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United States

Securities and Exchange Commission

Washington, D.C. 20549



FORM 10-K



|x | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ------------------------------------------------------------------------------------



For fiscal year ended December 31, 2004



OR



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



For the transition period from
 to



Commission File Number 000-33411



New Peoples Bankshares, Inc.

(Exact
name of registrant as specified in its charter)



|                                                              |  |                                    
|------------------------------------------------------------- |  | -----------------------------------
|Virginia                                                      |  | 31-1804543                         
|(State or other jurisdiction ofincorporation or organization) |  | (I.R.S. EmployerIdentification No.)
|                                                              | 
|67 Commerce Drive Honaker, VA                                 |  | 24260                              
|(Address of principal executive offices)                      |  | (Zip Code)                         



Registrants
telephone number, including area code (276) 873-7000



Securities registered pursuant to Section 12(b) of the Act:

None



Securities registered pursuant to Section 12(g) of the Act:

Common Stock - $2 Par Value



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



Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrants knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ̈



Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes x No ̈



The aggregate market
value of the common stock held by non-affiliates, based on the last reported sales prices of $14.00 per share on the last business day of the second quarter of 2004 was $85,178,786.



The number of shares outstanding of the registrants common stock was 6,910,204 as of March 30, 2005.



DOCUMENTS INCORPORATED BY REFERENCE:



Portions of the Corporations Proxy Statement for the Annual Meeting of
Shareholders to be held on June 7, 2005, are incorporated by reference into Part III hereof.



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TABLE OF CONTENTS



|           |  |                                                                                                              |  |     
|---------- |  | ------------------------------------------------------------------------------------------------------------ |  | ----
|           |  |                                                                                                              |  | Page
|PART I     |  |                                                                                                              |  |     
|           |  |                                                                                                             
|Item 1.    |  | Business                                                                                                     |  | 1   
|           |  |                                                                                                             
|Item 2.    |  | Properties                                                                                                   |  | 10  
|           |  |                                                                                                             
|Item 3.    |  | Legal Proceedings                                                                                            |  | 10  
|           |  |                                                                                                             
|Item 4.    |  | Submission of Matters to a Vote of Security Holders                                                          |  | 11  
|           |  |                                                                                                             
|PART II    |  |                                                                                                              |  |     
|           |  |                                                                                                             
|Item 5.    |  | Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities |  | 12  
|           |  |                                                                                                             
|Item 6.    |  | Selected Financial Data                                                                                      |  | 13  
|           |  |                                                                                                             
|Item 7.    |  | Managements Discussion and Analysis of Financial Condition and Results of Operation                         |  | 14  
|           |  |                                                                                                             
|Item 7A.   |  | Quantitative and Qualitative Disclosures About Market Risk                                                   |  | 26  
|           |  |                                                                                                             
|Item 8.    |  | Financial Statements and Supplementary Data                                                                  |  | 27  
|           |  |                                                                                                             
|Item 9.    |  | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure                         |  | 49  
|           |  |                                                                                                             
|Item 9A.   |  | Controls and Procedures                                                                                      |  | 49  
|           |  |                                                                                                             
|Item 9B.   |  | Other Information                                                                                            |  | 50  
|           |  |                                                                                                             
|PART III   |  |                                                                                                              |  |     
|           |  |                                                                                                             
|Item 10.   |  | Directors and Executive Officers of the Registrant                                                           |  | 50  
|           |  |                                                                                                             
|Item 11.   |  | Executive Compensation                                                                                       |  | 50  
|           |  |                                                                                                             
|Item 12.   |  | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters               |  | 50  
|           |  |                                                                                                             
|Item 13.   |  | Certain Relationships and Related Transactions                                                               |  | 50  
|           |  |                                                                                                             
|Item 14.   |  | Principal Accounting Fees and Services                                                                       |  | 50  
|           |  |                                                                                                             
|PART IV    |  |                                                                                                              |  |     
|           |  |                                                                                                             
|Item 15.   |  | Exhibits Financial Statement Schedules                                                                       |  | 50  
|           | 
|SIGNATURES |  |                                                                                                             





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PART I



|Item 1. | Business
|------- | --------



General



New Peoples Bankshares, Inc.
(New Peoples) is a financial holding company operating under the laws of Virginia and is headquartered in Honaker, Virginia. New Peoples wholly owns three subsidiaries: New Peoples Bank, Inc., (the Bank) a Virginia banking corporation; NPB Financial
Services, Inc., (NPB Financial) an insurance and investment services corporation; and NPB Web Services, Inc., (NPB Web) a web design and hosting company. In July 2004, NPB Capital Trust I was formed for the issuance of trust preferred securities.



New Peoples Bank, Inc. offers a range of banking and related financial
services focused primarily towards serving individuals, small to medium size businesses, and the professional community. We strive to serve the banking needs of our customers while developing personal, hometown relationships with them. Our board of
directors believes that marketing customized banking services will enable us to establish a niche in the financial services marketplace in our market.



The Bank is headquartered in Honaker, Virginia and operates 19 full service offices and 1 loan production office in the southwestern Virginia counties of Russell, Scott,
Washington, Tazewell, Buchanan, Dickenson, and Wise; Mercer county in southern West Virginia and Sullivan county in eastern Tennessee. The close proximity and mobile nature of individuals and businesses in adjoining counties in Virginia, West
Virginia, Tennessee and nearby cities places these markets within our banks targeted trade area, as well.



We provide professionals and small and medium size businesses in our market area with responsive and technologically advanced banking services. These services include
loans that are priced on a deposit relationship basis, easy access to our decision makers, and quick and innovative action necessary to meet a customers banking needs. Our capitalization and lending limit enables us to satisfy the credit needs
of a large portion of the targeted market segment. When a customer needs a loan that exceeds our lending limit, we try to find other financial institutions to participate in the loan with us.



Our History



The Bank was incorporated under the laws of the Commonwealth of Virginia on December 9, 1997 and began operations on October 28, 1998. On
September 27, 2001, the shareholders of the Bank approved a plan of reorganization under which they exchanged their shares of Bank common stock for shares of our common stock. On November 30, 2001, the reorganization was completed and the Bank
became New Peoples wholly owned subsidiary.



The formation of the Bank
was first discussed by a group of citizens who responded to their communitys yearning for the friendly hometown banking provided for years by Peoples Bank, which also originated in Russell County. Peoples Bank served their community as an
independent community bank from its formation in 1970 until 1987 and as part of the Premier Bank family from its acquisition by Premier Bankshares Corporation in 1987 until 1997. First Virginia Banks, Inc. acquired Premier and all of its banking
subsidiaries in 1997. Although Peoples Bank and New Peoples Bank have no formal or legal connection, several of the officers, board members and employees who made Peoples Bank a success formed the nucleus for New Peoples Bank.



This core Russell County group invited residents of Scott County, Buchanan County and
Dickenson County to promote the idea of organizing southwest Virginias first community bank in almost two decades. The community response was overwhelming and over 2,400 shareholders emerged to raise in excess of $11 million dollars in
start-up capital within a 90-day sale period. The Commonwealth of Virginia authorized the Bank to open three branches at once, including the central headquarters in Honaker, Virginia, and branches in Weber City and Castlewood, Virginia. Loan
production offices were opened in Norton, Clintwood and Claypool Hill, Virginia.



In June 2003, New Peoples formed two new wholly owned subsidiaries, NPB Financial Services, Inc. and NPB Web Services, Inc.



NPB Financial is a full-service insurance and investment firm, dealing in all types of personal and group, life, health, and disability products, along with mutual funds,
fixed rate annuities, fee based asset management and other investment products through a broker/dealer relationship with LINSCO/Private Ledger.



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NPB Web is an internet web site development and hosting company. It produces custom designed web pages for use on the
world wide web and serves as a web site host for customers and non-profit organizations. It also develops the web sites of other subsidiaries and supplies advertising and marketing expertise for New Peoples.



In July 2004, NPB Capital Trust I was formed to issue $11.3 million in trust preferred
securities.



Location and Market Area



We initially opened with full service branches in Honaker and Weber City, Virginia and in
1999 opened a full service branch in Castlewood, Virginia. During 2000, we opened full service branches in Haysi and Lebanon, Virginia. During 2001, we opened branches in Pounding Mill, Virginia and Princeton, West Virginia. In 2002, we opened
branch offices in Gate City, Clintwood, Big Stone Gap, Tazewell and Davenport, Virginia. During 2003, we expanded into Grundy, Dungannon, and Bristol, Virginia. We expanded into Tennessee and opened an office in Bloomingdale, Tennessee in 2003, as
well. In 2004, we opened offices in Richlands, Abingdon, and Bristol, Virginia. We have a loan production office located in Norton, Virginia. We anticipate a full service branch location opening in Bluefield, Virginia in the second quarter of 2005
and two additional offices in Esserville, Virginia and Piney Flats, Tennessee in the latter part of the year. Management will continue to investigate and consider other possible sites that would enable us to profitably serve our chosen market area.



In order to open additional banking offices, we must obtain prior regulatory
approval, which takes into account a number of factors, including, among others, a determination that we have adequate capital and a finding that the public interest will be served. While we plan to seek regulatory approval at the appropriate time
to establish additional banking offices, there can be no assurance when or if we will be able to undertake such expansion plans.



Internet Site



In March 2001, we opened our internet banking site at www.newpeoplesbank.com. The site includes a customer service area that contains branch and ATM locations, product descriptions and current interest rates offered
on deposit accounts. Customers with internet access can access account balances, make transfers between accounts, enter stop payment orders, order checks, and use an optional bill paying service.



Available Information



We file annual, quarterly, and current reports, proxy statements and other information with the SEC. Our SEC filings are filed
electronically and are available to the public over the internet at the SECs web site at www.sec.gov. In addition, any document we file with the SEC can be read and copied at the SECs public reference facilities at 450 Fifth Street,
N.W., Washington, D.C. 20549. Copies of documents can be obtained at prescribed rates by writing to the Public Reference Section of the SEC at 450 Fifth Street, N.W., Washington, D.C. 20549. The public may obtain information on the operation of the
Public Reference Room by calling the SEC at 1-800-SEC-0330. We also make available through our internet website at www.newpeoplesbank.com under Investor Relations our annual reports on Form 10-K, quarterly reports on Form 10-Q, current
reports on Form 8-K, and amendments to those reports, as soon as reasonably practicable after we file such material with, or furnish it to, the SEC.



Banking Services



General. We accept deposits, make consumer and commercial loans, issues drafts, and provide other services customarily offered by a commercial bank, such as business and personal checking and savings accounts,
walk-up tellers, drive-in windows, and 24-hour automated teller machines. New Peoples Bank is a member of the Federal Reserve System and its deposits are insured under the Federal Deposit Insurance Act to the limits provider thereunder.



We offer a full range of short-to-medium term commercial and personal loans. Commercial
loans include both secured and unsecured loans for working capital (including inventory and receivables), business expansion (including acquisition of real estate and improvements) and purchase of equipment and machinery. Consumer loans may include
secured and unsecured loans for financing automobiles, home improvements, education and personal investments.



Our lending activities are subject to a variety of lending limits imposed by state law. While differing limits apply in certain circumstances based on the type of loan or the nature of the borrower (including the
borrowers relationship to the Bank), in general, the Bank is subject to a loan-to-one borrower limit of an amount equal to 15% of its capital and surplus in the case of loans which are not fully secured by readily marketable or other
permissible types of collateral. The Bank voluntarily may choose to impose a policy limit on loans to a single borrower that is less than the legal lending limit.



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We obtain short-to-medium term commercial and personal loans through direct solicitation of owners and continued business
from customers. Completed commercial loan applications are reviewed by our loan officers. As part of the application process, information is obtained concerning the income, financial condition, employment and credit history of the applicant. If
commercial real estate is involved, information is also obtained concerning cash flow after debt service. Loan quality is analyzed based on the banks experience and its credit underwriting guidelines.



Loans by type as a percentage of total loans are as follows:



|                                       |  |              |   |  |        |   |  |        |   |  |        |   |  |        |  
|-------------------------------------- |  | ------------ | - |  | ------ | - |  | ------ | - |  | ------ | - |  | ------ | -
|                                       |  | December 31, |  
|                                       |  | 2004         |   |  | 2003   |   |  | 2002   |   |  | 2001   |   |  | 2000   |  
|Commercial, financial and agricultural |  | 18.49        | % |  | 19.83  | % |  | 19.32  | % |  | 19.62  | % |  | 22.84  | %
|Real estate  construction             |  | 2.95         | % |  | 2.46   | % |  | 2.52   | % |  | 2.15   | % |  | 1.17   | %
|Real estate  mortgage                 |  | 66.72        | % |  | 62.68  | % |  | 58.93  | % |  | 54.81  | % |  | 54.05  | %
|Installment loans to individuals       |  | 11.83        | % |  | 15.03  | % |  | 19.23  | % |  | 23.42  | % |  | 21.94  | %
|                                       |  |              |   |  |        |   |  |        |   |  |        |   |  |        |  
|Total                                  |  | 100.00       | % |  | 100.00 | % |  | 100.00 | % |  | 100.00 | % |  | 100.00 | %
|                                       |  |              |   |  |        |   |  |        |   |  |        |   |  |        |  



Commercial Loans. We make
commercial loans to qualified businesses in our market area. Our commercial lending consists primarily of commercial and industrial loans to finance accounts receivable, inventory, property, plant and equipment. Commercial business loans generally
have a higher degree of risk than residential mortgage loans, but have commensurately higher yields. Residential mortgage loans generally are made on the basis of the borrowers ability to make repayment from employment and other income and are
secured by real estate whose value tends to be easily ascertainable. In contrast, commercial business loans typically are made on the basis of the borrowers ability to make repayment from cash flow from its business and are secured by business
assets, such as commercial real estate, accounts receivable, equipment and inventory. As a result, the availability of funds for the repayment of commercial business loans may be substantially dependent on the success of the business itself.



Further, the collateral for commercial business loans may depreciate over time
and cannot be appraised with as much precision as residential real estate. To manage these risks, our underwriting guidelines require us to secure commercial loans with both the assets of the borrowing business and other additional collateral and
guarantees that may be available. In addition, we actively monitor certain measures of the borrower, including advance rate, cash flow, collateral value and other appropriate credit factors.



Residential Mortgage Loans. Our residential mortgage loans consist of residential
first and second mortgage loans, residential construction loans, home equity lines of credit and term loans secured by first and second mortgages on the residences of borrowers for home improvements, education and other personal expenditures. We
make mortgage loans with a variety of terms, including fixed and floating or variable rates and a variety of maturities. Maturities for construction loans generally range from 4 to 12 months for residential property and from 6 to 18 months for
non-residential and multi-family properties.



Under our underwriting
guidelines, residential mortgage loans generally are made on the basis of the borrowers ability to make repayment from employment and other income and are secured by real estate whose value tends to be easily ascertainable. These loans are
made consistent with the appraisal policies and real estate lending policies, which detail maximum loan-to-value ratios and maturities.



Construction Loans. Construction lending entails significant additional risks, compared to residential mortgage lending. Construction loans often involve larger
loan balances concentrated with single borrowers or groups of related borrowers. Construction loans also involve additional risks attributable to the fact that loan funds are advanced upon the security of property under construction, which is of
uncertain value prior to the completion of construction. Thus, it is more difficult to evaluate accurately the total loan funds required to complete a project and related loan-to-value ratios. To minimize the risks associated with construction
lending, loan to value limitations for residential, multi-family and non-residential properties are in place. These are in addition to the usual credit analysis of borrowers. Management feels that the loan-to-value ratios are sufficient to
compensate for fluctuations in the real estate market to minimize the risk of loss.



Consumer Loans. Our consumer loans consist primarily of installment loans to individuals for personal, family and household purposes. The specific types of consumer loans that we make include home improvement loans, debt
consolidation loans and general consumer lending. Consumer loans entail greater risk than residential mortgage loans do, particularly in the case of consumer loans that are unsecured, such as lines of credit, or secured by rapidly depreciable assets
such as automobiles. In



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such cases, any repossessed collateral for a defaulted consumer loan may not provide an adequate source of repayment of the outstanding loan balance as a
result of the greater likelihood of damage, loss or depreciation. The remaining deficiency often does not warrant further substantial collection efforts against the borrower. In addition, consumer loan collections are dependent on the
borrowers continuing financial stability, and thus are more likely to be adversely affected by job loss, divorce, illness or personal bankruptcy. Furthermore, the application of various federal and state laws, including federal and state
bankruptcy and insolvency laws, may limit the amount which can be recovered on such loans. Such loans may also give rise to claims and defenses by a consumer loan borrower against an assignee of such loan such as the Bank, and a borrower may be able
to assert against such assignee claims and defenses that it has against the seller of the underlying collateral.



Our underwriting policy for consumer loans is to accept moderate risk while minimizing losses, primarily through a careful analysis of the borrower. In evaluating
consumer loans, we require our lending officers to review the borrowers level and stability of income, past credit history and the impact of these factors on the ability of the borrower to repay the loan in a timely manner. In addition, we
maintain an appropriate margin between the loan amount and collateral value.



Other Bank Services. Other bank services include safe deposit boxes, cashiers checks, certain cash management services, travelers checks, direct deposit of payroll and social security checks and automatic drafts for
various accounts. We offer ATM card services that can be used by our customers throughout Virginia and other regions. We also offer MasterCard and VISA credit card services through an intermediary. Electronic banking services include debit cards,
internet banking, telephone banking, and wire transfers.



We do not anticipate
exercising trust powers in the next few years. We may establish a trust department in the future but cannot do so without the prior approval of the Virginia State Corporation Commissions Bureau of Financial Institutions. In the interim, we may
contract for trust services to be provided to our customers through outside vendors.



Competition



The banking business is highly competitive. We
compete as a financial intermediary with other commercial banks, savings and loan associations, credit unions, mortgage banking firms, consumer finance companies, securities brokerage firms, insurance companies, money market mutual funds and other
financial institutions operating in the southwestern Virginia, southern West Virginia, and eastern Tennessee market area and elsewhere. Our market area is a highly competitive, highly branched banking market.



Competition in the market area for loans to small businesses and professionals, the
banks target market, is intense, and pricing is important. Many of our competitors have substantially greater resources and lending limits than we have. They offer certain services, such as extensive and established branch networks and trust
services that we do not expect to provide or will not provide in the near future. Moreover, larger institutions operating in the southwestern Virginia market area have access to borrowed funds at lower costs than are available to us. Deposit
competition among institutions in the market area also is strong. As a result, it is possible that we may pay above-market rates to attract deposits. We generally pay above-market rates, usually one percent above current rates for a six-month
period, to attract deposits when we open a new branch office.



While pricing is
important, our principal method of competition is service. As a community banking organization, we strive to serve the banking needs of our customers while developing personal, hometown relationships with them. As a result, we provide a significant
amount of service and a range of products without the fees that customers can expect from larger banking institutions.



According to a market share report prepared by the FDIC, as of June 30, 2004, the most recent date for which market share information is available, New Peoples
Banks deposits as a percentage of total deposits in its major market areas were as follows: Russell County, VA  33.77%, Scott County, VA  30.21%, Dickenson County, VA  26.56%, Tazewell County, VA  5.29%, Buchanan
County, VA  5.56%, Wise County, VA  3.42%, Washington County, VA  0.78%, Mercer County, WV  4.37% and Sullivan County TN  0.46%. Information for the City of Bristol, VA is not available since this branch was not opened
until after the second quarter of 2004.



Employees



As of December 31, 2004, we had 247 total employees, of which 237 were full-time employees.
None of our employees is covered by any collective bargaining agreement, and relations with employees are considered excellent.



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Supervision and Regulation



GeneralAs a bank holding company, New Peoples is subject to regulation under the Bank Holding Company Act of 1956, as amended, and
the examination and reporting requirements of the Board of Governors of the Federal Reserve System. As a state-chartered commercial bank, the Bank is subject to regulation, supervision and examination by the Virginia State Corporation
Commissions Bureau of Financial Institutions. It is also subject to regulation, supervision and examination by the Federal Reserve Board. Other federal and state laws, including various consumer protection and compliance laws, govern the
activities of the Bank, the investments that it makes and the aggregate amount of loans that it may grant to one borrower.



The following description summarizes the significant federal and state laws applicable to New Peoples and its subsidiaries. To the extent that statutory or regulatory
provisions are described, the description is qualified in its entirety by reference to that particular statutory or regulatory provision.



The Bank Holding Company ActUnder the Bank Holding Company Act, New Peoples is subject to periodic examination by the Federal Reserve and is required to file
periodic reports regarding its operations and any additional information that the Federal Reserve may require. Activities at the bank holding company level are limited to:



| |  |  | banking, managing or controlling banks;
| | - |  | ---------------------------------------



| |  |  | furnishing services to or performing services for its subsidiaries; and
| | - |  | -----------------------------------------------------------------------



| |  |  | engaging in other activities that the Federal Reserve has determined by regulation or order to be so closely related to banking as to be a proper incident to these activities.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Some of the activities that the Federal Reserve has determined
by regulation to be proper incidents to the business of a bank holding company include making or servicing loans and specific types of leases, performing specific data processing services and acting in some circumstances as a fiduciary or investment
or financial adviser.



With some limited exceptions, the Bank Holding Company
Act requires every bank holding company to obtain the prior approval of the Federal Reserve before:



| |  |  | acquiring substantially all the assets of any bank;
| | - |  | ---------------------------------------------------



| |  |  | acquiring direct or indirect ownership or control of any voting shares of any bank if after such acquisition it would own or control more than 5% of the voting shares of such bank
(unless it already owns or controls the majority of such shares); or
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | merging or consolidating with another bank holding company.
| | - |  | -----------------------------------------------------------



In addition, and subject to some exceptions, the Bank Holding Company Act and the Change in Bank Control Act, together with the regulations promulgated thereunder,
require Federal Reserve approval prior to any person or company acquiring control of a bank holding company. Control is conclusively presumed to exist if an individual or company acquires 25% or more of any class of voting securities of
the bank holding company. Control is rebuttably presumed to exist if a person acquires 10% or more, but less than 25%, of any class of voting securities and either has registered securities under Section 12 of the Securities Exchange Act of 1934 or
no other person owns a greater percentage of that class of voting securities immediately after the transaction. The regulations provide a procedure for challenging this rebuttable control presumption.



In November 1999, Congress enacted the Gramm-Leach-Bliley Act (GLBA), which made
substantial revisions to the statutory restrictions separating banking activities from other financial activities. Under the GLBA, bank holding companies that are well-capitalized and well-managed and meet other conditions can elect to become
financial holding companies. As financial holding companies, they and their subsidiaries are permitted to acquire or engage in previously impermissible activities such as insurance underwriting, securities underwriting and distribution,
travel agency activities, insurance agency activities, merchant banking and other activities that the Federal Reserve determines to be financial in nature or complementary to these activities. Financial holding companies continue to be subject to
the overall oversight and supervision of the Federal Reserve, but the GLBA applies the concept of functional regulation to the activities conducted by subsidiaries. For example, insurance activities would be subject to supervision and regulation by
state insurance authorities



Payment of DividendsNew Peoples is a legal
entity separate and distinct from its banking and other subsidiaries. New Peoples derives the majority of its revenues from dividends paid to the company by its subsidiaries. The Bank is subject to laws and regulations that limit the amount of
dividends it can pay. In addition, both New Peoples and the Bank are subject to various regulatory restrictions relating to the payment of dividends, including requirements to maintain capital at or above regulatory minimums. Banking regulators have
indicated that banking organizations should generally pay dividends only if the organizations net income available to common shareholders over the past year has been sufficient to fully fund the dividends and the prospective rate of earnings
retention appears consistent with the organizations capital needs, asset quality



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and overall financial condition. Although New Peoples does not expect that any of these laws, regulations or policies will materially affect the ability of
the Bank to pay dividends, during the year ended December 31, 2004, the Bank nonetheless did not declare any dividends to New Peoples. For additional discussion of restriction on dividends see Note 15 in the notes to the consolidated financial
statements.



The FDIC has the general authority to limit the dividends
paid by insured banks if the payment is deemed an unsafe and unsound practice. The FDIC has indicated that paying dividends that deplete a banks capital base to an inadequate level would be an unsound and unsafe banking practice.



Insurance of Accounts, Assessments and Regulation by the FDICThe deposits of the
Bank are insured by the FDIC up to the limits set forth under applicable law. The deposits of the Bank are subject to the deposit insurance assessments of the Bank Insurance Fund (BIF) of the FDIC.



The FDIC has implemented a risk-based deposit insurance assessment system under which the
assessment rate for an insured institution may vary according to regulatory capital levels of the institution and other factors, including supervisory evaluations. For example, depository institutions insured by the BIF that are well
capitalized and that present few or no supervisory concerns are required to pay only the statutory minimum assessment of $2,000 annually for deposit insurance, while all other banks are required to pay premiums ranging from .03% to .27% of
domestic deposits. These rate schedules are subject to future adjustments by the FDIC. In addition, the FDIC has authority to impose special assessments from time to time. For the year ended December 31, 2004, the Bank paid deposit insurance
premiums at a rate of .01% of domestic deposits.



The FDIC is authorized to
prohibit any BIF-insured institution from engaging in any activity that the FDIC determines by regulation or order to pose a serious threat to the respective insurance fund. Also, the FDIC may initiate enforcement actions against banks, after first
giving the institutions primary regulatory authority an opportunity to take such action. The FDIC may terminate the deposit insurance of any depository institution if it determines, after a hearing, that the institution has engaged or is
engaging in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations, or has violated any applicable law, regulation, order or any condition imposed in writing by the FDIC. It also may suspend deposit insurance
temporarily during the hearing process for the permanent termination of insurance, if the institution has no tangible capital. If deposit insurance is terminated, the deposits at the institution at the time of termination, less subsequent
withdrawals, shall continue to be insured for a period from six months to two years, as determined by the FDIC. New Peoples is not aware of any existing circumstances that could result in termination of any of the Banks deposit insurance.



Capital RequirementsThe Federal Reserve has issued risk-based and
leverage capital guidelines applicable to banking organizations that it supervises. Under the risk-based capital requirements, New Peoples and the Bank are each generally required to maintain a minimum ratio of total capital to risk-weighted assets
(including certain off-balance sheet activities, such as standby letters of credit) of 8%. At least half of the total capital must be composed of Tier 1 Capital, which is defined as common equity, retained earnings and qualifying
perpetual preferred stock, less certain intangibles. The remainder may consist of Tier 2 Capital, which is defined as specific subordinated debt, some hybrid capital instruments and other qualifying preferred stock and a limited amount
of the loan loss allowance. In addition, each of the federal banking regulatory agencies has established minimum leverage capital requirements for banking organizations. Under these requirements, banking organizations must maintain a minimum ratio
of Tier 1 capital to adjusted average quarterly assets equal to 3% to 5%, subject to federal bank regulatory evaluation of an organizations overall safety and soundness. In sum, the capital measures used by the federal banking regulators are:



| |  |  | the Total Capital ratio, which is the total of Tier 1 Capital and Tier 2 Capital;
| | - |  | ---------------------------------------------------------------------------------



| |  |  | the Tier 1 Capital ratio; and
| | - |  | -----------------------------



| |  |  | the leverage ratio.
| | - |  | -------------------



Under these regulations, a bank holding company or bank will be:



| |  |  | well capitalized if it has a Total Capital ratio of 10% or greater, a Tier 1 Capital ratio of 6% or greater, a leverage ratio of 5% or greater, and is not subject to any
written agreement, order, capital directive, or prompt corrective action directive by a federal bank regulatory agency to meet and maintain a specific capital level for any capital measure;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | adequately capitalized if it has a Total Capital ratio of 8% or greater, a Tier 1 Capital ratio of 4% or greater, and a leverage ratio of 4% or greater  or 3% in
certain circumstances  and is not well capitalized;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | undercapitalized if it has a Total Capital ratio of less than 8% or greater, a Tier 1 Capital ratio of less than 4%or 3% in certain circumstances;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------



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| |  |  | significantly undercapitalized if it has a Total Capital ratio of less than 6%, a Tier 1 Capital ratio of less than 3%, or a leverage ratio of less than 3%; or
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | critically undercapitalized if its tangible equity is equal to or less than 2% of average quarterly tangible assets.
| | - |  | ----------------------------------------------------------------------------------------------------------------------



The risk-based capital standards of the Federal Reserve explicitly identify concentrations of
credit risk and the risk arising from non-traditional activities, as well as an institutions ability to manage these risks, as important factors to be taken into account by the agency in assessing an institutions overall capital
adequacy. The capital guidelines also provide that an institutions exposure to a decline in the economic value of its capital due to changes in interest rates be considered by the agency as a factor in evaluating a banking organizations
capital adequacy.



The FDIC may take various corrective actions against any
undercapitalized bank and any bank that fails to submit an acceptable capital restoration plan or fails to implement a plan accepted by the FDIC. These powers include, but are not limited to, requiring the institution to be recapitalized,
prohibiting asset growth, restricting interest rates paid, requiring prior approval of capital distributions by any bank holding company that controls the institution, requiring divestiture by the institution of its subsidiaries or by the holding
company of the institution itself, requiring new election of directors, and requiring the dismissal of directors and officers. As of December 31, 2004, New Peoples and the Bank were well capitalized, with Total Capital ratios of 13.72%,
Tier 1 Capital ratios of 12.88% and leverage ratios of 10.64%.



Other Safety
and Soundness RegulationsThere are a number of obligations and restrictions imposed on bank holding companies and their depository institution subsidiaries by federal law and regulatory policy that are designed to reduce potential loss exposure
to the depositors of such depository institutions and to the FDIC insurance funds in the event that the depository institution is insolvent or is in danger of becoming insolvent. For example, under the requirements of the Federal Reserve with
respect to bank holding company operations, a bank holding company is required to serve as a source of financial strength to its subsidiary depository institutions and to commit resources to support such institutions in circumstances where it might
not do so otherwise. In addition, the cross-guarantee provisions of federal law require insured depository institutions under common control to reimburse the FDIC for any loss suffered or reasonably anticipated by the FDIC as a result of
the insolvency of commonly controlled insured depository institutions or for any assistance provided by the FDIC to commonly controlled insured depository institutions in danger of failure. The FDIC may decline to enforce the cross-guarantee
provision if it determines that a waiver is in the best interests of the deposit insurance funds. The FDICs claim for reimbursement under the cross guarantee provisions is superior to claims of shareholders of the insured depository
institution or its holding company but is subordinate to claims of depositors, secured creditors and nonaffiliated holders of subordinated debt of the commonly controlled insured depository institutions.



Interstate Banking and BranchingCurrent federal law authorizes interstate
acquisitions of banks and bank holding companies without geographic limitation. Effective June 1, 1997, a bank headquartered in one state is authorized to merge with a bank headquartered in another state, as long as neither of the states had opted
out of such interstate merger authority prior to such date. After a bank has established branches in a state through an interstate merger transaction, the bank may establish and acquire additional branches at any location in the state where a bank
headquartered in that state could have established or acquired branches under applicable federal or state law.



Monetary PolicyThe commercial banking business is affected not only by general economic conditions but also by the monetary policies of the Federal Reserve. The instruments of monetary policy employed by the
Federal Reserve include open market operations in United States government securities, changes in the discount rate on member bank borrowing and changes in reserve requirements against deposits held by all federally insured banks. The Federal
Reserves monetary policies have had a significant effect on the operating results of commercial banks in the past and are expected to continue to do so in the future. In view of changing conditions in the national and international economy and
in the money markets, as well as the effect of actions by monetary fiscal authorities, including the Federal Reserve, no prediction can be made as to possible future changes in interest rates, deposit levels, loan demand or the business and earnings
of the Bank.



Federal Reserve SystemIn 1980, Congress enacted
legislation that imposed reserve requirements on all depository institutions that maintain transaction accounts or nonpersonal time deposits. NOW accounts, money market deposit accounts and other types of accounts that permit payments or transfers
to third parties fall within the definition of transaction accounts and are subject to these reserve requirements, as are any nonpersonal time deposits at an institution.



These percentages are subject to adjustment by the Federal Reserve. Because required reserves must be maintained in the form of vault cash
or in a non-interest-bearing account at, or on behalf of, a Federal Reserve Bank, the effect of the reserve requirement is to reduce the amount of the institutions interest-earning assets.



7



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Transactions with AffiliatesTransactions between banks and their affiliates are governed by Sections 23A and 23B
of the Federal Reserve Act. An affiliate of a bank is any bank or entity that controls, is controlled by or is under common control with such bank. Generally, Sections 23A and 23B (i) limit the extent to which the Bank or its subsidiaries may engage
in covered transactions with any one affiliate to an amount equal to 10% of such institutions capital stock and surplus, and maintain an aggregate limit on all such transactions with affiliates to an amount equal to 20% of such
capital stock and surplus, and (ii) require that all such transactions be on terms substantially the same, or at least as favorable, to the association or subsidiary as those provided to a nonaffiliate. The term covered transaction
includes the making of loans, purchase of assets, issuance of a guarantee and similar other types of transactions.



Loans to InsidersThe Federal Reserve Act and related regulations impose specific restrictions on loans to directors, executive officers and principal shareholders
of banks. Under Section 22(h) of the Federal Reserve Act, loans to a director, an executive officer and to a principal shareholder of a bank, and some affiliated entities of any of the foregoing, may not exceed, together with all other outstanding
loans to such person and affiliated entities, the banks loan-to-one borrower limit. Loans in the aggregate to insiders and their related interests as a class may not exceed two times the banks unimpaired capital and unimpaired surplus
until the banks total assets equal or exceed $100 million, at which time the aggregate is limited to the banks unimpaired capital and unimpaired surplus. Section 22(h) also prohibits loans, above amounts prescribed by the appropriate
federal banking agency, to directors, executive officers and principal shareholders of a bank or bank holding company, and their respective affiliates, unless such loan is approved in advance by a majority of the board of directors of the bank with
any interested director not participating in the voting. The FDIC has prescribed the loan amount, which includes all other outstanding loans to such person, as to which such prior board of director approval is required, as being the
greater of $25,000 or 5% of capital and surplus (up to $500 thousand). Section 22(h) requires that loans to directors, executive officers and principal shareholders be made on terms and underwriting standards substantially the same as offered in
comparable transactions to other persons.



Community Reinvestment ActUnder the Community Reinvestment Act and related regulations, depository institutions have an affirmative obligation to assist in meeting the credit needs of their market areas, including low and moderate-income areas, consistent with safe and
sound banking practice. The Community Reinvestment Act requires the adoption by each institution of a Community Reinvestment Act statement for each of its market areas describing the depository institutions efforts to assist in its
communitys credit needs. Depository institutions are periodically examined for compliance with the Community Reinvestment Act and are periodically assigned ratings in this regard. Banking regulators consider a depository institutions
Community Reinvestment Act rating when reviewing applications to establish new branches, undertake new lines of business, and/or acquire part or all of another depository institution. An unsatisfactory rating can significantly delay or even prohibit
regulatory approval of a proposed transaction by a bank holding company or its depository institution subsidiaries. The Bank received a rating of Satisfactory at its last Community Reinvestment Act performance evaluation, as of August 4,
2003.



The GLBA and federal bank regulators have made various changes to the
Community Reinvestment Act. Among other changes, Community Reinvestment Act agreements with private parties must be disclosed and annual reports must be made to a banks primary federal regulator. A bank holding company will not be permitted to
become a financial holding company and no new activities authorized under the GLBA may be commenced by a holding company or by a bank financial subsidiary if any of its bank subsidiaries received less than a satisfactory rating in its
latest Community Reinvestment Act examination.



Fair Lending; Consumer LawsIn addition to the Community Reinvestment Act, other federal and state laws regulate various lending and consumer aspects of the banking business. The Federal banking agencies and the Department of Justice, have become concerned that prospective
borrowers experience discrimination in their efforts to obtain loans from depository and other lending institutions. These agencies have brought litigation against depository institutions alleging discrimination against borrowers. Many of these
suits have been settled, in some cases on material terms, short of a full trial.



Recently, these governmental agencies have clarified what they consider to be lending discrimination and have specified various factors that they will use to determine the existence of lending discrimination under the Equal Credit
Opportunity Act and the Fair Housing Act, including evidence that a lender discriminated on a prohibited basis, evidence that a lender treated applicants differently based on prohibited factors in the absence of evidence that the treatment was the
result of prejudice or a conscious intention to discriminate, and evidence that a lender applied an otherwise neutral non-discriminatory policy uniformly to all applicants, but the practice had a discriminatory effect, unless the practice could be
justified as a business necessity .



8



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##### Table of Contents

Banks and other depository institutions also are subject to numerous consumer-oriented laws and regulations. These laws,
which include the Truth in Lending Act, the Truth in Savings Act, the Real Estate Settlement Procedures Act, the Electronic Funds Transfer Act, the Equal Credit Opportunity Act, the Fair and Accurate Credit Transactions Act of 2003 and the Fair
Housing Act, require compliance by depository institutions with various disclosure and consumer information handling requirements and requirements regulating the availability of funds after deposit or the making of some loans to customers.



Gramm-Leach-Bliley Act of 1999The Gramm-Leach-Bliley Act of 1999 was
signed into law on November 12, 1999. The GLBA covers a broad range of issues, including a repeal of most of the restrictions on affiliations among depository institutions, securities firms and insurance companies. The following description
summarizes some of its significant provisions.



The GLBA repealed sections 20
and 32 of the Glass-Steagall Act, thus permitting unrestricted affiliations between banks and securities firms. It also permits bank holding companies to elect to become financial holding companies, which can engage in a broad range of financial
services. A financial holding company may engage in or acquire companies that engage in a broad range of financial services, including securities activities such as underwriting, dealing, investment, merchant banking, insurance underwriting, sales
and brokerage activities. In order to become a financial holding company, a bank holding company and all of its affiliated depository institutions must be well-capitalized, well-managed and have at least a satisfactory Community Reinvestment Act
rating. New Peoples has elected to be treated as a financial holding company for various reasons.



The GLBA provides that the states continue to have the authority to regulate insurance activities, but prohibits the states in most instances from preventing or significantly interfering with the ability of a bank,
directly or through an affiliate, to engage in insurance sales, solicitations or cross-marketing activities. Although the states generally must regulate bank insurance activities in a nondiscriminatory manner, the states may continue to adopt and
enforce rules that specifically regulate bank insurance activities in specific areas identified under the law. Under the GLBA, the federal bank regulatory agencies adopted insurance consumer protection regulations that apply to sales practices,
solicitations, advertising and disclosures.



The GLBA adopted a system of
functional regulation under which the Federal Reserve is designated as the umbrella regulator for financial holding companies, but financial holding company affiliates are principally regulated by functional regulators such as the FDIC for state
nonmember bank affiliates, the Securities and Exchange Commission for securities affiliates, and state insurance regulators for insurance affiliates. It repealed the broad exemption of banks from the definitions of broker and
dealer for purposes of the Securities Exchange Act of 1934, as amended. It also identified a set of specific activities, including traditional bank trust and fiduciary activities, in which a bank may engage without being deemed a
broker, and a set of activities in which a bank may engage without being deemed a dealer. Additionally, the GLBA made conforming changes in the definitions of broker and dealer for purposes of the
Investment Company Act of 1940, as amended, and the Investment Advisers Act of 1940, as amended.



The GLBA contains extensive customer privacy protection provisions. Under these provisions, a financial institution must provide to its customers, both at the inception of the customer relationship and on an annual
basis, the institutions policies and procedures regarding the handling of customers nonpublic personal financial information. The law provides that, except for specific limited exceptions, an institution may not provide such personal
information to unaffiliated third parties unless the institution discloses to the customer that such information may be so provided and the customer is given the opportunity to opt out of such disclosure. An institution may not disclose to a
non-affiliated third party, other than to a consumer reporting agency, customer account numbers or other similar account identifiers for marketing purposes. The GLBA also provides that the states may adopt customer privacy protections that are
stricter than those contained in the act.



USA Patriot ActThe
USA Patriot Act became effective in October 2001 and provides for the facilitation of information sharing among governmental entities and financial institutions for the purpose of combating terrorism and money laundering. Among other provisions, the
USA Patriot Act permits financial institutions, upon providing notice to the United States Treasury, to share information with one another in order to better identify and report to the federal government concerning activities that may involve money
laundering or terrorists activities. The USA Patriot Act is considered a significant banking law in terms of information disclosure regarding certain customer transactions. Although it does create a reporting obligation for the Bank and NPB
Financial, New Peoples does not expect the USA Patriot Act to materially affect its products, services or other business activities.



The Federal Bureau of Investigation (FBI) has sent, and will send, our banking regulatory agencies lists of the names of persons suspected of terrorist
activities. The Bank and NPB Financial have been requested, and will be requested, to search their records for any relationships or transactions with persons on those lists. If the Bank or NPB Financial finds any relationship or transactions, it
must file a suspicious activity report and contact the FBI.



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The Office of Foreign Assets Control (OFAC), which is a division of the Department of the Treasury, is
responsible for helping to ensure that United States entities do not engage in transactions with enemies of the United States, as defined by various Executive Orders and Acts of Congress. OFAC has sent, and will send, our banking
regulatory agencies lists of names of persons and organizations suspected of aiding, harboring or engaging in terrorist acts. If the Bank or NPB Financial finds a name on any account, or wire transfer that is on an OFAC list, it must freeze such
account, file a suspicious activity report and notify the FBI. The USA Patriot Act also requires financial institutions, such as the Bank and NPB Financial, to maintain customer identification programs. These programs must provide for
the collection of certain identifying information at account openings, the verification of the identity of new account holders within a reasonable time period, the reasonable belief by a banking organization that it knows each customers
identity, the recordation of the information used to verify a customers identity and the comparison of the names of new customers against government lists of known or suspected terrorists or terrorist organizations.



Sarbanes-Oxley ActOn July 30, 2002 President Bush signed into law the Sarbanes-Oxley
Act of 2002 (the Sarbanes-Oxley Act). The stated goals of the Sarbanes-Oxley Act are to increase corporate responsibility, provide enhanced penalties for accounting and auditing improprieties by publicly traded companies and to protect
investors by improving the accuracy and reliability of corporate disclosures made pursuant to the securities law. The changes required by the Sarbanes-Oxley Act and its implementing regulations are intended to allow shareholders to monitor the
performance of companies and their directors more easily and effectively.



The
Sarbanes-Oxley Act generally applies to all domestic companies, such as New Peoples, that file periodic reports with the Securities and Exchange Commission (SEC) under the Securities Exchange Act of 1934, as amended. The Sarbanes-Oxley
Act includes significant additional disclosure requirements and new corporate governance rules, which required the SEC to adopt extensive additional disclosures, corporate governance provisions and other related rules. New Peoples has expended
considerable time and money in complying with the Sarbanes-Oxley Act and expects to continue to do so in the future.



Future Regulatory UncertaintyBecause federal regulation of financial institutions changes regularly and is the subject of constant legislative debate, New Peoples
cannot forecast how federal regulation of financial institutions may change in the future and impact its operations. Although Congress in recent years has sought to reduce the regulatory burden on financial institutions with respect to the approval
of specific transactions, New Peoples fully expects that the financial institution industry will remain heavily regulated in the near future and that additional laws or regulations may be adopted further regulating specific banking practices.



|Item 2. | Properties
|------- | ----------



At December 31, 2004, the Companys net investment in premises and equipment in service was $19.4 million. Our main office is located in Honaker, Virginia. This location contains a full service branch,
administration, and operations. During 2004, an operations center was built in Honaker and occupied in December. The new operations center will accommodate future growth.



The Bank owns 16 of its 19 full service branches. The owned properties in Virginia are located in Abingdon, Big Stone Gap, Bristol,
Castlewood, Clintwood, Davenport, Gate City, Grundy, Haysi, Honaker, Lebanon, Pounding Mill, Richlands, Tazewell, and Weber City. Offices in Princeton, West Virginia and Bloomingdale, Tennessee are also owned by the Bank.



The Bank has 4 operating lease arrangements with varying lengths terms. Of these 4, 3 are
full service branches in Bristol, Davenport and Dungannon, Virginia. The other leased office is located in Norton, Virginia and is used for loan production and NPB Financial operations.



We believe that all of our properties are maintained in good operating condition and are suitable and adequate for our operational needs.



We will continue to investigate and consider other possible sites that will
enable us to profitably serve our chosen market area. Purchases of premises and equipment for the year 2005 will depend on the decision to open additional branches.



|Item 3. | Legal Proceedings
|------- | -----------------



In the course of operations, we may become a party to legal proceedings. We are not aware of any material pending or threatened legal proceedings.



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##### Table of Contents

|Item 4. | Submission of Matters to a Vote of Security Holders
|------- | ---------------------------------------------------



None.



11



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##### Table of Contents

PART II



|Item 5. | Market for Registrants Common Equity, Related Stockholder Matters, and Issues/ Purchases of Equity Securities
|------- | --------------------------------------------------------------------------------------------------------------



|(a) | Market Information
|--- | ------------------



We act as our own transfer agent. At present, there is no public trading market for our common stock. Trades in our common stock occur sporadically on a local basis.



The high and low trade prices of our common stock for each quarter in the past two years are
set forth in the table below. Other transactions may have occurred at prices about which we are not aware.



|           |  |      |       |      |   |       |  |     |       |  |   |      
|---------- |  | ---- | ----- | ---- | - | ----- |  | --- | ----- |  | - | -----
|           |  | 2004 |       | 2003
|           |  | High |       | Low  |   | High  |  | Low
|1stquarter |  | $    | 15.00 |      | $ | 10.00 |  | $   | 10.00 |  | $ | 10.00
|2ndquarter |  |      | 25.00 |      |   | 10.00 |  |     | 10.00 |  |   | 9.00 
|3rdquarter |  |      | 15.00 |      |   | 8.00  |  |     | 10.00 |  |   | 10.00
|4thquarter |  |      | 20.00 |      |   | 10.00 |  |     | 11.00 |  |   | 10.00



The most recent sales price of which
management is aware was $15.00 per share during the first quarter of 2005.



|(b) | Holders
|--- | -------



On March 10, 2005, there were approximately 4,689 shareholders of record.



|(c) | Dividends
|--- | ---------



We have not declared a dividend. The declaration of dividends in the future will depend on our earnings and capital requirements. We are subject to certain restrictions imposed by the reserve and capital requirements
of federal and Virginia banking statutes and regulations. Additionally, we intend to follow a policy of retaining earnings, if any, for the purpose of increasing net worth and reserves in order to promote growth and the ability to compete in our
market area. As a result, we do not anticipate paying a dividend on our common stock in 2005. See Note 15 and Note 19 of the Notes to the Consolidated Financial Statements for further discussion of dividend limitations and capital requirements.



12



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##### Table of Contents

|Item 6. | Selected Financial Data
|------- | -----------------------



The following consolidated summary sets forth selected financial data for us for the periods and at the dates indicated. The selected financial data has been derived from
our audited financial statements for the years ended December 31, 2004, 2003, 2002, 2001, and 2000. The following is qualified in its entirety by the detailed information and the financial statements included elsewhere in this Form 10-K.



|                                                    |  |                                  |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|--------------------------------------------------- |  | -------------------------------- | ------- | - | ---- | - | ------- | ---- |  | - | ------- | - |  | ---- | ------- | - |  | - | ------- | -
|                                                    |  | For the Years Ended December 31, |        
|(Dollars in thousands, except per share data)       |  | 2004                             |         |   | 2003 |   |         | 2002 |  |   | 2001    |   |  | 2000 |        
|Income Statement Data                               |  |                                  |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Gross interest income                               |  | $                                | 24,265  |   |      | $ | 19,956  |      |  | $ | 17,040  |   |  | $    | 15,267  |   |  | $ | 11,228  |  
|Gross interest expense                              |  |                                  | 6,471   |   |      |   | 6,332   |      |  |   | 6,375   |   |  |      | 7,950   |   |  |   | 6,325   |  
|Net interest income                                 |  |                                  | 17,794  |   |      |   | 13,624  |      |  |   | 10,665  |   |  |      | 7,317   |   |  |   | 4,903   |  
|Provision for possible loan losses                  |  |                                  | 990     |   |      |   | 364     |      |  |   | 603     |   |  |      | 571     |   |  |   | 513     |  
|Net interest income after provision for loan losses |  |                                  | 16,804  |   |      |   | 13,260  |      |  |   | 10,062  |   |  |      | 6,746   |   |  |   | 4,390   |  
|Non-interest income                                 |  |                                  | 2,558   |   |      |   | 1,802   |      |  |   | 1,412   |   |  |      | 753     |   |  |   | 444     |  
|Non-interest expense                                |  |                                  | 14,422  |   |      |   | 10,801  |      |  |   | 8,218   |   |  |      | 5,934   |   |  |   | 3,683   |  
|Income (loss) before income taxes                   |  |                                  | 4,940   |   |      |   | 4,261   |      |  |   | 3,256   |   |  |      | 1,565   |   |  |   | 1,151   |  
|Income tax expense (benefit)                        |  |                                  | 1,682   |   |      |   | 1,447   |      |  |   | 1,078   |   |  |      | 556     |   |  |   | 389     |  
|Net income (loss)                                   |  |                                  | 3,258   |   |      |   | 2,814   |      |  |   | 2,178   |   |  |      | 1,009   |   |  |   | 762     |  
|Per Share Data and Shares Outstanding (1)           |  |                                  |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Net income, basic                                   |  |                                  | 0.47    |   |      |   | 0.41    |      |  |   | 0.36    |   |  |      | 0.17    |   |  |   | 0.14    |  
|Net income, diluted                                 |  |                                  | 0.46    |   |      |   | 0.41    |      |  |   | 0.35    |   |  |      | 0.17    |   |  |   | 0.14    |  
|Cash dividends                                      |  |                                  |        |   |      |   |        |      |  |   |        |   |  |      |        |   |  |   |        |  
|Book value at end of period                         |  |                                  | 5.22    |   |      |   | 4.75    |      |  |   | 4.04    |   |  |      | 3.15    |   |  |   | 2.98    |  
|Tangible book value at period end                   |  |                                  | 5.22    |   |      |   | 4.75    |      |  |   | 4.04    |   |  |      | 3.15    |   |  |   | 2.98    |  
|Weighted average shares outstanding, basic(1)       |  |                                  | 6,907   |   |      |   | 6,876   |      |  |   | 6,105   |   |  |      | 6,000   |   |  |   | 5,400   |  
|Weighted average shares outstanding, diluted(1)     |  |                                  | 7,032   |   |      |   | 6,937   |      |  |   | 6,168   |   |  |      | 6,000   |   |  |   | 5,400   |  
|Shares outstanding at period end(1)                 |  |                                  | 6,910   |   |      |   | 6,903   |      |  |   | 6,008   |   |  |      | 6,000   |   |  |   | 6,000   |  
|Shares subscribed at period end                     |  |                                  |        |   |      |   |        |      |  |   | 541     |   |  |      |        |   |  |   |        |  
|Period-End Balance Sheet Data                       |  |                                  |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Total assets                                        |  |                                  | 437,751 |   |      |   | 342,508 |      |  |   | 291,398 |   |  |      | 214,253 |   |  |   | 157,390 |  
|Total loans                                         |  |                                  | 383,567 |   |      |   | 295,438 |      |  |   | 222,394 |   |  |      | 179,216 |   |  |   | 131,086 |  
|Total allowance for loan losses                     |  |                                  | (3,090  | ) |      |   | (2,432  | )    |  |   | (2,224  | ) |  |      | (1,793  | ) |  |   | (1,311  | )
|Total deposits                                      |  |                                  | 388,120 |   |      |   | 308,221 |      |  |   | 263,805 |   |  |      | 194,011 |   |  |   | 138,447 |  
|Shareholders equity                                |  |                                  | 36,098  |   |      |   | 32,805  |      |  |   | 26,481  |   |  |      | 18,891  |   |  |   | 17,882  |  
|Performance Ratios                                  |  |                                  |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Return on average assets                            |  |                                  | 0.83    | % |      |   | 0.86    | %    |  |   | 0.89    | % |  |      | 0.54    | % |  |   | 0.58    | %
|Return on average shareholders equity              |  |                                  | 9.58    | % |      |   | 9.46    | %    |  |   | 10.80   | % |  |      | 5.48    | % |  |   | 5.26    | %
|Average shareholders equity to average assets      |  |                                  | 8.64    | % |      |   | 9.09    | %    |  |   | 8.22    | % |  |      | 9.91    | % |  |   | 11.10   | %
|Net interest margin(2)                              |  |                                  | 5.00    | % |      |   | 4.58    | %    |  |   | 4.87    | % |  |      | 4.31    | % |  |   | 3.99    | %
|Asset Quality Ratios                                |  |                                  |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Net charge-offs to average loans                    |  |                                  | 0.10    | % |      |   | 0.06    | %    |  |   | 0.09    | % |  |      | 0.06    | % |  |   | 0.06    | %
|Allowance to period-end gross loans                 |  |                                  | 0.81    | % |      |   | 0.82    | %    |  |   | 1.00    | % |  |      | 1.00    | % |  |   | 1.00    | %
|Nonperforming assets to gross loans                 |  |                                  | 0.23    | % |      |   | 0.19    | %    |  |   | 0.34    | % |  |      | 0.04    | % |  |   | 0.07    | %
|Capital and Liquidity Ratios                        |  |                                  |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|                                                    |  |                                  |         |   |     
|Risk-based:                                         |  |                                  |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Tier 1 capital                                      |  |                                  | 12.88   | % |      |   | 12.20   | %    |  |   | 11.05   | % |  |      | 10.99   | % |  |   | 15.24   | %
|Total capital                                       |  |                                  | 13.72   | % |      |   | 13.10   | %    |  |   | 12.11   | % |  |      | 12.03   | % |  |   | 16.36   | %
|Leverage capital ratio                              |  |                                  | 10.64   | % |      |   | 9.29    | %    |  |   | 9.51    | % |  |      | 9.19    | % |  |   | 11.73   | %
|Total equity to total assets                        |  |                                  | 8.25    | % |      |   | 9.58    | %    |  |   | 9.09    | % |  |      | 8.82    | % |  |   | 11.36   | %



|(1) | We have adjusted all share amounts and per share data to reflect a two-for-one stock split of
our common stock in January 2002.
|--- | -------------------------------------------------------------------------------------------------------------------------------



|(2) | Net interest margin is calculated as tax-equivalent net interest income divided by average
earning assets and represents our net yield on our earning assets.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------



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|Item 7. | Managements Discussion and Analysis of Financial Condition and Results of Operation
|------- | ------------------------------------------------------------------------------------



Caution About Forward Looking Statements



We make forward looking statements in this annual report that are subject to risks and uncertainties. These forward looking statements include statements regarding our
profitability, liquidity, allowance for loan losses, interest rate sensitivity, market risk, growth strategy, and financial and other goals. The words believes, expects, may, will, should,
projects, contemplates, anticipates, forecasts, intends, or other similar words or terms are intended to identify forward looking statements.



These forward looking statements are subject to significant uncertainties because they are
based upon or are affected by factors including the following: the ability to successfully manage our growth or implement our growth strategies if we are unable to identify attractive markets, locations or opportunities to expand in the future;
maintaining capital levels adequate to support our growth; maintaining cost controls and asset qualities as we open or acquire new branches; reliance on our management team, including our ability to attract and retain key personnel; the successful
management of interest rate risk; changes in general economic and business conditions in our market area; changes in interest rates and interest rate policies; risks inherent in making loans such as repayment risks and fluctuating collateral values;
competition with other banks and financial institutions, and companies outside of the banking industry, including those companies that have substantially greater access to capital and other resources; demand, development and acceptance of new
products and services; problems with technology utilized by us; changing trends in customer profiles and behavior; and changes in banking and other laws and regulations applicable to us.



Because of these uncertainties, our actual future results may be materially different from the results indicated by these forward looking
statements. In addition, our past results of operations do not necessarily indicate our future results.



General



The following commentary
discusses major components of our business and presents an overview of our consolidated financial position at December 31, 2004 and 2003 as well as results of operations for the years ended December 31, 2004, 2003 and 2002. This discussion should be
reviewed in conjunction with the consolidated financial statements and accompanying notes and other statistical information presented elsewhere in this Form 10-K.



We are not aware of any current recommendations by any regulatory authorities that, if they were implemented, would have a material effect
on our liquidity, capital resources or results of operations.



New Peoples
generates a significant amount of its income from the net interest income earned by the Bank. Net interest income is the difference between interest income and interest expense. Interest income depends on the amount of interest-earning assets
outstanding during the period and the interest rates earned thereon. The Banks cost of money is a function of the average amount of deposits and borrowed money outstanding during the period and the interest rates paid thereon. The quality of
the assets further influences the amount of interest income lost on nonaccrual loans and the amount of additions to the allowance for loan losses. The Bank also generates noninterest income from service charges on deposit accounts and commissions on
insurance products sold.



Overview



During 2004, we continued to have excellent growth. At December 31, 2004, total assets were
$437.8 million, an increase of $95.2 million, or 27.81%, over 2003. Total deposits grew $79.9 million, or 25.92%, to $388.1 million, and total loans were $383.6 million, an increase of $88.1 million, or 29.83%. Total capital was $36.1 million at the
end of 2004 as compared to total capital of $32.8 million at the end of 2003. During 2004, we issued $11.3 million in trust preferred securities to support future growth needs.



Our net income for the year ended December 31, 2004 was $3.3 million, as compared to net income of $2.8 million, an increase of $444
thousand, or 15.78% over the previous year. Net income per share was $.47 for the year ended December 31, 2004, as compared to $.41 and $.36 for 2003 and 2002, respectively. This increase is due to the increased production at the branches and to a
higher net interest margin. The provision for loan losses increased to $990 thousand from $364 thousand as was deemed appropriate by the evaluation of the quality of the loan portfolio by management. The return on average assets was .83%, .86% and
..89% for the periods ending December 31, 2004, 2003 and 2002, respectively. The



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return on average equity was 9.58%, 9.46% and 10.80% for the same periods ending December 31, 2004, 2003 and 2002, respectively.



Asset quality remains strong as evidenced by non-performing loans being $888 thousand, or
..23% of total loans during 2004. Net charge offs during 2004 totaled $332 thousand. The ratio of net charge offs to average loans was .10%. The allowance for loan losses was $3.1 million at December 31, 2004 as compared to $2.4 million in 2003.



During 2004, New Peoples continued expanding its branch network by adding
offices in Abingdon, Bristol and Richlands, Virginia. We anticipate that each new office will contribute to the growth of New Peoples. The Bank currently has 20 locations throughout southwestern Virginia, southern West Virginia, and eastern
Tennessee. We also opened our new operations center in Honaker, Virginia which houses our administrative offices and bank operations.



We continually strive to meet the financial service needs of our customers. Our focus remains on being a community bank that serves the financial needs of our customers
throughout southwestern Virginia, southern West Virginia, and eastern Tennessee.



Critical Accounting Policies



Certain critical accounting
policies affect the more significant judgments and estimates used in the preparation of our financial statements. Our most critical accounting policy relates to our provision for loan losses, which reflects the estimated losses resulting from the
inability of our customers to make required payments. If the financial condition of our borrowers were to deteriorate, resulting in an impairment of their ability to make payments, our estimates would be updated, and additional provisions could be
required. For further discussion of the estimates used in determining the allowance for loan losses, we refer you to the section on Provision for Loan Losses in this discussion.



Net Interest Income and Net Interest Margin



Our main source of income is our net interest margin, or the difference between interest
income earned on earning assets and interest expenses on interest bearing liabilities. The net interest margin best indicates how effective we have been in deploying assets and liabilities and pricing strategies.



Our net interest income, which equals total interest and dividend income less total interest
expense, increased from $13.6 million for 2003 to $17.8 million for 2004. The increase is related to the increase in loan volume during the year and controlling interest expenses on deposits. Loan income increased to $24.0 million for 2004 from
$19.4 million for 2003, which is an increase of $4.6 million, or 23.88%. In addition, despite a $67.3 million, or 24.47% annual increase in total interest bearing deposits, we were able to control the costs on these funds. Total interest expense
slightly increased $139 thousand to $6.5 million. The increase is primarily attributed to the $232 thousand interest expense on the trust preferred securities issued in July 2004.



The net interest margin, which equals net interest income divided by total interest earning assets, in 2004 was 5.00%, compared to 4.58% for
2003. This is an increase of 42 basis points. During 2004, we experienced strong loan growth resulting in a higher yield on earning assets of 6.82% for 2004 versus 6.71% for 2003. With the rise of interest rates, we anticipate the net interest
margin to slightly decrease during 2005, but remain strong.



The net interest
margin in 2003 was 4.58%, compared to 4.87% for 2002. This is a decrease of 29 basis points. During 2003, we experienced large deposit growth in a short period of time as a result of new branches. This growth outpaced loan growth for a period of
time. As a result, the funds were invested in lower yielding assets such as investments and federal funds sold; thus, the result was a lower yield on earning assets of 6.71% for 2003 versus 7.78% for 2002. During the fourth quarter of 2003, we
experienced some deposit runoff and short term deposits re-priced at lower interest rates. In addition, loan volume increased significantly which has reduced the amount of funds invested in lower yielding assets.



15



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##### Table of Contents

The following table shows the rates paid on earning assets and deposit liabilities for the periods indicated.



Net Interest Margin Analysis

Average Balances, Income and Expense, and Yields and Rates

(Dollars in thousands)



|                                           |  |                                     |         |   |                                     |   |              |                                     |      |                |  |   |                |   |              |   |        |                |      |   |                |   |               |   |  |   |        |  |      |  
|------------------------------------------ |  | ----------------------------------- | ------- | - | ----------------------------------- | - | ------------ | ----------------------------------- | ---- | -------------- |  | - | -------------- | - | ------------ | - | ------ | -------------- | ---- | - | -------------- | - | ------------- | - |  | - | ------ |  | ---- | -
|                                           |  | For the Year EndedDecember 31, 2004 |         |   | For the Year EndedDecember 31, 2003 |   |              | For the Year EndedDecember 31, 2002 |     
|                                           |  | AverageBalance                      |         |   | Income/Expense                      |   | Yields/Rates |                                     |      | AverageBalance |  |   | Income/Expense |   | Yields/Rates |   |        | AverageBalance |      |   | Income/Expense |   | Yields/ Rates |  
|ASSETS                                     |  |                                     |         |   |                                     |   |              |                                     |      |                |  |   |                |   |              |   |        |                |      |   |                |   |               |   |  |   |        |  |      |  
|Loans (1), (2), (3)                        |  | $                                   | 344,711 |   |                                     | $ | 24,035       |                                     | 6.97 | %              |  | $ | 254,153        |   |              | $ | 19,402 |                | 7.63 | % |                | $ | 201,417       |   |  | $ | 16,675 |  | 8.28 | %
|Federal Funds sold                         |  |                                     | 3,170   |   |                                     |   | 46           |                                     | 1.45 | %              |  |   | 16,538         |   |              |   | 172    |                | 1.04 | % |                |   | 12,501        |   |  |   | 200    |  | 1.60 | %
|Other investments (3)                      |  |                                     | 8,095   |   |                                     |   | 184          |                                     | 2.27 | %              |  |   | 26,695         |   |              |   | 382    |                | 1.43 | % |                |   | 5,224         |   |  |   | 165    |  | 3.16 | %
|                                           |  |                                     |         |   |                                     |   |              |                                     |      |                |  |   |                |   |              |   |        |                |      |   |                |   |               |   |  |   |        |  |      |  
|Total Earning Assets                       |  |                                     | 355,976 |   |                                     |   | 24,265       |                                     | 6.82 | %              |  |   | 297,386        |   |              |   | 19,956 |                | 6.71 | % |                |   | 219,142       |   |  |   | 17,040 |  | 7.78 | %
|                                           |  |                                     |         |   |                                     |   |              |                                     |      |                |  |   |                |   |              |   |        |                |      |   |                |   |               |   |  |   |        |  |      |  
|Less: Allowance for loans losses           |  |                                     | (2,672  | ) |                                     |   |              |                                     |      |                |  |   | (2,503         | ) |              |   |        |                |      |   |                |   | (2,003        | ) |  |   |        |  |      |  
|Non-earning assets                         |  |                                     | 40,578  |   |                                     |   |              |                                     |      |                |  |   | 32,194         |   |              |   |        |                |      |   |                |   | 28,389        |   |  |   |        |  |      |  
|                                           |  |                                     |         |   |                                     |   |              |                                     |      |                |  |   |                |   |              |   |        |                |      |   |                |   |               |   |  |   |        |  |      |  
|Total Assets                               |  |                                     | 393,882 |   |                                     |   |              |                                     |      |                |  | $ | 327,077        |   |              |   |        |                |      |   |                | $ | 245,528       |   |  |   |        |  |      |  
|                                           |  |                                     |         |   |                                     |   |              |                                     |      |                |  |   |                |   |              |   |        |                |      |   |                |   |               |   |  |   |        |  |      |  
|LIABILITIES AND STOCKHOLDERS EQUITY       |  |                                     |         |   |                                     |   |              |                                     |      |                |  |   |                |   |              |   |        |                |      |   |                |   |               |   |  |   |        |  |      |  
|Deposits                                   |  |                                     |         |   |                                     |   |              |                                     |      |                |  |   |                |   |              |   |        |                |      |   |                |   |               |   |  |   |        |  |      |  
|Demand  Interest bearing                  |  | $                                   | 21,031  |   |                                     |   | 105          |                                     | 0.50 | %              |  | $ | 14,224         |   |              |   | 110    |                | 0.77 | % |                | $ | 13,253        |   |  |   | 107    |  | 0.81 | %
|Savings                                    |  |                                     | 42,460  |   |                                     |   | 410          |                                     | 0.97 | %              |  |   | 34,670         |   |              |   | 441    |                | 1.27 | % |                |   | 18,862        |   |  |   | 451    |  | 2.39 | %
|Time deposits                              |  |                                     | 243,586 |   |                                     |   | 5,680        |                                     | 2.33 | %              |  |   | 215,734        |   |              |   | 5,770  |                | 2.67 | % |                |   | 170,999       |   |  |   | 5,817  |  | 3.40 | %
|Short Term Borrowings                      |  |                                     | 3,051   |   |                                     |   | 44           |                                     | 1.44 | %              |  |   | 730            |   |              |   | 11     |                | 1.51 | % |                |   |              |   |  |   |       |  |     |  
|                                           |  |                                     |         |   |                                     |   |              |                                     |      |                |  |   |                |   |              |   |        |                |      |   |                |   |               |   |  |   |        |  |      |  
|Trust Preferred Securities                 |  |                                     | 4,715   |   |                                     |   | 232          |                                     | 4.92 | %              |  |   |                |   |              |   |        |                |      |   |                |   |               |   |  |   |        |  |      |  
|                                           |  |                                     |         |   |                                     |   |              |                                     |      |                |  |   |                |   |              |   |        |                |      |   |                |   |               |   |  |   |        |  |      |  
|Total interest bearing liabilities         |  |                                     | 314,843 |   |                                     |   | 6,471        |                                     | 2.06 | %              |  |   | 265,358        |   |              |   | 6,332  |                | 2.39 | % |                |   | 203,114       |   |  |   | 6,375  |  | 3.14 | %
|                                           |  |                                     |         |   |                                     |   |              |                                     |      |                |  |   |                |   |              |   |        |                |      |   |                |   |               |   |  |   |        |  |      |  
|Non-interest bearing deposits              |  |                                     | 42,728  |   |                                     |   |              |                                     |      |                |  |   | 30,473         |   |              |   |        |                |      |   |                |   | 20,901        |   |  |   |        |  |      |  
|Other liabilities                          |  |                                     | 2,297   |   |                                     |   |              |                                     |      |                |  |   | 1,501          |   |              |   |        |                |      |   |                |   | 1,340         |   |  |   |        |  |      |  
|                                           |  |                                     |         |   |                                     |   |              |                                     |      |                |  |   |                |   |              |   |        |                |      |   |                |   |               |   |  |   |        |  |      |  
|Total Liabilities                          |  |                                     | 359,868 |   |                                     |   |              |                                     |      |                |  |   | 297,332        |   |              |   |        |                |      |   |                |   | 225,355       |   |  |   |        |  |      |  
|Stockholders Equity                       |  |                                     | 34,014  |   |                                     |   |              |                                     |      |                |  |   | 29,745         |   |              |   |        |                |      |   |                |   | 20,173        |   |  |   |        |  |      |  
|                                           |  |                                     |         |   |                                     |   |              |                                     |      |                |  |   |                |   |              |   |        |                |      |   |                |   |               |   |  |   |        |  |      |  
|Total Liabilities and Stockholders Equity |  | $                                   | 393,882 |   |                                     |   |              |                                     |      |                |  | $ | 327,077        |   |              |   |        |                |      |   |                | $ | 245,528       |   |  |   |        |  |      |  
|                                           |  |                                     |         |   |                                     |   |              |                                     |      |                |  |   |                |   |              |   |        |                |      |   |                |   |               |   |  |   |        |  |      |  
|Net Interest Income                        |  |                                     |         |   |                                     | $ | 17,794       |                                     |      |                |  |   |                |   |              | $ | 13,624 |                |      |   |                |   |               |   |  | $ | 10,665 |  |      |  
|                                           |  |                                     |         |   |                                     |   |              |                                     |      |                |  |   |                |   |              |   |        |                |      |   |                |   |               |   |  |   |        |  |      |  
|Net Yield on Interest Earning Assets       |  |                                     |         |   |                                     |   |              |                                     | 5.00 | %              |  |   |                |   |              |   |        |                | 4.58 | % |                |   |               |   |  |   |        |  | 4.87 | %
|                                           |  |                                     |         |   |                                     |   |              |                                     |      |                |  |   |                |   |              |   |        |                |      |   |                |   |               |   |  |   |        |  |      |  
|Net Interest Spread                        |  |                                     |         |   |                                     |   |              |                                     | 4.76 | %              |  |   |                |   |              |   |        |                | 4.32 | % |                |   |               |   |  |   |        |  | 4.64 | %
|                                           |  |                                     |         |   |                                     |   |              |                                     |      |                |  |   |                |   |              |   |        |                |      |   |                |   |               |   |  |   |        |  |      |  



|(1) | Non-accrual loans are not significant and have been included in the average balance of loans outstanding.
|--- | ---------------------------------------------------------------------------------------------------------



|(2) | Loan fees are not material and have been included in interest income on loans.
|--- | ------------------------------------------------------------------------------



|(3) | Tax exempt income is not significant and has been treated as fully taxable.
|--- | ---------------------------------------------------------------------------



Net interest income is affected by changes in both average interest rates and the average volumes of interest-earning assets and interest-bearing liabilities. The
following table sets forth the amounts of the total changes in interest income and expense which can be attributed to rate (change in rate multiplied by old volume) and volume (change in volume multiplied by old rate) for the periods indicated. The
change in interest due to both volume and rate has been allocated to the change due to rates.



16



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Volume and Rate Analysis

(Dollars in thousands)



|                                   |  |                                          |       |   |                                          |   |        |                                 |  |   |              |   |            |   |       |                                 |   |        |   |  |   |       |  
|---------------------------------- |  | ---------------------------------------- | ----- | - | ---------------------------------------- | - | ------ | ------------------------------- |  | - | ------------ | - | ---------- | - | ----- | ------------------------------- | - | ------ | - |  | - | ----- | -
|                                   |  | 2004 Compared to 2003 Increase(Decrease) |       |   | 2003 Compared to 2002 Increase(Decrease) |  
|                                   |  | VolumeEffect                             |       |   | RateEffect                               |   |        | Change inInterestIncome/Expense |  |   | VolumeEffect |   | RateEffect |   |       | Change inInterestIncome/Expense |  
|Interest Income:                   |  |                                          |       |   |                                          |   |        |                                 |  |   |              |   |            |   |       |                                 |   |        |   |  |   |       |  
|Loans                              |  | $                                        | 6,913 |   |                                          | $ | (2,289 | )                               |  | $ | 4,633        |   |            | $ | 4,366 |                                 | $ | (1,639 | ) |  | $ | 2,727 |  
|Federal funds sold                 |  |                                          | (139  | ) |                                          |   | 13     |                                 |  |   | (126         | ) |            |   | 65    |                                 |   | (93    | ) |  |   | (28   | )
|Other investments                  |  |                                          | (266  | ) |                                          |   | 68     |                                 |  |   | (198         | ) |            |   | 678   |                                 |   | (461   | ) |  |   | 217   |  
|                                   |  |                                          |       |   |                                          |   |        |                                 |  |   |              |   |            |   |       |                                 |   |        |   |  |   |       |  
|Total Earning Assets               |  |                                          | 6,508 |   |                                          |   | (2,208 | )                               |  |   | 4,309        |   |            |   | 5,109 |                                 |   | (2,193 | ) |  |   | 2,916 |  
|                                   |  |                                          |       |   |                                          |   |        |                                 |  |   |              |   |            |   |       |                                 |   |        |   |  |   |       |  
|Interest Bearing Liabilities:      |  |                                          |       |   |                                          |   |        |                                 |  |   |              |   |            |   |       |                                 |   |        |   |  |   |       |  
|Demand                             |  |                                          | 53    |   |                                          |   | (57    | )                               |  |   | (5           | ) |            |   | 8     |                                 |   | (5     | ) |  |   | 3     |  
|Savings                            |  |                                          | 99    |   |                                          |   | (128   | )                               |  |   | (31          | ) |            |   | 378   |                                 |   | (388   | ) |  |   | (10   | )
|All other time deposits            |  |                                          | 745   |   |                                          |   | (839   | )                               |  |   | (90          | ) |            |   | 1,522 |                                 |   | (1,569 | ) |  |   | (47   | )
|Short term borrowings              |  |                                          | 35    |   |                                          |   | (2     | )                               |  |   | 33           |   |            |   |      |                                 |   |       |   |  |   | 11    |  
|Trust Preferred Securities         |  |                                          | 232   |   |                                          |   |       |                                 |  |   | 232          |   |            |   |      |                                 |   |       |   |  |   |      |  
|                                   |  |                                          |       |   |                                          |   |        |                                 |  |   |              |   |            |   |       |                                 |   |        |   |  |   |       |  
|Total Interest Bearing Liabilities |  |                                          | 1,164 |   |                                          |   | (1,026 | )                               |  |   | 139          |   |            |   | 1,908 |                                 |   | (1,962 | ) |  |   | (43   | )
|                                   |  |                                          |       |   |                                          |   |        |                                 |  |   |              |   |            |   |       |                                 |   |        |   |  |   |       |  
|Change in Net Interest Income      |  | $                                        | 5,344 |   |                                          | $ | (1,182 | )                               |  | $ | 4,170        |   |            | $ | 3,201 |                                 | $ | (231   | ) |  | $ | 2,959 |  
|                                   |  |                                          |       |   |                                          |   |        |                                 |  |   |              |   |            |   |       |                                 |   |        |   |  |   |       |  



Loans



Our primary source of income comes from interest earned on loans receivable. We have
continued to have strong loan demand as evidenced by annual increases of $88.1 million, $73.0 million, and $43.1 million for the years 2004, 2003 and 2002, respectively. A schedule of loans by type is set forth immediately below. Approximately
69.68% of the loan portfolio is secured by real estate at the end of 2004.



Loans receivable outstanding are summarized as follows:



Loan Portfolio



|                                       |  |              |         |      |   |         |  |      |         |      |   |         |  |   |        
|-------------------------------------- |  | ------------ | ------- | ---- | - | ------- |  | ---- | ------- | ---- | - | ------- |  | - | -------
|                                       |  | December 31,
|(Dollars in thousands)                 |  | 2004         |         | 2003 |   | 2002    |  | 2001 |         | 2000
|Commercial, financial and agricultural |  | $            | 70,915  |      | $ | 58,593  |  | $    | 42,959  |      | $ | 35,168  |  | $ | 29,941 
|Real estate  construction             |  |              | 11,332  |      |   | 7,258   |  |      | 5,615   |      |   | 3,845   |  |   | 1,528  
|Real estate  mortgage                 |  |              | 255,925 |      |   | 185,191 |  |      | 131,050 |      |   | 98,229  |  |   | 70,858 
|Installment loans to individuals       |  |              | 45,395  |      |   | 44,396  |  |      | 42,770  |      |   | 41,974  |  |   | 28,759 
|                                       |  |              |         |      |   |         |  |      |         |      |   |         |  |   |        
|Total                                  |  | $            | 383,567 |      | $ | 295,438 |  | $    | 222,394 |      | $ | 179,216 |  | $ | 131,086
|                                       |  |              |         |      |   |         |  |      |         |      |   |         |  |   |        



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Our loan maturities as of December 31, 2004 are shown in the following table:



Maturities of Loans



|                              |  |                   |         |                  |   |                 |  |       |         |  |   |        
|----------------------------- |  | ----------------- | ------- | ---------------- | - | --------------- |  | ----- | ------- |  | - | -------
|(Dollars in thousands)        |  | Less thanOne Year |         | One to FiveYears |   | After FiveYears |  | Total
|Commercial and agriculture    |  | $                 | 34,601  |                  | $ | 22,457          |  | $     | 13,793  |  | $ | 70,851 
|Real estate                   |  |                   | 80,569  |                  |   | 41,394          |  |       | 146,034 |  |   | 267,997
|Consumer - installment/ other |  |                   | 9,168   |                  |   | 33,068          |  |       | 2,483   |  |   | 44,719 
|                              |  |                   |         |                  |   |                 |  |       |         |  |   |        
|Total                         |  | $                 | 124,338 |                  | $ | 96,919          |  | $     | 162,310 |  | $ | 383,567
|                              |  |                   |         |                  |   |                 |  |       |         |  |   |        
|Loans with fixed rates        |  | $                 | 24,700  |                  | $ | 76,894          |  | $     | 158,044 |  | $ | 259,638
|Loans with variable rates     |  |                   | 99,638  |                  |   | 20,025          |  |       | 4,266   |  |   | 123,929
|                              |  |                   |         |                  |   |                 |  |       |         |  |   |        
|Total                         |  | $                 | 124,338 |                  | $ | 96,919          |  | $     | 162,310 |  | $ | 383,567
|                              |  |                   |         |                  |   |                 |  |       |         |  |   |        



This table reflects the earlier of the
maturity or re-pricing dates for loans at December 31, 2004. In preparing this table, no assumptions are made with respect to loan prepayments. Loan principal payments are included in the earliest period in which the loan matures or can be
re-priced. Principal payments on installment loans scheduled prior to maturity are included in the period of maturity or re-pricing.



Provision for Loan Losses



The provision for loan losses was $990 thousand for 2004 compared with $364 thousand for 2003. The allowance for loan losses was $3.1 million at December 31, 2004. The
ratio of the allowance for loan losses to total loans was .81% at the end of 2004 as compared to .82% at the end of 2003. Net loans charged off for 2004 were $332 thousand, or .10% of average loans, compared to $156 thousand for 2003, or .06% of
average loans.



The provision for loan losses was $603 thousand for 2002 as
compared with $364 thousand for 2003. The allowance for loan losses at the end of 2002 was approximately 1.00% of total loans as compared to .82% at the end of 2003. Net loans charged off for 2002 were $172 thousand, or .09% of average loans, and
$156 thousand, or .06% of average loans at the end of 2003.



The calculation of
the allowance for loan losses is considered a critical accounting policy. The adequacy of the allowance for loan losses is based upon managements judgment and analysis. The following factors are evaluated in determining the adequacy of the
allowance: risk characteristics of the loan portfolio, current and historical loss experience, concentrations and internal and external factors such as general economic conditions.



Certain risk factors exist in the Banks loan portfolio. Since the Bank began in 1998, we have experienced significant loan growth each
year. Although we have experienced lenders who are familiar with their customer base, some of the loans are too new to have exhibited signs of weakness. In addition, recent expansions into new markets increase credit risk. We consider these factors
to be the primary higher risk characteristics of the loan portfolio.



Loans
delinquent greater than 90 days still accruing interest and loans in non-accrual status present a higher risk factor. As of December 31, 2004, there were 13 loans in non-accrual status totaling $773 thousand, or .20% of total loans. The amount of
interest that would have been recognized on these loans in the year 2004 was $75 thousand. There were 4 loans greater than 90 days past due and still accruing interest totaling $115 thousand, or .03% of total loans. It is our policy to stop accruing
interest on a loan, and classify that loan as non-accrual under the following circumstances: (a) whenever we are advised by the borrower that scheduled payment or interest payments cannot be met, (b) when our best judgment indicates that payment in
full of principal and interest can no longer be expected, or (c) when any such loan or obligation becomes delinquent for 90 days unless it is both well secured and in the process of collection. Non-accrual loans did not have a significant impact on
interest income in any of the periods presented. No loans are classified as troubled debt restructurings as defined by Financial Accounting Standards Boards (FASB) Statement of Financial Accounting Standards (SFAS) No. 15, Accounting by
Debtors and Creditors for Troubled Debt Restructurings. There are also no loans identified as potential problem loans. We do not have any commitments to lend additional funds to non-performing debtors. Following is a summary of
non-accrual and past due loans greater than 90 days still accruing interest:



Non-Accrual and Past Due Loans

(Dollars in thousands)



|                                                  |  |              |      |   |      |   |      |      |  |   |      |   |  |      |      |   |  |   |      |  
|------------------------------------------------- |  | ------------ | ---- | - | ---- | - | ---- | ---- |  | - | ---- | - |  | ---- | ---- | - |  | - | ---- | -
|                                                  |  | December 31, |     
|                                                  |  | 2004         |      |   | 2003 |   |      | 2002 |  |   | 2001 |   |  | 2000 |     
|Non-accruing loans                                |  | $            | 773  |   |      | $ | 539  |      |  | $ | 761  |   |  | $    | 47   |   |  | $ | 73   |  
|Loans past due 90 days or more and still accruing |  |              | 115  |   |      |   | 26   |      |  |   |     |   |  |      | 29   |   |  |   | 23   |  
|                                                  |  |              |      |   |      |   |      |      |  |   |      |   |  |      |      |   |  |   |      |  
|Total                                             |  | $            | 888  |   |      | $ | 565  |      |  | $ | 761  |   |  | $    | 76   |   |  | $ | 96   |  
|                                                  |  |              |      |   |      |   |      |      |  |   |      |   |  |      |      |   |  |   |      |  
|Percent of total loans                            |  |              | 0.23 | % |      |   | 0.19 | %    |  |   | 0.34 | % |  |      | 0.04 | % |  |   | 0.07 | %
|                                                  |  |              |      |   |      |   |      |      |  |   |      |   |  |      |      |   |  |   |      |  



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Loss experience in the loan portfolio has been minimal. Net loans charged-off over the five year period have not exceeded
..10% of average loans in a particular year. In addition, non-performing assets as a percentage of total loans has not exceeded .34%. The trend has been consistent through the current year. We view these as positive indicators of the quality of the
loans originated in the early years of the Bank.



A majority of the loans are
collateralized by real estate located in our market area. Market values have been and remain stable. It is our policy to sufficiently collateralize loans to minimize loss exposures in case of default. The market area is somewhat diverse, but in
certain areas more reliant upon agriculture and coal mining. As a result, increased risk of loan impairments is possible if these industries experience a significant downturn. However, we do not foresee this happening in the near future.



All internal and external factors are considered in determining the adequacy of the
allowance for loan losses. The methodology used to calculate the allowance provides sufficiently for potential losses present at the end of the period. The evaluation of individual loan credits is performed by our internal credit review department.
Loans are initially risk rated by the originating loan officer. If deteriorations in the financial condition of the borrower and the capacity to repay the debt occur, along with other factors, the loan may be downgraded. This is typically determined
by either the loan officer or credit review personnel. Guidance for the evaluation is established by the regulatory authorities who periodically review the results for compliance. The classifications used by the Bank are superior, average, pass,
other assets especially mentioned, substandard, doubtful and loss.



In the
past, our policy has been to keep the allowance for loan losses at a minimum of 1.00% of total loans or an amount calculated by multiplying a loss factor times each risk classification pool. This was due to the fact that we had no historical loss
trends as a de novo financial institution. This methodology is consistent with the guidelines traditionally used by bank regulatory agencies. However, during the fourth quarter of 2003, we changed our methodology for calculating the allowance for
loan losses. This change in methodology has been approved by the Board of Directors. Due to the risk factors previously mentioned, all loans classified as other assets especially mentioned, substandard, doubtful and loss are now individually
reviewed for impairment. An evaluation is made to determine if the collateral is sufficient for each of these credits. If an exposure exists, a specific allowance is directly made for the amount of the potential loss, which totaled $4 thousand on
December 31, 2004, or .13% of the allowance for loan loss. In addition, for these credits adequately secured by collateral, a general allocation is made to allow for any inherent risks. We calculate an allowance for the remaining loan portfolio
based upon an estimated loan loss percentage. The evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available. As economic conditions and performance of our loans
change, it is possible that future increases may be needed to the allowance for loan losses. The following table provides a summary of the activity in the allowance for loan losses.



Analysis of the Allowance for Loan Losses

(Dollars in thousands)



|                                        |  |                                  |       |   |      |   |       |      |  |   |       |   |  |      |       |   |  |   |       |  
|--------------------------------------- |  | -------------------------------- | ----- | - | ---- | - | ----- | ---- |  | - | ----- | - |  | ---- | ----- | - |  | - | ----- | -
|                                        |  | For the Years Ended December 31, |      
|Activity                                |  | 2004                             |       |   | 2003 |   |       | 2002 |  |   | 2001  |   |  | 2000 |      
|Beginning Balance                       |  | $                                | 2,432 |   |      | $ | 2,224 |      |  | $ | 1,793 |   |  | $    | 1,311 |   |  | $ | 865   |  
|                                        |  |                                  |       |   |      |   |       |      |  |   |       |   |  |      |       |   |  |   |       |  
|Provision charged to expense            |  |                                  | 990   |   |      |   | 364   |      |  |   | 603   |   |  |      | 571   |   |  |   | 513   |  
|                                        |  |                                  |       |   |      |   |       |      |  |   |       |   |  |      |       |   |  |   |       |  
|Loan Losses:                            |  |                                  |       |   |      |   |       |      |  |   |       |   |  |      |       |   |  |   |       |  
|Installment loans to individuals        |  |                                  | 285   |   |      |   | (180  | )    |  |   | (207  | ) |  |      | (98   | ) |  |   | (70   | )
|Real estate mortgage                    |  |                                  | 8     |   |      |   |       |      |  |   |       |   |  |      |       |   |  |   |       |  
|Commercial loans                        |  |                                  | 59    |   |      |   | (7    | )    |  |   |      |   |  |      |      |   |  |   |       |  
|Recoveries:                             |  |                                  |       |   |      |   |       |      |  |   |       |   |  |      |       |   |  |   |       |  
|Installment loans to individuals        |  |                                  | 20    |   |      |   | 31    |      |  |   | 35    |   |  |      | 9     |   |  |   | 3     |  
|                                        |  |                                  |       |   |      |   |       |      |  |   |       |   |  |      |       |   |  |   |       |  
|Net charge offs                         |  |                                  | (332  | ) |      |   | (156  | )    |  |   | (172  | ) |  |      | (89   | ) |  |   | (67   | )
|                                        |  |                                  |       |   |      |   |       |      |  |   |       |   |  |      |       |   |  |   |       |  
|Balance at End of Period                |  | $                                | 3,090 |   |      | $ | 2,432 |      |  | $ | 2,224 |   |  | $    | 1,793 |   |  | $ | 1,311 |  
|                                        |  |                                  |       |   |      |   |       |      |  |   |       |   |  |      |       |   |  |   |       |  
|Net charge offs as a % of average loans |  |                                  | .10   | % |      |   | 0.06  | %    |  |   | 0.09  | % |  |      | 0.06  | % |  |   | 0.06  | %
|                                        |  |                                  |       |   |      |   |       |      |  |   |       |   |  |      |       |   |  |   |       |  



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We have allocated the allowance according to the amount deemed to be reasonably necessary to provide for the possibility
of losses being incurred within each of the categories of loans. The allocation of the allowance as shown in the following table should not be interpreted as an indication that loan losses in future years will occur in the same proportions or that
the allocation indicates future loan loss trends. Furthermore, the portion allocated to each loan category is not the total amount available for future losses that might occur within such categories since the total allowance is a general allowance
applicable to the entire portfolio.



The allocation of the allowance for loan
losses is based on our judgment of the relative risk associated with each type of loan. We have allocated 20% of the allowance to cover real estate loans, which reflects their lower risk. Residential mortgage loans are secured by real estate whose
value tends to be easily ascertainable. These loans are made consistent with appraisal policies and real estate lending policies, which detail maximum loan-to-value ratios and maturities.



We have allocated 35% of the allowance to commercial loans, which have more risk than residential real estate loans. Commercial business
loans typically are made on the basis of the borrowers ability to make repayment from cash flow from its business and are secured by business assets, such as commercial real estate, accounts receivable, equipment and inventory. As a result,
the availability of funds for the repayment of commercial business loans may be substantially dependent on the success of the business itself.



We have allocated 45% of the allowance to consumer installment loans. Consumer installment loans entail greater risk than commercial or real estate loans, because the
loans may be unsecured, such as lines of credit, or secured by rapidly depreciable assets such as automobiles. In addition, consumer loan collections are dependent on the borrowers continuing financial stability, and thus are more likely to be
adversely affected by job loss, divorce, illness or personal bankruptcy. Losses related to consumer loans have been influenced by the increase in personal bankruptcies in recent years. To date, the largest majority of all loans charged off by the
Bank have been consumer loans.



In 2003, we changed the allocations to assign
greater risk to real estate loans and commercial loans; consequently, we eliminated the unallocated portion in 2003. The reason for the changes to these two categories is the increased growth in these areas in the past year versus the growth in
consumer loans. We are not aware of any significant changes in the composition of the loan portfolio or known risk factors that would result in a change to the allocation of the allowance for loan losses during the periods presented other than the
fast pace of growth mentioned above.



The following table shows the balance and
percentage of our allowance for loan losses allocated to each major category of loans.



Allocation of the Allowance for Loan Losses

December 31, 2000 through December 31, 2004

(Dollars in thousands)



|                           |  |                   |       |                    |                   |   |                |                   |   |        |   |                    |  |     |                |  |        |        |  |                    |       |  |                |   |  |        |  
|-------------------------- |  | ----------------- | ----- | ------------------ | ----------------- | - | -------------- | ----------------- | - | ------ | - | ------------------ |  | --- | -------------- |  | ------ | ------ |  | ------------------ | ----- |  | -------------- | - |  | ------ | -
|                           |  | December 31, 2004 |       |                    | December 31, 2003 |   |                | December 31, 2002 |  
|                           |  | Amount            |       | PercentofAllowance |                   |   | PercentofLoans |                   |   | Amount |   | PercentofAllowance |  |     | PercentofLoans |  |        | Amount |  | PercentofAllowance |       |  | PercentofLoans |  
|Analysis of Ending Balance |  |                   |       |                    |                   |   |                |                   |   |        |   |                    |  |     |                |  |        |        |  |                    |       |  |                |   |  |        |  
|Commercial                 |  | $                 | 1,081 |                    | 35                | % |                | 18.49             | % |        | $ | 851                |  | 35  | %              |  | 19.83  | %      |  | $                  | 445   |  | 20             | % |  | 19.32  | %
|Real estate mortgage       |  |                   | 618   |                    | 20                | % |                | 69.67             | % |        |   | 486                |  | 20  | %              |  | 65.14  | %      |  |                    | 134   |  | 6              | % |  | 61.45  |  
|Installment                |  |                   | 1,391 |                    | 45                | % |                | 11.83             | % |        |   | 1,095              |  | 45  | %              |  | 15.03  | %      |  |                    | 1,090 |  | 49             | % |  | 19.23  | %
|Unallocated                |  |                   |      |                    |                  | % |                |                   |   |        |   |                   |  |    | %              |  |        |        |  |                    | 555   |  | 25             | % |  |        |  
|                           |  |                   |       |                    |                   |   |                |                   |   |        |   |                    |  |     |                |  |        |        |  |                    |       |  |                |   |  |        |  
|Total                      |  | $                 | 3,090 |                    | 100               | % |                | 100.00            | % |        | $ | 2,432              |  | 100 | %              |  | 100.00 | %      |  | $                  | 2,224 |  | 100            | % |  | 100.00 | %
|                           |  |                   |       |                    |                   |   |                |                   |   |        |   |                    |  |     |                |  |        |        |  |                    |       |  |                |   |  |        |  



|                           |  |                  |       |                    |                   |   |                |        |   |        |   |                    |  |     |                |  |        |  
|-------------------------- |  | ---------------- | ----- | ------------------ | ----------------- | - | -------------- | ------ | - | ------ | - | ------------------ |  | --- | -------------- |  | ------ | -
|                           |  | December 31,2001 |       |                    | December 31, 2000 |  
|                           |  | Amount           |       | PercentofAllowance |                   |   | PercentofLoans |        |   | Amount |   | PercentofAllowance |  |     | PercentofLoans | 
|Analysis of Ending Balance |  |                  |       |                    |                   |   |                |        |   |        |   |                    |  |     |                |  |        |  
|Commercial                 |  | $                | 359   |                    | 20                | % |                | 19.62  | % |        | $ | 262                |  | 20  | %              |  | 22.84  | %
|Real estate mortgage       |  |                  | 108   |                    | 6                 | % |                | 56.96  | % |        |   | 79                 |  | 6   | %              |  | 55.22  | %
|Installment                |  |                  | 879   |                    | 49                | % |                | 23.42  | % |        |   | 642                |  | 49  | %              |  | 21.94  | %
|Unallocated                |  |                  | 447   |                    | 25                | % |                |        |   |        |   | 328                |  | 25  | %              |  |        |  
|                           |  |                  |       |                    |                   |   |                |        |   |        |   |                    |  |     |                |  |        |  
|Total                      |  | $                | 1,793 |                    | 100               | % |                | 100.00 | % |        | $ | 1,311              |  | 100 | %              |  | 100.00 | %
|                           |  |                  |       |                    |                   |   |                |        |   |        |   |                    |  |     |                |  |        |  



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Investment Securities



Total investment securities decreased to $5.8 million at December 31, 2004 from $10.7 million at December 31, 2003 as a result of strong loan growth. The portfolio is
primarily made up of U. S. Government Agency securities with fairly short maturities, and we have no other securities with any issuer that exceeds 10% of stockholders equity. All securities are classified as available for sale for liquidity
purposes. The carrying amount of certain securities totaling $3.1 million are pledged by us to secure public deposits at December 31, 2004.



The Bank, as a member of the Federal Reserve Bank and the Federal Home Loan Bank, is required to hold stock in each. These equity securities are restricted from trading
and are recorded at a cost of $1.4 million as of December 31, 2004 and 2003.



The carrying values of investment securities are shown in the following table:



Investment Securities Portfolio

(Dollars in thousands)



|                         |               |      |           |      |               |       |           |   |               |  |           |        |  |   |   |  |   |  
|------------------------ | ------------- | ---- | --------- | ---- | ------------- | ----- | --------- | - | ------------- |  | --------- | ------ |  | - | - |  | - | -
|December 31,             |               | 2004 |           | 2003 |               | 2002 
|                         | AmortizedCost |      | FairValue |      | AmortizedCost |       | FairValue |   | AmortizedCost |  | FairValue
|Available for Sale       |               |      |           |      |               |       |           |   |               |  |           |        |  |   |   |  |   |  
|U.S. Government Agencies |               | $    | 5,700     |      | $             | 5,674 |           | $ | 10,612        |  | $         | 10,614 |  | $ |  |  | $ | 
|Municipal Governments    |               |      | 100       |      |               | 101   |           |   | 101           |  |           | 105    |  |   |  |  |   | 
|                         |               |      |           |      |               |       |           |   |               |  |           |        |  |   |   |  |   |  
|Total Securities AFS     |               | $    | 5,800     |      | $             | 5,775 |           | $ | 10,713        |  | $         | 10,719 |  | $ |  |  | $ | 
|                         |               |      |           |      |               |       |           |   |               |  |           |        |  |   |   |  |   |  



|                         |  |                |   |      |   |      |  |   |       
|------------------------ |  | -------------- | - | ---- | - | ---- |  | - | ------
|                         |  | Amortized Cost
|December 31,             |  | 2004           |   | 2003 |   | 2002
|Held To Maturity         |  |                |   |      |   |      |  |   |       
|U.S. Government Agencies |  | $              |  |      | $ | 0    |  | $ | 34,204
|Municipal Governments    |  |                |  |      |   | 0    |  |   | 101   
|                         |  |                |   |      |   |      |  |   |       
|Total Securities HTM     |  | $              |  |      | $ | 0    |  | $ | 34,305
|                         |  |                |   |      |   |      |  |   |       



The amortized cost, fair value and
weighted average yield of investment securities at December 31, 2004, by contractual maturity, are shown in the following schedule. Expected maturities will differ from contractual maturities because issuers may have the right to call or prepay
obligations with or without call or prepayment penalties.



Maturities of Securities

(Dollars in thousands)



|                                      |  |               |       |           |   |                      |  |      |  
|------------------------------------- |  | ------------- | ----- | --------- | - | -------------------- |  | ---- | -
|                                      |  | AmortizedCost |       | FairValue |   | WeightedAverageYield | 
|Securities Available for Sale         |  |               |       |           |   |                      |  |      |  
|Due in one year or less               |  | $             | 2,607 |           | $ | 2,602                |  | 2.44 | %
|Due after one year through five years |  |               | 3,193 |           |   | 3,173                |  | 2.50 | %
|                                      |  |               |       |           |   |                      |  |      |  
|Total                                 |  | $             | 5,800 |           | $ | 5,775                |  | 2.47 | %
|                                      |  |               |       |           |   |                      |  |      |  



Deposits



During 2004, we continued to have excellent growth in our deposits which totaled $388.1
million at December 31, 2004 and $308.2 million at December 31, 2003, an increase of $79.9 million, or 25.92%. The increase in deposits is the result of new branches opened in 2004 and 2003, particularly in the Abingdon office which opened during
the last half of 2004. The largest areas of growth were in demand and time deposits. Noninterest bearing demand deposits increased $12.6 million, or 37.93%, to $45.9 million in 2004 from $33.3 million in 2003. Interest-bearing demand deposits grew
$1.7 million, or 8.67%, to $21.5 million in 2004 from $19.8 million in 2003. Savings deposits also increased $3.0 million, or 7.49%, to $43.4 million in 2004 from $40.4 million in 2003. Time deposits increased by $62.5 million, or 29.12%, from
$214.7 million in 2003 to $277.2 million in 2004.



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Time deposits of $100,000 or more equaled approximately 20.59% of deposits at the end of 2004 and 18.53% at the end of
2003. We do not have brokered deposits and internet accounts are limited to customers located in the surrounding geographical area. The average balance of and the average rate paid on deposits is shown in the net interest margin analysis.



Maturities of time certificates of deposit of $100,000 or more outstanding are
summarized as follows:



Maturities of Time Deposits of $100
Thousand and More

(Dollars in thousands)



|                                      |  |                   |       
|------------------------------------- |  | ----------------- | ------
|                                      |  | December 31, 2004
|Three months or less                  |  | $                 | 28,517
|Over three months through six months  |  |                   | 26,892
|Over six months through twelve months |  |                   | 10,356
|Over one year                         |  |                   | 14,123
|                                      |  |                   |       
|Total                                 |  | $                 | 79,888
|                                      |  |                   |       



Noninterest Income



Noninterest income increased from $1.8 million in 2003 to $2.6 million in 2004. This is
an increase of $756 thousand for the year, or 41.95%. The major sources of noninterest income include overdraft fees on deposit accounts, insurance commissions, and a gain realized on the sale of property. Overdraft fees increased from $918 thousand
for 2003 to $1.3 million for 2004, an increase of $354 thousand, or 38.56%. This increase is due to growth in demand deposit accounts. Insurance commissions increased from $213 thousand for 2003 to $476 thousand for 2004. This is the result of
increased loans with credit life insurance commissions and insurance sales through NPB Financial. During 2004, the Bank sold property and realized a gain of $185 thousand. Noninterest income as a percentage of average assets increased from .55% in
2003 to .65% in 2004. We anticipate this percentage to increase in 2005 as we increase noninterest income from our nonbank subsidiaries.



Noninterest income increased from $1.4 million in 2002 to $1.8 million in 2003. This is an increase of $390 thousand for the year, or 27.62%. This was largely due to
growth in service charges resulting from increased deposit volumes. However, noninterest income as a percentage of average assets decreased from .58% in 2002 to .55 % in 2003.



Noninterest Expense



Noninterest expense increased from $10.8 million in 2003 to $14.4 million in 2004. The increase was primarily due to increased staffing and expenses associated with new
branches and NPB Financial. Salaries and benefits increased from $6.3 million to $8.9 million. This will continue to increase as we continue branching. Again, this is the result of new branch expenses and the general growth in operations.
Noninterest expense as a percentage of average assets increased from 3.30% for 2003 to 3.66% for 2004.



Greater efficiencies should result as we maximize the performance of our branches. Our efficiency ratio, which is defined as noninterest expense divided by the sum of net interest income plus noninterest income, was
70.86% for 2004 as compared to 70.03%. This was slightly higher as the result of the branches and additional staffing during 2004 and 2003. The ratio of assets to full-time equivalent employee was $1.81 million at the end of 2004 as compared to $1.7
million at the end of 2003. Since we are still in the growth phase, these numbers will remain lowcompared to our peers until we reach a level of maturity, but should continue to improve.



Noninterest expenses increased from $8.2 million in 2002 to $10.8 million in 2003. The increase was due to additional staffing and expenses
associated with the new branches opened and the general growth in operations. Noninterest expense as a percentage of average assets decreased from 3.35% in 2002 to 3.30% for 2003.



Income Taxes



Due to timing differences between book and tax treatment of several income and expense items, a deferred tax liability of $746 thousand has been recognized at December
31, 2004 as compared to $512 thousand at December 31, 2003. During 2003, we amended prior years tax returns to accelerate tax depreciation expenses on certain fixed assets as allowed by certain tax regulations. The deferred tax liability
represents increases to future income tax liabilities from future reduced deductions for depreciation, increases to income from unrealized accretion and unrealized BOLI income, and increases to deductions related to the allowance for loan losses.
Our income tax expense was computed at the normal corporate income



22



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##### Table of Contents

tax rate of 34% of taxable income included in net income. We do not have significant nontaxable income or nondeductible expenses.



Life Insurance



We have life insurance policies with three insurance companies on the lives of four key officers. The Bank is the beneficiary under each
policy. The total cash surrender value of the policies was $8.7 million and $8.4 million at December 31, 2004 and December 31, 2003, respectively. Total income for the policies during 2004 was $387 thousand as compared to $419 thousand and $457
thousand for the years ending 2003 and 2002, respectively. The insurance policies had a yield, net of mortality costs, of 4.54% for the year 2004 as compared to 5.13% in 2003. The minimum guaranteed rate on each of the policies is 4.00%.



Capital



We originally capitalized our company in 1998 with $11.1 million received through an offering of common stock. In 2000, we increased capital
by an additional $6.0 million through another offering of common stock. During 2002 and ending February 7, 2003, we raised an additional $8.8 million in capital through another common stock offering. Total capital raised by this most recent offering
totaled $8.8 million net of related expenses. The additional capital was necessary to support growth and to maintain acceptable capital ratios.



Total capital at the end of 2004 was $36.1 million compared to $32.8 million in 2003. The increase was $3.3 million, or 10.04%. We remain well capitalized at the end of
2004, as defined by the capital guidelines of regulatory agencies. Capital as a percentage of total assets was 8.25% at December 31, 2004 compared to 9.58% at December 31, 2003, which exceeded regulatory requirements.



The number of shares of common stock issued and outstanding at the end of 2004 was 6,910,069,
an increase of 7,066 shares from the 6,903,003 shares outstanding at the end of 2003. All of the increase resulted from the exercise of stock options, of which 6,066 were exercised at a price of $7.50 per share and 1,000 were exercised at a price of
$10.00.



No dividends have been paid historically and none are anticipated in
the foreseeable future. New Peoples strategic plan is to continue growing. To accommodate this growth and have sufficient capital, earnings will need to be retained. When the board of directors considers it prudent to do so, dividends will be
paid.



Trust Preferred Securities



In July, 2004, we completed the issuance of $11.3 million in floating rate trust preferred
securities through a newly formed subsidiary NPB Capital Trust I. The proceeds of the offering are being used for general corporate purposes which may include capital management for affiliates, retirement of indebtedness, and other investments. The
securities mature in 30 years and are redeemable, in whole or in part, without penalty, at our option after five years. Due to the ability to defer interest and principal payments for 60 months without being considered in default, regulatory
agencies consider the trust preferred securities as Tier 1 capital up to certain limits. As of December 31, 2004, $11.0 million was considered Tier 1 capital. The securities have a floating rate of 3 month LIBOR plus 260 basis points, which resets
quarterly, with a current rate of 4.67% at December 31, 2004. Total interest expense in 2004 related to the trust preferred securities was $232 thousand.



Liquidity



At the end of December 31, 2004 and 2003, we had liquid assets in the form of cash, due from banks and federal funds sold of approximately $17.4 million and $12.1 million, respectively. At December 31, 2004 all of our
investments are classified as available-for-sale providing an additional source of liquidity in the amount of $2.7 million, which is net of those securities pledged as collateral for public funds. We believe that our liquid assets were adequate. at
both dates.



In the event we need additional funds, we have the ability to
purchase federal funds under established lines of credit totaling $20.4 million. We may also borrow up to $65.3 million from the Federal Home Loan Bank which is secured by a blanket lien on residential real estate loans. Additional liquidity will be
provided by the future growth that management expects in deposit accounts and loan repayments. We believe that this future growth will result from an increase in market share in our targeted trade area. In 2004 alone, we have opened three new
branches and plan to open additional branches during 2005.



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As of December 31, 2004, we had time deposits of $229.7 million that mature within one year. Historically, we have been
able to retain a majority of maturing deposits by establishing business relationships. We continue to offer premium rates at our new branches to attract new customers and deposits.



Our loan to deposit ratio at year end 2004 was 98.83% as compared to 95.85% at the end of 2003. We are implementing strategies to increase
deposits during 2005 at both the new branches and existing branches. We can lower the ratio as management deems appropriate by managing the rate of growth in our loan portfolio. This can be done by changing interest rates charged or limiting the
amount of new loans approved.



Growth in loans and deposits does not always
occur in the same time period. An excess or deficit of funds provided affects the amount that we retain in cash or invest in fed funds or short-term investments. Our practice has been to invest available funds in short-term U.S. Treasury and
Government Agency securities in order to provide liquidity or to provide income until the funds are needed for new loans.



We have primarily used the funds provided by common stock issues, trust preferred securities issued, and deposits to fund the purchase of banking facilities and the loan
portfolio.



Financial Instruments with Off-Balance-Sheet Risk and
Credit Risk and Contractual Obligations



The Bank is a party to financial
instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers and to reduce its own exposure to fluctuations in interest rates. These financial instruments include commitments to extend credit
and standby letters of credit. Those instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the balance sheet. The contract or notional amounts of those instruments reflect the extent
of involvement the Bank has in particular classes of financial instruments.



The Banks exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit is represented by the contractual amount of those
instruments. The Bank uses the same credit policies in making commitments and conditional obligations as it does for on-balance-sheet instruments.



A summary of the contract amount of the Banks exposure to off-balance-sheet risk as of December 31, 2004 and 2003, is as follows:



|                                                                    |  |                        |        |      |   |       
|------------------------------------------------------------------- |  | ---------------------- | ------ | ---- | - | ------
|                                                                    |  | 2004                   |        | 2003
|                                                                    |  | (Dollars in thousands)
|Financial instruments whose contract amounts represent credit risk: |  |                        |        |      |   |       
|Commitments to extend credit                                        |  | $                      | 31,596 |      | $ | 22,080
|Standby letters of credit                                           |  |                        | 1,342  |      |   | 721   



Commitments to extend credit are
agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the
commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Bank evaluates each customers credit worthiness on a case-by-case basis. The amount of
collateral obtained, if deemed necessary by the Bank upon extension of credit, is based on managements credit evaluation of the counterparty. Collateral held varies but may include accounts receivable, inventory, property and equipment, and
income-producing commercial properties.



Unfunded commitments under lines of
credit are commitments for possible future extensions of credit to existing customers. Those lines of credit may not be drawn upon to the total extent to which the Bank is committed.



Standby letters of credit are conditional commitments issued by the Bank to guarantee the performance of a customer to a third party. Those
guarantees are primarily issued to support public and private borrowing arrangements, including commercial paper, bond financing, and similar transactions. The credit risk involved in issuing letters of credit is essentially the same as that
involved in extending loan facilities to customers. The Bank holds certificates of deposit, deposit accounts, and real estate as collateral supporting those commitments for which collateral is deemed necessary.



24



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##### Table of Contents

New Peoples and its subsidiaries have operating lease obligations and trust preferred securities indebtedness. The
following is a breakdown of the payment obligations over the life of the agreements:



|                                        |  |                                              |        |                |   |          |  |          |    |                 |   |    |  |   |       
|--------------------------------------- |  | -------------------------------------------- | ------ | -------------- | - | -------- |  | -------- | -- | --------------- | - | -- |  | - | ------
|                                        |  | Payments Due by Period(Dollars in thousands)
|                                        |  | Total                                        |        | Lessthan 1year |   | 1-3years |  | 3-5years |    | Morethan 5years
|Contractual Obligations                 |  |                                              |        |                |   |          |  |          |    |                 |   |    |  |   |       
|Trust preferred securities indebtedness |  | $                                            | 11,341 |                | $ |         |  | $        |   |                 | $ |   |  | $ | 11,341
|Operating Lease Obligations             |  |                                              | 156    |                |   | 50       |  |          | 37 |                 |   | 18 |  |   | 51    
|                                        |  |                                              |        |                |   |          |  |          |    |                 |   |    |  |   |       
|Total                                   |  | $                                            | 11,497 |                | $ | 50       |  | $        | 37 |                 | $ | 18 |  | $ | 11,392
|                                        |  |                                              |        |                |   |          |  |          |    |                 |   |    |  |   |       



We believe future deposit growth from
our branches, along with available lines of credit, the ability to sell securities in our available for sale investment portfolio, and the control we may exercise over loan growth will provide sufficient liquidity to meet future cash demands.



Interest Sensitivity



At December 31, 2004, we had a negative cumulative gap rate sensitivity ratio of 41.65% for
the one year re-pricing period, compared to 38.63% at December 31, 2003. This generally indicates that earnings would improve in a declining interest rate environment as liabilities re-price more quickly than assets. Conversely, earnings would
probably decrease in periods during which interest rates are increasing. On a quarterly basis, management reviews our interest rate risk and has decided that the current position is an acceptable risk for a growing community bank operating in a
rural environment.



Interest Sensitivity Analysis

December 31, 2004

(Dollars in thousands)



|                                            |  |            |         |    |            |   |          |             |  |   |           |    |  |           |          |    |              |   |         |       |  |   |        |   |  |   |        
|------------------------------------------- |  | ---------- | ------- | -- | ---------- | - | -------- | ----------- |  | - | --------- | -- |  | --------- | -------- | -- | ------------ | - | ------- | ----- |  | - | ------ | - |  | - | -------
|                                            |  | 1 -90 Days |         |    | 91-365Days |   |          | 1  3 Years |  |   | 4-5 Years |    |  | 6-15Years |          |    | Over 15years |   |         | Total
|Uses of funds:                              |  |            |         |    |            |   |          |             |  |   |           |    |  |           |          |    |              |   |         |       |  |   |        |   |  |   |        
|Loans                                       |  | $          | 89,933  |    |            | $ | 34,656   |             |  | $ | 42,111    |    |  | $         | 54,658   |    |              | $ | 94,491  |       |  | $ | 67,718 |   |  | $ | 383,567
|Federal funds sold                          |  |            | 2,124   |    |            |   |         |             |  |   |          |    |  |           |         |    |              |   |        |       |  |   |       |   |  |   | 2,124  
|Investments                                 |  |            | 695     |    |            |   | 2,602    |             |  |   | 3,173     |    |  |           |         |    |              |   |        |       |  |   | 746    |   |  |   | 7,216  
|Bank owned life insurance                   |  |            | 8,694   |    |            |   |         |             |  |   |          |    |  |           |         |    |              |   |        |       |  |   |       |   |  |   | 8,694  
|                                            |  |            |         |    |            |   |          |             |  |   |           |    |  |           |          |    |              |   |         |       |  |   |        |   |  |   |        
|Total earning assets                        |  | $          | 101,446 |    |            |   | 37,258   |             |  | $ | 45,284    |    |  | $         | 54,658   |    |              | $ | 94,491  |       |  | $ | 68,464 |   |  | $ | 401,601
|                                            |  |            |         |    |            |   |          |             |  |   |           |    |  |           |          |    |              |   |         |       |  |   |        |   |  |   |        
|Sources of funds:                           |  |            |         |    |            |   |          |             |  |   |           |    |  |           |          |    |              |   |         |       |  |   |        |   |  |   |        
|Int Bearing DDA                             |  | $          | 21,518  |    |            | $ |         |             |  | $ |          |    |  | $         |         |    |              | $ |        |       |  | $ |       |   |  | $ | 21,518 
|Savings & MMDA                              |  |            | 43,445  |    |            |   |         |             |  |   |          |    |  |           |         |    |              |   |        |       |  |   |       |   |  |   | 43,445 
|Time Deposits                               |  |            | 98,150  |    |            |   | 131,526  |             |  |   | 40,603    |    |  |           | 6,954    |    |              |   |        |       |  |   |       |   |  |   | 277,233
|                                            |  |            |         |    |            |   |          |             |  |   |           |    |  |           |          |    |              |   |         |       |  |   |        |   |  |   |        
|Trust preferred securities                  |  |            | 11,341  |    |            |   |         |             |  |   |          |    |  |           |         |    |              |   |        |       |  |   |       |   |  |   | 11,341 
|                                            |  |            |         |    |            |   |          |             |  |   |           |    |  |           |          |    |              |   |         |       |  |   |        |   |  |   |        
|Total interest bearing liabilities          |  | $          | 174,454 |    |            | $ | 131,526  |             |  | $ | 40,603    |    |  | $         | 6,954    |    |              | $ |        |       |  | $ |       |   |  | $ | 353,537
|                                            |  |            |         |    |            |   |          |             |  |   |           |    |  |           |          |    |              |   |         |       |  |   |        |   |  |   |        
|Discrete Gap                                |  | $          | (73,008 | )  |            | $ | (94,268  | )           |  | $ | 4,681     |    |  | $         | 47,704   |    |              | $ | 94,491  |       |  | $ | 68,464 |   |  | $ | 48,064 
|                                            |  |            |         |    |            |   |          |             |  |   |           |    |  |           |          |    |              |   |         |       |  |   |        |   |  |   |        
|Cumulative Gap                              |  |            | (73,008 | )  |            |   | (167,276 | )           |  |   | (162,595  | )  |  |           | (114,891 | )  |              |   | (20,400 | )     |  |   | 48,064 |   |  |   |        
|                                            |  |            |         |    |            |   |          |             |  |   |           |    |  |           |          |    |              |   |         |       |  |   |        |   |  |   |        
|Cumulative Gap as % of Total Earning Assets |  |            | (18.18  | %) |            |   | (41.65   | %)          |  |   | (40.49    | %) |  |           | (28.61   | %) |              |   | (5.08   | %)    |  |   | 11.97  | % |  |   |        



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##### Table of Contents

|Item 7A. | Quantitative and Qualitative Disclosures About Market Risk
|-------- | ----------------------------------------------------------



Market risk is the risk of loss due to adverse changes in current and future cash flows, fair values, earnings or capital due to adverse movements in interest rates and
other factors, including foreign exchange rates and commodity prices. Because we have no significant foreign exchange activities and hold no commodities, interest rate risk represents the primary risk factor affecting our balance sheet and net
interest margin. Significant changes in interest rates by the Federal Reserve could result in similar changes in other interest rates that could affect interest earned on our loan and investment portfolios and interest paid on our deposit accounts.
Changes in the interest rates earned and paid also affect the estimated fair value of our interest bearing assets and liabilities.



Our Asset and Liability Committee has been delegated the responsibility of managing our interest-sensitive balance sheet accounts to maximize earnings while managing
interest rate risk. The committee, comprised of various members of senior management and three external board members, is also responsible for establishing policies to monitor and limit our exposure to interest rate risk and to manage our liquidity
and capital positions. The committee satisfies its responsibilities through quarterly meetings during which product pricing issues, liquidity measures and interest sensitivity positions are monitored.



We use an asset/liability management and simulation software model to periodically measure
the potential impact on net interest income of projected or hypothetical changes in interest rates. Our policy objective is to monitor our position and to manage our short term and long-term interest rate risk exposure. Our board of directors has
established percentages for the maximum potential reductions in net interest income that we are willing to accept, which result from changes in interest rates over the next 12-month period. The percentage limitations relate to instantaneous and
sustained parallel changes in interest rates of plus and minus certain basis points.



The following table summarizes our established percentage limitations and the sensitivity of our net interest income to various interest rate scenarios for the next 12 months, based on assets and liabilities as of December 31, 2004. At this
date, our interest rate risk is within the established limitations.



|                                             |  |                                                                      |    |  |                        |   
|-------------------------------------------- |  | -------------------------------------------------------------------- | -- |  | ---------------------- | --
|ImmediateBasis Point ChangeIn Interest Rates |  | Estimated Increase(Decrease) in NetInterest Income December 31, 2004 |    |  | Established Limitation |   
|                                             | 
|+300                                         |  | (10.29                                                               | )% |  | (20.00                 | )%
|+200                                         |  | (6.82                                                                | )  |  | (15.00                 | ) 
|+100                                         |  | (3.37                                                                | )  |  | (7.00                  | ) 
|-100                                         |  | 3.78                                                                 |    |  | (7.00                  | ) 
|-200                                         |  | 6.84                                                                 |    |  | (15.00                 | ) 
|-300                                         |  | 2.22                                                                 |    |  | (20.00                 | ) 



The type of modeling used to generate
the above table does not take into account all strategies that we might adopt in response to a sudden and sustained change in interest rates. These strategies may include asset liability acquisitions of appropriate maturities in the cash market and
may also include off-balance sheet alternatives to the extent such activity is authorized by the board of directors.



The committee is also responsible for long-term asset/liability management and completes the following functions:



| |  |  | Monitoring available opportunities to undertake major corrective actions (in the nature and mix of assets and liabilities) for structural mismatches.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Determining the appropriateness of fixed rate vs. variable rate lending and investment strategies and formulation policies to influence this activity.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Developing parameters for the investment portfolio in the context of overall balance sheet management (liquidity, interest rate risk, credit risk, risk-based capital, price risk,
and earnings).
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Establishing financial goals, including minimum standards for return on assets and equity.
| | - |  | ------------------------------------------------------------------------------------------



| |  |  | Overseeing the long-term strategic use of capital to maximize the return on equity within reasonable levels of risk.
| | - |  | --------------------------------------------------------------------------------------------------------------------



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##### Table of Contents

|Item 8. | Financial Statements and Supplementary Data
|------- | -------------------------------------------



FINANCIAL STATEMENTS



CONTENTS



|                                                                                               |  |     
|---------------------------------------------------------------------------------------------- |  | ----
|                                                                                               |  | Page
|                                                                                               | 
|Reports of Independent Registered Public Accounting Firm                                       |  | 28  
|                                                                                               | 
|Independent Auditors Report                                                                   |  | 29  
|                                                                                               | 
|Consolidated Balance Sheets as of December 31, 2004 and 2003                                   |  | 30  
|                                                                                               | 
|Consolidated Statements of Income  Years Ended December 31, 2004, 2003, and 2002              |  | 31  
|                                                                                               | 
|Consolidated Statements of Stockholders Equity - Years Ended December 31, 2004, 2003 and 2002 |  | 32  
|                                                                                               | 
|Consolidated Statements of Cash Flows  Years Ended December 31, 2004, 2003 and 2002           |  | 33  
|                                                                                               | 
|Notes to Consolidated Financial Statements                                                     |  | 34  



27



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##### Table of Contents

Report of Independent Registered Public Accounting Firm



To the Board of Directors and Stockholders

New Peoples Bankshares, Inc. and Subsidiaries

Honaker, VA



We have audited the accompanying consolidated balance sheets of New Peoples Bankshares, Inc. and Subsidiaries as of December 31, 2004 and 2003, and the related consolidated statements of income, stockholders equity,
and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Companys management. Our responsibility is to express an opinion on these financial statements based on our audits. The financial
statements of New Peoples Bankshares, Inc. and Subsidiaries as of December 31, 2002, were audited by other auditors whose report dated January 17, 2003, expressed an unqualified opinion on those statements.



We conducted our audits in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our opinion.



In our opinion, the 2004 and 2003 consolidated financial statements referred to above present fairly, in all material respects, the financial position of New Peoples Bankshares, Inc. and Subsidiaries as of December 31, 2004 and 2003, and
the results of its operations and its cash flows for the two years then ended in conformity with U.S. generally accepted accounting principles.



/s/ Brown, Edwards and Company, LLP



Bluefield, West Virginia



March 4, 2005



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##### Table of Contents

INDEPENDENT AUDITORS REPORT



The Board of
Directors and Stockholders

New Peoples Bankshares, Inc.

Honaker, Virginia



We have audited the consolidated balance sheets of
New Peoples Bankshares, Inc. and subsidiary as of December 31, 2002, and the related consolidated statements of income, stockholders equity, and cash flows for the year then ended. These consolidated financial statements are the responsibility
of the Companys management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.



We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the
audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also
includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.



In our opinion, the consolidated financial statements referred to above present fairly, in
all material respects, the financial position of New Peoples Bankshares, Inc. and subsidiary as of December 31, 2002, and the results of its operations and its cash flows for the year then ended, in conformity with accounting principles generally
accepted in the United States of America.



/s/ S. B. HOOVER & COMPANY, L.L.P.



January 17, 2003

Harrisonburg, Virginia



29



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##### Table of Contents



NEW PEOPLES BANKSHARES, INC.

CONSOLIDATED BALANCE SHEETS

DECEMBER 31, 2004 AND 2003

(IN
THOUSANDS EXCEPT SHARE DATA)



|                                                                                                                                                    |  |      |         |   |      |   |         |  
|--------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---- | ------- | - | ---- | - | ------- | -
|                                                                                                                                                    |  | 2004 |         |   | 2003 |  
|ASSETS                                                                                                                                              |  |      |         |   |      |   |         |  
|Cash and due from banks (Note 3)                                                                                                                    |  | $    | 15,281  |   |      | $ | 8,746   |  
|Federal funds sold (Note 3)                                                                                                                         |  |      | 2,124   |   |      |   | 3,327   |  
|                                                                                                                                                    |  |      |         |   |      |   |         |  
|Total Cash and Cash Equivalents                                                                                                                     |  |      | 17,405  |   |      |   | 12,073  |  
|Investment Securities                                                                                                                               |  |      |         |   |      |   |         |  
|Available-for-sale (Note 4)                                                                                                                         |  |      | 5,775   |   |      |   | 10,719  |  
|Loans receivable (Note 5)                                                                                                                           |  |      | 383,567 |   |      |   | 295,438 |  
|Allowance for loan losses (Note 6)                                                                                                                  |  |      | (3,090  | ) |      |   | (2,432  | )
|                                                                                                                                                    |  |      |         |   |      |   |         |  
|Net Loans                                                                                                                                           |  |      | 380,477 |   |      |   | 293,006 |  
|Bank premises and equipment, net (Note 7)                                                                                                           |  |      | 19,403  |   |      |   | 14,291  |  
|Equity securities (restricted) (Note 4)                                                                                                             |  |      | 1,441   |   |      |   | 1,365   |  
|Other real estate owned                                                                                                                             |  |      | 1,186   |   |      |   |        |  
|Accrued interest receivable                                                                                                                         |  |      | 2,272   |   |      |   | 1,896   |  
|Life insurance investments                                                                                                                          |  |      | 8,694   |   |      |   | 8,359   |  
|Other assets                                                                                                                                        |  |      | 1,098   |   |      |   | 799     |  
|                                                                                                                                                    |  |      |         |   |      |   |         |  
|Total Assets                                                                                                                                        |  | $    | 437,751 |   |      | $ | 342,508 |  
|                                                                                                                                                    |  |      |         |   |      |   |         |  
|LIABILITIES                                                                                                                                         |  |      |         |   |      |   |         |  
|Deposits:                                                                                                                                           |  |      |         |   |      |   |         |  
|Demand deposits:                                                                                                                                    |  |      |         |   |      |   |         |  
|Noninterest bearing                                                                                                                                 |  | $    | 45,924  |   |      | $ | 33,296  |  
|Interest-bearing                                                                                                                                    |  |      | 21,518  |   |      |   | 19,802  |  
|Savings deposits                                                                                                                                    |  |      | 43,445  |   |      |   | 40,418  |  
|Time deposits (Note 8)                                                                                                                              |  |      | 277,233 |   |      |   | 214,705 |  
|                                                                                                                                                    |  |      |         |   |      |   |         |  
|Total Deposits                                                                                                                                      |  |      | 388,120 |   |      |   | 308,221 |  
|Accrued interest payable                                                                                                                            |  |      | 891     |   |      |   | 496     |  
|Accrued expenses and other liabilities                                                                                                              |  |      | 1,301   |   |      |   | 986     |  
|Trust preferred securities (Note 21)                                                                                                                |  |      | 11,341  |   |      |   |        |  
|                                                                                                                                                    |  |      |         |   |      |   |         |  
|Total Liabilities                                                                                                                                   |  |      | 401,653 |   |      |   | 309,703 |  
|                                                                                                                                                    |  |      |         |   |      |   |         |  
|STOCKHOLDERS EQUITY (Notes 12 & 15)                                                                                                                |  |      |         |   |      |   |         |  
|Common stock - $2.00 par value; 12,000,000 shares authorized; 6,910,069 and 6,903,003 shares issued and outstanding for 2004 and 2003,
respectively |  |      | 13,820  |   |      |   | 13,806  |  
|Additional Paid-in-Capital                                                                                                                          |  |      | 13,118  |   |      |   | 13,076  |  
|Retained earnings                                                                                                                                   |  |      | 9,177   |   |      |   | 5,919   |  
|Accumulated other comprehensive income                                                                                                              |  |      | (17     | ) |      |   | 4       |  
|                                                                                                                                                    |  |      |         |   |      |   |         |  
|Total Stockholders Equity                                                                                                                          |  |      | 36,098  |   |      |   | 32,805  |  
|                                                                                                                                                    |  |      |         |   |      |   |         |  
|Total Liabilities and Stockholders Equity                                                                                                          |  | $    | 437,751 |   |      | $ | 342,508 |  
|                                                                                                                                                    |  |      |         |   |      |   |         |  



The accompanying notes
are an integral part of this statement.



30



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##### Table of Contents



NEW PEOPLES BANKSHARES, INC.

CONSOLIDATED STATEMENTS OF INCOME

FOR THE YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002

(IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)



|                                                       |  |      |           |   |      |   |           |      |  |   |          
|------------------------------------------------------ |  | ---- | --------- | - | ---- | - | --------- | ---- |  | - | ---------
|                                                       |  | 2004 |           |   | 2003 |   |           | 2002
|INTEREST AND DIVIDEND INCOME                           |  |      |           |   |      |   |           |      |  |   |          
|Loans including fees                                   |  | $    | 24,035    |   |      | $ | 19,402    |      |  | $ | 16,675   
|Federal funds sold                                     |  |      | 46        |   |      |   | 172       |      |  |   | 200      
|U.S. Treasury securities and U. S. Government agencies |  |      | 104       |   |      |   | 322       |      |  |   | 133      
|Dividends on Equity securities (restricted)            |  |      | 80        |   |      |   | 60        |      |  |   | 32       
|                                                       |  |      |           |   |      |   |           |      |  |   |          
|Total Interest and Dividend Income                     |  |      | 24,265    |   |      |   | 19,956    |      |  |   | 17,040   
|                                                       |  |      |           |   |      |   |           |      |  |   |          
|INTEREST EXPENSE                                       |  |      |           |   |      |   |           |      |  |   |          
|Deposits                                               |  |      |           |   |      |   |           |      |  |   |          
|Demand                                                 |  |      | 105       |   |      |   | 110       |      |  |   | 107      
|Savings                                                |  |      | 410       |   |      |   | 441       |      |  |   | 451      
|Time deposits below $100,000                           |  |      | 4,051     |   |      |   | 4,211     |      |  |   | 4,289    
|Time deposits above $100,000                           |  |      | 1,629     |   |      |   | 1,559     |      |  |   | 1,528    
|Other                                                  |  |      | 3         |   |      |   | 11        |      |  |   |         
|Interest on FHLB Advances                              |  |      | 41        |   |      |   |          |      |  |   |         
|Interest on Trust Preferred Securities                 |  |      | 232       |   |      |   |          |      |  |   |         
|                                                       |  |      |           |   |      |   |           |      |  |   |          
|Total Interest Expense                                 |  |      | 6,471     |   |      |   | 6,332     |      |  |   | 6,375    
|                                                       |  |      |           |   |      |   |           |      |  |   |          
|NET INTEREST INCOME                                    |  |      | 17,794    |   |      |   | 13,624    |      |  |   | 10,665   
|PROVISION FOR LOAN LOSSES (Note 6)                     |  |      | 990       |   |      |   | 364       |      |  |   | 603      
|                                                       |  |      |           |   |      |   |           |      |  |   |          
|NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES    |  |      | 16,804    |   |      |   | 13,260    |      |  |   | 10,062   
|                                                       |  |      |           |   |      |   |           |      |  |   |          
|NONINTEREST INCOME                                     |  |      |           |   |      |   |           |      |  |   |          
|Service charges                                        |  |      | 1,294     |   |      |   | 936       |      |  |   | 663      
|Fees, commissions and other income                     |  |      | 263       |   |      |   | 239       |      |  |   | 188      
|Insurance fees                                         |  |      | 476       |   |      |   | 213       |      |  |   | 104      
|Loss on sale of securities                             |  |      |          |   |      |   | (5        | )    |  |   |         
|Loss on sale of other real estate owned                |  |      | (47       | ) |      |   |          |      |  |   |         
|Life insurance investment income                       |  |      | 387       |   |      |   | 419       |      |  |   | 457      
|Gain on Sale of Fixed Assets                           |  |      | 185       |   |      |   |          |      |  |   |         
|                                                       |  |      |           |   |      |   |           |      |  |   |          
|Total Noninterest Income                               |  |      | 2,558     |   |      |   | 1,802     |      |  |   | 1,412    
|                                                       |  |      |           |   |      |   |           |      |  |   |          
|NONINTEREST EXPENSES                                   |  |      |           |   |      |   |           |      |  |   |          
|Salaries and employee benefits (Note 11)               |  |      | 8,902     |   |      |   | 6,258     |      |  |   | 4,431    
|Occupancy expense                                      |  |      | 841       |   |      |   | 627       |      |  |   | 458      
|Equipment expense                                      |  |      | 1,503     |   |      |   | 1,152     |      |  |   | 917      
|Advertising and public relations                       |  |      | 282       |   |      |   | 211       |      |  |   | 190      
|Stationery and supplies                                |  |      | 217       |   |      |   | 203       |      |  |   | 211      
|Other operating expenses                               |  |      | 2,677     |   |      |   | 2,350     |      |  |   | 2,011    
|                                                       |  |      |           |   |      |   |           |      |  |   |          
|Total Noninterest Expenses                             |  |      | 14,422    |   |      |   | 10,801    |      |  |   | 8,218    
|                                                       |  |      |           |   |      |   |           |      |  |   |          
|INCOME BEFORE INCOME TAXES                             |  |      | 4,940     |   |      |   | 4,261     |      |  |   | 3,256    
|INCOME TAX EXPENSE (Note 9)                            |  |      | 1,682     |   |      |   | 1,447     |      |  |   | 1,078    
|                                                       |  |      |           |   |      |   |           |      |  |   |          
|NET INCOME                                             |  | $    | 3,258     |   |      | $ | 2,814     |      |  | $ | 2,178    
|                                                       |  |      |           |   |      |   |           |      |  |   |          
|Earnings Per Share(1)                                  |  |      |           |   |      |   |           |      |  |   |          
|Basic                                                  |  | $    | .47       |   |      | $ | .41       |      |  | $ | .36      
|                                                       |  |      |           |   |      |   |           |      |  |   |          
|Fully Diluted                                          |  | $    | .46       |   |      | $ | .41       |      |  | $ | .35      
|                                                       |  |      |           |   |      |   |           |      |  |   |          
|Average Weighted Shares of Common Stock(1)             |  |      |           |   |      |   |           |      |  |   |          
|Basic                                                  |  |      | 6,907,157 |   |      |   | 6,875,754 |      |  |   | 6,104,734
|                                                       |  |      |           |   |      |   |           |      |  |   |          
|Fully Diluted                                          |  |      | 7,031,868 |   |      |   | 6,937,309 |      |  |   | 6,168,000
|                                                       |  |      |           |   |      |   |           |      |  |   |          



|(1) | Earnings per share and average weighted shares of common stock have been restated to reflect the 2 for 1 stock split which occurred on January 1, 2002.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------



The accompanying notes are an integral part of this statement.



31



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##### Table of Contents

NEW PEOPLES BANKSHARES, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY

FOR THE YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002

(IN THOUSANDS INCLUDING SHARE DATA)



|                                                                                                         |  |                      |  |             |        |                          |   |        |                            |  |   |                                        |   |                                               |   |       |                          |   |     |                            |  |   |        |   |  |   |       |  
|-------------------------------------------------------------------------------------------------------- |  | -------------------- |  | ----------- | ------ | ------------------------ | - | ------ | -------------------------- |  | - | -------------------------------------- | - | --------------------------------------------- | - | ----- | ------------------------ | - | --- | -------------------------- |  | - | ------ | - |  | - | ----- | -
|                                                                                                         |  | Shares ofCommonStock |  | CommonStock |        | AdditionalPaid inCapital |   |        | Common StockSub-scriptions |  |   | RetainedEarnings/(Accum-ulatedDeficit) |   | Accum- ulated OtherCompre-hensiveIncome(Loss) |   |       | TotalShareholdersEquity |   |     | Compre-hensiveIncome(Loss) | 
|Balance, December 31, 2001                                                                               |  | 3,000                |  | $           | 12,000 |                          | $ | 5,964  |                            |  | $ |                                       |   |                                               | $ | 927   |                          | $ |    |                            |  | $ | 18,891 |   |  | $ | 1,009 |  
|                                                                                                         |  |                      |  |             |        |                          |   |        |                            |  |   |                                        |   |                                               |   |       |                          |   |     |                            |  |   |        |   |  |   |       |  
|Net Income                                                                                               |  |                      |  |             |        |                          |   |        |                            |  |   |                                        |   |                                               | $ | 2,178 |                          |   |     |                            |  | $ | 2,178  |   |  | $ | 2,178 |  
|Stock Split                                                                                              |  | 3,000                |  |             |        |                          |   |        |                            |  |   |                                        |   |                                               |   |       |                          |   |     |                            |  |   |        |   |  |   |       |  
|Stock Options Exercised                                                                                  |  | 2                    |  |             | 5      |                          |   | 14     |                            |  |   |                                        |   |                                               |   |       |                          |   |     |                            |  |   | 19     |   |  |   |       |  
|Common Stock Subscribed                                                                                  |  |                      |  |             |        |                          |   |        |                            |  |   | 5,469                                  |   |                                               |   |       |                          |   |     |                            |  |   | 5,469  |   |  |   |       |  
|Common Stock Issued                                                                                      |  | 6                    |  |             | 12     |                          |   | 46     |                            |  |   | (58                                    | ) |                                               |   |       |                          |   |     |                            |  |   |       |   |  |   |       |  
|Cost of Common Stock Offering                                                                            |  |                      |  |             |        |                          |   | (76    | )                          |  |   |                                        |   |                                               |   |       |                          |   |     |                            |  |   | (76    | ) |  |   |       |  
|                                                                                                         |  |                      |  |             |        |                          |   |        |                            |  |   |                                        |   |                                               |   |       |                          |   |     |                            |  |   |        |   |  |   |       |  
|Balance, December 31, 2002                                                                               |  | 6,008                |  | $           | 12,017 |                          | $ | 5,948  |                            |  | $ | 5,411                                  |   |                                               | $ | 3,105 |                          | $ |    |                            |  | $ | 26,481 |   |  | $ | 2,178 |  
|                                                                                                         |  |                      |  |             |        |                          |   |        |                            |  |   |                                        |   |                                               |   |       |                          |   |     |                            |  |   |        |   |  |   |       |  
|Net Income                                                                                               |  |                      |  |             |        |                          |   |        |                            |  |   |                                        |   |                                               |   | 2,814 |                          |   |     |                            |  |   | 2,814  |   |  |   | 2,814 |  
|Unrealized gains (net of tax) on available-for-sale securities, net of reclassification adjustment of $5 |  |                      |  |             |        |                          |   |        |                            |  |   |                                        |   |                                               |   |       |                          |   | 4   |                            |  |   | 4      |   |  |   | 4     |  
|Stock Options Exercised                                                                                  |  | 10                   |  |             | 20     |                          |   | 55     |                            |  |   |                                        |   |                                               |   |       |                          |   |     |                            |  |   | 75     |   |  |   |       |  
|Common Stock Issued                                                                                      |  | 885                  |  |             | 1,769  |                          |   | 7,076  |                            |  |   | (5,411                                 | ) |                                               |   |       |                          |   |     |                            |  |   | 3,434  |   |  |   |       |  
|Cost of Common Stock Offering                                                                            |  |                      |  |             |        |                          |   | (3     | )                          |  |   |                                        |   |                                               |   |       |                          |   |     |                            |  |   | (3     | ) |  |   |       |  
|                                                                                                         |  |                      |  |             |        |                          |   |        |                            |  |   |                                        |   |                                               |   |       |                          |   |     |                            |  |   |        |   |  |   |       |  
|Balance, December 31, 2003                                                                               |  | 6,903                |  | $           | 13,806 |                          | $ | 13,076 |                            |  | $ |                                       |   |                                               | $ | 5,919 |                          | $ | 4   |                            |  | $ | 32,805 |   |  | $ | 2,818 |  
|                                                                                                         |  |                      |  |             |        |                          |   |        |                            |  |   |                                        |   |                                               |   |       |                          |   |     |                            |  |   |        |   |  |   |       |  
|Net Income                                                                                               |  |                      |  |             |        |                          |   |        |                            |  |   |                                        |   |                                               |   | 3,258 |                          |   |     |                            |  |   | 3,258  |   |  |   | 3,258 |  
|Unrealized loss (net of tax) on available-for-sale securities, net of reclassification adjustment of $9  |  |                      |  |             |        |                          |   |        |                            |  |   |                                        |   |                                               |   |       |                          |   | (21 | )                          |  |   | (21    | ) |  |   | (21   | )
|Stock Options Exercised                                                                                  |  | 7                    |  |             | 14     |                          |   | 42     |                            |  |   |                                        |   |                                               |   |       |                          |   |     |                            |  |   | 56     |   |  |   |       |  
|                                                                                                         |  |                      |  |             |        |                          |   |        |                            |  |   |                                        |   |                                               |   |       |                          |   |     |                            |  |   |        |   |  |   |       |  
|Balance, December 31, 2004                                                                               |  | 6,910                |  | $           | 13,820 |                          | $ | 13,118 |                            |  | $ |                                       |   |                                               | $ | 9,177 |                          | $ | (17 | )                          |  | $ | 36,098 |   |  | $ | 3,237 |  
|                                                                                                         |  |                      |  |             |        |                          |   |        |                            |  |   |                                        |   |                                               |   |       |                          |   |     |                            |  |   |        |   |  |   |       |  



The accompanying notes
are an integral part of this statement.



32



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##### Table of Contents

NEW PEOPLES BANKSHARES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002

(IN THOUSANDS)



|                                                                                  |  |      |         |   |      |   |         |      |  |   |         |  
|--------------------------------------------------------------------------------- |  | ---- | ------- | - | ---- | - | ------- | ---- |  | - | ------- | -
|                                                                                  |  | 2004 |         |   | 2003 |   |         | 2002 | 
|CASH FLOWS FROM OPERATING ACTIVITIES                                              |  |      |         |   |      |   |         |      |  |   |         |  
|Net income                                                                        |  | $    | 3,258   |   |      | $ | 2,814   |      |  | $ | 2,178   |  
|Adjustments to reconcile net income to net cash provided by operating activities: |  |      |         |   |      |   |         |      |  |   |         |  
|Depreciation                                                                      |  |      | 1,388   |   |      |   | 1,121   |      |  |   | 866     |  
|Provision for loan losses                                                         |  |      | 990     |   |      |   | 364     |      |  |   | 603     |  
|Income (less expenses) on life insurance                                          |  |      | (335    | ) |      |   | (371    | )    |  |   | (419    | )
|Gain (loss) on sale of fixed assets                                               |  |      | (185    | ) |      |   |        |      |  |   |        |  
|Loss on sale of foreclosed real estate                                            |  |      | 47      |   |      |   | 32      |      |  |   | 72      |  
|Loss on sale of investment securities                                             |  |      |        |   |      |   | 5       |      |  |   |        |  
|Amortization of bond premiums                                                     |  |      | (48     | ) |      |   | 395     |      |  |   | 86      |  
|Deferred tax expense (benefit)                                                    |  |      | 245     |   |      |   | 286     |      |  |   | 435     |  
|Net change in:                                                                    |  |      |         |   |      |   |         |      |  |   |         |  
|Interest receivable                                                               |  |      | (376    | ) |      |   | (50     | )    |  |   | (208    | )
|Other assets                                                                      |  |      | (299    | ) |      |   | (138    | )    |  |   | 202     |  
|Accrued interest payable                                                          |  |      | 395     |   |      |   | (206    | )    |  |   | 15      |  
|Accrued expense and other liabilities                                             |  |      | 70      |   |      |   | 291     |      |  |   | (691    | )
|                                                                                  |  |      |         |   |      |   |         |      |  |   |         |  
|Net Cash Provided by Operating Activities                                         |  |      | 5,150   |   |      |   | 4,543   |      |  |   | 3,139   |  
|                                                                                  |  |      |         |   |      |   |         |      |  |   |         |  
|CASH FLOWS FROM INVESTING ACTIVITIES                                              |  |      |         |   |      |   |         |      |  |   |         |  
|Net increase in loans                                                             |  |      | (88,461 | ) |      |   | (73,200 | )    |  |   | (43,351 | )
|Purchase of securities available for sale                                         |  |      | (4,998  | ) |      |   |        |      |  |   |        |  
|Purchase of securities held-to-maturity                                           |  |      |        |   |      |   | (95,744 | )    |  |   | (32,232 | )
|Proceeds from sale and maturities of securities available-for-sale                |  |      | 9,969   |   |      |   | 19,936  |      |  |   |        |  
|Proceeds from maturities of securities held-to-maturity                           |  |      |        |   |      |   | 98,999  |      |  |   | 3,500   |  
|Purchase of Federal Reserve Bank stock                                            |  |      | (87     | ) |      |   | (120    | )    |  |   | (10     | )
|Purchase (sale) of Federal Home Loan Bank stock                                   |  |      | 11      |   |      |   | (706    | )    |  |   |        |  
|Payments for the purchase of property                                             |  |      | (6,840  | ) |      |   | (4,500  | )    |  |   | (3,152  | )
|Proceeds from the sale of property                                                |  |      | 525     |   |      |   | 4       |      |  |   | 292     |  
|Net change in other real estate owned                                             |  |      | (1,233  | ) |      |   |        |      |  |   |        |  
|                                                                                  |  |      |         |   |      |   |         |      |  |   |         |  
|Net Cash Used in Investing Activities                                             |  |      | (91,114 | ) |      |   | (55,331 | )    |  |   | (74,953 | )
|                                                                                  |  |      |         |   |      |   |         |      |  |   |         |  
|CASH FLOWS FROM FINANCING ACTIVITIES                                              |  |      |         |   |      |   |         |      |  |   |         |  
|Net proceeds from common stock offering                                           |  |      |        |   |      |   | 3,431   |      |  |   | 5,393   |  
|Common stock options exercised                                                    |  |      | 56      |   |      |   | 75      |      |  |   | 19      |  
|Trust preferred securities borrowing                                              |  |      | 11,341  |   |      |   |        |      |  |   |        |  
|Net change in:                                                                    |  |      |         |   |      |   |         |      |  |   |         |  
|Demand deposits                                                                   |  |      | 14,344  |   |      |   | 21,008  |      |  |   | 8,757   |  
|Savings deposits                                                                  |  |      | 3,027   |   |      |   | 13,292  |      |  |   | 8,479   |  
|Time deposits                                                                     |  |      | 62,528  |   |      |   | 10,116  |      |  |   | 52,558  |  
|                                                                                  |  |      |         |   |      |   |         |      |  |   |         |  
|Net Cash Provided by Financing Activities                                         |  |      | 91,296  |   |      |   | 47,922  |      |  |   | 75,206  |  
|                                                                                  |  |      |         |   |      |   |         |      |  |   |         |  
|Net increase (decrease) in cash and cash equivalents                              |  |      | 5,332   |   |      |   | (2,866  | )    |  |   | 3,391   |  
|Cash and Cash Equivalents, Beginning of Year                                      |  |      | 12,073  |   |      |   | 14,939  |      |  |   | 11,547  |  
|                                                                                  |  |      |         |   |      |   |         |      |  |   |         |  
|Cash and Cash Equivalents, End of Year                                            |  | $    | 17,405  |   |      | $ | 12,073  |      |  | $ | 14,939  |  
|                                                                                  |  |      |         |   |      |   |         |      |  |   |         |  
|Supplemental Disclosure of Cash Paid During the Year for:                         |  |      |         |   |      |   |         |      |  |   |         |  
|Interest                                                                          |  |      | 6,076   |   |      |   | 6,538   |      |  |   | 6,360   |  
|Taxes                                                                             |  |      | 1,710   |   |      |   | 1,065   |      |  |   | 1,394   |  
|Supplemental Disclosure of Non Cash Transactions:                                 |  |      |         |   |      |   |         |      |  |   |         |  
|Loans made to finance sale of foreclosed real estate                              |  |      | 86      |   |      |   | (33     | )    |  |   | 33      |  
|Transfer of securities from held-to-maturity to available-for-sale                |  |      |        |   |      |   | 30,655  |      |  |   |        |  



The accompanying notes
are an integral part of this statement



33



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##### Table of Contents

NEW PEOPLES BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



|NOTE 1 | NATURE OF OPERATIONS
|------ | --------------------



Nature of Operations New Peoples Bankshares, Inc. (Company) is a bank holding company whose principal activity is the ownership and management of a community bank. New Peoples Bank
(Bank) was organized and incorporated under the laws of the Commonwealth of Virginia on December 9, 1997. The Bank commenced operations on October 28, 1998, after receiving regulatory approval. As a state chartered bank, the Bank is
subject to regulations by the Virginia Bureau of Financial Institutions, the Federal Deposit Insurance Corporation and the Federal Reserve Bank. The Bank provides general banking services to individuals, small and medium size businesses and the
professional community of southwestern Virginia, southern West Virginia, and eastern Tennessee. On June 9, 2003, the Company formed two wholly owned subsidiaries, NPB Financial Services, Inc. and NPB Web Services, Inc. On July 7, 2004 the Company
established NPB Capital Trust I for the purpose of issuing trust preferred securities.



|NOTE 2 | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
|------ | -------------------------------------------



Consolidation Policy - The consolidated financial statements include the Company, the Bank, NPB Financial Services, Inc., and NPB Web Services, Inc. All
significant intercompany balances and transactions have been eliminated. In accordance with FIN 46R, NPB Capital Trust I is not included in the consolidated financial statements.



Use of Estimates- The preparation of financial statements in conformity with generally accepted accounting principles
requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those estimates. The determination of the adequacy of the allowance for loan losses is based on estimates that are particularly susceptible to significant changes in the economic
environment and market conditions.



Cash and Cash Equivalents 
Cash and cash equivalents as used in the cash flow statements include cash and due from banks and federal funds sold.



Investment Securities  Management determines the appropriate classification of securities at the time of purchase. If management has the intent and the Bank
has the ability at the time of purchase to hold securities until maturity, they are classified as held to maturity and carried at amortized historical cost. Securities not intended to be held to maturity are classified as available for sale and
carried at fair value. Securities available for sale are intended to be used as part of the Banks asset and liability management strategy and may be sold in response to changes in interest rates, prepayment risk or other similar factors.



The amortization of premiums and accretion of discounts are recognized in
interest income using the effective interest method over the period to maturity. Realized gains and losses on dispositions are based on the net proceeds and the adjusted book value of the securities sold, using the specific identification method.
Realized gains (losses) on securities available-for-sale are included in noninterest income and, when applicable, are reported as a reclassification adjustment, net of tax, in other comprehensive income. Unrealized gains and losses on investment
securities available for sale are based on the difference between book value and fair value of each security. These gains and losses are credited or charged to shareholders equity, whereas realized gains and losses flow through the Banks
income statement.



Loans Loans are carried on the balance sheet
at unpaid principal balance, net of any unearned interest and the allowance for loan losses. Interest income on loans is computed using the effective interest method, except where serious doubt exists as to the collectibility of the loan, in which
accrual of the income is discontinued.



It is the Banks policy to stop
accruing interest on a loan, and classify that loan as non-accrual under the following circumstances: (a) whenever we are advised by the borrower that scheduled payment or interest payments cannot be met, (b) when our best judgment indicates that
payment in full of principal and interest can no longer be expected, or (c) when any such loan or obligation becomes delinquent for 90 days unless it is both well secured and in the process of collection. All interest accrued but not collected for
loans that are placed on nonaccrual or charged off are reversed against interest income. The interest on these loans is accounted for on the cash basis or cost-recovery method, until qualifying for return to accrual. Loans are returned to accrual
status when all the principal and interest amounts contractually due are brought current and prospects for future contractual payments are reasonably assured.



34



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##### Table of Contents

NEW PEOPLES BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)



|NOTE 2 | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
|------ | -------------------------------------------------------



Allowance for Loan Losses The allowance for loan losses is maintained at a level which, in managements judgment, is adequate to absorb credit losses
inherent in the loan portfolio. The loan portfolio is analyzed periodically and loans are assigned a risk rating. Allowances for impaired loans are generally determined based on collateral values or the present value of estimated cash flows. A
general allowance is made for all other loans not considered impaired as deemed appropriate by management. In determining the adequacy of the allowance, management considers the following factors: the nature of the portfolio, credit concentrations,
trends in historical loss experience, specific impaired loans, the estimated value of any underlying collateral, prevailing economic conditions, and other inherent risks. While management uses available information to recognize losses on loans,
further reductions in the carrying amounts of loans may be necessary based on changes in local collateral values and future cash flows on impaired loans. This evaluation is inherently subjective as it requires estimates that are susceptible to
significant revision as more information becomes available.



The allowance is
increased by a provision for loan losses, which is charged to expense and reduced by charge-offs, net of recoveries. Loans are charged against the allowance for loan losses when management believes that collectibility of the principal is unlikely.
Past due status is determined based on contractual terms.



Bank Premises and
Equipment Land, buildings and equipment are recorded at cost less accumulated depreciation. Depreciation is computed using the straight-line method over the following estimated useful lives:



|                                |  |                      
|------------------------------- |  | ---------------------
|Type                            |  | Estimated useful life
|Buildings                       |  | 39 years             
|Paving and landscaping          |  | 15 years             
|Computer equipment and software |  | 3 to 5 years         
|Vehicles                        |  | 5 years              
|Furniture and other equipment   |  | 5 to 7 years         



Advertising Cost
Advertising costs are expensed in the period incurred.



Stock Options Statement of Financial Accounting Standards (SFAS) No. 123, Accounting for Stock-Based Compensation, sets forth compensation recognition principles that are based on a fair value model. The Company has elected another
alternative provided for under SFAS 123, which is to account for the activity under the Plan using the intrinsic value method of accounting prescribed by Accounting Principles Board Opinion 25, Accounting for Stock Issued to
Employees. Accordingly, compensation cost is not recognized in the financial statements for grants of stock options as all options granted under the Plan have an exercise price equal to the fair market value of the underlying stock at date
of grant.



Had compensation cost for the Companys stock option plan been
determined consistent with SFAS 123, net income would have been reduced to the pro forma amounts reflected below for the years ended December 31:



|                                                                                            |  |      |       |      |   |       |  |   |      
|------------------------------------------------------------------------------------------- |  | ---- | ----- | ---- | - | ----- |  | - | -----
|Years Ended December 31,                                                                    |  | 2004 |       | 2003 |   | 2002 
|Net Income, as reported                                                                     |  | $    | 3,258 |      | $ | 2,814 |  | $ | 2,178
|Deduct: Compensation expense related to stock plans using fair value accounting, net of tax |  |      | 517   |      |   | 173   |  |   |     
|                                                                                            |  |      |       |      |   |       |  |   |      
|Net Income, on a pro forma basis                                                            |  | $    | 2,741 |      | $ | 2,641 |  | $ | 2,178
|                                                                                            |  |      |       |      |   |       |  |   |      



The weighted fair value of each option
was $4.14 in 2004 and $3.30 in 2003 and were estimated at the date of grant using the Black-Scholes option pricing model. The Black-Scholes option pricing model was originally developed for use in estimating the fair value of traded options, which
have different characteristics from the Companys stock options. The model is also sensitive to changes in assumptions, which can materially affect the fair value estimate. The following weighted  average assumptions were used to
determine the fair value of options in the years 2004, 2003 and 2002.



|                         |  |               |   |  |          |   |  |     
|------------------------ |  | ------------- | - |  | -------- | - |  | ----
|Years Ended December 31, |  | 2004          |   |  | 2003     |   |  | 2002
|Dividend yield           |  | 0.00          | % |  | 0.00     | % |  | n/a 
|Expected life            |  | 10 years      |   |  | 10 years |   |  | n/a 
|Expected volatility      |  | 0.00          | % |  | 0.00     | % |  | n/a 
|Risk free interest rate  |  | 4.14% - 4.48% |   |  | 4.01     | % |  | n/a 



35



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##### Table of Contents

NEW PEOPLES BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)



|NOTE 2 | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
|------ | -------------------------------------------------------



Income Taxes  Deferred income tax assets and liabilities are determined using the liability (or balance sheet) method. Under this method, the net deferred
tax asset or liability is determined based on the tax effects of the temporary differences between the book and tax bases of the various balance sheet assets and liabilities and gives current recognition to changes in tax rates and laws.



Financial Instruments  Off-balance-sheet instruments - In the ordinary course
of business, the Bank has entered into commitments to extend credit. Such financial instruments are recorded in the financial statements when they are funded.



Comprehensive Income  Accounting principles generally require that recognized revenue, expenses, gains and losses be included in net income. Although
certain changes in assets and liabilities, such as unrealized gains and losses on available for sale securities, are reported as a separate component of the equity section of the balance sheet, such items, along with net income, are components of
comprehensive income.



Earnings Per Share  Basic earnings per
share computations are based on the weighted average number of shares outstanding during each year. Dilutive earnings per share reflects the additional common shares that would have been outstanding if dilutive potential common shares had been
issued. Potential common shares that may be issued relate to outstanding options determined by the Treasury Method. Weighted average shares outstanding at December 31, 2002 included outstanding stock subscriptions as a result of the ongoing stock
offering at December 31, 2002. During 2003, the stock subscriptions were converted to shares of common stock. The weighted average shares outstanding at December 31, 2004 and 2003 reflect the converted subscriptions and the additional stock issued.



Other Real Estate Owned Other real estate owned represents
properties acquired through foreclosure or deed taken in lieu of foreclosure. At the time of acquisition, these properties are recorded at fair value less estimated costs to sell. Expenses incurred in connection with operating these properties and
subsequent write-downs, if any, are charged to expense. Gains and losses on the sales of these properties are credited or charged to income in the year of the sale.



Reclassification of Financial Statement Presentation Certain reclassifications have been made to the 2003 and 2002 financial
statements to conform with the 2004 financial statement presentation. Such reclassification had no effect on net income as previously reported.



|NOTE 3 | DEPOSITS IN AND FEDERAL FUNDS SOLD TO BANKS:
|------ | --------------------------------------------



The Bank had federal funds sold and cash on deposit with other commercial banks amounting to $11.2 million and $6.0 million at December 31, 2004 and 2003, respectively.
Deposit amounts at other commercial banks may, at times, exceed federally insured limits.



|NOTE 4 | INVESTMENT SECURITIES:
|------ | ----------------------



The amortized cost and estimated fair value of securities are as follows:



|                           |  |               |        |                      |   |                       |  |                       |    |  |   |       
|-------------------------- |  | ------------- | ------ | -------------------- | - | --------------------- |  | --------------------- | -- |  | - | ------
|(Dollars are in thousands) |  | AmortizedCost |        | GrossUnrealizedGains |   | GrossUnrealizedLosses |  | ApproximateFair Value
|December 31, 2004          |  |               |        |                      |   |                       |  |                       |    |  |   |       
|Available for Sale         |  |               |        |                      |   |                       |  |                       |    |  |   |       
|U.S. Government Agencies   |  | $             | 5,700  |                      | $ |                      |  | $                     | 26 |  | $ | 5,674 
|Municipal Governments      |  |               | 100    |                      |   | 1                     |  |                       |   |  |   | 101   
|                           |  |               |        |                      |   |                       |  |                       |    |  |   |       
|Total Securities AFS       |  | $             | 5,800  |                      | $ | 1                     |  | $                     | 26 |  | $ | 5,775 
|                           |  |               |        |                      |   |                       |  |                       |    |  |   |       
|December 31, 2003          |  |               |        |                      |   |                       |  |                       |    |  |   |       
|Available for Sale         |  |               |        |                      |   |                       |  |                       |    |  |   |       
|U.S. Government Agencies   |  | $             | 10,612 |                      | $ | 8                     |  | $                     | 6  |  | $ | 10,614
|Municipal Governments      |  |               | 101    |                      |   | 4                     |  |                       |   |  |   | 105   
|                           |  |               |        |                      |   |                       |  |                       |    |  |   |       
|Total Securities AFS       |  | $             | 10,713 |                      | $ | 12                    |  | $                     | 6  |  | $ | 10,719
|                           |  |               |        |                      |   |                       |  |                       |    |  |   |       



During the month of December 2003, the
Bank reclassified all securities from held to maturity to available for sale to provide additional liquidity. At December 31, 2004 and 2003, the Bank had not identified any securities as held to maturity.



36



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##### Table of Contents

NEW PEOPLES BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)



|NOTE 4 | INVESTMENT SECURITIES (CONTINUED):
|------ | ----------------------------------



The amortized cost and approximate fair value of securities available for sale that were in a loss position at December 31, 2004 are shown below.



|                         |  |                |       |                           |   |                           |  |             |   |  |   |      
|------------------------ |  | -------------- | ----- | ------------------------- | - | ------------------------- |  | ----------- | - |  | - | -----
|                         |  |                |       | Gross Unrealized Losses   |   |                          
|December 31, 2004        |  | Amortized Cost |       | Loss Position < 12 Months |   | Loss Position > 12 Months |  | Fair Values
|U.S. Government Agencies |  | $              | 5,700 |                           | $ | 26                        |  | $           |  |  | $ | 5,674
|                         |  |                |       |                           |   |                           |  |             |   |  |   |      
|Totals                   |  | $              | 5,700 |                           | $ | 26                        |  | $           |  |  | $ | 5,674
|                         |  |                |       |                           |   |                           |  |             |   |  |   |      



At December 31, 2004, the available
for sale portfolio included 5 individual investments for which the fair market value was less than amortized cost. Management does not believe any individual unrealized loss as of December 31, 2004 represents an other-than-temporary impairment.
These unrealized losses are primarily attributable to changes in interest rates resulting from market fluctuations. The Company has the ability to hold the securities contained in the previous table for the time necessary to recover the amortized
cost.



The amortized cost and fair value of investment securities at December
31, 2004, by contractual maturity, are shown in the following schedule. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.



|                                      |  |               |       |           |   |                      |  |      |  
|------------------------------------- |  | ------------- | ----- | --------- | - | -------------------- |  | ---- | -
|(Dollars are in thousands)            |  | AmortizedCost |       | FairValue |   | WeightedAverageYield | 
|Securities Available for Sale         |  |               |       |           |   |                      |  |      |  
|Due in one year or less               |  | $             | 2,607 |           | $ | 2,602                |  | 2.44 | %
|Due after one year through five years |  |               | 3,193 |           |   | 3,173                |  | 2.50 | %
|                                      |  |               |       |           |   |                      |  |      |  
|Total                                 |  | $             | 5,800 |           | $ | 5,775                |  | 2.47 | %
|                                      |  |               |       |           |   |                      |  |      |  



Investment securities with a carrying
value of $3.1 million and $3.3 million at December 31, 2004 and 2003, were pledged to secure public deposits and for other purposes required by law.



The Bank, as a member of the Federal Reserve Bank and the Federal Home Loan Bank, is required to hold stock in each. These equity securities are restricted from trading
and are recorded at a cost of $1.4 million as of December 31, 2004 and 2003, respectively.



|NOTE 5 | LOANS:
|------ | ------



Loans receivable outstanding at December 31, are summarized as follows:



|                                       |  |      |         |      |   |        
|-------------------------------------- |  | ---- | ------- | ---- | - | -------
|(Dollars are in thousands)             |  | 2004 |         | 2003
|Commercial, financial and agricultural |  | $    | 70,915  |      | $ | 58,593 
|Real estate - construction             |  |      | 11,332  |      |   | 7,258  
|Real estate - mortgages                |  |      | 255,925 |      |   | 185,191
|Installment loans to individuals       |  |      | 45,395  |      |   | 44,396 
|                                       |  |      |         |      |   |        
|Total Loans                            |  | $    | 383,567 |      | $ | 295,438
|                                       |  |      |         |      |   |        



The following is a summary of
information at December 31, pertaining to nonperforming loans:



|                                                       |  |      |     |      |   |    
|------------------------------------------------------ |  | ---- | --- | ---- | - | ---
|(Dollars are in thousands)                             |  | 2004 |     | 2003
|Principal:                                             |  |      |     |      |   |    
|Nonaccrual Loans                                       |  | $    | 773 |      | $ | 539
|Loans past due 90 days or more still accruing interest |  |      | 115 |      |   | 26 
|                                                       |  |      |     |      |   |    
|Total Loans                                            |  | $    | 888 |      | $ | 565
|                                                       |  |      |     |      |   |    



At the end of 2004, impaired loans
totaled $891 thousand with a valuation allowance of $4 thousand. Interest income not recognized on these loans was $75 thousand. The average investment in impaired loans was $81 thousand in 2004.



37



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##### Table of Contents

NEW PEOPLES BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)



|NOTE 6 | ALLOWANCE FOR LOAN LOSSES:
|------ | --------------------------



A summary of transactions in the allowance for loan losses is as follows:



|                                |  |      |       |   |      |   |       |      |  |   |       |  
|------------------------------- |  | ---- | ----- | - | ---- | - | ----- | ---- |  | - | ----- | -
|(Dollars are in thousands)      |  | 2004 |       |   | 2003 |   |       | 2002 | 
|Balance, beginning of year      |  | $    | 2,432 |   |      | $ | 2,224 |      |  | $ | 1,793 |  
|Provision for loan losses       |  |      | 990   |   |      |   | 364   |      |  |   | 603   |  
|Recoveries of loans charged off |  |      | 20    |   |      |   | 31    |      |  |   | 35    |  
|Loans charged off               |  |      | (352  | ) |      |   | (187  | )    |  |   | (207  | )
|                                |  |      |       |   |      |   |       |      |  |   |       |  
|Balance, End of Year            |  | $    | 3,090 |   |      | $ | 2,432 |      |  | $ | 2,224 |  
|                                |  |      |       |   |      |   |       |      |  |   |       |  
|Percentage of Loans             |  |      | 0.81  | % |      |   | 0.82  | %    |  |   | 1.00  | %



|NOTE 7 | BANK PREMISES AND EQUIPMENT:
|------ | ----------------------------



Bank premises and equipment at December 31, are summarized as follows:



|                              |  |      |        |   |      |   |        |  
|----------------------------- |  | ---- | ------ | - | ---- | - | ------ | -
|(Dollars are in thousands)    |  | 2004 |        |   | 2003 |  
|Land                          |  | $    | 3,784  |   |      | $ | 2,960  |  
|Buildings and improvements    |  |      | 12,237 |   |      |   | 8,252  |  
|Furniture and equipment       |  |      | 7,481  |   |      |   | 4,909  |  
|Vehicles                      |  |      | 344    |   |      |   | 248    |  
|Construction in progress      |  |      | 234    |   |      |   | 1,226  |  
|                              |  |      |        |   |      |   |        |  
|                              |  |      | 24,080 |   |      |   | 17,595 |  
|Less accumulated depreciation |  |      | (4,677 | ) |      |   | (3,304 | )
|                              |  |      |        |   |      |   |        |  
|Bank Premises and Equipment   |  | $    | 19,403 |   |      | $ | 14,291 |  
|                              |  |      |        |   |      |   |        |  



Depreciation expense for 2004, 2003
and 2002 was $1.4 million, $1.1 million, and $866 thousand respectively.



At
December 31, 2004, construction in progress included the costs of buildings and land for new branches in Virginia at Bluefield and Esserville and in Piney Flats, Tennessee. Each location is anticipated to be complete and operational as full service
branches during 2005 at an additional cost of $2.6 million. At December 31, 2003, construction in progress included the costs of buildings and land purchased for a new branch at Abingdon, Virginia and the operations center at Honaker, Virginia which
have been completed and placed in service.



|NOTE 8 | OTHER TIME DEPOSITS:
|------ | --------------------



The aggregate amount of time deposits with a minimum denomination of $100,000 was $79.9 million and $57.1 million at December 31, 2004 and 2003, respectively



At December 31, 2004, the scheduled maturities of certificates of deposit are as follows
(dollars are in thousands):





|                 |  |   |        
|---------------- |  | - | -------
|2005             |  | $ | 229,759
|2006             |  |   | 20,919 
|2007             |  |   | 19,684 
|2008             |  |   | 4,061  
|2009             |  |   | 2,810  
|After five years |  |   |       
|                 |  |   |        
|Total            |  | $ | 277,233
|                 |  |   |        



|NOTE 9 | INCOME TAX EXPENSE:
|------ | -------------------



The components of income tax expense for the years ended December 31, are as follows:



|                           |  |      |       |      |   |       |  |   |      
|-------------------------- |  | ---- | ----- | ---- | - | ----- |  | - | -----
|(Dollars are in thousands) |  | 2004 |       | 2003 |   | 2002 
|Current expense            |  | $    | 1,437 |      | $ | 1,161 |  | $ | 643  
|Deferred expense (benefit) |  |      | 245   |      |   | 286   |  |   | 435  
|                           |  |      |       |      |   |       |  |   |      
|Net Income Tax             |  | $    | 1,682 |      | $ | 1,447 |  | $ | 1,078
|                           |  |      |       |      |   |       |  |   |      



38



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##### Table of Contents

NEW PEOPLES BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)



|NOTE 9 | INCOME TAX EXPENSE (CONTINUED):
|------ | -------------------------------



The deferred tax expense (benefit) resulting from temporary differences for the years ended December 31 is as follows:



|                                          |  |      |      |   |      |   |      |      |  |   |      |  
|----------------------------------------- |  | ---- | ---- | - | ---- | - | ---- | ---- |  | - | ---- | -
|(Dollars are in thousands)                |  | 2004 |      |   | 2003 |   |      | 2002 | 
|Organization and start-up cost            |  | $    | 2    |   |      | $ | 7    |      |  | $ | 19   |  
|Provision for loan losses                 |  |      | (257 | ) |      |   | (105 | )    |  |   | (149 | )
|Depreciation                              |  |      | 420  |   |      |   | 284  |      |  |   | 438  |  
|Deferred compensation expense             |  |      | (29  | ) |      |   | (23  | )    |  |   | (27  | )
|Unrealized accretion income               |  |      |     |   |      |   | (4   | )    |  |   | 4    |  
|Net earnings on bank owned life insurance |  |      | 114  |   |      |   | 126  |      |  |   | 165  |  
|Capitalized interest and repair expense   |  |      | (5   | ) |      |   | 1    |      |  |   | (15  | )
|                                          |  |      |      |   |      |   |      |      |  |   |      |  
|Deferred Income Tax Expense (Benefit)     |  | $    | 245  |   |      | $ | 286  |      |  | $ | 435  |  
|                                          |  |      |      |   |      |   |      |      |  |   |      |  



The net deferred tax assets and
liabilities resulting from temporary differences as of December 31 are summarized as follows:



|                                                   |  |      |       |   |      |   |       |      |  |   |      |  
|-------------------------------------------------- |  | ---- | ----- | - | ---- | - | ----- | ---- |  | - | ---- | -
|(Dollars are in thousands)                         |  | 2004 |       |   | 2003 |   |       | 2002 | 
|Deferred Tax Assets:                               |  |      |       |   |      |   |       |      |  |   |      |  
|Organization and start-up cost                     |  | $    | 7     |   |      | $ | 9     |      |  | $ | 17   |  
|Allowance for loan losses                          |  |      | 970   |   |      |   | 713   |      |  |   | 608  |  
|Deferred compensation                              |  |      | 80    |   |      |   | 51    |      |  |   | 27   |  
|Unrealized loss on securities Available for sale   |  |      | 9     |   |      |   |       |      |  |   |      |  
|Capitalized interest and repair expense            |  |      | 24    |   |      |   | 19    |      |  |   | 20   |  
|                                                   |  |      |       |   |      |   |       |      |  |   |      |  
|Total Assets                                       |  |      | 1,090 |   |      |   | 792   |      |  |   | 672  |  
|                                                   |  |      |       |   |      |   |       |      |  |   |      |  
|Deferred Tax Liabilities:                          |  |      |       |   |      |   |       |      |  |   |      |  
|Accelerated depreciation                           |  |      | 1,430 |   |      |   | 1,010 |      |  |   | 725  |  
|Unrealized accretion income                        |  |      |      |   |      |   |      |      |  |   | 4    |  
|Unrealized gain on securities Available for sale   |  |      |      |   |      |   | 2     |      |  |   |     |  
|Net unrealized income on bank owned life insurance |  |      | 406   |   |      |   | 292   |      |  |   | 166  |  
|                                                   |  |      |       |   |      |   |       |      |  |   |      |  
|Total Liabilities                                  |  |      | 1,836 |   |      |   | 1,304 |      |  |   | 895  |  
|                                                   |  |      |       |   |      |   |       |      |  |   |      |  
|Net Deferred Tax Asset (Liability)                 |  | $    | (746  | ) |      | $ | (512  | )    |  | $ | (223 | )
|                                                   |  |      |       |   |      |   |       |      |  |   |      |  



The following table summarizes the
differences between the actual income tax expense and the amounts computed using the federal statutory tax rates:



|                                                  |  |      |       |   |      |   |       |      |  |   |       |  
|------------------------------------------------- |  | ---- | ----- | - | ---- | - | ----- | ---- |  | - | ----- | -
|(Dollars are in thousands)                        |  | 2004 |       |   | 2003 |   |       | 2002 | 
|Income tax expense at the applicable federal rate |  | $    | 1,680 |   |      | $ | 1,450 |      |  | $ | 1,107 |  
|Permanent differences resulting from:             |  |      |       |   |      |   |       |      |  |   |       |  
|Nondeductible expenses                            |  |      | 15    |   |      |   | 3     |      |  |   | 3     |  
|Tax exempt interest income                        |  |      | (63   | ) |      |   | (17   | )    |  |   | (15   | )
|State income taxes less federal tax effect        |  |      | 32    |   |      |   | 12    |      |  |   | 7     |  
|Other adjustments                                 |  |      | (18   | ) |      |   | (1    | )    |  |   | (24   | )
|                                                  |  |      |       |   |      |   |       |      |  |   |       |  
|Income Tax Expense                                |  | $    | 1,682 |   |      | $ | 1,447 |      |  | $ | 1,078 |  
|                                                  |  |      |       |   |      |   |       |      |  |   |       |  



Certain deferred tax assets and
deferred tax liabilities for 2002 have been restated to conform with amended tax returns filed. Current and deferred income tax expense for 2002 has also been reclassified due to the changes in deferred tax assets and liabilities.



39



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##### Table of Contents

NEW PEOPLES BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)



|NOTE 10 | RELATED PARTY TRANSACTIONS:
|------- | ---------------------------



During the year, officers and directors (and companies controlled by them) were customers of and had loan transactions with the Bank in the normal course of business
which amounted to $10.7 million at December 31, 2004 and $7.9 million at December 31, 2003. During the year ended December 31, 2004, total principal additions were $11.0 million and principal payments were $10.7 million. These transactions were made
on substantially the same terms as those prevailing for other customers and did not involve any abnormal risk. Total related party deposits held at the Bank were $11.7 million and $12.1 million at the end of years 2004 and 2003, respectively.



During the first quarter of 2004, the Bank finished construction of its branch
location in Grundy, Virginia. The property was subdivided into condominiums. One unit was sold to Director Michael McGlothlin for a price of $375,000 to relocate his law practice. The Board of directors approved the transaction without participation
by Director McGlothlin and he abstained from the vote.



|NOTE 11 | RETIREMENT PLANS:
|------- | -----------------



The Company has established a qualified defined contribution plan which covers all full time employees. Under the plan the Company matches employee contributions up to a maximum of 5% of their salary. The Company
contributed $264 thousand, $178 thousand, and $143 thousand to the defined contribution plan for 2004, 2003 and 2002, respectively.



In addition, in 2002, the Bank established a salary continuation plan for key executives, which is funded by single premium life insurance policies. Expenses related to
the plan were $87 thousand, $69 thousand, and $0 for 2004, 2003, and 2002, respectively.



|NOTE 12 | COMMON STOCK:
|------- | -------------



On October 15, 2002, 1,200,000 shares of common stock were offered for sale by means of a prospectus to existing shareholders and to the general public in the states of Virginia, West Virginia and Tennessee only. The
sale ended on February 07, 2003, after one 30 day extension from the original sale period. The total number of shares sold under the offering were 890,469.



|NOTE 13 | STOCK OPTION PLAN:
|------- | ------------------



New Peoples Stock Option Plan (the Plan) was adopted on September 27, 2001. The purpose of the Plan is to reward employees and directors for services rendered and investment risks undertaken to date
and to promote the success of the Company by providing incentives to employees and directors that will promote the identification of their personal interest with the long-term financial success of the Company and with growth in shareholder value.
The Plan provides that options for up to 900,000 shares of the Companys common stock may be issued to employees and directors. The exercise price may not be less than 100% of the fair market value of the shares on the award date. Each award
becomes exercisable in the event of a change in control of the Company. All options are subject to exercise or forfeiture if the Companys capital falls below its minimum requirements, as determined by its primary state or federal regulators.
The Plan will expire on May 31, 2011, unless terminated earlier by the Board of Directors. At December 31, 2004, there were 378,500 additional shares available for grant under the Plan.



40



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##### Table of Contents

NEW PEOPLES BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)



|NOTE 13 | STOCK OPTION PLAN (CONTINUED):
|------- | ------------------------------



Information about stock options outstanding at December 31, 2004 follows:



|                |  |                   |  |                                         |  |                              |      
|--------------- |  | ----------------- |  | --------------------------------------- |  | ---------------------------- | -----
|Exercise Prices |  | NumberOutstanding |  | WeightedAverageRemainingContractualLife |  | WeightedAverageExercisePrice
|$  7.50         |  | 234,400           |  | 7.00 years                              |  | $                            | 7.50 
|$10.00          |  | 164,500           |  | 8.52 years                              |  | $                            | 10.00
|$13.50          |  | 103,000           |  | 10.00 years                             |  | $                            | 13.50
|                |  |                   |  |                                         |  |                              |      
|Totals          |  | 501,900           |  | 8.11 years                              |  | $                            | 11.32



A summary of the status of the
Companys stock option plan is presented below:



|                                               |  |                 |  |                              |       |                 |         |   |                              |   |                 |  |         |                              |  |   |     
|---------------------------------------------- |  | --------------- |  | ---------------------------- | ----- | --------------- | ------- | - | ---------------------------- | - | --------------- |  | ------- | ---------------------------- |  | - | ----
|                                               |  | 2004            |  | 2003                         |       | 2002           
|                                               |  | Number ofShares |  | WeightedAverageExercisePrice |       | Number ofShares |         |   | WeightedAverageExercisePrice |   | Number ofShares |  |         | WeightedAverageExercisePrice
|Outstanding and exercisable, Beginning of year |  | 319,966         |  | $                            | 8.12  |                 | 252,466 |   |                              | $ | 7.50            |  | 256,000 |                              |  | $ | 7.50
|Granted                                        |  | 189,000         |  |                              | 11.91 |                 | 79,500  |   |                              |   | 10.00           |  |        |                              |  |   |    
|Exercised                                      |  | 7,066           |  |                              | 7.85  |                 | (10,000 | ) |                              |   | 7.50            |  | (2,534  | )                            |  |   | 7.50
|Forfeited                                      |  |                |  |                              |      |                 | (2,000  | ) |                              |   | 7.50            |  | (1,000  | )                            |  |   | 7.50
|                                               |  |                 |  |                              |       |                 |         |   |                              |   |                 |  |         |                              |  |   |     
|Outstanding and exercisable, end of year       |  | 501,900         |  | $                            | 11.32 |                 | 319,966 |   |                              | $ | 8.12            |  | 252,466 |                              |  | $ | 7.50
|                                               |  |                 |  |                              |       |                 |         |   |                              |   |                 |  |         |                              |  |   |     



|NOTE 14 | LEASING ACTIVITIES:
|------- | -------------------



The Companys leasing activities consist of the leasing of land and buildings under agreements in which the Bank is lessee. These leases have been classified as operating leases.



The following is a schedule by years of future minimum rental payments required under
non-cancelable operating leases that have initial or remaining non-cancelable lease terms in excess of one year as of December 31, 2004:



|                                |  |   |    
|------------------------------- |  | - | ---
|Year ending December 31:        |  |  
|2005                            |  | $ | 50 
|2006                            |  |   | 29 
|2007                            |  |   | 8  
|2008                            |  |   | 9  
|2009                            |  |   | 9  
|Thereafter                      |  |   | 51 
|                                |  |   |    
|Total minimum payments required |  | $ | 156



Rental commitments of less than one
year are not included in the above schedule. Rentals charged to operations under operating leases were $55 thousand, $46 thousand, and $21 thousand for the years ended 2004, 2003, and 2002, respectively.



|NOTE 15 | DIVIDEND LIMITATIONS ON SUBSIDIARY BANK:
|------- | ----------------------------------------



The principal source of funds of the Company is dividends paid by the Bank. The Federal Reserve Act restricts the amount of dividends the Bank may pay. Approval by the
Board of Governors of the Federal Reserve System is required if the dividends declared by a state member bank, in any year, exceed the sum of (1) net income of the current year and (2) income net of dividends for the preceding two years. As of
January 1, 2005, approximately $6.1 million was available for dividend distribution.



41



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##### Table of Contents

|NOTE 16 | AVAILABLE LINES OF CREDIT:
|------- | --------------------------



The Bank has federal funds lines of credit with correspondent banks totaling $20.4 million as of December 31, 2004. In addition, the Bank may borrow up to $65.3 million
from the Federal Home Loan Bank which is secured by a blanket lien on residential real estate loans.



|NOTE 17 | FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK:
|------- | --------------------------------------------------



In the normal course of business, the Bank has outstanding commitments and contingent liabilities, such as commitments to extend credit and standby letters of credit,
which are not included in the accompanying consolidated financial statements. The Banks exposure to credit loss in the event of nonperformance by the other party to the financial instruments for commitments to extend credit and standby letters
of credit is represented by the contractual or notional amount of those instruments. The Bank uses the same credit policies in making such commitments as it does for instruments that are included in the balance sheet.



Financial instruments whose contract amount represents credit risk were as follows:



|                             |  |      |        |      |   |       
|---------------------------- |  | ---- | ------ | ---- | - | ------
|(Dollars are in thousands)   |  | 2004 |        | 2003
|Commitments to extend credit |  | $    | 31,596 |      | $ | 22,080
|Standby letters of credit    |  |      | 1,342  |      |   | 721   



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##### Table of Contents

NEW PEOPLES BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)



|NOTE 17 | FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK (CONTINUED):
|------- | --------------------------------------------------------------



Commitments to extend credit are agreements to lend to a customer at either a fixed or variable interest rate as long as there is no violation of any condition
established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts
do not necessarily represent future cash requirements. The Bank evaluates each customers creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Bank upon extension of credit, is based on
managements credit evaluation. Collateral held varies but may include accounts receivable, inventory, property and equipment, and income-producing commercial properties.



Standby letters of credit are conditional commitments issued by the Bank to guarantee the performance of a customer to a third party.
Standby letters of credit generally have fixed expiration dates or other termination clauses and may require payment of a fee. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan
facilities to customers. The Banks policy for obtaining collateral, and the nature of such collateral, is essentially the same as that involved in making commitments to extend credit.



|NOTE 18 | CONCENTRATION OF CREDIT RISK:
|------- | -----------------------------



The Company recognizes a concentration as any obligation, direct or indirect, of the same or affiliated interests which represent 25% or more of its capital structure, or
$9.0 million as of December 31, 2004. Certain concentrations may pose credit risk. Note 5 shows the types of loans made by the Bank. A substantial portion of the Banks loans are secured by real estate. The Bank does not have any significant
concentrations to any one industry or customer. Through periodic credit analyses, management monitors concentrations to assess and mitigate potential losses that may arise.



|NOTE 19 | REGULATORY MATTERS:
|------- | -------------------



The Company and the Bank are subject to various capital requirements administered by federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory, and possibly, additional
discretionary actions by regulators that, if undertaken, could have a direct material effect on the Companys and the Banks financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action,
the Company and the Bank must meet specific capital guidelines that involve quantitative measures of assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The capital amounts and classification
are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Prompt corrective action provisions are not applicable to bank holding companies.



Quantitative measures established by regulation to ensure capital adequacy require the
Company and the Bank to maintain minimum amounts and ratios (set forth in the following table) of total and Tier 1 capital (as defined) to risk-weighted assets (as defined) and of Tier 1 capital (as defined) to average assets (as defined).
Management believes, as of December 31, 2004 and 2003, that the Company and the Bank meet all capital adequacy requirements to which they are subject.



As of August 30, 2004, the most recent date of notification, the Commonwealth of Virginia State Corporation Commission Bureau of Financial Institutions categorized the
Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, an institution must maintain minimum total risk-based, Tier 1 risk-based and Tier 1 leverage ratios as set forth in the
following tables. There are no conditions or events since the notification that management believes have changed the Banks category.



43



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NEW PEOPLES BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)



|NOTE 19 | REGULATORY MATTERS (CONTINUED):
|------- | -------------------------------



The Companys and the Banks actual capital amounts and ratios are presented in the table as of December 31, 2004 and 2003, respectively.



|                                        |  |        |        |       |                           |   |        |                                                                      |        |  |   |        |  |       |        |  |     |  
|--------------------------------------- |  | ------ | ------ | ----- | ------------------------- | - | ------ | -------------------------------------------------------------------- | ------ |  | - | ------ |  | ----- | ------ |  | --- | -
|                                        |  | Actual |        |       | MinimumCapitalRequirement |   |        | Minimum To BeWell CapitalizedUnder PromptCorrective ActionProvisions |       
|(Dollars in thousands)                  |  | Amount |        | Ratio |                           |   | Amount |                                                                      | Ratio  |  |   | Amount |  | Ratio |       
|December 31, 2004:                      |  |        |        |       |                           |   |        |                                                                      |        |  |   |        |  |       |        |  |     |  
|Total Capital to Risk Weighted Assets   |  |        |        |       |                           |   |        |                                                                      |        |  |   |        |  |       |        |  |     |  
|The Company                             |  | $      | 50,205 |       | 13.72                     | % |        | $                                                                    | 29,272 |  | 8 | %      |  | $     | N/A    |  | N/A |  
|The Bank:                               |  |        | 37,475 |       | 10.31                     | % |        |                                                                      | 29,088 |  | 8 | %      |  |       | 36,361 |  | 10  | %
|Tier 1 Capital to Risk Weighted Assets: |  |        |        |       |                           |   |        |                                                                      |        |  |   |        |  |       |        |  |     |  
|The Company                             |  |        | 47,115 |       | 12.88                     | % |        |                                                                      | 14,636 |  | 4 | %      |  |       | N/A    |  | N/A |  
|The Bank                                |  |        | 34,385 |       | 9.46                      | % |        |                                                                      | 14,544 |  | 4 | %      |  |       | 21,816 |  | 6   | %
|Tier 1 Capital to Average Assets:       |  |        |        |       |                           |   |        |                                                                      |        |  |   |        |  |       |        |  |     |  
|The Company                             |  |        | 47,115 |       | 10.64                     | % |        |                                                                      | 17,708 |  | 4 | %      |  |       | N/A    |  | N/A |  
|The Bank                                |  |        | 34,385 |       | 8.00                      | % |        |                                                                      | 17,189 |  | 4 | %      |  |       | 21,487 |  | 5   | %
|December 31, 2003:                      |  |        |        |       |                           |   |        |                                                                      |        |  |   |        |  |       |        |  |     |  
|Total Capital to Risk Weighted Assets:  |  |        |        |       |                           |   |        |                                                                      |        |  |   |        |  |       |        |  |     |  
|The Company                             |  | $      | 35,233 |       | 13.10                     | % |        | $                                                                    | 21,510 |  | 8 | %      |  | $     | N/A    |  | N/A |  
|The Bank                                |  |        | 31,346 |       | 11.66                     | % |        |                                                                      | 21,510 |  | 8 | %      |  |       | 26,887 |  | 10  | %
|Tier 1 Capital to Risk Weighted Assets: |  |        |        |       |                           |   |        |                                                                      |        |  |   |        |  |       |        |  |     |  
|The Company                             |  |        | 32,801 |       | 12.20                     | % |        |                                                                      | 10,755 |  | 4 | %      |  |       | N/A    |  | N/A |  
|The Bank                                |  |        | 28,914 |       | 10.75                     | % |        |                                                                      | 10,755 |  | 4 | %      |  |       | 16,132 |  | 6   | %
|Tier 1 Capital to Average Assets:       |  |        |        |       |                           |   |        |                                                                      |        |  |   |        |  |       |        |  |     |  
|The Company                             |  |        | 32,801 |       | 9.29                      | % |        |                                                                      | 14,122 |  | 4 | %      |  |       | N/A    |  | N/A |  
|The Bank                                |  |        | 28,914 |       | 8.19                      | % |        |                                                                      | 14,122 |  | 4 | %      |  |       | 17,652 |  | 5   | %



|NOTE 20 | DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS:
|------- | ------------------------------------------------------



Statement of Financial Accounting Standards No. 107 (SFAS 107) Disclosures About the Fair Value of Financial Statements defines the fair value of a financial
instrument as the amount at which a financial instrument could be exchanged in a current transaction between willing parties, other than in a forced liquidation sale. As the majority of the Banks financial instruments lack an available trading
market, significant estimates, assumptions and present value calculations are required to determine estimated fair value. Estimated fair value and the carrying value of financial instruments at December 31, 2004 and 2003, are as follows:



|                               |  |                     |         |                   |   |                     |  |               |         |  |   |        
|------------------------------ |  | ------------------- | ------- | ----------------- | - | ------------------- |  | ------------- | ------- |  | - | -------
|                               |  | December 31, 2004   |         | December 31, 2003
|(Dollars are in thousands)     |  | EstimatedFair Value |         | CarryingValue     |   | EstimatedFair Value |  | CarryingValue
|Financial Assets               |  |                     |         |                   |   |                     |  |               |         |  |   |        
|Cash and due from bank         |  | $                   | 15,281  |                   | $ | 15,281              |  | $             | 8,746   |  | $ | 8,746  
|Federal funds sold             |  |                     | 2,124   |                   |   | 2,124               |  |               | 3,327   |  |   | 3,327  
|Investment securities          |  |                     | 5,775   |                   |   | 5,775               |  |               | 10,719  |  |   | 10,719 
|Equity securities (restricted) |  |                     | 1,441   |                   |   | 1,441               |  |               | 1,365   |  |   | 1,365  
|Loans                          |  |                     | 384,672 |                   |   | 383,567             |  |               | 297,287 |  |   | 295,438
|Accrued interest receivable    |  |                     | 2,272   |                   |   | 2,272               |  |               | 1,896   |  |   | 1,896  
|Life insurance investments     |  |                     | 8,694   |                   |   | 8,694               |  |               | 8,359   |  |   | 8,359  
|Financial Liabilities          |  |                     |         |                   |   |                     |  |               |         |  |   |        
|Demand Deposits:               |  |                     |         |                   |   |                     |  |               |         |  |   |        
|Non-interest bearing           |  |                     | 45,924  |                   |   | 45,924              |  |               | 33,296  |  |   | 33,296 
|Interest-bearing               |  |                     | 21,518  |                   |   | 21,518              |  |               | 19,802  |  |   | 19,802 
|Savings deposits               |  |                     | 43,445  |                   |   | 43,445              |  |               | 40,418  |  |   | 40,418 
|Time deposits                  |  |                     | 277,608 |                   |   | 277,233             |  |               | 216,321 |  |   | 214,705
|Accrued interest payable       |  |                     | 891     |                   |   | 891                 |  |               | 496     |  |   | 496    
|Trust preferred securities     |  |                     | 11,341  |                   |   | 11,341              |  |               |        |  |   |       



44



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NEW PEOPLES BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)



|NOTE 20 | DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED):
|------- | ------------------------------------------------------------------



The carrying value of cash and due from banks, federal funds sold, interest-bearing deposits, deposits with no stated maturities, trust preferred securities and accrued
interest approximates fair value. The estimated fair value of investment securities was based on closing market prices. The remaining financial instruments were valued based on the present value of estimated future cash flows, discounted at various
rates in effect for similar instruments during the months of December 2004 and 2003.



|NOTE 21 | TRUST PREFERRED SECURITIES:
|------- | ---------------------------



On July 7, 2004, the Company completed the issuance of $11.3 million in floating rate trust preferred securities offered by its wholly owned subsidiary, NPB Capital Trust
I. The proceeds of the funds are being used for general corporate purposes which may include capital management for affiliates, retirement of indebtedness and other investments. Under the terms of the subordinated debt transaction, the securities
mature in 30 years and are redeemable, in whole or in part, without penalty, at the option of the Company after five years. Due to the ability to defer interest and principal payments for 60 months without being considered in default, the regulatory
agencies consider the trust preferred securities as Tier 1 capital. The securities have a floating rate of 3 month LIBOR plus 260 basis points, which resets quarterly, with a current rate at December 31, 2004 of 4.67%.



|NOTE 22 | RECENT ACCOUNTING DEVELOPMENTS
|------- | ------------------------------



In December 2003, the FASB revised Interpretation No. 46, Consolidation of Variable Interest Entities issued in January 2003 (FIN 46), which
addresses consolidation by business enterprises of variable interest entities (VIEs) that either (1) do not have sufficient equity investment at risk to permit the entity to finance its activities without additional subordinated financial support,
or (2) have equity investors that lack an essential characteristic of a controlling financial interest. FIN 46 (R) introduced a new scope exception for certain types of entities that qualify as a business as defined in FIN 46 (R),
revised the method of calculating expected losses and residual returns for determination of the primary beneficiary and included new guidance for assessing variable interests. No new consolidation was required as a result of applying FIN 46 or FIN
46 (R). The implementation of FIN 46 (R) did not have and is not expected to have a significant impact on the financial condition or results of operations of the Company.



In March 2004, the FASBs Emerging Issues Task Force (EITF), reached consensus on EITF 03-01, The Meaning of
Other-than-Temporary Impairment and its Application to Certain Investments. EITF 03-01 requires that unrealized losses on investment securities that are deemed other-than-temporary be recorded as an adjustment to operations. The guidance
applies to certain debt and equity securities within the scope of SFAS No. 115. EITF 03-01 provides that investments that have declined in value due to credit concerns or to changes in the interest rate environment and/or sector spreads must be
recorded as other-than-temporarily impaired, unless the investor can demonstrate the positive ability and intent to hold such securities until a forecasted recovery of fair value or until maturity of the security. EITF 03-01 requires separate
disclosure related to unrealized losses for securities that have been in an unrealized loss position for a period of less that twelve months and for those that have been in an unrealized loss position for a period greater than twelve months, for
financial statements issued for years ending after December 15, 2003. The loss recognition provisions of other-than-temporary losses under EITF 03-01 were to be effective September 30, 2004, however, the FASB issued FASB Staff Position EIFT 03-01-1,
which deferred the effective date until further implementation guidance could be established. Management will continue to monitor changes in the guidance and evaluate the impact of initial adoption on the financial condition and results of
operations of the Company.



In December 2004, the FASB issued SFAS No.
123 (Revised), Share-Based Payment (Revised 2004) (SFAS 123 (R)). SFAS 123 (R) replaces SFAS 123 and supercedes APB Opinion Number 25. This standard requires all entities to recognize compensation expense in an amount equal to the
grant date fair value of stock options and other share-based payments. Public entities (other than those filing as small business issuers) will be required to apply SFAS 123 (R) as of the first interim or annual reporting period that begins after
June 15, 2005. This statement is to be applied using a modified version of prospective application. Compensation expense is required to be recorded (as previous awards continue to vest) for the unvested portion of previously granted



45



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##### Table of Contents

NEW PEOPLES BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED



|NOTE 22 | RECENT ACCOUNTING DEVELOPMENTS (CONTINUED):
|------- | -------------------------------------------



awards that remain outstanding at the date of adoption. In addition, the Company may elect to adopt SFAS 123(R) by adjusting previously issued financial statements on a
basis consistent with the amounts of the expense previously calculated and reported in the pro forma disclosures that had been required by SFAS No. 123. Management has not completed its evaluation of the effect of adoption of SFAS 123 (R), but
believes that the effect will be consistent with the application in its pro forma disclosures that had been required by SFAS No. 123.



|NOTE 23 | PARENT CORPORATION ONLY FINANCIAL STATEMENTS:
|------- | ---------------------------------------------



CONDENSED BALANCE SHEETS

AS OF
DECEMBER 31, 2004 AND 2003

(In Thousands)



|                                                                                                                                                    |  |      |        |   |      |   |       
|--------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---- | ------ | - | ---- | - | ------
|                                                                                                                                                    |  | 2004 |        |   | 2003
|ASSETS                                                                                                                                              |  |      |        |   |      |   |       
|Due from banks                                                                                                                                      |  | $    | 10,507 |   |      | $ | 3,785 
|Investment in subsidiaries                                                                                                                          |  |      | 35,039 |   |      |   | 28,987
|Premises and fixed assets                                                                                                                           |  |      | 2,163  |   |      |   |      
|Other assets                                                                                                                                        |  |      | 323    |   |      |   | 42    
|                                                                                                                                                    |  |      |        |   |      |   |       
|Total Assets                                                                                                                                        |  | $    | 48,032 |   |      | $ | 32,814
|                                                                                                                                                    |  |      |        |   |      |   |       
|LIABILITIES                                                                                                                                         |  |      |        |   |      |   |       
|Accrued interest payable                                                                                                                            |  | $    | 121    |   |      | $ |      
|Accrued expenses and other liabilities                                                                                                              |  |      | 60     |   |      |   | 9     
|Due to subsidiaries                                                                                                                                 |  |      | 412    |   |      |   |      
|Trust preferred securities                                                                                                                          |  |      | 11,341 |   |      |   |      
|                                                                                                                                                    |  |      |        |   |      |   |       
|Total Liabilities                                                                                                                                   |  | $    | 11,934 |   |      | $ | 9     
|                                                                                                                                                    |  |      |        |   |      |   |       
|STOCKHOLDERS EQUITY                                                                                                                                |  |      |        |   |      |   |       
|Common stock - $ 2.00 par value, 12,000,000 shares authorized;6,910,069 and 6,903,003 shares issued and outstanding for 2004 and 2003,
respectively |  |      | 13,820 |   |      |   | 13,806
|Paid-in-Surplus                                                                                                                                     |  |      | 13,118 |   |      |   | 13,076
|Retained earnings                                                                                                                                   |  |      | 9,177  |   |      |   | 5,919 
|Accumulated other comprehensive income (loss)                                                                                                       |  |      | (17    | ) |      |   | 4     
|                                                                                                                                                    |  |      |        |   |      |   |       
|Total Stockholders Equity                                                                                                                          |  |      | 36,098 |   |      |   | 32,805
|                                                                                                                                                    |  |      |        |   |      |   |       
|Total Liabilities and Stockholders Equity                                                                                                          |  | $    | 48,032 |   |      | $ | 32,814
|                                                                                                                                                    |  |      |        |   |      |   |       



CONDENSED STATEMENTS
OF INCOME

FOR THE YEARS ENDED DECEMBER 31, 2004, 2003

AND ONE MONTH ENDED DECEMBER 31, 2002

(Dollars in Thousands)



|                                            |  |      |       |      |   |       |  |   |      
|------------------------------------------- |  | ---- | ----- | ---- | - | ----- |  | - | -----
|                                            |  | 2004 |       | 2003 |   | 2002 
|Income                                      |  |      |       |      |   |       |  |   |      
|Dividends from subsidiaries                 |  | $    |      |      | $ |      |  | $ |     
|Miscellaneous income                        |  |      | 28    |      |   |      |  |   |     
|Undistributed income from subsidiaries      |  |      | 3,331 |      |   | 2,872 |  |   | 2,194
|                                            |  |      |       |      |   |       |  |   |      
|Total Income                                |  |      | 3,359 |      |   | 2,872 |  |   | 2,194
|                                            |  |      |       |      |   |       |  |   |      
|Expenses                                    |  |      |       |      |   |       |  |   |      
|Trust preferred securities interest expense |  |      | 232   |      |   |      |  |   |     
|Legal fees                                  |  |      | 42    |      |   | 7     |  |   |     
|Accounting fees                             |  |      | 69    |      |   | 45    |  |   |     
|Other operating expenses                    |  |      | 15    |      |   | 36    |  |   |     
|Shareholder related expenses                |  |      | 26    |      |   |      |  |   | 24   
|                                            |  |      |       |      |   |       |  |   |      
|Total Expenses                              |  |      | 384   |      |   | 88    |  |   | 24   
|                                            |  |      |       |      |   |       |  |   |      
|Income before Income Taxes                  |  |      | 2,975 |      |   | 2,784 |  |   | 2,170
|Income Tax Benefit                          |  |      | 283   |      |   | 30    |  |   | 8    
|                                            |  |      |       |      |   |       |  |   |      
|Net Income                                  |  | $    | 3,258 |      | $ | 2,814 |  | $ | 2,178
|                                            |  |      |       |      |   |       |  |   |      



46



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NEW PEOPLES BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)





|NOTE 23 | PARENT CORPORATION ONLY FINANCIAL STATEMENTS (CONTINUED):
|------- | ---------------------------------------------------------



CONDENSED STATEMENTS OF CASH FLOWS

FOR THE YEARS ENDED DECEMBER 31, 2004, 2003

AND THE ONE MONTH ENDED DECEMBER 31, 2002

(Dollars and Shares in Thousands)



|                                                                              |  |      |        |   |      |   |        |      |  |   |        |  
|----------------------------------------------------------------------------- |  | ---- | ------ | - | ---- | - | ------ | ---- |  | - | ------ | -
|                                                                              |  | 2004 |        |   | 2003 |   |        | 2002 | 
|Cash Flows From Operating Activities:                                         |  |      |        |   |      |   |        |      |  |   |        |  
|Net Income                                                                    |  | $    | 3,258  |   |      | $ | 2,814  |      |  | $ | 2,178  |  
|Adjustments to reconcile net income to net cash used in operating activities: |  |      |        |   |      |   |        |      |  |   |        |  
|Income of subsidiaries                                                        |  |      | (3,331 | ) |      |   | (2,872 | )    |  |   | (2,194 | )
|Net change in:                                                                |  |      |        |   |      |   |        |      |  |   |        |  
|Other assets                                                                  |  |      | (281   | ) |      |   | (22    | )    |  |   | (17    | )
|Other liabilities                                                             |  |      | 584    |   |      |   | (4     | )    |  |   | 5      |  
|                                                                              |  |      |        |   |      |   |        |      |  |   |        |  
|Net Cash Used in Operating Activities                                         |  |      | 230    |   |      |   | (84    | )    |  |   | (27    | )
|                                                                              |  |      |        |   |      |   |        |      |  |   |        |  
|Cash Flows From Investing Activities:                                         |  |      |        |   |      |   |        |      |  |   |        |  
|Payments for the purchase of property                                         |  |      | (2,164 | ) |      |   |       |      |  |   |       |  
|Investment in subsidiary                                                      |  |      | (2,400 | ) |      |   | (2,772 | )    |  |   | (2,250 | )
|                                                                              |  |      |        |   |      |   |        |      |  |   |        |  
|Net Cash Used in Investing Activities                                         |  |      | (4,564 | ) |      |   | (2,772 | )    |  |   | (2,250 | )
|                                                                              |  |      |        |   |      |   |        |      |  |   |        |  
|Cash Flows From Financing Activities:                                         |  |      |        |   |      |   |        |      |  |   |        |  
|Net proceeds from common stock offering                                       |  |      |       |   |      |   | 3,431  |      |  |   | 5,393  |  
|Net proceeds for trust preferred securities                                   |  |      | 11,000 |   |      |   |       |      |  |   |       |  
|Exercise of stock options                                                     |  |      | 56     |   |      |   | 75     |      |  |   | 19     |  
|                                                                              |  |      |        |   |      |   |        |      |  |   |        |  
|Net Cash Provided by Financing Activities                                     |  |      | 11,056 |   |      |   | 3,506  |      |  |   | 5,412  |  
|                                                                              |  |      |        |   |      |   |        |      |  |   |        |  
|Net Increase in Cash and Cash Equivalents                                     |  |      | 6,722  |   |      |   | 650    |      |  |   | 3,135  |  
|Cash and Cash Equivalents, Beginning of Year                                  |  |      | 3,785  |   |      |   | 3,135  |      |  |   |       |  
|                                                                              |  |      |        |   |      |   |        |      |  |   |        |  
|Cash and Cash Equivalents, End of Year                                        |  | $    | 10,507 |   |      | $ | 3,785  |      |  | $ | 3,135  |  
|                                                                              |  |      |        |   |      |   |        |      |  |   |        |  



|NOTE 24 | SELECTED QUARTERLY INFORMATION (UNAUDITED)
|------- | ------------------------------------------



|                                                     |  |               |         |       |   |         |  |       |         |  |   |        
|---------------------------------------------------- |  | ------------- | ------- | ----- | - | ------- |  | ----- | ------- |  | - | -------
|                                                     |  | 2004 Quarters
|(Dollars and shares in thousands)                    |  | Fourth        |         | Third |   | Second  |  | First
|Income statement                                     |  |               |         |       |   |         |  |       |         |  |   |        
|Interest income                                      |  | $             | 6,659   |       | $ | 6,223   |  | $     | 5,904   |  | $ | 5,479  
|Interest expense                                     |  |               | 1,962   |       |   | 1,719   |  |       | 1,445   |  |   | 1,345  
|Net interest income                                  |  |               | 4,697   |       |   | 4,504   |  |       | 4,459   |  |   | 4,134  
|Noninterest income                                   |  |               | 711     |       |   | 642     |  |       | 723     |  |   | 482    
|Total revenue                                        |  |               | 5,408   |       |   | 5,146   |  |       | 5,182   |  |   | 4,616  
|Provision for credit losses                          |  |               | 370     |       |   | 220     |  |       | 280     |  |   | 120    
|Noninterest expense                                  |  |               | 4,047   |       |   | 3,711   |  |       | 3,343   |  |   | 3,321  
|Income before income taxes                           |  |               | 991     |       |   | 1,215   |  |       | 1,559   |  |   | 1,175  
|Income tax expense                                   |  |               | 373     |       |   | 375     |  |       | 532     |  |   | 402    
|Net income                                           |  |               | 618     |       |   | 840     |  |       | 1,027   |  |   | 773    
|Average common shares issued and outstanding         |  |               | 6,909   |       |   | 6,909   |  |       | 6,906   |  |   | 6,905  
|Average diluted common shares issued and outstanding |  |               | 7,067   |       |   | 7,054   |  |       | 7,036   |  |   | 7,002  
|Period end balance sheet                             |  |               |         |       |   |         |  |       |         |  |   |        
|Total loans and leases                               |  | $             | 383,567 |       | $ | 366,427 |  | $     | 347,398 |  | $ | 324,029
|Total assets                                         |  |               | 437,751 |       |   | 418,762 |  |       | 394,201 |  |   | 368,334
|Total deposits                                       |  |               | 388,120 |       |   | 369,644 |  |       | 345,524 |  |   | 329,545
|Total shareholders equity                           |  |               | 36,098  |       |   | 35,494  |  |       | 34,619  |  |   | 33,606 



47



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NEW PEOPLES BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)



|NOTE 24 | SELECTED QUARTERLY INFORMATION (UNAUDITED) (CONTINUED):
|------- | -------------------------------------------------------



|                                                     |  |               |         |   |       |   |         |  |       |         |  |   |        
|---------------------------------------------------- |  | ------------- | ------- | - | ----- | - | ------- |  | ----- | ------- |  | - | -------
|                                                     |  | 2003 Quarters
|(Dollars and shares in thousands)                    |  | Fourth        |         |   | Third |   | Second  |  | First
|Income statement                                     |  |               |         |   |       |   |         |  |       |         |  |   |        
|Interest income                                      |  | $             | 5,384   |   |       | $ | 5,102   |  | $     | 4,838   |  | $ | 4,632  
|Interest expense                                     |  |               | 1,459   |   |       |   | 1,610   |  |       | 1,597   |  |   | 1,666  
|Net interest income                                  |  |               | 3,925   |   |       |   | 3,492   |  |       | 3,241   |  |   | 2,966  
|Noninterest income                                   |  |               | 503     |   |       |   | 491     |  |       | 440     |  |   | 373    
|Total revenue                                        |  |               | 4,428   |   |       |   | 3,983   |  |       | 3,681   |  |   | 3,339  
|Provision for credit losses                          |  |               |        |   |       |   | 30      |  |       | 174     |  |   | 160    
|Gains (losses) on sales of securities                |  |               | (5      | ) |       |   |        |  |       |        |  |   |       
|Noninterest expense                                  |  |               | 3,132   |   |       |   | 2,798   |  |       | 2,608   |  |   | 2,268  
|Income before income taxes                           |  |               | 1,296   |   |       |   | 1,155   |  |       | 899     |  |   | 911    
|Income tax expense                                   |  |               | 447     |   |       |   | 394     |  |       | 306     |  |   | 300    
|Net income                                           |  |               | 849     |   |       |   | 761     |  |       | 593     |  |   | 611    
|Average common shares issued and outstanding         |  |               | 6,903   |   |       |   | 6,901   |  |       | 6,898   |  |   | 6,801  
|Average diluted common shares issued and outstanding |  |               | 6,971   |   |       |   | 6,970   |  |       | 6,968   |  |   | 6,871  
|Period end balance sheet                             |  |               |         |   |       |   |         |  |       |         |  |   |        
|Total loans and leases                               |  | $             | 295,438 |   |       | $ | 268,745 |  | $     | 250,942 |  | $ | 234,170
|Total assets                                         |  |               | 342,508 |   |       |   | 348,672 |  |       | 328,262 |  |   | 303,335
|Total deposits                                       |  |               | 308,221 |   |       |   | 314,966 |  |       | 295,800 |  |   | 271,330
|Total shareholders equity                           |  |               | 32,805  |   |       |   | 31,953  |  |       | 31,155  |  |   | 30,562 



48



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|Item 9. | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
|------- | ------------------------------------------------------------------------------------



None.



|Item 9A. | Controls and Procedures
|-------- | -----------------------



Internal Control Over Financial Reporting



Our management is responsible for establishing and maintaining adequate internal control over financial reporting. There were no changes in New Peoples internal
control over financial reporting during the last fiscal quarter that materially affected, or are reasonably likely to materially affect, internal control over financial reporting. However, as discussed further below, in the first fiscal quarter of
2005 New Peoples has begun to implement certain changes to its internal control over financial reporting that are intended to improve, and are reasonably likely to materially affect, its internal control over financial reporting.



As of the date of filing this Form 10-K, New Peoples is in the process of testing its
internal control procedures in order to satisfy the requirements of Section 404 of the Sarbanes-Oxley Act, which requires an annual management report on the effectiveness of New Peoples internal control over financial reporting and for New
Peoples independent registered public accountants to attest to this report. New Peoples is eligible for a 45 day extension of time allowed by the Securities and Exchange Commission for companies of a certain size to file this management report
and the related attestation. New Peoples has elected to use this 45 day extension and, therefore, this Form 10-K does not include the management report or the related attestation. New Peoples intends to complete the process of testing its internal
control procedures and to file the required report and related attestation in an amended Form 10-K, which New Peoples anticipates filing in April 2005.



Based on testing performed to date, management identified in February 2005 certain control deficiencies in NPB Financial, a new startup division. These deficiencies
relate to the design effectiveness of certain internal controls regarding segregation of duties in the processes of initiating, authorizing, recording, processing, and reporting certain insurance and brokerage transactions, as well as the design
effectiveness of related fraud detection controls. Management has concluded that the above-described deficiencies constitute a material weakness as defined by Public Company Accounting Oversight Board Accounting Standard No. 2. Management, with the
oversight of the Audit Committee of the Board of Directors, has taken steps to address these control deficiencies and is committed to effectively remediating these deficiencies as soon as possible. Although the companys remediation efforts are
underway, management will be unable to conclude that New Peoples internal control over financial reporting was effective as of December 31, 2004. As a result, New Peoples believes that its independent registered public accounting firm
will issue an adverse opinion on the effectiveness of New Peoples internal control over financial reporting for the fiscal year ended December 31, 2004. New Peoples does not believe that managements conclusion with respect to New
Peoples internal controls over financial reporting will preclude an unqualified opinion on the financial statements contained in New Peoples 2004 Annual Report on Form 10-K and prepared in conformity with accounting principles generally
accepted in the United States of America.



No other material weaknesses have
been identified to date in connection with New Peoples year-end assessment of internal controls.



Disclosure Controls and Procedures



We
also maintain a system of disclosure controls and procedures that is designed to ensure that material information is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to
allow timely decisions regarding required disclosure. As required, management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the design and operation of our disclosure controls and
procedures as of the end of the period covered by this report. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were not operating effectively to ensure that
information required to be disclosed by us in reports that we file or submit under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized, and reported within the time periods specified in the SECs rules and forms.
This conclusion was due to the determination, discussed in Internal Control Over Financial Reporting above, that a material weakness existed in New Peoples internal control over financial reporting at December 31, 2004 as a result
of the identified control deficiencies in NPB Financial, and that, as a result, a more than remote likelihood existed that a material misstatement of New Peoples financial statements would not be prevented or detected.



49



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##### Table of Contents

Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that
our disclosure controls and procedures will detect or uncover every situation involving the failure of persons within New Peoples to disclose material information otherwise required to be set forth in our periodic reports.



|Item 9B. | Other Information
|-------- | -----------------



None.



PART III



Except as otherwise indicated, information called for by the following items under Part III
is contained in the Proxy Statement for New Peoples 2005 Annual Meeting of Shareholders (2005 Proxy Statement) to be held on June 7, 2005.



|Item 10. | Directors and Executive Officers of the Registrant
|-------- | --------------------------------------------------



The information contained under the captions Election of Directors, Executive Officers Who Are Not Directors, Corporate Governance and the
Board of Directors and Section 16(a) Beneficial Ownership Reporting Compliance in the 2005 Proxy Statement that is required to be disclosed in this Item 10 is incorporated herein by reference.



|Item 11. | Executive Compensation
|-------- | ----------------------



The information contained under the captions Director Compensation, Executive Compensation and Related Party Transactions and Stock
Performance in the 2005 Proxy Statement that is required to be disclosed in this Item 11 is incorporated herein by reference.



|Item 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
|-------- | ----------------------------------------------------------------------------------------------



The information contained under the captions Security Ownership of Management, Security Ownership of Certain Beneficial
Owners and Equity Compensation Plan Information in the 2005 Proxy Statement that is required to be disclosed in this Item 12 is incorporated herein by reference.



|Item 13. | Certain Relationships and Related Transactions
|-------- | ----------------------------------------------



The information contained under the caption Transactions with Management in the 2005 Proxy Statement that is required to be disclosed in this Item 13 is
incorporated herein by reference.



|Item 14. | Principal Accountant Fees and Services
|-------- | --------------------------------------



The information contained under the caption Audit Information in the 2005 Proxy Statement that is required to be disclosed in this Item 14 is incorporated
herein by reference.



|Item 15. | Exhibits, Financial Statement Schedules
|-------- | ---------------------------------------



Exhibits



The following exhibits are filed as part of this Form 10-K, and this list includes the exhibit index:



|    |  |                                                                                                                                                                 
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------
|    | 
|2   |  | Agreement and Plan of Share Exchange dated August 15, 2001 (incorporated by reference to Exhibits to Form 8-K filed December 12, 2002)                          
|    | 
|3.1 |  | Articles of Incorporation of Registrant (incorporated by reference to Exhibit 3.1 to Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2004)
|    | 
|3.2 |  | Bylaws of Registrant (incorporated by reference to Exhibit 3.1 to Form 8-K filed April 15, 2004)                                                                



Certain instruments
relating to capital securities not being registered have been omitted in accordance with Item 601(b)(4)(iii) of Regulation S-K. The registrant will furnish a copy of any such instrument to the Securities and Exchange Commission upon its request.



50



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##### Table of Contents

|      |  |                                                                                                                                                                                                                               
|----- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|      | 
|10.1* |  | New Peoples Bank, Inc. 2001 Stock Option Plan (incorporated by reference to Exhibit 10.1 to Annual Report on Form 10-KSB for the fiscal year ended December 31, 2001)                                                         
|      | 
|10.2* |  | Form of Non-Employee Director Non-Qualified Stock Option Agreement (incorporated by reference to Exhibit 10.2 to Form 8-K filed November 30, 2004)                                                                            
|      | 
|10.3* |  | Form of Incentive Stock Option Agreement (incorporated by reference to Exhibit 10.3 to Form 8-K filed November 30, 2004)                                                                                                      
|      | 
|10.4* |  | Salary Continuation Agreement dated December 18, 2002 between New Peoples Bank, Inc. and Kenneth D. Hart (incorporated by reference to Exhibit 10.2 to Annual Report on Form 10-K for the
fiscal year ended December 31, 2002)
|      | 
|10.5* |  | First Amendment dated June 30, 2003 to Salary Continuation Agreement between New Peoples Bank, Inc. and Kenneth D. Hart                                                                                                       
|      | 
|10.6* |  | Salary Continuation Agreement dated December 18, 2002 between New Peoples Bank, Inc. and Frank Sexton, Jr.                                                                                                                    
|      | 
|10.7* |  | First Amendment dated June 30, 2003 to Salary Continuation Agreement between New Peoples Bank, Inc. and Frank Sexton, Jr.                                                                                                     
|      | 
|14    |  | Code of Ethics (incorporated by reference to Exhibit 14 to Annual Report on Form 10-K for the fiscal year ended December 31, 2003)                                                                                            
|      | 
|21    |  | Subsidiaries of the Registrant                                                                                                                                                                                                
|      | 
|24    |  | Powers of Attorney (contained on signature page)                                                                                                                                                                              
|      | 
|31.1  |  | Certification by Chief Executive Officer pursuant to Rule 13a-14(a)                                                                                                                                                           
|      | 
|31.2  |  | Certification by Chief Financial Officer pursuant to Rule 13a-14(a)                                                                                                                                                           
|      | 
|32    |  | Certification by Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350                                                                                                                       

---

|* | Denotes management contract.
|- | ----------------------------



51



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##### Table of Contents

SIGNATURES



Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.



NEW PEOPLES BANKSHARES, INC.By:

/s/ KENNETH D. HARTKenneth D. Hart President and Chief Executive OfficerDate:

March 30, 2005By:

/s/ C. TODD ASBURYC. Todd Asbury Senior Vice President and Chief Financial OfficerDate:

March 30, 2005




POWER OF
ATTORNEY



Each of the undersigned hereby appoints Kenneth D. Hart and C.
Todd Asbury, and each of them, as attorneys and agents for the undersigned, with full power of substitution, in his name and on his behalf as a director of New Peoples Bankshares, Inc. (the Registrant), to act and to execute any and all
instruments as such attorneys or attorney deem necessary or advisable to enable the Registrant to comply with the Securities Exchange Act of 1934, and any rules, regulations, policies or requirements of the Securities and Exchange Commission (the
Commission) in respect thereof, in connection with the preparation and filing with the Commission of the Registrants Annual Report on Form 10-K for the fiscal year ended December 31, 2004 (the Report), and any and all
amendments to such Report, including any amendment for the purpose of complying with Section 404 of the Sarbanes-Oxley Act, together with such other supplements, statements, instruments and documents as such attorneys or attorney deem necessary or
appropriate.



Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons on behalf of the registrant in the capacities and on the dates indicated.



|                                               |  |          |  |               
|---------------------------------------------- |  | -------- |  | --------------
|Signature                                      |  | Capacity |  | Date          
|                                               |  |         
|/s/ TIM BALLTim Ball                           |  | Director |  | March 30, 2005
|                                               |  |         
|/s/ JOE CARTERJoe Carter                       |  | Director |  | March 30, 2005
|                                               |  |         
|/s/ JOHN D. COXJohn D. Cox                     |  | Director |  | March 30, 2005
|                                               |  |         
|/s/ CHARLES H. GENTCharles H. Gent             |  | Director |  | March 30, 2005
|                                               |  |         
|/s/ HAROLD LYNNE KEENEHarold Lynne Keene       |  | Director |  | March 30, 2005
|                                               |  |         
|/s/ FRANK KILGOREFrank Kilgore                 |  | Director |  | March 30, 2005
|                                               |  |         
|/s/ JOHN MAXFIELDJohn Maxfield                 |  | Director |  | March 30, 2005
|                                               |  |         
|/s/ MICHAEL G. MCGLOTHLINMichael G. McGlothlin |  | Director |  | March 30, 2005
|                                               |  |         
|/s/ FRED MEADEFred Meade                       |  | Director |  | March 30, 2005





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##### Table of Contents

|                                                          |  |          |  |               
|--------------------------------------------------------- |  | -------- |  | --------------
|                                                          |  |         
|/s/ BILL ED SAMPLEBill Ed Sample                          |  | Director |  | March 30, 2005
|                                                          |  |         
|/s/ EARNEST VIRGIL SAMPSON, JREarnest Virgil Sampson, Jr. |  | Director |  | March 30, 2005
|                                                          |  |         
|/s/ STEPHEN H. STARNESStephen H. Starnes                  |  | Director |  | March 30, 2005
|                                                          |  |         
|/s/ PAUL VENCILL, JR.Paul Vencill, Jr.                    |  | Director |  | March 30, 2005
|                                                          |  |         
|/s/ B. SCOTT WHITEB. Scott White                          |  | Director |  | March 30, 2005