S-4/A 1 ds4a.htm FORM S-4/A Form S-4/A
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As filed with the Securities and Exchange Commission on November 14, 2008

Registration No. 333-154959

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

Amendment No. 1

to

FORM S-4

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

HAMPTON ROADS BANKSHARES, INC.

(Exact name of registrant as specified in its charter)

 

Virginia   6021   54-2053718

(State or other jurisdiction of incorporation

or organization)

 

(Primary Standard Industrial Classification

Code Number)

  (I.R.S. Employer
Identification No.)

999 Waterside Dr., Suite 200

Norfolk, Virginia 23510

(757) 217-1000

(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)

Jack W. Gibson

Vice Chairman, President and Chief Executive Officer

Hampton Roads Bankshares, Inc.

999 Waterside Drive

Suite 200

Norfolk, Virginia 23510

(757) 217-1000

(Name, address, including zip code, and telephone number, including area code, of agent for service)

 

 

Copies to:

 

William A. Old, Jr.

Williams Mullen

999 Waterside Drive, Suite 1700

Norfolk, Virginia 23510

(757) 622-3366

 

Anthony Gaeta, Jr.

Gaeta & Eveson, P.A.

8305 Falls of Neuse Road, Suite 203

Raleigh, North Carolina 27615

(919) 845-2558

Approximate date of commencement of the proposed sale to the public:  As soon as practicable after the effectiveness of this registration statement and the satisfaction or waiver of all other conditions to the merger described in the joint proxy statement/prospectus.

If the securities being registered on this form are being offered in connection with the formation of a holding company and there is compliance with General Instruction G, check the following box.  ¨

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

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 the definitions 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  ¨

The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the registration statement will become effective on such date as the Securities and Exchange Commission, acting pursuant to Section 8(a), may determine.

 

 

 


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THE INFORMATION IN THIS JOINT PROXY STATEMENT/PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.

 

SUBJECT TO COMPLETION

 

LOGO   LOGO

JOINT PROXY STATEMENT/PROSPECTUS

FOR THE PROPOSED MERGER OF

HAMPTON ROADS BANKSHARES, INC.

AND GATEWAY FINANCIAL HOLDINGS, INC.

The boards of directors of Hampton Roads Bankshares, Inc. and Gateway Financial Holdings, Inc. have unanimously agreed to a merger of our companies. If the proposed merger is completed, Gateway Financial Holdings, Inc. shareholders will receive 0.6700 shares of Hampton Roads Bankshares, Inc. common stock for each share of Gateway Financial Holdings, Inc. common stock they own, one share of newly designated Hampton Roads Bankshares, Inc. Series A Preferred Stock (which will have substantially the same powers, designations, preferences, rights and qualifications, limitations and restrictions as the Gateway Financial Holdings, Inc. Series A Preferred Stock) for each share of Gateway Financial Holdings, Inc. Series A Preferred Stock they own, and one share of newly designated Hampton Roads Bankshares, Inc. 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 Gateway Financial Holdings, Inc. Series B Non-Convertible Non-Cumulative Perpetual Preferred Stock) for each share of Gateway Financial Holdings, Inc. Series B Non-Convertible Non-Cumulative Perpetual Preferred Stock they own, in each case subject to possible adjustment as described in this joint proxy statement/prospectus.

Hampton Roads Bankshares, Inc. common stock is listed on the Nasdaq Global Select Market under the symbol “HMPR.” Gateway Financial Holdings, Inc. common stock is listed on the Nasdaq Global Select Market under the symbol “GBTS.”

This joint proxy statement/prospectus provides detailed information about the merger and the special meeting of Hampton Roads Bankshares, Inc. shareholders and the special meeting of Gateway Financial Holdings, Inc. shareholders. It also provides information about the Hampton Roads Bankshares, Inc. stock to be issued to Gateway Financial Holdings, Inc. shareholders in the event the merger is approved. As described in this joint proxy statement/prospectus, we cannot complete the merger unless we obtain the necessary government approvals and unless the shareholders of both Hampton Roads Bankshares, Inc. and Gateway Financial Holdings, Inc. approve the merger proposal.

Please carefully review and consider this joint proxy statement prospectus which explains the merger proposal in detail, including the discussion under the heading “Risk Factors” beginning on page 22.

It is important that your shares are represented at your shareholders meeting, whether or not you plan to attend. Accordingly, please complete, date, sign, and return promptly your proxy card in the enclosed envelope. You may attend the meeting and vote your shares in person if you wish, even if you have previously returned your proxy.

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved the securities to be issued under this joint proxy statement/prospectus or determined if this joint proxy statement/prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

The securities to be issued in the merger are not savings or deposit accounts and are not insured by the Federal Deposit Insurance Corporation or any other federal or state governmental agency.

This joint proxy statement/prospectus is dated [                    ], 2008. It is first being mailed to Hampton Roads Bankshares, Inc.’s and Gateway Financial Holdings, Inc.’s shareholders on or about [                    ], 2008.


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ADDITIONAL INFORMATION

This joint proxy statement/prospectus incorporates certain important business and financial information about Hampton Roads Bankshares, Inc. and Gateway Financial Holdings, Inc. from other documents filed with the SEC that is not included in or delivered with this joint proxy statement/prospectus. For a listing of the documents incorporated by reference into this joint proxy statement/prospectus, see “Where You Can Find More Information”. This information is available to you without charge upon your written or oral request. You can obtain the documents incorporated by reference into this document through the Securities and Exchange Commission website at http://www.sec.gov or by requesting them in writing or by telephone at the appropriate address below.

 

Hampton Roads Bankshares, Inc.    Gateway Financial Holdings, Inc.
999 Waterside Drive, Suite 200    1580 Laskin Road
Norfolk, Virginia 23510    Virginia Beach, Virginia 23451
(757) 217-1000    (757) 422-4055
Attn: Jack W. Gibson    Attn: D. Ben Berry

If you would like to request any documents, please do so by December 11, 2008 in order to receive them before your shareholders’ meeting.


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LOGO

MERGER PROPOSAL—YOUR VOTE IS VERY IMPORTANT

You are cordially invited to attend the special meeting of the shareholders of Hampton Roads Bankshares, Inc. to be held on December 18, 2008 at 2:00 p.m. local time at our headquarters at 999 Waterside Dr., Suite 200, Norfolk, VA 23510. At the special meeting, you will be asked to:

 

   

approve the proposed merger of Gateway Financial Holdings, Inc. with and into Hampton Roads Bankshares, Inc.;

 

   

approve a proposal to adopt an amendment to the articles of incorporation of Hampton Roads Bankshares, Inc. to increase the maximum number of members of the board of directors from 18 to 20; and

 

   

adjourn the meeting to a later date or dates, if necessary, to permit further solicitation of proxies in the event there are not sufficient votes at the time of the meeting to approve the matters to be considered by the shareholders at the meeting.

Your board recommends that you vote for the merger. We need your vote to complete the merger. Whether or not you plan to attend the special meeting, please complete, sign and date the enclosed proxy card and return it promptly in the enclosed envelope. If you do not vote your shares by proxy or in person, the effect will be to vote against the merger.

Emil A. Viola

Chairman of the Board

Hampton Roads Bankshares, Inc.


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HAMPTON ROADS BANKSHARES, INC.

NOTICE OF SPECIAL MEETING OF SHAREHOLDERS

TO BE HELD ON DECEMBER 18, 2008

YOU ARE HEREBY NOTIFIED of and invited to attend the special meeting of shareholders of Hampton Roads Bankshares, Inc., a Virginia corporation, to be held on December 18, 2008 at 2:00 p.m. local time at our headquarters at 999 Waterside Dr., Suite 200, Norfolk, VA 23510, for the purpose of considering and voting upon the following:

 

  1. A proposal to approve and adopt the Agreement and Plan of Merger dated as of September 23, 2008, by and between Gateway Financial Holdings, Inc., and Hampton Roads Bankshares, Inc. and the transactions contemplated thereby. The merger agreement provides that Gateway Financial Holdings, Inc. will merge with and into Hampton Roads Bankshares, Inc., upon the terms and subject to the conditions set forth in the merger agreement, as more fully described in the accompanying joint proxy statement/prospectus. (see Proposal I)

 

  2. A proposal to approve and adopt an amendment to the articles of incorporation of Hampton Roads Bankshares, Inc. to increase the maximum number of members of the board of directors from 18 to 24. (see Proposal II)

 

  3. A proposal to adjourn the meeting to a later date or dates, if necessary, to permit further solicitation of proxies in the event there are not sufficient votes at the time of the meeting to approve the matters to be considered by the shareholders at the meeting, as more fully described in the accompanying joint proxy statement/prospectus. (see Proposal III)

Proposals I and II are conditioned on each other and approval of each is required for completion of the merger.

Our board of directors has determined that the terms of the merger are fair to and in the best interest of Hampton Roads Bankshares, Inc. and our shareholders, has approved and adopted the merger agreement and the related transactions, and unanimously recommends that our shareholders vote FOR the approval and adoption of the merger agreement and the related transactions and FOR the approval and adoption of the amendment to the articles of incorporation.

Our board of directors has fixed the close of business on November 12, 2008 as the record date for determination of our shareholders entitled to receive notice of and to vote at the special meeting. The special meeting may be adjourned or postponed from time to time upon approval of our shareholders without any notice other than by announcement at the special meeting of the adjournment or postponement thereof, and any and all business for which notice is hereby given may be transacted at such adjourned or postponed special meeting.

The affirmative vote of the holders of a majority of the outstanding shares of our common stock on the record date is required to approve and adopt the merger agreement and the related transactions and to approve and adopt the amendment to our articles of incorporation. Please complete, date, sign and promptly return the enclosed proxy card, which is solicited by our board of directors, in the enclosed envelope, whether or not you expect to attend the special meeting. You may revoke the proxy at any time before its exercise by delivering to us a written notice of revocation, delivering to us a duly executed proxy card bearing a later date or by voting in person at the special meeting. Failure to return a properly executed proxy card, or to vote at the special meeting, will have the same effect as a vote against the merger agreement and the transactions contemplated thereby.

 

    By Order of the Board of Directors
[                    ], 2008    

Jack W. Gibson

Vice Chairman, President and Chief Executive Officer


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LOGO

MERGER PROPOSAL—YOUR VOTE IS VERY IMPORTANT

You are cordially invited to attend a special meeting of the shareholders of Gateway Financial Holdings, Inc. to be held on December 18, 2008 at 3:00 p.m. local time at our headquarters at 1580 Laskin Road, Virginia Beach, VA 23451. At the special meeting, you will be asked to approve the proposed merger of Gateway Financial Holdings, Inc. into Hampton Roads Bankshares, Inc.

In the merger, each share of Gateway Financial Holdings, Inc. common stock that you own will be exchanged for 0.6700 shares of Hampton Roads Bankshares, Inc. common stock, each share of Gateway Financial Holdings, Inc. Series A Preferred Stock that you own will be exchanged for one share of Hampton Roads Bankshares, Inc. Series A Preferred Stock, and each share of Gateway Financial Holdings, Inc. Series B Non-Convertible Non-Cumulative Perpetual Preferred Stock that you own will be exchanged for one share of Hampton Roads Bankshares, Inc. Series B Non-Convertible Non-Cumulative Perpetual Preferred Stock. We expect the merger to be tax-free with respect to the shares of Hampton Roads Bankshares, Inc. stock that you receive.

Your board recommends that you vote for the merger. We need your vote to complete the merger. Whether or not you plan to attend the special meeting, please complete, sign and date the enclosed proxy card and return it promptly in the enclosed envelope. If you do not return your card or vote in person, the effect will be to vote against the merger.

Under North Carolina law, holders of Gateway Financial Holdings, Inc. Series A Preferred Stock and Series B Non-Convertible Non-Cumulative Perpetual Preferred Stock have the right to assert dissenters’ rights with respect to the merger and demand in writing that Hampton Roads Bankshares, Inc. pay the fair value of those shares. In order to exercise and protect your dissenters’ rights, you must:

 

   

Give written notice of your intent to demand payment for your shares of preferred stock to Gateway Financial before voting on the merger at the special meeting;

 

   

Not vote in favor of the merger; and

 

   

Then, if the merger is approved at the special meeting, you must complete, sign and return the dissenters’ notice which Gateway Financial Holdings, Inc. will send you within ten days of the shareholder vote.

A copy of the applicable North Carolina statutory provisions is included in the joint proxy statement/prospectus as Annex D, and a description of the procedures to demand and perfect dissenters’ rights is included in the section entitled “Proposal I—Approval of the Merger and Related Matters—Approval of the Merger—Dissenters’ Rights of Holders of Gateway Financial Preferred Stock” beginning on page [    ].

You should obtain current market quotations on shares of Hampton Roads Bankshares, Inc. common stock and Gateway Financial Holdings, Inc. common stock, which are listed on the Nasdaq Global Select Market under the symbols “HMPR” and “GBTS,” respectively.

D. Ben Berry

Chairman of the Board

Gateway Financial Holdings, Inc.


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GATEWAY FINANCIAL HOLDINGS, INC.

NOTICE OF SPECIAL MEETING OF SHAREHOLDERS

TO BE HELD ON DECEMBER 18, 2008

YOU ARE HEREBY NOTIFIED of and invited to attend a special meeting of shareholders of Gateway Financial Holdings, Inc., a North Carolina corporation, to be held on December 18, 2008 at 3:00 p.m. local time at our headquarters at 1580 Laskin Road, Virginia Beach, VA 23451, for the purpose of considering and voting upon the following:

 

  1. A proposal to approve and adopt the Agreement and Plan of Merger dated as of September 23, 2008, by and between Gateway Financial Holdings, Inc., and Hampton Roads Bankshares, Inc. and the transactions contemplated thereby. The merger agreement provides that Gateway Financial Holdings, Inc. will merge with and into Hampton Roads Bankshares, Inc., upon the terms and subject to the conditions set forth in the merger agreement, as more fully described in the accompanying joint proxy statement/prospectus. (see Proposal I)

 

  2. A proposal to adjourn the meeting to a later date or dates, if necessary, to permit further solicitation of proxies in the event there are not sufficient votes at the time of the meeting to approve the matters to be considered by the shareholders at the meeting, as more fully described in the accompanying joint proxy statement/prospectus. (see Proposal III)

Our board of directors has determined that the terms of the merger are fair to and in the best interest of Gateway Financial Holdings, Inc. and our shareholders, has approved and adopted the merger agreement and the related transactions, and unanimously recommends that our shareholders vote FOR the approval and adoption of the merger agreement and the related transactions.

Our board of directors has fixed the close of business on November 14, 2008 as the record date for determination of our shareholders entitled to receive notice of and to vote at the special meeting. The special meeting may be adjourned or postponed from time to time upon approval of our shareholders without any notice other than by announcement at the special meeting of the adjournment or postponement thereof, and any and all business for which notice is hereby given may be transacted at such adjourned or postponed special meeting.

The affirmative vote of the holders of a majority of the outstanding shares of our common stock on the record date, voting as a separate group, and the holders of a majority of the outstanding shares of our Series A Preferred Stock and Series B Non-Convertible Non-Cumulative Perpetual Preferred Stock on the record date, voting together as a separate group, are required to approve and adopt the merger agreement and the related transactions. Please complete, date, sign and promptly return the enclosed proxy card, which is solicited by our board of directors, in the enclosed envelope, whether or not you expect to attend the special meeting. You may revoke the proxy at any time before its exercise by delivering to us a written notice of revocation, delivering to us a duly executed proxy card bearing a later date or by voting in person at the special meeting. Failure to return a properly executed proxy card, or to vote at the special meeting, will have the same effect as a vote against the merger agreement and the transactions contemplated thereby.

 

    By Order of the Board of Directors
[                    ], 2008    

D. Ben Berry

President and Chief Executive Officer


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TABLE OF CONTENTS

     Page

QUESTIONS AND ANSWERS ABOUT THE MERGER AND THE SHAREHOLDER MEETINGS

   1

SUMMARY

   5

RECENT DEVELOPMENTS

   12

PRICE RANGE OF COMMON STOCK AND DIVIDENDS

   13

COMPARATIVE UNAUDITED PER SHARE DATA

   15

RATIO OF EARNINGS TO FIXED CHARGES

   16

UNAUDITED PRO FORMA CONDENSED FINANCIAL INFORMATION

   17

SUMMARY SELECTED FINANCIAL DATA

   21

RISK FACTORS

   22

FORWARD-LOOKING STATEMENTS

   34

THE GATEWAY FINANCIAL SPECIAL MEETING

   35

General

   35

Matters to Be Considered

   35

Proxies

   35

Solicitation of Proxies

   35

Record Date and Voting Rights

   35

Vote Required

   36

Recommendation of the Gateway Financial Board of Directors

   37

THE HAMPTON ROADS BANKSHARES SPECIAL MEETING

   38

General

   38

Matters to Be Considered

   38

Proxies

   38

Solicitation of Proxies

   38

Record Date and Voting Rights

   39

Vote Required

   39

Recommendation of the Hampton Roads Bankshares Board of Directors

   39

PROPOSAL I—APPROVAL OF THE MERGER AND RELATED MATTERS

   40

Merger

   40

Background of the Merger

   40

Hampton Roads Bankshares’ Reasons for the Merger

   43

Gateway Financial’s Reasons for the Merger

   44

Opinion of Gateway Financial’s Financial Advisor

   46
     Page

Opinion of Hampton Roads Bankshares’ Financial Advisor

   59
Dissenters’ or Appraisal Rights    64
Dissenters’ Rights of Holders of Gateway Financial Preferred Stock    64

Interests of Certain Persons in the Merger

   66

Regulatory Approvals

   67

Accounting Treatment

   68

Management and Operations after the Merger

   68

Resales of Hampton Roads Bankshares Stock

   68

Merger Consideration

   69

Conditions of the Merger

   69

Representations and Warranties

   71

Termination of the Merger Agreement

   72

Effect of Termination; Termination Fee

   72

Waiver and Amendment

   73

Indemnification; Directors’ and Officers’ Insurance

   73

Acquisition Proposals

   73

Closing Date; Effective Time

   74

Conduct of Business Pending the Merger

   74

CERTAIN FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER

   76

General

   76

The Merger

   76

Consequences to Shareholders

   77

PROPOSAL II—APPROVAL OF ADOPTION OF AMENDMENT TO THE ARTICLES OF INCORPORATION OF HAMPTON ROADS BANKSHARES, INC.  

   79

INFORMATION ABOUT HAMPTON ROADS BANKSHARES AND GATEWAY FINANCIAL

   80

Hampton Roads Bankshares

   80

Gateway Financial

   80

SECURITIES OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT OF GATEWAY FINANCIAL

   81

DESCRIPTION OF HAMPTON ROADS BANKSHARES, INC. CAPITAL STOCK

   85

General

   85

Common Stock

   85

Preferred Stock

   85

 

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Annex A     Agreement and Plan of Merger dated as of September 23, 2008, by and between Hampton Roads Bankshares and Gateway Financial, as amended.
Annex B     Opinion of Sandler O’Neill + Partners, L.P. to the Board of Directors of Gateway Financial Holdings, Inc.
Annex C     Opinion of McKinnon & Company, Inc. to the Board of Directors of Hampton Roads Bankshares, Inc.
Annex D     Sections 55-13-01 through 55-13-31 of the North Carolina Business Corporation Act.
Annex E     Articles of Amendment to Hampton Roads Bankshares, Inc.’s articles of incorporation increasing the maximum number of directors.
Annex F     Gateway Financial Holdings, Inc.’s Annual Report on Form 10-K for the fiscal year ended December 31, 2007.
Annex G     Gateway Financial Holdings, Inc.’s Quarterly Report on Form 10-Q for the period ended September 30, 2008.

 

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QUESTIONS AND ANSWERS

ABOUT THE MERGER AND THE SHAREHOLDER MEETINGS

The following questions and answers briefly address some commonly asked questions about the Hampton Roads Bankshares, Inc. (“Hampton Roads Bankshares”) and the Gateway Financial Holdings, Inc. (“Gateway Financial”) special meetings. They may not include all the information that is important to shareholders of Hampton Roads Bankshares and Gateway Financial. We urge shareholders to carefully read this entire joint proxy statement/prospectus including the annexes and the other documents referred to herein.

 

Q: Why am I receiving these materials?

 

A: We are sending you these materials to help you decide how to vote your shares of Gateway Financial or Hampton Roads Bankshares stock with respect to their proposed merger.

The merger cannot be completed unless the Gateway Financial and Hampton Roads Bankshares shareholders adopt the merger agreement, as amended (the “merger agreement”), and Hampton Roads Bankshares shareholders approve the amendment of Hampton Roads Bankshares’ articles of incorporation. Each of Gateway Financial and Hampton Roads Bankshares is holding its special meeting of shareholders to vote on the proposals necessary to complete the merger. Information about these meetings, the merger and the other business to be considered by shareholders is contained in this joint proxy statement/prospectus.

 

Q: Why are Gateway Financial and Hampton Roads Bankshares proposing the merger transaction?

 

A: We believe the proposed merger is in the best interest of Gateway Financial, Hampton Roads Bankshares and our respective shareholders. Our boards of directors believe that combining Gateway Financial with Hampton Roads Bankshares will provide significant value to our shareholders.

You should review the reasons for the merger described in greater detail under the captions “Proposal I—Approval of the Merger and Related Matters—Approval of the Merger—Background of the Merger,” “—Hampton Roads Bankshares’ Reasons for the Merger” and “—Gateway Financial’s Reasons for the Merger” beginning on page [    ].

 

Q: When and where are the shareholder meetings?

 

A: The Gateway Financial special meeting is scheduled to take place on December 18, 2008 at 3:00 p.m. local time at Gateway Financial’s headquarters at 1580 Laskin Road, Virginia Beach, VA 23451.

The Hampton Roads Bankshares special meeting is scheduled to take place on December 18, 2008 at 2:00 p.m. local time at Hampton Roads Bankshares’ headquarters at 999 Waterside Dr., Suite 200, Norfolk, VA 23510.

 

Q: What do the boards of directors recommend?

 

A: The Gateway Financial and Hampton Roads Bankshares boards of directors have unanimously approved and adopted the merger agreement and unanimously recommend that shareholders vote “FOR” the proposal to approve the merger agreement and the transactions contemplated thereby. The Hampton Roads Bankshares board of directors unanimously approved the amendment to Hampton Roads Bankshares’ articles of incorporation and unanimously recommend that shareholders vote “FOR” the proposal to approve the amendment. For shareholders of Hampton Roads Bankshares, the approval of the amendment to the articles of incorporation and the merger agreement are conditioned on each other, and approval of each is required for completion of the merger.

 

Q: What will shareholders receive for their stock?

 

A:

For each share of Gateway Financial common stock that you own, you will receive 0.6700 shares (which we call the “common stock exchange ratio”) of Hampton Roads Bankshares common stock. For each share of

 

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Gateway Financial Holdings, Inc. Series A Preferred Stock that you own, you will receive one share of Hampton Roads Bankshares Series A Preferred Stock unless you dissent from the transaction. For each share of Gateway Financial Holdings, Inc. Series B Non-Convertible Non-Cumulative Perpetual Preferred Stock that you own, you will receive one share of Hampton Roads Bankshares Series B Non-Convertible Non-Cumulative Perpetual Preferred Stock unless you dissent from the transaction.

Hampton Roads Bankshares shareholders will continue to hold their existing shares, which will not change as a result of the merger.

 

Q: How will I receive my shares of Hampton Roads Bankshares common stock and/or preferred stock?

 

A: If you are a holder of Gateway Financial stock, you will receive written instructions from the exchange agent after the merger is completed on how to exchange your stock certificates for Hampton Roads Bankshares stock.

You should not forward your Gateway Financial stock certificates with your proxy card.

 

Q: When will we complete the Merger?

 

A: We intend to complete the merger as soon as possible after shareholder approval is received, all regulatory approvals have been obtained and other conditions to the closing have been satisfied or waived.

The regulatory approvals are described under “Proposal I—Approval of the Merger and Related Matters—Approval of the Merger—Regulatory Approvals” beginning on page [    ].

 

Q: What should I do now?

 

A: Mail your signed proxy card in the enclosed return envelope as soon as possible so that your shares may be represented at your shareholders’ meeting. It is important that the proxy card be received as soon as possible and in any event before your shareholders’ meeting.

 

Q: Can I change my vote after I mail my proxy card?

 

A: Yes. You can change your vote at any time before your proxy is voted at your shareholders’ meeting. You can do this in one of three ways:

 

   

First, you can send a written notice stating that you would like to revoke your proxy.

 

   

Second, you can complete and submit a new proxy card.

 

   

Third, you can attend your shareholders’ meeting and vote in person. Simply attending your shareholders’ meeting, however, will not revoke your proxy.

If you choose either of the first or second methods, you must submit your notice of revocation or your new proxy card prior to your shareholders’ meeting. If you are a Gateway Financial shareholder, your submission must be mailed to D. Ben Berry, Gateway Financial at 1580 Laskin Road, Virginia Beach, VA 23451. If you are a Hampton Roads Bankshares shareholder, your submission must be mailed to Jack W. Gibson, Hampton Roads Bankshares at 999 Waterside Dr., Suite 200, Norfolk, VA 23510.

 

Q: Who will be soliciting proxies?

 

A: The boards of directors of Hampton Roads Bankshares and Gateway Financial will be soliciting proxies. In addition Gateway Financial has engaged a professional proxy solicitation firm, Georgeson, to assist it in soliciting proxies.

 

Q: What if I do not vote or I abstain from voting?

 

A: If you do not vote or you abstain from voting, your failure to vote or abstention will count as a vote “AGAINST” the merger.

 

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Q: If my shares are held by my broker in “street name,” will my broker vote my shares for me?

 

A: Your broker will vote your shares on the merger only if you provide instructions on how to vote. You should follow the directions provided by your broker to vote your shares. If you do not provide your broker with instructions on how to vote your shares held in “street name,” your broker will not be permitted to vote your shares, which will have the effect of a vote “AGAINST” the merger.

 

Q: If I am a Gateway Financial shareholder, will I be able to sell the shares of Hampton Roads Bankshares common stock that I receive in the merger?

 

A: Yes, in most cases. The shares of Hampton Roads Bankshares common stock to be issued in the merger will be registered under the Securities Act of 1933 and listed on the Nasdaq Global Select Market. However, certain shareholders who are deemed to be “affiliates” of Hampton Roads Bankshares or Gateway Financial under the Securities Act (generally, directors, executive officers and shareholders of Hampton Roads Bankshares or Gateway Financial holding 10% or more of the outstanding shares of common stock) must abide by certain transfer restrictions under the Securities Act.

 

Q: What are the tax consequences of the merger to me?

 

A: Hampton Roads Bankshares and Gateway Financial intend for the merger to qualify as a reorganization within the meaning of Section 368(a) of the Internal Revenue Code of 1986, which we refer to as the Code, for U.S. federal income tax purposes. Assuming the merger qualifies for such treatment, a holder of Gateway Financial stock generally will not recognize any gain or loss for U.S. federal income tax purposes upon the exchange of the holder’s shares of Gateway Financial stock for shares of Hampton Roads Bankshares stock pursuant to the merger.

If you are a Hampton Roads Bankshares shareholder, there will be no changes to your shares of Hampton Roads Bankshares common stock and there will be no tax consequences for you.

 

Q: Do I have appraisal or dissenters’ rights?

 

A: Hampton Roads Bankshares shareholders do not have appraisal or dissenters’ rights in connection with the merger under applicable Virginia corporate law. Holders of Gateway Financial common stock do not have appraisal or dissenters’ rights in connection with the merger under applicable North Carolina corporate law.

However, holders of Gateway Financial Series A Preferred Stock and Series B Non-Convertible Non-Cumulative Perpetual Preferred Stock have the right to assert dissenters’ rights with respect to the merger and demand in writing that Hampton Roads Bankshares pay the fair value of their shares. As a dissenting holder of preferred shares in Gateway Financial, in order to exercise and perfect dissenters’ rights, you must:

 

   

Give written notice of your intent to demand payment for your shares to Gateway Financial before voting on the merger at the special meeting;

 

   

Not vote in favor of the merger; and

 

   

Then, if your merger is approved at the special meeting, you must complete, sign and return the dissenters’ notice which Gateway Financial will send you within ten days of the shareholder vote.

Payment for your shares will be made only if the merger is completed. A copy of the applicable North Carolina statutory provisions is included in this joint proxy statement/prospectus as Annex D, and a description of the procedures to demand and perfect dissenters’ rights is included in the section entitled “Proposal I—Approval of the Merger and Related Matters—Approval of the Merger—Dissenters’ Rights of Holders of Gateway Financial Preferred Stock” beginning on page [    ].

 

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Q: What are the federal income tax consequences of exercising my appraisal rights?

 

A: If you exercise your dissenters’ rights and receive a cash payment with respect to your shares of Gateway Financial preferred shares and have held your preferred shares of Gateway Financial stock as a capital asset, you generally will recognize capital gain or loss equal to the difference between your tax basis in those shares and the amount of cash you receive in exchange for those shares. For greater detail, see “Proposal I—Approval of the Merger and Related Matters—Certain Federal Income Tax Consequences of the Merger” beginning on page [    ].

 

Q: Who should shareholders call with questions?

 

A: If you have more questions about the merger you should contact:

 

Gateway Financial Holdings, Inc.    Hampton Roads Bankshares, Inc.
1580 Laskin Road    999 Waterside Drive, Suite 200
Virginia Beach, Virginia 23451    Norfolk, Virginia 23510
(757) 422-4055    (757) 217-1000
Attn: D. Ben Berry    Attn: Jack W. Gibson
or   
Georgeson   
199 Water Street, 26th Floor   
New York, New York 10038   
(212) 440-9800   

 

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SUMMARY

This summary highlights selected information from this joint proxy statement/prospectus. It does not contain all of the information that is important to you. We urge you to carefully read the entire joint proxy statement/prospectus and the other documents to which this joint proxy statement/prospectus refers to fully understand the merger and the other matters to be considered at the shareholder meeting. See “Where You Can Find More Information” on page [    ]. Each item in this summary includes a page reference directing you to a more complete description of that item.

 

The Merger (page [    ])

We have attached the merger agreement to this joint proxy statement/prospectus as Annex A. Please read the merger agreement. It is the legal document that governs the merger.

In the merger, Hampton Roads Bankshares will acquire Gateway Financial through the merger of Gateway Financial into Hampton Roads Bankshares. Gateway Bank & Trust Co., Gateway Financial’s wholly-owned subsidiary, will operate as a separate, wholly-owned subsidiary of Hampton Roads Bankshares. However, the companies anticipate that Gateway Bank & Trust Co.’s offices in Virginia Beach, Chesapeake, Norfolk and Suffolk, Virginia, will be converted to Bank of Hampton Roads locations with the additional consolidation of overlapping market locations. Gateway Bank & Trust Co.’s offices outside of southside Hampton Roads will continue to operate as either Gateway Bank & Trust Co. locations or, as presently the case in Richmond, Virginia, as the Bank of Richmond.

Each share of Gateway Financial common stock outstanding will be converted in the merger into 0.6700 shares of Hampton Roads Bankshares common stock as further described below. We expect to complete the merger in the fourth quarter of 2008, although there can be no assurance in this regard.

Our Reasons for the Merger (page [    ])

Gateway Financial’s board of directors is proposing the merger because, among other reasons:

 

   

the per share value of the merger consideration to holders of Gateway Financial common stock;

 

   

the merger allows Gateway Financial’s shareholders to be part owner of a larger, more diversified financial services institution;

 

   

the merger will result in Gateway Bank & Trust Co., Gateway Financial’s wholly-owned subsidiary, becoming a subsidiary of Hampton Roads Bankshares; and

 

   

the merger should position Gateway Bank & Trust Co. to expand its presence in the Virginia and North Carolina markets, increase competitiveness and improve operations.

Hampton Roads Bankshares board of directors is proposing the merger because, among other reasons:

 

   

the merger will broaden the market presence of Hampton Roads Bankshares beyond southside Hampton Roads and the Delmarva Peninsula;

 

   

the merger will position Hampton Roads Bankshares to expand into additional markets in Central Virginia and North Carolina;

 

   

the merger will diversify Hampton Roads Bankshares’ deposit and loan base;

 

   

the merger will allow it to better serve its customers through the higher combined legal lending limits available through the combined banks;

 

   

the merger will broaden Hampton Roads Bankshares’ management and employee depth; and

 

   

the merger will increase the capacity of the resulting organization to add to its current offering of financial products and services.

What Shareholders Will Receive (page [    ])

Each of your shares of Gateway Financial common stock will automatically be converted into


 

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0.6700 shares of Hampton Roads Bankshares common stock, each of your shares of Gateway Financial Series A Preferred Stock will automatically be converted into one share of Hampton Roads Bankshares Series A Preferred Stock unless you exercise your dissenters’ rights, and each of your shares of Gateway Financial Series B Non-Convertible Non-Cumulative Perpetual Preferred Stock, will automatically be converted into one share of Hampton Roads Bankshares Series B Non-Convertible Non-Cumulative Perpetual Preferred Stock unless you exercise your dissenters’ rights.

Hampton Roads Bankshares will not issue any fractional shares in the merger. Instead, you will receive cash for any fractional share of Hampton Roads Bankshares common stock owed to you. The amount of cash that you will receive for any such fractional share will be calculated by multiplying the fractional share interest by the product obtained by multiplying the average of the daily closing prices of Hampton Roads Bankshares common stock on the Nasdaq Global Select Market for the 10 consecutive trading days ending on the fifth day before the merger by the common stock exchange ratio.

Dissenters’ Rights (page [    ])

Hampton Roads Bankshares shareholders and holders of Gateway Financial common stock will not have any dissenters’ or appraisal rights in connection with the merger and the other matters described in this joint proxy statement/prospectus. Holders of Gateway Financial Series A Preferred Stock and Series B Non-Convertible Non-Cumulative Perpetual Preferred Stock are entitled to dissenters’ rights under North Carolina law and may demand that Hampton Roads Bankshares pay fair market value for those shares.

Board Recommendations (page [    ])

Gateway Financial

The Gateway Financial board of directors believes that the merger is fair to Gateway Financial’s shareholders and in their best interest. Gateway Financial’s board unanimously recommends

that shareholders vote FOR the proposal to approve and adopt the merger agreement and the transactions contemplated thereby.

Hampton Roads Bankshares

The Hampton Roads Bankshares board of directors believes that the merger is fair to Hampton Roads Bankshares shareholders and in their best interest. Hampton Roads Bankshares’ board unanimously recommends that shareholders vote FOR the proposal to approve and adopt the merger agreement and the transactions contemplated thereby and “FOR” the proposal to approve and adopt the amendment to Hampton Roads Bankshares’ articles of incorporation.

Opinion of Gateway Financial’s Financial Advisor (page [    ])

Sandler O’Neill + Partners, L.P. delivered a written opinion to the Gateway Financial board of directors that, as of September 23, 2008, the merger consideration is fair to the shareholders from a financial point of view. We have attached this opinion to this joint proxy statement/prospectus as Annex B. You should read this opinion completely to understand the assumptions made, matters considered and limitations of the review undertaken by Sandler O’Neill + Partners, L.P. in providing its opinion.

Opinion of Hampton Roads Bankshares’ Financial Advisor (page [    ])

McKinnon & Company, Inc. delivered a written opinion to the Hampton Roads Bankshares board of directors that, as of September 23, 2008, the common stock exchange ratio is fair to the shareholders from a financial point of view. We have attached this opinion to this joint proxy statement/prospectus as Annex C. You should read this opinion completely to understand the assumptions made, matters considered and limitations of the review undertaken by McKinnon & Company, Inc. in providing its opinion.

Accounting Treatment (page [    ])

The merger will be accounted for under the purchase method of accounting.


 

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Certain Federal Income Tax Consequences (page [    ])

Gateway Financial

Gateway Financial and Hampton Roads Bankshares intend for the merger to qualify as a reorganization within the meaning of Section 368(a) of the Code for U.S. federal income tax purposes. Assuming the merger qualifies for such treatment, a holder of Gateway Financial stock generally will not recognize any gain or loss for U.S. federal income tax purposes upon the exchange of the holder’s shares of Gateway Financial stock for shares of Hampton Roads Bankshares stock pursuant to the merger. It is a condition to each of Gateway Financial’s and Hampton Roads Bankshares’ respective obligations to complete the merger that it receives a separate legal opinion, at the effective time of the merger, that the merger will be treated as a reorganization within the meaning of Section 368(a) of the Code for U.S. federal income tax purposes.

For a more complete description of the material U.S. federal income tax consequences of the merger, see “Certain Federal Income Tax Consequences” beginning on page [    ].

The discussion of United States federal income tax consequences set forth above is for general information only and does not purport to be a complete analysis or listing of all potential tax effects that may apply to a holder of Gateway Financial common stock. Shareholders of Gateway Financial are strongly urged to consult their tax advisors to determine the particular tax consequences to them of the merger, including the application and effect of federal, state, local, foreign and other tax laws.

The Companies (page [    ])

Hampton Roads Bankshares, Inc.

999 Waterside Drive, Suite 200

Norfolk, Virginia 23510

(757) 217-1000

Hampton Roads Bankshares is a bank holding company organized under the laws of the Commonwealth of Virginia and is registered under the federal Bank Holding Company Act. It has two

banking subsidiaries—Bank of Hampton Roads and Shore Bank, which together have 26 offices in Virginia and Maryland.

Hampton Roads Bankshares is engaged in the business of offering banking services to the general public. Through its subsidiaries, Hampton Roads Bankshares offers checking accounts, savings and time deposits, and commercial, real estate, personal, home improvement, automobile and other installment and term loans. It also offers financial services, travelers’ checks, safe deposit boxes, collection, notary public and other customary bank services (with the exception of trust services) to its customers. The three principal types of loans that the banks make are commercial and industrial loans, real estate loans and loans to individuals for household, family and other consumer expenditures.

As of September 30, 2008, Hampton Roads Bankshares reported, on a consolidated basis, total assets of $918 million, net loans of $797 million, deposits of $675 million and shareholders’ equity of $109 million.

Gateway Financial

1580 Laskin Road

Virginia Beach, Virginia 23451

(757) 422-4055

Gateway Financial is a corporation organized under the laws of the State of North Carolina and is registered as a financial holding company with the Federal Reserve Board. Gateway Financial was formed in October 2001 to become the owner of all outstanding shares of Gateway Bank & Trust Co., which commenced operations in December 1998.

Gateway Bank & Trust Co. has a total of thirty-seven full-service financial centers—twenty-one in Virginia: Virginia Beach (7), Richmond (6), Chesapeake (3), Emporia (2), Suffolk, Norfolk, and Charlottesville; and sixteen in North Carolina: Chapel Hill, Elizabeth City (3), Edenton, Kitty Hawk (2), Raleigh (3), Moyock, Nags Head, Plymouth, Roper, Wake Forest and Wilmington. The bank provides insurance through its Gateway Insurance Services, Inc. subsidiary, brokerage services through its Gateway Investment Services, Inc. subsidiary, mortgage banking services through its Gateway Bank


 

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Mortgage, Inc. subsidiary, and title insurance services through its Gateway Title Agency, Inc. subsidiary.

As of September 30, 2008, Gateway Financial reported, on a consolidated basis, total assets of $2,280 million, net loans of $1,809 million, deposits of $1,834 million and shareholders’ equity of $164 million.

The Shareholder Meetings (page [    ])

Gateway Financial

The special meeting will be held on December 18, 2008 at 3:00 p.m. local time at Gateway Financial’s headquarters at 1580 Laskin Road, Virginia Beach, VA 23451. At the special meeting, you will be asked:

 

   

to approve the merger agreement and the transactions contemplated thereby (see Proposal I); and

 

   

to consider and vote upon a proposal to adjourn the meeting to a later date or dates, if necessary, to permit further solicitation of proxies in the event that there are not sufficient votes at the time of the meeting to approve the matter to be considered by the shareholders at the meeting (see Proposal III).

Hampton Roads Bankshares

The special meeting will be held on December 18, 2008 at 2:00 p.m. local time at Hampton Roads Bankshares’ headquarters at 999 Waterside Dr., Suite 200, Norfolk, VA 23510. At the special meeting, you will be asked:

 

   

to approve the merger agreement and the transactions contemplated thereby (see Proposal I);

 

   

to approve to increase the maximum number of members of the board of directors from 18 to 24 (see Proposal II); and

 

   

to consider and vote upon a proposal to adjourn the meeting to a later date or dates, if necessary, to permit further solicitation of proxies in the event that there are not sufficient votes at the time of the meeting to approve the matter to be considered by the shareholders at the meeting (see Proposal III).

 

Record Date; Vote Required (page [    ])

Gateway Financial

Shareholders of Gateway Financial can vote at the special meeting if they owned shares of Gateway Financial stock at the close of business on November 14, 2008. On that date, Gateway Financial had [            ] shares of common stock outstanding and entitled to vote, 23,266 shares of Series A Preferred Stock outstanding and entitled to vote, and 37,550 shares of Series B Non-Convertible Non-Cumulative Perpetual Preferred Stock outstanding and entitled to vote. You can cast one vote for each share of Gateway Financial stock that you owned on that date.

The approval of the merger agreement and the transactions contemplated thereby requires the affirmative vote of the holders of a majority of Gateway Financial’s outstanding shares of common stock, voting as a separate group, and the affirmative vote of the holders of a majority of Gateway Financial’s outstanding shares of Series A Preferred Stock and Series B Non-Convertible Non-Cumulative Perpetual Preferred Stock, voting together as a separate group.

Approval of the adjournment of the meeting requires the affirmative vote of a majority of the shares represented at the meeting, whether or not a quorum is present.

As of November 14, 2008, Gateway Financial’s directors and executive officers held approximately [      ]% of the outstanding shares of Gateway Financial common stock entitled to vote at the special meeting and [      ]% of the outstanding shares of Gateway Financial Series A Preferred Stock and Series B Non-Convertible Non-Cumulative Perpetual Preferred Stock entitled to vote at the special meeting. The Gateway Financial executive officers and directors have indicated that they plan to vote the shares of Gateway Financial stock that they own for approval of the merger agreement and the transactions contemplated thereby.

In addition, each executive officer and director of Gateway Financial has entered into a support agreement which generally precludes these persons from transferring, selling, or otherwise disposing of


 

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any shares of stock of Gateway Financial held by them during the pendency of the transaction. The persons that entered into the support agreements also agreed to vote in favor of the merger agreement and the merger and to surrender the shares of stock of Gateway Financial held by such persons at the effective time of the merger. In addition, the persons that entered into the support agreements agreed to vote against any proposal or any amendment of Gateway Financial’s articles of incorporation or bylaws which would frustrate or impede the merger. The support agreements require that any signing party not make any statement, written or oral, to the effect that it does not support the merger or that other shareholders of Gateway Financial should not support the merger; provided, however, that members of the board of directors and officers of Gateway Financial are permitted to discuss or communicate about the merger in accordance with their fiduciary duties if such discussions and communications are limited to other members of the board and officers of Gateway Financial and Gateway Bank & Trust Co., financial advisors, legal advisors, and other persons owing duties of confidentiality to Gateway Financial.

Hampton Roads Bankshares

Shareholders of Hampton Roads Bankshares can vote at the special meeting if they owned shares of Hampton Roads Bankshares common stock at the close of business on November 12, 2008. On that date, Hampton Roads Bankshares had [            ] shares of common stock outstanding and entitled to vote. You can cast one vote for each share of Hampton Roads Bankshares common stock that you owned on that date.

The approval of the merger agreement and the transactions contemplated thereby requires the affirmative vote of the holders of a majority of Hampton Roads Bankshares’ outstanding shares.

The approval of the adoption of the amendment to Hampton Roads Bankshares’ articles of incorporation to increase the maximum number of members of the board of directors from 18 to 24 requires the affirmative vote of a majority of Hampton Roads Bankshares’ outstanding shares.

 

Approval of the adjournment of the meeting requires the affirmative vote of a majority of the shares represented at the meeting, whether or not a quorum is present.

As of November 12, 2008, Hampton Roads Bankshares’ directors and executive officers held approximately [      ]% of the outstanding shares of Hampton Roads Bankshares common stock entitled to vote at the special meeting. The Hampton Roads Bankshares directors have indicated that they plan to vote the shares of Hampton Roads Bankshares common stock that they own for approval of the merger agreement and the transactions contemplated thereby and for adoption of the amendment to the articles of incorporation.

Conditions to Completion of the Merger (page [    ])

The obligations of Hampton Roads Bankshares and Gateway Financial to complete the merger depend on a number of conditions being met. These include:

 

   

the shareholders of Hampton Roads Bankshares and Gateway Financial must approve the merger agreement and the related transactions;

 

   

the approval of the merger by the necessary federal and state regulatory authorities; and

 

   

the receipt by Gateway Financial and Hampton Roads Bankshares of opinions that, for United States federal income tax purposes, the transaction will constitute a reorganization within the meaning of Section 368(a) of the Internal Revenue Code.

Where the law permits, either of us could choose to waive a condition to our obligation to complete the merger although that condition has not been satisfied. We cannot be certain when, or if, the conditions to the merger will be satisfied or waived, or that the merger will be completed.

Regulatory Approvals (page [    ])

We cannot complete the merger unless it is approved by the Board of Governors of the Federal


 

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Reserve System and the Virginia Bureau of Financial Institutions. Once the Federal Reserve Board approves the merger, we have to wait 15 days before we can complete it. During that time, the Department of Justice may challenge the merger.

As of the date of this joint proxy statement/prospectus, we have not yet received the required approvals. While we do not know of any reason why we would not be able to obtain the necessary approvals in a timely manner, we cannot be certain when or if we will receive them.

Termination of the Merger Agreement; Expenses (page [    ])

Hampton Roads Bankshares and Gateway Financial can mutually agree at any time to terminate the merger agreement without completing the merger, even if the Gateway Financial and Hampton Roads Bankshares shareholders have approved it. Also, either of us can decide, without the consent of the other, to terminate the merger agreement in a number of other situations, including:

 

   

the final denial of a required regulatory approval;

 

   

the failure to obtain the required shareholder votes at a duly called meeting;

 

   

the failure of the other party to recommend that its shareholders adopt the merger agreement, the failure of the other party to call a shareholders’ meeting for that purpose, or the other party’s willful and material breach of the merger agreement;

 

   

an unremedied breach of the merger agreement by the other party, so long as the party that is seeking to terminate the merger agreement has not itself breached the agreement; and

 

   

the failure to complete the merger by June 30, 2009 without a breach by the other party.

Gateway Financial can terminate the merger agreement if, as a result of a tender offer by a party other than Hampton Roads Bankshares, or any written offer with respect to a merger, share

exchange, sale of a material portion of its assets or other business combination, Gateway Financial’s board of directors determines that it has a fiduciary obligation to its shareholders to accept such proposal and the proposal is superior to the merger agreement.

If the merger agreement is terminated under certain circumstances, Hampton Roads Bankshares may be entitled to receive a termination fee from Gateway Financial in the amount of $3,300,000. Under certain circumstances, Gateway Financial may be entitled to receive a termination fee from Hampton Roads Bankshares in the amount of $3,300,000.

Waiver and Amendment (page [    ])

We may jointly amend the merger agreement, and each of us may waive our right to require the other party to adhere to the terms and conditions of the merger agreement. However, we may not do so after either party’s shareholders approve the merger if the amendment or waiver reduces or changes the consideration that will be received by Gateway Financial shareholders or adversely affects the tax consequences of the consideration received by you.

Certain Benefits of Directors and Officers of Gateway Financial (page [    ])

Some of the directors and officers of Gateway Financial have interests in the merger that differ from, or are in addition to, their interests as shareholders of Gateway Financial. These interests exist because of, among other things, employment or severance agreements that the officers entered into with Gateway Financial, and rights that these officers and directors have under Gateway Financial’s benefit plans. These employment and severance agreements provide certain officers with severance benefits if their employment is terminated following the merger.

D. Ben, Berry, the Chairman, President and Chief Executive Officer of Gateway Financial, will join the board of directors of Hampton Roads Bankshares, and Gateway Financial will designate six additional individuals (who will be existing directors of Gateway Financial) to the board of directors of Hampton Roads Bankshares. Mr. Berry will become President of Hampton Roads Bankshares, and David R. Twiddy, Senior Executive


 

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Vice President of Gateway Financial, will become President and Chief Executive Officer of Gateway Bank & Trust Co. and an executive officer of Hampton Roads Bankshares.

The members of the Gateway Financial board of directors knew about these additional interests and considered them when they approved the merger agreement and the merger.

Stock Options (page [    ])

Under the merger agreement, each stock option to buy Gateway Financial common stock granted under Gateway Financial’s stock option plan that is outstanding and not yet exercised immediately prior to the merger will become an option to buy Hampton Roads Bankshares’ common stock. The number of shares of Hampton Roads Bankshares’ common stock subject to each new stock option, as well as the exercise price of that stock option, will be adjusted to reflect the common stock exchange ratio in the merger.

 

Restricted Stock (page [    ])

Under the merger agreement, each share of Gateway Financial restricted stock, whether or not vested, will be converted into and become rights with respect to Hampton Roads Bankshares common stock. Each share of Gateway Financial restricted stock will be converted into 0.6700 shares of Hampton Roads Bankshares common stock.

Material Differences in the Rights of Hampton Roads Bankshares Shareholders and Gateway Financial Shareholders (page [    ])

The rights of Hampton Roads Bankshares shareholders are governed by Virginia law and by Hampton Roads Bankshares’ articles of incorporation and bylaws. The rights of Gateway Financial shareholders are governed by North Carolina law and by Gateway Financial’s articles of incorporation and bylaws. Upon completion of the merger, the rights of the Hampton Roads Bankshares shareholders, including former shareholders of Gateway Financial, will be governed by Virginia law, and the articles of incorporation and bylaws of Hampton Roads Bankshares.


 

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RECENT DEVELOPMENTS

Creation and Issuance of Series B Non-Convertible Non-Cumulative Perpetual Preferred Stock

On September 25, 2008, Gateway Financial filed Articles of Amendment with the North Carolina Secretary of State for the purpose of amending its Amended and Restated Articles of Incorporation to create a Series B Non-Convertible Non-Cumulative Perpetual Preferred Stock, no par value per share. The terms of the Series B Non-Convertible Non-Cumulative Perpetual Preferred Stock prohibits Gateway Financial from declaring or paying any cash dividends on its common stock in the event Gateway Financial fails to declare and pay full cash dividends (or declare and set aside a sum sufficient for payment thereof) on the Series B Non-Convertible Non-Cumulative Perpetual Preferred Stock through the date on which Gateway Financial proposes to declare and pay the cash dividend on the common stock. The Series B Non-Convertible Non-Cumulative Perpetual Preferred Stock will not participate in dividends paid with respect to any other class or series of the Gateway Financial’s capital stock. The Series B Non-Convertible Non-Cumulative Perpetual Preferred Stock ranks on parity with Gateway Financial’s existing Series A Preferred Stock (and senior to the common stock) with respect to dividend and liquidation rights. The Series B Non-Convertible Non-Cumulative Perpetual Preferred Stock has a 12% non-cumulative dividend, may be redeemed at the election of Gateway Financial at any time after October 1, 2009, and initially has a liquidation preference of $1,000 per share.

On September 29, 2008, Gateway Financial accepted subscription offers from investors for the purchase of 37,550 shares of the Series B Non-Convertible Non-Cumulative Perpetual Preferred Stock. The offering closed on September 29, 2008, and Gateway Financial received gross proceeds of $37.55 million from the sale.

Bank Loans

On September 30, 2008, Gateway Financial obtained loans in the aggregate amount of approximately $31.0 million from Hampton Roads Bankshares and its subsidiaries. The loans are payable on demand and secured by a first priority lien on all of the issued and outstanding shares of common stock of Gateway Bank & Trust Co., the principal subsidiary of Gateway Financial. The proceeds from the loans were used to terminate Gateway Financial’s credit agreement, dated May 30, 2008, with JPMorgan Chase Bank, N.A., which previously provided Gateway Financial with: (a) a term loan in the principal amount of $500,000; (b) a revolving line of credit in the maximum principal amount of $20,000,000; and (c) a subordinated debt facility in the aggregate principal amount of $20,000,000. The aggregate amount of approximately $31.0 million paid to JPMorgan Chase Bank, N.A. represented the principal amount borrowed and outstanding under the term loan, revolving line of credit and subordinated debt facility, plus accrued and unpaid interest and other facility fees and expenses, including a 0.50% prepayment penalty on the subordinated debt facility.

Material Impairment

On October 1, 2008, the Audit Committee of the Board of Directors of Gateway Financial concluded that Gateway Financial must record as of September 30, 2008 an other-than-temporary impairment in the amount of $37.4 million on its investments in perpetual preferred securities issued by the Federal National Mortgage Association (“Fannie Mae”) and the Federal Home Loan Mortgage Corporation (“Freddie Mac”). This determination was made as a result of the action taken by the United States Treasury Department and the Federal Housing Finance Agency on September 7, 2008, which placed Fannie Mae and Freddie Mac into conservatorship. Gateway Financial’s preferred investments in Fannie Mae and Freddie Mac are included in securities available for sale at a cost of $20.2 million and $20.2 million, respectively. As of the market close on [                    ], 2008, the total market value of the Freddie Mac and Fannie Mae preferred stock was $[            ] million. The other than temporary impairment with respect to Gateway Financial’s investments in the Freddie Mac and Fannie Mae preferred stock will result in a non-cash charge to earnings.

 

 

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PRICE RANGE OF COMMON STOCK AND DIVIDENDS

Hampton Roads Bankshares common stock is traded on the Nasdaq Global Select Market under the symbol “HMPR.” The closing sale price reported for Hampton Roads Bankshares common stock on September 23, 2008, the last trading date preceding the public announcement of the merger agreement, was $10.20. Gateway Financial common stock is traded on the Nasdaq Global Select Market under the symbol “GBTS.” The closing sale price reported for Gateway Financial common stock on September 23, 2008, the last trading date preceding the public announcement of the merger agreement, was $5.90.

The following table sets forth for the periods indicated the high and low prices per share of Hampton Roads Bankshares and Gateway Financial common stock as reported on the Nasdaq Global Select Market, along with the quarterly cash dividends per share declared. The per share prices do not include adjustments for markups, markdowns or commissions.

 

     Hampton Roads Bankshares    Gateway Financial
     Sales Price    Cash
Dividend
Declared
   Sales Price    Cash
Dividend
Declared
     High    Low       High    Low   

2006

                 

First Quarter

   $ 12.00    $ 10.50    $ 0.20    $ 15.96    $ 15.14    $ 0.03

Second Quarter

     11.75      10.90      —        15.85      14.60      0.03

Third Quarter

     13.23      10.32      0.20      14.91      14.11      0.05

Fourth Quarter

     12.50      11.35      0.10      14.67      14.00      0.05

2007

                 

First Quarter

   $ 13.25    $ 11.55    $ 0.10    $ 14.80    $ 14.13    $ 0.05

Second Quarter

     15.25      12.10      0.11      14.99      13.50      0.08

Third Quarter

     14.71      11.90      0.11      16.04      12.99      0.08

Fourth Quarter

     13.24      11.01      0.11      15.19      11.93      0.08

2008

                 

First Quarter

   $ 12.45    $ 9.50    $ 0.11    $ 11.89    $ 10.02    $ 0.08

Second Quarter

   $ 13.38    $ 9.54      0.11      10.98      7.56      0.08

Third Quarter

   $ 12.72    $ 10.15      0.11      9.42      4.16      0.08

Fourth Quarter (through [                    ], 2008)

                 

Hampton Roads Bankshares presently pays a quarterly dividend. Its future dividend policy is subject to the discretion of its board of directors and will depend upon a number of factors, including future consolidated earnings, financial condition, liquidity and capital requirements of both Hampton Roads Bankshares and its subsidiary banks, applicable governmental regulations and policies and other factors deemed relevant by its board of directors.

After the merger Hampton Roads Bankshares’ ability to distribute cash dividends in the future will depend primarily on the ability of its subsidiary banks to pay dividends to it. As state member banks, Bank of Hampton Roads, Shore Bank and Gateway Bank and Trust Co. are subject to certain restrictions imposed by the reserve and capital requirements of federal, Virginia and North Carolina banking statutes and regulations. Furthermore, neither Hampton Roads Bankshares nor any bank may declare or pay a cash dividend on any of its stock if it is insolvent or if the payment of the dividend would render it insolvent or unable to pay its obligations as they become due in the ordinary course of business.

No dividend will be declared or paid during any calendar year on the Hampton Roads Bankshares common stock unless and until there has been paid in full (or set apart for purposes of such payment) to the holders of the

 

 

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Hampton Roads Bankshares Series A Preferred Stock and the Hampton Roads Bankshares Series B Non-Convertible Non-Cumulative Perpetual Preferred Stock that will be issued upon consummation of the merger, at least a pro rata portion of the stated annual dividend on such shares of preferred stock for that calendar year, at their respective rates, through the date on which Hampton Roads Bankshares proposes to pay the cash dividend on the common stock.

The following table sets forth historical per share market values for Hampton Roads Bankshares common stock and Gateway Financial common stock (i) on September 23, 2008, the last trading day prior to public announcement of the merger agreement, and (ii) on [                    ], 2008 the most recent practicable date before the printing and mailing of this joint proxy statement/prospectus. The table also shows the equivalent pro forma market value of Gateway Financial common stock on September 23, 2008 and [                    ], 2008, assuming the receipt of stock consideration.

The equivalent pro forma market value of Gateway Financial common stock is obtained by multiplying the historical market price of Hampton Roads Bankshares common stock by the common stock exchange ratio of 0.6700 shares of Hampton Roads Bankshares common stock for each share of Gateway Financial common stock.

The historical market prices represent the last sale prices on or before the dates indicated.

Historical Market Price

 

     Hampton
Roads
Bankshares
   Gateway
Financial
   Gateway Financial
Equivalent Pro Forma
Market Value

September 23, 2008

   $ 10.20    $ 5.90    $ 6.83

[                    ], 2008

   $                 $                

Once the merger is completed, there will be no further public market for Gateway Financial common stock.

 

 

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COMPARATIVE UNAUDITED PER SHARE DATA

We have summarized below historical per share information for Hampton Roads Bankshares and Gateway Financial and additional information as if the companies had been combined for the periods shown, which we refer to as “pro forma” information.

We expect that both Hampton Roads Bankshares and Gateway Financial will incur merger and integration charges as a result of the merger. We also anticipate that the merger will provide the combined company with financial benefits that may include reduced operating expenses. The unaudited information set forth below, while helpful in illustrating the financial characteristics of the combined company under one set of assumptions, may not reflect all of these anticipated expenses and does not reflect any of these anticipated financial benefits and, accordingly, does not attempt to predict or suggest future results. It also does not necessarily reflect what the historical results of the combined company would have been had our companies been combined during the periods presented.

 

     Net Income Per
Share
    Dividends
Declared on
Common
Stock
   Book
Value
Per
Common
Share
   Tangible
Book
Value
Per
Common
Share
     Basic     Diluted          

Year Ended December 31, 2007

            

Hampton Roads Bankshares

   $ 0.67     $ 0.65     $ 0.43    $ 7.14    $ 7.14

Shore Financial

   $ 1.09     $ 1.08     $ 0.39    $ 11.28    $ 10.95

Gateway Financial

   $ 0.91     $ 0.89     $ 0.29    $ 11.24    $ 7.17

Nine Months Ended September 30, 2008

            

Hampton Roads Bankshares (1)

   $ 0.42     $ 0.41     $ 0.33    $ 8.21    $ 5.86

Gateway Financial

   $ (2.70 )   $ (2.70 )   $ 0.24    $ 8.08    $ 4.10

Pro Forma Combined

            

Year Ended December 31, 2007

   $ 0.76     $ 0.74     $ 0.43    $ 11.46    $ 7.62

Nine Months Ended September 30, 2008

   $ (1.47 )   $ (1.47 )   $ 0.33    $ 9.08    $ 5.28

 

(1) Includes the results of Shore Financial since its merger with Hampton Roads Bankshares, which was completed on June 1, 2008.

 

 

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RATIO OF EARNINGS TO FIXED CHARGES

The following table sets forth Hampton Roads Bankshares’ consolidated ratio of earnings to fixed charges for each of the periods indicated:

 

     Year Ended December 31    Nine Months
Ended
September 30

2008
     2007    2006    2005    2004    2003   
   1.7    2.0    2.4    2.6    2.4    1.6

In computing the ratio of earnings to fixed charges, earnings have been based on income from continuing operations before income tax provision plus fixed charges. Fixed charges consist of interest expense and the portion of rental expense on operating leases attributable to interest.

 

 

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UNAUDITED PRO FORMA CONDENSED FINANCIAL INFORMATION

The following unaudited pro forma condensed combined financial information and explanatory notes are presented to show the impact of the merger on the companies’ historical financial positions and results of operations in accordance with Statement of Financial Accounting Standard No. 141, “Business Combinations” and Statement of Financial Accounting Standard No. 142, “Goodwill and Other Intangible Assets.” Under these statements, the assets and liabilities of the company not surviving the merger are, as of the effective time of the merger, recorded at their respective fair values and added to those of the surviving company. The unaudited pro forma condensed combined financial information combines the historical financial information of Hampton Roads Bankshares and Gateway Financial as of and for the year ended December 31, 2007 and as of and for the nine months ended September 30, 2008. The unaudited pro forma condensed combined balance sheets as of September 30, 2008 assume the merger was consummated on that date. The unaudited pro forma condensed combined statements of income give effect to the merger as if the merger had been consummated at the beginning of the period.

The unaudited pro forma condensed combined financial information is based on, derived from, and should be read in conjunction with the historical consolidated financial statements of Hampton Roads Bankshares and Gateway Financial, which are included in this joint proxy statement/prospectus or incorporated in this document by reference.

The unaudited pro forma condensed combined financial information is presented for illustrative purposes only and is not necessarily indicative of the operating results that would have occurred, or financial position that would have existed if the merger had been consummated during the period or as of the date for which the pro forma data are presented, nor is it necessarily indicative of the future operating results or financial position of the combined company.

In connection with the merger, the two companies are in the process of assessing computer systems, service contracts, equipment, premises, benefit plans, and personnel to determine where Hampton Roads Bankshares may take advantage of redundancies or where it will be necessary or beneficial to convert to a single system. The costs associated with such decisions may have the effect of increasing the amount of the purchase price applicable to goodwill. It is expected that all such costs will be identified and recorded within one year of completion of the merger and all such actions required to effect these decisions would be taken within one year after finalization of the plans.

In addition to the costs described above, merger-related charges may be incurred in the process of combining the operations of the two companies. These merger-related charges include systems conversions, costs of incremental communications to customers, and other charges. It is expected that these costs will be incurred within one year after completion of the merger.

 

 

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Hampton Roads Bankshares, Inc. and Gateway Financial Holdings, Inc.

Pro Forma Combined Condensed Balance Sheets

As of September 30, 2008

(Unaudited)

 

     Hampton Roads
Bankshares
    Gateway
Financial
    Pro Forma
Adjustments
    Pro Forma  
     (in thousands)  

Assets

        

Cash and cash equivalents

   $ 19,524     $ 129,936     $ (4,450 )(1)   $ 145,010  

Total investment securities

     41,909       138,262       —         180,171  

Total gross loans

     796,875       1,843,091       (30,965 )(2)  
         (18,247 )(3)     2,590,754  

Loan loss reserves

     (8,692 )     (22,783 )     —         (31,475 )
                                

Net loans

     788,183       1,820,308       (49,212 )     2,559,279  

Goodwill

     22,186       46,006       (9,869 )(4)     58,323  

Core deposit intangible

     8,911       4,606       10,912 (5)     24,429  
                                

Total intangibles

     31,097       50,612       1,043       82,752  

OREO

     1,127       3,089       —         4,216  

Deferred tax assets

     778       4,918       (101 )(6)     5,595  

Other assets

     35,207       132,559       572 (7)     168,338  
                                

Total assets

   $ 917,825     $ 2,279,684     $ (52,148 )   $ 3,145,361  
                                

Liabilities

        

Deposits

   $ 675,399     $ 1,834,324     $ 11,901 (8)   $ 2,521,624  

Other borrowings

     127,263       273,850       (30,965 )(2)  
         (18,953 )(9)     351,195  

Other liabilities

     6,643       7,966       —         14,609  
                                

Total liabilities

     809,305       2,116,140       (38,017 )     2,887,428  

Equity

        

Common stock

     8,263       —         5,326 (10)     13,589  

Preferred stock

     —         60,483       —   (11)     60,483  

Capital surplus

     74,896       128,121       83,604 (12)  
         (128,121 )(13)     158,500  

Retained earnings

     25,592       (22,131 )     22,131 (13)     25,592  

Accumulated other comprehensive income (loss)

     (231 )     (2,929 )     2,929 (13)     (231 )
                                

Total equity

     108,520       163,544       (14,131 )     257,933  
                                

Total liabilities and equity

   $ 917,825     $ 2,279,684     $ (52,148 )   $ 3,145,361  
                                

 

(1) Cash paid for merger expenses and employee contracts
(2) Eliminate intercompany loan
(3) Mark to market adjustment for loans
(4) Goodwill, net of seller’s goodwill
(5) Core deposit intangible, net of seller’s core deposit intangible
(6) Deferred tax liability related to mark to market adjustments and core deposit intangible, net of seller’s deferred tax liability related to mark to market adjustments and core deposit intangible
(7) Mark to market adjustment for land and buildings
(8) Mark to market adjustment for time deposits
(9) Mark to market adjustment for borrowings and trust preferred obligations
(10) Issuance of common stock consideration for merger
(11) Issuance of preferred stock in consideration for merger, net of seller’s preferred stock
(12) Increase in capital surplus for the excess of the fair value of the shares issued over the par value plus the fair value of outstanding options
(13) Elimination of seller’s equity

Note: Hampton Roads Bankshares represents the pro forma results of the merger between Hampton Roads Bankshares, Inc. and Shore Financial Corporation which was completed on June 1, 2008.

 

 

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Hampton Roads Bankshares, Inc. and Gateway Financial Holdings, Inc.

Pro Forma Combined Condensed Statements of Income

Year Ended December 31, 2007

(Unaudited)

 

(in thousands, except per share data)    Hampton Roads
Bankshares
   Gateway
Financial
   Pro Forma
Adjustments
    Pro Forma
Combined

Interest income

   $ 54,156    $ 109,559    $ 2,807 (1)   $ 166,522

Interest expense

     21,557      60,474      (4,800 )(2)     77,231
                            

Net interest income

     32,599      49,085      7,607       89,291

Provision for loan losses

     1,159      4,900      —         6,059
                            

Net interest income after provision for loan losses

     31,440      44,185      7,607       83,232

Noninterest income

     6,840      17,765      —         24,605

Noninterest expense

     25,517      44,941      2,486 (3)     72,944
                            

Income before income tax provision

     12,763      17,009      5,121       34,893

Income tax provision

     4,195      5,990      1,792 (4)     11,977
                            

Net income

   $ 8,568    $ 11,019    $ 3,329     $ 22,916
                            

Per share data:

          

Net income, basic

   $ 0.66    $ 0.91               (7)   $ 0.76

Net income, diluted

   $ 0.64    $ 0.89               (7)   $ 0.74

Cash dividends-common stock

   $ 0.43    $ 0.29      $ 0.43

Average common shares outstanding

          

Basic

     12,942,063      11,960,932      (3,439,053 )(5)     21,463,942

Diluted

     13,367,305      12,346,870      (3,711,635 )(6)     22,002,540

 

(1) Accretion of loan discount of $2,807 annually over 6.5 years.
(2) Amortization of deposit premium of $3,967 annually over 3.0 years, plus amortization of FHLB borrowings of $1,762 annually for 4.0 years, and net of accretion of trust preferred of $929 annually for 28.0 years.
(3) Amortization of core deposit intangible of $3,104 annually over 5.0 years netted against seller’s amortization of core deposit intangible of $618 annually.
(4) Income tax effect calculated at 35% of income (loss) before income taxes.
(5) Cancellation of seller’s basic average shares outstanding net of the effect of an additional 8,521,879 basic average Hampton Roads Bankshares’ shares issued in the merger.
(6) Cancellation of seller’s diluted average shares outstanding net of the effect of an additional 8,635,505 diluted average Hampton Roads Hampton Roads Bankshares’ shares issued in the merger and the incremental number of shares as a result of the options issued in the merger.
(7) Net income available to common shareholders equals net income less dividends on preferred shares of $6,542.

Note: Hampton Roads Bankshares represents the pro forma results of the merger between Hampton Roads Bankshares, Inc. and Shore Financial Corporation which was completed on June 1, 2008.

 

 

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Hampton Roads Bankshares, Inc. and Gateway Financial Holdings, Inc.

Pro Forma Combined Condensed Statements of Income

Nine Months Ended September 30, 2008

(Unaudited)

 

(in thousands, except per share data)    Hampton Roads
Bankshares
   Gateway
Financial
    Pro Forma
Adjustments
    Pro Forma
Combined
 

Interest income

   $ 37,999    $ 89,993     $ 2,105 (1)   $ 130,097  

Interest expense

     15,751      48,128       (3,600 )(2)     60,280  
                               

Net interest income

     22,248      41,865       5,706       69,818  

Provision for loan losses

     1,079      9,200       —         10,279  
                               

Net interest income after provision for loan losses

     21,169      32,665       5,706       59,539  

Noninterest income

     6,061      (20,637 )     —         (14,575 )

Noninterest expense

     19,883      43,278       1,864 (3)     65,024  
                               

Income before income tax provision

     7,347      (31,249 )     3,842       (20,060 )

Income tax provision

     3,152      1,094       1,345 (4)     5,591  
                               

Net income

   $ 4,195    $ (32,344 )   $ 2,497     $ (25,651 )
                               

Per share data:

         

Net income, basic

   $ 0.40    $ (2.70 )              (7)   $ (1.47 )

Net income, diluted

   $ 0.39    $ (2.70 )              (7)   $ (1.47 )

Cash dividends-common stock

   $ 0.33    $ 0.24       $ 0.33  

Average common shares outstanding

         

Basic

     13,066,816      12,532,031       (4,010,152 )(5)     21,588,695  

Diluted

     13,191,824      12,532,031       (4,135,160 )(6)     21,588,695  

 

(1) Accretion of loan discount of $2,807 annually over 6.5 years.
(2) Amortization of deposit premium of $3,967 annually over 3.0 years, plus amortization of FHLB borrowings of $1,762 annually for 4.0 years, and net of accretion of trust preferred of $929 annually for 28 years.
(3) Amortization of core deposit intangible of $3,104 annually over 5.0 years netted against seller’s amortization of core deposit intangible of $618 annually.
(4) Income tax effect calculated at 35% of income (loss) before income taxes.
(5) Cancellation of seller’s basic average shares outstanding net of the effect of an additional 8,521,879 basic average Hampton Roads Bankshares’ shares issued in the merger.
(6) All options are antidilutive. Cancellation of seller’s diluted average shares outstanding net of the effect of an additional 8,396,871 diluted average Hampton Roads Bankshares’ shares issued in the merger.
(7) Net income available to common shareholders equals net income less dividends on preferred shares of $4,906.

Note: Hampton Roads Bankshares represents the pro forma results of the merger between Hampton Roads Bankshares, Inc. and Shore Financial Corporation which was completed on June 1, 2008.

 

 

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Table of Contents

SUMMARY SELECTED FINANCIAL DATA

The following tables set forth certain summary historical consolidated financial information for Hampton Roads Bankshares and Gateway Financial. The balance sheet data and income statement data of each of Hampton Roads Bankshares and Gateway Financial as of and for the five years in the period ended December 31, 2007 are taken from the audited consolidated financial statements of Hampton Roads Bankshares and Gateway Financial, respectively. The consolidated financial information of Hampton Roads Bankshares as of and for the nine-month periods ended September 30, 2007 and 2008 is derived from Hampton Roads Bankshares’ unaudited consolidated financial statements incorporated by reference into this joint proxy statement/prospectus. The consolidated financial information of Gateway Financial as of and for the nine-month periods ended September 30, 2007 and 2008 is derived from Gateway Financial’s unaudited consolidated financial statements annexed in this joint proxy statement/prospectus.

The selected historical financial data below should be read in conjunction with the consolidated financial statements that are annexed in or incorporated by reference into this document and their accompanying notes.

HAMPTON ROADS BANKSHARES—SELECTED HISTORICAL FINANCIAL DATA

 

    As of and For the Years Ended December 31,   As of and For the Nine
Months Ended
September 30
    2007   2006   2005   2004   2003   2008   2007
    (dollars in thousands, except per share data)

Operating Results:

             

Net interest income

  $ 24,187   $ 20,898   $ 18,689   $ 14,157   $ 13,052   $ 18,585   $ 18,079

Net income

    6,811     6,036     5,507     4,134     4,023     4,830     5,098

Net Income Per Share

             

Basic

    0.67     0.66     0.68     0.52     0.52     0.42     0.50

Diluted

    0.65     0.65     0.66     0.50     0.50     0.41     0.49

Cash Dividends Per Share

    0.43     0.50     0.36     0.33     0.42     0.33     0.32

Assets

    563,828     476,299     409,517     344,969     316,473     917,825     554,225

Deposits

    431,457     363,261     327,447     275,115     257,433     675,399     411,371

Shareholders’ equity

    73,660     70,163     49,131     43,626     41,314     108,520     72,495

GATEWAY FINANCIAL—SELECTED HISTORICAL FINANCIAL DATA

    As of and For the Years Ended December 31,   As of and For the Nine
Months Ended
September 30
    2007   2006   2005   2004   2003   2008     2007
    (dollars in thousands, except per share data)

Operating Results:

             

Net interest income

  $ 49,085   $ 36,998   $ 23,303   $ 12,941   $ 8,145   $ 41,865     $ 35,307

Net income (loss)

    11,019     5,269     3,939     2,010     1,200     (32,344 )     8,749

Net Income Per Share

             

Basic

    0.91     0.49     0.48     0.37     0.30     (2.70 )     0.74

Diluted

    0.89     0.47     0.46     0.34     0.29     (2.70 )     0.72

Cash Dividends Per Share

    0.29     0.18427     0.03306     0.01653     —       0.24       0.21

Assets

    1,868,185     1,207,477     883,373     535,728     314,826     2,279,684       1,737,245

Deposits

    1,408,919     923,725     646,262     406,259     238,452     1,834,324       1,353,297

Shareholders’ equity

    164,407     109,640     98,744     64,318     24,971     163,544       141,101

 

 

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RISK FACTORS

You should carefully read and consider the following risk factors concerning Hampton Roads Bankshares, Gateway Financial and the merger before you decide whether to vote to approve the merger and/or the other matters to be considered and voted upon at your shareholder meeting.

Risks Associated with the Merger

Fluctuations in the trading price of Hampton Roads Bankshares common stock will change the value of the shares of Hampton Roads Bankshares common stock that Gateway Financial shareholders receive in the merger.

The number of shares of Hampton Roads Bankshares common stock that Gateway shareholders will receive for their common stock will not change regardless of any change in value of Hampton Roads Bankshares common stock. As a result, the market value of the Hampton Roads Bankshares common stock that you receive in the merger will increase or decrease depending solely on the direction of the price movement of the Hampton Roads Bankshares common stock before or after the merger.

The integration of the operations of Hampton Roads Bankshares and Gateway Financial may be more difficult than anticipated.

The success of the merger will depend on a number of factors, including (but not limited to) Hampton Roads Bankshares’ ability to:

 

   

timely and successfully integrate the operations of Hampton Roads Bankshares and Gateway Financial;

 

   

maintain existing relationships with depositors in Gateway Bank & Trust Co. to minimize withdrawals of deposits subsequent to the merger;

 

   

maintain and enhance existing relationships with borrowers;

 

   

limit unanticipated losses from loans;

 

   

control the incremental non-interest expense from Hampton Roads Bankshares to maintain overall operating efficiencies;

 

   

the incurrence and possible impairment of goodwill associated with an acquisition and possible adverse short-term effects on our results of operations;

 

   

retain and attract qualified personnel at Hampton Roads Bankshares and Gateway Bank & Trust Co.; and

 

   

compete effectively in the communities served by Hampton Roads Bankshares and Gateway Bank & Trust Co. and in nearby communities.

The merger with Gateway Financial may distract management from its other responsibilities.

The merger could cause the management of both companies to focus its time and energies on matters related to the merger that otherwise would be directed to their business and operations. Any such distraction on the part of management, if significant, could affect its ability to service existing business and develop new business and adversely affect the business and earnings of the merged companies.

The shareholders of each merged company will have less influence than they had before the merger.

Gateway Financial’s shareholders currently have the right to vote in the election of the board of directors of Gateway Financial and on other matters affecting Gateway Financial. Hampton Roads Bankshares’ shareholders

 

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currently have the right to vote in the election of the board of directors of Hampton Roads Bankshares and on other matters affecting Hampton Roads Bankshares. After the merger, the shareholders of Gateway Financial as a group will own approximately 39% of the combined organization and the current shareholders of Hampton Roads Bankshares as a group will own approximately 61% of the combined organization. Because of this, Gateway Financial’s current shareholders as well as Hampton Roads Bankshares’ current shareholders will have less influence on the management and policies of Hampton Roads Bankshares after the combination than they now have on the management and policies of their separate companies before the merger.

The fairness opinions obtained by Hampton Roads Bankshares and Gateway Financial from their respective financial advisors will not reflect changes in circumstances between signing the merger agreement and the merger.

The fairness opinion of McKinnon and Company, Inc. to Hampton Roads Bankshares and the fairness opinion of Sandler O’Neill & Partners, L.P. to Gateway Financial do not speak as of the time the merger will be completed or as of any date other than the date of each such opinion in September, 2008. Changes in the operations and prospects of Hampton Roads Bankshares or Gateway Financial, general market and economic conditions and other factors which may be beyond the control of Hampton Roads Bankshares or Gateway Financial, and on which the fairness opinions were based, may alter the value of Hampton Roads Bankshares or Gateway Financial or the prices of shares of Hampton Roads Bankshares common stock or Gateway Financial common stock by the time the merger is completed.

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

Gateway Financial 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 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 Hampton Roads Bankshares, 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 Hampton Roads Bankshares will be senior to its shares of common stock. As a result, Hampton Roads Bankshares 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. Hampton Roads Bankshares 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 Hampton Roads Bankshares or Gateway Financial after the merger.

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 or at all could have a material adverse effect on the financial markets, which in turn could materially and adversely affect Hampton Roads Bankshares’ business, financial condition and results of operations. Since the rules and guidelines of the TARP have not yet been published, Hampton Roads Bankshares is unable to assess whether participation in the program would be beneficial to it.

 

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The U.S. government’s plan to provide TARP Senior Preferred Stock capital to financial institutions may not be available to Hampton Roads Bankshares or Gateway Financial.

Hampton Roads Bankshares and Gateway Financial each have applied for TARP Senior Preferred Stock and common stock warrant capital which may be furnished by the U. S. Treasury to financially healthy institutions. Gateway Financial may not issue any TARP Senior Preferred Stock or common stock warrants to the U.S. Treasury without the prior written consent of Hampton Roads Bankshares, which consent has not been given. Hampton Roads Bankshares does not need the consent of Gateway Financial to issue TARP Senior Preferred Stock or common stock warrants to 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 Hampton Roads Bankshares or Gateway Financial or that they will accept some or all of the capital that may be available to them.

Due to accounting rule changes, failure to complete the merger by December 31, 2008 will result in additional charges for Hampton Roads Bankshares in 2009.

On December 4, 2007, the Financial Accounting Standards Board issued a revised version of Financial Accounting Standard No. 141 (“FAS 141(R)”), which addresses accounting for business combinations. Prior to the effective date of FAS 141(R), the costs of an acquisition—such as legal, consulting, banking and other professional fees related to an acquisition—have been and will be capitalized as part of the purchase price of the transaction. After December 31, 2008, when FAS 141(R) will become effective for Hampton Roads Bankshares, transaction-related costs of an acquisition must be expensed during the period in which they are incurred. Accordingly, if the merger is not completed until after December 31, 2008, transaction related costs will be expensed, and Hampton Roads Bankshares’ earnings will be reduced accordingly.

The proposed merger is subject to the receipt of consents and approvals from government entities that may impose conditions that could have an adverse effect on the combined companies.

Before the merger may be completed, various approvals or consents must be obtained from the Federal Reserve Board and various bank regulatory and other authorities. These governmental entities, including the Federal Reserve Board, may impose conditions on the completion of the merger or require changes to the terms of the merger. Although we do not currently expect that any such conditions or changes would be imposed, there can be no assurance that they will not be, and such conditions or changes could have the effect of delaying completion of the merger or imposing additional costs on or limiting the revenues of the surviving corporation following the merger, any of which might have a material adverse effect on the surviving corporation following the merger.

Risks Associated with Hampton Roads Bankshares

Hampton Roads Bankshares depends on the services of key personnel.

The loss of any of these personnel could disrupt Hampton Roads Bankshares’ operations, and its business could suffer. Hampton Roads Bankshares’ success depends substantially on the banking relationships maintained with its customers and the skills and abilities of its executive officers and senior lending officers. Hampton Roads Bankshares has entered into employment agreements with the following executive officers:

 

Jack W. Gibson    Vice Chairman, President and Chief Executive Officer
Douglas J. Glenn    Executive Vice President and General Counsel
Julie R. Anderson    Executive Vice President and Chief Credit Officer
Scott C. Harvard    Executive Vice President for Delmarva Operations
Lorelle L. Fritsch    Senior Vice President and Chief Financial Officer
Tiffany K. Glenn    Senior Vice President, Marketing Officer and Secretary
Gregory P. Marshall    Executive Vice President and Commercial Loan Officer
Renee’ R. McKinney    Senior Vice President and Branch Administrator

 

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The existence of such agreements, however, does not necessarily assure that Hampton Roads Bankshares will be able to continue to retain their services. They provide valuable services to Hampton Roads Bankshares and the unexpected loss of one or more of them could have an adverse impact on Hampton Roads Bankshares’ business and possibly result in reduced revenues and earnings.

Hampton Roads Bankshares’ business success also is dependent upon its ability to continue to attract, hire, motivate, and retain skilled personnel to develop new customer relationships, as well as new financial products and services. Many experienced banking professionals employed by Hampton Roads Bankshares’ competitors are covered by agreements not to compete or solicit their existing customers if they were to leave their current employment. These agreements make the recruitment of these professionals more difficult. The market for these people is competitive, and Hampton Roads Bankshares cannot assure you that it will be successful in attracting, hiring, motivating, or retaining them.

Hampton Roads Bankshares’ future success is dependent on its ability to compete effectively in a highly competitive banking industry.

Hampton Roads Bankshares faces vigorous competition from other banks and other financial institutions, including savings and loan associations, finance companies, and credit unions for deposits, loans, and other financial services in its market area. A number of these banks and other financial institutions are significantly larger than Hampton Roads Bankshares is and have substantially greater access to capital and other resources, as well as larger lending limits and branch networks, and offer a wider array of banking services. In addition, Hampton Roads Bankshares also competes with other providers of financial services, such as money market mutual funds, consumer finance companies, mortgage companies, insurance companies, and governmental organizations that may offer more favorable financing than it can. Many of Hampton Roads Bankshares’ non-bank competitors are not subject to the same extensive regulations that govern it. As a result, these non-bank competitors have advantages over Hampton Roads Bankshares in providing certain services. The competition may reduce or limit Hampton Roads Bankshares’ margins and its market share and may adversely affect its results of operations and financial condition.

Because of Hampton Roads Bankshares’ business of lending for construction and land development, a downturn in real estate markets could increase its credit losses and negatively affect its financial results.

Hampton Roads Bankshares’ loan portfolio includes a substantial amount of loans for construction and land development. At September 30, 2008, Hampton Roads Bankshares had loans of $169 million, or 21.25% of total loans, outstanding to finance construction and land development. If the market for new housing should experience a significant slowdown, it could impact the value of loan collateral, the ability of borrowers to meet required principal and/or interest payments, and, potentially, the volume of loan losses. Hampton Roads Bankshares is subject to the risk of loan defaults and foreclosures as the result of being in the lending business. In spite of Hampton Roads Bankshares’ efforts to limit exposure to credit risk, it cannot eliminate it entirely. As a result, loan losses, whether from construction and land development loans or other loans in Hampton Roads Bankshares’ portfolio, may occur in the future and could affect operating results adversely.

Hampton Roads Bankshares serves a limited market area, and an economic downturn in its market area could adversely affect its business.

Hampton Roads Bankshares’ current market area consists primarily of the southside Hampton Roads portion of Virginia, which includes the cities of Norfolk, Chesapeake, Virginia Beach, and Suffolk, and the Delmarva Peninsula. In the event of an economic downturn in this market, the lack of geographic diversification could adversely affect banking business and, consequently, Hampton Roads Bankshares’ results of operations and financial condition. Although the local economy is diverse, the military has a significant presence. In 2005, the federal government considered the possibility of military base closures. Although the government ultimately decided not to close any significant military bases in Hampton Roads Bankshares’ market at this time, there is no

 

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guarantee that it will not do so in the future. A significant reduction in the military presence in Hampton Roads Bankshares’ market, however, whether due to base closures or large troop deployments out of the area, could have a materially adverse impact on the local economy and potentially on its customers and its business.

If Hampton Roads Bankshares’ allowance for loan losses becomes inadequate, its results of operations may be adversely affected.

Hampton Roads Bankshares maintains an allowance for loan losses that it believes is a reasonable estimate of known and inherent losses in its loan portfolio. Through a periodic review and consideration of the loan portfolio, management determines the amount of the allowance for loan losses by considering general market conditions, credit quality of the loan portfolio, the collateral supporting the loans, historical loan loss experience, and both local and national economic conditions and trends. The amount of losses is susceptible to changes in economic, operating, and other conditions, including changes in interest rates, which may be beyond Hampton Roads Bankshares’ control, and these losses may exceed its estimates. Hampton Roads Bankshares cannot predict with certainty the amount of losses that may be sustained or that its allowance for loan losses will be adequate in the future.

Changes in interest rates could negatively impact Hampton Roads Bankshares’ results of operations.

Hampton Roads Bankshares’ results of operations depend to a large extent on its net interest income, which is the difference between the interest income received on earning assets, such as loans, investment securities, and short-term investments, and interest expense incurred on deposit accounts and borrowings. The amount of net interest income Hampton Roads Bankshares earns is influenced by market rates of interest, which in turn are influenced by monetary policy and other external factors, including competition. Net interest income also is influenced by Hampton Roads Bankshares’ asset and liability management policies, the volume of its interest bearing assets and liabilities, and changes in the mix of those assets and liabilities, as well as growth in the respective categories. The relationship of interest rate changes to Hampton Roads Bankshares’ financial condition and its results of operations is complex, however, as an asset-sensitive financial institution, Hampton Roads Bankshares’ net interest income is likely to decline in a declining interest rate environment and to increase in an increasing interest rate environment. Hampton Roads Bankshares uses various techniques to analyze the effects of changes in interest rates and utilizes various strategies intended to mitigate any adverse effects. Due to the fact that most of Hampton Roads Bankshares’ assets and liabilities are interest bearing instruments, its financial condition and results of operation are subject to interest rate risk. Although Hampton Roads Bankshares attempts to manage interest rate risk, it cannot eliminate it.

Governmental and regulatory changes may adversely affect Hampton Roads Bankshares’ cost structure.

Hampton Roads Bankshares is subject to extensive regulation by state and federal regulatory authorities. In addition, as a public company Hampton Roads Bankshares is subject to securities laws and standards imposed by the Sarbanes-Oxley Act. Because Hampton Roads Bankshares is a relatively small company, the costs of compliance are disproportionate compared with much larger organizations. Continued growth of legal and regulatory compliance mandates could adversely affect Hampton Roads Bankshares’ expenses and future results of operations. In addition, government and regulatory authorities have the power to impose rules or other requirements, including requirements that Hampton Roads Bankshares is unable to anticipate, that could have an adverse impact on its results of operations.

Hampton Roads Bankshares faces a variety of threats from technology based frauds and scams.

Financial institutions are a prime target of criminal activities through various channels of information technology. Hampton Roads Bankshares attempts to mitigate risk from such activities through policies, procedures, and preventative and detective measures. In addition, Hampton Roads Bankshares maintains insurance coverage designed to provide a level of financial protection to its business. However, risks posed by

 

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business interruption, fraud losses, business recovery expenses, and other potential losses or expenses that may be experienced from a significant event are not readily predictable and, therefore, could have an impact on Hampton Roads Bankshares’ results of operations.

If Hampton Roads Bankshares needs capital in the future to continue its growth, it may not be able to obtain it on terms that are favorable. This could negatively affect Hampton Roads Bankshares’ performance and the value of its common stock.

Hampton Roads Bankshares’ business strategy calls for continued growth. Hampton Roads Bankshares anticipates that it will be able to support this growth through this merger, as well as the generation of additional deposits at new branch locations and investment opportunities. However, Hampton Roads Bankshares may need to raise capital in the future to support its continued growth and to maintain its capital levels. Hampton Roads Bankshares’ ability to raise capital through the sale of additional securities will depend primarily upon its financial condition and the condition of financial markets at that time. Hampton Roads Bankshares may not be able to obtain capital in the amounts or on terms satisfactory to it. Hampton Roads Bankshares’ growth may be constrained if it is unable to raise capital as needed.

Banking regulators have broad enforcement power, but regulations are meant to protect depositors, and not investors.

Hampton Roads Bankshares is subject to supervision by several governmental regulatory agencies. These regulations, and the interpretation and application of them by regulators, are beyond Hampton Roads Bankshares’ control, may change rapidly and unpredictably and can be expected to influence its earnings and growth. In addition, these regulations may limit its growth and the return to investors by restricting activities such as the payment of dividends, mergers with, or acquisitions by, other institutions, investments, loans and interest rates, interest rates paid on deposits and the creation of branch offices. Although these regulations impose costs upon Hampton Roads Bankshares, they are intended to protect depositors, and you should not assume that they protect your interests as a shareholder. The regulations to which Hampton Roads Bankshares is subject may not always be in the best interests of investors.

Trading in Hampton Roads Bankshares common stock has been sporadic and volume has been light. As a result, shareholders may not be able to quickly and easily sell their common stock.

Although Hampton Roads Bankshares common stock trades on the Nasdaq Global Select Market and a number of brokers offer to make a market in the common stock on a regular basis, trading volume to date has been limited and there can be no assurance that an active and liquid market for the common stock will develop.

Virginia law and the provisions of Hampton Roads Bankshares’ articles of incorporation and bylaws could deter or prevent takeover attempts by a potential purchaser of its common stock that would be willing to pay you a premium for your shares of Hampton Roads Bankshares common stock.

Hampton Roads Bankshares’ articles of incorporation and bylaws contain provisions that may be deemed to have the effect of discouraging or delaying uninvited attempts by third parties to gain control of it. These provisions include the division of Hampton Roads Bankshares’ board of directors into classes and the ability of its board to set the price, term and rights of, and to issue, one or more series of Hampton Roads Bankshares preferred stock. Similarly, the Virginia Stock Corporation Act contains provisions designed to protect Virginia corporations and employees from the adverse effects of hostile corporate takeovers. These provisions reduce the possibility that a third party could effect a change in control without the support of Hampton Roads Bankshares’ incumbent directors. These provisions may also strengthen the position of current management by restricting the ability of shareholders to change the composition of the board, to affect its policies generally and to benefit from actions which are opposed by the current board.

 

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Hampton Roads Bankshares’ directors and officers have significant voting power.

Hampton Roads Bankshares’ present officers and directors beneficially own [      ]% of its common stock. By voting against a proposal submitted to shareholders, the directors and officers may be able to make approval more difficult for proposals requiring the vote of shareholders such as mergers, share exchanges, asset sales and amendments to Hampton Roads Bankshares’ articles of incorporation.

Risks Associated with Gateway Financial

Gateway Financial’s continued pace of growth may require it to raise additional capital in the future, but that capital may not be available when it is needed.

Gateway Financial is required by federal and state regulatory authorities to maintain adequate levels of capital to support its operations. During 2007 Gateway Financial issued $26.2 million of common stock and $25 million in trust preferred securities to acquire The Bank of Richmond, N.A. Additionally, in December of 2007 Gateway Financial conducted a private placement of $23,366,000 in preferred stock and in September of 2008 Gateway Financial conducted an offering of $37,550,000 million in preferred stock to support its continued growth. In the third quarter of 2008, after suffering significant losses relating to Freddie Mac and Fannie Mae preferred stock and material increases in its loan loss reserve. At the end of the third quarter of 2008, Hampton Roads Bankshares refinanced the loan from JP Morgan on a demand note and assisted Gateway Financial in raising $37,550,000 from the issuance of Gateway Financial’s Series B Non-Convertible Non-Cumulative Perpetual Preferred Stock. If the merger is not consummated, Hampton Roads Bankshares may call its $31 million demand note for payment by Gateway Financial. The demand note is secured by all of the common stock of Gateway Bank & Trust Co. If the merger is not consummated, Gateway Financial may at some point need to again raise additional capital. Gateway Financial’s ability to raise additional capital, if needed, will depend on conditions in the capital markets at that time, which are outside its control, and on its financial performance. Accordingly, Gateway Financial cannot assure you of its ability to raise additional capital if needed on acceptable terms. If Gateway Financial cannot raise additional capital when needed, its ability to expand its operations through internal growth and acquisitions could be materially impaired.

Failure to maintain regulatory capital requirements may limit Gateway Financial’s ability to maintain its level of brokered certificates of deposit.

Among other sources of funds, Gateway Financial relies heavily on deposits for funds to make loans and provide for its other liquidity needs. However, Gateway Financial’s loan demand has exceeded the rate at which it has been able to build core deposits so it has relied heavily on time deposits, including out-of-market and brokered certificates of deposit, as a source of funds. Those deposits may not be as stable as other types of deposits and, in the future, depositors may not renew those time deposits when they mature, or Gateway Financial may have to pay a higher rate of interest to attract or keep them or to replace them with other deposits or with funds from other sources. Not being able to attract those deposits or to keep or replace them as they mature would adversely affect Gateway Financial’s liquidity. Paying higher deposit rates to attract, keep or replace those deposits could have a negative effect on Gateway Financial’s interest margin and operating results.

Gateway Financial is required by federal banking authorities to maintain certain capital levels to be considered “well capitalized.” If Gateway Financial fails to maintain these capital levels, it would have to seek regulatory approval to keep or obtain additional funding through the use of brokered certificates of deposit. The inability to keep or replace brokered certificates of deposit could result in Gateway Financial having to pay higher deposit rates to attract local deposits, which could have a material negative effect on its interest margin, operating results and its ability to make dividend payments.

 

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The decline in the fair market value of various investment securities available for sale could result in future impairment losses.

As of September 30, 2008, the total amortized cost of Gateway Financial’s portfolio of investment securities available for sale, which includes both debt and equity securities, was approximately $125.4 million while the fair market value of Gateway Financial’s investment securities available for sale was approximately $120.6 million. As of September 30, 2008, the difference between the estimated fair value and amortized cost of the equity securities included within Gateway Financial’s available-for-sale investment portfolio was a loss of $4.8 million, and an approximate $2.9 million loss net of tax, which was included in accumulated other comprehensive loss as a reduction in shareholders’ equity on its balance sheet.

On September 7, 2008, the United States Treasury placed Freddie Mac and Fannie Mae into conservatorship, two companies whose preferred stock Gateway Financial had purchased and included in its investment securities available for sale. Because Freddie Mac and Fannie Mae have been placed into conservatorship, Gateway Financial determined that it must recognize the difference between the cost to Gateway Financial of their preferred stock and their fair market value as an other-than-temporary impairment. In the third quarter of 2008, Gateway Financial recognized an impairment of $37.4 million on the securities of Fannie Mae and Freddie Mac. Even after this impairment loss, Gateway Financial cannot guarantee that it will not have to recognize in one or more future reporting periods additional impairment losses which could have a material adverse effect on its financial condition and results of operation.

A number of factors could cause Gateway Financial to conclude in one or more future reporting periods that any difference between the fair value and the amortized cost of any of its investment securities available for sale constitutes an other-than-temporary impairment. These factors include, but are not limited to, an increase in the severity of the unrealized loss on a particular security, an increase in the length of time unrealized losses continue without an improvement in value, a change in Gateway Financial’s intent or ability to hold the security for a period of time sufficient to allow for the forecasted recovery, or changes in market conditions or industry or issuer specific factors that would render Gateway Financial unable to forecast a full recovery in value. As of the market close on September 30, 2008, the total market value of the Freddie Mac and Fannie Mae preferred stock was $3.0 million.

Gateway Financial faces risks with respect to the our proposed merger.

The merger agreement generally restricts Gateway Financial from seeking other merger partners, and Gateway Financial is subject to a $3,300,000 termination fee under certain circumstances if it enters into a transaction agreement with a third party. The merger agreement also prohibits Gateway Financial from issuing additional stock, common or preferred, or otherwise entering into transactions outside of the ordinary course of business.

Gateway Financial’s financial condition and results of operations could be negatively affected if it fails to manage its growth effectively.

Gateway Financial pursued a significant growth strategy for its business historically, but intends to normalize its future growth. Gateway Financial cannot assure you it will be able to successfully manage this normalization of its growth or that any such a change in its historic business strategy will not adversely affect its

 

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results of operations. Failure to manage Gateway Financial’s growth effectively could have a material adverse effect on its business, future prospects, financial condition or results of operations, and could adversely affect its ability to successfully implement its business strategy.

Gateway Financial’s business is subject to the success of the local economies where it operates.

Gateway Financial’s success significantly depends upon the growth in population, income levels, deposits and housing starts in its primary and secondary markets. If the communities in which it operates do not grow or if prevailing economic conditions locally or nationally are unfavorable, its business may not succeed. Adverse economic conditions in Gateway Financial’s specific market area could reduce its growth rate, affect the ability of its customers to repay their loans to it and generally affect its financial condition and results of operations. Gateway Financial is less able than a larger institution to spread the risks of unfavorable local economic conditions across a large number of diversified economies. Moreover, Gateway Financial cannot give any assurance it will benefit from any market growth or favorable economic conditions in its primary market areas if they do occur.

Any adverse market or economic conditions in Virginia and North Carolina may disproportionately increase the risk that Gateway Financial’s borrowers will be unable to make their loan payments. In addition, the market value of the real estate securing loans as collateral could be adversely affected by unfavorable changes in market and economic conditions. Any sustained period of increased payment delinquencies, foreclosures or losses caused by adverse market or economic conditions in Virginia and North Carolina could adversely affect the value of Gateway Financial’s assets, its revenues, results of operations and financial condition.

If the value of real estate in Gateway Financial’s core market areas were to decline materially, a significant portion of its loan portfolio could become under-collateralized, which could have a material adverse effect on it.

With most of Gateway Financial’s loans concentrated in the Richmond and Greater Metropolitan Hampton Roads areas of Virginia and the coastal and eastern Piedmont region of North Carolina, a decline in local economic conditions could adversely affect the values of its real estate collateral. Consequently, a decline in local economic conditions may have a greater effect on Gateway Financial’s earnings and capital than on the earnings and capital of larger financial institutions whose real estate loan portfolios are geographically diverse.

In addition to the financial strength and cash flow characteristics of the borrower in each case, Gateway Bank and Trust Co. often secures loans with real estate collateral. At June 30, 2008, approximately 80% of Gateway Bank and Trust Co.’s loans have real estate as a primary or secondary component of collateral. The real estate collateral in each case provides an alternate source of repayment in the event of default by the borrower and may deteriorate in value during the time the credit is extended. If Gateway Financial is required to liquidate the collateral securing a loan to satisfy the debt during a period of reduced real estate values, its earnings and capital could be adversely affected.

Gateway Financial’s construction loans are subject to additional lending risks that could adversely affect earnings.

As of September 30, 2008, approximately 37.6% of Gateway Financial’s total loan portfolio was in construction, acquisition and development loans. In the event of a general economic slowdown like the one we are currently experiencing, these loans have additional risks beyond Gateway Financial’s other loans that could affect the borrowers’ ability to repay on a timely basis. In addition to the normal loan risks of nonpayment by borrowers and decreases in real estate values, construction lending poses additional risks that affect the ability of borrowers to repay loans and the value and marketability of real estate collateral, such as:

 

   

developments, builders or owners may fail to complete or develop projects;

 

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municipalities may place moratoriums on building, utility connections or required certifications;

 

   

developers may fail to sell the improved real estate;

 

   

there may be construction delays and cost overruns;

 

   

the variable rates on these loans could increase the payment on the loan at a time when the borrower’s income is under stress;

 

   

collateral may prove insufficient; or

 

   

permanent financing may not be obtained in a timely manner.

Any of these conditions could negatively affect Gateway Financial’s net income and its financial condition.

An inadequate allowance for loan losses would reduce Gateway Financial’s earnings and capital.

Gateway Financial’s loan losses could exceed the allowance for loan losses it has set aside. Gateway Financial’s average loan size continues to increase. Reliance on historic loan loss experience may not be indicative of future loan losses. Approximately 78.1% of Gateway Financial’s loan portfolio is composed of construction, acquisition and development, commercial mortgage and commercial and industrial loans. Repayment of such loans is generally considered more subject to market risk than residential mortgage loans. Industry experience shows that a portion of loans will become delinquent and a portion of the loans will require partial or entire charge-off. Regardless of the underwriting criteria Gateway Financial utilizes, losses may be experienced as a result of various factors beyond its control, including, among other things, changes in market conditions affecting the value of its loan collateral and problems affecting the credit of its borrowers.

Management makes various assumptions and judgments about the ultimate collectibility of the loan portfolio and provides an allowance for loan losses based upon a percentage of the outstanding balances and for specific loans when their ultimate collectibility is considered questionable. If management’s assumptions and judgments prove to be incorrect and the allowance for loan losses is inadequate to absorb losses, or if the bank regulatory authorities require the bank to increase the allowance for loan losses as a part of their examination process, the bank’s earnings and capital could be significantly and adversely affected.

A significant part of Gateway Financial’s loan portfolio is unseasoned.

From the beginning of 2007 through September 30, 2008, Gateway Financial’s loan portfolio grew by approximately $30.9%, including approximately $168 million in loans acquired as a result of its acquisition of The Bank of Richmond, N.A. It is difficult to assess the future performance of this part of Gateway Financial’s loan portfolio due to the recent origination of these loans. Industry experience shows that it takes several years for loan difficulties to become apparent. Gateway Financial can give no assurance that these loans will not become non-performing or delinquent, which could adversely affect its future performance.

Gateway Financial may be adversely affected by interest rate changes.

Changes in interest rates may affect Gateway Financial’s level of interest income, the primary component of its gross revenue, as well as the level of its interest expense, its largest recurring expenditure. Net interest income is the difference between income from interest-earning assets, such as loans, and the expense of interest-bearing liabilities, such as deposits and Gateway Financial’s borrowings, including its outstanding junior subordinated debentures. Gateway Financial may not be able to effectively manage changes in what it charges as interest on its earning assets and the expense it must pay on interest-bearing liabilities, which may significantly reduce its earnings. The Federal Reserve has made significant reductions in interest rates during the first quarter of 2008. Since rates charged on loans often tend to react to market conditions faster than do rates paid on deposit accounts, these rate changes are expected to have a negative impact on Gateway Financial’s earnings until it can

 

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make appropriate adjustments in its deposit rates. In addition, there are costs associated with Gateway Financial’s risk management techniques, and these costs could be material. Fluctuations in interest rates are not predictable or controllable and, therefore, there can be no assurances of Gateway Financial’s ability to continue to maintain a consistent positive spread between the interest earned on its earning assets and the interest paid on its interest-bearing liabilities.

Gateway Financial’s operations and customers might be affected by the occurrence of a natural disaster or other catastrophic event in its market area.

Because substantially all of Gateway Financial’s loans are with customers and businesses located in the central and coastal portions of Virginia and North Carolina, catastrophic events, including natural disasters, such as hurricanes which historically have struck the east coast of the United States with some regularity, or terrorist attacks, could disrupt its operations. Any of these natural disasters or other catastrophic events could have a negative impact on most or all of Gateway Financial’s offices and customer base, as well as the strength of its loan portfolio. Even though Gateway Financial carries business interruption insurance policies, make contingency plans and typically have provisions in its contracts that protect it in certain events, it might suffer losses as a result of business interruptions that exceed the coverage available under its insurance policies or for which it does not have coverage. Any natural disaster or catastrophic event affecting Gateway Financial could have a significant negative impact on its operations.

Competition from financial institutions and other financial service providers may adversely affect Gateway Financial’s profitability.

The banking business is highly competitive and Gateway Financial experiences competition in each of its markets from many other financial institutions. Gateway Financial competes with commercial banks, credit unions, savings and loan associations, mortgage banking firms, consumer finance companies, securities brokerage firms, insurance companies, money market funds, and other mutual funds, as well as other super-regional, national and international financial institutions that operate offices in its primary market areas and elsewhere.

Gateway Financial competes with these institutions both in attracting deposits and in making loans. In addition, Gateway Financial has to attract its customer base from other existing financial institutions and from new residents. Many of Gateway Financial’s competitors are well-established, larger financial institutions. While Gateway Financial believes it can and does successfully compete with these other financial institutions in its primary markets, it may face a competitive disadvantage as a result of its smaller size, lack of geographic diversification and inability to spread its marketing costs across a broader market. Although Gateway Financial competes by concentrating its marketing efforts in its primary markets with local advertisements, personal contacts, and greater flexibility and responsiveness in working with local customers, it can give no assurance this strategy will be successful.

Directors and officers of Gateway Financial have interests in the merger that differ from the interests of non-director or non-management shareholders.

Some of the directors and officers of Gateway Financial have interests in the merger that differ from, or are in addition to, their interests as shareholders of Gateway Financial generally. These interests exist because of, among other things, employment or severance agreements that the officers entered into with Gateway Financial, rights that Gateway Financial officers and directors have under Gateway Financial’s benefit plans (including the treatment of their stock options following the merger) and rights to indemnification and directors and officers insurance following the merger. D. Ben Berry, the Chairman, President and Chief Executive Officer of Gateway Financial, will join the board of directors of Hampton Roads Bankshares, and Gateway Financial will designate six additional individuals (who will be existing directors of Gateway Financial) to the board of directors of Hampton Roads Bankshares. Mr. Berry will become President of Hampton Roads Bankshares, and David R. Twiddy, Senior Executive Vice President of Gateway Financial, will become President and Chief Executive

 

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Officer of Gateway Bank & Trust Co. and an executive officer of Hampton Roads Bankshares. Gateway Financial’s board of directors knew about these additional interests and considered them when they approved the merger agreement and the merger, you should understand that some of the directors and officers of Gateway Financial will receive benefits or other payments in connection with the merger that you will not receive. See “Proposal I—Approval of the Merger and Related Matters—Approval of the Merger—Interests of Certain Persons in the Merger” on page [    ].

Gateway Financial is subject to extensive regulation that could limit or restrict its activities.

Gateway Financial is a public company that operates in a highly regulated industry and is subject to examination, supervision, and comprehensive regulation by various federal and state agencies. Gateway Financial’s compliance with these regulations is costly and restricts certain of its activities, including payment of dividends, mergers and acquisitions, investments, loans and interest rates charged, interest rates paid on deposits and locations of offices. Gateway Financial is also subject to capitalization guidelines established by its regulators, which require it to maintain adequate capital to support its growth.

The laws and regulations applicable to public companies and the banking industry could change at any time, and Gateway Financial cannot predict the effects of these changes on its business and profitability. Because government regulation greatly affects the business and financial results of all commercial banks and bank and financial holding companies, Gateway Financial’s cost of compliance could adversely affect its ability to operate profitably.

The FDIC deposit insurance assessments that Gateway Bank and Trust Co. is required to pay may materially increase in the future, which would have an adverse effect on Gateway Financial’s earnings and its ability to pay dividends.

Gateway Bank and Trust Co. is required to pay semi-annual deposit insurance premium assessments to the FDIC. Due to the recent failure of several unaffiliated out-of-market FDIC insurance depository institutions and the potential failure of other depository institutions, the deposit insurance premium assessments paid by all banks may increase. In addition, the FDIC has indicated that it intends to propose changes to the deposit insurance premium assessment system that will shift a greater share of any increase in such assessments onto institutions with higher risk profiles, including banks that rely on brokered deposits, such as Gateway Bank and Trust Co. If the deposit insurance premium assessment rate applicable to the bank increases, Gateway Financial’s earnings would be adversely affected which may impact our ability to make dividend payments.

 

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FORWARD-LOOKING STATEMENTS

This joint proxy statement/prospectus contains data and information that constitute forward-looking statements (within the meaning of the Private Securities Litigation Reform Act of 1995) regarding, among other things, the anticipated closing date of the merger, the expected pro forma effect of the merger, and plans and objectives of Hampton Roads Bankshares’ management for future operations of the combined organization following consummation of the merger. You can identify these forward-looking statements because they may include terms such as “believes,” “anticipates,” “intends,” “expects,” or similar expressions and may include discussions of future strategy. Each of Hampton Roads Bankshares and Gateway Financial caution you not to rely unduly on any forward-looking statements in this joint proxy statement/prospectus. These forward-looking statements are based on current expectations that involve a number of risks and uncertainties. Actual results may differ materially from the results expressed in these forward-looking statements.

Factors that might cause such a difference include the following:

 

   

the ability of Gateway Financial or Hampton Roads Bankshares to obtain the required shareholder approval or the companies to obtain the required regulatory approvals for the merger;

 

   

the ability of the companies to consummate the merger;

 

   

the ability to successfully integrate Gateway Financial into Hampton Roads Bankshares following the merger;

 

   

a material adverse change in the financial condition, results of operations or prospects of either Hampton Roads Bankshares or Gateway Financial;

 

   

the ability to fully realize any cost savings and revenues or the ability to realize them on a timely basis;

 

   

the risk of borrower, depositor and other customer attrition after the transaction is completed;

 

   

a change in general business and economic conditions;

 

   

changes in the interest rate environment, deposit flows, loan demand, real estate values, and competition;

 

   

changes in accounting principles, policies or guidelines;

 

   

changes in legislation and regulation;

 

   

other economic, competitive, governmental, regulatory, geopolitical, and technological factors affecting the companies’ operations, pricing, and services;

 

   

the failure of Hampton Roads Bankshares or Gateway Financial to continue to qualify as “well-capitalized”; and

 

   

other risk factors described on pages [    ] to [    ] of this joint proxy statement/prospectus.

Hampton Roads Bankshares and Gateway Financial undertake no obligation to update or clarify these forward-looking statements, whether as a result of new information, future events or otherwise.

 

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THE GATEWAY FINANCIAL SPECIAL MEETING

General

This section contains information about the Gateway Financial special shareholders’ meeting that has been called to vote upon the matters described below.

We are mailing this joint proxy statement/prospectus to you, as a Gateway Financial shareholder, on or about [                    ], 2008. Together with this joint proxy statement/prospectus, we also are sending to you a notice of the special meeting and a form of proxy that the Gateway Financial board is soliciting for use at the special meeting. The special meeting will be held on December 18, 2008 at 3:00 p.m. local time at Gateway Financial’s headquarters at 1580 Laskin Road, Virginia Beach, VA 23451.

Matters to Be Considered

At the special meeting, you will be asked:

 

   

to approve the merger agreement and the transactions contemplated thereby (see Proposal I); and

 

   

to consider and vote upon a proposal to adjourn the meeting to a later date or dates, if necessary, to permit further solicitation of proxies in the event there are not sufficient votes at the time of the meeting to approve the matters to be considered by the shareholders at the meeting (see Proposal III).

Proxies

The accompanying form of proxy is for use at the special meeting if you are unable or do not desire to attend in person. You may attend the special meeting even if you have previously delivered a proxy to us. You can revoke your proxy at any time before the vote is taken at the special meeting by submitting to the Gateway Financial corporate secretary written notice of revocation or a properly executed proxy of a later date, or by attending the special meeting and electing to vote in person. Written notices of revocation and other communications about revoking your proxy should be addressed to:

 

  Gateway Financial Holdings, Inc.  
  1580 Laskin Road  
  Virginia Beach, Virginia 23451  
  Attn: D. Ben Berry  

All shares represented by valid proxies that we receive through this solicitation, and not revoked before they are exercised, will be voted in the manner specified in such proxies. If you make no specification on your returned proxy card, your proxy will be voted “FOR” the matters to be considered at the special meeting as described above.

Solicitation of Proxies

Gateway Financial will bear the entire cost of soliciting proxies from you. In addition to solicitation of proxies by mail, we will request banks, brokers and other record holders to send proxies and proxy material to the beneficial owners of the stock and secure their voting instructions, if necessary. Gateway Financial will reimburse those record holders for their reasonable expenses in taking those actions. If necessary, we also may use several of our regular employees, who will not be specially compensated, to solicit proxies from our shareholders, either personally or by telephone, the Internet, telegram, fax, letter or special delivery letter.

Record Date and Voting Rights

In accordance with North Carolina law, Gateway Financial’s articles of incorporation and bylaws and the Nasdaq Global Select Market rules, we have fixed November 14, 2008 as the record date for determining the

 

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shareholders entitled to notice of and to vote at the special meeting. Accordingly, you are only entitled to notice of, and to vote at, the special meeting if you were a record holder of Gateway Financial stock at the close of business on the record date. At that time, [            ] shares of Gateway Financial common stock were outstanding, held by [            ] holders of record; 23,266 shares of Gateway Financial Series A Preferred Stock were outstanding, held by [            ] holders of record; and 37,550 shares of Gateway Financial Series B Non-Convertible Non-Cumulative Perpetual Preferred Stock, held by [            ] holders of record. To have a quorum that permits us to conduct business at the special meeting, we require the presence, whether in person or through the prior submission of a proxy, of the holders of Gateway Financial common stock representing a majority of the shares outstanding and entitled to vote on the record date, and the holders of Gateway Financial Series A Preferred Stock and Series B Non-Convertible Non-Cumulative Perpetual Preferred Stock representing a majority of the shares outstanding and entitled to vote on the record date. You are entitled to one vote for each outstanding share of Gateway Financial stock you held as of the close of business on the record date.

Holders of shares of Gateway Financial stock present in person at the special meeting but not voting, and shares of Gateway Financial stock for which we have received proxies indicating that their holders have abstained, will be counted as present at the special meeting for purposes of determining whether we have a quorum for transacting business.

Vote Required

The approval of the merger agreement and the transactions contemplated thereby requires the affirmative vote of the holders of a majority of Gateway Financial’s outstanding shares of common stock, voting as a separate group, and the affirmative vote of the holders of a majority of Gateway Financial’s outstanding shares of Series A Preferred Stock and Series B Non-Convertible Non-Cumulative Perpetual Preferred Stock, voting together as a separate group.

Approval of the adjournment of the meeting requires the affirmative vote of a majority of the shares represented at the meeting, whether or not a quorum is present.

Because approval of the merger agreement and the transactions contemplated thereby require the affirmative vote of the holders of a majority of the outstanding shares of Gateway Financial common stock entitled to vote at the special meeting, voting as a separate group, and the holders of a majority of the outstanding shares of Gateway Financial Series A Preferred Stock and Series B Non-Convertible Non-Cumulative Perpetual Preferred Stock entitled to vote at the special meeting, voting together as a separate group, abstentions and broker non-votes will have the same effect as votes against these matters. Accordingly, the Gateway Financial board of directors urges you to complete, date and sign the accompanying proxy and return it promptly in the enclosed, postage-paid envelope.

As of the record date, directors and executive officers of Gateway Financial beneficially owned (i) approximately [            ] shares of Gateway Financial common stock, entitling them to exercise approximately [      ]% of the voting power of the Gateway Financial common stock entitled to vote at the special meeting, and (ii) approximately [            ] shares of Gateway Financial Series A Preferred Stock and Series B Non-Convertible Non-Cumulative Perpetual Preferred Stock, entitling them to exercise approximately [      ]% of the voting power of the Gateway Financial Series A Preferred Stock and Series B Non-Convertible Non-Cumulative Perpetual Preferred Stock entitled to vote at the special meeting. Each director and executive officer of Gateway Financial has indicated that he will vote each share of Gateway Financial stock that he or she owns “FOR” approval and adoption of the merger agreement and the transactions contemplated thereby.

In addition, each director and executive officer of Gateway Financial has entered into a support agreement which generally precludes these persons from transferring, selling, or otherwise disposing of any shares of stock of Gateway Financial held by them during the pendency of the transaction. The parties that entered into the support agreements also agreed to vote in favor of the merger agreement and the merger and to surrender the

 

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shares of common stock of Gateway Financial held by such persons at the effective time of the merger. In addition, the parties that entered into the support agreements agreed to vote against any proposal or any amendment of Gateway Financial’s articles of incorporation or bylaws which would frustrate or impede the merger. The support agreements require that any signing party not make any statement, written or oral, to the effect that he does not support the merger or that other shareholders of Gateway Financial should not support the merger; provided, however, that members of the board of directors and officers of Gateway Financial are permitted to discuss or communicate about the merger in accordance with their fiduciary duties if such discussions and communications are limited to other members of the board and officers of Gateway Financial and Gateway Bank & Trust Co., financial advisors, legal advisors, and other persons owing duties of confidentiality to Gateway Financial.

Recommendation of the Gateway Financial Board of Directors

The Gateway Financial board of directors has approved the merger agreement and the transactions contemplated thereby, including the merger. The Gateway Financial board believes that the merger agreement and the transactions contemplated thereby, including the merger, are fair to, and are in the best interests of, Gateway Financial and its shareholders and unanimously recommends that shareholders vote “FOR” approval of the merger agreement and the transactions contemplated thereby.

 

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THE HAMPTON ROADS BANKSHARES SPECIAL MEETING

General

This section contains information about the Hampton Roads Bankshares special shareholders’ meeting that has been called to vote upon the matters described below.

We are mailing this joint proxy statement/prospectus to you, as a Hampton Roads Bankshares shareholder, on or about [                    ], 2008. Together with this joint proxy statement/prospectus, we also are sending to you a notice of the special meeting and a form of proxy that the Hampton Roads Bankshares board is soliciting for use at the special meeting. The special meeting will be held on December 18, 2008 at 2:00 p.m. local time at Hampton Roads Bankshares’ headquarters at 999 Waterside Dr., Suite 200, Norfolk, VA 23510.

Matters to Be Considered

At the special meeting, you will be asked:

 

   

to approve the merger agreement and the transactions contemplated thereby (Proposal I);

 

   

to approve a proposal to adopt an amendment to Hampton Roads Bankshares’ articles of incorporation to increase the maximum number of members of the board of directors from 18 to 24 (Proposal II); and

 

   

to consider and vote upon a proposal to adjourn the meeting to a later date or dates, if necessary, to permit further solicitation of proxies in the event there are not sufficient votes at the time of the meeting to approve the matters to be considered by the shareholders at the meeting (Proposal III).

Proxies

The accompanying form of proxy is for use at the special meeting if you are unable or do not desire to attend in person. You may attend the special meeting even if you have previously delivered a proxy to us. You can revoke your proxy at any time before the vote is taken at the special meeting by submitting to the Hampton Roads Bankshares Secretary written notice of revocation or a properly executed proxy of a later date, or by attending the special meeting and electing to vote in person. Written notices of revocation and other communications about revoking your proxy should be addressed to:

Hampton Roads Bankshares, Inc.

999 Waterside Drive, Suite 200

Norfolk, Virginia 23510

Attn: Tiffany K. Glenn

All shares represented by valid proxies that we receive through this solicitation, and not revoked before they are exercised, will be voted in the manner specified in such proxies. If you make no specification on your returned proxy card, your proxy will be voted “FOR” the matters to be considered at the special meeting as described above.

Solicitation of Proxies

Hampton Roads Bankshares will bear the entire cost of soliciting proxies from you. In addition to solicitation of proxies by mail, we will request banks, brokers and other record holders to send proxies and proxy material to the beneficial owners of the stock and secure their voting instructions, if necessary. Hampton Roads Bankshares will reimburse those record holders for their reasonable expenses in taking those actions. If necessary, we also may use several of our regular employees, who will not be specially compensated, to solicit proxies from our shareholders, either personally or by telephone, the Internet, telegram, fax, letter or special delivery letter.

 

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Record Date and Voting Rights

In accordance with Virginia law, Hampton Roads Bankshares’ articles of incorporation and bylaws and the Nasdaq Global Select Market rules, we have fixed November 12, 2008 as the record date for determining the shareholders entitled to notice of and to vote at the special meeting. Accordingly, you are only entitled to notice of, and to vote at, the special meeting if you were a record holder of Hampton Roads Bankshares common stock at the close of business on the record date. At that time, [            ] shares of Hampton Roads Bankshares common stock were outstanding, held by [            ] holders of record. To have a quorum that permits us to conduct business at the special meeting, we require the presence, whether in person or through the prior submission of a proxy, of the holders of Hampton Roads Bankshares common stock representing a majority of the shares outstanding and entitled to vote on the record date. You are entitled to one vote for each outstanding share of Hampton Roads Bankshares common stock you held as of the close of business on the record date.

Holders of shares of Hampton Roads Bankshares common stock present in person at the special meeting but not voting, and shares of Hampton Roads Bankshares common stock for which we have received proxies indicating that their holders have abstained, will be counted as present at the special meeting for purposes of determining whether we have a quorum for transacting business. Shares held in street name that have been designated by brokers on proxy cards as not voted will not be counted as votes cast for or against any proposal. These broker non-votes, however, will be counted for purposes of determining whether a quorum exists.

Vote Required

The approval of the merger agreement and the transactions contemplated thereby requires the affirmative vote of the holders of a majority of Hampton Roads Bankshares outstanding shares.

The approval of a proposal to adopt an amendment to the articles of incorporation of Hampton Roads Bankshares to increase the maximum number of members of the board of directors from 18 to 24 requires the affirmative vote of the holders of a majority of Hampton Roads Bankshares outstanding shares.

Approval of the adjournment of the meeting requires the affirmative vote of a majority of the shares represented at the meeting, whether or not a quorum is present.

Because approval of the merger agreement and the transactions contemplated thereby and the adoption of the amendment to the articles of incorporation each require the affirmative vote of the holders of a majority of the outstanding shares of Hampton Roads Bankshares common stock entitled to vote at the special meeting, abstentions and broker non-votes will have the same effect as votes against these matters. Accordingly, the Hampton Roads Bankshares board of directors urges you to complete, date and sign the accompanying proxy and return it promptly in the enclosed, postage-paid envelope.

As of the record date, directors and executive officers of Hampton Roads Bankshares beneficially owned approximately [            ] shares of Hampton Roads Bankshares common stock, entitling them to exercise approximately [      ]% of the voting power of the Hampton Roads Bankshares common stock entitled to vote at the special meeting. Each director and executive officer of Hampton Roads Bankshares has indicated that he will vote each share of Hampton Roads Bankshares common stock that he or she owns “FOR” approval and adoption of the merger agreement and the transactions contemplated thereby and “FOR” the adoption of the amendment to the articles of incorporation.

Recommendation of the Hampton Roads Bankshares Board of Directors

The Hampton Roads Bankshares board of directors has approved the merger agreement and the transactions contemplated thereby, including the merger. The Hampton Roads Bankshares board of directors believes that the merger agreement and the transactions contemplated thereby, including the merger, are fair to, and are in the best interests of, Hampton Roads Bankshares and its shareholders and unanimously recommends that shareholders vote “FOR” approval of the merger agreement and the transactions contemplated thereby and “FOR” the approval of the amendment to Hampton Roads Bankshares’ articles of incorporation.

 

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PROPOSAL I—APPROVAL OF THE MERGER AND RELATED MATTERS

APPROVAL OF THE MERGER

Merger

Subject to satisfaction or waiver of all conditions in the merger agreement, Gateway Financial will merge with and into Hampton Roads Bankshares. Upon completion of the merger, Gateway Financial’s corporate existence will terminate. Immediately following the merger, D. Ben Berry, the Chairman, President and Chief Executive Officer of Gateway Financial, will join the board of directors of Hampton Roads Bankshares, and Gateway Financial will designate six additional individuals (who will be existing directors of Gateway Financial) to the board of directors of Hampton Roads Bankshares. Gateway Financial’s wholly-owned subsidiary, Gateway Bank & Trust Co., will remain in existence and operate as a separate subsidiary of Hampton Roads Bankshares.

Background of the Merger

From time-to-time over the past several years, Hampton Roads Bankshares’ Vice Chairman, President and Chief Executive Officer, Jack W. Gibson, (“Gibson”) and Gateway Financial’s Chairman and Chief Executive Officer, D. Ben Berry, (“Berry”) discussed the possibility of combining the businesses. These discussions were informal and exploratory. They did not result in any formal or follow-up discussions, or the creation of a proposal that could be presented to the board of directors of either company.

On September 8th of this year, Gibson telephoned Berry to suggest that Hampton Roads Bankshares would be interested in discussing a possible business combination in light of Gateway Financial’s disclosed position in Fannie Mae and Freddie Mac securities and the federal government’s takeover of those entities on September 7, 2008. Berry responded to Gibson that while his interest was appreciated, Gateway Financial had a capital formation plan that it was then undertaking and expected to conclude.

On the evening of September 8, 2008, Douglas J. Glenn (“Glenn”), Hampton Roads Bankshares’ Executive Vice-President and General Counsel, spoke with Theodore L. Salter (“Salter”), Gateway Financial’s Senior Executive Vice-President and Chief Financial Officer, to confirm Hampton Roads Bankshares’ interest in presenting a possible alternative to Gateway Financial’s capital formation plan. Salter expressed appreciation for the inquiry and indicated that he would be happy to present Berry with any information that Hampton Roads Bankshares would want to provide to him.

Hampton Roads Bankshares had a regularly scheduled meeting of its board of directors on September 9, 2008. Gateway Financial’s capital position was a topic of general discussion during both the regular board session and its executive session. Gibson advised the executive session of the board of his expression of interest in a business combination to Berry and the board expressed support for continuing such an approach. In addition, following the board meeting, Gibson discussed the approach to Gateway Financial in more detail with Emil A. Viola (“Viola”), the board’s Chairman, and Herman A. Hall, III (“Hall”), who are members, together with Gibson, of the board’s executive committee. Both Viola and Hall urged Gibson to pursue further discussions with Gateway Financial.

Later in the week of September 8, 2008, Hall contacted Frank T. Williams (“Williams”), a long-time acquaintance of Hall, a director of Gateway Financial, and a significant beneficial owner of its common stock, to ensure that Williams was aware of Hampton Roads Bankshares’ interest in a business combination with Gateway Financial. Williams expressed appreciation for and interest in the information provided by Hall. Gibson also requested that W. Lewis Witt (“Witt”), a director of Hampton Roads Bankshares, contact Jerry T. Womack (“Womack”), a director of Gateway Financial, a long-time acquaintance of Witt, and significant beneficial owner of Gateway Financial’s common stock, to ensure that Womack was aware of Hampton Roads Bankshares’ interest in a business combination with Gateway Financial. Womack expressed appreciation for and interest in the information provided by Witt.

 

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Womack, Williams, and Billy G. Roughton (“Roughton”), a director of Gateway Financial and a member of the board’s executive committee, decided to pursue further discussions with Hampton Roads Bankshares. On Monday, September 15, 2008, Womack telephoned Gibson and invited him to offer a presentation to members of the executive committee of Gateway Financial’s board of directors and Berry at a special meeting called for September 17, 2008.

On the morning of September 17, 2008, Berry met with Roughton and Ollin B. Sykes, a director of Gateway Financial and a member of the board’s executive committee, at Gateway Financial’s Hilltop office in Virginia Beach, Virginia. Berry, Roughton, and Sykes then met with Gibson and Glenn at the Hilton Virginia Beach Oceanfront hotel. Gibson, on behalf of Hampton Roads Bankshares, presented a view of Gateway Financial’s perceived challenges, a rationale for combining the businesses and a plan for maximizing shareholder value in the operation of the combined businesses. Gibson proposed a stock-for-stock transaction with closing to occur before December 31, 2008, in order to take advantage of certain accounting standard changes scheduled to take effect in December of 2008. Pricing was only discussed in general terms. Following the meeting, Berry, Roughton, and Sykes decided to engage Sandler O’Neill + Partners, L.P., to render financial advisory services to Gateway Financial in conjunction with a possible transaction with Hampton Roads Bankshares.

In the afternoon of September 17, 2008, Berry called Gibson and advised him that Gateway Financial’s board desired to enter into formal negotiations with Hampton Roads Bankshares regarding a possible combination of the businesses. Gibson and Berry determined to meet the following morning with all necessary representatives.

On September 17, 2008, Glenn contacted William A. Old, Jr. (“Old”) of Williams Mullen and formally engaged Old and his firm to represent Hampton Roads Bankshares in its negotiations with Gateway Financial.

On September 17, 2008, Hampton Roads Bankshares formally engaged McKinnon & Company, Inc. to render financial advisory and investment banking services to the company in connection with the acquisition of Gateway Financial.

On September 18, 2008, Gibson, Glenn, Old and William J. McKinnon, Jr., of McKinnon and Company, Inc. met with Berry, Salter, David R. Twiddy (“Twiddy”), the President and Chief Operating Officer of Gateway Bank & Trust Co., Roughton, Sykes and representatives of Sandler O’Neill + Partners, L.P., at the Norfolk Waterside Marriott Hotel. The parties negotiated the pricing terms of a combination whereby the shareholders of Gateway Financial would receive 0.6700 shares of common stock of Hampton Roads Bankshares for each share of Gateway Financial common stock they own immediately prior to the effective time of the merger. Each of Gateway Financial’s preferred shares outstanding immediately prior to the effective time of the merger would convert into new preferred shares of Hampton Roads Bankshares that have substantially identical rights.

On September 18, 2008, Hampton Roads Bankshares called a special meeting of its board to be held September 19, 2008, at 4:00 p.m. to discuss the terms of the acquisition proposal as negotiated with Gateway Financial.

On the evening of September 18, 2008, Gibson and Berry met to further discuss the financial terms of the proposed business combination of Hampton Roads Bankshares.

On September 19, 2008, Hampton Roads Bankshares and Gateway Financial, through their respective advisors and representatives, met at the offices of Williams Mullen in Norfolk, Virginia, to negotiate the terms of a definitive merger agreement that the management of Hampton Roads Bankshares and Gateway Financial could recommend to their respective boards of directors. Gateway Financial engaged Gaeta & Eveson, P.A. to provide legal advice to Gateway Financial.

On September 19, 2008, the Hampton Roads Bankshares board of directors met to be apprised of the status of the negotiations with Gateway Financial, including a presentation by Gibson regarding a view of Gateway Financial’s perceived challenges, a rationale for combining the businesses and a plan for maximizing shareholder

 

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value in the operation of the combined businesses as well as pricing and structure. The board was unanimous in its continued support for the negotiations and adjourned the special meeting until Sunday, September 21, 2008, at 4:00 pm.

The Gateway Financial board of directors also met on September 19, 2008 to be apprised of the status of the transaction. At the meeting, Berry and Jonathan J. Doyle of Sandler O’Neill + Partners, L.P. updated the board on the discussions with Hampton Roads Bankshares and outlined the major deal parameters that were already in place, including pricing and structure. The board discussed the background and results of Hampton Roads Bankshares and inquired as to the details of the pro forma company. The chairman of the executive committee reported that Gateway Financial’s executive committee had been reviewing information and unanimously supported the merger. The full board approved a motion to proceed with the merger based on the information presented at the meeting, and planned to meet on Sunday, September 21, 2008, to consider the merger agreement.

Subsequent to the Hampton Roads Bankshares’ board meeting on September 19, 2008, and continuing through the afternoon of September 21, 2008, the respective advisors and representatives of Hampton Roads Bankshares and Gateway Financial continued to meet at the offices of Williams Mullen to negotiate the terms of a definitive merger agreement. Of primary importance were Gateway Financial’s capital position at the end of the third quarter on September 30, 2008, and the terms of various credit facilities with JPMorgan Chase Bank, N.A. (“JP Morgan”). It was agreed that, as a condition to the merger, Gateway Financial would use its best efforts to raise between $20,000,000 and $35,000,000 in qualified capital (collectively, the “Capital Financing”) through the sale of its Series B preferred stock. Any increase in the amount of the offering or change to the terms of the securities offered would require the approval of Hampton Roads Bankshares. Provided the Capital Financing permitted Gateway Bank to qualify as “well capitalized” on or before September 29, 2008, Hampton Roads Bankshares agreed to lend, on its own behalf or that of Bank of Hampton Roads and Shore Bank, $31,000,000 (the “HRB Loan”), payable on demand. The repayment of the HRB Loan by Gateway Financial would be secured by a first priority lien on the stock of Gateway Bank, and the proceeds would be used to pay off all outstanding obligations under Gateway Financial’s various credit facilities with JP Morgan. A definitive merger agreement, including the foregoing conditions, was substantially agreed to by the negotiating parties on September 21, 2008. A copy of the definitive agreement was then submitted to both Sandler O’Neill + Partners, L.P. and McKinnon and Company, Inc. for their consideration of its fairness to the shareholders of Hampton Roads Bankshares and Gateway Financial.

On September 21, 2008, the Hampton Roads Bankshares’ board of directors met to review and consider the definitive agreement. At the meeting, Old, for Williams Mullen, reviewed the terms and conditions of the definitive agreement with the board and McKinnon and Company, Inc. delivered to the board its oral and written opinion that as of the date of its opinion the proposed transaction was fair from a financial point of view to the holders of the Hampton Roads Bankshares common stock. The Hampton Roads Bankshares board was unanimous in its continued support for the proposed merger and authorized management to continue negotiations of the final definitive merger agreement for consideration at the board’s September 23, 2008 special meeting.

On September 21, 2008, the Gateway Financial board of directors met at the Norfolk offices of Williams Mullen to review the progress made on the transaction. Scott Clark of Sandler O’Neill + Partners, L.P. (“Clark”) reviewed the financial aspects of the proposed merger. The board also reviewed the terms and conditions of the definitive merger agreement. William F. Hickey of Sandler O’Neill + Partners, L.P. reviewed the prospects of the pro forma company. The board also had extensive discussions regarding the need to satisfy various outstanding credit facilities with JP Morgan Chase Bank, N.A. before proceeding with the merger.

Subsequent to the Hampton Roads Bankshares’ board meeting on September 21, 2008, and continuing through the afternoon of September 23, 2008, the respective advisors and representatives of Hampton Roads Bankshares and Gateway Financial continued to meet at the offices of Williams Mullen to negotiate and further finalize the terms of a definitive merger agreement.

 

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On September 23, 2008, the Hampton Roads Bankshares board of directors met to review and consider the final version of the definitive merger agreement. At the meeting, Old, for Williams Mullen, again, reviewed the terms and conditions of the definitive agreement with the board and explained what changes had been made to the agreement since the board’s September 21, 2008, meting. As the pricing structure of the proposed merger had not changed, McKinnon and Company, Inc. reaffirmed through management its opinion that the proposed transaction was fair from a financial point of view to the holders of the Hampton Roads Bankshares common stock. The Hampton Roads Bankshares board then unanimously approved the agreement and plan of merger with Gateway Financial and resolved to recommend it to the Hampton Roads Bankshares shareholders for approval.

On September 23, 2008, the Gateway Financial board of directors met in Virginia Beach, Virginia. Anthony Gaeta, Jr., of Gaeta & Eveson, P.A., reviewed the terms of the definitive merger agreement and the various approvals necessary to complete the merger. Clark reviewed the proposal to satisfy all outstanding obligations under Gateway Financial’s credit facilities with JP Morgan through the HRB Loan. The board also discussed the proposed Capital Financing. After discussion, the board unanimously approved a resolution authorizing the Series B Non-Convertible Non-Cumulative Perpetual Preferred Stock and approved the merger agreement with Hampton Roads Bankshares.

A joint press release announcing the execution of the merger agreement was issued by Hampton Roads Bankshares and Gateway Financial on September 24, 2008.

Hampton Roads Bankshares’ Reasons for the Merger

In reaching its decision to initially propose and thereafter approve the merger agreement and recommend the merger to its shareholder, the Hampton Roads Bankshares board of directors consulted with Hampton Roads Bankshares’ management, as well as with its outside financial and legal advisors, reviewed various financial data and evaluation materials, and made an independent determination that the proposed merger with Gateway Financial was in the best interests of Hampton Roads Bankshares and its shareholders. The board of directors considered a number of positive factors that it believes support its recommendation that Hampton Roads Bankshares’ shareholders approve the merger agreement, including:

 

   

that the transaction conforms with Hampton Roads Bankshares’ long term goals of enhancing shareholder value; diversifying deposit gathering and credit risk; broadening its customer base for loans and deposits and broadening its market penetration;

 

   

that Gateway Financial has a strong market presence in Virginia and North Carolina in areas outside of Hampton Roads Bankshares’ markets, that Gateway Financial’s market is contiguous to Hampton Roads Bankshares’ existing market without significant overlap or redundant facilities in Hampton Roads, Virginia, and presents opportunities to grow the business further into and through the Central Virginia region and in North Carolina;

 

   

the financial analysis and presentation of McKinnon & Company, Inc. and its written opinion that, as of September 23, 2008, the proposed common stock exchange ratio was fair, from a financial point of view, to Hampton Roads Bankshares (see “—Opinion of Hampton Roads Bankshares’ Financial Advisor”);

 

   

the financial terms of recent business combinations in the financial services industry;

 

   

its belief that the merger will create a larger and more diversified organization, with a higher combined legal lending limit, that is better positioned to compete and grow its business;

 

   

its knowledge and analysis of the current competitive and regulatory environment for financial institutions generally, Hampton Roads Bankshares’ current competitive position and the other potential strategic alternatives available to Hampton Roads Bankshares, including accelerating de novo branch growth, making acquisitions or developing or acquiring non-bank businesses;

 

   

its review of Gateway Financial’s financial condition, earnings, business operations and prospects and its belief that Gateway Financial has a compatible business culture with a shared approach to customer service, treatment of employees and increasing shareholder value;

 

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the assessment of the likelihood that the merger would be completed in a timely manner without unacceptable regulatory conditions or requirements, including that no branch divestitures would likely be required, and the ability of the management team to successfully integrate and operate the business of the combined company after the merger;

 

   

its expectation that shareholders in the combined company will continue to receive dividends from the earnings of the combined company; and

 

   

the fact that the merger should enable shareholders in the combined company to enjoy greater liquidity from the larger shareholder base so as to allow them to buy and sell shares quickly and efficiently.

The Hampton Roads Bankshares board also considered the risks and potentially negative factors outlined below, but concluded that the anticipated benefits of combining with Gateway Financial were likely to outweigh substantially these risks and factors. The risks and factors included:

 

   

the possibility that the merger and the related integration process could result in the loss of key employees, in the disruption of Hampton Roads Bankshares on-going business, and in the loss of customers;

 

   

the possibility that the merger may not be well received by Gateway Financial’s key employees or customers, resulting in either or both the loss of such key employees or customers

 

   

the potential risk of diverting management’s focus and resources from other strategic opportunities and from operational matters while working to implement the merger;

 

   

interest rate changes and short term asset-liability adjustments; and

 

   

the risks of the type and nature described under “Forward-Looking Statements” and “Risk Factors.”

The foregoing discussion of the factors considered by Hampton Roads Bankshares’ board is not intended to be exhaustive, but is believed to include all material factors considered by Hampton Roads Bankshares’ board. In view of the wide variety of factors considered in connection with its evaluation of the merger and the complexity of these matters, the Hampton Roads Bankshares’ board of directors did not find it useful and did not attempt to quantify or assign any relative or specific weight to the various factors that it considered in reaching its determination to initially propose and thereafter approve the merger and recommend that Hampton Roads Bankshares’ shareholders vote “FOR” the approval of the merger agreement. In addition, individual members of the Hampton Roads Bankshares board of directors may have given differing weights to different factors. The Hampton Roads Bankshares board of directors conducted an overall analysis of the factors described above, including thorough discussions with Hampton Roads Bankshares management and outside financial and legal advisors and considered the factors overall to be favorable to and to support its determination to approve the merger and recommend that Hampton Roads Bankshares’ shareholders approve the merger agreement.

It should be noted that this explanation of the Hampton Roads Bankshares’ board of directors’ reasoning and the other information presented in this section is forward-looking in nature and, therefore, should be read in light of the factors discussed under the heading “Forward-Looking Statements.”

The approval of the merger agreement and the transactions contemplated thereby and the approval of the amendment to Hampton Roads’ Bankshares articles of incorporation are conditioned on each other, and approval of each is required for completion of the merger.

Based on the foregoing, the Hampton Roads Bankshares board of directors unanimously determined that the merger, the merger agreement, and the transactions contemplated thereby are in the best interests of Hampton Roads Bankshares and its shareholders. The Hampton Roads Bankshares’ board of directors unanimously recommends that Hampton Roads Bankshares’ shareholders vote “FOR” the approval of the merger agreement.

Gateway Financial’s Reasons for the Merger

In reaching its decision to approve the merger agreement and recommend the merger to its shareholders, the Gateway Financial board of directors consulted with Gateway Financial’s management, as well as with its

 

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outside financial and legal advisors, reviewed various financial data and evaluation materials, and made an independent determination that the proposed merger with Hampton Roads Bankshares was in the best interests of Gateway Financial and its shareholders. The board of directors considered a number of positive factors that it believes support its recommendation that Gateway Financial’s shareholders approve the merger agreement, including:

 

   

the financial analysis and presentation of Sandler O’Neill + Partners, L.P., and its written opinion that, as of September 23, 2008, the merger was fair, from a financial point of view, to Gateway Financial (see “—Opinion of Gateway Financial’s Financial Advisor”);

 

   

the financial terms of recent business combinations in the financial services industry and a comparison of the multiples paid in selected business combinations with the terms of the merger;

 

   

its belief that the merger will create a larger and more diversified organization, with a higher combined legal lending limit, that is better positioned to compete and grow its business;

 

   

the corporate governance and operational provisions established for the transaction, including the fact that Gateway Bank & Trust Co. will retain its banking charter and continue to operate as a separate bank and the composition of the post-merger board of directors of Hampton Roads Bankshares;

 

   

its knowledge and analysis of the current competitive and regulatory environment for financial institutions generally, Gateway Financial’s current competitive position and the other potential strategic alternatives available to Gateway Financial, including remaining independent, accelerating branch growth, making acquisitions, developing or acquiring non-bank businesses and selling Gateway Financial to certain other financial institutions;

 

   

its review of Hampton Roads Bankshares’ financial condition, earnings, business operations and prospects and its belief that Hampton Roads Bankshares is a high quality financial services company with a compatible business culture and shared approach to customer service and increasing shareholder value;

 

   

the assessment of the likelihood that the merger would be completed in a timely manner without unacceptable regulatory conditions or requirements, including that no branch divestitures would likely be required, and the ability of the management team to successfully integrate and operate the business of the combined company after the merger; and

 

   

the fact that the merger will enable Gateway Financial’s common stock shareholders to exchange their shares of Gateway Financial, in a tax-free transaction, for registered shares of common stock of a company that will have a significantly larger pro forma market capitalization, that will potentially provide greater liquidity for Gateway Financial shareholders to sell their shares quickly and efficiently.

The Gateway Financial board also considered the risks and potentially negative factors outlined below, but concluded that the anticipated benefits of combining with Hampton Roads Bankshares were likely to outweigh substantially these risks and factors. The risks and factors included:

 

   

the possibility that the merger and the related integration process could result in the loss of key employees, in the disruption of Gateway Financial’s on-going business, and in the loss of customers;

 

   

the potential risk of diverting management’s focus and resources from other strategic opportunities and from operational matters while working to implement the merger;

 

   

the matters described in “—Interests of Directors and Executive Officers in the Merger” beginning on page [    ]; and

 

   

the risks of the type and nature described under “Forward-Looking Statements” and “Risk Factors.”

The foregoing discussion of the factors considered by Gateway Financial’s board is not intended to be exhaustive, but is believed to include all material factors considered by Gateway Financial’s board. In view of the wide variety of factors considered in connection with its evaluation of the merger and the complexity of these matters, the Gateway Financial board of directors did not find it useful and did not attempt to quantify or assign any relative or specific weight to the various factors that it considered in reaching its determination to approve

 

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the merger and recommend that Gateway Financial’s shareholders vote “FOR” the approval of the merger agreement. In addition, individual members of the Gateway Financial board of directors may have given differing weights to different factors. The Gateway Financial board of directors conducted an overall analysis of the factors described above, including thorough discussions with Gateway Financial’s management and outside financial and legal advisors and considered the factors overall to be favorable to and to support its determination to approve the merger and recommend that Gateway Financial’s shareholders approve the merger agreement.

It should be noted that this explanation of the Gateway Financial board’s reasoning and the other information presented in this section is forward-looking in nature and, therefore, should be read in light of the factors discussed under the heading “Forward-Looking Statements.”

Based on the foregoing, the Gateway Financial board of directors unanimously determined that the merger, the merger agreement, and the transactions contemplated thereby are in the best interests of Gateway Financial and its shareholders. The Gateway Financial board of directors unanimously recommends that Gateway Financial’s shareholders vote “FOR” the approval of the merger agreement.

Opinion of Gateway Financial’s Financial Advisor

By a letter of agreement dated September 18, 2008, Gateway Financial retained Sandler O’Neill + Partners, L.P. (“Sandler O’Neill”) to act as its financial advisor in connection with a possible business combination with Hampton Roads Bankshares. Sandler O’Neill is a nationally recognized investment banking firm whose principal business specialty is financial institutions. In the ordinary course of its investment banking business, Sandler O’Neill is regularly engaged in the valuation of financial institutions and their securities in connection with mergers and acquisitions and other corporate transactions.

Sandler O’Neill acted as financial advisor to Gateway Financial in connection with the proposed merger and participated in certain of the negotiations leading to the merger agreement. At the September 23, 2008 meeting at which Gateway Financial’s board considered and approved the merger agreement, Sandler O’Neill delivered to the board its opinion, subsequently confirmed in writing that, as of such date, the merger consideration was fair to Gateway Financial’s shareholders from a financial point of view. The full text of Sandler O’Neill’s written opinion is attached as Annex B. The opinion outlines the procedures followed, assumptions made, matters considered and qualifications and limitations on the review undertaken by Sandler O’Neill in rendering its opinion. The description of the opinion set forth below is qualified in its entirety by reference to the opinion. Gateway Financial shareholders are urged to read the entire opinion carefully in connection with their consideration of the proposed merger.

Sandler O’Neill’s opinion speaks only as of the date of the opinion. The opinion is directed to the Gateway Financial board and speaks only to the fairness from a financial point of view of the merger consideration to Gateway Financial shareholders. It does not address the underlying business decision of Gateway Financial to engage in the merger or any other aspect of the merger and is not a recommendation to any Gateway Financial shareholder as to how such shareholder should vote at the special meeting with respect to the merger or any other matter.

In connection with rendering its September 23, 2008 opinion, Sandler O’Neill reviewed and considered, among other things:

 

  (1) the merger agreement;

 

  (2) certain publicly available financial statements and other historical financial information of Gateway Financial that Sandler O’Neill deemed relevant;

 

  (3) certain publicly available financial statements and other historical financial information of Hampton Roads Bankshares that Sandler O’Neill deemed relevant;

 

  (4) internal financial projections for Gateway Financial for the years ending December 31, 2008 through 2012 as provided by and reviewed with senior management of Gateway Financial;

 

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  (5) internal financial projections for Hampton Roads Bankshares for the years ending December 31, 2008 through 2012 as prepared by and reviewed with senior management of Hampton Roads Bankshares;

 

  (6) the pro forma financial impact of the merger on Hampton Roads Bankshares and Gateway Financial based on assumptions relating to transaction expenses, purchase accounting adjustments, cost savings and other synergies as determined by the senior managements of Gateway Financial and Hampton Roads Bankshares;

 

  (7) the publicly reported historical price and trading activity for Gateway Financial’s and Hampton Roads Bankshares’ common stock, including a comparison of certain financial and stock market information for Gateway Financial and Hampton Roads Bankshares with similar publicly available information for certain other companies the securities of which are publicly traded;

 

  (8) the financial terms of certain recent business combinations in the commercial banking industry, to the extent publicly available;

 

  (9) the current market environment generally and the banking environment in particular; and

 

  (10) such other information, financial studies, analyses and investigations and financial, economic and market criteria as Sandler O’Neill considered relevant.

Sandler O’Neill also discussed with certain members of senior management of Gateway Financial the business, financial condition, results of operations and prospects of Gateway Financial, including certain operating, liquidity, regulatory and other financial matters, in particular Gateway Financial’s determination that it would be less than well-capitalized as of September 30, 2008 and the impact of certain pending write-downs. Sandler O’Neill also held similar discussions with certain members of senior management of Hampton Roads Bankshares regarding the business, financial condition, results of operations and prospects of Hampton Roads Bankshares.

In performing its review, Sandler O’Neill relied upon the accuracy and completeness of all of the financial information, projections, estimates and other information that was available to it from public sources, that was provided by Gateway Financial and Hampton Roads Bankshares or their respective representatives or that was otherwise reviewed by Sandler O’Neill and assumed such accuracy and completeness for purposes of rendering its opinion. Sandler O’Neill further relied on the assurances of management of Gateway Financial and Hampton Roads Bankshares that they were not aware of any facts or circumstances that would make any of such information inaccurate or misleading. Sandler O’Neill was not asked to undertake, and did not undertake, an independent verification of any of such information and Sandler O’Neill did not assume any responsibility or liability for the accuracy or completeness thereof. Sandler O’Neill did not make an independent evaluation or appraisal of the specific assets, the collateral securing assets or the liabilities (contingent or otherwise) of Gateway Financial or Hampton Roads Bankshares or any of their subsidiaries, or the collectibility of any such assets, nor was Sandler O’Neill furnished with any such evaluations or appraisals. Sandler O’Neill did not make an independent evaluation of the adequacy of the allowance for loan losses of Gateway Financial or Hampton Roads Bankshares, nor did Sandler O’Neill review any individual credit files relating to Gateway Financial or Hampton Roads Bankshares. Sandler O’Neill assumed, with Gateway Financial’s consent, that the respective allowances for loan losses for both Gateway Financial and Hampton Roads Bankshares were adequate to cover such losses and will be adequate on a pro forma basis for the combined entity.

Sandler O’Neill’s opinion was necessarily based upon financial, economic, market and other conditions as they existed on, and could be evaluated as of, the date of its opinion. Sandler O’Neill assumed, in all respects material to its analysis that each party to the merger agreement would perform all of the material covenants required to be performed by such party under such agreements and that the conditions precedent in the merger agreement had not been waived. Sandler O’Neill also assumed that there had been no material change in Gateway Financial’s and Hampton Roads Bankshares’ assets, financial condition, results of operations, business or prospects since the date of the last financial statements made available to them, that Gateway Financial and Hampton Roads Bankshares would remain as going concerns for all periods relevant to its analyses, and that the merger would qualify as a tax-free reorganization for federal income tax purposes. Sandler O’Neill, with

 

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Gateway Financial’s consent, relied on the advice Gateway Financial received from its legal, accounting, and tax advisors as to all legal, accounting, and tax matters relating to the merger agreement and the transactions contemplated by the merger agreement.

The internal financial projections for Gateway Financial and Hampton Roads Bankshares used and relied upon by Sandler O’Neill in its analyses and the projections of transaction costs, estimates of purchase accounting adjustments, expected cost savings, and other synergies relating to the merger were reviewed with the senior managements of Gateway Financial and Hampton Roads Bankshares, and such managements confirmed to Sandler O’Neill that they reflected the best currently available estimates and judgments of such managements of the future financial performance of Gateway Financial and Hampton Roads Bankshares, both respectively and related to the combined entity, and Sandler O’Neill assumed that such performances would be achieved. Sandler O’Neill expressed no opinion as to such estimates and projections or the assumptions on which they were based. Those estimates and projections, as well as the other estimates used by Sandler O’Neill in its analysis, were based on numerous variables and assumptions which are inherently uncertain and, accordingly, actual results could vary materially from those set forth in such projections.

Financial Analysis of Sandler O’Neill. The preparation of a fairness opinion is a complex process involving subjective judgments as to the most appropriate and relevant methods of financial analysis and the application of those methods to the particular circumstances. The process, therefore, is not necessarily susceptible to a partial analysis or summary description. Sandler O’Neill believes that its analysis must be considered as a whole and that selecting portions of the factors and analyses considered without considering all factors and analyses, or attempting to ascribe relative weights to some or all such factors and analyses, could create an incomplete view of the evaluation process underlying their respective opinions. Also, no company included in the comparative analysis described below is identical to Gateway Financial or Hampton Roads Bankshares and no transaction is identical to the merger. In performing its analysis, Sandler O’Neill also made numerous assumptions with respect to industry performance, business and economic conditions and various other matters, many of which cannot be predicted and are beyond the control of Gateway Financial, Hampton Roads Bankshares and Sandler O’Neill. The analysis performed by Sandler O’Neill is not necessarily indicative of actual values or future results, both of which may be significantly more or less favorable than suggested by such analysis. Sandler O’Neill prepared its analysis solely for purposes of rendering its opinion and provided such analysis to the Gateway Financial board at the board’s September 23, 2008 meeting. Estimates on the values of companies did not purport to be appraisals or necessarily reflect the prices at which companies or their securities might actually be sold. Such estimates are inherently subject to uncertainty and actual values may be materially different. Accordingly, Sandler O’Neill’s analysis does not necessarily reflect the value of Hampton Roads Bankshares’ or Gateway Financial’s common stock or the prices at which Hampton Roads Bankshares’ or Gateway Financial’s common stock may be sold at any time. The analysis of Sandler O’Neill and its opinion were among a number of factors taken into consideration by Gateway Financial’s board in making its determination to approve the merger, the merger agreement and the transactions contemplated by the merger agreement and the analysis described below should not be viewed as determinative of the decision of Gateway Financial’s board or management with respect to the fairness of the merger.

The summary below is not a complete description of the analyses underlying the opinion of Sandler O’Neill or the presentation made by Sandler O’Neill to Gateway Financial’s board, but is instead a summary of the material analyses performed and presented in connection with its opinion.

In arriving at its opinion, Sandler O’Neill did not attribute any particular weight to any analysis or factor that it considered. Rather Sandler O’Neill made its own qualitative judgments as to the significance and relevance of each analysis and factor. The financial analysis summarized below includes information presented in tabular format. Sandler O’Neill did not form an opinion as to whether any individual analysis or factor (positive or negative) considered in isolation supported or failed to support its opinion; rather Sandler O’Neill made its determination as to the fairness of the per share merger consideration on the basis of its experience and professional judgment after considering the results of all the analyses taken as a whole. Accordingly, Sandler O’Neill believes that its analyses and the summary of its analyses must be considered as a whole and that

 

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selecting portions of its analysis and factors or focusing on the information presented below in tabular format, without considering all analyses and factors or the full narrative description of the financial analyses, including methodologies and assumptions underlying the analyses, could create a misleading or incomplete view of the process underlying its analysis and opinion. The tables alone do not constitute complete descriptions of the financial analyses presented in such tables.

Summary of Proposal. Sandler O’Neill reviewed the financial terms of the proposed transaction. Pursuant to the merger agreement, each share of Gateway Financial common stock issued and outstanding immediately prior to the merger will be converted into the right to receive 0.6700 shares of Hampton Roads Bankshares common stock. Based upon per-share financial information for Gateway Financial for the twelve months ended June 30, 2008, and projected financial information through September 30, 2008 based on Gateway Financial projections, Sandler O’Neill calculated the following ratios:

Transaction Ratios (1)

 

Transaction price/Book value per share

   61 %

Transaction price/Tangible book value per share

   96 %

Transaction price/Adjusted book value per share (2)

   82 %

Transaction price/Adjusted tangible book value per share

   158 %

Transaction price/Adjusted Management Est. 2008 EPS

   NM  

Transaction price/Adjusted Management Est. 2009 EPS (3)

   8.9x  

Transaction price/Adjusted core deposit premium (2)(4)

   2.3 %

Market premium (5)

   22.1 %

 

(1) Based on Hampton Roads Bankshares’ closing price of $10.15 on September 22, 2008
(2) Projected tangible book value as of September 30, 2008, per management guidance, which includes a loss of $37.0 million from the write-down of Fannie Mae and Freddie Mac preferred securities, per management guidance
(3) Per management guidance, assumes a $50 million common equity capital raise at $5.00 per share
(4) Core deposits exclude time deposits with balances greater then $100,000
(5) Based on Gateway Financial’s closing price of $5.57 on September 22, 2008

The aggregate transaction value was approximately $86.5 million.

Capital Raise Analysis. Sandler O’Neill considered, given Gateway Financial’s exposure to Fannie Mae and Freddie Mac preferred stock, the pro forma capital impact to Gateway Financial assuming a loss of $37 million on Gateway Financial’s Fannie Mae and Freddie Mac holdings, as discussed and reviewed by Gateway Financial senior management. Were Gateway Financial to write off $37 million in preferred stock, it would have a pro forma Risk Based Capital Ratio as of September 30, 2008 of 8.95%, over 1.0% below “well-capitalized”, as per regulatory capital requirements.

Stock Trading History. Sandler O’Neill reviewed the history of the publicly reported trading prices of Gateway Financial’s and Hampton Roads Bankshares’ common stock. For the one- and three-year period ended September 22, 2008, Sandler O’Neill compared the relative performance of Gateway Financial’s and Hampton Roads Bankshares’ common stock with the following:

 

   

the S&P 500 Index;

 

   

the NASDAQ Bank Index; and

 

   

the S&P Bank Index.

 

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During the one-year period ended September 22, 2008, the relative performances were as follows:

Gateway Financial’s and Hampton Roads Bankshares’ Stock Performance

 

     Beginning Index Value
September 22, 2007
    Ending Index Value
September 22, 2008
 

Gateway Financial

   100.0 %   35.8 %

Hampton Roads Bankshares

   100.0     72.5  

S&P 500 Index

   100.0     79.1  

NASDAQ Bank Index

   100.0     83.1  

S&P Bank Index

   100.0     55.3  

During the three-year period ended September 22, 2008, the relative performances were as follows:

Gateway Financial’s and Hampton Roads Bankshares’ Stock Performance

 

     Beginning Index Value
September 22, 2005
    Ending Index Value
September 22, 2008
 

Gateway Financial

   100.0 %   34.4 %

Hampton Roads Bankshares

   100.0     92.3  

S&P 500 Index

   100.0     99.4  

NASDAQ Bank Index

   100.0     85.2  

S&P Bank Index

   100.0     59.9  

Comparable Company Analysis. Sandler O’Neill used publicly available information to compare selected financial and market trading information for Gateway Financial and Hampton Roads Bankshares to various peer groups selected by Sandler O’Neill.

The “Virginia Banks” peer group for Gateway Financial consisted of the following companies:

 

Burke & Herbert Bank & Trust Company    C&F Financial Corporation
Cardinal Financial Corporation    Carter Bank & Trust
Commonwealth Bankshares, Inc.    Eastern Virginia Bankshares, Inc.
First Bancorp, Inc.    First Community Bancshares, Inc.
Hampton Roads Bankshares, Inc.    Middleburg Financial Corporation
National Bankshares, Inc.    Old Point Financial Corporation
TowneBank    Union Bankshares Corporation
Virginia Commerce Bancorp, Inc.   

 

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The analysis compared publicly available financial information as of and for the twelve-month period ended June 30, 2008 and market trading information as of September 22, 2008. The table below compares the data for Gateway Financial and the median data for the comparable peer group.

Comparable Group Analysis

 

     Gateway
Financial
    Virginia Banks
Peer Group
Median
 

Total Assets (in millions)

   $ 2,128     $ 1,027  

Tangible Equity/Tangible Assets

     5.44 %     7.23 %

Last Twelve Months Return on Average Assets

     0.62 %     0.94 %

Last Twelve Months Return on Average Equity

     7.5 %     9.3 %

Net Interest Margin

     3.18 %     3.85 %

Last Twelve Months Efficiency Ratio

     68.6 %     65.4 %

Reserves/Loans

     1.04 %     1.14 %

Non-Performing Assets/Assets

     0.47 %     0.40 %

Net Charge-Offs/Average Loans

     0.08 %     0.09 %

Market Capitalization (in millions)

   $ 70.7     $ 159.1  

Core Deposit Premium

     (3.15 %)     3.98 %

Dividend Yield

     5.43 %     3.62 %

Price/Book Value per Share

     43 %     110 %

Price/Tangible Book Value per Share

     63 %     136 %

Price/52-Week High

     34.3 %     79.0 %

Price/Last Twelve Months Earnings per Share

     7.0x       12.2x  

Price/Estimated 2009 Earnings per Share

     6.6x       11.7x  

The “Select Companies with Significant FNM/FRE Exposure” peer group for Gateway Financial consisted of the following companies (1):

 

Bank Holdings    Berkshire Bancorp Inc.
Cascade Financial Corporation    Central Virginia Bankshares, Inc.
Community Financial Corporation    Cooperative Bankshares, Inc.
Financial Institutions, Inc.    First Litchfield Financial Corporation
Midwest Banc Holdings, Inc.    Ohio Legacy Corp

 

(1) Select banks who have published record of owning Fannie Mae and / or Freddie Mac preferred securities.

 

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The analysis compared publicly available financial information as of and for the twelve-month period ended June 30, 2008 and market trading information as of September 22, 2008. The table below compares the data for Gateway Financial and the median data for the comparable peer group.

Comparable Group Analysis

 

     Gateway
Financial
    Select Companies with
Significant FNM/FRE
Exposure

Median
 

Total Assets (in millions)

   $ 2,128     $ 813  

Tangible Equity/Tangible Assets

     5.44 %     6.79 %

Last Twelve Months Return on Average Assets

     0.62 %     0.62 %

Last Twelve Months Return on Average Equity

     7.5 %     7.2 %

Net Interest Margin

     3.18 %     3.24 %

Last Twelve Months Efficiency Ratio

     68.6 %     67.2 %

FNM & FRE Preferred Stock Fair Value/Tangible Book Value

     35.8 %     26.0 %

Reserves/Loans

     1.04 %     1.14 %

Non-Performing Assets/Assets

     0.47 %     1.14 %

Net Charge-Offs/Average Loans

     0.08 %     0.18 %

Market Capitalization (in millions)

   $ 70.7     $ 32  

Core Deposit Premium

     (3.15 %)     (3.08 %)

Dividend Yield

     5.43 %     1.34 %

Price/Book Value per Share

     43 %     61 %

Price/Tangible Book Value per Share

     63 %     72 %

Price/52-Week High

     34.3 %     43.6 %

Price/Last Twelve Months Earnings per Share

     7.0x       8.5x  

Price/Estimated 2009 Earnings per Share

     6.6x       8.0x  

The selected comparable “Virginia Banks” peer group for Hampton Roads Bankshares consisted of the following companies:

 

Access National Corporation    Alliance Bankshares Corporation
American National Bankshares Inc.    C&F Financial Corporation
Commonwealth Bankshares, Inc.    Eagle Financial Services, Inc.
Fauquier Bankshares, Inc.    First Bancorp, Inc.
First National Corporation    Highlands Bankshares, Inc.
Middleburg Financial Corporation    National Bankshares, Inc.
Old Point Financial Corporation    Valley Financial Corporation

 

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The analysis compared publicly available financial information as of and for the twelve-month period ended June 30, 2008 and market trading information as of September 22, 2008. The table below compares the data for Hampton Roads Bankshares and the median data for the comparable peer group.

Comparable Group Analysis

 

     Hampton Roads
Bankshares
    Virginia Banks
Peer Group
Median
 

Total Assets (in millions)

   $ 845     $ 733  

Tangible Equity/Tangible Assets

     9.35 %     8.08 %

Last Twelve Months Return on Average Assets

     1.15 %     0.94 %

Last Twelve Months Return on Average Equity

     8.8 %     9.9 %

Net Interest Margin

     4.30 %     3.84 %

Last Twelve Months Efficiency Ratio

     59.8 %     67.6 %

Reserves/Loans

     1.18 %     1.02 %

Non-Performing Assets/Assets

     0.23 %     0.67 %

Net Charge-Offs/Average Loans

     0.02 %     0.19 %

Market Capitalization (in millions)

   $ 133.5     $ 60.2  

Core Deposit Premium

     11.17 %     2.12 %

Dividend Yield

     4.22 %     3.40 %

Price/Book Value per Share

     124 %     107 %

Price/Tangible Book Value per Share

     175 %     115 %

Price/52-Week High

     70.8 %     66.3 %

Price/Last Twelve Months Earnings per Share

     16.4x       11.0x  

Price/Estimated 2009 Earnings per Share

     15.1x       8.8x  

Analysis of Selected Merger Transactions. Sandler O’Neill reviewed the following eight (8) selected merger transactions announced from January 1, 2007 through September 22, 2008 involving Mid-Atlantic and Southeast commercial banks:

 

Acquirer

  

Acquiree

1st United Bancorp Inc.    Equitable Financial Group Inc
Cape Bancorp Inc.    Boardwalk Bancorp Inc.
Community Bnkrs Acq Corp    BOE Financial Services of VA
F.N.B. Corp.    Iron & Glass Bancorp
First Citizens Bancorp.    Community Bankshares Inc.
First National Bancshares Inc.    Carolina National Corp.
Hampton Roads Bankshares Inc.    Shore Financial Corp.
Yadkin Valley Financial    American Community Bancshares

Sandler O’Neill reviewed the following multiples in the selected merger transactions:

 

   

transaction price at announcement to last twelve months’ reported earnings per share;

 

   

transaction price to book value per share;

 

   

transaction price to tangible book value per share;

 

   

tangible book premium/core deposits; and

 

   

transaction price/seller stock price 2 days prior to transaction announcement.

 

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As illustrated in the following table, Sandler O’Neill compared the multiples of the proposed merger to the median multiples of the selected merger transactions.

Comparable Transaction Multiples

 

     Hampton Roads
Bankshares /Gateway
Financial (1)
    Median
Mid-Atlantic and
Southeastern
Commercial Bank

Group
Multiple
 

Transaction price / Book value per share

   61 %   186 %

Transaction price / Tangible book value per share

   96 %   199 %

Transaction price / Adjusted book value per share (2)

   82 %   —    

Transaction price / Adjusted tangible book value per share (2)

   158 %   —    

Transaction price / Last twelve months earnings per share

   —       23.5 x

Transaction price / Adjusted Management Est. 2008 EPS

   NM     —    

Transaction price / Adjusted Management Est. 2009 EPS (3)

   8.9 x   —    

Tangible book premium / Core deposits (2)(4)

   2.3 %   22.1 %

Transaction price / Seller stock price 2 days prior to transaction announcement (5)

   22.1 %   68.3 %

 

(1) Based on Hampton Roads Bankshares’ closing price of $10.15 on September 22, 2008
(2) Projected tangible book value as of September 30, 2008, per management guidance, which includes a loss of $37.0 million from the write-down of Fannie Mae and Freddie Mac preferred securities, per management guidance
(3) Per management guidance, assumes a $50 million common equity capital raise at $5.00 per share
(4) Core deposits exclude time deposits with balances greater then $100,000
(5) Based on Gateway Financial’s closing price of $5.57 on September 22, 2008

Discounted Cash Flow Analysis of Gateway Financial. Sandler O’Neill performed a discounted cash flow analysis to estimate a range of the present values of after-tax cash flows that Gateway Financial could provide to equity holders through 2012 on a stand-alone basis, assuming, per management guidance, a $50 million capital raise issued at $5.00 per share and excluding the effects related to the merger. In performing this analysis, Sandler O’Neill used management estimates of per share net income of $(1.50) for 2008, $0.76 for 2009, $0.82 for 2010, $0.87 for 2011 and $0.95 for 2012. The range of values was determined by the present value of the “terminal value” of Gateway Financial common stock. In calculating the terminal value of Gateway Financial common stock, Sandler O’Neill applied multiples ranging from 6.0x to 18.0x to Gateway Financial’s 2012 management estimated earnings. Sandler O’Neill also applied multiples ranging from 60% to 180% to Gateway Financial’s 2012 management projected tangible book value per share. The terminal value was then discounted back using discount rates ranging from 12.1% to 16.1%, which range Sandler O’Neill viewed as appropriate for a company with Gateway Financial’s risk characteristics. In a third instance of discounted cash flow analysis, Sandler O’Neill applied multiples ranging from 6.0x to 18.0x to Gateway Financial’s 2012 management estimated earnings, and positive and negative variations to those estimated earnings ranging from negative 50% to positive 50%.

 

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This analysis resulted in the following reference ranges of indicated per share values for Gateway Financial common stock:

Net Present Value Per Share for Period Ending Dec. 31, 2012—Based on Diluted Earnings Per Share

Terminal Multiple

 

Discount
Rate

   6.0x    9.0x    12.0x    15.0x    18.0x

12.1%

   $ 3.73    $ 5.43    $ 7.13    $ 8.83    $ 10.54

13.1%

   $ 3.59    $ 5.22    $ 6.86    $ 8.49    $ 10.13

14.1%

   $ 3.46    $ 5.03    $ 6.60    $ 8.17    $ 9.74

15.1%

   $ 3.33    $ 4.84    $ 6.35    $ 7.86    $ 9.37

16.1%

   $ 3.21    $ 4.66    $ 6.11    $ 7.57    $ 9.02

Net Present Value Per Share for Period Ending Dec. 31, 2012—Based on Tangible Book Value Per Share

Terminal Multiple

 

Discount
Rate

   60%    90%    120%    150%    180%

12.1%

   $ 3.42    $ 4.97    $ 6.52    $ 8.06    $ 9.61

13.1%

   $ 3.29    $ 4.78    $ 6.27    $ 7.75    $ 9.24

14.1%

   $ 3.17    $ 4.60    $ 6.03    $ 7.46    $ 8.89

15.1%

   $ 3.05    $ 4.43    $ 5.80    $ 7.18    $ 8.55

16.1%

   $ 2.94    $ 4.27    $ 5.59    $ 6.91    $ 8.23

Net Present Value Per Share for Period Ending Dec. 31, 2012—Based on Diluted Earnings Per Share

Terminal Multiple

 

Under / Over
Budget

   6.0x    9.0x    12.0x    15.0x    18.0x

(50.0%)

   $ 1.88    $ 2.67    $ 3.46    $ 4.24    $ 5.03

(25.0%)

   $ 2.67    $ 3.85    $ 5.03    $ 6.21    $ 7.39

0.0%

   $ 3.46    $ 5.03    $ 6.60    $ 8.17    $ 9.74

25.0%

   $ 4.24    $ 6.21    $ 8.17    $ 10.14    $ 12.10

50.0%

   $ 5.03    $ 7.39    $ 9.74    $ 12.10    $ 14.46

Sandler O’Neill performed a second discounted cash flow analysis to estimate a range of the present values of after-tax cash flows that Gateway Financial could provide to equity holders through 2012 on a stand-alone basis, assuming, per management guidance, a $50 million capital raise issued at $4.00 per share and excluding the effects related to the merger. In performing this analysis, Sandler O’Neill used management estimates of per share net income of $(1.40) for 2008, $0.69 for 2009, $0.74 for 2010, $0.78 for 2011 and $0.85 for 2012. The range of values was determined by the present value of the “terminal value” of Gateway Financial common stock. In calculating the terminal value of Gateway Financial common stock, Sandler O’Neill applied multiples ranging from 6.0x to 18.0x to Gateway Financial’s 2012 management estimated earnings. Sandler O’Neill also applied multiples ranging from 60% to 180% to Gateway Financial’s 2012 management projected tangible book value per share. The terminal value was then discounted back using discount rates ranging from 12.1% to 16.1%, which range Sandler O’Neill viewed as appropriate for a company with Gateway Financial’s risk characteristics. In a third instance of discounted cash flow analysis, Sandler O’Neill applied multiples ranging from 6.0x to 18.0x to Gateway Financial’s 2012 management estimated earnings, and positive and negative variations to those estimated earnings ranging from negative 50% to positive 50%.

 

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This analysis resulted in the following reference ranges of indicated per share values for Gateway Financial common stock:

Net Present Value Per Share for Period Ending Dec. 31, 2012—Based on Diluted Earnings Per Share

Terminal Multiple

 

Discount
Rate

   6.0x    9.0x    12.0x    15.0x    18.0x

12.1%

   $ 3.38    $ 4.91    $ 6.44    $ 7.97    $ 9.50

13.1%

   $ 3.26    $ 4.72    $ 6.19    $ 7.66    $ 9.13

14.1%

   $ 3.14    $ 4.55    $ 5.96    $ 7.37    $ 8.78

15.1%

   $ 3.02    $ 4.38    $ 5.74    $ 7.09    $ 8.45

16.1%

   $ 2.91    $ 4.22    $ 5.52    $ 6.83    $ 8.13

Net Present Value Per Share for Period Ending Dec. 31, 2012—Based on Tangible Book Value Per Share

Terminal Multiple

 

Discount
Rate

   60%    90%    120%    150%    180%

12.1%

   $ 3.10    $ 4.48    $ 5.87    $ 7.25    $ 8.64

13.1%

   $ 2.98    $ 4.31    $ 5.64    $ 6.98    $ 8.31

14.1%

   $ 2.87    $ 4.15    $ 5.43    $ 6.71    $ 7.99

15.1%

   $ 2.77    $ 4.00    $ 5.23    $ 6.46    $ 7.69

16.1%

   $ 2.67    $ 3.85    $ 5.03    $ 6.22    $ 7.40

Net Present Value Per Share for Period Ending Dec. 31, 2012—Based on Diluted Earnings Per Share

Terminal Multiple

 

Under / Over
Budget

   6.0x    9.0x    12.0x    15.0x    18.0x

(50.0%)

   $ 1.72    $ 2.43    $ 3.14    $ 3.84    $ 4.55

(25.0%)

   $ 2.43    $ 3.49    $ 4.55    $ 5.61    $ 6.67

0.0%

   $ 3.14    $ 4.55    $ 5.96    $ 7.37    $ 8.78

25.0%

   $ 3.84    $ 5.61    $ 7.37    $ 9.14    $ 10.90

50.0%

   $ 4.55    $ 6.67    $ 8.78    $ 10.90    $ 13.02

In connection with their analyses, Sandler O’Neill considered and discussed with the Gateway Financial board how the present value analyses would be affected by changes in the underlying assumptions, including variations with respect to net income. Sandler O’Neill noted that the terminal value analysis is a widely used valuation methodology, but the results of such methodology are highly dependent upon the numerous assumptions that must be made, and the results thereof are not necessarily indicative of actual values or future results.

Discounted Cash Flow Analysis of Hampton Roads Bankshares. Sandler O’Neill performed a discounted cash flow analysis to estimate a range of the present values of after-tax cash flows that Hampton Roads Bankshares could provide to equity holders through 2012 on a stand-alone basis, excluding the effects related to the merger. In performing this analysis, Sandler O’Neill used management estimates of per share net income of $0.53 for 2008, $0.67 for 2009, $0.75 for 2010, $0.83 for 2011 and $0.90 for 2012. The range of values was determined by the present value of the “terminal value” of Hampton Roads Bankshares common stock. In calculating the terminal value of Hampton Roads Bankshares common stock, Sandler O’Neill applied multiples ranging from 10.0x to 18.0x to Hampton Roads Bankshares’ 2012 management estimated earnings. Sandler O’Neill also applied multiples ranging from 125% to 225% to Hampton Roads Bankshares’ 2012 management

 

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projected tangible book value per share. The terminal value was then discounted back using discount rates ranging from 12.1% to 16.1%, which range Sandler O’Neill viewed as appropriate for a company with Hampton Roads Bankshares’ risk characteristics. In a third instance of discounted cash flow analysis, Sandler O’Neill applied multiples ranging from 10.0x to 18.0x to Hampton Roads Bankshares’ 2012 management estimated earnings, and positive and negative variations to those estimated earnings ranging from negative 50% to positive 50%.

This analysis resulted in the following reference ranges of indicated per share values for Hampton Roads Bankshares common stock:

Net Present Value Per Share for Period Ending Dec. 31, 2012—Based on Diluted Earnings Per Share

Terminal Multiple

 

Discount
Rate

   10.0x    12.0x    14.0x    16.0x    18.0x

12.1%

   $ 6.80    $ 7.88    $ 8.95    $ 10.03    $ 11.10

13.1%

   $ 6.56    $ 7.59    $ 8.62    $ 9.66    $ 10.69

14.1%

   $ 6.33    $ 7.32    $ 8.31    $ 9.31    $ 10.30

15.1%

   $ 6.11    $ 7.06    $ 8.02    $ 8.97    $ 9.92

16.1%

   $ 5.90    $ 6.81    $ 7.73    $ 8.65    $ 9.57

Net Present Value Per Share for Period Ending Dec. 31, 2012—Based on Tangible Book Value Per Share

Terminal Multiple

 

Discount
Rate

   125%    150%    175%    200%    225%

12.1%

   $ 6.70    $ 7.76    $ 8.81    $ 9.86    $ 10.92

13.1%

   $ 6.46    $ 7.48    $ 8.49    $ 9.50    $ 10.52

14.1%

   $ 6.23    $ 7.21    $ 8.18    $ 9.16    $ 10.13

15.1%

   $ 6.02    $ 6.95    $ 7.89    $ 8.83    $ 9.76

16.1%

   $ 5.81    $ 6.71    $ 7.61    $ 8.51    $ 9.41

Net Present Value Per Share for Period Ending Dec. 31, 2012—Based on Diluted Earnings Per Share

Terminal Multiple

 

Under / Over
Budget

   10.0x    12.0x    14.0x    16.0x    18.0x

(50.0%)

   $ 3.85    $ 4.34    $ 4.84    $ 5.34    $ 5.83

(25.0%)

   $ 5.09    $ 5.83    $ 6.58    $ 7.32    $ 8.06

0.0%

   $ 6.33    $ 7.32    $ 8.31    $ 9.31    $ 10.30

25.0%

   $ 7.57    $ 8.81    $ 10.05    $ 11.29    $ 12.53

50.0%

   $ 8.81    $ 10.30    $ 11.79    $ 13.28    $ 14.77

In connection with their analyses, Sandler O’Neill considered and discussed with Hampton Roads Bankshares management how the present value analyses would be affected by changes in the underlying assumptions, including variations with respect to net income. Sandler O’Neill noted that the terminal value analysis is a widely used valuation methodology, but the results of such methodology are highly dependent upon the numerous assumptions that must be made, and the results thereof are not necessarily indicative of actual values or future results.

Pro Forma Merger Analysis. Sandler O’Neill analyzed certain potential pro forma effects of the merger, assuming:

 

   

the merger closes during the fourth quarter of 2008;

 

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consideration of 100% stock at a fixed exchange ratio of 0.6700;

 

   

earnings per share projection in 2008 through 2012 for Gateway Financial confirmed with Gateway Financial management;

 

   

earnings per share projections in 2008 and through 2012 confirmed with Hampton Roads Bankshares management;

 

   

certain purchase accounting adjustments (including amortizable identifiable intangibles created in the merger), charges and transaction costs associated with the merger;

 

   

cost savings and other synergies are consistent with the estimates of the senior managements of Gateway Financial and Hampton Roads Bankshares; and

 

   

Gateway Financial pays down $20M of subordinated debt, $10M holding company line and prepayment penalties through $31M loan from Hampton Roads Bankshares, per management guidance.

For each of the years 2009, 2010, 2011 and 2012, Sandler O’Neill compared the estimated earnings per share of Hampton Roads Bankshares common stock and Gateway Financial common stock to the estimated earnings per share, on a GAAP basis, of the combined company’s common stock using the foregoing assumptions. For the same years, including 2008, Sandler O’Neill compared the management estimated tangible book value per share of Hampton Roads Bankshares common stock and Gateway Financial common stock to the estimated tangible book value per share, on a GAAP basis, of the combined company’s stock using the foregoing assumptions.

The analyses indicated that the merger would be accretive to Hampton Roads Bankshares’ management projected 2009, 2010, 2011 and 2012 GAAP EPS, and immediately accretive to Hampton Roads Bankshares’ tangible book value per share. The analyses also indicated that the merger would be accretive to Gateway Financial’s management projected 2009, 2010, 2011 and 2012 GAAP EPS. The actual results achieved by the combined company may vary from projected results and the variations may be material.

Sandler O’Neill also considered the contributions to certain financial and market metrics of Hampton Roads Bankshares and Gateway Financial on a stand-alone basis to the pro forma company.

 

(Dollars in Thousands)    Gateway
Financial
   Contribution     Hampton
Roads
Bankshares
   Contribution  

Cash & Securities

   $ 201,176    76 %   $ 65,138    24 %

Net Loans

   $ 1,727,792    71 %   $ 714,681    29 %

Total Intangibles

   $ 50,767    62 %   $ 31,280    38 %

Total Assets

   $ 2,127,725    72 %   $ 845,490    28 %

Total Deposits

   $ 1,618,541    72 %   $ 635,681    28 %

Total Borrowings

   $ 337,262    78 %   $ 94,304    22 %

Total Equity (1)

   $ 126,684    54 %   $ 107,442    46 %

Tangible Equity (1)

   $ 75,917    50 %   $ 76,162    50 %

Adjusted Tangible Equity

   $ 38,917    34 %   $ 76,162    66 %

LTM Net Income

   $ 10,479    61 %   $ 6,683    39 %

2009 Est. Net Income

   $ 15,733    64 %   $ 9,027    36 %

Market Capitalization

   $ 70,700    35 %   $ 133,500    65 %

Pro Forma Ownership

      39 %      61 %

 

(1) Adjusted tangible equity and equity for Gateway Financial adjusts equity for $37 mm loss on Fannie Mae’s and Freddie Mac’s preferred stock, as per management guidance.

Miscellaneous. Gateway Financial paid Sandler O’Neill a non-refundable advisory fee of $100,000 payable via wire transfer in immediately available funds. Gateway Financial has also agreed to pay Sandler O’Neill a transaction fee in connection, which is contingent, and payable, upon closing of the merger. Sandler O’Neill also

 

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received a $250,000 fee for rendering its fairness opinion. Gateway Financial has also agreed to reimburse certain of Sandler O’Neill’s reasonable out-of-pocket expenses incurred in connection with its engagement and to indemnify Sandler O’Neill and its affiliates and their respective partners, directors, officers, employees, agents, and controlling persons against certain expenses and liabilities, including liabilities under the securities laws.

In the ordinary course of their respective broker and dealer businesses, Sandler O’Neill may purchase securities from and sell securities to Gateway Financial and Hampton Roads Bankshares and their affiliates. Sandler O’Neill may also actively trade the debt and/or equity securities of Hampton Roads Bankshares and Gateway Financial or their affiliates for their own accounts and for the accounts of their customers and, accordingly, may at any time hold a long or short position in such securities.

The full text of the Sandler O’Neill opinion, which describes, among other things, the assumptions made, matters considered, and the limitations on the review undertaken, is attached to this document as Annex B and is incorporated in this document by reference. The description of the Sandler O’Neill opinion set above is qualified in its entirety by reference to the full text of the Sandler O’Neill opinion in Annex B. Gateway Financial’s shareholders are urged to read the Sandler O’Neill opinion carefully and in its entirety.

Opinion of Hampton Roads Bankshares’ Financial Advisor

McKinnon & Company, Inc. (“McKinnon”) was retained by Hampton Roads Bankshares on September 18, 2008 to serve as its exclusive financial advisor to assist with evaluating the strategic merits of an acquisition of Gateway Financial, structuring a proposal on terms acceptable to the board of directors of Hampton Roads Bankshares and structuring and carrying through to settlement any agreement which may be reached. In the ordinary course of business, McKinnon is regularly involved in the valuation of financial institutions and their securities in connection with mergers and acquisitions, negotiated underwritings, secondary distributions of listed and unlisted securities, securities trading, private placements and valuations for estate, corporate and other purposes. On September 21, 2008, McKinnon provided its written opinion to the board of directors of Hampton Roads Bankshares that, as of such date subject to certain assumptions, factors and limitations, the consideration proposed to be paid by Hampton Roads Bankshares pursuant to the merger agreement was fair from a financial point of view. On September 23, 2008, McKinnon updated and reconfirmed its written opinion. The full text of McKinnon’s opinion dated September 23, 2008, which discusses the assumptions made and limitations on the review, is attached hereto as Annex C. The shareholders of Hampton Roads Bankshares are urged to read the McKinnon opinion in its entirety.

McKinnon’s opinion is directed to the board of directors of Hampton Roads Bankshares and addresses only the fairness from a financial point of view, of the aggregate consideration to be paid by Hampton Roads Bankshares in the merger and is not a recommendation to any shareholder of Hampton Roads Bankshares as to how the shareholder should vote at the meeting of the shareholders of Hampton Roads Bankshares to consider the merger or any related matter.

In rendering its opinion, McKinnon reviewed and considered, among other things:

 

   

The merger agreement and certain related documents; and

 

   

Public and non-public financial statements and other historical financial information of Hampton Roads Bankshares, Bank of Hampton Roads, Shore Bank, Gateway Financial and Gateway Bank and Trust Co. including annual reports, audited financial statements, regulatory filings, quarterly and monthly financial statements and certain other internally prepared or publicly available financial documents available or made available as of the date of the McKinnon opinion dated September 23, 2008. In addition, McKinnon discussed with the managements of Hampton Roads Bankshares and Gateway Financial, their respective operations, regulatory relationships, prospects and other matters deemed to be relevant.

In conducting its review and arriving at its opinion, McKinnon relied upon and assumed, without independent verification, the accuracy and completeness of all of the financial and other information that was

 

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provided or was publicly available. McKinnon did not make or obtain any evaluations or appraisals of the properties, assets of liabilities of Hampton Roads Bankshares or Gateway Financial, nor did McKinnon examine any loan credit files. McKinnon relied upon the managements of Hampton Roads Bankshares and Gateway Financial as to the reasonableness and achievability of the financial forecasts and related assumptions provided to it. McKinnon assumed that such forecasts reflected the best available estimates and judgments of such managements and that such forecasts will be realized in the amounts and in the time periods estimated by such managements. McKinnon assumed that all of the representations and warranties contained in the merger agreement are true and correct and that the merger will be completed on the terms provided for in the merger agreement. McKinnon assumed that there has been no material change in the financial condition, operating results, business or prospects of Hampton Roads Bankshares or Gateway Financial. McKinnon’s opinion was based on market, economic and other conditions as they existed on the date of its opinion.

The preparation of a fairness opinion involves various determinations as to the most appropriate and relevant methods of financial analysis and the application of those methods to the particular circumstances. Therefore, McKinnon’s opinion is not readily conducive to summary description. In arriving at its opinion, McKinnon performed a variety of analyses, no one of which was assigned a greater significance than another. McKinnon believes that the analyses must be considered as a whole and that the consideration of a portion or portions of such analyses, without considering all factors and analyses, could create an incomplete view of the analyses and the process underlying McKinnon’s opinion.

Transaction Summary. Under the terms of the merger, the holders of Gateway Financial common stock will receive 0.6700 shares of Hampton Roads Bankshares common stock for each share of Gateway Financial common stock.

The common stock exchange ratio of 0.6700 and the proposed public announcement of the definitive agreement on September 24, 2008 valuing the deal at $101 million were based upon the 20-day weighted average closing price of Hampton Roads Bankshares’ common stock through September 12, 2008, of $11.91 per share. The closing price of Hampton Roads common stock on the last trading day, September 19, 2008, prior to the September 21 board meeting of Hampton Roads Bankshares was $10.42 per share; closing price on the last trading day, September 22, 2008, prior to the September 23 board meeting of Hampton Roads Bankshares was $10.15 per share. Based on: a) the 20 day weighted average closing price of Hampton Roads Bankshares’ common stock through September 12, 2008, of $11.91; b) the closing price on September 19, 2008; or the closing price on September 22, 2008, the value of the transaction is as follows:

 

     Per Share
Value of
Transaction
   Total Value of
Transaction
(approximate)

Gateway Financial receives 0.6700 common shares of Hampton Roads Bankshares per common share of Gateway Financial Values Based on Hampton Roads Bankshares Price of:

     

a) 20-day wted. average closing price through September 12, 2008

   $ 7.98    $ 101.3 million

b) September 19, 2008

     6.98      88.6 million

c) September 22, 2008

     6.75      86.3 million

 

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Pro Forma Effect of the Merger. McKinnon reviewed certain operating and financial projections for Hampton Roads Bankshares and Gateway Financial. Based on such projections, which the management of Hampton Roads Bankshares and Gateway Financial considered to be reasonable, including potential efficiencies and operating synergies available to the combined institution, and assuming a loss of $36.36 million on Gateway Financial’s Fannie Mae and Freddie Mac preferred securities in line with management’s expectations, the following estimates and projections of various income and balance sheet items were made:

 

     Gateway Financial receiving
0.6700 common shares of
Hampton Roads Bankshares
for each common share of
Gateway Financial

Estimated 2009 GAAP diluted earnings-per-share accretion

   Greater than 10%

Estimated 2008 cash (GAAP earnings less the estimated expense for amortization of one/deposit intangibles) diluted earning per share accretion

   Greater than 10%

Estimated 2010 GAAP diluted earnings-per-share accretion

   Greater than 10%

Estimated 2010 cash (GAAP earnings less the estimated expense for amortization of core/deposit intangibles) diluted earnings-per-share accretion

   Greater than 10%

Estimated year-end 2008 book value per share accretion

   Greater than 4%

The analysis indicated that the merger would be over 10% accretive to Hampton Roads Bankshares’ estimated 2009 and 2010 GAAP diluted earnings-per-share and cash diluted earnings per share plus immediately accretive to its book-value per share at closing.

Contribution Analysis. McKinnon prepared a contribution analysis of total assets, net loans, deposits, equity, tangible equity, net income for the trailing-twelve-months, and net interest income before provision expense for the trailing-twelve-months for Hampton Roads Bankshares and Gateway Financial as of or for the period ended June 30, 2008. McKinnon also prepared a contribution analysis on adjusted common equity, adjusted tangible equity and adjusted net income for Gateway Financial which assumes a charge-off/loss of $36.36 million on Gateway Financial’s Fannie Mae and Freddie Mac preferred securities, in line with management’s expectations, as if it had occurred during the period ended or as of June 30, 2008. The contribution analysis showed that without any merger adjustments, each institution contributed the following percentage to the combined institution’s pro forma balance sheet and income statement.

 

     Hampton
Roads
Bankshares
    Gateway
Financial
 

Assets

   28.4 %   71.6 %

Net Loans

   29.2     70.8  

Deposits

   28.2     71.8  

Common Equity

   43.3     56.7  

Adjusted Common Equity

   50.8     29.2  

Tangible Equity

   45.9     54.1  

Adjusted Tangible Equity

   58.8     41.2  

Net Income trailing-twelve-months (TTM)

   38.9     61.1  

Adjusted Net Income (TTM)

   NM     NM  

Net Interest Income before Provision (TTM)

   30.4     69.6  

Without any merger adjustments and without considering the dilutive impact from options outstanding at Hampton Roads Bankshares or Gateway Financial, the pro forma common ownership of Gateway Financial in the combined company would be approximately 39.2% based on the indicated common stock exchange ratio of 0.6700 shares of Hampton Roads Bankshares for each share of Gateway Financial.

 

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Comparable Transaction Analysis. McKinnon reviewed and compared the financial terms of the merger with the terms of transactions which were deemed to be pertinent and generally comparable to the analysis of the merger. The pricing ratios for the merger and the comparable transactions were compared for (a) the price to book value (including the price to adjusted book value for Gateway Financial) (b) the price to tangible book values (including the price to adjusted tangible book value for Gateway Financial) (c) the price to trailing-twelve-months (TTM) earnings (including the price to adjusted trailing-twelve-months (TTM) earnings for Gateway Financial) (d) the price to total assets and (e) the tangible book premium to core deposits (transaction price less tangible common equity to core deposits defined as deposits less than $100,000) and the adjusted tangible book premium to core deposits. Adjusted figures assume a loss of $36.36 million on Fannie Mae and Freddie Mac as if it had occurred during the period ending or at June 30, 2008. All figures are based on Hampton Roads Bankshares closing price of $10.15 on September 22, 2008.

The following table provides a summary analysis of the financial terms of the merger as compared to the terms for two groups, including: (1) for 10 bank and thrift mergers announced in the Southeast between January 1, 2008 and September 15, 2008 where the selling institution had $100 million to $3 billion in total assets; and (2) for 11 bank and thrift mergers announced nationally during the same period where the selling institutions had $500 million to $5 billion in total assets.

 

     Comparable
Southeast
Median
    Transactions
Nation
Median
    Hampton Roads
Bankshares/
Gateway Financial
(0.67 Exchange Ratio)
 

(a) Price/Book Value

   175 %   156 %   61 %

Price/Adjusted Book Value

       83  

(b) Price/Tangible Book Value

   178     176     96  

Price/Adjusted Tangible Book Value

       162  

(c) Price/Trailing-Twelve-Months Earnings

   19.80 x   24.23 x   8.29 x

Price/Adjusted Trailing-Twelve-Months Earnings

       NM  

(d) Price/Total Assets

   17.65 %   16.40 %   4.05 %

(e) Tangible Book Premium/Core Deposits

   11.96     13.40     -0.26  

Adjusted Tangible Book Premium/Core Deposits

       2.46 %

The following is a list of the (1) 10 Southeast transactions and the (2) 11 national transactions (Buyer/Seller): (1) Yadkin Valley Financial/American Community Bancshares; Jefferson Bancshares, Inc./State of Franklin Bancshares, Inc.; First Citizens Bancorp/Community Bankshares, Inc.; Summit Financial Group, Inc./Greater Atlantic Financial; First Security Bancorp/Union Bancshares of Benton, Inc.; Caja Madrid/City National Bankshares, Inc.; Hampton Roads Bankshares, Inc./Shore Financial Corp.; Community Bankshares Acquisition Corp./BOE Financial Services of VA; First Volunteer Corporation/Benton Bancshares Inc.; and SunTrust Banks, Inc./GB&T Bancshares, Inc.; and: (2) Yadkin Valley Financial/American Community Bancshares; First Merchants Corp./Lincoln Bancorp; First Citizens Bancorp/Community Bankshares, Inc.; FBOP Corp./PFF Bancorp, Inc.; Whitney Holdings Corp./Parish National Corp.; Harleysville National Corp./Willow Financial Bancorp, Inc.; First Place Financial Corp./Camco Financial Corp.; Caja Madrid/City National Bancshares, Inc.; Valley National Bancorp/Greater Community Bancorp; Eastern Bank Corporation/MASSBANK Corp.; and Mutual First Financial Inc./MFB Corp.

The 10 Southeastern institutions and 11 national institutions being acquired in the transactions considered in the table above had the following characteristics, respectively: median assets of $295 and $870 million, respectively; median equity/assets of 10.20 and 9.29%, respectively; median return on average assets of 0.94 and 0.57%, respectively; median return on average equity of 9.41 and 5.34%, respectively and the median deal value was $55.8 and $95.9 million, respectively.

 

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Comparable Company Analysis. McKinnon compared historical operating and financial performance of Gateway Financial to 10 commercial banks and thrifts based in the Southeast and 10 based in Virginia where total assets were between $1.7 billion and $2.4 billion in the Southeast and between $800 million and $3.1 billion in Virginia.

The Southeast peer group consisted of: Union Bankshares Corporation; Seacoast Banking Corporation of Florida; Ameris Bancorp; Bank Trust Financial Group, Inc.; New Bishop Bancorp; FNB United Corp.; First Community Bancshares, Inc.; Cadence Financial Corporation; Great Florida Bank; and Fidelity Southern Corporation.

The Virginia peer group consisted of: Stellar One Corporation; TowneBank; Virginia Commerce Bancorp, Inc.; Union Bankshares Corporation; First Community Bancshares, Inc.; Cardinal Financial Corporation; Eastern Virginia Bankshares, Inc.; Commonwealth Bankshares, Inc.; Middleburg Financial Corporation; and National Bankshares, Inc.

 

     Median
Region
    Median
State (VA)
    Gateway
Financial
 

Median Total Assets ($000)

   $ 2,059,000     $ 1,890,010     $ 2,127,725  

Return on Average Assets (LTM)

     0.37 %     0.90 %     0.62 %

Return on Average Equity (LTM)

     3.32       9.09       7.51  

Net Interest Margin (LTM)

     3.75       3.84       3.18  

Efficiency Ratio (LTM)

     70.49       63.62       68.62  

Non-Interest Income/Oper. Revenues (LTM)

     23.81 %     24.34 %     28.02 %

Tangible Equity/Tg. Assets

     6.27       7.22       5.44  

Non-performing Assets/Assets

     1.55       0.48       0.47  

Net Charge-offs/Average Loans

     0.61       0.10       0.08  

Reserves/Loans

     1.54       1.15       1.04  

Based on this analysis, Gateway Financial’s operating performance and financial condition were generally above the performance of the regional banking institutions of comparable size and in line or slightly below that of the state institutions of comparable size. Gateway Financial’s leverage as measured by tangible equity/tangible assets was higher (therefore weaker) than that of both comparable groups.

Other Analysis. McKinnon performed such other analyses as were deemed appropriate, including a review of the public trading history of the common stock of Hampton Roads Bankshares. The preceding analyses do not purport to be all of the analyses performed nor all of the matters considered in rendering the opinion.

McKinnon’s opinion included in this joint proxy statement/prospectus as Annex C, dated September 23, 2008, is based solely upon the information available to McKinnon and the economic market and other circumstances as they existed as of September 23, 2008. Events occurring after that date could materially affect the assumptions and conclusion contained in McKinnon’s opinion. McKinnon was retained by Hampton Roads Bankshares to serve as financial advisor in conjunction with a potential acquisition of Gateway Financial and for rendering its fairness opinion. For its services, McKinnon has been paid $100,000, will receive another $100,000 at the time of the mailing of this joint proxy statement/prospectus and will receive an additional $650,000 upon closing of this transaction, plus actual expenses incurred. In the ordinary course of business, McKinnon trades the securities of Hampton Roads Bankshares for its own account and for the accounts of its customers, and officers, employees, consultants and agents may have long or short positions in the securities of Hampton Roads Bankshares as well.

Based on and subject to the assumptions, factors and limitations as set forth in the attached opinion, as discussed therein, the consideration offered to Gateway Financial in the merger transaction is fair to the shareholders of Hampton Roads Bankshares from a financial point of view. No limitations were imposed by Hampton Roads Bankshares upon McKinnon with respect to the investigation made or procedures followed by it in arriving at its opinion.

 

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The full text of the McKinnon opinion, which describes, among other things, the assumptions made, matters considered, and the limitations on the review undertaken, is attached to this document as Annex C and is incorporated in this document by reference. The description of the McKinnon opinion set forth below is qualified in its entirety by reference to the full text of the McKinnon opinion in Annex C. Hampton Roads Bankshares’ shareholders are urged to read the McKinnon opinion carefully and in its entirety.

Dissenters’ or Appraisal Rights

Hampton Roads Bankshares shareholders and holders of Gateway Financial common stock will not have any dissenters’ or appraisal rights in connection with the merger and the other matters described in this joint proxy statement/prospectus. Holders of Gateway Financial Series A Preferred Stock and Series B Non-Convertible Non-Cumulative Perpetual Preferred Stock have dissenters’ rights under North Carolina law. See “—Dissenters’ Rights of Holders of Gateway Financial Preferred Stock” below.

Dissenters’ Rights of Holders of Gateway Financial Preferred Stock

Pursuant to Article 13 of the North Carolina Business Corporation Act, each holder of Gateway Financial Series A Preferred Stock and Series B Non-Convertible Non-Cumulative Perpetual Preferred Stock is permitted to dissent from the merger and to obtain the fair value of his or her shares of Gateway Financial preferred stock if the merger is completed. The following is a summary of dissenters’ rights under Article 13. If you wish to exercise your dissenters’ rights, you should review carefully the complete text of Article 13, which is attached as Annex D to this joint proxy statement/prospectus, and are urged to consult a legal advisor before electing or attempting to exercise these rights. Failure to comply with the procedures prescribed by Article 13 will result in the loss of your dissenters’ rights.

Any holder of Gateway Financial preferred shares who intends to dissent from the merger must give Gateway Financial, and Gateway Financial must actually receive, before a vote on the merger is taken at the special meeting, written notice of your intent to demand payment for your shares of Gateway Financial preferred stock if the merger is completed. This notice should be mailed to the Corporate Secretary of Gateway Financial at the following address: Gateway Financial Holdings, Inc., Attention: Corporate Secretary, 1580 Laskin Road, Virginia Beach, Virginia 23451. A vote against the merger will not be sufficient to satisfy this notice requirement. A Gateway Financial shareholder who provides this written notice, votes against the merger and follows the other procedures in Article 13 will be entitled to receive the fair value of his or her Gateway Financial preferred stock. He or she will not be entitled to receive the merger consideration for his or her Gateway Financial preferred stock.

In addition to providing the written notice, a Gateway Financial shareholder dissenting from the merger must not vote his or her shares in favor of the merger, but must, instead, either vote against or abstain from voting on the merger. Gateway Financial shareholders who return a signed proxy but fail to provide instructions as to the manner in which their Gateway Financial shares are to be voted will be deemed to have voted in favor of the merger and will not be entitled to assert dissenters’ rights. A shareholder who dissents must dissent with respect to all Gateway Financial preferred shares he or she beneficially owns.

If the merger is approved by Gateway Financial shareholders at the special meeting or at any adjournment thereof, Gateway Financial must, no later than 10 days following such shareholder approval, send a written notice to each dissenting Gateway Financial shareholder who satisfies the requirements described in the preceding two paragraphs. That notice, called a dissenters’ notice, will:

 

   

state where the dissenting Gateway Financial shareholder’s payment demand must be sent, and where and when stock certificates evidencing Gateway Financial shares must be deposited;

 

   

supply a form for demanding payment;

 

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set a date by which Gateway Financial must receive the dissenting Gateway Financial shareholder’s payment demand (which may not be fewer than 30 nor more than 60 days after the date the dissenters’ notice is mailed); and

 

   

be accompanied by a copy of Article 13.

Gateway Financial shareholders receiving the dissenters’ notice must then demand payment and deposit their Gateway Financial preferred stock certificates in accordance with the terms of the dissenters’ notice to be entitled to dissenters’ rights. Any Gateway Financial shareholder who demands payment and deposits his or her Gateway Financial preferred stock certificates in accordance with Article 13 will retain all other rights as a Gateway Financial holder of preferred stock until such rights are canceled or modified by consummation of the merger. A Gateway Financial shareholder who does not demand payment or deposit his or her preferred stock certificates where required, each by the date set in the dissenters’ notice, will not be entitled to payment for his or her shares of Gateway Financial preferred stock under Article 13. If Gateway Financial does not consummate the merger within 60 days after the date set for demanding payment and depositing certificates in the dissenters’ notice, Gateway Financial must return the deposited certificates. If the merger is consummated thereafter, Gateway Financial must send a new dissenters’ notice and repeat the payment demand procedure described above. Any holder of dissenting shares at the time of the merger who does not continue strictly to follow the procedures prescribed by Article 13 and described in this summary will receive in the merger the form of consideration receivable by shareholders. See “—Merger Consideration” above.

As soon as the merger is completed, Gateway Financial will be required to pay each dissenting shareholder who timely demanded payment and deposited his or her preferred stock certificates in accordance with the terms of the dissenters’ notice the amount that Gateway Financial estimates to be the fair value of the shareholder’s dissenting shares, plus interest accrued from the effective time of the merger to the date of payment. The payment will be accompanied by:

 

   

Gateway Financial’s most recent year-end financial statements together with its most recent interim financial statements;

 

   

an explanation of how Gateway Financial estimated the fair value of the dissenting shares;

 

   

an explanation of how interest was calculated;

 

   

a statement of the dissenting Gateway Financial shareholder’s right to demand payment if dissatisfied with the amount of Gateway Financial’s payment; and

 

   

a copy of Article 13.

A dissenting Gateway Financial shareholder may notify Gateway Financial in writing of his or her own estimate of the value of his or her preferred shares and the amount of interest due and may demand payment of the amount by which such estimate exceeds the amount paid by Gateway Financial in any of the following circumstances:

 

   

a dissenting Gateway Financial shareholder believes that the amount paid by Gateway Financial is less than the fair value of the holder’s dissenting shares or that the interest due is incorrectly calculated;

 

   

Gateway Financial fails to make payment to a dissenting Gateway Financial shareholder as soon as the merger is consummated or within 30 days after receipt of a payment demand from the dissenting Gateway Financial shareholder; or

 

   

Gateway Financial fails to consummate the merger and does not return the deposited certificates within 60 days after the date set for demanding payment.

This notice must be given within 30 days after Gateway Financial makes payment or fails to perform. Any dissenting Gateway Financial shareholder who does not give notice within this 30-day period will waive his or her dissenters’ rights under Article 13 and will be deemed to have withdrawn his or her dissent and demand for payment.

 

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If a dissenting Gateway Financial shareholder has taken all required actions and the demand for payment remains unsettled, the dissenting shareholder may commence a proceeding within 60 days after the earlier of the date Gateway Financial made payment for the dissenting shares and the date the shareholder gives the notice described in the immediately preceding paragraph by filing a complaint with the North Carolina Superior Court Division of the General Court of Justice to determine the fair value of the holder’s dissenting shares and accrued interest. There is no right to a jury trial in any such proceeding commenced by a Gateway Financial shareholder. A dissenting Gateway Financial shareholder who takes no action within this 60-day period shall be deemed to have withdrawn his or her dissent and demand for payment. The court has discretion to make all dissenting Gateway Financial shareholders whose demands remain unsettled parties to the proceeding, in which case all parties must be served with a copy of the complaint. The court may appoint one or more persons as appraisers with such powers as the court may determine to receive evidence and recommend a decision on the question of fair value. Each dissenting Gateway Financial shareholder made a party to the proceeding will be entitled to judgment for the amount, if any, by which the court finds the fair value of the dissenting shares, plus interest, exceeds the amount paid by Gateway Financial. Court costs, as well as the fees and expenses of court-appointed appraisers, counsel and experts, may be assessed by the court as it deems equitable.

For a discussion of certain tax consequences applicable to dissenting Gateway Financial shareholders who receive cash upon the exercise of dissenters’ rights, see “—Certain Federal Income Tax Consequences of the Merger” beginning on page [    ].

Interests of Certain Persons in the Merger

Certain members of Gateway Financial’s management have interests in the merger in addition to their interests as shareholders of Gateway Financial. These interests are described below. In each case, the Gateway Financial board of directors was aware of these potential interests, and considered them, among other matters in approving the merger agreement and the transactions contemplated thereby.

Indemnification. Hampton Roads Bankshares will not indemnify or hold harmless any officers or directors of Gateway Financial or any of its subsidiaries with respect to matters occurring or arising on or prior to the effective time of the merger, whether asserted or claimed prior to at or after such time. However, Hampton Roads Bankshares has agreed to provide directors’ and officers’ liability insurance for those officers and directors comparable to the coverage currently provided by Gateway Financial for five years after the effective date of the merger for a premium not to exceed $200,000 per year.

Management Following the Merger. As a result of the merger, Gateway Financial will be merged with and into Hampton Roads Bankshares. The executive officers and directors of Hampton Roads Bankshares will not change as a result of the merger except that D. Ben Berry, who is Gateway Financial’s Chairman, President and Chief Executive Officer, and six other individuals designated by Gateway Financial (who will be existing directors of Gateway Financial) will be appointed to Hampton Roads Bankshares’ board of directors, Mr. Berry will become President of Hampton Roads Bankshares, and David R. Twiddy, Senior Executive Vice President of Gateway Financial, will become President and Chief Executive Officer of Gateway Bank & Trust Co. and an executive officer of Hampton Roads Bankshares.

Conversion of Stock Options. The merger agreement provides that each stock option granted to officers, employees and directors of Gateway Financial under Gateway Financial’s stock option plans and outstanding prior to the Effective Date will be converted into an option to purchase the number of shares of Hampton Roads Bankshares common stock equal to the product of the number of shares of Gateway Financial common stock subject to such stock option multiplied by the common stock exchange ratio. The terms and conditions of the converted option will otherwise remain the same as the terms and conditions applicable to the stock options granted by Gateway Financial, except that the exercise price per share of each converted option will be equal to the exercise price of the stock options granted by Gateway Financial divided by the common stock exchange ratio.

 

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Restricted Stock. To the extent that any restricted stock award agreement provides for acceleration of vesting in connection with the merger, the restricted stock will vest pursuant to the terms of the award agreement. If the restricted stock is vested as of the effective time of the merger, then it will be treated as Gateway Financial common stock for purposes of the merger, and will be converted into 0.6700 shares of Hampton Roads Bankshares common stock.

Employee Benefit Plans. Hampton Roads Bankshares has agreed that, upon consummation of the merger, the Gateway Financial and Gateway Bank & Trust Co. continuing employees will be entitled to participate in its current employee and fringe benefit plans. To the extent those benefit plans are inconsistent with those of Hampton Roads Bankshares and Bank of Hampton Roads, Hampton Roads Bankshares will endeavor in good faith to modify the Gateway Financial and Gateway Bank & Trust Co. plans so that the Gateway Financial employees will receive benefits substantially similar to employees of Hampton Roads Bankshares, Bank of Hampton Roads, after taking into account all factors deemed relevant by the boards of Hampton Roads Bankshares and Gateway Financial.

Hampton Roads Bankshares will honor Gateway Financial’s obligations for all accrued and unused vacation, sick leave and personal leave and any obligations under any employment, severance, consulting and other compensation agreements disclosed to it and remaining in force.

Regulatory Approvals

The merger and the other transactions contemplated by the merger agreement require the approval of the Federal Reserve Board and the Virginia State Corporation Commission. As a bank holding company, Hampton Roads Bankshares is subject to regulation under the Bank Holding Company Act of 1956. Hampton Roads Bankshares, will file all required applications seeking approval of the merger with the Federal Reserve and the Virginia State Corporation Commission.

Under the Bank Holding Company Act, the Federal Reserve Board is required to examine the financial and managerial resources and future prospects of the combined organization and analyze the capital structure and soundness of the resulting entity. The Federal Reserve Board has the authority to deny an application if it concludes that the combined organization would have inadequate capital. In addition, the Federal Reserve Board can withhold approval of the merger if, among other things, it determines that the effect of the merger would be to substantially lessen competition in the relevant market. Further, the Federal Reserve Board must consider whether the combined organization meets the requirements of the Community Reinvestment Act of 1977 by assessing the involved entities’ records of meeting the credit needs of the local communities in which they operate, consistent with the safe and sound operation of such institutions. The Virginia State Corporation Commission will review the merger under similar standards.

The merger cannot be consummated prior to receipt of all required approvals. There can be no assurance that required regulatory approvals for the merger will be obtained, and, if the merger is approved, as to the date of such approvals or whether the approvals will contain any unacceptable conditions. There can likewise be no assurance that the United States Department of Justice will not challenge the merger during the waiting period set aside for such challenges after receipt of approval from the Federal Reserve Board.

Hampton Roads Bankshares and Gateway Financial are not aware of any governmental approvals or actions that may be required for consummation of the merger other than as described above. Should any other approval or action be required, it is presently contemplated that such approval or action would be sought. There can be no assurance that any necessary regulatory approvals or actions will be timely received or taken, that no action will be brought challenging such approval or action or, if such a challenge is brought, as to the result thereof, or that any such approval or action will not be conditioned in a manner that would cause the parties to abandon the merger.

 

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Accounting Treatment

The merger will be accounted for under the “purchase” method of accounting. Under the purchase method of accounting, the assets and liabilities of Gateway Financial, as of the completion of the merger, will be recorded at their fair values and the excess of purchase price over the fair value of net assets will be allocated to goodwill. Financial statements of Hampton Roads Bankshares issued after the consummation of the merger will reflect such values and will not be restated retroactively to reflect the historical position or results of operations of Gateway Financial. The operating results of Gateway Financial will be reflected in Hampton Roads Bankshares’ consolidated financial statements from and after the date the merger is consummated. The unaudited pro forma combined consolidated financial statements contained in this joint proxy statement/prospectus have been prepared using the purchase method of accounting to account for the merger.

Management and Operations after the Merger

Board of Directors. D. Ben Berry, who is the Chairman, President and Chief Executive Officer of Gateway Financial, and six persons designated by Gateway Financial (who will be existing directors of Gateway Financial) will be added to the board of directors of Hampton Roads Bankshares immediately after the effective time of the merger. Mr. Berry, age [53], has been Chairman, President and Chief Executive Officer of Gateway Financial Holdings since October 2001 and Chairman and Chief Executive Officer, and until March 2005, President of Gateway Bank & Trust Co., Elizabeth City, North Carolina. See “—Interests of Certain Persons in the Merger—Management Following the Merger” beginning on page [    ].

Management. Mr. Berry will become President of Hampton Roads Bankshares, and David R. Twiddy, Senior Executive Vice President of Gateway Financial, will become President and Chief Executive Officer of Gateway Bank & Trust Co. and an executive officer of Hampton Roads Bankshares. See “—Interests of Certain Person in the Merger—Management Following the Merger” beginning on page [    ].

Articles of Incorporation and Bylaws. The articles of incorporation and bylaws of the surviving entity will be the same as the articles of incorporation and bylaws of Hampton Roads Bankshares.

Resales of Hampton Roads Bankshares Stock

The shares of Hampton Roads Bankshares stock to be issued to shareholders of Gateway Financial under the merger agreement have been registered under the Securities Act of 1933 and may be freely traded without restriction by holders who will not be affiliates of Hampton Roads Bankshares after the merger and who were not affiliates of Gateway Financial on the date of the special meeting.

Certain directors and executive officers of Gateway Financial will be considered affiliates of Hampton Roads Bankshares after the merger. They may resell shares of Hampton Roads Bankshares stock received in the merger only if the shares are registered for resale under the Securities Act or an exemption is available. They may resell under the safe harbor provisions of Rule 145 under the Securities Act or as otherwise permitted under the Securities Act. Each person deemed to be an affiliate will enter into an agreement with Hampton Roads Bankshares providing that the person will not transfer any shares of Hampton Roads Bankshares stock received in the merger, except in compliance with the Securities Act. Hampton Roads Bankshares encourages any such person to obtain advice of securities counsel before reselling any Hampton Roads Bankshares stock.

 

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THE MERGER AGREEMENT

This summary of the material terms and provisions of the merger agreement is qualified in its entirety by reference to such documents. The merger agreement is attached as Annex A to this joint proxy statement/prospectus. We incorporate this document into this summary by reference.

Merger Consideration

Each share of Gateway Financial common stock will be converted in the merger into 0.6700 shares of Hampton Roads Bankshares common stock. Each share of Gateway Financial Series A Preferred Stock will be converted in the merger into one share of Hampton Roads Bankshares Series A Preferred Stock. Each share of Gateway Financial Series B Non-Convertible Non-Cumulative Perpetual Preferred Stock will be converted in the merger into one share of Hampton Roads Bankshares Series B Non-Convertible Non-Cumulative Perpetual Preferred Stock.

The amount and nature of the merger consideration was established through arm’s-length negotiations between Hampton Roads Bankshares and Gateway Financial and their respective advisors, and reflects the balancing of a number of countervailing factors. The total amount of the merger consideration reflects a price both parties concluded was appropriate. See “—Approval of the Merger—Background of the Merger,” “—Hampton Roads Bankshares’ Reasons for the Merger” and “—Gateway Financial’s Reasons for the Merger” beginning on page [    ]. The parties have structured the merger, in part, to have the favorable tax attributes of a “reorganization” for federal income tax purposes. See “—Certain Federal Income Tax Consequences of the Merger” beginning on page [    ].

Conditions of the Merger

The respective obligations of Hampton Roads Bankshares and Gateway Financial to consummate the merger are subject to the satisfaction of certain mutual conditions, including the following:

 

   

The shareholders of Gateway Financial and Hampton Roads Bankshares approve the merger agreement and the transactions contemplated thereby, described in this joint proxy statement/prospectus;

 

   

All regulatory approvals required by law to consummate the transactions contemplated by the merger agreement are obtained from the Federal Reserve Board, the Virginia State Corporation Commission and the other appropriate federal and/or state regulatory agencies, and all waiting periods after such approvals required by law or regulation expire;

 

   

The registration statement (of which this joint proxy statement/prospectus is a part) registering shares of Hampton Roads Bankshares common stock to be issued in the merger is declared effective and not subject to a stop order or any threatened stop order;

 

   

The Hampton Roads Bankshares shares to be issued in connection with the merger shall have been approved for listing on the Nasdaq Global Select Market;

 

   

There is no actual or threatened litigation, investigations or proceedings challenging the validity of the merger, seeking to restrain the merger, or seeking damages in connection with the merger that would have a material adverse effect with respect to the interests of Hampton Roads Bankshares or Gateway Financial; and

 

   

There is no actual or threatened litigation, investigations or proceedings, regardless of the materiality of any such claim, in connection with any act or omission of any officer or director of Gateway Financial or any of its subsidiaries.

In addition to the mutual covenants described above, the obligation of Hampton Roads Bankshares to consummate the merger is subject to the satisfaction, unless waived, of the following other conditions:

 

   

Subject to a materiality standard set forth in the merger agreement, the representations and warranties of Gateway Financial made in the merger agreement are true and correct as of the date of the merger

 

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agreement and as of the effective time of the merger and Hampton Roads Bankshares receives a certificate of the chief executive officer of Gateway Financial to that effect;

 

   

Gateway Financial performs in all material respects all obligations required to be performed under the merger agreement prior to the effective time of the merger and delivers to Hampton Roads Bankshares a certificate of its chief executive officer to that effect;

 

   

Gaeta & Eveson, P.A., counsel to Gateway Financial, delivers to Hampton Roads Bankshares an opinion, dated as of the effective time of the merger, in the form described in the merger agreement;

 

   

Gateway Financial shall have obtained those consents required in order to permit the succession by Hampton Roads Bankshares, as the surviving company, to any obligations, rights or interests of Gateway Financial under any loan, lease, license, or other agreement;

 

   

Gateway Financial and Hampton Roads Bankshares shall have agreed on the total number of Gateway Financial shares outstanding and the total number of options, warrants, commitments or other rights to purchase Gateway Financial shares outstanding as of the effective time of the merger;

 

   

Hampton Roads Bankshares shall have received an opinion of Williams Mullen, counsel to Hampton Roads Bankshares, dated as of the date the proxy is mailed to shareholders of Hampton Roads Bankshares, stating that, among other things, the merger will constitute a “reorganization” under Section 368 of the Internal Revenue Code and that no gain or loss will be recognized by Hampton Roads Bankshares or the shareholders of Hampton Roads Bankshares in connection with the merger;

 

   

Each officer and director of Gateway Financial and its subsidiaries shall have delivered to Hampton Roads Bankshares a waiver, in a form acceptable to Hampton Roads Bankshares, of any indemnification rights he or she may have with respect to matters occurring or arising on or prior to the effective time of the merger, whether asserted or claimed prior to at or after such time;

 

   

Hampton Roads Bankshares shall have received consent from Compass Bank, a creditor of Hampton Roads Bankshares, to enter into the merger in form and substance satisfactory to Hampton Roads Bankshares;

 

   

Immediately prior to the effective time of the merger, each of the following balance sheet items of Gateway Financial shall not have decreased by more than twenty percent (20%) from the amounts set forth in the September 30, 2008 financial statements of Gateway Financial: (i) shareholders’ equity (excluding goodwill), (ii) total assets, (iii) total deposits, and (iv) net loans. Gateway Bank & Trust Co. shall have sufficient regulatory capital to qualify as “well capitalized”, and neither Gateway Bank & Trust Co. nor Gateway Financial shall have received any cease and desist order, or be subject to any memorandum of understanding or any other form of enforcement action; and

 

   

Not more than ten percent (10%) of the shares of Gateway Financial Series A Preferred Stock and Series B Non-Convertible Non-Cumulative Perpetual Preferred Stock shall have perfected dissenters’ rights and no shares of Gateway Financial Series A Preferred Stock or Series B Non-Convertible Non-Cumulative Perpetual Preferred Stock owned by officers, directors, employees or affiliates of Gateway Financial shall have perfected dissenters’ rights.

In addition to the mutual covenants described above, Gateway Financial’s obligation to complete the merger is subject to the satisfaction, unless waived, of the following other conditions:

 

   

Subject to a materiality standard set forth in the merger agreement, the representations and warranties of Hampton Roads Bankshares made in the merger agreement are true and correct as of the date of the merger agreement and as of the effective time of the merger and Gateway Financial receives a certificate of the chief executive officer of Hampton Roads Bankshares to that effect;

 

   

Williams Mullen, counsel to Hampton Roads Bankshares, delivers to Gateway Financial an opinion, dated as of the effective time of the merger, in the form described in the merger agreement;

 

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Hampton Roads Bankshares performs in all material respects all obligations required to be performed under the merger agreement prior to the effective time of the merger and delivers to Gateway Financial a certificate of its chief executive officer and president to that effect;

 

   

The Hampton Roads Bankshares common stock to be issued in connection with the merger shall be duly authorized and validly issued; and

 

   

Gateway Financial shall have received an opinion of Gaeta & Eveson, P.A., counsel to Gateway Financial, dated as of the date the proxy is mailed to the shareholders of Gateway Financial, stating that, among other things, the merger will constitute a “reorganization” under Section 368 of the Internal Revenue Code and that no gain or loss will be recognized by the shareholders of Gateway Financial to the extent that they receive Hampton Roads Bankshares common stock in exchange for their Gateway Financial common stock in the merger.

Representations and Warranties

The merger agreement contains representations and warranties by Hampton Roads Bankshares and Gateway Financial. These include, among other things, representations and warranties by Hampton Roads Bankshares and Gateway Financial to each other as to:

 

•        organization and good standing of each entity and its subsidiaries;

 

•        each entity’s capital structure;

 

•        each entity’s authority relative to the execution and delivery of, and performance of its obligations under, the merger agreement;

 

•        absence of material adverse changes since June 30, 2008;

 

•        sufficiency of the allowance for loan losses;

 

•        agreements with regulatory agencies;

 

•        absence of actions that would keep the merger from qualifying as a reorganization under the Internal Revenue Code;

 

•        required consents and approvals;

 

•        regulatory matters;

 

•        accuracy of documents, including financial statements and other reports, filed by each company with the applicable regulatory authorities including the Federal Reserve Board, FDIC, state regulatory agencies, self-regulatory organizations and the SEC;

 

•        absence of defaults under contracts and agreements;

 

•        absence of environmental problems;

 

•        absence of conflicts between each entity’s obligations under the merger agreement and its charter documents and contracts to which it is a party or by which it is bound;

 

•        litigation and related matters;

 

•        taxes and tax regulatory matters;

 

•        compliance with the Sarbanes-Oxley Act and accounting controls;

 

•        absence of brokerage commissions, except as disclosed for financial advisors;

 

•        loans, commitments and contracts;

 

•        absence of undisclosed liabilities;

 

•        real and personal property;

 

•        insurance matters;

 

•        compliance with laws;

 

•        material contracts;

 

•        labor matters;

 

•        the absence of antitakeover laws;

 

•        environmental matters;

 

•        the existence of certain material interests of certain persons;

 

•        employee benefit plans and related matters; and

 

•        derivative contracts.

 

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Termination of the Merger Agreement

The merger agreement may be terminated at any time prior to the effective date of the merger, whether before or after approval by Gateway Financial’s shareholders, by mutual consent of Hampton Roads Bankshares’ and Gateway Financial’s board of directors.

Hampton Roads Bankshares’ or Gateway Financial’s board of directors may unilaterally terminate the merger agreement:

 

   

at any time after June 30, 2009, if the merger has not been consummated by such date (except to the extent that the failure of the merger then to be consummated arises out of or results from the intentional act or inaction of the party seeking to terminate);

 

   

if any governmental authority whose approval is required for consummation of the merger issues a final non-appealable denial of such approval;

 

   

if the shareholders of Gateway Financial or Hampton Roads Bankshares fail to approve the merger as required under North Carolina or Virginia law, as the case may be; or

 

   

in the event of a material breach (not waived or cured within 30 days after written notice) of any representation, warranty, covenant or agreement contained in the merger agreement by the non-breaching party.

Hampton Roads Bankshares may also terminate the merger agreement if:

 

   

Gateway Financial fails to make the recommendation to its shareholders to approve the merger and the transactions contemplated thereby as required by the merger agreement, withdraws such recommendation or modifies or changes such recommendation in a manner adverse in any respect to the interests of Hampton Roads Bankshares; or

 

   

Gateway Financial has entered into a definitive merger agreement to be acquired by another party.

Gateway Financial may also terminate the merger agreement if:

 

   

Hampton Roads Bankshares fails to make the recommendation to its shareholders to approve the merger and the transactions contemplated thereby as required by the merger agreement, withdraws such recommendation or modifies or changes such recommendation in a manner adverse in any respect to the interests of Gateway Financial.

Effect of Termination; Termination Fee

Except where the termination fees described below are payable, each party is responsible for its own expenses under the merger agreement. Each party has agreed to limit their remedies for breach of the merger agreement to reimbursement for its expenses and under certain circumstances the termination fees described below.

Termination Fees. The following events trigger a termination fee under the merger agreement:

 

   

If (i) a party intentionally and willfully breaches any of its representations, warranties covenants or agreements set forth in the merger agreement (and such breach is not cured within 30 days after notice thereof), (ii) the board of a party fails to recommend the merger, or withdraws, modifies or qualifies its recommendation, or (iii) the board of a party fails to call a meeting of its shareholders and deliver them the joint proxy statement, then the breaching party will owe the non-breaching party a termination fee of $3,300,000.

 

   

If Hampton Roads Bankshares terminates the merger agreement because Gateway Financial’s shareholders failed to approve the merger and the merger agreement at their shareholder meeting called

 

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for that purpose, and at the time of Gateway Financial’s shareholder meeting a third party takeover proposal had been made, and Gateway Financial shall enter into an agreement with respect to any takeover proposal within one (1) year of the date of such shareholder meeting, then on the day Gateway Financial enters into such agreement with respect to such takeover proposal, Gateway Financial will owe a $3,300,000 termination fee.

 

   

If Gateway Financial properly determines that is has received an unsolicited takeover proposal that is more favorable to its shareholders from a financial point of view than the merger with Hampton Roads Bankshares (a “superior proposal”), determines that it has a fiduciary duty to accept the superior proposal and elects to terminate the merger agreement to enter into a definitive agreement with respect to the superior proposal, then Gateway Financial will owe the termination fee of $3,300,000 on the business day following such termination.

 

   

If shareholders of Gateway Financial fail to approve the merger or merger agreement and a support agreement is materially breached, Gateway Financial will owe Hampton Roads Bankshares a $3,300,000 termination fee.

Reimbursement of Expenses. If one party materially breaches its representations, warranties, covenants and agreements in the Merger Agreement but such breach is not willful or intentional, then the breaching party will owe the non-breaching party the non-breaching party’s reasonable out of pocket costs incurred after September 1, 2008 in connection with the merger.

Waiver and Amendment

Prior to the effective time of the merger, any provision of the merger agreement may be waived by the party benefiting by the provision or amended or modified by an agreement in writing between the parties, except that, after the shareholders’ meetings, the merger agreement may not be amended if it would violate the Virginia Stock Corporation Act, the North Carolina Business Corporation Act or reduce the consideration to be received by Gateway Financial’s shareholders in the merger.

Indemnification; Directors’ and Officers’ Insurance

Hampton Roads Bankshares will not indemnify or hold harmless any officers or directors of Gateway Financial or any of its subsidiaries with respect to matters occurring or arising on or prior to the effective time of the merger, whether asserted or claimed prior to at or after such time. However, Hampton Roads Bankshares has agreed to obtain directors’ or officers’ liability insurance for the directors and officers of Gateway Financial as described under “—Approval of the Merger—Interests of Certain Persons in the Merger—Indemnification” beginning on page [    ].

Acquisition Proposals

Gateway Financial has agreed that it will not, and that it will cause its officers, directors, agents, advisors, and affiliates not to, solicit, encourage, initiate or facilitate the submission of a third party’s (other than Hampton Roads Bankshares’) proposal to acquire the stock or assets of Gateway Financial or other business combination transactions with Gateway Financial. However, Gateway Financial may provide information to, negotiate with and enter into an acquisition agreement with a third party who makes an unsolicited takeover proposal if the Gateway Financial board of directors concludes in good faith, after consultation with and consideration of the advice of outside counsel, that the failure to enter into such discussions or negotiations or resolving to accept such acquisition proposal, would constitute a breach of its fiduciary duties to shareholders under applicable law. Additionally, the board of directors of Gateway Financial must have determined in good faith in the proper exercise of their fiduciary duties after consultation with Sandler O’Neill, that any such unsolicited proposal is more favorable to Gateway Financial from a financial point of view than the merger. If the board of directors of Gateway Financial determines in the manner described in the two preceding sentences that an acquisition is a

 

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superior proposal to Hampton Roads Bankshares’ offer set forth in the merger agreement, Gateway Financial is obligated to pay to Hampton Roads Bankshares the termination fee of $3,300,000. See “—Effect of Termination; Termination Fee” beginning on page [    ].

Closing Date; Effective Time

The merger will be consummated and become effective on the date and time the parties specify in the articles of merger filed in North Carolina and the articles of merger filed in Virginia. Unless otherwise agreed to by Hampton Roads Bankshares and Gateway Financial, the effective time of the merger will be the 15th business day following the later to occur of (i) the effective date (including expiration of any applicable waiting period) of the last required consent of any regulatory authority, (ii) the date on which the shareholders of Gateway Financial have approved the merger or (iii) the date on which the shareholders of Hampton Roads Bankshares have approved the merger.

Conduct of Business Pending the Merger

In the merger agreement, Gateway Financial agreed to (i) conduct its business in the usual, regular and ordinary course consistent with past practice and prudent banking principles, (ii) use its best efforts to maintain and preserve intact for itself and Hampton Roads Bankshares its business organization, employees, goodwill with customers and advantageous business relationships and retain the services of its officers and key employees (except to the extent that the pending merger encourages officers and employees to leave), and (iii) except as required by law or regulation, take no action which would adversely affect or materially delay the ability to obtain any consent from any regulatory authority or other approvals required for the consummation of the merger.

Gateway Financial also agreed not to take the following actions until the merger becomes effective without the prior written consent of Hampton Roads Bankshares:

 

   

amend the articles of incorporation or bylaws of Gateway Financial;

 

   

except for the issuance of shares pursuant to the terms of previously existing Gateway Financial stock option plans, change the number of shares of the authorized, issued or outstanding capital stock of Gateway Financial, whether preferred or common, including any issuance, purchase, redemption, split, combination or reclassification thereof, or issue or grant any option, warrant, call, commitment, subscription, right or agreement to purchase relating to the authorized or issued capital stock of Gateway Financial, declare, set aside or pay any dividend or other distribution with respect to the outstanding capital stock of Gateway Financial;

 

   

incur any indebtedness for borrowed money other than in the ordinary course of business consistent with past practice;

 

   

make any capital expenditures in excess of $5,000 individually and $25,000 in the aggregate (other than expenditures necessary to maintain existing assets in good repair);

 

   

convey or otherwise dispose of any real property (including “other real estate owned”) or interest therein;

 

   

pay any bonuses to any executive officer; enter into any new, or amend in any respect any existing employment, consulting, non-competition or independent contractor agreement with any person; alter the terms of any existing incentive bonus or commission plan; adopt any new or amend in any material respect any existing employee benefit plan, except as may be required by law; grant any general increase in compensation to its employees as a class or to its officers except for non-executive officers in the ordinary course of business and consistent with past practices and policies or except in accordance with the terms of an enforceable written agreement; grant any material increase in fees or

 

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other increases in compensation or in other benefits to any of its directors; or effect any change in any material respect in retirement benefits to any class of employees or officers, except as required by law;

 

   

enter into or extend any material agreement, lease or license relating to real property, personal property, data processing or bankcard functions;

 

   

acquire the assets or equity securities of any entity or acquire direct or indirect control of any entity, other than in connection with (A) any internal reorganization or consolidation involving existing Gateway Financial business units which has been approved in advance in writing by Hampton Roads Bankshares or (B) foreclosures in the ordinary course of business;

 

   

materially increase or decrease above or below the market rate of interest paid on time deposits or on certificates of deposit, except in a manner and pursuant to policies consistent with Gateway Financial’s past practices;

 

   

take any action that is intended to or may reasonably be expected to result in a failure of the mutual conditions to closing;

 

   

purchase or otherwise acquire any investment securities other than debt securities issued by the U.S. Treasury or other U.S. governmental agencies or purchase or otherwise acquire any derivative contract or any asset-backed security;

 

   

commence any cause of action or proceeding other than in accordance with past practice or settle or waive any right in connection with any action, claim, arbitration, complaint, criminal prosecution, demand letter, governmental or other examination or investigation, hearing, inquiry or other proceeding against Gateway Financial for material money damages or restrictions upon any of their operations; or

 

   

amend or otherwise modify any agreement for stock options of Gateway Financial, including, but not limited to, any amendment to accelerate the vesting of any such options.

 

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CERTAIN FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER

General

The following summary sets forth the anticipated material U.S. federal income tax consequences of the merger to the holders of Gateway Financial stock. The tax consequences under state, local and foreign laws are not addressed in this summary. The following summary is based upon the Internal Revenue Code of 1986, as amended, Treasury regulations, administrative rulings and judicial authorities in effect as of the date hereof, all of which are subject to change, possibly with retroactive effect. Such a change could affect the continuing validity of this summary. No assurance can be given that the Internal Revenue Service would not assert, or that a court would not sustain, a position contrary to any of the tax consequences set forth below.

The following summary addresses U.S. holders who are citizens or residents of the United States who hold their Gateway Financial stock as a capital asset within the meaning of Section 1221 of the Internal Revenue Code. It does not address all the tax consequences that may be relevant to particular shareholders in light of their individual circumstances or to shareholders that are subject to special rules, including, without limitation: foreign persons; financial institutions; tax-exempt organizations; S corporations, partnerships or other pass-through entities (or an investor in an S corporation, partnership or other pass-through entities); insurance companies; mutual funds; dealers in stocks or securities, or foreign currencies; foreign holders; a trader in securities who elects the mark-to-market method of accounting for the securities; persons that hold shares as a hedge against currency risk, a straddle or a constructive sale or conversion transaction; holders who acquired their shares pursuant to the exercise of employee stock options or otherwise as compensation or through a tax-qualified retirement plan; holders of Gateway Financial stock options, stock warrants or debt instruments; and holders subject to the alternative minimum tax.

For purposes of this section, the term “U.S. holder” means a beneficial owner of Gateway Financial stock that for U.S. federal income tax purposes is: a citizen or resident of the United States; a corporation, or other entity treated as a corporation for U.S. federal income tax purposes, created or organized in or under the laws of the United States or any State or the District of Columbia; an estate that is subject to U.S. federal income tax on its income regardless of its source; or a trust, the substantial decisions of which are controlled by one or more U.S. persons and which is subject to the primary supervision of a U.S. court, or a trust that validly has elected under applicable Treasury regulations to be treated as a U.S. person for U.S. federal income tax purposes.

The Merger

None of the tax opinions given in connection with the merger will be binding on the IRS. In addition, if any of the representations or assumptions upon which those opinions are based is inconsistent with the actual facts, the U.S. federal income tax consequences of the merger could be adversely affected. No ruling has been, or will be, sought from the Internal Revenue Service as to the U.S. federal income tax consequences of the merger. Consummation of the merger is conditioned upon Gateway Financial receiving an opinion from its counsel, Gaeta & Eveson, P.A., and Hampton Roads Bankshares receiving an opinion from its counsel, Williams Mullen, to the effect that, based upon facts, representations and assumptions set forth in such opinions, the merger constitutes a reorganization within the meaning of Section 368(a) of the Internal Revenue Code. The issuance of the opinion is conditioned on, among other things, such tax counsel’s receipt of representation letters from each of Gateway Financial, and Hampton Roads Bankshares and in each case in form and substance reasonably satisfactory to such counsel.

Based upon the above assumptions and qualifications, for U.S. federal income tax purposes the merger will constitute a reorganization within the meaning of Section 368(a) of the Internal Revenue Code. Gateway Financial and Hampton Roads Bankshares each will be a party to the merger within the meaning of Section 368(b) of the Internal Revenue Code, and neither Gateway Financial nor Hampton Roads Bankshares will recognize any gain or loss as a result of the merger.

 

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Consequences to Shareholders

Exchange of Gateway Financial Stock for Hampton Roads Bankshares Stock. A holder of Gateway Financial stock who exchanges his or her Gateway Financial stock for Hampton Roads Bankshares stock will not recognize income, gain or loss for U.S. federal income tax purposes, except, as discussed below, with respect to cash received in lieu of fractional shares of Hampton Roads Bankshares common stock.

Cash in Lieu of Fractional Shares. Holders of Gateway Financial common stock who receive cash in lieu of fractional shares of Hampton Roads Bankshares common stock in the merger generally will be treated as if the fractional shares of Hampton Roads Bankshares common stock had been distributed to them as part of the merger, and then redeemed by Hampton Roads Bankshares in exchange for the cash actually distributed in lieu of the fractional shares, with the redemption generally qualifying as an “exchange” under Section 302 of the Internal Revenue Code, as described below. Consequently, those holders generally will recognize capital gain or loss with respect to the cash payments they receive in lieu of fractional shares measured by the difference between the amount of cash received and the tax basis allocated to the fractional shares.

Tax Consequences of Exercising Dissenters’ Rights. A holder of Gateway Financial preferred stock who perfects his or her dissenters’ rights (a “Dissenting Shareholder”) and exchanges his or her Gateway Financial preferred stock solely for cash will generally recognize capital gain or loss measured by the difference between the holder’s adjusted basis for the Gateway Financial preferred stock exchanged and the cash received.

In some cases, a Dissenting Shareholder who actually or constructively owns Hampton Roads Bankshares common stock immediately after the merger may be treated as having received ordinary dividend income in the amount of the cash received for Gateway Financial preferred stock under the tests set forth in section 302 of the Internal Revenue Code. These rules are complex and dependent upon the specific factual circumstances particular to each holder. Consequently, each Dissenting Shareholder should consult his or her tax advisor about the application of these rules to the particular facts relevant to such Dissenting Shareholder.

Taxation of Capital Gain. Any capital gain recognized by any holder of Gateway Financial stock under the above discussion will be long-term capital gain if the holder has held the Gateway Financial stock for more than twelve months on the effective date of the exchange. In the case of a non-corporate holder, that long-term capital gain may be subject to a maximum federal income tax of 15%, and the short-term capital gain is subject to a maximum federal income tax of 35%. The deductibility of capital losses by shareholders may be limited.

Basis and Holding Period in Hampton Roads Bankshares Stock. Each holder’s aggregate tax basis in Hampton Roads Bankshares stock received in the merger will be the same as the holder’s aggregate tax basis in the Gateway Financial stock exchanged, decreased by the amount of any cash received in the merger and by the amount of any tax basis allocable to any fractional share interest for which cash is received and increased by any gain recognized in the exchange. The holding period of Hampton Roads Bankshares stock received by a holder in the merger will include the holding period of the Gateway Financial stock exchanged in the merger to the extent the Gateway Financial stock exchanged is held as a capital asset at the time of the merger.

Constructive Ownership. In applying the constructive ownership provisions of Section 318 of the Internal Revenue Code, a holder of Gateway Financial stock may be deemed to own stock that is owned directly or indirectly by other persons, such as certain family members and entities such as trusts, corporations, partnerships or other entities in which the holder has an interest. Since the constructive ownership provisions are complex, holders should consult their tax advisors as to the applicability of these provisions.

Backup Withholding and Reporting Requirements. Holders of Gateway Financial stock, other than certain exempt recipients, may be subject to backup withholding at a rate of 28% with respect to any cash payment received in the merger. However, backup withholding will not apply to any holder who proves to Hampton Roads Bankshares and its exchange agent that the holder is exempt from backup withholding.

 

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Shareholders also will be required to file certain information with their federal income tax returns and to retain certain records with regard to the merger.

The discussion of U.S. federal income tax consequences set forth above is for general information only and does not purport to be a complete analysis or listing of all potential tax effects that may apply to a holder of Gateway Financial stock. We strongly encourage shareholders of Gateway Financial to consult their tax advisors to determine the particular tax consequences to them of the merger, including the application and effect of federal, state, local, foreign, alternative minimum tax and other tax laws and changes in those laws.

 

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PROPOSAL II

APPROVAL OF ADOPTION OF AMENDMENT TO THE ARTICLES OF INCORPORATION

OF HAMPTON ROADS BANKSHARES, INC.

The merger agreement provides that at or prior to the effective time of the merger, Hampton Roads Bankshares will cause the number of Hampton Roads Bankshares directors to be increased from 13 to 20. However, subsection (a) of Article VII of Hampton Roads Bankshares’ articles of incorporation provides that the board of directors shall consist of not less than eight nor more than 18 persons. Pursuant to the Virginia Stock Corporation Act and Hampton Roads Bankshares’ articles of incorporation, an amendment to the articles of incorporation increasing the maximum number of directors requires shareholder approval. In order to satisfy Hampton Roads Bankshares’ obligations under the merger agreement and to provide for additional board seats for possible future growth, the board of Hampton Roads Bankshares proposes that the articles of incorporation be amended to allow up to 24 directors.

The proposed articles of amendment to Hampton Roads Bankshares’ articles of incorporation is annexed hereto as Annex E and the proposed language is as follows:

Subsection (a) of Article VII of the corporation’s Articles of Incorporation is amended as follows:

(a) Number of Directors. The business and affairs of the Corporation shall be managed under the direction of the Board of Directors, subject to any requirement of action by the Corporation’s shareholders under the VSCA, these Articles of Incorporation or the Corporation’s Bylaws, as each may be amended from time to time. The Board of Directors shall consist of not less than eight (8) nor more than twenty-four (24) persons. The exact number of directors within the minimum and maximum limitations specified in the preceding sentence shall be fixed from time to time by the Board of Directors pursuant to a resolution adopted by a majority of the directors then in office.

The approval of the merger agreement and the transactions contemplated thereby and the approval of the amendment to Hampton Roads’ Bankshares articles of incorporation are conditioned on each other, and approval of each is required for completion of the merger.

Based on the foregoing, the Hampton Roads Bankshares board of directors unanimously determined that proposed amendment to the company’s articles of incorporation is in the best interests of Hampton Roads Bankshares and its shareholders. The Hampton Roads Bankshares’ board of directors unanimously recommends that Hampton Roads Bankshares’ shareholders vote “FOR” the proposed amendment to the Hampton Roads Bankshares’ articles of incorporation.

 

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INFORMATION ABOUT HAMPTON ROADS BANKSHARES AND

GATEWAY FINANCIAL

Hampton Roads Bankshares

Hampton Roads Bankshares is a financial holding company organized under the laws of the Commonwealth of Virginia and is registered under the federal Bank Holding Company Act. It has two banking subsidiaries—Bank of Hampton Roads and Shore Bank which together have 26 offices in Virginia and Maryland—through which all of its business is conducted.

Hampton Roads Bankshares is engaged in the business of offering banking services to the general public. Through its subsidiaries, Hampton Roads Bankshares offers checking accounts, savings and time deposits, and commercial, real estate, personal, home improvement, automobile and other installment and term loans. It also offers financial services, travelers’ checks, safe deposit boxes, collection, notary public and other customary bank services (with the exception of trust services) to its customers. The three principal types of loans that the subsidiary banks make are commercial and industrial loans, real estate loans and loans to individuals for household, family and other consumer expenditures.

As of September 30, 2008, Hampton Roads Bankshares reported, on a consolidated basis, total assets of $918 million, net loans of $797 million, deposits of $675 million and shareholders’ equity of $109 million.

The principal executive offices of Hampton Roads Bankshares are located at 999 Waterside Drive, Suite 200, Norfolk, Virginia 23510, telephone number (757) 217-1000.

This joint proxy statement/prospectus incorporates by reference Hampton Roads Bankshares’ annual report on Form 10-K for the year ended December 31, 2007.

Gateway Financial

Gateway Financial is a financial holding company organized under the laws of the State of North Carolina and is registered under the federal Bank Holding Company Act. Gateway Financial’s services include commercial, real estate and installment loans and checking, savings and time deposit accounts. Gateway Financial has one banking subsidiary—Gateway Bank & Trust Co.

As of September 30, 2008, Gateway Financial reported, on a consolidated basis, total assets of $2,280 million, net loans of $1,809 million, deposits of $1,834 million and shareholders’ equity of $164 million.

The principal executive offices of Gateway Financial are located at 1580 Laskin Road, Virginia Beach, Virginia 23451, telephone number (757) 422-4055.

For additional important information regarding Gateway Financial, please refer to the following documents which are part of this joint proxy statement/prospectus:

 

   

Annex F—Gateway Financial’s Annual Report on Form 10-K for the fiscal year ended December 31, 2007.

 

   

Annex G—Gateway Financial’s Quarterly Report on Form 10-Q for the period ended September 30, 2008.

 

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SECURITIES OWNERSHIP OF CERTAIN

BENEFICIAL OWNERS AND MANAGEMENT OF GATEWAY FINANCIAL

The following table sets forth the beneficial ownership of each person holding more than five percent of the shares of Gateway Financial common stock as of October 31, 2008 (as reported in filings with the SEC on behalf of the respective shareholders listed below).

 

Name and Address of Shareholder

   Shares Currently
Beneficially Owned
    Percentage of Shares
Beneficially Owned(1)
 

Wellington Management Co. LLP

75 State Street

Boston, MA 02109

   832,730 (2)   6.55 %

Dimensional Fund Advisors LP

1299 Ocean Avenue

Santa Monica, CA 90401

   706,091 (3)   5.55 %

Jerry T. Womack

1190 Harmony Road

Norfolk, VA 23502

   682,498 (4)   5.35 %

 

(1) The ownership percentage shown is calculated based on the total of 12,723,919 shares issued and outstanding at October 31, 2008.

 

(2) Based on a Schedule 13G filed by Wellington Management Company, LLP on February 14, 2008, with the SEC, reporting its ownership as of December 31, 2007.

 

(3) Based on a Schedule 13G filed by Dimensional Fund Advisors, LP on February 6, 2008, with the SEC, reporting its ownership as of December 31, 2007.

 

(4) Mr. Womack is a director of Gateway Financial. His ownership percentage is calculated based on the total shares of common stock issued and outstanding at October 31, 2008, plus the number of shares of common stock that can be issued to the named individual within 60 days of October 31, 2008, upon the exercise of stock options held by the named individual that were exercisable as of October 31, 2008.

 

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The following table shows, as of October 31, 2008, the number of shares beneficially owned by each director and principal officer and by all directors and principal officers of Gateway Financial as a group:

 

Name and Address of Shareholder

   Shares Currently
Beneficially Owned(1)
   Percentage of Shares
Beneficially Owned(2)
 

H. Spencer Barrow (director)

   64,111    *  

D. Ben Berry (director, Chairman, President & CEO)

   109,908    *  

William Brumsey III (director)

   173,082    1.35 %

Jimmie Dixon, Jr. (director)

   75,652    *  

James H. Ferebee, Jr. (director)

   143,590    1.12 %

Robert Y. Green, Jr. (director)

   24,596    *  

William Taylor Johnson, Jr. (director)

   72,000    *  

Robert Willard Luther III (director)

   7,665    *  

Frances Morrisette Norrell (director)

   22,163    *  

W.C. “Bill” Owens, Jr. (director)

   114,310    *  

William A. Paulette (director)

   52,509    *  

Billy Roughton (director)

   133,125    1.04 %

Theodore L. Salter (Senior Executive Vice President and Chief Financial Officer)

   16,000    *  

Ollin B. Sykes (director)

   157,054    1.23 %

David R. Twiddy (Senior Executive Vice President)

   71,326    *  

Frank T. Williams (director)

   394,550    3.09 %

Jerry T. Womack (director)

   682,498    5.35 %

Directors and principal officers as a group (17 persons)

   2,314,139    17.20 %

 

* Owns less than one percent of the outstanding common stock.

 

(1) For each director or principal officer listed above, this column includes the following number of shares of common stock capable of being issued within 60 days of October 31, 2008, upon the exercise of stock options held by the named individual: Barrow – 22,000; Berry – 151,612; Brumsey – 57,925; Dixon – 37,226; Ferebee – 44,586; Green – 24,200; Johnson – 22,000; Luther – 31,560; Norrell – 57,925; Owens – 57,925; Paulette – 11,695; Roughton – 22,000; Sykes – 24,200; Twiddy – 65,911; Williams – 57,925; Womack – 44,586; directors and principal officers as a group – 733,276.

 

(2) The ownership percentage of each individual is calculated based on the total of 12,719,222 Gateway Financial shares issued and outstanding as of October 31, 2008, plus the number of shares of common stock that can be issued to that individual within 60 days of October 31, 2008, upon the exercise of stock options held by the individual. The ownership percentage of the group is based on the shares of common stock outstanding plus the number of shares of common stock that can be issued to the entire group within 60 days of October 31, 2008, upon the exercise of all stock options held by the group that were exercisable as of October 31, 2008.

 

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The following table sets forth the beneficial ownership of each person holding more than five percent of the shares of Gateway Financial Series A Preferred Stock as of October 31, 2008.

 

Name and Address of Shareholder(1)

   Shares Currently
Beneficially Owned
   Percentage of Shares
Beneficially Owned(2)
 

Paragon Bank

   4,000    17.2 %

Jerry T. Womack

   2,000    8.60 %

 

(1) The business address of each holder of Gateway Financial Series A Preferred Stock is c/o Gateway Financial Holdings, Inc., 1580 Laskin Road, Virginia Beach, VA 23451.

 

(2) The ownership percentage shown is calculated based on the total of 23,266 shares issued and outstanding at October 31, 2008.

The following table shows, as of October 31, 2008, the number of shares of Series A Preferred Stock beneficially owned by each director and principal officer and by all directors and principal officers of Gateway Financial as a group:

 

Name and Address of Shareholder

   Shares Currently
Beneficially Owned
   Percentage of Shares
Beneficially Owned(1)
 

H. Spencer Barrow (director)

   300    1.29 %

D. Ben Berry (director, Chairman, President & CEO)

   300    1.29 %

William Brumsey III (director)

   300    1.29 %

Jimmie Dixon, Jr. (director)

   100    *  

James H. Ferebee, Jr. (director)

   500    2.15 %

William Taylor Johnson, Jr. (director)

   300    1.29 %

W.C. “Bill” Owens, Jr. (director)

   250    1.07 %

William A. Paulette (director)

   500    2.15 %

Billy Roughton (director)

   500    2.15 %

Theodore L. Salter (Senior Executive Vice President and Chief Financial Officer)

  

50

   *  

Ollin B. Sykes (director)

   700    3.01 %

David R. Twiddy (Senior Executive Vice President)

   250    *  

Jerry T. Womack (director)

   2,000    8.60 %

Directors and principal officers as a group (13 persons)

   5,450    23.42 %

 

* Owns less than one percent of the outstanding Series A Preferred Stock.

 

(1) The ownership percentage of each individual is calculated based on the total of 23,266 shares issued and outstanding as of October 31, 2008.

 

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The following table sets forth the beneficial ownership of each person holding more than five percent of the shares of Gateway Financial Series B Non-Convertible Non-Cumulative Perpetual Preferred Stock as of October 31, 2008.

 

Name and Address of Shareholder(1)

   Shares Currently
Beneficially Owned
   Percentage of Shares
Beneficially Owned(2)
 

Michael D. Sifen

   5,000    13.32 %

James E. Baylor, Jr.

   4,000    10.65 %

George Ray Bunch, Jr.

   4,000    10.65 %

James H. Ferebee, Jr.

   2,500    6.66 %

W. Preston Fussell

   2,500    6.66 %

Billy G. Roughton

   2,500    6.66 %

John P. Wright

   2,000    5.33 %

Roland Carroll Smith, Sr.

   2,000    5.33 %

 

(1) The business address of each holder of Gateway Financial Series B Non-Convertible Non-Cumulative Perpetual Preferred Stock is c/o Gateway Financial Holdings, Inc., 1580 Laskin Road, Virginia Beach, VA 23451.

 

(2) The ownership percentage shown is calculated based on the total of 37,550 shares issued and outstanding at October 31, 2008.

The following table shows, as of October 31, 2008, the number of shares of Series B Non-Convertible Non-Cumulative Perpetual Preferred Stock beneficially owned by each director and principal officer and by all directors and principal officers of Gateway Financial as a group:

 

Name and Address of Shareholder

   Shares Currently
Beneficially Owned
   Percentage of
Shares
Beneficially
Owned(1)
 

James H. Ferebee, Jr. (director)

   2,500    6.66 %

Robert Y. Green, Jr. (director)

   1,000    2.66 %

William Taylor Johnson, Jr. (director)

   500    1.33 %

William A. Paulette (director)

   200    *  

Billy Roughton (director)

   2,500    6.66 %

Ollin B. Sykes (director)

   50    *  

Directors and principal officers as a group (6 persons)

   6,750    17.98 %

 

* Owns less than one percent of the outstanding Series B Non-Convertible Non-Cumulative Perpetual Preferred Stock.

 

(1) The ownership percentage of each individual is calculated based on the total of 37,550 shares issued and outstanding as of October 31, 2008.

 

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DESCRIPTION OF HAMPTON ROADS

BANKSHARES, INC. CAPITAL STOCK

General

Our authorized capital stock consists of 40,000,000 shares of common stock, par value $0.625 per share and 1,000,000 shares of preferred stock, no par value. As of November 12, 2008, there were [            ] shares of common stock issued and outstanding held by [            ] shareholders of record. The issued shares of common stock represent non-withdrawable capital, are not accounts of an insurable type, and are not federally insured. We do not currently have any shares of preferred stock issued or outstanding, although the issuance of preferred stock is contemplated in connection with the merger as described below.

Common Stock

Voting Rights

Each holder of shares of common stock is entitled to one vote per share held on any matter submitted to a vote of shareholders. There are no cumulative voting rights in the election of directors.

Dividends

Holders of shares of common stock are entitled to receive dividends when and as declared by the board of directors out of funds legally available therefor. We are a corporation separate and distinct from Bank of Hampton Roads, Shore Bank and the other subsidiaries. Since most of our revenues will be received by us in the form of dividends or interest paid by our subsidiaries, our ability to pay dividends will be subject to regulatory restrictions as described in “Price Range of Common Stock and Dividends” above.

No dividend will be declared or paid during any calendar year on the common stock unless and until there has been paid in full (or set apart for purposes of such payment) to the holders of the Series A Preferred Stock and the Series B Non-Convertible Non-Cumulative Perpetual Preferred Stock that will be issued upon consummation of the merger, at least a pro rata portion of the stated annual dividend on such shares of preferred stock for that calendar year, at their respective rates, through the date on which Hampton Roads Bankshares proposes to pay the cash dividend on the common stock. See “Preferred Stock” below.

No Preemptive or Conversion Rights

Holders of shares of our common stock do not have preemptive rights to purchase additional shares of our common stock, and have no conversion or redemption rights.

Calls and Assessments

All of the issued and outstanding shares of our common stock are non-assessable and non-callable.

Liquidation Rights

In the event of our liquidation, dissolution or winding up, the holders of shares of our common stock shall be entitled to receive, in cash or in kind, our assets available for distribution remaining after payment or provision for payment of our debts and liabilities, including the payments on the Series A Preferred Stock and Series B Non-Convertible Non-Cumulative Perpetual Preferred Stock described below.

Preferred Stock

Summarized below are the material terms of our preferred stock, including the Series A Preferred Stock and Series B Non-Convertible Non-Cumulative Perpetual Preferred Stock that will be issued upon consummation of the merger.

 

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General Provisions Relating to Preferred Stock

Our board of directors is empowered to authorize the issuance, in one or more series, of shares of preferred stock at such times, for such purposes and for such consideration as it may deem advisable without shareholder approval. Our board is also authorized to fix the designations, voting, conversion, preference and other relative rights, qualifications and limitations of any such series of preferred stock.

Our board of directors, without shareholder approval, may authorize the issuance of one or more series of preferred stock with voting and conversion rights which could adversely affect the voting power of the holders of our common stock and, under certain circumstances, discourage an attempt by others to gain control of us.

The creation and issuance of any series of preferred stock, and the relative rights, designations and preferences of such series, if and when established, will depend upon, among other things, our future capital needs, then existing market conditions and other factors that, in the judgment of the our board, might warrant the issuance of preferred stock.

Series A Preferred Stock

Designation

In connection with the merger, Hampton Roads Bankshares will establish a new series of preferred stock, which will be designated “Series A Preferred Stock.” There are currently outstanding 23,266 shares of Gateway Financial Series A Preferred Stock. Each share of Gateway Financial Series A Preferred Stock outstanding immediately before the merger will be converted into the right to receive one share of the newly designated Hampton Roads Bankshares Series A Preferred Stock, which has substantially the same powers, designations, preferences, rights and qualifications.

Dividends

The holders of shares of Hampton Roads Bankshares Series A Preferred Stock will be entitled to receive cash dividends at an annual rate of 8.75%. Dividends on the Series A Preferred Stock will not be cumulative on a year-to-year basis. Dividends will be payable as they are declared by the Hampton Roads Bankshares board of directors at such time or times as it elects, and no holder of Series A Preferred Stock will have any right to receive any dividend unless and until that dividend has been declared by the board of directors.

Liquidation

In the event of liquidation, dissolution or winding up of Hampton Roads Bankshares, the holders of Series A Preferred Stock are entitled to be paid first out of the assets of Hampton Roads Bankshares available for distribution to holders of capital stock of all classes (whether such assets are capital, surplus or earnings), an amount equal to $1,000.00 per share of Series A Preferred Stock, plus the amount of any dividend on such share which has been declared by the board of directors:

 

   

before any distribution or payment is made to any common shareholders or holders of any other class or series of capital stock of Hampton Roads Bankshares designated to be junior to the Series A Preferred Stock;

 

   

subject to the liquidation rights of the Hampton Roads Bankshares Series B Non-Convertible Non-Cumulative Perpetual Preferred Stock, which will be designated on a parity with the Series A Preferred Stock with respect to liquidation preferences; and

 

   

subject to the liquidation rights and preferences of any class or series of preferred stock designated in the future to be senior to, or on a parity with, the Series A Preferred Stock with respect to liquidation preferences.

 

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After payment in full of the liquidation preference to the holders of Series A Preferred Stock, holders of the Series A Preferred Stock will have no right or claim to any of the remaining available assets.

Voting

Shares of Series A Preferred Stock will be non-voting shares, and holders of Series A Preferred Stock will have no right to vote on matters submitted to a vote of Hampton Roads Bankshares’ shareholders except to the extent such voting rights are required by applicable law.

Redemption

After January 1, 2009, Hampton Roads Bankshares will have the right and option to redeem all or a portion of the outstanding shares of Series A Preferred Stock at the rate of $1,000.00 for each share of Series A Preferred Stock.

Series B Non-Convertible Non-Cumulative Perpetual Preferred Stock

Designation

In connection with the merger, Hampton Roads Bankshares will establish a new series of preferred stock, which will be designated “Series B Non-Convertible Non-Cumulative Perpetual Preferred Stock.” There are currently outstanding 37,550 shares of Gateway Financial Series B Non-Convertible Non-Cumulative Perpetual Preferred Stock. Each share of Gateway Financial Series B Non-Convertible Non-Cumulative Perpetual Preferred Stock outstanding immediately before the merger will be converted into the right to receive one share of the newly designated Hampton Roads Bankshares Series B Non-Convertible Non-Cumulative Perpetual Preferred Stock, which has substantially the same powers, designations, preferences, rights and qualifications.

Dividends

The holders of shares of Hampton Roads Bankshares Series B Non-Convertible Non-Cumulative Perpetual Preferred Stock will be entitled to receive cash dividends at an annual rate of 12.0%. Dividends on the Series B Non-Convertible Non-Cumulative Perpetual Preferred Stock will not be cumulative on a year-to-year basis. Dividends will be payable as they are declared by the Hampton Roads Bankshares board of directors at such time or times as it elects, and no holder of Series B Non-Convertible Non-Cumulative Perpetual Preferred Stock will have any right to receive any dividend unless and until that dividend has been declared by the board of directors.

Liquidation

In the event of liquidation, dissolution or winding up of Hampton Roads Bankshares, the holders of Series B Non-Convertible Non-Cumulative Perpetual Preferred Stock are entitled to be paid first out of the assets of Hampton Roads Bankshares available for distribution to holders of capital stock of all classes (whether such assets are capital, surplus or earnings), an amount equal to $1,000.00 per share of Series B Non-Convertible Non-Cumulative Perpetual Preferred Stock, plus the amount of any dividend on such share which has been declared by the board of directors:

 

   

before any distribution or payment is made to any common shareholders or holders of any other class or series of capital stock of Hampton Roads Bankshares designated to be junior to the Series B Non-Convertible Non-Cumulative Perpetual Preferred Stock;

 

   

subject to the liquidation rights of the Hampton Roads Bankshares Series B Non-Convertible Non-Cumulative Perpetual Preferred Stock, which will be designated on a parity with the Series A Preferred Stock with respect to liquidation preferences; and

 

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subject to the liquidation rights and preferences of any class or series of preferred stock designated in the future to be senior to, or on a parity with, the Series B Non-Convertible Non-Cumulative Perpetual Preferred Stock with respect to liquidation preferences.

After payment in full of the liquidation preference to the holders of Series B Non-Convertible Non-Cumulative Perpetual Preferred Stock, holders of the Series B Non-Convertible Non-Cumulative Perpetual Preferred Stock will have no right or claim to any of the remaining available assets.

Voting

Shares of Series B Non-Convertible Non-Cumulative Perpetual Preferred Stock will be non-voting shares, and holders of Series B Non-Convertible Non-Cumulative Perpetual Preferred Stock will have no right to vote on matters submitted to a vote of Hampton Roads Bankshares’ shareholders except to the extent such voting rights are required by applicable law.

Redemption

After October 1, 2009, Hampton Roads Bankshares will have the right and option to redeem all or a portion of the outstanding shares of Series B Non-Convertible Non-Cumulative Perpetual Preferred Stock at the rate of $1,000.00 for each share of Series B Non-Convertible Non-Cumulative Perpetual Preferred Stock.

Certain Provisions of the Articles of Incorporation, Bylaws and Virginia Law

General

Our articles of incorporation and bylaws contain provisions that could make more difficult an acquisition of us by means of a tender offer, a proxy contest or otherwise. These provisions are expected to discourage specific types of coercive takeover practices and inadequate takeover bids as well as to encourage persons seeking to acquire control to first negotiate with us. Although these provisions may have the effect of delaying, deferring or preventing a change in control, we believe that the benefits of increased protection through the potential ability to negotiate with the proponent of an unfriendly or unsolicited proposal to acquire or restructure the company outweigh the disadvantages of discouraging these proposals because, among other things, negotiation of such proposals could result in an improvement of their terms.

Classified Board of Directors

Our articles and bylaws divide the board of directors into three classes of directors serving staggered three-year terms. As a result, approximately one-third of the board of directors will be elected at each annual meeting of shareholders. The classification of directors, together with the provisions in the articles and bylaws described below that limit the ability of shareholders to remove directors and that permit the remaining directors to fill any vacancies on the board of directors, will have the effect of making it more difficult for shareholders to change the composition of the board of directors. As a result, at least two annual meetings of shareholders may be required for the shareholders to change a majority of the directors, whether or not a change in the board of directors would be beneficial and whether or not a majority of shareholders believe that such a change would be desirable.

Increasing the Number of Directors

Under Virginia law, a board of directors may amend or repeal bylaws unless the articles of incorporation or other provisions of Virginia law reserve such power exclusively in the shareholders or the shareholders, in adopting or amending particular bylaws, expressly prohibit the board of directors from amending or repealing that bylaw. Our articles of incorporation do not reserve the power to amend the bylaws to increase or decrease the number of directors exclusively to the shareholders and no bylaw, and no amendment thereto, expressly

 

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prohibits the board of directors from amending the bylaws to increase or decrease the number of directors. According to Virginia law, our board of directors may amend our bylaws at any time to increase or decrease the number of directors by up to 30% of the number of directors of all classes immediately following the most recent election of directors by the shareholders. In addition, the newly created directorships resulting from an increase in the number of authorized directors shall be filled by the affirmative vote of a majority of the directors then in office. As a result, if faced with an attempt to take control of our board, our directors may increase the size of the board and install directors opposed to the hostile takeover attempt.

Inability of Shareholders to Call Special Meetings

Pursuant to our bylaws, special meetings of shareholders may be called only by our president, the chairman of our board of directors or the board of directors. As a result, shareholders are not able to act on matters other than at annual shareholders meetings unless they are able to persuade the president, the chairman or a majority of the board of directors to call a special meeting.

Advance Notification Requirements

Our bylaws also require a shareholder who desires to nominate a candidate for election to the board of directors at an annual shareholders meeting to provide us advance notice of at least 45 days before the date the proxy statement for the last annual meeting was first mailed.

Affiliated Transactions

The Virginia Stock Corporation Act contains provisions governing “Affiliated Transactions.” Affiliated Transactions include certain mergers and share exchanges, material dispositions of corporate assets not in the ordinary course of business, any dissolution of the corporation proposed by or on behalf of an Interested Shareholder (as defined below), or reclassifications, including reverse stock splits, recapitalizations or mergers of the corporation with its subsidiaries which have the effect of increasing the percentage of voting shares beneficially owned by an Interested Shareholder by more than 5%. For purposes of the Virginia Stock Corporation Act, an “Interested Shareholder” is defined as any beneficial owner of more than 10% of any class of the voting securities of a Virginia corporation.

Subject to certain exceptions discussed below, the provisions governing Affiliated Transactions require that, for three years following the date upon which any shareholder becomes an Interested Shareholder, a Virginia corporation cannot engage in an Affiliated Transaction with such Interested Shareholder unless approved by the affirmative vote of the holders of two-thirds of the voting shares of the corporation, other than the shares beneficially owned by the Interested Shareholder, and by a majority (but not less than two) of the “Disinterested Directors.” A Disinterested Director means, with respect to a particular Interested Shareholder, a member of a corporation’s board of directors who (i) was a member before the later of January 1, 1988 and the date on which an Interested Shareholder became an Interested Shareholder and (ii) was recommended for election by, or was elected to fill a vacancy and received the affirmative vote of, a majority of the Disinterested Directors then on the board. At the expiration of the three-year period, these provisions require approval of Affiliated Transactions by the affirmative vote of the holders of two-thirds of the voting shares of the corporation, other than those beneficially owned by the Interested Shareholder.

The principal exceptions to the special voting requirement apply to Affiliated Transactions occurring after the three-year period has expired and require either that the transaction be approved by a majority of the Disinterested Directors or that the transaction satisfy certain fair price requirements of the statute. In general, the fair price requirements provide that the shareholders must receive the highest per share price for their shares as was paid by the Interested Shareholder for his shares or the fair market value of their shares, whichever is higher. They also require that, during the three years preceding the announcement of the proposed Affiliated Transaction,

 

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all required dividends have been paid and no special financial accommodations have been accorded the Interested Shareholder unless approved by a majority of the Disinterested Directors.

None of the foregoing limitations and special voting requirements apply to an Affiliated Transaction with an Interested Shareholder whose acquisition of shares making such person an Interested Shareholder was approved by a majority of the corporation’s Disinterested Directors.

These provisions were designed to deter certain takeovers of Virginia corporations. In addition, the statute provides that, by affirmative vote of a majority of the voting shares other than shares owned by any Interested Shareholder, a corporation may adopt, by meeting certain voting requirements, an amendment to its articles of incorporation or bylaws providing that the Affiliated Transactions provisions shall not apply to the corporation. Hampton Roads Bankshares has not adopted such an amendment.

Control Share Acquisitions

The Virginia Stock Corporation Act also contains provisions regulating certain “control share acquisitions,” which are transactions causing the voting strength of any person acquiring beneficial ownership of shares of a public corporation in Virginia to meet or exceed certain threshold percentages (20%, 33/ 1/3% or 50%) of the total votes entitled to be cast for the election of directors. Shares acquired in a control share acquisition have no voting rights unless: (i) the voting rights are granted by a majority vote of all outstanding shares other than those held by the acquiring person or any officer or employee director of the corporation, or (ii) the articles of incorporation or bylaws of the corporation provide that these Virginia law provisions do not apply to acquisitions of its shares. The acquiring person may require that a special meeting of the shareholders be held to consider the grant of voting rights to the shares acquired in the control share acquisition. These provisions were designed to deter certain takeovers of Virginia public corporations. However, the bylaws of Hampton Roads Bankshares contain a provision that makes these provisions inapplicable to acquisitions of our common stock.

Board of Directors

Directors’ Duties

The standards of conduct for directors of Virginia corporations are listed in the Virginia Stock Corporation Act. Directors must discharge their duties in accordance with their good faith business judgment of the best interests of the corporation. Directors may rely on the advice or acts of others, including officers, employees, attorneys, accountants and board committees if they have a good faith belief in their competence. Directors’ actions are not subject to a reasonableness or prudent person standard. Virginia’s federal and state courts have focused on the process involved with directors’ decision-making and are generally supportive of directors if they have based their decision on an informed process. These elements of Virginia law could make it more difficult to take over a Virginia corporation than corporations in other states.

Indemnification and Limitations on Liability of Officers and Directors

As permitted by the Virginia Stock Corporation Act, the articles of incorporation of Hampton Roads Bankshares contain provisions that indemnify its directors and officers to the full extent permitted by Virginia law and eliminate the personal liability of our directors and officers for monetary damages to Hampton Roads Bankshares or its shareholders for breach of their fiduciary duties, except to the extent that the Virginia Stock Corporation Act prohibits indemnification or elimination of liability. These provisions do not limit or eliminate the rights of Hampton Roads Bankshares or any shareholder to seek an injunction or any other non-monetary relief in the event of a breach of a director’s or officer’s fiduciary duty. In addition, these provisions apply only to claims against a director or officer arising out of his role as a director or officer and do not relieve a director or officer from liability if he engaged in willful misconduct or a knowing violation of the criminal law or any federal or state securities law.

 

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In addition, the articles of incorporation of Hampton Roads Bankshares provide for the indemnification of both directors and officers for expenses that they incur in connection with the defense or settlement of claims asserted against them in their capacities as directors and officers. This right of indemnification extends to judgments or penalties assessed against them. Hampton Roads Bankshares has limited its exposure to liability for indemnification of directors and officers by purchasing directors and officers liability insurance coverage.

The rights of indemnification provided in the articles of incorporation of Hampton Roads Bankshares are not exclusive of any other rights that may be available under any insurance or other agreement, by vote of shareholders or disinterested directors or otherwise.

Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers or persons controlling Hampton Roads Bankshares pursuant to the foregoing provisions, Hampton Roads Bankshares has been informed that in the opinion of the SEC this type of indemnification is against public policy as expressed in the Securities Act and is therefore unenforceable.

Shares Eligible for Future Sale

All of the shares that will be exchanged for shares of Gateway Financial common stock upon consummation of the merger will be freely tradable without restriction or registration under the Securities Act, except for shares owned by “affiliates” as described under “—Approval of the Merger—Resales of Hampton Roads Bankshares Common Stock” on page [    ].

Hampton Roads Bankshares cannot predict the effect, if any, that future sales of shares of its common stock, or the availability of shares for future sales, will have on the market price prevailing from time to time. Sales of substantial amounts of shares of our common stock, or the perception that such sales could occur, could adversely affect the prevailing market price of the shares.

 

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COMPARATIVE RIGHTS OF SHAREHOLDERS

The rights of both Hampton Roads Bankshares’ shareholders and Gateway Financial’s shareholders are governed by the Virginia Stock Corporation Act in the case of Hampton Roads Bankshares and by the North Carolina Business Corporation Act in the case of Gateway Financial, and by their respective articles of incorporation and bylaws. Following the merger, the rights of Gateway Financial’s shareholders that receive Hampton Roads Bankshares stock will be governed by the Virginia Stock Corporation Act and the articles and bylaws of Hampton Roads Bankshares. This summary does not purport to be a complete discussion of, and is qualified in its entirety by reference to, Gateway Financial’s articles of incorporation and bylaws, Hampton Roads Bankshares’ articles of incorporation and bylaws, Virginia law and North Carolina law.

Authorized Capital Stock

 

Hampton Roads Bankshares

   Gateway Financial

40,000,000

   31,000,000

Size of Board of Directors

 

Hampton Roads Bankshares

   Gateway Financial

13

   14

Cumulative Voting for Directors

Cumulative voting entitles each shareholder to cast an aggregate number of votes equal to the number of voting shares held, multiplied by the number of directors to be elected. Each shareholder may cast all of his or her votes for one nominee or distribute them among two or more nominees, thus permitting holders of less than a majority of the outstanding shares of voting stock to achieve board representation. Where cumulative voting is not permitted, holders of all outstanding shares of voting stock of a corporation elect the entire board of directors of the corporation, thereby precluding the election of any directors by the holders of less than a majority of the outstanding shares of voting stock.

 

Hampton Roads Bankshares

   Gateway Financial
Hampton Roads Bankshares’ shareholders do not have a right to cumulative voting in the election of directors because the articles of incorporation do not provide for such a right.    Cumulative voting is not available with respect to the election of directors of Gateway Financial.

Classes of Directors

 

Hampton Roads Bankshares

  Gateway Financial
Hampton Roads Bankshares’ articles of incorporation and bylaws provide that Hampton Roads Bankshares’ board of directors is divided into three classes of directors as nearly equal in number as possible, with each class being elected to a staggered three-year term.   The bylaws of Gateway Financial provide that the board of directors shall be divided into three classes, approximately equal in number, and elected to staggered three-year terms.

 

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Qualifications of Directors

 

Hampton Roads Bankshares

  Gateway Financial
Hampton Roads Bankshares’ bylaws set forth no age requirements for directors. However, the bylaws require that a person who is a director hold at least the number of Hampton Roads Bankshares common stock having a book value of not less than $5,000 or as may be prescribed in Section 6.1-47 of the Code of Virginia.   Gateway Financial’s bylaws set forth no age requirements for directors.

Filling Vacancies on the Board

 

Hampton Roads Bankshares

  Gateway Financial
Hampton Roads Bankshares’ articles of incorporation and bylaws are silent on the filling of vacancies on the board of directors and as such, any vacancy can be filled in the manner described in Section 13.1-682 of the Virginia Stock Corporation Act, subject to the limitations on the nomination of directors imposed by the bylaws. Section 13.1-682 of the Virginia Stock Corporation Act provides that, any vacancy occurring on Hampton Roads Bankshares’ board of directors may be filled by an affirmative vote of a majority of the remaining directors though less than a quorum, or by the shareholders. The term of a person who is elected to fill a vacancy by the board of directors shall expire at the next shareholders’ meeting at which directors are elected.   Gateway Financial’s bylaws provide a vacancy in the board of directors created by an increase in the authorized number of directors shall be filled only by election at an annual meeting of shareholders or at a special meeting of shareholders called for that purpose. Any vacancy in the board of directors created other than by an increase in the authorized number of directors may be filled by a majority of the remaining directors, even though less than a quorum, or by the sole remaining director. The shareholders may elect a director at any time to fill any vacancy not filled by the directors. In the event of the resignation of a director to take effect at a future date either the board of directors or the shareholders, at any time after tender of such resignation, may elect a successor to such director to take office as of the effective date of such resignation. Any director elected to fill a vacancy shall be elected for the unexpired term of his predecessor.

Removal of Directors

 

Hampton Roads Bankshares

  Gateway Financial
Hampton Roads Bankshares’ articles of incorporation provide that a director may only be removed by the shareholders for cause. In addition, the Hampton Roads Bankshares’ bylaws provide that a director may be removed if he or she fails to attend at least seventy-five percent of the meetings in any calendar year by a majority vote of the board of directors that occurs within six months of the end of the applicable calendar year.   Gateway Financial’s bylaws provide that shareholders may remov