal Reserve Bank stock                                 |  |                    |            |   |                    |   | 5,150       |  
|Purchase of Federal Reserve Bank stock                                            |  |                    | (865,600    | ) |                    |   | (1,100      | )
|Net increase in total loans                                                       |  |                    | (97,703,102 | ) |                    |   | (78,145,647 | )
|Purchase of premises and equipment                                                |  |                    | (3,308,578  | ) |                    |   | (323,289    | )
|Proceeds from sale of premises and equipment                                      |  |                    | 763,850     |   |                    |   |            |  
|                                                                                  |  |                    |             |   |                    |   |             |  
|Net cash used in investing activities                                             |  |                    | (76,911,326 | ) |                    |   | (69,194,400 | )
|                                                                                  |  |                    |             |   |                    |   |             |  
|Financing Activities:                                                             |  |                    |             |   |                    |   |             |  
|Net increase in deposits                                                          |  |                    | 35,589,220  |   |                    |   | 48,109,229  |  
|Repayments of Federal Home Loan Bank borrowings                                   |  |                    | (90,713,667 | ) |                    |   | (8,000,000  | )
|Proceeds from Federal Home Loan Bank borrowings                                   |  |                    | 102,847,000 |   |                    |   | 23,000,000  |  
|Proceeds from other borrowings                                                    |  |                    | 28,000,000  |   |                    |   |            |  
|Cash acquired in merger                                                           |  |                    | 16,165,634  |   |                    |   |            |  
|Cash paid in merger                                                               |  |                    | (22,045,882 | ) |                    |   |            |  
|Common stock repurchased                                                          |  |                    | (888,426    | ) |                    |   | (2,299,123  | )
|Issuance of shares to 401(k) plan                                                 |  |                    |            |   |                    |   | 137,199     |  
|Issuance of shares to executive savings plan                                      |  |                    | 121,671     |   |                    |   | 145,491     |  
|Proceeds from exercise of stock options                                           |  |                    | 504,913     |   |                    |   | 242,119     |  
|Excess tax benefit realized from stock options exercised                          |  |                    | 21,892      |   |                    |   | 21,981      |  
|Dividends paid, net                                                               |  |                    | (2,039,554  | ) |                    |   | (1,605,945  | )
|                                                                                  |  |                    |             |   |                    |   |             |  
|Net cash provided by financing activities                                         |  |                    | 67,562,801  |   |                    |   | 59,750,951  |  
|                                                                                  |  |                    |             |   |                    |   |             |  
|Decrease in cash and cash equivalents                                             |  |                    | (6,039,252  | ) |                    |   | (1,395,810  | )
|Cash and cash equivalents at beginning of period                                  |  |                    | 25,563,605  |   |                    |   | 26,798,551  |  
|                                                                                  |  |                    |             |   |                    |   |             |  
|Cash and cash equivalents at end of period                                        |  | $                  | 19,524,353  |   |                    | $ | 25,402,741  |  
|                                                                                  |  |                    |             |   |                    |   |             |  



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|                                                       |  |   |             |   |  |   |          
|------------------------------------------------------ |  | - | ----------- | - |  | - | ---------
|Supplemental cash flow information:                    |  |   |             |   |  |   |          
|Cash paid during the period for interest               |  | $ | 12,469,537  |   |  | $ | 9,690,219
|Cash paid during the period for income taxes           |  |   | 3,400,000   |   |  |   | 2,935,000
|                                                       |  |  
|Supplemental noncash information:                      |  |   |             |   |  |   |          
|Dividends reinvested                                   |  | $ | 1,685,079   |   |  | $ | 1,679,276
|Value of shares exchanged in exercise of stock options |  |   | 7,843       |   |  |   | 206,455  
|Change in unrealized gain (loss) on securities         |  |   | (430,554    | ) |  |   | 424,630  
|Transfer between loans and other real estate owned     |  |   | 1,129,514   |   |  |   | 69,552   
|Transfer between premises and equipment and loans      |  |   |            |   |  |   | 25,000   
|                                                       |  |  
|Transactions related to acquisition of subsidiary      |  |   |             |   |  |   |          
|Increase in assets and liabilities                     |  |   |             |   |  |   |          
|Loans, net                                             |  | $ | 220,449,679 |   |  | $ |         
|Securities                                             |  |   | 18,510,458  |   |  |   |         
|Other assets                                           |  |   | 13,676,851  |   |  |   |         
|Non interest bearing deposits                          |  |   | 33,331,029  |   |  |   |         
|Interest bearing deposits                              |  |   | 175,070,879 |   |  |   |         
|Borrowings                                             |  |   | 34,228,333  |   |  |   |         
|Other liabilities                                      |  |   | 3,221,339   |   |  |   |         
|Issuance of common stock and stock options             |  |   | 32,368,680  |   |  |   |         



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HAMPTON ROADS BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

September 30, 2008

NOTE A  BASIS OF PRESENTATION

Hampton Roads Bankshares, Inc., (the Company), is a multi-bank holding company incorporated under the laws of the Commonwealth of Virginia on
February 28, 2001. The Company owns Bank of Hampton Roads (Norfolk, Virginia), Shore Bank (Onley, Virginia) and its subsidiary Shore Investments, Inc. (Onley, Virginia), and Hampton Roads Investments, Inc. (Norfolk, Virginia). The consolidated
statements include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany accounts have been eliminated.

The Companys principal executive office is located at 999 Waterside Drive, Suite 200, Norfolk, VA 23510 and its telephone number is (757) 217-1000. The Companys common stock trades on the Nasdaq Global Select Market under
the symbol HMPR.

Bank of Hampton Roads is a Virginia state-chartered commercial bank with 18 full service offices in the
Hampton Roads region of southeastern Virginia, including nine offices in the city of Chesapeake, four offices in each of the cities of Norfolk and Virginia Beach, and one office in the city of Suffolk. Bank of Hampton Roads commenced operations in
1987.

Shore Bank is a Virginia state-chartered commercial bank with eight full service offices and two investment centers located on the
Eastern Shore of Virginia and Maryland including the counties of Accomack and Northampton in Virginia and the Pocomoke City/Worcester County and Salisbury/Wicomico County market areas in Maryland. Shore Bank commenced operations in 1961.

In January 2004, Hampton Roads Investments, Inc., a wholly owned subsidiary, was formed to provide securities, brokerage, and investment advisory
services.

The accompanying unaudited consolidated financial statements have been prepared in accordance with U. S. generally accepted
accounting principles 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 U. S. 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 consolidated financial statements and
footnotes thereto included in the Companys annual report on Form 10-K for the year ended December 31, 2007 (the 2007 Form 10-K). The results of operations for the nine months ended September 30, 2008 are not necessarily
indicative of the results to be expected for the full year.

NOTE B  ACQUISITION OF SHORE FINANCIAL

On June 1, 2008 pursuant to the terms of the Agreement and Plan of Merger, dated as of January 8, 2008 (the Shore Merger Agreement)
by and between the Company and Shore Financial Corporation (SFC) the Company acquired all of the outstanding shares of SFC. The shareholders of SFC received, for each share of SFC common stock that they owned immediately prior to the
effective time of the merger, either $22 per share in cash or 1.8 shares of common stock of the Company. Pursuant to the terms of the Shore Merger Agreement, shareholders of SFC had the opportunity to elect to receive cash, shares of common stock of
the Company, or a combination of both, subject to allocation and proration procedures ensuring that no less than 25% and no more than 45% of the total merger consideration was cash and the remainder was common stock of the Company. In addition, at
the effective time of the merger, each outstanding option to purchase shares of SFCs common stock under any stock plans vested pursuant to its terms and was converted into an option to acquire the number of shares of the Companys common
stock equal to the number of shares of SFC common stock underlying the option multiplied by 1.8. The exercise price of each option was adjusted accordingly. The aggregate purchase price was approximately $55.2 million, including common stock valued
at $31.2 million calculated by multiplying the 2,715,425 shares issued, by the Companys stock price on the day the merger was announced of $11.50, SFC stock held by the Company as an investment of $0.8 million, stock options exchanged valued
at $1.2 million, cash of $21.0 million and direct costs of the merger of $1.0 million.



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Net assets acquired are shown in the table below (in thousands).



|                              |  |   |        
|----------------------------- |  | - | -------
|Securities available for sale |  | $ | 18,510 
|Loans, net                    |  |   | 220,450
|Goodwill                      |  |   | 22,185 
|Core deposit intangible       |  |   | 9,117  
|Employee agreement intangible |  |   | 160    
|Other assets                  |  |   | 30,656 
|                              |  |   |        
|Total assets aquired          |  |   | 301,078
|Deposits                      |  |   | 208,402
|Borrowings                    |  |   | 34,228 
|Other liabilities             |  |   | 3,221  
|Total liabilities assumed     |  |   | 245,851
|                              |  |   |        
|Net assets aquired            |  | $ | 55,227 
|                              |  |   |        

The merger transaction was accounted for under the purchase method of accounting and is intended
to qualify as a tax-free reorganization under Section 368(a) of the Internal Revenue Code. The merger resulted in $22.1 million of goodwill and $9.1 million of core deposit intangibles. The core deposit intangible was based on an independent
valuation and will be amortized over the estimated life of the core deposits of nine years, based on undiscounted cash flows. In order to finance the merger transaction, the Company borrowed $23 million. The loan has a variable interest rate of
prime minus one percent and matures in July 2018. The loan requires that the Company meet certain covenants and as of September 30, 2008, all covenants were met.

The Company is in the process of analyzing the effect of canceling certain contracts between Shore Bank and their vendors in order to produce efficiencies from the merger. Costs of canceling the contracts could be
material and would change the amount of goodwill associated with the merger. Additionally, the Company is still determining the value of the core deposit intangible. An estimate of the core deposit intangible has been used in the preparation of
these consolidated financial statements, however, that estimate may be revised once the final valuations have been performed.

The
Companys consolidated financial statements include the results of operations of Shore Bank only from the date of acquisition. A pro forma condensed consolidated income statement for the nine months ended September 30, 2008 is shown as if
the merger occurred at the beginning of the period as follows:



|                                                    |  |   |       
|--------------------------------------------------- |  | - | ------
|Interest income                                     |  | $ | 37,999
|Interest expense                                    |  |   | 15,751
|                                                    |  |   |       
|Net interest income                                 |  |   | 22,248
|Provision for loan losses                           |  |   | 1,079 
|                                                    |  |   |       
|Net interest income after provision for loan losses |  |   | 21,169
|Noninterest income                                  |  |   | 6,061 
|Noninterest expense                                 |  |   | 19,883
|                                                    |  |   |       
|Income before income taxes                          |  |   | 7,347 
|Income tax expense                                  |  |   | 3,152 
|                                                    |  |   |       
|Net income                                          |  | $ | 4,195 
|                                                    |  |   |       
|Basic EPS                                           |  | $ | 0.40  
|Diluted EPS                                         |  | $ | 0.39  

NOTE C  STOCK-BASED COMPENSATION

The Company adopted Statement of Financial Accounting Standards (SFAS) No. 123R, Share Based Payment,on January 1, 2006 and,
accordingly, uses the fair-value method to account for stock-based compensation. Fair-value of stock options is estimated at the date of grant using a lattice option pricing model.

Stock-based compensation expense recognized in the consolidated statements of income for the nine months ended September 30, 2008 and
September 30, 2007 was $111,121 and $293,191, respectively, with a related tax benefit of $20,831 and $76,359, respectively. During the first nine months of 2008 and 2007, stock-based compensation expense was comprised of $63,532 and $127,570,
respectively, related to stock options which vested during the period, and $47,589 and $165,621, respectively, related to share awards.



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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 10-year terms and are either fully vested and exercisable at the date of grant or vest ratably over periods that range from one year to 10 years. A summary of the
Companys stock option activity and related information for the nine months ended September 30, 2008 is as follows:



|                              |  |                         |  |                               |       |                                     |      |                         |   |        
|----------------------------- |  | ----------------------- |  | ----------------------------- | ----- | ----------------------------------- | ---- | ----------------------- | - | -------
|                              |  | StockOptionsOutstanding |  | WeightedAverageExercise Price |       | RemainingContractual Life(in years) |      | AggregateIntrinsicValue
|Balance at December 31, 2007  |  | 858,156                 |  | $                             | 9.48  |                                     | N/A  |                         |   | N/A    
|Acquired through merger       |  | 216,183                 |  |                               | 6.27  |                                     | N/A  |                         |   | N/A    
|Granted                       |  | 18,000                  |  |                               | 11.41 |                                     | N/A  |                         |   | N/A    
|Forfeited                     |  | 2,750                   |  |                               | 12.00 |                                     | N/A  |                         |   | N/A    
|Exercised                     |  | 102,470                 |  |                               | 5.00  |                                     | N/A  |                         |   | N/A    
|Expired                       |  | 1,651                   |  |                               | 10.36 |                                     | N/A  |                         |   | N/A    
|                              |  |                         |  |                               |       |                                     |      |                         |   |        
|Balance at September 30, 2008 |  | 985,468                 |  | $                             | 9.27  |                                     | 5.41 |                         | $ | 917,716
|                              |  |                         |  |                               |       |                                     |      |                         |   |        

The stock options acquired and granted through the merger with SFC in the second quarter of 2008
were valued at the time of the merger with a weighted-average grant-date fair value of $5.20. The weighted-average grant-date fair value of stock options granted during the nine months ended September 30, 2007 was $2.13. 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 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. The assumptions used to value the stock options acquired and granted
through the merger in 2008 were as follows: risk-free interest rate of 3.34%, volatility of 34.30%, dividend yield of 3.93%, and expected option terms ranging from 1.3 years to 10.0 years. Expected volatility is based on historical volatility of the
Companys traded shares. The expected term is calculated by the lattice option pricing model using assumptions regarding the contractual term of the stock options, vesting periods, the exercise price to market stock price multiple experienced
by the Company, and the historical employee exit rate.

The total intrinsic value of stock options exercised during the nine month periods
ended September 30, 2008 and 2007 was $617,529 and $174,273, respectively. Cash received from stock option exercises for the nine month periods ended September 30, 2008 and 2007 was $504,915 and $242,130, respectively. The Company may
issue new shares to satisfy stock option grants and as of September 30, 2008 there were 2,057,309 shares available under existing stock incentive plans that were approved by shareholders. However, shares may be repurchased in open market or
privately negotiated transactions under certain circumstances. As of September 30, 2008, there was $314,639 of unrecognized compensation cost related to non-vested stock options. That cost is expected to be recognized over a weighted-average
period of 3.52 years.

The Company has granted non-vested shares of common stock to certain directors and employees as part of incentive
programs and to those directors who elected to use deferred directors fees to purchase non-vested shares of common stock. Non-vested shares of common stock awarded to employees and directors as part of incentive programs have vesting schedules
that range from four to nine years and are expensed over the same schedules. Non-vested shares of common stock issued to directors as a method of deferring their directors fees are expensed at the time the fees are earned by the director. A
summary of the Companys non-vested share activity and related information for the nine months ended September 30, 2008 is as follows:



|                              |  |                 |  |                                      |      
|----------------------------- |  | --------------- |  | ------------------------------------ | -----
|                              |  | Number ofShares |  | Weighted-AverageGrant-DateFair Value
|Balance at December 31, 2007  |  | 54,540          |  | $                                    | 11.23
|Granted                       |  |                |  |                                      |     
|Vested                        |  | 32,623          |  |                                      | 11.13
|                              |  |                 |  |                                      |      
|Balance at September 30, 2008 |  | 21,917          |  | $                                    | 11.38
|                              |  |                 |  |                                      |      



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As of September 30, 2008, there was $183,741 of total unrecognized compensation cost related to
non-vested shares of common stock. That cost is expected to be recognized over a weighted-average period of 3.98 years.

NOTE D  INVESTMENT
SECURITIES

The amortized cost and estimated fair value of investment securities available-for-sale were:



|                                    |  |                    |            |                     |   |               |  |                     |            |  |   |           
|----------------------------------- |  | ------------------ | ---------- | ------------------- | - | ------------- |  | ------------------- | ---------- |  | - | ----------
|                                    |  | September 30, 2008 |            | December 31, 2007  
|                                    |  | AmortizedCost      |            | EstimatedFair Value |   | AmortizedCost |  | EstimatedFair Value
|U.S. Agency securities              |  | $                  | 22,052,871 |                     | $ | 22,171,961    |  | $                   | 40,943,608 |  | $ | 41,272,656
|Mortgage-backed securities          |  |                    | 1,509,913  |                     |   | 1,529,351     |  |                     | 641,785    |  |   | 641,174   
|State and Municipal securities      |  |                    | 6,695,555  |                     |   | 6,629,772     |  |                     | 244,001    |  |   | 249,995   
|Equity securities                   |  |                    | 3,610,104  |                     |   | 3,178,003     |  |                     | 472,500    |  |   | 213,500   
|                                    |  |                    |            |                     |   |               |  |                     |            |  |   |           
|Total securities available-for-sale |  | $                  | 33,868,443 |                     | $ | 33,509,087    |  | $                   | 42,301,894 |  | $ | 42,377,325
|                                    |  |                    |            |                     |   |               |  |                     |            |  |   |           

During the third quarter of 2008, equity securities with an amortized cost of $396,594 were
determined to be other than temporarily impaired. An impairment loss for the entire $396,594 was recognized in the third quarter of 2008. The remaining unrealized losses have been evaluated and are considered to be temporary impairments of the value
of the issues. Management evaluates securities for other-than-temporary impairments at least on a quarterly basis, and more frequently when economic or market concerns warrant such evaluation. Consideration is given to (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, and (3) the intent and ability of the Company to retain its investment in the issuer for a period of
time sufficient to allow for any anticipated recovery in fair value.

NOTE E  LOANS

Major classifications of loans are summarized as follows:



|                                     |  |                    |             |                   |   |             |  
|------------------------------------ |  | ------------------ | ----------- | ----------------- | - | ----------- | -
|                                     |  | September 30, 2008 |             | December 31, 2007 |  
|Commercial                           |  | $                  | 143,134,115 |                   | $ | 109,782,739 |  
|Construction                         |  |                    | 169,341,022 |                   |   | 165,468,776 |  
|Real estate-commercial mortgage      |  |                    | 256,645,244 |                   |   | 151,600,649 |  
|Real estate-residential mortgage     |  |                    | 196,747,362 |                   |   | 38,523,593  |  
|Installment loans (to individuals)   |  |                    | 30,990,266  |                   |   | 11,976,075  |  
|Deferred loan fees and related costs |  |                    | 16,599      |                   |   | (202,600    | )
|                                     |  |                    |             |                   |   |             |  
|Total loans                          |  | $                  | 796,874,608 |                   | $ | 477,149,232 |  
|                                     |  |                    |             |                   |   |             |  

Non-performing assets were as follows:



|                                                   |  |                    |           |                   |   |          
|-------------------------------------------------- |  | ------------------ | --------- | ----------------- | - | ---------
|                                                   |  | September 30, 2008 |           | December 31, 2007
|Loans 90 days past due and still accruing interest |  | $                  | 600,690   |                   | $ | 851,846  
|Nonaccrual loans                                   |  |                    | 1,606,599 |                   |   | 1,792,758
|Real estate acquired in settlement of loans        |  |                    | 1,126,514 |                   |   |         
|                                                   |  |                    |           |                   |   |          
|Total non-performing assets                        |  | $                  | 3,333,803 |                   | $ | 2,644,604
|                                                   |  |                    |           |                   |   |          



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Information on impaired loans was as follows:



|                                                                                 |  |                    |           |                   |   |          
|-------------------------------------------------------------------------------- |  | ------------------ | --------- | ----------------- | - | ---------
|                                                                                 |  | September 30, 2008 |           | December 31, 2007
|Impaired loans for which an allowance has been provided                          |  | $                  | 2,322,606 |                   | $ | 1,697,758
|Impaired loans for which no allowance has been provided                          |  |                    | 442,593   |                   |   |         
|                                                                                 |  |                    |           |                   |   |          
|Total impaired loans                                                             |  | $                  | 2,765,199 |                   | $ | 1,697,758
|                                                                                 |  |                    |           |                   |   |          
|Allowance provided for impaired loans, included in the allowance for loan losses |  | $                  | 628,936   |                   | $ | 405,552  
|                                                                                 |  |                    |           |                   |   |          
|Average balance in impaired loans                                                |  | $                  | 3,133,319 |                   | $ | 1,782,143
|                                                                                 |  |                    |           |                   |   |          
|Interest income recognized from impaired loans                                   |  | $                  | 48,290    |                   | $ | 19,952   
|                                                                                 |  |                    |           |                   |   |          

NOTE F  ALLOWANCE FOR LOAN LOSSES

Transactions affecting the allowance for loan losses during the nine months ended September 30, 2008 and 2007 were as follows:



|                               |  |      |           |   |      |   |           |  
|------------------------------ |  | ---- | --------- | - | ---- | - | --------- | -
|                               |  | 2008 |           |   | 2007 |  
|Balance at beginning of period |  | $    | 5,042,583 |   |      | $ | 3,910,943 |  
|Provision for loan losses      |  |      | 824,150   |   |      |   | 738,000   |  
|Loans charged off              |  |      | (164,590  | ) |      |   | (10,775   | )
|Recoveries                     |  |      | 58,191    |   |      |   | 9,098     |  
|Allowance acquired in merger   |  |      | 2,931,749 |   |      |   |          |  
|                               |  |      |           |   |      |   |           |  
|Balance at end of period       |  | $    | 8,692,083 |   |      | $ | 4,647,266 |  
|                               |  |      |           |   |      |   |           |  

NOTE G  PREMISES AND EQUIPMENT

Premises and equipment consisted of the following:



|                                               |  |                    |             |   |                   |   |            |  
|---------------------------------------------- |  | ------------------ | ----------- | - | ----------------- | - | ---------- | -
|                                               |  | September 30, 2008 |             |   | December 31, 2007 |  
|Land                                           |  | $                  | 7,532,205   |   |                   | $ | 4,321,467  |  
|Buildings and improvements                     |  |                    | 16,261,140  |   |                   |   | 6,145,170  |  
|Leasehold improvements                         |  |                    | 1,019,403   |   |                   |   | 847,453    |  
|Equipment, furniture and fixtures              |  |                    | 10,299,334  |   |                   |   | 5,619,191  |  
|                                               |  |                    |             |   |                   |   |            |  
|                                               |  |                    | 35,112,082  |   |                   |   | 16,933,281 |  
|Less accumulated depreciation and amortization |  |                    | (10,425,255 | ) |                   |   | (4,966,130 | )
|                                               |  |                    |             |   |                   |   |            |  
|Premises and equipment, net                    |  | $                  | 24,686,827  |   |                   | $ | 11,967,151 |  
|                                               |  |                    |             |   |                   |   |            |  

NOTE H  SUPPLEMENTAL RETIREMENT AGREEMENTS

The Company has entered into supplemental retirement agreements with several key officers and recognizes expense each year related to these agreements
based on the present value of the benefits expected to be provided to the employees and any beneficiaries. The expense recognized during the first nine months of 2008 and 2007 was $495,000 and $377,540, respectively.

NOTE I  FAIR VALUE MEASUREMENTS

SFAS
No. 157, Fair Value Measurements, defines fair value, establishes a framework for measuring fair value, establishes a three-level valuation hierarchy for disclosure of fair value measurement and enhances disclosure requirements for fair
value measurements. The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date. The three levels are defined as follow:



| |  |  | Level 1 inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------



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| |  |  | Level 2 inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the
asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Level 3 inputs to the valuation methodology are unobservable and significant to the fair value measurement.
| | - |  | -----------------------------------------------------------------------------------------------------------

Following is a description of the valuation methodologies used for instruments measured at fair value, as well as the general classification of such
instruments pursuant to the valuation hierarchy:

Securities

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, quoted prices of securities with similar characteristics, or discounted cash flow. Level 2 securities would include U.S.
agency securities, mortgage-backed agency securities, obligations of states and political subdivisions and certain corporate, asset backed and other securities. 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. As of September 30, 2008 the Company had $32.3 million in Level 2 securities and $1.2 million in Level 3 securities.

Impaired loans

SFAS No. 157 applies to loans
measured for impairment using the practical expedients permitted by SFAS No. 114, Accounting by Creditors for Impairment of a Loan, including impaired loans measured at an observable market price (if available), or at the fair value of
the loans collateral (if the loan is collateral dependent). Fair value of the loans collateral, when the loan is dependent on collateral, is determined by appraisals or independent valuation which is then adjusted for the cost related to
liquidation of the collateral.

Other Real Estate Owned

Certain assets such as other real estate owned are measured at fair value less cost to sell. The Company believes that the fair value component in its valuation follows the provisions of SFAS No. 157.

NOTE J  GOODWILL AND OTHER INTANGIBLES

The
Company accounts for goodwill under SFAS No. 142, Goodwill and Other Intangible Assets (SFAS 142). In accordance with SFAS 142, goodwill is not amortized, but is tested for impairment at least annually. Intangible assets with
definite useful lives (such as core deposit intangibles) are amortized over their respective estimated useful lives to their estimated residual values and reviewed for impairment at least annually.

NOTE K  MERGER WITH GATEWAY FINANCIAL HOLDINGS, INC.

On September 23, 2008 the Company entered into an Agreement and Plan of Merger (the Gateway Merger Agreement) with Gateway Financial Holdings, Inc. (GFH). The Gateway Merger Agreement sets forth the terms and
conditions of the Companys acquisition of GFH through the merger of GFH with and into the Company (the Gateway Merger). Under the terms of the Gateway Merger Agreement, the Company will acquire all of the outstanding shares of GFH.
The shareholders of GFH will receive, for each share of GFH common stock that they own immediately prior to the effective time of the Gateway Merger, 0.67 shares of common stock of the Company and for each share of GFH preferred stock that they own
immediately prior to the effective time of the Gateway Merger, one share of the Companys newly designated Series A Preferred Stock (which will have substantially the same power, designation, preferences, rights and qualifications, limitations
and restrictions as the GFH Series A Preferred Stock) for each share of GFH Series A Preferred Stock that they own, and one share of the Companys newly designated Series B Non-Convertible Non-Cumulative Perpetual Preferred Stock (which will
have substantially the same powers, designations, preferences, rights and qualifications, limitations and restrictions as the GFH Series B Non-Convertible Non-Cumulative Perpetual Preferred Stock) for each share of GFH Series B Non-Convertible
Non-Cumulative Perpetual Preferred Stock that they own. In addition, at the effective time of the Gateway Merger, each outstanding option to purchase shares of GFHs common stock under any stock plans shall vest pursuant to its terms and shall
be converted into an option to acquire the number of shares of the Companys common stock equal to the number



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of shares of GFH common stock underlying the option multiplied by 0.67. The exercise price of each option will be adjusted accordingly. Furthermore, each
share of GFH restricted stock, whether or not vested, will be converted into and become rights with respect to the Companys common stock. Each share of GFH restricted stock will be converted into 0.67 shares of the Companys common stock.

Further, on September 30, 2008, the Company loaned, on its own behalf or that of its subsidiaries, Bank of Hampton Roads and Shore
Bank, $31,000,000 payable on demand. The loan is secured by a first priority lien on the stock of Gateway Bank and Trust.

NOTE L  BRANCH DEPOSIT
ACQUISITION

On September 26, 2008, Shore Bank signed a Purchase and Assumption Agreement to acquire approximately $7 million in
deposits from a Chevy Chase Bank branch located in Salisbury, Maryland. The transaction is subject to regulatory approvals and is expected to close in the fourth quarter of 2008.

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 2007 Form 10-K.

The Companys primary source of revenue is from net interest income earned by the banks. Net interest income represents interest and fees earned
from lending and investment activities less the interest paid to fund these activities. Variations in the volume and mix of interest earning assets and interest bearing liabilities, changes in the yields earned and the rates paid, and the level of
noninterest bearing liabilities available to support earning assets, all impact net interest income. In addition to net interest income, noninterest income is another important source of revenue for the Company. Noninterest income is derived
primarily from service charges on deposits and fees earned from bank services. Other factors that impact net income are the provision for loan losses and noninterest expense.

Financial Condition

Total assets, a benchmark used by banks when comparing size, are the strongest
indicator of the Companys continuous growth. Average assets increased $191.7 million, or 37.6%, to a new high of $701.3 million for the nine months ended September 30, 2008 compared to the nine months ended September 30, 2007. Total
assets at September 30, 2008 were $917.8 million, an increase of $354.0 million, or 62.8%, over December 31, 2007 total assets of $563.8 million. Shore Bank contributed total assets of $308.0 million at September 30, 2008.

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 loan portfolio grew $319.7 million, or 67.0%, to $796.9 million as of September 30, 2008 compared to December 31, 2007. Real estate commercial mortgages increased 69.3%
to $256.6 million at September 30, 2008 compared to $151.6 million at December 31, 2007. Real estate residential mortgages increased 410.7% to $196.7 million at September 30, 2008 compared with $38.5 million at December 31, 2007.
Commercial loans increased $33.4 million or 30.4% to $143.1 million at September 30, 2008 compared with $109.8 million at December 31, 2007. Installment loans to individuals increased 158.8% to $31.0 million at September 30, 2008
compared with $12.0 million at December 31, 2007. Construction loans increased to $169.3 million at September 30, 2008 compared with $165.5 million at December 31, 2007. The concentration of construction loans was 21.2% of the total
loan portfolio at September 30, 2008 compared with 34.7% at December 31, 2007. Shore Bank contributed $245.5 million to the loan portfolio at September 30, 2008. The primary lending program for Shore Bank has been in residential and
commercial real estate loans. Of the loans acquired from Shore Bank, approximately 59.4% were residential real estate loans and 32.2% were commercial real estate loans.

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 of its loan portfolio at least quarterly. The allowance for loan losses was $8.7 million, or 1.09% of outstanding loans, as of September 30, 2008
compared with $5.0 million, or 1.06% of outstanding loans, as of December 31, 2007. Shore Bank contributed $2.8 million to the allowance at September 30, 2008. The allowance increased due to growth in the loan portfolio and uncertain
economic conditions. Management considers the allowance for loan losses to be adequate. Management classifies as non-performing those loans in nonaccrual status, those loans on which payment has been delinquent for 90 days or more, and real estate
acquired in the settlement of loans. Total non-performing assets were $3.3 million or 0.36% of total assets at September 30, 2008 compared with $2.6 million or 0.47% of total assets at December 31, 2007. Nonaccrual loans at
September 30, 2008 were $1.6 million and consisted of one commercial loan and three residential real estate loans. Loans past due 90 days or more at September 30, 2008 were $601 thousand and consisted of one real estate loan, one
commercial loan and one installment loan. Other real estate owned was $1.1 million and consisted of three residential properties.



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The Companys investment portfolio consists primarily of available-for-sale U.S. Agency securities,
mortgage-backed securities, state and municipal securities, and equity securities. At September 30, 2008, the estimated fair value of investment securities held by the Company was $33.5 million, down $8.9 million, or 20.9%, from $42.4 million
at December 31, 2007. The decrease was the result of maturities of investment securities with a par value of $7.0 million netted against the purchase of investment securities with a par value of $2.8 million along with the change in unrealized
gains or losses on available-for-sale investment securities and amortization/accretion of premiums/discounts on the remaining investment securities. Additionally, during the first nine months of 2008, the Company sold investment securities with a
par value of $18.0 million and recorded a pre-tax gain on the sale of those investments of $457 thousand. Shore Bank contributed $15.6 million in investment securities at September 30, 2008.

Deposits are the primary 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 market, 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
September 30, 2008 increased $243.9 million, or 56.5%, to $675.4 million compared to $431.5 million at December 31, 2007. Changes in the deposit categories include an increase of $24.5 million or 24.3% in noninterest bearing demand
deposits, an increase of $67.1 million or 166.4% in interest bearing demand deposits and an increase of $7.2 million or 8.8% in savings accounts from December 31, 2007 to September 30, 2008. Total time deposits increased $145.2 million, or
69.6%, from December 31, 2007 to September 30, 2008. The increase in deposits was a result of the acquisition of SFC, with Shore Bank contributing deposits of $199.5 million at September 30, 2008, as well as an increase in broker
deposits of $54.0 million in the third quarter of 2008.

Federal Home Loan Bank (FHLB) borrowings increased $46.3 million or
87.3% to $99.3 million at September 30, 2008 compared to $53.0 million at December 31, 2007. This increase was primarily a result of the acquisition of SFC as Shore Bank had outstanding FHLB borrowings of $56.3 million at
September 30, 2008 netted against repayments of $10.0 million during the first nine months of 2008. In May 2008, the Company also borrowed $23.0 million to finance the purchase of SFC. In September 2008, the Company took a $5.0 million advance
on a line of credit. These loans have a variable rate of prime minus one percent with annual principal reduction payments. The loans require that the Company maintains certain covenants and as of September 30, 2008 all of those covenants were
met.

Results of Operations

During the
first nine months of 2008, the Company had net income of $4.8 million, a decrease of 5.2% over net income of $5.1 million in the first nine months of 2007. The decrease in net income in the first nine months of 2008 resulted primarily from the
effects of the declining interest rate environment coupled with expenses related to the integration of Shore Banks operations. Diluted earnings per share decreased to $0.41 per share for the first nine months of 2008 compared with $0.49 per
share for the nine months ending September 30, 2007. Return on average total assets for the first nine months of 2008 decreased to 0.92% from 1.34% for the first nine months of 2007. Return on average shareholders equity decreased in the
first nine months of 2008 to 7.27% from 9.58% for the first nine months of 2007. During the three months ended September 30, 2008, net income decreased $140 thousand or 8.2% over the same period in 2007. Diluted earnings per share decreased
27.8% to $0.13 per share for the three months ended September 30, 2008 compared with $0.18 per share for the three months ended September 30, 2007. The decrease in diluted earnings per share reflected the issuance of 2.7 million
shares related to the acquisition of SFC.

Net interest income for the first nine months of 2008 was $18.6 million, an increase of $506
thousand or 2.8% compared with the first nine months of 2007. Net interest income for the three months ended September 30, 2008 increased $1.2 million or 19.1% over the same period in 2007. The net interest margin, which is calculated by
expressing net interest income as a percentage of average interest earning assets, is an indicator of effectiveness in generating income from earning assets. The Companys net interest margin decreased from 5.05% during the first nine months of
2007 to 3.82% for the same period in 2008. During the period beginning September 18, 2007 and ending April 30, 2008, the Federal Open Market Committee reduced the target federal funds rate by 325 basis points. This reduction in rates is
expected to have an adverse effect on the net interest margin throughout 2008. The Companys net interest margin for the three months ended September 30, 2008 was 3.82% compared with 5.02% for the three months ended September 30,
2007.

The Companys interest earning assets consist primarily of loans, investment securities, interest-bearing deposits in other
banks, and overnight funds sold. Interest income on loans, including fees, increased $3.7 million to $29.8 million for the nine months ended September 30, 2008 compared to the same time period during 2007. This increase resulted from the $177.8
million increase in average loans and was partially offset by a 170 basis point decrease experienced in the average interest yield. Interest income on loans increased 28.4% to $11.9 million for the three months ended September 30, 2008 compared
with the same period in 2007. The valuation of Shore Banks loan portfolio, which is being amortized over forty months beginning in June 2008, reduced interest



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income on loans by $126 thousand in 2008. Interest income on investment securities decreased $436 thousand to $1.3 million for the nine months ended
September 30, 2008 compared to the same time period during 2007. The $13.5 million decrease in the average investment securities balance produced this decrease. For the three months ended September 30, 2008, interest income on investment
securities decreased 22.9% to $440 thousand compared with the same period in 2007. Interest income on interest-bearing deposits in other banks decreased $1 thousand for the nine months ended September 30, 2008 compared to the same time period
during 2007. This decrease was the result of the $5.3 million increase in average interest-bearing deposits netted against a 241 basis point decrease in the average interest yield. Interest income on interest-bearing deposits decreased 98.5% to $1
thousand for the three months ended September 30, 2008 compared with the same period in 2007. Interest income on overnight funds sold increased $17 thousand to $50 thousand for the nine months ended September 30, 2008 compared to the same
time period during 2007. This increase was due to the $2.2 million increase in average overnight funds sold netted against the 294 basis point decrease experienced in the average interest yield. Interest income on overnight funds sold decreased
14.6% to $4 thousand for the three months ended September 30, 2008 compared with the same period in 2007.

The Companys interest
bearing liabilities consist of deposit accounts and other borrowings. Interest expense from deposits increased $1.9 million to $10.4 million for the nine months ended September 30, 2008 compared to the same time period during 2007. This
increase resulted from the $137.7 million increase in average interest bearing deposits netted against a 69 basis point decrease in the average interest rate. Interest expense on deposits increased 22.2% to $3.7 million in the third quarter of 2008
compared with the same period in 2007. The valuation of certain Shore Bank deposits, being amortized over eleven months beginning June 2008, decreased interest expense on deposits by $195 thousand in 2008. Interest expense from borrowings, which
consists of FHLB borrowings, other borrowings, and overnight funds purchased increased $825 thousand to $2.5 million for the nine months ended September 30, 2008 compared to the same time period during 2007. The $27.3 million increase in
average borrowings netted against the 18 basis point decrease in the average interest rate on borrowings produced this result. Interest expense on borrowings increased 88.0% to $1.2 million during the third quarter of 2008 compared with the same
period in 2007. The valuation of Shore Banks borrowings, being amortized over fourteen months beginning in June 2008, decreased interest expense on borrowings by $99 thousand in 2008.

During the first nine months of 2008, the Company recorded net loan charge offs of $106 thousand and a provision for loan losses in the amount of $824
thousand. The provision for loan losses increased due to growth in the loan portfolio and uncertain economic conditions. During the first nine months of 2007, the Company recorded a provision for loan losses of $738 thousand. During the third
quarter of 2008, the Company recorded net loan charge-offs of $113 thousand and a provision for loan losses of $280 thousand.

The Company
reported an increase in total noninterest income of $2.1 million, or 80.2%, for the first nine months of 2008 compared to the same period in 2007. Service charges on deposit accounts, the Companys primary source of noninterest income,
increased $759 thousand or 51.1% to $2.2 million for the first nine months of 2008 compared to the same period in 2007. Other service charges and fees increased $851 thousand, or 78.0%, for the first nine months of 2008 compared to the first nine
months of 2007. During the first nine months of 2008, the Company recorded a pre-tax gain on the sale of investment securities of $457 thousand resulting from the sale of investment securities with a par value of $18 million. During the second
quarter of 2008, the Company sold a piece of land originally intended for expansion prior to moving the corporate headquarters to downtown Norfolk, Virginia. A gain of $511 thousand resulted from the sale of this property. Noninterest income
comprised 12.9% of total revenue in the first nine months of 2008 compared to 8.4% in the first nine months of 2007. During the three months ended September 30, 2008, noninterest income increased $976 thousand compared with the same period in
2007. Shore Bank contributed $1.2 million in noninterest income in the first nine months 2008.

Noninterest expense represents the overhead
expenses of the Company. Total noninterest expense increased $3.0 million, or 24.4%, for the first nine months of 2008 compared to the first nine months of 2007. This increase was attributable primarily to a 59.6% increase in occupancy expense
related to the opening of the Companys eighteenth branch location in the Edinburgh section of Chesapeake as well as expenses related to Shore Banks locations since the acquisition in June 2008. Salaries and employee benefits increased
$498 thousand to $8.2 million in the first nine months on 2008 compared with the same period in 2007. Data processing expense, another category of noninterest expense, posted an increase of $387 thousand for the first nine months of 2008 compared to
the first nine months of 2007. Other noninterest expenses posted an increase of 48.5% to $4.1 million which includes intangible assets amortization expense of $366 thousand, for the first nine months of 2008 compared to the same time period during
2007. Additionally, the Company took an impairment loss of $397 thousand on equity securities deemed to be other than temporarily impaired in the third quarter of 2008. Shore Bank contributed $3.2 million in noninterest expense in the first nine
months of 2008. During the third quarter of 2008, noninterest expense increased 61.4% to $6.5 million compared with $4.1 million for the same period in 2007.



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Income tax expense for the first nine months of 2008 and 2007 was $2.4 million and $2.6 million,
respectively. The Companys effective tax rate was 33.5% and 34.2% in 2008 and 2007, respectively, and differed in 2007 from the statutory rate of 34.0% due primarily to nondeductible expenses. The difference in 2008 was primarily the result of
tax advantaged investments in state and municipal securities.

Average Balance Sheet and Net Interest Margin Analysis

The table below presents the average interest earning assets and average interest bearing liabilities, the average yields earned on such assets and rates
paid on such liabilities, and the net interest margin for the nine months ended September 30, 2008 and 2007.



|                                         |  |                           |         |   |                           |   |                   |  |      |                |  |   |                        |   |                   |   |        |  |      |  
|---------------------------------------- |  | ------------------------- | ------- | - | ------------------------- | - | ----------------- |  | ---- | -------------- |  | - | ---------------------- | - | ----------------- | - | ------ |  | ---- | -
|                                         |  | September 2008 Annualized |         |   | September 2007 Annualized |  
|(In thousands)                           |  | AverageBalance            |         |   | InterestIncome/Expense    |   | AverageYield/Rate |  |      | AverageBalance |  |   | InterestIncome/Expense |   | AverageYield/Rate |  
|Assets                                   |  |                           |         |   |                           |   |                   |  |      |                |  |   |                        |   |                   |   |        |  |      |  
|Interest Earning Assets                  |  |                           |         |   |                           |   |                   |  |      |                |  |   |                        |   |                   |   |        |  |      |  
|Loans                                    |  | $                         | 593,658 |   |                           | $ | 39,848            |  | 6.71 | %              |  | $ | 415,897                |   |                   | $ | 34,964 |  | 8.41 | %
|Investment Securities                    |  |                           | 42,173  |   |                           |   | 1,799             |  | 4.27 | %              |  |   | 55,644                 |   |                   |   | 2,384  |  | 4.28 | %
|Interest-Bearing Deposits in other Banks |  |                           | 11,413  |   |                           |   | 313               |  | 2.74 | %              |  |   | 6,130                  |   |                   |   | 316    |  | 5.15 | %
|Overnight Funds Sold                     |  |                           | 3,055   |   |                           |   | 67                |  | 2.19 | %              |  |   | 878                    |   |                   |   | 45     |  | 5.13 | %
|                                         |  |                           |         |   |                           |   |                   |  |      |                |  |   |                        |   |                   |   |        |  |      |  
|Total Interest Earning Assets            |  |                           | 650,299 |   |                           |   | 42,027            |  | 6.46 | %              |  |   | 478,549                |   |                   |   | 37,709 |  | 7.88 | %
|                                         |  |                           |         |   |                           |  
|Noninterest Earning Assets               |  |                           |         |   |                           |   |                   |  |      |                |  |   |                        |   |                   |   |        |  |      |  
|Cash and Due from Banks                  |  |                           | 16,995  |   |                           |   |                   |  |      |                |  |   | 16,029                 |   |                   |   |        |  |      |  
|Premises and Equipment                   |  |                           | 17,409  |   |                           |   |                   |  |      |                |  |   | 11,970                 |   |                   |   |        |  |      |  
|Other Assets                             |  |                           | 23,339  |   |                           |   |                   |  |      |                |  |   | 7,310                  |   |                   |   |        |  |      |  
|Less: Allowance for Loan Losses          |  |                           | (6,783  | ) |                           |   |                   |  |      |                |  |   | (4,296                 | ) |                   |   |        |  |      |  
|                                         |  |                           |         |   |                           |   |                   |  |      |                |  |   |                        |   |                   |   |        |  |      |  
|Total Assets                             |  | $                         | 701,259 |   |                           |   |                   |  |      |                |  | $ | 509,562                |   |                   |   |        |  |      |  
|                                         |  |                           |         |   |                           |   |                   |  |      |                |  |   |                        |   |                   |   |        |  |      |  
|Liabilities and Shareholders Equity     |  |                           |         |   |                           |   |                   |  |      |                |  |   |                        |   |                   |   |        |  |      |  
|Interest Bearing Liabilities             |  |                           |         |   |                           |   |                   |  |      |                |  |   |                        |   |                   |   |        |  |      |  
|Interest Bearing Demand Deposits         |  | $                         | 70,975  |   |                           | $ | 943               |  | 1.33 | %              |  | $ | 41,428                 |   |                   | $ | 683    |  | 1.65 | %
|Savings Deposits                         |  |                           | 89,795  |   |                           |   | 1,893             |  | 2.11 | %              |  |   | 79,350                 |   |                   |   | 2,832  |  | 3.57 | %
|Time Deposits                            |  |                           | 260,656 |   |                           |   | 11,055            |  | 4.24 | %              |  |   | 162,997                |   |                   |   | 7,808  |  | 4.79 | %
|                                         |  |                           |         |   |                           |   |                   |  |      |                |  |   |                        |   |                   |   |        |  |      |  
|Total Interest Bearing Deposits          |  |                           | 421,426 |   |                           |   | 13,891            |  | 3.30 | %              |  |   | 283,775                |   |                   |   | 11,323 |  | 3.99 | %
|                                         |  |                           |         |   |                           |  
|Other Borrowings                         |  |                           | 76,154  |   |                           |   | 3,311             |  | 4.35 | %              |  |   | 48,884                 |   |                   |   | 2,213  |  | 4.53 | %
|                                         |  |                           |         |   |                           |   |                   |  |      |                |  |   |                        |   |                   |   |        |  |      |  
|Total Interest Bearing Liabilities       |  |                           | 497,580 |   |                           |   | 17,202            |  | 3.46 | %              |  |   | 332,659                |   |                   |   | 13,536 |  | 4.07 | %
|                                         |  |                           |         |   |                           |  
|Noninterest Bearing Liabilities          |  |                           |         |   |                           |   |                   |  |      |                |  |   |                        |   |                   |   |        |  |      |  
|Demand Deposits                          |  |                           | 106,514 |   |                           |   |                   |  |      |                |  |   | 98,886                 |   |                   |   |        |  |      |  
|Other Liabilities                        |  |                           | 8,368   |   |                           |   |                   |  |      |                |  |   | 6,911                  |   |                   |   |        |  |      |  
|Shareholders Equity                     |  |                           | 88,797  |   |                           |   |                   |  |      |                |  |   | 71,106                 |   |                   |   |        |  |      |  
|                                         |  |                           |         |   |                           |   |                   |  |      |                |  |   |                        |   |                   |   |        |  |      |  
|Total Liabilities and                    |  |                           |         |   |                           |   |                   |  |      |                |  |   |                        |   |                   |   |        |  |      |  
|Shareholders Equity                     |  | $                         | 701,259 |   |                           |   |                   |  |      |                |  | $ | 509,562                |   |                   |   |        |  |      |  
|                                         |  |                           |         |   |                           |   |                   |  |      |                |  |   |                        |   |                   |   |        |  |      |  
|Net Interest Income                      |  |                           |         |   |                           | $ | 24,825            |  |      |                |  |   |                        |   |                   | $ | 24,173 |  |      |  
|                                         |  |                           |         |   |                           |   |                   |  |      |                |  |   |                        |   |                   |   |        |  |      |  
|Net Interest Spread                      |  |                           |         |   |                           |   |                   |  | 3.01 | %              |  |   |                        |   |                   |   |        |  | 3.81 | %
|                                         |  |                           |         |   |                           |   |                   |  |      |                |  |   |                        |   |                   |   |        |  |      |  
|Net Interest Margin                      |  |                           |         |   |                           |   |                   |  | 3.82 | %              |  |   |                        |   |                   |   |        |  | 5.05 | %
|                                         |  |                           |         |   |                           |   |                   |  |      |                |  |   |                        |   |                   |   |        |  |      |  



|Note: | Annualized interest income from loans included fees of $621,524 in 2008 and $1,056,023 in 2007.
|----- | -----------------------------------------------------------------------------------------------

Nonaccrual loans are not material and are included in loans above.



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Effect of Changes in Rate and Volume on Net Interest Income



|                                           |  |                                |       |   |                         |   |        |                                |      |   |                         |        |  |   |       |   |  |   |        |   |  |   |       |  
|------------------------------------------ |  | ------------------------------ | ----- | - | ----------------------- | - | ------ | ------------------------------ | ---- | - | ----------------------- | ------ |  | - | ----- | - |  | - | ------ | - |  | - | ----- | -
|                                           |  | 2008 Compared to 2007          |       |   | 2007 Compared to 2006   |  
|(In thousands)                             |  | InterestIncome/ExpenseVariance |       |   | VarianceAttributable to |   |        | InterestIncome/ExpenseVariance |      |   | VarianceAttributable to |       
|                                           |  | Rate                           |       |   | Volume                  |   |        |                                | Rate |   |                         | Volume | 
|Interest Earning Assets                    |  |                                |       |   |                         |   |        |                                |      |   |                         |        |  |   |       |   |  |   |        |   |  |   |       |  
|Loans                                      |  | $                              | 4,884 |   |                         | $ | (4,359 | )                              |      | $ | 9,243                   |        |  | $ | 8,777 |   |  | $ | 197    |   |  | $ | 8,580 |  
|Investment Securities                      |  |                                | (585  | ) |                         |   | (10    | )                              |      |   | (575                    | )      |  |   | (405  | ) |  |   | 175    |   |  |   | (580  | )
|Interest-Bearing Deposits with Other Banks |  |                                | (3    | ) |                         |   | (5     | )                              |      |   | 2                       |        |  |   | 4     |   |  |   | (2     | ) |  |   | 6     |  
|Overnight Funds Sold                       |  |                                | 22    |   |                         |   | (6     | )                              |      |   | 28                      |        |  |   | (194  | ) |  |   | 4      |   |  |   | (198  | )
|                                           |  |                                |       |   |                         |   |        |                                |      |   |                         |        |  |   |       |   |  |   |        |   |  |   |       |  
|Total Interest Earning Assets              |  |                                | 4,318 |   |                         |   | (4,380 | )                              |      |   | 8,698                   |        |  |   | 8,182 |   |  |   | 374    |   |  |   | 7,808 |  
|                                           |  |                                |       |   |                         |   |        |                                |      |   |                         |        |  |   |       |   |  |   |        |   |  |   |       |  
|Interest Bearing Liabilities               |  |                                |       |   |                         |   |        |                                |      |   |                         |        |  |   |       |   |  |   |        |   |  |   |       |  
|Deposits                                   |  |                                | 2,568 |   |                         |   | (1,435 | )                              |      |   | 4,003                   |        |  |   | 4,028 |   |  |   | 1,967  |   |  |   | 2,061 |  
|Other Borrowings                           |  |                                | 1,098 |   |                         |   | (100   | )                              |      |   | 1,198                   |        |  |   | 865   |   |  |   | 226    |   |  |   | 639   |  
|                                           |  |                                |       |   |                         |   |        |                                |      |   |                         |        |  |   |       |   |  |   |        |   |  |   |       |  
|Total Interest Bearing Liabilities         |  |                                | 3,666 |   |                         |   | (1,535 | )                              |      |   | 5,201                   |        |  |   | 4,893 |   |  |   | 2,193  |   |  |   | 2,700 |  
|                                           |  |                                |       |   |                         |   |        |                                |      |   |                         |        |  |   |       |   |  |   |        |   |  |   |       |  
|Net Interest Income                        |  | $                              | 652   |   |                         | $ | (2,845 | )                              |      | $ | 3,497                   |        |  | $ | 3,289 |   |  | $ | (1,819 | ) |  | $ | 5,108 |  
|                                           |  |                                |       |   |                         |   |        |                                |      |   |                         |        |  |   |       |   |  |   |        |   |  |   |       |  



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

Capital Resources and Liquidity

Total shareholders equity increased $34.9 million, or 47.3%, to $108.5 million at September 30, 2008 compared to $73.7 million at
December 31, 2007. As of September 30, 2008, the Company, Bank of Hampton Roads, and Shore Bank were considered well-capitalized, the highest category of capitalization defined by the Federal Reserve Bank. The Company
continually monitors current and projected capital adequacy positions of the Company, Bank of Hampton Roads, and Shore 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 shareholders in the form of dividends.

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. At September 30, 2008, cash and due from banks, overnight funds
sold, interest-bearing deposits in other banks, and investment securities and loans maturing within one year were $530.9 million, or 57.8% of total assets. As a result of the Companys management of liquid assets and the ability to generate
liquidity through liability funding, management believes the Company maintains overall liquidity sufficient to satisfy its depositors requirements and meet its customers credit needs.

The Company also maintains additional sources of liquidity through a variety of borrowing arrangements including federal funds lines with large regional
and national banking institutions. These available lines total approximately $18.5 million, none of which were outstanding at September 30, 2008 or December 31, 2007. Federal funds purchased during the first nine months of 2008 and 2007
averaged $837 thousand and $254 thousand, respectively.

The Company has available credit lines in the amount of $117.8 million at FHLB.
These lines may be utilized for short and/or long term borrowing. The Company utilized the credit lines for overnight funding during the first nine months of 2008 and 2007 with average balances of $10.3 million and $88 thousand, respectively.
Long-term FHLB borrowings were $95.6 million and $53.0 million at September 30, 2008 and December 31, 2007, respectively.

Off-Balance Sheet
Arrangements

The Company is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the
financing needs of its customers. For more information on the Companys off-balance sheet arrangements, see Note 8 of the Notes to Consolidated Financial Statements contained in the 2007 Form 10-K. Total financial instruments with
off-balance-sheet risk as of September 30, 2008 were $139 million, a 4.9% increase from December 31, 2007. Shore Bank contributed $49 million of the September 30, 2008 total.



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Contractual Obligations

The Companys contractual obligations consist of FHLB borrowings, other borrowings, time deposits, and operating lease obligations. The most significant changes in the Companys contractual obligations since
December 31, 2007 were the time deposits contributed by Shore Bank of $83.8 million as of September 30, 2008 and the $23.0 million borrowing from Compass Bank utilized to fund the cash portion of the merger consideration to the former
shareholders of SFC.

Critical Accounting Policies

U.S. generally accepted accounting principles are complex and require management to apply significant judgment to various accounting, reporting, and disclosure matters. Management must use assumptions, judgments, and
estimates when applying these principles where precise measurements are not possible or practical. These policies are critical because they are highly dependent upon subjective or complex judgments, assumptions and estimates. Changes in such
judgments, assumptions and estimates may have a significant impact on the consolidated financial statements. Actual results, in fact, could differ from those estimates.

Goodwill and Other Intangible Assets

The Company adopted FAS No. 142, Goodwill and Other
Intangible Assets, effective January 1, 2002. Accordingly, goodwill is no longer subject to amortization over its estimated useful life, but is subject to at least an annual assessment for impairment by applying a fair value based test.
Additionally, under FAS No. 142, acquired intangible assets (such as core deposit intangibles) are separately recognized if the benefit of the asset can be sold, transferred, licensed, rented, or exchanged, and amortized over their useful life.
The cost of purchased deposit relationships and other intangible assets, based on independent valuation, are being amortized over their estimated lives not to exceed fifteen years. Amortization expense charged to operations was $382 thousand for the
nine months ended September 30, 2008. There was no amortization expense charged to operations in previous periods.

Allowance for Loan Losses

The allowance for loan losses reflects the estimated losses resulting from the inability of borrowers to make required loan payments. The
allowance for loan losses is established through a provision for loan losses charged to expense. Loans are charged against the allowance for loan losses when management believes that collectibility of the principal is unlikely. Subsequent
recoveries, if any, are credited to the allowance.

The allowance is an amount that management believes will be adequate to absorb
estimated losses relating to specifically identified loans, as well as probable credit losses inherent in the balance of the loan portfolio, based on an evaluation of the collectibility of existing loans and prior loss experience. This evaluation
also takes into consideration such factors as changes in the nature and volume of the loan portfolio, overall portfolio quality, credit concentrations, trends in historical loss experience, review of specific problem loans, and current economic
conditions.

The allowance consists of specific, general, and unallocated components. The specific component relates to loans that are
classified as impaired, doubtful, substandard or special mention. The general component covers non-classified loans and is based on historical loss experience adjusted for qualitative factors. An unallocated component is maintained to cover
uncertainties that could affect managements estimate of probable losses. The unallocated component of the allowance reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating specific and
general losses in the portfolio.

A loan is impaired when it is probable the creditor will be unable to collect all contractual principal
and interest payments due in accordance with the terms of the loan agreement. 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. Alternatively,
measurement also may be based on observable market prices or, for loans that are solely dependent on the collateral for repayment, measurement may be based on the fair value of the collateral. The Company does not aggregate loans for risk
classification. Loans that are to be foreclosed are measured based on the fair value of the collateral. If the recorded investment in the impaired loan exceeds the measure of fair value, a valuation allowance is established as a component of the
allowance for loan losses. Changes in the allowance for loan losses relating to impaired loans are charged or credited to the provision for loan losses.

Accounting Pronouncements

In December 2007, the Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standards No. 141(R), Business Combinations (SFAS 141(R)). The Standard will significantly change the financial accounting and reporting of business combination transactions. SFAS 141(R) establishes the
criteria for how an acquiring entity in a business combination recognizes the assets acquired and liabilities assumed in the transaction; establishes the acquisition date fair value as the measurement



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objective for all assets acquired and liabilities assumed; and requires the acquirer to disclose to investors and other users all of the information they
need to evaluate and understand the nature and financial effect of the business combination. Acquisition related costs including finders fees, advisory, legal, accounting valuation and other professional and consulting fees are required to be
expensed as incurred. SFAS 141(R) is effective for fiscal years beginning after December 15, 2008 and early implementation is not permitted. The Company does not expect the implementation to have a material impact on its consolidated financial
statements.

In December 2007, the FASB issued Statement of Financial Accounting Standards No.160, Noncontrolling Interests in
Consolidated Financial Statements (SFAS 160). SFAS 160 establishes accounting and reporting standards for ownership interests in subsidiaries held by parties other than the parent, the amount of consolidated net income attributable
to the parent and to the noncontrolling interest, changes in a parents ownership interest, and the valuation of retained noncontrolling equity investments when a subsidiary is deconsolidated. The statement also establishes reporting
requirements that provide sufficient disclosures to clearly identify and distinguish between the interests of the parent and the interests of the noncontrolling owners. SFAS 160 is effective for fiscal years, and interim periods within those fiscal
years, beginning on or after December 15, 2008. Earlier adoption is prohibited. The Company does not expect the implementation of SFAS 160 to have a material impact on its consolidated financial statements.

In March 2008, the FASB issued Statement of Financial Accounting Standards No. 161, Disclosures about Derivative Instruments and Hedging
Activities  an amendment of FASB Statement No. 133(SFAS 161). SFAS 161 changes the disclosure requirements for derivative instruments and hedging activities. Entities are required to provide enhanced disclosures about how
and why an entity uses derivative instruments, how derivative instruments and related hedged items are accounted for under Statement 133 and its related interpretations, and how derivative instruments and related hedged items affect an entitys
financial position, financial performance and cash flows. SFAS 161 is effective for fiscal years and interim periods beginning after November 15, 2008, with early application permitted. The Company does not expect the implementation of SFAS 161
to have a material impact on its consolidated financial statements.

In May 2008, the FASB issued Statement of Financial Accounting
Standards No. 162, The Hierarchy of Generally Accepted Accounting Principles(SFAS 162). This Statement identifies the sources of accounting principles and the framework for selecting the principles used in the preparation of
financial statements of nongovernmental entities that are presented in conformity with generally accepted accounting principles in the United States. SFAS 162 becomes effective 60 days following the SECs approval of the Public Company
Accounting Oversight Board amendments to AU Section 411. The Company does not expect the implementation of SFAS 162 to have a material impact on its consolidated financial statements.

In February 2008, the FASB issued FASB Staff Position (FSP) No. 157-2, Effective Date of FASB Statement No. 157 (FSP
157-2). FSP FAS 157-2 delays the effective date of SFAS 157, Fair Value Measurements, for nonfinancial assets and nonfinancial liabilities, except for items that are recognized or disclosed at fair value in the financial statements on a
recurring basis (at least annually). The delay is intended to allow the FASB and constituents additional time to consider the effect of various implementation issues that have arisen, or that may arise, from the application of SFAS 157. FSP 157-2
defers the effective date of SFAS 157 to fiscal years beginning after November 15, 2008, and interim periods within those fiscal years, for items within the scope of this FSP. Examples of items to which the deferral would and would not apply
are listed in the FSP. The Company does not expect the implementation of FSP 157-2 to have a material impact on its consolidated financial statements.

In April 2008, the FASB issued FSP 142-3, Determination of the Useful Life of Intangible Assets (FSP 142-3). This FSP amends the factors that should be considered in developing renewal or extension
assumptions used to determine the useful life of a recognized intangible asset under SFAS 142, Goodwill and Other Intangible Assets.The intent of this FSP is to improve the consistency between the useful life of a recognized intangible asset
under SFAS 142 and the period of expected cash flows used to measure the fair value of the asset under SFAS 141R, Business Combinations,and other U.S. generally accepted accounting principles. This FSP is effective for financial statements
issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. Early adoption is prohibited. The Company does not expect the implementation of FSP 142-3 to have a material impact on its
consolidated financial statements.

In May 2008, the FASB issued FSP APB 14-1, Accounting for Convertible Debt Instruments That May Be
Settled in Cash upon Conversion (Including Partial Cash Settlement) (FSP APB 14-1). FSP APB 14-1 clarifies that convertible debt instruments that may be settled in cash upon conversion (including partial cash settlement)
are not addressed by paragraph 12 of APB Opinion No. 14, Accounting for Convertible Debt and Debt Issued with Stock Purchase Warrants. The FSP requires that issuers of such instruments



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should separately account for the liability (debt) and equity (conversion option) components in a manner that reflects the issuers nonconvertible debt
borrowing rate. FSP APB 14-1 is effective for financial statements issued for fiscal years beginning after December 15, 2008 and interim periods within those years. The Company does not expect the implementation of FSP APB 14-1 to have a
material impact on its consolidated financial statements.

In October 2008, the FASB issued FSP 157-3, Determining the Fair Value of a
Financial Asset When the Market for That Asset Is Not Active(FSP 157-3). FSP 157-3 clarifies the application of SFAS 157, Fair Value Measurements,in a market that is not active and provides an example to illustrate key
considerations in determining the fair value of a financial asset when the market for that financial asset is not active. This FSP was effective upon issuance, including prior periods for which financial statements have not been issued.

In June 2008, the FASB finalized Staff Position (FSP) No. EITF 03-6-1, Determining Whether Instruments Granted in Share-Based Payment
Transactions Are Participating Securities.This FSP affects entities that accrue cash dividends on share-based payment awards during the awards service period when the dividends do not need to be returned if the employees forfeit the
awards. The FASB concluded that all outstanding unvested share-based payment awards that contain rights to nonforfeitable dividends participate in undistributed earnings with common shareholders. Because the awards are considered participating
securities, the issuing entity is required to apply the two-class method of computing basic and diluted earnings per share. The FASB also concluded that because the FSP applies to all outstanding unvested share-based payment awards that contain
right to nonforfeitable dividends, changes in an entitys forfeiture estimates from one reporting period to the next do not affect the computation of earnings per share, other than for the increase or decrease in compensation cost as a result
of the application of SFAS 123(R), Share-Based Payment.The transition guidance in the FSP requires an entity to retroactively adjust all prior-period earnings-per-share computations to reflect the FSPs provisions. The retroactive
adjustments encompass earnings-per-share computations included in interim financial statements. Early adoption of the FSP is not permitted. The FSP is effective for fiscal years beginning after December 15, 2008, and interim periods within
those fiscal years. The Company is currently evaluating the effect that this FSP will have on its financial statements when implemented.

Forward-Looking Statements

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

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

For a discussion of the risks, uncertainties and assumptions that could affect these statements
and our future events, developments or results, you should carefully review the risk factors summarized below and the more detailed discussions in the Risk Factors and Business sections in the 2007 Form 10-K. The
Companys risks include, without limitation, the following:



| |  |  | The dependence on key personnel;
| | - |  | --------------------------------



| |  |  | The high level of competition within the banking industry;
| | - |  | ----------------------------------------------------------



| |  |  | Dependence on construction and land development loans that could be negatively affected by a downturn in the real estate market;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------



| |  |  | The Company serves a limited market area, and an economic downturn in its market area could adversely affect its business;
| | - |  | --------------------------------------------------------------------------------------------------------------------------



| |  |  | The adequacy of the estimate for known and inherent losses in the Companys loan portfolio;
| | - |  | -------------------------------------------------------------------------------------------



| |  |  | Changes in interest rate;
| | - |  | -------------------------



| |  |  | Ability to manage growth;
| | - |  | -------------------------



| |  |  | Governmental and regulatory changes that may adversely affect the Companys expenses and cost structure;
| | - |  | --------------------------------------------------------------------------------------------------------



| |  |  | The threat from technology based frauds and scams;
| | - |  | --------------------------------------------------



| |  |  | If the Company needs capital in the future to continue its growth, it may not be able to obtain capital on terms that are favorable and capital transactions may be
dilutive to existing shareholders;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



| |  |  | Trading in the Companys common stock has been sporadic and volume has been light so shareholders may not be able to quickly and easily sell their common
stock;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Virginia law and the provisions of the Companys articles of incorporation and bylaws could deter or prevent takeover attempts by a potential purchaser of the
Companys common stock that would be willing to pay you a premium for your shares;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Directors and officers have significant voting power;
| | - |  | -----------------------------------------------------



| |  |  | The failure of the Company of GFH to obtain the required shareholder approval or the companies to obtain regulatory approvals for the merger;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Any material adverse change in the financial condition, results of operations or prospects of either the Company or GFH;
| | - |  | ------------------------------------------------------------------------------------------------------------------------



| |  |  | The Company may not be able to realize all of the anticipated benefits of the merger with GFH; and
| | - |  | --------------------------------------------------------------------------------------------------



| |  |  | Other risk factors described in Item 1A of Part II below.
| | - |  | ---------------------------------------------------------

The Companys forward-looking statements could be wrong in light of these and other risks, uncertainties and assumptions. The future events, developments or results described in this report could turn out to be
materially different. The Company has no obligation to publicly update or revise its forward-looking statements after the date of this quarterly report and you should not expect it to do so.

ITEM 3  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

The
primary goal of the Companys asset/liability management strategy is to optimize net interest income while limiting exposure to fluctuations caused by changes in the interest rate environment. The Companys ability to manage its interest
rate risk depends generally on the Companys ability to 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, determines the overall
magnitude of interest sensitivity risk and then formulates policies governing asset generation and pricing, funding sources and pricing, and off-balance sheet commitments. These decisions are based on managements expectations regarding future
interest rate movements, the state of the national and regional economy, and other financial and business risk factors.

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

The expected effect on net interest income for the twelve months
following September 30, 2008 and December 31, 2007 due to a shock in interest rates is shown below. These estimates are dependent on material assumptions, such as those previously discussed.



|                          |  |                               |       |   |                               |       |   |        |   |        |   |  |        |  
|------------------------- |  | ----------------------------- | ----- | - | ----------------------------- | ----- | - | ------ | - | ------ | - |  | ------ | -
|                          |  | September 30, 2008            |       |   | December 31, 2007             |      
|(in thousands)            |  | Change in Net Interest Income |       |   | Change in Net Interest Income |      
|                          |  | Amount                        |       |   | %                             |       |   | Amount |   |        | % | 
|Change in Interest Rates: |  |                               |       |   |                               |       |   |        |   |        |   |  |        |  
|+ 200 basis points        |  | $                             | 3,102 |   |                               | 8.52  | % |        | $ | 4,494  |   |  | 19.39  | %
|+ 100 basis points        |  |                               | 1,404 |   |                               | 3.86  |   |        |   | 2,249  |   |  | 9.70   |  
|-  100 basis points       |  |                               | (858  | ) |                               | (2.36 | ) |        |   | (2,230 | ) |  | (9.62  | )
|-  200 basis points       |  |                               | N/A   |   |                               | N/A   |   |        |   | (4,333 | ) |  | (18.69 | )

A decrease in interest rates would tend to reduce the Companys net interest income, while an
increase would tend to increase the Companys net interest income. Thus, the Companys interest rate sensitivity position is asset-sensitive. In the current declining



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interest rate environment and absent any mitigating factors, the Company could experience a substantial reduction in net interest income. 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. Consequently, variations should be expected from the projections resulting from the controlled conditions of the simulation analysis.

The Company had no derivative financial instruments, foreign currency exposure, or trading portfolio as of September 30, 2008.

ITEM 4  CONTROLS AND PROCEDURES

As of September 30, 2008, the Company carried out an evaluation, under the supervision and with the participation of the Companys management, including the Companys Chief Executive Officer and Chief
Financial Officer, of the effectiveness of the design and operation of the Companys disclosure controls and procedures pursuant to Rule 13a-15(e) of the Securities Exchange Act of 1934, as amended (the Exchange Act). Based upon
that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Companys disclosure controls and procedures are effective in timely alerting them to material information relating to the Company (including its
consolidated subsidiaries) required to be included in the Companys Exchange Act filings pursuant to the Securities Exchange Act of 1934. 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 quarter ended September 30, 2008 that has materially affected, or is reasonably likely to materially affect, the Companys internal control over financial reporting.

PART II  OTHER INFORMATION

ITEM 1  LEGAL PROCEEDINGS

In the ordinary course of operations, the Company may become a party to legal proceedings.
Currently, the Company is not party to any material legal proceedings.

ITEM 1A  RISK FACTORS

The following are additional risk factors from those disclosed in the 2007 Form 10-K:

As a result of the Gateway Merger, the Company will create two new series of preferred stock that will have rights that are senior to those of its
common shareholders before the merger.

GFH has outstanding 23,266 shares of Series A Preferred Stock and 37,550 shares of Series B
Non-Convertible Non-Cumulative Perpetual Preferred Stock. Pursuant to the Gateway Merger Agreement, the shares of Series A Preferred Stock and Series B Non-Convertible Non-Cumulative Perpetual Preferred Stock will, in each case, be exchanged for a
newly-designated series of preferred stock of the Company, having substantially the same powers, designations, preferences, rights and qualifications, limitations and restrictions as the stock so converted. Each of the newly-designated series of
preferred stock of the Company will be senior to its shares of common stock. As a result, the Company must make dividend payments on each series of the preferred stock before any dividends can be paid on its common stock and, in the event of its
bankruptcy, dissolution or liquidation, the holders of each series of the preferred stock must be satisfied before any distributions can be made on its common stock. The Company will have the right to defer distributions on its preferred stock for
any period of time, during which time no dividends may be paid on its common stock.

The U.S. governments plan to purchase
large amounts of illiquid, mortgage-backed and other securities from financial institutions may not be effective and/or it may not be available to the Company.

In response to the financial crises affecting the banking system and financial markets and the going concern threats to the ability of investment banks and other financial institutions, the U.S. Congress adopted the
new Emergency Economic Stabilization Act of 2008 (EESA). The primary feature of the EESA is the establishment of a troubled asset relief program (TARP), under which the U.S. Treasury Department will purchase up to $700
billion of troubled assets, including mortgage-backed and other securities, from financial institutions for the purpose of stabilizing the financial markets and to purchase capital stock from these financial institutions. There can be no assurance
as to what impact it will have on the financial markets, including the extreme levels of volatility currently being experienced. The failure of the U.S. government to execute this program expeditiously could have a material adverse effect on



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the financial markets, which in turn could materially and adversely affect the Companys business, financial condition and results of operations. Since
the rules and guidelines of the TARP have not yet been published, the Company is unable to assess whether participation in the program would be beneficial to it.

The U.S. governments plan to provide TARP Senior Preferred Stock capital to financial institutions may not be available to the Company.

The Company intends to apply for TARP Senior Preferred Stock capital which may be furnished by the U. S. Treasury. This capital may be used to retire
more costly debt or stock or for other uses. However, no assurances can be given that this capital will be available to the Company.

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 open market and privately negotiated transactions. During the first nine months of 2008, the Company
repurchased 72,687 shares of its common stock. The Company did not repurchase any shares of common stock other than through this publicly announced plan. Details for the share repurchase transactions conducted during the third quarter of 2008 appear
below.



|                                     |  |                               |  |                             |       |                                                                              |       |                                                                            |  
|------------------------------------ |  | ----------------------------- |  | --------------------------- | ----- | ---------------------------------------------------------------------------- | ----- | -------------------------------------------------------------------------- | -
|Period                               |  | Total NumberofSharesPurchased |  | Average Price PaidPer Share |       | Total Number ofShares Purchased asPart of PubliclyAnnounced Plans orPrograms |       | Maximum Numberof Shares that MayYet be
PurchasedUnder the Plans orPrograms
|July 1, 2008-July 31, 2008           |  |                              |  |                             |      |                                                                              |      |                                                                            | 
|August 1, 2008-August 31, 2008       |  | 7,724                         |  | $                           | 11.96 |                                                                              | 7,724 |                                                                            | 
|September 1, 2008-September 30, 2008 |  |                              |  |                             |      |                                                                              |      |                                                                            | 
|Total                                |  | 7,724                         |  | $                           | 11.96 |                                                                              | 7,724 |                                                                            | 

ITEM 3  DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4 
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None

ITEM 5  OTHER INFORMATION

None.

ITEM 6  EXHIBITS



|    |  |                                                                                                                                                                                                                         
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|3.1 |  | Articles of Incorporation of Hampton Roads Bankshares, Inc., as amended, attached as Exhibit 3.1 to the Registrants Quarterly Report on Form 10-Q for the period ended June 30,
2008, incorporated herein by reference.
|    | 
|3.2 |  | Bylaws of Hampton Roads Bankshares, Inc., as amended, attached as Exhibit 3.2 to the Registrants Quarterly Report of Form 10-Q for the period ended September 30, 2007, incorporated
herein by reference.              
|    | 
|4.1 |  | Specimen of Common Stock Certificate, attached as Exhibit 4.1 to the Registrants Annual Report on Form 10-K for the year ended December 31, 2005, incorporated herein by
reference.                                    



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|     |  |                                                                                                                                                                                                                                                                                                              
|---- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|     | 
|10.1 |  | Agreement and Plan of Merger, dated as of September 23, 2008, by and between Hampton Roads Bankshares, Inc. and Gateway Financial Holdings, Inc., including the form of certain Support
Agreements, attached as Exhibit 2.1 to the Registrants Current Report of Form 8-K, incorporated herein by reference.
|     | 
|31.1 |  | The Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer is filed herewith.                                                                                                                                                                                                                     
|     | 
|31.2 |  | The Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer is filed herewith.                                                                                                                                                                                                                     
|     | 
|32.1 |  | Statement of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, is filed herewith.                                                                                                                                                                                      

SIGNATURES

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



|                       |  |  |  |                                    
|---------------------- |  |  |  | -----------------------------------
|                       |  |  |  | HAMPTON ROADS BANKSHARES, INC.     
|                       |  |  |  | (Registrant)                       
|                       |  | 
|DATE: November 5, 2008 |  |  |  | /s/ Lorelle L. Fritsch             
|                       |  |  |  | Lorelle L. Fritsch                 
|                       |  |  |  | Senior Vice President and          
|                       |  |  |  | Chief Financial Officer            
|                       |  |  |  | (On behalf of the Registrant       
|                       |  |  |  | and as principal financial officer)



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