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United States

Securities and Exchange Commission

Washington, D.C. 20549



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FORM 10-K



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

For fiscal year ended December 31, 2005

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



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New Peoples Bankshares, Inc.

(Exact name of registrant as specified in its charter)



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

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



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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



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Indicate by
check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes ̈No  x

Indicate by check mark if the registrant is not
required to file reports pursuant to Section 13 of Section 15 (d) of the Act.    Yes ̈No  x

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(Section 229.405 of this chapter) 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 a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in Rule 12b-2
of the Exchange Act. (Check one):

Large accelerated filer ̈Accelerated filer  x    Non-accelerated filer ̈

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

The aggregate market value of the common stock held by non-affiliates, based on the last reported sales
prices of $15 per share on the last business day of the second quarter of 2005 was $101,868,000.00.

The number of shares outstanding of
the registrants common stock, was 7,624,772 as of March 3, 2006.

DOCUMENTS INCORPORATED BY REFERENCE:

Portions of the Corporations Proxy Statement for the Annual Meeting of Shareholders to be held on May 18, 2006, are incorporated by reference
into Part III hereof.



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TABLE OF CONTENTS



|           |  |          |  |                                                                                                              |  |     
|---------- |  | -------- |  | ------------------------------------------------------------------------------------------------------------ |  | ----
|           |  |          |  |                                                                                                              |  | Page
|PART I     |  |          |  |                                                                                                             
|           |  | Item 1.  |  | Business                                                                                                     |  | 3   
|           |  |          | 
|           |  | Item 1A. |  | Risk Factors                                                                                                 |  | 12  
|           |  |          | 
|           |  | Item 1B. |  | Unresolved Staff Comments                                                                                    |  | 15  
|           |  |          | 
|           |  | Item 2.  |  | Properties                                                                                                   |  | 15  
|           |  |          | 
|           |  | Item 3.  |  | Legal Proceedings                                                                                            |  | 16  
|           |  |          | 
|           |  | Item 4.  |  | Submission of Matters to a Vote of Security Holders                                                          |  | 16  
|           |  |         
|PART II    |  |          |  |                                                                                                             
|           |  | Item 5.  |  | Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities |  | 16  
|           |  |          | 
|           |  | Item 6.  |  | Selected Financial Data                                                                                      |  | 17  
|           |  |          | 
|           |  | Item 7.  |  | Managements Discussion and Analysis of Financial Condition and Results of Operation                         |  | 18  
|           |  |          | 
|           |  | Item 7A. |  | Quantitative and Qualitative Disclosures About Market Risk                                                   |  | 30  
|           |  |          | 
|           |  | Item 8.  |  | Financial Statements and Supplementary Data                                                                  |  | 31  
|           |  |          | 
|           |  | Item 9.  |  | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure                         |  | 55  
|           |  |          | 
|           |  | Item 9A. |  | Controls and Procedures                                                                                      |  | 55  
|           |  |          | 
|           |  | Item 9B. |  | Other Information                                                                                            |  | 56  
|           |  |         
|PART III   |  |          |  |                                                                                                             
|           |  | Item 10. |  | Directors and Executive Officers of the Registrant                                                           |  | 56  
|           |  |          | 
|           |  | Item 11. |  | Executive Compensation                                                                                       |  | 56  
|           |  |          | 
|           |  | Item 12. |  | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters               |  | 56  
|           |  |          | 
|           |  | Item 13. |  | Certain Relationships and Related Transactions                                                               |  | 56  
|           |  |          | 
|           |  | Item 14. |  | Principal Accountant Fees and Services                                                                       |  | 56  
|           |  |         
|PART IV    |  |          |  |                                                                                                             
|           |  | Item 15. |  | Exhibits Financial Statement Schedules                                                                       |  | 56  
|           | 
|SIGNATURES |  | 58      



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##### Table of Contents

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 four 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.

The Bank 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 21 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 New Peoples 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 the 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 the Bank.

This core Russell County group invited residents of Scott County, Buchanan County and Dickenson County to promote the idea of organizing what was then
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 personal and group, life, health, and disability products, along with mutual
funds, fixed rate annuities, variable annuities, fee based asset management and other investment products through a broker/dealer relationship with UVEST Financial Services, Inc.



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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 New Peoples 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. In 2005 full service branches were opened in Bluefield and Cleveland, Virginia. We have a loan production office located in Norton, Virginia. We anticipate opening full
service branches in Esserville, Pound, and Lee County, Virginia and Jonesborough, Tennessee in 2006. 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 Securities and Exchange Commission (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 100 F Street, N.E., Washington, D.C. 20549. Copies of documents can be obtained at prescribed rates by writing to the Public
Reference Section of the SEC at 100 F Street, N.E., 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 provide a link to our filings on the SEC
website through our internet website www.npbankshares.com under Investor Relations.

Banking Services

General. We accept deposits, make consumer and commercial loans, issue 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. The Bank is a member of the Federal Reserve System and its deposits are insured under the Federal Deposit Insurance Act to
the limits provided 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 business owners and continued
business from existing 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, |  
|                                       |  | 2005         |   |  | 2004   |   |  | 2003   |   |  | 2002   |   |  | 2001   |  
|Commercial, financial and agricultural |  | 20.08        | % |  | 18.49  | % |  | 19.83  | % |  | 19.32  | % |  | 19.62  | %
|Real estate  construction             |  | 5.61         | % |  | 2.95   | % |  | 2.46   | % |  | 2.52   | % |  | 2.15   | %
|Real estate  mortgage                 |  | 64.47        | % |  | 66.72  | % |  | 62.68  | % |  | 58.93  | % |  | 54.81  | %
|Installment loans to individuals       |  | 9.84         | % |  | 11.83  | % |  | 15.03  | % |  | 19.23  | % |  | 23.42  | %
|                                       |  |              |   |  |        |   |  |        |   |  |        |   |  |        |  
|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.

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. 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.

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 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



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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 are able to provide trust services through our affiliation with UVEST Financial Services, Inc.

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 Federal Deposit Insurance Corporation (the FDIC), as of June 30, 2005, the most recent date for which market
share information is available, the Banks deposits as a percentage of total deposits in its major market areas were as follows: Russell County, VA  34.64%, Scott County, VA - 29.70%, Dickenson County, VA  27.70%, Tazewell County,
VA  7.10%, Buchanan County, VA  8.58%, Wise County, VA  3.42%, Washington County, VA  5.50%, Mercer County, WV  4.71% and Sullivan County, TN  0.48% and the City of Bristol, VA - 2.35%.

Employees

As of December 31, 2005, we had 270 total employees,
of which 254 were full-time employees. None of our employees is covered by any collective bargaining agreement, and we consider relations with employees to be excellent.

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 (the Federal Reserve). 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



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regulation, supervision and examination by the Federal Reserve. 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. New Peoples has elected to be treated as a financial holding company for various reasons.

Payment of Dividends New 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 and overall financial condition. 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, 2005, the Bank, however, did not declare any dividends to New Peoples in
order that it may retain earnings to fund future loan growth and branch expansion efforts. For additional discussion of restriction on dividends see Note 14 in the notes to the consolidated financial statements.



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The FDIC has the general authority to limit the dividends paid by FDIC insured banks if the FDIC deems the payment to be
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.

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 BIF. 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%, a Tier 1 Capital ratio of less than 4% - or 3% in certain circumstances;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | 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.
| | - |  | ----------------------------------------------------------------------------------------------------------------------



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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, 2005, New Peoples and the Bank were well capitalized, with Total Capital ratios of 11.82%, Tier 1 Capital ratios of 10.96% and leverage ratios of 9.63%.

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.

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



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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.

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.



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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 and cost of compliance 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.

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



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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 1A. Risk Factors

Changes in interest rates could have an adverse effect on our income.

Our profitability depends to a large extent upon our net interest income. Net interest income is the difference between interest income on interest-earning assets, such
as loans and investments, and interest expense on interest-bearing liabilities, such as deposits and borrowings. Our net interest income will be adversely affected if market interest rates change so that the interest we pay on deposits and
borrowings increases faster than the interest we earn on loans and investments. Changes in interest rates also affect the value of our loans. An increase in interest rates could adversely affect borrowers ability to pay the principal or
interest on existing loans or reduce their desire to borrow more money. This may lead to an increase in our nonperforming assets or a decrease in loan originations, either of which could have a material and negative effect on our results of
operations. Interest rates are highly sensitive to many factors that are partly or completely outside of our control, including governmental monetary policies, domestic and international economic and political conditions and general economic
conditions such as inflation, recession, unemployment and money supply. Fluctuations in market interest rates are neither predictable nor controllable and may have a material and negative effect on our business, financial condition and results of
operations.

Failure to maintain effective systems of internal and disclosure control could have a material adverse effect on our results of
operation and financial condition.

Effective internal and disclosure controls are necessary for us to provide reliable financial reports and
effectively prevent fraud and to operate successfully as a public company. If we cannot provide reliable financial reports or prevent fraud, our reputation and operating results would be harmed. As part of our ongoing monitoring of internal control
we may discover material weaknesses or significant deficiencies in our internal control as defined under standards adopted by the Public Company Accounting Oversight Board, or PCAOB, that require remediation. Last year, management identified a
material weakness in our internal control over financial reporting as part of its assessment of those controls and, therefore, concluded that, as of December 31, 2004, our internal control over financial reporting was not effective.
Relatedly, we disclosed in our amended filing on Form 10-K/A for the year ended December 31, 2004, and on Form 10-Q for the quarters ended March 31, June 30 and September 30, 2005, that our disclosure controls and procedures did
not operate effectively as of the end of each of those reporting periods due to the identified material weakness in our internal control. Under the PCAOB standards, a material weakness is a significant deficiency or combination of
significant deficiencies that results in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected. We believe that this material weakness has been successfully
remediated



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and management has concluded that, as of December 31, 2005, our internal control over financial reporting was
effective. We cannot guarantee, however, that other internal or disclosure control deficiencies might not be identified or come into existence at a later date. Any failure to maintain effective controls or to timely effect any necessary improvement
of our internal and disclosure controls could, among other things, result in losses from fraud or error, harm our reputation or cause investors to lose confidence in our reported financial information, all of which could have a material adverse
effect on our results of operation and financial condition.

We have a high concentration of loans secured by real estate and a downturn in the real
estate market, for any reason, could result in losses and materially and adversely affect business, financial condition, results of operations and future prospects.

A significant portion of our loan portfolio is dependent on real estate. In addition to the financial strength and cash flow characteristics of the borrower in each case, we often secure loans with real estate
collateral. At December 31, 2005, approximately 70.08% of our loans have real estate as a primary or secondary component of collateral. The real estate collateral in each case provides an alternate source of repayment in the event of default by
the borrower and may deteriorate in value during the time the credit is extended. An adverse change in the economy affecting values of real estate generally or in our primary markets specifically could significantly impair the value of our
collateral and result in a significant portion of our portfolio being under-collateralized. In such a case, it would be likely that we would be required to increase our provision for loan losses, which would negatively affect our results of
operations. If we are required to liquidate the collateral securing a loan to satisfy the debt during a period of reduced real estate values, our ability to recover fully on defaulted loans by foreclosing and selling the real estate collateral would
be diminished and we would be more likely to suffer losses on defaulted loans, which could adversely affect our profitability and financial condition.

We will face risks with respect to future expansion.

Our current strategy is to continue growing in the southwest Virginia, southern
West Virginia and northeastern Tennessee markets. Our expansion strategy will involve a number of risks such as the time and expense associated with evaluating new markets for expansion, hiring local management and opening new offices. Any future
expansion efforts may entail substantial costs and may not produce the additional growth or earnings that were anticipated, which could adversely affect our results of operations. Any expansion plans we undertake may also divert the attention of our
management from the operation of our current business, which could also have an adverse effect on our results of operations.

The success of our
growth strategy depends on our ability to identify and recruit individuals with experience and relationships in the markets in which we intend to expand.

We intend to expand our banking network over the next several years in the southwest Virginia, southern West Virginia and northeastern Tennessee markets. We believe that to expand into new markets successfully, we must identify and recruit
experienced key management members with local expertise and relationships in these markets. We expect that competition for qualified management in the markets in which we expand will be intense and that there will be a limited number of qualified
persons with knowledge of and experience in the community banking industry in these markets. The process of identifying and recruiting individuals with the combination of skills and attributes required to carry out our strategy is often lengthy.
Even if we identify individuals that we believe could assist us in establishing a presence in a new market, we may be unable to recruit these individuals away from more established banks. Many experienced banking professionals employed by our
competitors are covered by agreements not to compete or solicit their existing customers if they were to leave their current employment. These agreements make the recruitment of these professionals more difficult. Our inability to identify, recruit
and retain talented personnel to manage new offices effectively and in a timely manner would limit our growth and could materially adversely affect our business, financial condition and results of operations.

We rely heavily on our management team and the unexpected loss of any of those personnel could adversely affect our operations; we depend on our ability to attract
and retain key personnel.

We are a customer-focused and relationship-driven organization. We expect our future growth to be driven in a large part
by the relationships maintained with our customers by our President and Chief Executive Officer, Kenneth D. Hart, and our other executive and senior lending officers. We have entered into employment agreements with Mr. Hart and Frank Sexton,
Jr., our Executive Vice President and Chief Operating Officer. The existence of such agreements, however, does not necessarily assure that we will be able to continue to retain their services. The unexpected loss of either Mr. Hart or
Mr. Sexton or other key employees could have a material adverse effect on our business and possibly result in reduced revenues and earnings.



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If our allowance for loan losses becomes inadequate, our results of operations may be adversely affected.

We maintain an allowance for loan losses that we believe is a reasonable estimate of known and inherent losses in our loan portfolio. Through a
periodic review and consideration of the loan portfolio, management determines the amount of the allowance for loan losses by considering general market conditions, credit quality of the loan portfolio, the collateral supporting the loans and
performance of our customers relative to their financial obligations with us. The amount of future losses is susceptible to changes in economic, operating and other conditions, including changes in interest rates, that may be beyond our control, and
these losses may exceed our current estimates. Rapidly growing loan portfolios are, by their nature, unseasoned. As a result, estimating loan loss allowances is more difficult, and may be more susceptible to changes in estimates, and to losses
exceeding estimates, than more seasoned portfolios. Although we believe the allowance for loan losses is a reasonable estimate of known and inherent losses in our loan portfolio, we cannot fully predict such losses or that our loan loss allowance
will be adequate in the future. Excessive loan losses could have a material impact on our financial performance. Because of our growth strategy, we expect that our earnings will be negatively impacted by loan growth, which requires additions to our
allowance for loan losses. Consistent with our loan loss reserve methodology, we expect to make additions to our loan loss reserve levels as a result of our growth strategy, which may affect our short-term earnings.

Federal and state regulators periodically review our allowance for loan losses and may require us to increase our provision for loan losses or recognize further loan
charge-offs, based on judgments different than those of our management. Any increase in the amount of our provision or loans charged-off as required by these regulatory agencies could have a negative effect on our operating results.

Lack of seasoning of our loan portfolio may increase the risk of credit defaults in the future, which would adversely affect our financial condition and results of
operation.

Although we have experienced lenders who are familiar with their customer base, some of our loans are too new to have exhibited signs of
weakness. In addition, recent expansions into new markets increase credit risk. In general, new loans do not begin to show signs of credit deterioration or default until they have been outstanding for some period of time, a process referred to as
seasoning. As a result, a portfolio of older loans will usually behave more predictably than a newer portfolio, although there can be no assurance that more seasoned loans will be of higher quality or perform better. Because a portion of
our loan portfolio is relatively new, the current level of delinquencies and defaults may not be representative of the level that will prevail when our portfolio becomes more seasoned, which may be significantly higher than current levels. A higher
rate of delinquencies or defaults on loans could cause us to increase our provision for loan losses and otherwise negatively affect our financial condition, results of operations and financial prospects.

Our profitability may suffer because of rapid and unpredictable changes in the highly regulated environment in which we operate.

We are subject to extensive supervision by several governmental regulatory agencies at the federal and state levels. These agencies examine financial and bank holding
companies and commercial banks, establish capital and other financial requirements and approve new branches, acquisitions or other changes of control. Our ability to establish new banks or branches or make acquisitions is conditioned on receiving
required regulatory approvals from the applicable regulators. Recently enacted, proposed and future banking legislation and regulations have had, and will continue to have, or may have a significant impact on the financial services industry. These
regulations, which are intended to protect depositors and not our shareholders, and the interpretation and application of them by federal and state regulators, are beyond our control, may change rapidly and unpredictably and can be expected to
influence our earnings and growth. Such changes could subject us to additional costs, limit the types of financial services and products we may offer, increase the ability of non-banks to offer competing financial services and products, and/or
assist competitors that are not subject to similar regulation, among other things. Failure to comply with laws, regulations or policies could result in sanctions by regulatory agencies, civil money penalties and damage to our reputation, which could
have a material adverse effect on our business, financial condition and results of operation.

The Banks ability to pay dividends is subject to
regulatory limitations which, to the extent we require such dividends in the future, may affect our ability to pay its obligations and pay dividends.

We are a separate legal entity from the Bank and our other subsidiaries and we do not have significant operations of our own. We currently depend on the Banks cash and liquidity as well as dividends paid by it to us to pay our
operating expenses. No assurance can be made that in the future the Bank will have the capacity to pay the necessary dividends and that we will not require dividends from the Bank to satisfy our obligations. The availability of dividends from the
Bank is limited by various statutes and regulations. It is possible, depending upon our financial condition and other factors, that federal regulators could assert that payment of dividends or other payments by the Bank are an unsafe or unsound
practice. In the event the Bank is unable to pay dividends sufficient to satisfy our obligations and the Bank is unable to pay dividends to us, we may not be able to service our obligations as they become due. Consequently, the inability to receive
dividends from the Bank could adversely affect our financial condition, results of operations, cash flows and prospects.



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Our business is subject to various lending and other economic risks that could adversely impact our results of
operations and financial condition.

Changes in economic conditions, particularly an economic slowdown, could hurt our business. Our business is
directly affected by political and market conditions, broad trends in industry and finance, legislative and regulatory changes, changes in governmental monetary and fiscal policies and inflation, all of which are beyond our control. A deterioration
in economic conditions, in particular an economic slowdown within our geographic region, could result in the following consequences, any of which could hurt our business materially:



| |  |  | loan delinquencies may increase;
| | - |  | --------------------------------



| |  |  | problem assets and foreclosures may increase;
| | - |  | ---------------------------------------------



| |  |  | demand for our products and services may decline; and
| | - |  | -----------------------------------------------------



| |  |  | collateral for loans made by us may decline in value, in turn reducing a clients borrowing power, and reducing the value of assets and collateral associated with our loans
held for investment.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Although our market area is somewhat economically diverse, in certain areas the local economies are more reliant upon
agriculture and coal mining. To the extent an economic downturn disproportionately affected these two industries, the above-described negative effects could be exacerbated.

A downturn in the real estate market could hurt our business. Our business activities and credit exposure are concentrated in Virginia, West Virginia and Tennessee and at December 31, 2005, approximately 70.02%
of our loans have real estate as a primary or secondary component of collateral. As such, a downturn in this regional real estate market could hurt our business because of the geographic concentration within this regional area. If there is a
significant decline in real estate values, the collateral for our loans will provide less security. As a result, our ability to recover on defaulted loans by selling the underlying real estate would be diminished, and we would be more likely to
suffer losses on defaulted loans.

We face strong competition from other financial institutions, financial service companies and other organizations
offering services similar to those offered by us and our subsidiaries, which could hurt our business.

Our business operations are centered
primarily in Virginia, West Virginia, and Tennessee. Increased competition within this region may result in reduced loan originations and deposits. Ultimately, we may not be able to compete successfully against current and future competitors. Many
competitors offer the types of loans and banking services that we offer. These competitors include other savings associations, national banks, regional banks and other community banks. We also face competition from many other types of financial
institutions, including finance companies, brokerage firms, insurance companies, credit unions, mortgage banks and other financial intermediaries. In particular, the Banks competitors include other state and national banks and major financial
companies whose greater resources may afford them a marketplace advantage by enabling them to maintain numerous banking locations and to mount extensive promotional and advertising campaigns.

Additionally, banks and other financial institutions with larger capitalization and financial intermediaries not subject to bank regulatory restrictions have larger
lending limits and are thereby able to serve the credit needs of larger clients. These institutions, particularly to the extent they are more diversified than us, may be able to offer the same loan products and services that we offer at more
competitive rates and prices. If we are unable to attract and retain banking clients, we may be unable to continue the Banks loan and deposit growth and our business, financial condition and prospects may be negatively affected.

Item 1B. Unresolved Staff Comments

As of March 15, 2006, there were no unresolved comments from the staff of the SEC
with respect to any of New Peoples periodic or current reports.

Item 2. Properties

At December 31, 2005, the Companys net investment in premises and equipment in service was
$22.0 million. Our main office and operations center is located in Honaker, Virginia. This location contains a full service branch, and our administration and operations center.



15



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##### Table of Contents

The Bank owns 17 of its 21 full service branches. The owned properties in Virginia are located in Abingdon, Big Stone
Gap, Bluefield, Bristol, Castlewood, Clintwood, 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 5 operating lease arrangements of varying lengths. Of these 5, 4 are full service branches in Bristol, Cleveland, 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 2006 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.

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

None

PART II

Item 5. Market for Registrants Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities

(a) Market Information

The Bank acts as the transfer agent for New Peoples. 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 known to us 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.



|            |  |      |       |      |   |       |  |     |       |  |   |      
|----------- |  | ---- | ----- | ---- | - | ----- |  | --- | ----- |  | - | -----
|            |  | 2005 |       | 2004
|            |  | High |       | Low  |   | High  |  | Low
|1st quarter |  | $    | 15.00 |      | $ | 13.00 |  | $   | 15.00 |  | $ | 10.00
|2nd quarter |  | $    | 15.00 |      | $ | 12.00 |  |     | 25.00 |  |   | 10.00
|3rd quarter |  | $    | 15.00 |      | $ | 12.00 |  |     | 15.00 |  |   | 8.00 
|4th quarter |  | $    | 17.04 |      | $ | 10.00 |  |     | 20.00 |  |   | 10.00

The most recent sales price of which management is aware was $15.00 per share
during the first quarter of 2006.

(b) Holders

On February 27, 2006, there were approximately 4,908 shareholders of record.

(c) Dividends

On June 7, 2005, we issued a 10% stock dividend to all shareholders of record on the same date. We have never declared a cash 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 2006. See
Note 14 and Note 18 of the Notes to the Consolidated Financial Statements for further discussion of dividend limitations and capital requirements.



16



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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, 2005, 2004, 2003, 2002, and 2001. The following is qualified in its entirety by the detailed
information and the financial statements included elsewhere in this Form 10K.



|                                                    |  |                                  |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|--------------------------------------------------- |  | -------------------------------- | ------- | - | ---- | - | ------- | ---- |  | - | ------- | - |  | ---- | ------- | - |  | - | ------- | -
|                                                    |  | For the Years Ended December 31, |        
|(Dollars in thousands, except per share data)       |  | 2005                             |         |   | 2004 |   |         | 2003 |  |   | 2002    |   |  | 2001 |        
|Income Statement Data                               |  |                                  |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Gross interest income                               |  | $                                | 30,507  |   |      | $ | 24,265  |      |  | $ | 19,956  |   |  | $    | 17,040  |   |  | $ | 15,267  |  
|Gross interest expense                              |  |                                  | 11,279  |   |      |   | 6,471   |      |  |   | 6,332   |   |  |      | 6,375   |   |  |   | 7,950   |  
|Net interest income                                 |  |                                  | 19,228  |   |      |   | 17,794  |      |  |   | 13,624  |   |  |      | 10,665  |   |  |   | 7,317   |  
|Provision for possible loan losses                  |  |                                  | 1,130   |   |      |   | 990     |      |  |   | 364     |   |  |      | 603     |   |  |   | 571     |  
|Net interest income after provision for loan losses |  |                                  | 18,098  |   |      |   | 16,804  |      |  |   | 13,260  |   |  |      | 10,062  |   |  |   | 6,746   |  
|Non-interest income                                 |  |                                  | 2,784   |   |      |   | 2,558   |      |  |   | 1,802   |   |  |      | 1,412   |   |  |   | 753     |  
|Non-interest expense                                |  |                                  | 16,672  |   |      |   | 14,422  |      |  |   | 10,801  |   |  |      | 8,218   |   |  |   | 5,934   |  
|Income before income taxes                          |  |                                  | 4,210   |   |      |   | 4,940   |      |  |   | 4,261   |   |  |      | 3,256   |   |  |   | 1,565   |  
|Income tax expense                                  |  |                                  | 1,487   |   |      |   | 1,682   |      |  |   | 1,447   |   |  |      | 1,078   |   |  |   | 556     |  
|Net income                                          |  |                                  | 2,723   |   |      |   | 3,258   |      |  |   | 2,814   |   |  |      | 2,178   |   |  |   | 1,009   |  
|Per Share Data and Shares Outstanding (1)           |  |                                  |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|                                                    |  |                                  |         |   |     
|Net income, basic                                   |  |                                  | .36     |   |      |   | 0.43    |      |  |   | 0.37    |   |  |      | 0.33    |   |  |   | 0.15    |  
|Net income, diluted                                 |  |                                  | .35     |   |      |   | 0.42    |      |  |   | 0.37    |   |  |      | 0.32    |   |  |   | 0.15    |  
|Cash dividends                                      |  |                                  |        |   |      |   |        |      |  |   |        |   |  |      |        |   |  |   |        |  
|Book value at end of period                         |  |                                  | 5.11    |   |      |   | 4.75    |      |  |   | 4.32    |   |  |      | 3.67    |   |  |   | 2.86    |  
|Tangible book value at period end                   |  |                                  | 5.11    |   |      |   | 4.75    |      |  |   | 4.32    |   |  |      | 3.67    |   |  |   | 2.86    |  
|Weighted average shares outstanding, basic(1)       |  |                                  | 7,606   |   |      |   | 7,600   |      |  |   | 7.563   |   |  |      | 6,716   |   |  |   | 6,600   |  
|Weighted average shares outstanding, diluted(1)     |  |                                  | 7,826   |   |      |   | 7,735   |      |  |   | 7,631   |   |  |      | 6,785   |   |  |   | 6,600   |  
|Shares outstanding at period end(1)                 |  |                                  | 7,619   |   |      |   | 6,910   |      |  |   | 6,903   |   |  |      | 6,008   |   |  |   | 6,000   |  
|Shares subscribed at period end                     |  |                                  |        |   |      |   |        |      |  |   |        |   |  |      | 541     |   |  |   |        |  
|Period-End Balance Sheet Data                       |  |                                  |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|                                                    |  |                                  |         |   |     
|Total assets                                        |  |                                  | 527,770 |   |      |   | 437,751 |      |  |   | 342,508 |   |  |      | 291,398 |   |  |   | 214,253 |  
|Total loans                                         |  |                                  | 468,045 |   |      |   | 383,567 |      |  |   | 295,438 |   |  |      | 222,394 |   |  |   | 179,216 |  
|Total allowance for loan losses                     |  |                                  | (3,943  | ) |      |   | (3,090  | )    |  |   | (2,432  | ) |  |      | (2,224  | ) |  |   | (1,793  | )
|Total deposits                                      |  |                                  | 462,692 |   |      |   | 388,120 |      |  |   | 308,221 |   |  |      | 263,805 |   |  |   | 194,011 |  
|Shareholders equity                                |  |                                  | 38,964  |   |      |   | 36,098  |      |  |   | 32,805  |   |  |      | 26,481  |   |  |   | 18,891  |  
|Performance Ratios                                  |  |                                  |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|                                                    |  |                                  |         |   |     
|Return on average assets                            |  |                                  | 0.56    | % |      |   | 0.83    | %    |  |   | 0.86    | % |  |      | 0.89    | % |  |   | 0.54    | %
|Return on average shareholders equity              |  |                                  | 7.28    | % |      |   | 9.58    | %    |  |   | 9.46    | % |  |      | 10.80   | % |  |   | 5.48    | %
|Average shareholders equity to average assets      |  |                                  | 7.72    | % |      |   | 8.64    | %    |  |   | 9.09    | % |  |      | 8.22    | % |  |   | 9.91    | %
|Net interest margin(2)                              |  |                                  | 4.38    | % |      |   | 5.00    | %    |  |   | 4.58    | % |  |      | 4.87    | % |  |   | 4.31    | %
|Asset Quality Ratios                                |  |                                  |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|                                                    |  |                                  |         |   |     
|Net charge-offs to average loans                    |  |                                  | 0.07    | % |      |   | 0.10    | %    |  |   | 0.06    | % |  |      | 0.09    | % |  |   | 0.06    | %
|Allowance to period-end gross loans                 |  |                                  | 0.84    | % |      |   | 0.81    | %    |  |   | 0.82    | % |  |      | 1.00    | % |  |   | 1.00    | %
|Nonperforming assets to gross loans                 |  |                                  | 0.12    | % |      |   | 0.23    | %    |  |   | 0.19    | % |  |      | 0.34    | % |  |   | 0.04    | %
|Capital and Liquidity Ratios                        |  |                                  |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|                                                    |  |                                  |         |   |     
|Risk-based:                                         |  |                                  |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Tier 1 capital                                      |  |                                  | 10.96   | % |      |   | 12.88   | %    |  |   | 12.20   | % |  |      | 11.05   | % |  |   | 10.99   | %
|Total capital                                       |  |                                  | 11.82   | % |      |   | 13.72   | %    |  |   | 13.10   | % |  |      | 12.11   | % |  |   | 12.03   | %
|Leverage capital ratio                              |  |                                  | 9.63    | % |      |   | 10.64   | %    |  |   | 9.29    | % |  |      | 9.51    | % |  |   | 9.19    | %
|Total equity to total assets                        |  |                                  | 7.38    | % |      |   | 8.25    | %    |  |   | 9.58    | % |  |      | 9.09    | % |  |   | 8.82    | %

---

|(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 and a 10% stock dividend in June 2005.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(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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##### Table of Contents

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; the successful management of interest rate risk; changes in interest rates and interest rate policies; reliance on our management team, including our ability
to attract and retain key personnel; changes in general economic and business conditions in our market area; 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. We expressly
disclaim any obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.

For additional discussion of risk factors that may cause our actual future results to differ materially from the results indicated within forward looking statements, please see Item 1A  Risk Factors herein.

General

The following commentary discusses major
components of our business and presents an overview of our consolidated financial position at December 31, 2005 and 2004 as well as results of operations for the years ended December 31, 2005, 2004 and 2003. 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 interest expense 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

After 7 years of operations, New Peoples reached a milestone by crossing the $500 million asset size and at year-end 2005 had $527.8 million in total
assets. This represents total asset growth of $90.0 million over year-end 2004, or 20.56%. Total deposits grew $74.6 million, or 19.21%, to $462.7 million, and total loans were $468.0 million, an increase of $84.5 million, or 22.02%. Total
stockholders equity was $39.0 million at the end of 2005 as compared to total stockholders equity of $36.1 million at the end of 2004.

Our
strategy is to continue growing in the southwest Virginia, southern West Virginia and northeastern Tennessee markets. With the additions of the Bluefield and Cleveland, Virginia offices in 2005, we now have 22 locations throughout the region. Future
branches are planned over the next five years.



18



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##### Table of Contents

In the year 2005, we faced rising interest rates and made significant and prudent investments to support New
Peoples expansion. As a result, net income decreased $535 thousand, or 16.41%, to $2.7 million for the year 2005, as compared to net income of $3.3 million in the previous year.

The major contributing factor for the decrease is a lower net interest margin. The net interest margin decreased to 4.38% for 2005 from 5.00% for 2004. The primary reason for this decrease relates to the 8 interest
rate hikes enforced by the Federal Reserve Bank during 2005. As a result, our cost of funds increased at a faster pace than the yield on our earning assets. During 2005, we have been strategically repositioning the maturities and repricing of the
assets and liabilities to benefit from future interest rate increases.

During 2005, we made difficult but necessary decisions to provide a stronger
infrastructure for the growth we have experienced and anticipate to have. We have significantly enhanced our loan review process and continue to make improvements. As a result, we have further evaluated our loan portfolio and increased the allowance
for loan losses by making a provision of $1.1 million for 2005 as compared to $990 thousand in 2004. In addition, we have made significant investments in the past year by enhancing our deposit risk management area and internal audit functions. We
believe that these are prudent investments that will yield long-term benefits. The cost of additional personnel in these areas, although immediate, is expected to provide a long term benefit as we continue to grow.

Asset quality remained strong as evidenced by non-performing loans being $562 thousand, or .12% of total loans during 2005. Net charge offs during 2005 totaled $277
thousand. The ratio of net charge offs to average loans was .07%. The allowance for loan losses was $3.9 million at December 31, 2005 as compared to $3.1 million in 2004.

The return on average assets was .56%, .83%, and .86% for the periods ending December 31, 2005, 2004 and 2003, respectively. The return on average equity was 7.28%, 9.58%, and 9.46% for the same periods ending
December 31, 2005, 2004 and 2003, respectively.

We remain focused on being a community bank that strives to meet the financial service needs of our
customers throughout southwest 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 net interest income, which equals total interest and dividend income less total interest expense, increased $1.4 million, or 8.06%, from $17.8 million for 2004 to $19.2 million for 2005. This growth is related to
the increased loan volume during the year. Loan income increased to $30.0 million for 2005 from $24.0 million for 2004, which is an increase of $6.0 million, or 24.84%.

Interest expenses, however, grew at a more rapid pace than interest income. Total interest expense was $11.3 million for 2005 as compared to $6.5 million for 2004. This $4.8 million, or 74.30%, increase is primarily
related to the 8 interest rates hikes imposed by the Federal Reserve in 2005. Pressure to fund loan growth and increased competition are also factors in the increase in our cost of funds. In addition, in 2005 we realized a full year effect of trust
preferred interest expense. This resulted in a $437 thousand increase from $232 thousand for 2004 as compared to $669 thousand in 2005.

The net interest
margin, which equals net interest income divided by total interest earning assets, in 2005 was 4.38%, compared to 5.00% in 2004. The explanation for the decrease is discussed in the previous paragraph. In addition, in 2005, we implemented the
deferral of loan origination fees and costs. As a result, loan interest income was negatively impacted by $230 thousand in 2005. Although there was a negative impact in the year 2005, these net origination fees amortize over the life of the loan and
provide an income stream in future periods.

The net interest margin, 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. Interest expense increased slightly in 2004 as compared to 2003.



19



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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 Ended December 31, 2005 |         |   | For the Year Ended December 31, 2004 |   |              | For the Year Ended December 31, 2003 |     
|                                           |  | AverageBalance                       |         |   | Income/Expense                       |   | Yields/Rates |                                      |      | AverageBalance |  |   | Income/Expense |   | Yields/Rates |   |        | AverageBalance |      |   | Income/Expense |   | Yields/Rates |  
|ASSETS                                     |  |                                      |         |   |                                      |   |              |                                      |      |                |  |   |                |   |              |   |        |                |      |   |                |   |              |   |  |   |        |  |      |  
|Loans (1), (2), (3)                        |  | $                                    | 424,419 |   |                                      | $ | 30,006       |                                      | 7.07 | %              |  | $ | 344,711        |   |              | $ | 24,035 |                | 6.97 | % |                | $ | 254,153      |   |  | $ | 19,402 |  | 7.63 | %
|Federal Funds sold                         |  |                                      | 7,593   |   |                                      |   | 256          |                                      | 3.37 | %              |  |   | 3,170          |   |              |   | 46     |                | 1.45 | % |                |   | 16,538       |   |  |   | 172    |  | 1.04 | %
|Other investments (3)                      |  |                                      | 7,359   |   |                                      |   | 245          |                                      | 3.33 | %              |  |   | 8,095          |   |              |   | 184    |                | 2.27 | % |                |   | 26,695       |   |  |   | 382    |  | 1.43 | %
|                                           |  |                                      |         |   |                                      |   |              |                                      |      |                |  |   |                |   |              |   |        |                |      |   |                |   |              |   |  |   |        |  |      |  
|Total Earning Assets                       |  |                                      | 439,371 |   |                                      |   | 30,507       |                                      | 6.94 | %              |  |   | 355,976        |   |              |   | 24,265 |                | 6.82 | % |                |   | 297,386      |   |  |   | 19,956 |  | 6.71 | %
|                                           |  |                                      |         |   |                                      |   |              |                                      |      |                |  |   |                |   |              |   |        |                |      |   |                |   |              |   |  |   |        |  |      |  
|Less: Allowance for loans losses           |  |                                      | (3,516  | ) |                                      |   |              |                                      |      |                |  |   | (2,672         | ) |              |   |        |                |      |   |                |   | (2,503       | ) |  |   |        |  |      |  
|Non-earning assets                         |  |                                      | 48,947  |   |                                      |   |              |                                      |      |                |  |   | 40,578         |   |              |   |        |                |      |   |                |   | 32,194       |   |  |   |        |  |      |  
|                                           |  |                                      |         |   |                                      |   |              |                                      |      |                |  |   |                |   |              |   |        |                |      |   |                |   |              |   |  |   |        |  |      |  
|Total Assets                               |  | $                                    | 484,802 |   |                                      |   |              |                                      |      |                |  |   | 393,882        |   |              |   |        |                |      |   |                | $ | 327,077      |   |  |   |        |  |      |  
|                                           |  |                                      |         |   |                                      |   |              |                                      |      |                |  |   |                |   |              |   |        |                |      |   |                |   |              |   |  |   |        |  |      |  
|LIABILITIES AND STOCKHOLDERS EQUITY       |  |                                      |         |   |                                      |   |              |                                      |      |                |  |   |                |   |              |   |        |                |      |   |                |   |              |   |  |   |        |  |      |  
|Deposits                                   |  |                                      |         |   |                                      |   |              |                                      |      |                |  |   |                |   |              |   |        |                |      |   |                |   |              |   |  |   |        |  |      |  
|Demand  Interest bearing                  |  | $                                    | 23,160  |   |                                      |   | 164          |                                      | 0.71 | %              |  | $ | 21,031         |   |              |   | 105    |                | 0.50 | % |                | $ | 14,224       |   |  |   | 110    |  | 0.77 | %
|Savings                                    |  |                                      | 44,686  |   |                                      |   | 468          |                                      | 1.05 | %              |  |   | 42,460         |   |              |   | 410    |                | 0.97 | % |                |   | 34,670       |   |  |   | 441    |  | 1.27 | %
|Time deposits                              |  |                                      | 310,305 |   |                                      |   | 9,935        |                                      | 3.20 | %              |  |   | 243,586        |   |              |   | 5,680  |                | 2.33 | % |                |   | 215,734      |   |  |   | 5,770  |  | 2.67 | %
|Short Term Borrowings                      |  |                                      | 1,281   |   |                                      |   | 43           |                                      | 3.36 | %              |  |   | 3,051          |   |              |   | 44     |                | 1.44 | % |                |   | 730          |   |  |   | 11     |  | 1.51 | %
|                                           |  |                                      |         |   |                                      |   |              |                                      |      |                |  |   |                |   |              |   |        |                |      |   |                |   |              |   |  |   |        |  |      |  
|Trust Preferred Securities                 |  |                                      | 11,341  |   |                                      |   | 669          |                                      | 5.90 | %              |  |   | 4,715          |   |              |   | 232    |                | 4.92 | % |                |   |              |   |  |   |        |  |      |  
|                                           |  |                                      |         |   |                                      |   |              |                                      |      |                |  |   |                |   |              |   |        |                |      |   |                |   |              |   |  |   |        |  |      |  
|Total interest bearing liabilities         |  |                                      | 390,773 |   |                                      |   | 11,279       |                                      | 2.89 | %              |  |   | 314,843        |   |              |   | 6,471  |                | 2.06 | % |                |   | 265,358      |   |  |   | 6,332  |  | 2.39 | %
|                                           |  |                                      |         |   |                                      |   |              |                                      |      |                |  |   |                |   |              |   |        |                |      |   |                |   |              |   |  |   |        |  |      |  
|Non-interest bearing deposits              |  |                                      | 54,218  |   |                                      |   |              |                                      |      |                |  |   | 42,728         |   |              |   |        |                |      |   |                |   | 30,473       |   |  |   |        |  |      |  
|Other liabilities                          |  |                                      | 2,395   |   |                                      |   |              |                                      |      |                |  |   | 2,297          |   |              |   |        |                |      |   |                |   | 1,501        |   |  |   |        |  |      |  
|                                           |  |                                      |         |   |                                      |   |              |                                      |      |                |  |   |                |   |              |   |        |                |      |   |                |   |              |   |  |   |        |  |      |  
|Total Liabilities                          |  |                                      | 447,386 |   |                                      |   |              |                                      |      |                |  |   | 359,868        |   |              |   |        |                |      |   |                |   | 297,332      |   |  |   |        |  |      |  
|Stockholders Equity                       |  |                                      | 37,416  |   |                                      |   |              |                                      |      |                |  |   | 34,014         |   |              |   |        |                |      |   |                |   | 29,745       |   |  |   |        |  |      |  
|                                           |  |                                      |         |   |                                      |   |              |                                      |      |                |  |   |                |   |              |   |        |                |      |   |                |   |              |   |  |   |        |  |      |  
|Total Liabilities and Stockholders Equity |  | $                                    | 484,802 |   |                                      |   |              |                                      |      |                |  | $ | 393,882        |   |              |   |        |                |      |   |                | $ | 327,077      |   |  |   |        |  |      |  
|                                           |  |                                      |         |   |                                      |   |              |                                      |      |                |  |   |                |   |              |   |        |                |      |   |                |   |              |   |  |   |        |  |      |  
|Net Interest Income                        |  |                                      |         |   |                                      | $ | 19,228       |                                      |      |                |  |   |                |   |              | $ | 17,794 |                |      |   |                |   |              |   |  | $ | 13,624 |  |      |  
|                                           |  |                                      |         |   |                                      |   |              |                                      |      |                |  |   |                |   |              |   |        |                |      |   |                |   |              |   |  |   |        |  |      |  
|Net Yield on Interest Earning Assets       |  |                                      |         |   |                                      |   |              |                                      | 4.38 | %              |  |   |                |   |              |   |        |                | 5.00 | % |                |   |              |   |  |   |        |  | 4.58 | %
|                                           |  |                                      |         |   |                                      |   |              |                                      |      |                |  |   |                |   |              |   |        |                |      |   |                |   |              |   |  |   |        |  |      |  
|Net Interest Spread                        |  |                                      |         |   |                                      |   |              |                                      | 4.06 | %              |  |   |                |   |              |   |        |                | 4.76 | % |                |   |              |   |  |   |        |  | 4.32 | %
|                                           |  |                                      |         |   |                                      |   |              |                                      |      |                |  |   |                |   |              |   |        |                |      |   |                |   |              |   |  |   |        |  |      |  

---

|(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.



20



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Volume and Rate Analysis

(Dollars in thousands)



|                                   |  |                                           |       |   |                                           |   |        |                                 |  |   |              |   |  |            |       |   |                                 |   |        |   |  |   |       |  
|---------------------------------- |  | ----------------------------------------- | ----- | - | ----------------------------------------- | - | ------ | ------------------------------- |  | - | ------------ | - |  | ---------- | ----- | - | ------------------------------- | - | ------ | - |  | - | ----- | -
|                                   |  | 2005 Compared to 2004 Increase (Decrease) |       |   | 2004 Compared to 2003 Increase (Decrease) |  
|                                   |  | VolumeEffect                              |       |   | RateEffect                                |   |        | Changein InterestIncome/Expense |  |   | VolumeEffect |   |  | RateEffect |       |   | Changein InterestIncome/Expense |  
|Interest Income:                   |  |                                           |       |   |                                           |   |        |                                 |  |   |              |   |  |            |       |   |                                 |   |        |   |  |   |       |  
|Loans                              |  | $                                         | 5,556 |   |                                           | $ | 424    |                                 |  | $ | 5,971        |   |  | $          | 6,913 |   |                                 | $ | (2,289 | ) |  | $ | 4,633 |  
|Federal funds sold                 |  |                                           | 64    |   |                                           |   | 146    |                                 |  |   | 210          |   |  |            | (139  | ) |                                 |   | 13     |   |  |   | (126  | )
|Other investments                  |  |                                           | (17   | ) |                                           |   | 78     |                                 |  |   | 61           |   |  |            | (266  | ) |                                 |   | 68     |   |  |   | (198  | )
|                                   |  |                                           |       |   |                                           |   |        |                                 |  |   |              |   |  |            |       |   |                                 |   |        |   |  |   |       |  
|Total Earning Assets               |  |                                           | 5,603 |   |                                           |   | 648    |                                 |  |   | 6,242        |   |  |            | 6,508 |   |                                 |   | (2,208 | ) |  |   | 4,309 |  
|                                   |  |                                           |       |   |                                           |   |        |                                 |  |   |              |   |  |            |       |   |                                 |   |        |   |  |   |       |  
|Interest Bearing Liabilities:      |  |                                           |       |   |                                           |   |        |                                 |  |   |              |   |  |            |       |   |                                 |   |        |   |  |   |       |  
|Demand                             |  |                                           | 11    |   |                                           |   | 49     |                                 |  |   | 59           |   |  |            | 53    |   |                                 |   | (57    | ) |  |   | (5    | )
|Savings                            |  |                                           | 22    |   |                                           |   | 36     |                                 |  |   | 58           |   |  |            | 99    |   |                                 |   | (128   | ) |  |   | (31   | )
|All other time deposits            |  |                                           | 1,555 |   |                                           |   | 2,700  |                                 |  |   | 4,255        |   |  |            | 745   |   |                                 |   | (839   | ) |  |   | (90   | )
|Short term borrowings              |  |                                           | (25   | ) |                                           |   | 25     |                                 |  |   | (1           | ) |  |            | 35    |   |                                 |   | (2     | ) |  |   | 33    |  
|Trust Preferred Securities         |  |                                           | 326   |   |                                           |   | 111    |                                 |  |   | 437          |   |  |            | 232   |   |                                 |   |       |   |  |   | 232   |  
|                                   |  |                                           |       |   |                                           |   |        |                                 |  |   |              |   |  |            |       |   |                                 |   |        |   |  |   |       |  
|Total Interest Bearing Liabilities |  |                                           | 1,887 |   |                                           |   | 2,920  |                                 |  |   | 4,808        |   |  |            | 1,164 |   |                                 |   | (1,026 | ) |  |   | 139   |  
|                                   |  |                                           |       |   |                                           |   |        |                                 |  |   |              |   |  |            |       |   |                                 |   |        |   |  |   |       |  
|Change in Net Interest Income      |  | $                                         | 3,716 |   |                                           | $ | (2,272 | )                               |  | $ | 1,434        |   |  | $          | 5,344 |   |                                 | $ | (1,182 | ) |  | $ | 4,170 |  
|                                   |  |                                           |       |   |                                           |   |        |                                 |  |   |              |   |  |            |       |   |                                 |   |        |   |  |   |       |  

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 $84.5 million, $88.1 million, and $73.0 million for the years 2005, 2004 and 2003,
respectively. A schedule of loans by type is set forth immediately below. Approximately 70.08% of the loan portfolio is secured by real estate at the end of 2005.

Loans receivable outstanding are summarized as follows:

Loan Portfolio



|                                       |  |              |         |      |   |         |  |      |         |      |   |         |  |   |        
|-------------------------------------- |  | ------------ | ------- | ---- | - | ------- |  | ---- | ------- | ---- | - | ------- |  | - | -------
|                                       |  | December 31,
|(Dollars in thousands)                 |  | 2005         |         | 2004 |   | 2003    |  | 2002 |         | 2001
|Commercial, financial and agricultural |  | $            | 93,987  |      | $ | 70,915  |  | $    | 58,593  |      | $ | 42,959  |  | $ | 35,168 
|Real estate  construction             |  |              | 26,267  |      |   | 11,332  |  |      | 7,258   |      |   | 5,615   |  |   | 3,845  
|Real estate  mortgage                 |  |              | 301,740 |      |   | 255,925 |  |      | 185,191 |      |   | 131,050 |  |   | 98,229 
|Installment loans to individuals       |  |              | 46,051  |      |   | 45,395  |  |      | 44,396  |      |   | 42,770  |  |   | 41,974 
|                                       |  |              |         |      |   |         |  |      |         |      |   |         |  |   |        
|Total                                  |  | $            | 468,045 |      | $ | 383,567 |  | $    | 295,438 |      | $ | 222,394 |  | $ | 179,216
|                                       |  |              |         |      |   |         |  |      |         |      |   |         |  |   |        

Our loan maturities as of December 31, 2005 are shown in the following
table:

Maturities of Loans



|                             |  |                   |         |                  |   |                 |  |       |         |  |   |        
|---------------------------- |  | ----------------- | ------- | ---------------- | - | --------------- |  | ----- | ------- |  | - | -------
|(Dollars in thousands)       |  | Less thanOne Year |         | One to FiveYears |   | After FiveYears |  | Total
|Commercial and agriculture   |  | $                 | 55,366  |                  | $ | 26,058          |  | $     | 12,563  |  | $ | 93,987 
|Real estate                  |  |                   | 114,059 |                  |   | 82,311          |  |       | 131,637 |  |   | 328,007
|Consumer- installment/ other |  |                   | 5,849   |                  |   | 37,335          |  |       | 2,867   |  |   | 46,051 
|                             |  |                   |         |                  |   |                 |  |       |         |  |   |        
|Total                        |  | $                 | 175,274 |                  | $ | 145,704         |  | $     | 147,067 |  | $ | 468,045
|                             |  |                   |         |                  |   |                 |  |       |         |  |   |        
|Loans with fixed rates       |  | $                 | 33,679  |                  | $ | 91,436          |  | $     | 141,773 |  | $ | 266,888
|Loans with variable rates    |  |                   | 141,595 |                  |   | 54,268          |  |       | 5,294   |  |   | 201,157
|                             |  |                   |         |                  |   |                 |  |       |         |  |   |        
|Total                        |  | $                 | 175,274 |                  | $ | 145,704         |  | $     | 147,067 |  | $ | 468,045
|                             |  |                   |         |                  |   |                 |  |       |         |  |   |        



21



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##### Table of Contents

This above table reflects the earlier of the maturity or re-pricing dates for loans at December 31, 2005. 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 $1.1 million for 2005 as compared with $990 thousand for 2004. The allowance for loan losses was $3.9 million at December 31, 2005.
The allowance for loan losses at the end of 2005 was approximately .84% of total loans as compared to .81% at the end of 2004. Net loans charged off for 2005 were $277 thousand, or .07% of average loans, and $332 thousand, or .10% of average loans
at the end of 2004.

The provision for loan losses was $990 thousand for 2004 as 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 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, 2005, there were 9 loans in non-accrual status totaling $446 thousand, or .10% of total
loans. The amount of interest that would have been recognized on these loans in the year 2005 was $19 thousand. There were 6 loans greater than 90 days past due and still accruing interest totaling $116 thousand, or .02% of total loans. It is our
policy to stop accruing interest on a loan, and to 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, |     
|                                                  |  | 2005         |      |   | 2004 |   |      | 2003 |  |   | 2002 |   |  | 2001 |     
|Non-accruing loans                                |  | $            | 446  |   |      | $ | 773  |      |  | $ | 539  |   |  | $    | 761  |   |  | $ | 47   |  
|Loans past due 90 days or more and still accruing |  |              | 116  |   |      |   | 115  |      |  |   | 26   |   |  |      |     |   |  |   | 29   |  
|                                                  |  |              |      |   |      |   |      |      |  |   |      |   |  |      |      |   |  |   |      |  
|Total                                             |  | $            | 562  |   |      | $ | 888  |      |  | $ | 565  |   |  | $    | 761  |   |  | $ | 76   |  
|                                                  |  |              |      |   |      |   |      |      |  |   |      |   |  |      |      |   |  |   |      |  
|Percent of total loans                            |  |              | 0.12 | % |      |   | 0.23 | %    |  |   | 0.19 | % |  |      | 0.34 | % |  |   | 0.04 | %
|                                                  |  |              |      |   |      |   |      |      |  |   |      |   |  |      |      |   |  |   |      |  

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 was consistent through 2005. 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.



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The aforementioned risk factors are considered in determining the adequacy of the allowance for loan losses. We believe
that 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 exceptional, very good, standard, acceptable,
transitory risk, 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 specific allowance totaled $52 thousand on December 31, 2005, or 1.32% 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                                |  | 2005                             |       |   | 2004 |   |       | 2003 |  |   | 2002  |   |  | 2001 |      
|Beginning Balance                       |  | $                                | 3,090 |   |      | $ | 2,432 |      |  | $ | 2,224 |   |  | $    | 1,793 |   |  | $ | 1,311 |  
|                                        |  |                                  |       |   |      |   |       |      |  |   |       |   |  |      |       |   |  |   |       |  
|Provision charged to expense            |  |                                  | 1,130 |   |      |   | 990   |      |  |   | 364   |   |  |      | 603   |   |  |   | 571   |  
|                                        |  |                                  |       |   |      |   |       |      |  |   |       |   |  |      |       |   |  |   |       |  
|Loan Losses:                            |  |                                  |       |   |      |   |       |      |  |   |       |   |  |      |       |   |  |   |       |  
|Installment loans to individuals        |  |                                  | (266  | ) |      |   | (285  | )    |  |   | (180  | ) |  |      | (207  | ) |  |   | (98   | )
|Real estate mortgage                    |  |                                  | (28   | ) |      |   | (8    | )    |  |   |       |   |  |      |       |   |  |   |       |  
|Commercial loans                        |  |                                  | (4    | ) |      |   | (59   | )    |  |   | (7    | ) |  |      |      |   |  |   |       |  
|Recoveries:                             |  |                                  |       |   |      |   |       |      |  |   |       |   |  |      |       |   |  |   |       |  
|Installment loans to individuals        |  |                                  | 19    |   |      |   | 20    |      |  |   | 31    |   |  |      | 35    |   |  |   | 9     |  
|Real estate mortgage                    |  |                                  | 2     |   |      |   |      |      |  |   |      |   |  |      |      |   |  |   |      |  
|                                        |  |                                  |       |   |      |   |       |      |  |   |       |   |  |      |       |   |  |   |       |  
|Net charge offs                         |  |                                  | (277  | ) |      |   | (332  | )    |  |   | (156  | ) |  |      | (172  | ) |  |   | (89   | )
|                                        |  |                                  |       |   |      |   |       |      |  |   |       |   |  |      |       |   |  |   |       |  
|Balance at End of Period                |  | $                                | 3,943 |   |      | $ | 3,090 |      |  | $ | 2,432 |   |  | $    | 2,224 |   |  | $ | 1,793 |  
|                                        |  |                                  |       |   |      |   |       |      |  |   |       |   |  |      |       |   |  |   |       |  
|Net charge offs as a % of average loans |  |                                  | 0.07  | % |      |   | 0.10  | %    |  |   | 0.06  | % |  |      | 0.09  | % |  |   | 0.06  | %
|                                        |  |                                  |       |   |      |   |       |      |  |   |       |   |  |      |       |   |  |   |       |  

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 constituted 64.5% of our loan portfolio at December 31, 2005. The allocation 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 constituted 20.1% of our loan portfolio at December 31, 2005. This allocation is due to the fact
that commercial loans 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.



23



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##### Table of Contents

We have allocated 45% of the allowance to consumer installment loans, which constituted 9.8% of our loan portfolio at
December 31, 2005. 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, 2001 through December 31, 2005

(Dollars in thousands)



|                           |  |                   |       |                     |                   |   |                |                   |   |        |   |                     |  |     |                |  |        |        |  |                     |       |  |                |   |  |        |  
|-------------------------- |  | ----------------- | ----- | ------------------- | ----------------- | - | -------------- | ----------------- | - | ------ | - | ------------------- |  | --- | -------------- |  | ------ | ------ |  | ------------------- | ----- |  | -------------- | - |  | ------ | -
|                           |  | December 31, 2005 |       |                     | December 31, 2004 |   |                | December 31, 2003 |  
|                           |  | Amount            |       | Percent ofAllowance |                   |   | PercentofLoans |                   |   | Amount |   | Percent ofAllowance |  |     | PercentofLoans |  |        | Amount |  | Percent ofAllowance |       |  | PercentofLoans |  
|Analysis of Ending Balance |  |                   |       |                     |                   |   |                |                   |   |        |   |                     |  |     |                |  |        |        |  |                     |       |  |                |   |  |        |  
|Commercial                 |  | $                 | 1,380 |                     | 35                | % |                | 20.08             | % |        | $ | 1,081               |  | 35  | %              |  | 18.49  | %      |  | $                   | 851   |  | 35             | % |  | 19.83  | %
|Real estate mortgage       |  |                   | 789   |                     | 20                | % |                | 70.08             | % |        |   | 618                 |  | 20  | %              |  | 69.67  | %      |  |                     | 486   |  | 20             | % |  | 65.14  | %
|Installment                |  |                   | 1,774 |                     | 45                | % |                | 9.84              | % |        |   | 1,391               |  | 45  | %              |  | 11.83  | %      |  |                     | 1,095 |  | 45             | % |  | 15.03  | %
|Unallocated                |  |                   |      |                     |                  | % |                |                   |   |        |   |                     |  |    |                |  |       | %      |  |                     |       |  |               |   |  |       | %
|                           |  |                   |       |                     |                   |   |                |                   |   |        |   |                     |  |     |                |  |        |        |  |                     |       |  |                |   |  |        |  
|Total                      |  | $                 | 3,943 |                     | 100               | % |                | 100.00            | % |        | $ | 3,090               |  | 100 | %              |  | 100.00 | %      |  | $                   | 2,432 |  | 100            | % |  | 100.00 | %
|                           |  |                   |       |                     |                   |   |                |                   |   |        |   |                     |  |     |                |  |        |        |  |                     |       |  |                |   |  |        |  



|                                      |  |                  |       |                     |                   |   |                |        |   |        |   |                     |  |     |                |  |        |  
|------------------------------------- |  | ---------------- | ----- | ------------------- | ----------------- | - | -------------- | ------ | - | ------ | - | ------------------- |  | --- | -------------- |  | ------ | -
|                                      |  | December 31,2002 |       |                     | December 31, 2001 |  
|                                      |  | Amount           |       | Percent ofAllowance |                   |   | PercentofLoans |        |   | Amount |   | Percent ofAllowance |  |     | PercentofLoans | 
|Analysis of Ending Balance Commercial |  | $                | 445   |                     | 20                | % |                | 19.32  | % |        | $ | 359                 |  | 20  | %              |  | 19.62  | %
|Real estate mortgage                  |  |                  | 134   |                     | 6                 | % |                | 61.45  | % |        |   | 108                 |  | 6   | %              |  | 56.96  | %
|Installment                           |  |                  | 1,090 |                     | 49                | % |                | 19.23  | % |        |   | 879                 |  | 49  | %              |  | 23.42  | %
|Unallocated                           |  |                  | 555   |                     | 25                | % |                |        |   |        |   | 447                 |  | 25  | %              |  |        |  
|                                      |  |                  |       |                     |                   |   |                |        |   |        |   |                     |  |     |                |  |        |  
|Total                                 |  | $                | 2,224 |                     | 100               | % |                | 100.00 | % |        | $ | 1,793               |  | 100 | %              |  | 100.00 | %
|                                      |  |                  |       |                     |                   |   |                |        |   |        |   |                     |  |     |                |  |        |  

Investment Securities

Total investment securities slightly increased to $6.2 million at December 31, 2005 from $5.8 million at December 31, 2004. 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 $3.0 million are pledged by us
to secure public deposits at December 31, 2005.

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 $2.3 million and $1.4 million as of December 31, 2005 and 2004, respectively.



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

Investment Securities Portfolio

(Dollars in thousands)



|                         |               |      |           |      |               |       |           |   |               |  |           |       |  |   |        |  |   |       
|------------------------ | ------------- | ---- | --------- | ---- | ------------- | ----- | --------- | - | ------------- |  | --------- | ----- |  | - | ------ |  | - | ------
|December 31,             |               | 2005 |           | 2004 |               | 2003 
|                         | AmortizedCost |      | FairValue |      | AmortizedCost |       | FairValue |   | AmortizedCost |  | FairValue
|Available for Sale       |               |      |           |      |               |       |           |   |               |  |           |       |  |   |        |  |   |       
|U.S. Government Agencies |               | $    | 6,185     |      | $             | 6,163 |           | $ | 5,700         |  | $         | 5,674 |  | $ | 10,612 |  |   | 10,614
|Municipal Governments    |               |      |          |      |               |      |           |   | 100           |  |           | 101   |  |   | 101    |  |   | 105   
|                         |               |      |           |      |               |       |           |   |               |  |           |       |  |   |        |  |   |       
|Total Securities AFS     |               | $    | 6,185     |      | $             | 6,163 |           | $ | 5,800         |  | $         | 5,775 |  | $ | 10,713 |  | $ | 10,719
|                         |               |      |           |      |               |       |           |   |               |  |           |       |  |   |        |  |   |       

The amortized cost, fair value and weighted average yield of investment securities at December 31, 2005, 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)



|                                      |  |               |       |           |   |                      |  |      |  
|------------------------------------- |  | ------------- | ----- | --------- | - | -------------------- |  | ---- | -
|Securities Available for Sale         |  | AmortizedCost |       | FairValue |   | WeightedAverageYield | 
|Due in one year or less               |  | $             | 5,683 |           | $ | 5,663                |  | 3.16 | %
|Due after one year through five years |  |               | 502   |           |   | 500                  |  | 4.22 | %
|                                      |  |               |       |           |   |                      |  |      |  
|Total                                 |  | $             | 6,185 |           | $ | 6,163                |  | 3.24 | %
|                                      |  |               |       |           |   |                      |  |      |  

Deposits

We
continue to enjoy deposit growth in the markets we serve. Total deposits as of December 31, 2005 were $462.7 million as compared to $388.1 million at December 31, 2004. This is an increase of $74.6 million, or 19.21%. The Bluefield,
Virginia office that was opened in May 2005 has positively contributed to our deposit growth and we anticipate it to continue to grow.

The largest areas
of growth were in demand and time deposits. Noninterest bearing demand deposits increased $14.0 million, or 30.48%, to $59.9 million in 2005 from $45.9 million in 2004. Interest-bearing demand deposits slightly decreased by $1.7 million, or 7.77%,
to $19.8 million in 2005 from $21.5 million in 2004. Savings deposits increased $1.3 million, or 3.07%, to $44.8 million in 2005 from $43.4 million in 2004. Time deposits increased by $60.9 million, or 21.97%, from $277.2 million in 2004 to $338.1
million in 2005.

Time deposits of $100,000 or more equaled approximately 21.29% of deposits at the end of 2005 and 20.59% of deposits at the end of 2004.
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 above.

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 31,2005
|Three months or less                  |  | $                | 22,569
|Over three months through six months  |  |                  | 15,590
|Over six months through twelve months |  |                  | 28,098
|Over one year                         |  |                  | 32,240
|                                      |  |                  |       
|Total                                 |  | $                | 98,497
|                                      |  |                  |       

Noninterest Income

Noninterest income increased from $2.6 million in 2004 to $2.8 million in 2005. This is an increase of $226 thousand for the year, or 8.85%. The major sources of noninterest income include service charges on deposit accounts and insurance
commissions. Service charges, including overdraft fees, increased from $1.3 million for 2004 to $1.7 million for



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2005, an increase of $413 thousand, or 31.92%. This increase is due to increased fees charged per overdraft and growth in
demand deposit accounts. There were no gains on the sale of fixed assets during 2005. During 2004, the Bank sold property and realized a gain of $185 thousand.

During 2005, we reorganized our subsidiary NPB Financial. Part of that process was choosing a new broker-dealer relationship with UVEST Financial Services. In addition, we eliminated positions and restructured compensation schedules of our
sales people. We also changed our broker agent for life insurance commissions to UVEST Financial Services. As a result of the process of reorganization, commissions were practically the same as the previous year. Total commissions generated by NPB
Financial in 2005 were $289 thousand as compared to $292 thousand. We anticipate 2006 to be a better year in commissions generated by this subsidiary as greater focus will be upon sales production instead of reorganization.

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 service charges on deposit accounts, insurance commissions, and a gain realized on the sale of property. Service charges 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. During 2004, the Bank sold property and realized a gain of $185 thousand.

Noninterest
income as a percentage of average assets decreased from .65% in 2004 to .57% in 2005. In comparing 2004 and 2003, the ratio increased from .55% in 2003 to .65% in 2004. We anticipate this percentage to increase in 2006 as we increase noninterest
income from our nonbank subsidiaries.

Noninterest Expense

Noninterest expense increased $2.3 million, or 15.97%, from $14.4 million in 2004 to $16.7 million in 2005. The following expenses contributed to the increase for the year. During 2005, we added two new branch locations. We also incurred
increased auditing expenses associated with compliance with Section 404 of the Sarbanes-Oxley Act. The reorganization of NPB Financial increased legal expenses during the year. In addition, as we continue to implement our growth plans, we have
incurred costs associated with enhancing the infrastructure of New Peoples. These enhancements include additional internal audit staff, loan review staff, risk management personnel, and the operations center that was placed in service in December
2004. We expect each of these investments to be beneficial to the continued growth of New Peoples. Despite an increase in noninterest expenses, the ratio of noninterest expense as a percentage of average assets decreased from 3.66% for 2004 to 3.44%
for 2005.

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 increase was 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.

We expect greater efficiencies to 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 75.74% for 2005 as compared to 70.86% for 2004 and 70.03% for 2003. This was higher in 2005 as the net
interest margin decreased while noninterest expenses increased. When comparing 2004 to 2003, a minimal increase resulted from the growth in branches and additional staffing during 2004 and 2003.

The ratio of assets to full-time equivalent employee was $2.0 million at the end of 2005 as compared to $1.81 million, at the end of 2004, and $1.7 million at the end of
2003. Since we are still in the growth phase, these numbers will remain low compared to our peers until we reach a level of maturity, but should continue to improve.

Income Taxes

Due to timing differences between book and tax treatment of several income and expense items, a
deferred tax liability of $507 thousand has been recognized at December 31, 2005, as compared to $746 thousand at December 31, 2004. 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 Bank-owned life insurance income, and increases to deductions related to the allowance for loan losses. Our income tax expense was computed at the normal
corporate income tax rate of 34% of taxable income included in net income. We do not have significant nontaxable income or nondeductible expenses.



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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 $9.0 million and $8.7 million at December 31, 2005
and December 31, 2004, respectively. Total income for the policies during 2005 was $393 thousand as compared to $387 thousand and $419 thousand for the years ending 2004 and 2003, respectively. The insurance policies had a yield, net of
mortality costs, of 4.50% for the year 2005 as compared to 4.54% in 2004. 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 2005 was $39.0 million compared to $36.1 million in 2004. The increase was $2.9 million, or 7.94%. We remain well capitalized at the end of 2005, as defined by the capital guidelines of regulatory agencies. Capital as a
percentage of total assets was 7.38% at December 31, 2005 compared to 8.25% at December 31, 2004, which exceeded regulatory requirements.

The
number of shares of common stock issued and outstanding at the end of 2005 was 7,619,355, an increase of 709,286 shares from the 6,910,069 shares outstanding at the end of 2004. The increase is related to two different activities, a stock dividend
and exercised stock options. During the second quarter of 2005, the board of directors awarded a 10% stock dividend to shareholders of record on June 7, 2005 which resulted in the issuance of an additional 690,963 shares of common stock. The
remaining 18,323 increase resulted from the exercise of stock options at various prices.

No cash 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, 2005 and 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 6.75% at December 31, 2005 as compared to 4.67% at December 31, 2004. Total interest expense in 2005
related to the trust preferred securities was $669 thousand as compared to $232 thousand in 2004. The $437 thousand increase is related to a full year of interest expense and multiple interest rate hikes in 2005.

Liquidity

At the end of December 31, 2005 and 2004, liquid
assets in the form of cash, due from banks and federal funds sold were approximately $18.7 million and $17.4 million, respectively. At December 31, 2005 all of our investments are classified as available-for-sale providing an additional source
of liquidity in the amount of $3.2 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 $71.1 million from the Federal Home Loan Bank
under a line of credit which is secured by a blanket lien on residential real estate loans. Additional liquidity is expected to 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 2005 alone, we have opened two new branches and plan to open additional branches during 2006.



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At December 31, 2005, outstanding overnight advances from the Federal Home Loan Bank line of credit totaled $11.6
million as compared to no borrowings at the end of 2004. These borrowings are overnight and interest rates adjust daily. We expect to reduce this debt as we generate new deposit growth in early 2006.

As of December 31, 2005, time deposits of $254.3 million 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 2005 was 101.16% as compared to 98.83% at the end of 2004. With new branch openings anticipated in the first half of 2006, we anticipate deposits to increase and the loan to deposit ratio to decrease. 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. 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.

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.

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, 2005 and
2004, is as follows:



|                                                                    |  |                        |        |      |   |       
|------------------------------------------------------------------- |  | ---------------------- | ------ | ---- | - | ------
|                                                                    |  | 2005                   |        | 2004
|                                                                    |  | (Dollars in thousands)
|Financial instruments whose contract amounts represent credit risk: |  |                        |        |      |   |       
|Commitments to extend credit                                        |  | $                      | 46,459 |      | $ | 31,596
|Standby letters of credit                                           |  |                        | 2,988  |      |   | 1,342 

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 actually 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



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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.

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)
|Contractual Obligations                 |  | Total                  |        | Lessthan 1year |   | 1-3years |  | 3-5years |    | Morethan 5years
|Trust preferred securities indebtedness |  | $                      | 11,341 |                | $ |         |  | $        |   |                 | $ |   |  | $ | 11,341
|Operating Lease Obligations             |  |                        | 276    |                |   | 49       |  |          | 89 |                 |   | 53 |  |   | 85    
|                                        |  |                        |        |                |   |          |  |          |    |                 |   |    |  |   |       
|Total                                   |  | $                      | 11,617 |                | $ | 49       |  | $        | 89 |                 | $ | 53 |  | $ | 11,426
|                                        |  |                        |        |                |   |          |  |          |    |                 |   |    |  |   |       

Interest Sensitivity

At December 31, 2005, we had a negative cumulative gap rate sensitivity ratio of 30.38% for the one year re-pricing period, compared to 41.65% at December 31, 2004. A negative cumulative gap 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. Strategies of lengthening maturities of deposits
and shortening the repricing frequency on earning assets has resulted in a cumulative gap position improved for a rising rate environment. 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; however, our strategy is to continue to improve our repricing position to benefit from a rising interest rate environment.

Interest Sensitivity Analysis

December 31, 2005

(Dollars in thousands)



|                                            |  |            |         |    |            |   |          |             |  |   |           |    |  |           |         |    |              |   |        |       |  |   |        |   |  |   |        
|------------------------------------------- |  | ---------- | ------- | -- | ---------- | - | -------- | ----------- |  | - | --------- | -- |  | --------- | ------- | -- | ------------ | - | ------ | ----- |  | - | ------ | - |  | - | -------
|                                            |  | 1- 90 Days |         |    | 91-365Days |   |          | 1  3 Years |  |   | 4-5 Years |    |  | 6-15Years |         |    | Over 15years |   |        | Total
|Uses of funds:                              |  |            |         |    |            |   |          |             |  |   |           |    |  |           |         |    |              |   |        |       |  |   |        |   |  |   |        
|Loans                                       |  | $          | 120,766 |    |            | $ | 54,508   |             |  | $ | 58,360    |    |  | $         | 87,344  |    |              | $ | 88,877 |       |  | $ | 58,190 |   |  | $ | 468,045
|Federal funds sold                          |  |            | 2,922   |    |            |   |         |             |  |   |          |    |  |           |        |    |              |   |       |       |  |   |       |   |  |   | 2,922  
|Investments                                 |  |            | 3,113   |    |            |   | 3,071    |             |  |   | 500       |    |  |           |        |    |              |   |       |       |  |   | 1,752  |   |  |   | 8,436  
|Bank owned life insurance                   |  |            | 9,031   |    |            |   |         |             |  |   |          |    |  |           |        |    |              |   |       |       |  |   |       |   |  |   | 9,031  
|                                            |  |            |         |    |            |   |          |             |  |   |           |    |  |           |         |    |              |   |        |       |  |   |        |   |  |   |        
|Total earning assets                        |  | $          | 135,832 |    |            |   | 57,579   |             |  | $ | 58,860    |    |  | $         | 87,344  |    |              | $ | 88,877 |       |  | $ | 59,942 |   |  | $ | 488,434
|                                            |  |            |         |    |            |   |          |             |  |   |           |    |  |           |         |    |              |   |        |       |  |   |        |   |  |   |        
|Sources of funds:                           |  |            |         |    |            |   |          |             |  |   |           |    |  |           |         |    |              |   |        |       |  |   |        |   |  |   |        
|Int Bearing DDA                             |  | $          | 19,845  |    |            | $ |         |             |  | $ |          |    |  | $         |        |    |              | $ |       |       |  | $ |       |   |  | $ | 19,845 
|Savings & MMDA                              |  |            | 44,778  |    |            |   |         |             |  |   |          |    |  |           |        |    |              |   |       |       |  |   |       |   |  |   | 44,778 
|Time Deposits                               |  |            | 87,617  |    |            |   | 166,639  |             |  |   | 30,187    |    |  |           | 53,705  |    |              |   |       |       |  |   |       |   |  |   | 338,148
|FHLB advances                               |  |            | 11,570  |    |            |   |         |             |  |   |          |    |  |           |        |    |              |   |       |       |  |   |       |   |  |   | 11,570 
|Trust preferred securities                  |  |            | 11,341  |    |            |   |         |             |  |   |          |    |  |           |        |    |              |   |       |       |  |   |       |   |  |   | 11,341 
|                                            |  |            |         |    |            |   |          |             |  |   |           |    |  |           |         |    |              |   |        |       |  |   |        |   |  |   |        
|Total interest bearing liabilities          |  | $          | 175,151 |    |            | $ | 166,639  |             |  | $ | 30,187    |    |  | $         | 53,705  |    |              | $ |       |       |  | $ |       |   |  | $ | 425,682
|                                            |  |            |         |    |            |   |          |             |  |   |           |    |  |           |         |    |              |   |        |       |  |   |        |   |  |   |        
|Discrete Gap                                |  | $          | (39,319 | )  |            | $ | (109,060 | )           |  | $ | 28,673    |    |  | $         | 33,639  |    |              | $ | 88,877 |       |  | $ | 59,942 |   |  | $ | 62,752 
|                                            |  |            |         |    |            |   |          |             |  |   |           |    |  |           |         |    |              |   |        |       |  |   |        |   |  |   |        
|Cumulative Gap                              |  |            | (39,319 | )  |            |   | (148,379 | )           |  |   | (119,706  | )  |  |           | (86,067 | )  |              |   | 2,810  |       |  |   | 62,752 |   |  |   |        
|                                            |  |            |         |    |            |   |          |             |  |   |           |    |  |           |         |    |              |   |        |       |  |   |        |   |  |   |        
|Cumulative Gap as % of Total Earning Assets |  |            | (8.05   | )% |            |   | (30.38   | )%          |  |   | (24.51    | )% |  |           | (17.62  | )% |              |   | 0.57   | %     |  |   | 12.85  | % |  |   |        



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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, capital levels, 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, 2005. At this date, our interest rate risk is within the established limitations.



|                                               |  |                                                                     |    |  |                       |   
|---------------------------------------------- |  | ------------------------------------------------------------------- | -- |  | --------------------- | --
|Immediate Basis Point Change
In Interest Rates |  | Estimated Increase(Decrease) in NetInterest
IncomeDecember 31, 2005 |    |  | EstablishedLimitation |   
|+300                                           |  | (4.77                                                               | )% |  | (20.00                | )%
|+200                                           |  | (3.17                                                               | )  |  | (15.00                | ) 
|+100                                           |  | (1.60                                                               | )  |  | (7.00                 | ) 
|-100                                           |  | 1.32                                                                |    |  | (7.00                 | ) 
|-200                                           |  | 3.24                                                                |    |  | (15.00                | ) 
|-300                                           |  | 5.19                                                                |    |  | (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.
|- |  | --------------------------------------------------------------------------------------------------------------------



30



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##### Table of Contents

Item 8. Financial Statements and Supplementary Data

FINANCIAL STATEMENTS

CONTENTS



|                                                                                               |  |     
|---------------------------------------------------------------------------------------------- |  | ----
|                                                                                               |  | Page
|                                                                                               | 
|Report of the Independent Registered Public Accounting Firm                                    |  | 32  
|                                                                                               | 
|Attestation Report of Independent Registered Public Accounting Firm                            |  | 33  
|                                                                                               | 
|Managements Annual Report on Internal Control over Financial Reporting                        |  | 34  
|                                                                                               | 
|Consolidated Balance Sheets as of December 31, 2005 and 2004                                   |  | 35  
|                                                                                               | 
|Consolidated Statements of Income  Years Ended December 31, 2005, 2004, and 2003              |  | 36  
|                                                                                               | 
|Consolidated Statements of Stockholders Equity - Years Ended December 31, 2005, 2004 and 2003 |  | 37  
|                                                                                               | 
|Consolidated Statements of Cash Flows  Years Ended December 31, 2005, 2004 and 2003           |  | 38  
|                                                                                               | 
|Notes to Consolidated Financial Statements                                                     |  | 39  



31



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##### Table of Contents

REPORT OF THE INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders

New Peoples Bankshares, Inc.

Honaker, VA

We have audited the accompanying consolidated balance sheets of New Peoples Bankshares, Inc. and Subsidiaries as of December 31, 2005 and 2004, and the
related consolidated statements of income, stockholders equity, and cash flows for each of the years in the three-year period ended December 31, 2005. 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.

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 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, 2005 and 2004, and the results of its operations
and its cash flows for each of the years in the three-year period ended December 31, 2005 in conformity with accounting principles generally accepted in the United States of America.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of New Peoples
Bankshares, Inc. and Subsidiaries internal control over financial reporting as of December 31, 2005, based on criteria established in Internal ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO), and our report dated March 13, 2006 expressed an unqualified opinion on managements assessment of internal control over financial reporting and an unqualified opinion on the effectiveness of internal control over
financial reporting.

BROWN, EDWARDS & COMPANY, L.L.P.

CERTIFIED PUBLIC ACCOUNTANTS

Bluefield,
West Virginia

March 13, 2006



32



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##### Table of Contents

ATTESTATION REPORT OF INDEPENDENT

REGISTERED PUBLIC ACCOUNTING FIRM

We have audited managements assessment, included in the accompanying Managements Annual Report on Internal Control Over Financial Reporting,
that New Peoples Bankshares, Inc. and Subsidiaries maintained effective internal control over financial reporting as of December 31, 2005, based on criteria established in Internal Control  Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission (the COSO criteria). New Peoples Bankshares, Inc. and Subsidiaries management is responsible for maintaining effective internal control over financial reporting and for its assessment of the
effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on managements assessment and an opinion on the effectiveness of the companys internal control over financial reporting based on our
audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal
control over financial reporting, evaluating managements assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We
believe that our audit provides a reasonable basis for our opinion.

A companys internal control over financial reporting is a
process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A companys
internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company;
(2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made
only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the companys assets that could
have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies
or procedures may deteriorate.

In our opinion, managements assessment that New Peoples Bankshares, Inc. and Subsidiaries maintained
effective internal control over financial reporting as of December 31, 2005, is fairly stated, in all material respects, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of
the Treadway Commission (COSO). Also, in our opinion, New Peoples Bankshares, Inc. and Subsidiaries maintained, in all material respects, effective internal control over financial reporting as of December 31, 2005, based on the COSO criteria.

We have also audited in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated
balance sheets of New Peoples Bankshares, Inc. and Subsidiaries as of December 31, 2005 and 2004, and the related consolidated statements of income, stockholders equity, and cash flows for each of the three years in the period ended December
31, 2005 and our report dated March 13, 2006, expressed an unqualified opinion thereon.

BROWN, EDWARDS & COMPANY,
L.L.P.

CERTIFIED PUBLIC ACCOUNTANTS

Bluefield, West Virginia

March 13, 2006



33



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##### Table of Contents

Managements Annual Report on Internal Control over Financial Reporting

Management is responsible for establishing and
maintaining adequate internal control over financial reporting of New Peoples Bankshares, Inc. New Peoples internal control system was designed to provide reasonable assurance to management and the Board of Directors regarding the reliability
of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting practices.

All
internal control systems, no matter how well designed, have inherent limitations. Because of these inherent limitations, internal control over financial reporting can provide only reasonable assurance with respect to financial statement preparation
and presentation, and may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.

Management assessed the effectiveness of New Peoples internal control over financial
reporting as of December 31, 2005. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control  Integrated Framework.
Based on our assessment, we believe that, as of December 31, 2005, New Peoples internal control over financial reporting was effective based on those criteria.

Managements assessment of the effectiveness of internal control over financial reporting as of December 31, 2005, has been audited by Brown, Edwards & Company, L.L.P., the independent registered
public accounting firm which also audited the Companys consolidated financial statements. Brown, Edwards & Companys attestation report on managements assessment of internal control over financial reporting is included
elsewhere in this annual report.

March 10, 2006



|                                                 
|-------------------------------------------------
|/S/ KENNETH D. HART                              
|Kenneth D. Hart                                  
|President and Chief Executive Officer            
|                                                 
|/S/ C. TODD ASBURY                               
|C. Todd Asbury                                   
|Senior Vice-President and Chief Financial Officer



34



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##### Table of Contents

NEW PEOPLES BANKSHARES, INC.

CONSOLIDATED BALANCE SHEETS

DECEMBER 31, 2005 AND 2004

(IN
THOUSANDS EXCEPT SHARE DATA)



|                                                                                                                                                    |  |      |         |   |      |   |         |  
|--------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---- | ------- | - | ---- | - | ------- | -
|                                                                                                                                                    |  | 2005 |         |   | 2004 |  
|ASSETS                                                                                                                                              |  |      |         |   |      |   |         |  
|Cash and due from banks (Note 3)                                                                                                                    |  | $    | 15,728  |   |      | $ | 15,281  |  
|Federal funds sold (Note 3)                                                                                                                         |  |      | 2,922   |   |      |   | 2,124   |  
|                                                                                                                                                    |  |      |         |   |      |   |         |  
|Total Cash and Cash Equivalents                                                                                                                     |  |      | 18,650  |   |      |   | 17,405  |  
|                                                                                                                                                    |  |     
|Investment Securities                                                                                                                               |  |      |         |   |      |   |         |  
|Available-for-sale (Note 4)                                                                                                                         |  |      | 6,163   |   |      |   | 5,775   |  
|Loans receivable (Note 5)                                                                                                                           |  |      | 468,045 |   |      |   | 383,567 |  
|Allowance for loan losses (Note 6)                                                                                                                  |  |      | (3,943  | ) |      |   | (3,090  | )
|                                                                                                                                                    |  |      |         |   |      |   |         |  
|Net Loans                                                                                                                                           |  |      | 464,102 |   |      |   | 380,477 |  
|                                                                                                                                                    |  |     
|Bank premises and equipment, net (Note 7)                                                                                                           |  |      | 22,046  |   |      |   | 19,403  |  
|Equity securities (restricted) (Note 4)                                                                                                             |  |      | 2,273   |   |      |   | 1,441   |  
|Other real estate owned                                                                                                                             |  |      | 1,396   |   |      |   | 1,186   |  
|Accrued interest receivable                                                                                                                         |  |      | 3,005   |   |      |   | 2,272   |  
|Life insurance investments                                                                                                                          |  |      | 9,031   |   |      |   | 8,694   |  
|Other assets                                                                                                                                        |  |      | 1,104   |   |      |   | 1,098   |  
|                                                                                                                                                    |  |      |         |   |      |   |         |  
|Total Assets                                                                                                                                        |  | $    | 527,770 |   |      | $ | 437,751 |  
|                                                                                                                                                    |  |      |         |   |      |   |         |  
|LIABILITIES                                                                                                                                         |  |      |         |   |      |   |         |  
|                                                                                                                                                    |  |     
|Deposits:                                                                                                                                           |  |      |         |   |      |   |         |  
|Demand deposits:                                                                                                                                    |  |      |         |   |      |   |         |  
|Noninterest bearing                                                                                                                                 |  | $    | 59,921  |   |      | $ | 45,924  |  
|Interest-bearing                                                                                                                                    |  |      | 19,845  |   |      |   | 21,518  |  
|Savings deposits                                                                                                                                    |  |      | 44,778  |   |      |   | 43,445  |  
|Time deposits (Note 8)                                                                                                                              |  |      | 338,148 |   |      |   | 277,233 |  
|                                                                                                                                                    |  |      |         |   |      |   |         |  
|Total Deposits                                                                                                                                      |  |      | 462,692 |   |      |   | 388,120 |  
|FHLB advances (Note 15)                                                                                                                             |  |      | 11,570  |   |      |   |        |  
|Accrued interest payable                                                                                                                            |  |      | 1,558   |   |      |   | 891     |  
|Accrued expenses and other liabilities                                                                                                              |  |      | 1,645   |   |      |   | 1,301   |  
|Trust preferred securities (Note 19)                                                                                                                |  |      | 11,341  |   |      |   | 11,341  |  
|                                                                                                                                                    |  |      |         |   |      |   |         |  
|Total Liabilities                                                                                                                                   |  |      | 488,806 |   |      |   | 401,653 |  
|                                                                                                                                                    |  |      |         |   |      |   |         |  
|STOCKHOLDERS EQUITY (Notes 12 & 14)                                                                                                                |  |      |         |   |      |   |         |  
|                                                                                                                                                    |  |     
|Common stock - $2.00 par value; 12,000,000 shares authorized; 7,619,355 and 6,910,069 shares issued and outstanding for 2005 and 2004,
respectively |  |      | 15,239  |   |      |   | 13,820  |  
|Additional Paid-in-Capital                                                                                                                          |  |      | 21,265  |   |      |   | 13,118  |  
|Retained earnings                                                                                                                                   |  |      | 2,475   |   |      |   | 9,177   |  
|Accumulated other comprehensive income                                                                                                              |  |      | (15     | ) |      |   | (17     | )
|                                                                                                                                                    |  |      |         |   |      |   |         |  
|Total Stockholders Equity                                                                                                                          |  |      | 38,964  |   |      |   | 36,098  |  
|                                                                                                                                                    |  |      |         |   |      |   |         |  
|Total Liabilities and Stockholders Equity                                                                                                          |  | $    | 527,770 |   |      | $ | 437,751 |  
|                                                                                                                                                    |  |      |         |   |      |   |         |  

The accompanying notes are an integral part of this statement.



35



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##### Table of Contents

NEW PEOPLES BANKSHARES, INC.

CONSOLIDATED STATEMENTS OF INCOME

FOR THE YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003

(IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)



|                                                    |  |      |           |   |      |   |           |      |  |   |           |  
|--------------------------------------------------- |  | ---- | --------- | - | ---- | - | --------- | ---- |  | - | --------- | -
|                                                    |  | 2005 |           |   | 2004 |   |           | 2003 | 
|INTEREST AND DIVIDEND INCOME                        |  |      |           |   |      |   |           |      |  |   |           |  
|Loans including fees                                |  | $    | 30,006    |   |      | $ | 24,035    |      |  | $ | 19,402    |  
|Federal funds sold                                  |  |      | 256       |   |      |   | 46        |      |  |   | 172       |  
|Investments                                         |  |      | 161       |   |      |   | 104       |      |  |   | 322       |  
|Dividends on Equity securities (restricted)         |  |      | 84        |   |      |   | 80        |      |  |   | 60        |  
|                                                    |  |      |           |   |      |   |           |      |  |   |           |  
|Total Interest and Dividend Income                  |  |      | 30,507    |   |      |   | 24,265    |      |  |   | 19,956    |  
|                                                    |  |      |           |   |      |   |           |      |  |   |           |  
|INTEREST EXPENSE                                    |  |      |           |   |      |   |           |      |  |   |           |  
|Deposits                                            |  |      |           |   |      |   |           |      |  |   |           |  
|Demand                                              |  |      | 164       |   |      |   | 105       |      |  |   | 110       |  
|Savings                                             |  |      | 468       |   |      |   | 410       |      |  |   | 441       |  
|Time deposits below $100,000                        |  |      | 6,917     |   |      |   | 4,051     |      |  |   | 4,211     |  
|Time deposits above $100,000                        |  |      | 3,018     |   |      |   | 1,629     |      |  |   | 1,559     |  
|Other                                               |  |      | 1         |   |      |   | 3         |      |  |   | 11        |  
|FHLB Advances                                       |  |      | 42        |   |      |   | 41        |      |  |   |          |  
|Trust Preferred Securities                          |  |      | 669       |   |      |   | 232       |      |  |   |          |  
|                                                    |  |      |           |   |      |   |           |      |  |   |           |  
|Total Interest Expense                              |  |      | 11,279    |   |      |   | 6,471     |      |  |   | 6,332     |  
|                                                    |  |      |           |   |      |   |           |      |  |   |           |  
|NET INTEREST INCOME                                 |  |      | 19,228    |   |      |   | 17,794    |      |  |   | 13,624    |  
|                                                    |  |      |          
|PROVISION FOR LOAN LOSSES (Note 6)                  |  |      | 1,130     |   |      |   | 990       |      |  |   | 364       |  
|                                                    |  |      |           |   |      |   |           |      |  |   |           |  
|NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES |  |      | 18,098    |   |      |   | 16,804    |      |  |   | 13,260    |  
|                                                    |  |      |           |   |      |   |           |      |  |   |           |  
|NONINTEREST INCOME                                  |  |      |           |   |      |   |           |      |  |   |           |  
|Service charges                                     |  |      | 1,707     |   |      |   | 1,294     |      |  |   | 936       |  
|Fees, commissions and other income                  |  |      | 341       |   |      |   | 263       |      |  |   | 239       |  
|Insurance fees                                      |  |      | 381       |   |      |   | 476       |      |  |   | 213       |  
|Loss on sale of securities                          |  |      |          |   |      |   |          |      |  |   | (5        | )
|Loss on sale of other real estate owned             |  |      | (38       | ) |      |   | (47       | )    |  |   |          |  
|Life insurance investment income                    |  |      | 393       |   |      |   | 387       |      |  |   | 419       |  
|Gain on Sale of Fixed Assets                        |  |      |          |   |      |   | 185       |      |  |   |          |  
|                                                    |  |      |           |   |      |   |           |      |  |   |           |  
|Total Noninterest Income                            |  |      | 2,784     |   |      |   | 2,558     |      |  |   | 1,802     |  
|                                                    |  |      |           |   |      |   |           |      |  |   |           |  
|NONINTEREST EXPENSES                                |  |      |           |   |      |   |           |      |  |   |           |  
|Salaries and employee benefits (Note 11)            |  |      | 10,031    |   |      |   | 8,902     |      |  |   | 6,258     |  
|Occupancy expense                                   |  |      | 1,122     |   |      |   | 841       |      |  |   | 627       |  
|Equipment expense                                   |  |      | 1,723     |   |      |   | 1,503     |      |  |   | 1,152     |  
|Advertising and public relations                    |  |      | 352       |   |      |   | 282       |      |  |   | 211       |  
|Stationery and supplies                             |  |      | 245       |   |      |   | 217       |      |  |   | 203       |  
|Other operating expenses                            |  |      | 3,199     |   |      |   | 2,677     |      |  |   | 2,350     |  
|                                                    |  |      |           |   |      |   |           |      |  |   |           |  
|Total Noninterest Expenses                          |  |      | 16,672    |   |      |   | 14,422    |      |  |   | 10,801    |  
|                                                    |  |      |           |   |      |   |           |      |  |   |           |  
|INCOME BEFORE INCOME TAXES                          |  |      | 4,210     |   |      |   | 4,940     |      |  |   | 4,261     |  
|                                                    |  |      |          
|INCOME TAX EXPENSE (Note 9)                         |  |      | 1,487     |   |      |   | 1,682     |      |  |   | 1,447     |  
|                                                    |  |      |           |   |      |   |           |      |  |   |           |  
|NET INCOME                                          |  | $    | 2,723     |   |      | $ | 3,258     |      |  | $ | 2,814     |  
|                                                    |  |      |           |   |      |   |           |      |  |   |           |  
|Earnings Per Share (1)                              |  |      |           |   |      |   |           |      |  |   |           |  
|Basic                                               |  | $    | .36       |   |      | $ | .43       |      |  | $ | .37       |  
|                                                    |  |      |           |   |      |   |           |      |  |   |           |  
|Fully Diluted                                       |  | $    | .35       |   |      | $ | .42       |      |  | $ | .37       |  
|                                                    |  |      |           |   |      |   |           |      |  |   |           |  
|Average Weighted Shares of Common Stock(1)          |  |      |           |   |      |   |           |      |  |   |           |  
|Basic                                               |  |      | 7,605,568 |   |      |   | 7,600,073 |      |  |   | 7,563,329 |  
|                                                    |  |      |           |   |      |   |           |      |  |   |           |  
|Fully Diluted                                       |  |      | 7,826,479 |   |      |   | 7,735,055 |      |  |   | 7,631,040 |  
|                                                    |  |      |           |   |      |   |           |      |  |   |           |  

---

|(1) | Restated to reflect the 10% stock dividend which occurred on June 7, 2005.
|--- | --------------------------------------------------------------------------

The accompanying notes are an integral part of this statement.



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NEW PEOPLES BANKSHARES, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY

FOR THE YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003

(IN THOUSANDS INCLUDING SHARE DATA )



|                                                                                                                                  |  |                     |  |             |        |                          |   |        |                             |  |   |                  |   |  |                                             |        |   |                          |   |     |                            |  |   |        |   |  |   |       |  
|--------------------------------------------------------------------------------------------------------------------------------- |  | ------------------- |  | ----------- | ------ | ------------------------ | - | ------ | --------------------------- |  | - | ---------------- | - |  | ------------------------------------------- | ------ | - | ------------------------ | - | --- | -------------------------- |  | - | ------ | - |  | - | ----- | -
|                                                                                                                                  |  | SharesofCommonStock |  | CommonStock |        | AdditionalPaid inCapital |   |        | CommonStock Sub- scriptions |  |   | RetainedEarnings |   |  | Accum-ulatedOtherCompre-hensiveIncome(Loss) |        |   | TotalStockholdersEquity |   |     | Compre-hensiveIncome(Loss) | 
|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 deferred tax liability of $2) 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 deferred tax benefit of $9) on available-for-sale securities                                              |  |                     |  |             |        |                          |   |        |                             |  |   |                  |   |  |                                             |        |   |                          |   | (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 |  
|                                                                                                                                  |  |                     |  |             |        |                          |   |        |                             |  |   |                  |   |  |                                             |        |   |                          |   |     |                            |  |   |        |   |  |   |       |  
|Net Income                                                                                                                        |  |                     |  |             |        |                          |   |        |                             |  |   |                  |   |  |                                             | 2,723  |   |                          |   |     |                            |  |   | 2,723  |   |  |   | 2,723 |  
|Unrealized gain (net of deferred tax benefit of $1) on available-for-sale securities                                              |  |                     |  |             |        |                          |   |        |                             |  |   |                  |   |  |                                             |        |   |                          |   | 2   |                            |  |   | 2      |   |  |   | 2     |  
|10% Stock Dividend, June 7, 2005                                                                                                  |  | 691                 |  |             | 1,382  |                          |   | 8,043  |                             |  |   |                  |   |  |                                             | (9,425 | ) |                          |   |     |                            |  |   |       |   |  |   |       |  
|Stock Options Exercised                                                                                                           |  | 18                  |  |             | 37     |                          |   | 104    |                             |  |   |                  |   |  |                                             |        |   |                          |   |     |                            |  |   | 141    |   |  |   |       |  
|                                                                                                                                  |  |                     |  |             |        |                          |   |        |                             |  |   |                  |   |  |                                             |        |   |                          |   |     |                            |  |   |        |   |  |   |       |  
|Balance, December 31, 2005                                                                                                        |  | 7,619               |  | $           | 15,239 |                          | $ | 21,265 |                             |  | $ |                 |   |  | $                                           | 2,475  |   |                          | $ | (15 | )                          |  | $ | 38,964 |   |  | $ | 2,725 |  
|                                                                                                                                  |  |                     |  |             |        |                          |   |        |                             |  |   |                  |   |  |                                             |        |   |                          |   |     |                            |  |   |        |   |  |   |       |  

The accompanying notes are an integral part of this statement.



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NEW PEOPLES BANKSHARES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003

(IN THOUSANDS)



|                                                                                  |  |      |         |   |      |   |         |      |  |   |         |  
|--------------------------------------------------------------------------------- |  | ---- | ------- | - | ---- | - | ------- | ---- |  | - | ------- | -
|                                                                                  |  | 2005 |         |   | 2004 |   |         | 2003 | 
|CASH FLOWS FROM OPERATING ACTIVITIES                                              |  |      |         |   |      |   |         |      |  |   |         |  
|Net income                                                                        |  | $    | 2,723   |   |      | $ | 3,258   |      |  | $ | 2,814   |  
|Adjustments to reconcile net income to net cash provided by operating activities: |  |      |         |   |      |   |         |      |  |   |         |  
|Depreciation                                                                      |  |      | 1,922   |   |      |   | 1,388   |      |  |   | 1,121   |  
|Provision for loan losses                                                         |  |      | 1,130   |   |      |   | 990     |      |  |   | 364     |  
|Income (less expenses) on life insurance                                          |  |      | (337    | ) |      |   | (335    | )    |  |   | (371    | )
|Gain (loss) on sale of fixed assets                                               |  |      | 27      |   |      |   | (185    | )    |  |   |         |  
|Loss on sale of foreclosed real estate                                            |  |      | 38      |   |      |   | 47      |      |  |   | 32      |  
|Loss on sale of investment securities                                             |  |      |        |   |      |   |        |      |  |   | 5       |  
|Amortization (accretion) of bond premiums/ discounts                              |  |      | (13     | ) |      |   | (48     | )    |  |   | 395     |  
|Deferred tax expense (benefit)                                                    |  |      | (241    | ) |      |   | 245     |      |  |   | 286     |  
|Net change in:                                                                    |  |      |         |   |      |   |         |      |  |   |         |  
|Interest receivable                                                               |  |      | (733    | ) |      |   | (376    | )    |  |   | (50     | )
|Other assets                                                                      |  |      | (6      | ) |      |   | (299    | )    |  |   | (138    | )
|Accrued interest payable                                                          |  |      | 667     |   |      |   | 395     |      |  |   | (206    | )
|Accrued expense and other liabilities                                             |  |      | 586     |   |      |   | 70      |      |  |   | 291     |  
|                                                                                  |  |      |         |   |      |   |         |      |  |   |         |  
|Net Cash Provided by Operating Activities                                         |  |      | 5,763   |   |      |   | 5,150   |      |  |   | 4,543   |  
|                                                                                  |  |      |         |   |      |   |         |      |  |   |         |  
|CASH FLOWS FROM INVESTING ACTIVITIES                                              |  |      |         |   |      |   |         |      |  |   |         |  
|Net increase in loans                                                             |  |      | (84,755 | ) |      |   | (88,461 | )    |  |   | (73,200 | )
|Purchase of securities available for sale                                         |  |      | (2,972  | ) |      |   | (4,998  | )    |  |   |        |  
|Purchase of securities held-to-maturity                                           |  |      |        |   |      |   |        |      |  |   | (95,744 | )
|Proceeds from sale and maturities of securities available-for-sale                |  |      | 2,600   |   |      |   | 9,969   |      |  |   | 19,936  |  
|Proceeds from maturities of securities held-to-maturity                           |  |      |        |   |      |   |        |      |  |   | 98,999  |  
|Purchase of Federal Reserve Bank stock                                            |  |      |        |   |      |   | (87     | )    |  |   | (120    | )
|Purchase (sale) of Federal Home Loan Bank stock                                   |  |      | (832    | ) |      |   | 11      |      |  |   | (706    | )
|Payments for the purchase of property                                             |  |      | (4,592  | ) |      |   | (6,840  | )    |  |   | (4,500  | )
|Proceeds from the sale of property                                                |  |      |        |   |      |   | 525     |      |  |   | 4       |  
|Net change in other real estate owned                                             |  |      | (248    | ) |      |   | (1,233  | )    |  |   |        |  
|                                                                                  |  |      |         |   |      |   |         |      |  |   |         |  
|Net Cash Used in Investing Activities                                             |  |      | (90,800 | ) |      |   | (91,114 | )    |  |   | (55,331 | )
|                                                                                  |  |      |         |   |      |   |         |      |  |   |         |  
|CASH FLOWS FROM FINANCING ACTIVITIES                                              |  |      |         |   |      |   |         |      |  |   |         |  
|Net proceeds from common stock offering                                           |  |      |        |   |      |   |        |      |  |   | 3,431   |  
|Common stock options exercised                                                    |  |      | 141     |   |      |   | 56      |      |  |   | 75      |  
|Trust preferred securities borrowing                                              |  |      |        |   |      |   | 11,341  |      |  |   |        |  
|Net change in:                                                                    |  |      |         |   |      |   |         |      |  |   |         |  
|Demand deposits                                                                   |  |      | 12,324  |   |      |   | 14,344  |      |  |   | 21,008  |  
|Savings deposits                                                                  |  |      | 1,333   |   |      |   | 3,027   |      |  |   | 13,292  |  
|Time deposits                                                                     |  |      | 60,915  |   |      |   | 62,528  |      |  |   | 10,116  |  
|Net increase in FHLB borrowings                                                   |  |      | 11,570  |   |      |   |        |      |  |   |        |  
|                                                                                  |  |      |         |   |      |   |         |      |  |   |         |  
|Net Cash Provided by Financing Activities                                         |  |      | 86,282  |   |      |   | 91,296  |      |  |   | 47,922  |  
|                                                                                  |  |      |         |   |      |   |         |      |  |   |         |  
|Net increase (decrease) in cash and cash equivalents                              |  |      | 1,245   |   |      |   | 5,332   |      |  |   | (2,866  | )
|                                                                                  |  |      |        
|Cash and Cash Equivalents, Beginning of Year                                      |  |      | 17,405  |   |      |   | 12,073  |      |  |   | 14,939  |  
|                                                                                  |  |      |         |   |      |   |         |      |  |   |         |  
|Cash and Cash Equivalents, End of Year                                            |  | $    | 18,650  |   |      | $ | 17,405  |      |  | $ | 12,073  |  
|                                                                                  |  |      |         |   |      |   |         |      |  |   |         |  
|Supplemental Disclosure of Cash Paid During the Year for:                         |  |      |         |   |      |   |         |      |  |   |         |  
|Interest                                                                          |  |      | 7,247   |   |      |   | 6,076   |      |  |   | 6,538   |  
|Taxes                                                                             |  |      | 1,350   |   |      |   | 1,710   |      |  |   | 1,065   |  
|Supplemental Disclosure of Non Cash Transactions:                                 |  |      |         |   |      |   |         |      |  |   |         |  
|Transfer of securities from held-to-maturity to available- for-sale               |  |      |        |   |      |   |        |      |  |   | 30,655  |  
|Other real estate acquired in settlement of foreclosed loans                      |  |      | 210     |   |      |   | 1,186   |      |  |   |        |  
|Loans made to finance sale of foreclosed real estate                              |  |      | 143     |   |      |   | 86      |      |  |   |        |  

The accompanying notes are an integral part of this statement.



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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 stockholders equity, whereas realized gains and losses flow through the 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.



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NEW PEOPLES BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):

Loans (Continued) A loan is considered impaired when, based on current information and events, it is probable that the Company will be
unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value, and the
probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment
delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrowers prior payment record,
and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan by loan basis for commercial and construction loans by either the present value of expected future cash flows discounted at the
loans effective interest rate, the loans obtainable market price, or the fair value of the collateral if the loan is collateral dependent.

Significant Group Concentrations 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 the Companys capital
structure, or $9.7 million as of December 31, 2005. Most of the Companys activities are with customers located within the southwest Virginia, southern West Virginia, and northeastern Tennessee region. Certain concentrations may pose
credit risk. Note 4 discusses the types of securities that the Company invests in. 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.

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 Companys stock option plan have an exercise price equal to the fair market value of the underlying stock at date of grant.



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NEW PEOPLES BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):

Had compensation cost for the Companys stock option plan been determined consistent with the fair value model under 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,                                                                    |  | 2005 |       | 2004 |   | 2003 
|(Dollars are in thousands, except per share data)                                           |  |      |       |      |   |       |  |   |      
|Net Income, as reported                                                                     |  | $    | 2,723 |      | $ | 3,258 |  | $ | 2,814
|Deduct: Compensation expense related to stock plans using fair value accounting, net of tax |  |      | 1,096 |      |   | 517   |  |   | 173  
|                                                                                            |  |      |       |      |   |       |  |   |      
|Net Income, on a pro forma basis                                                            |  | $    | 1,627 |      | $ | 2,741 |  | $ | 2,641
|                                                                                            |  |      |       |      |   |       |  |   |      
|Basic earnings per share - As reported                                                      |  | $    | .36   |      | $ | .43   |  | $ | .37  
|- Pro forma                                                                                 |  | $    | .21   |      | $ | .36   |  | $ | .35  
|Diluted earnings per share - As reported                                                    |  | $    | .35   |      | $ | .42   |  | $ | .37  
|- Pro forma                                                                                 |  | $    | .21   |      | $ | .35   |  | $ | .35  

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  Generally accepted accounting principles 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. During
2003, the stock subscriptions from 2002 were converted to shares of common stock. The weighted average shares outstanding at December 31, 2005, 2004 and 2003 reflect the converted subscriptions, additional stock issued, and the 10% stock
dividend during 2005.

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 the lower of cost or 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. Subsequent to foreclosure, management periodically considers the adequacy of the reserve for losses on the property. 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 2004 and 2003 financial statements to
conform with the 2005 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 $11.7 million and $11.2
million at December 31, 2005 and 2004, respectively. Deposit amounts at other commercial banks may, at times, exceed federally insured limits.



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NEW PEOPLES BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

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, 2005          |  |               |       |                      |   |                       |  |                       |    |  |   |      
|Available for Sale         |  |               |       |                      |   |                       |  |                       |    |  |   |      
|U.S. Government Agencies   |  | $             | 6,185 |                      | $ |                      |  | $                     | 22 |  | $ | 6,163
|                           |  |               |       |                      |   |                       |  |                       |    |  |   |      
|Total Securities AFS       |  | $             | 6,185 |                      | $ |                      |  | $                     | 22 |  | $ | 6,163
|                           |  |               |       |                      |   |                       |  |                       |    |  |   |      
|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
|                           |  |               |       |                      |   |                       |  |                       |    |  |   |      

At December 31, 2005 and 2004, the Bank had not identified any securities as
held-tomaturity.

The amortized cost and approximate fair value of securities available for sale that were in a loss position at December 31,
2005 and 2004 are shown below.



|                         |  |                         |       |                           |   |                           |  |             |    |  |   |      
|------------------------ |  | ----------------------- | ----- | ------------------------- | - | ------------------------- |  | ----------- | -- |  | - | -----
|                         |  | Gross Unrealized Losses
|December 31, 2005        |  | Amortized Cost          |       | Loss Position < 12 Months |   | Loss Position > 12 Months |  | Fair Values
|U.S. Government Agencies |  | $                       | 6,185 |                           | $ | 9                         |  | $           | 13 |  | $ | 6,163
|                         |  |                         |       |                           |   |                           |  |             |    |  |   |      
|Totals                   |  | $                       | 6,185 |                           | $ | 9                         |  | $           | 13 |  | $ | 6,163
|                         |  |                         |       |                           |   |                           |  |             |    |  |   |      
|December 31, 2004        |  |                         |       |                           |   |                           |  |             |    |  |   |      
|U.S. Government Agencies |  | $                       | 5,700 |                           | $ | 26                        |  | $           |   |  | $ | 5,674
|                         |  |                         |       |                           |   |                           |  |             |    |  |   |      
|Totals                   |  | $                       | 5,700 |                           | $ | 26                        |  | $           |   |  | $ | 5,674
|                         |  |                         |       |                           |   |                           |  |             |    |  |   |      

At December 31, 2005, the available for sale portfolio included 4 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, 2005 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, 2005, 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               |  | $             | 5,683 |           | $ | 5,663                |  | 3.16 | %
|Due after one year through five years |  |               | 502   |           |   | 500                  |  | 4.22 | %
|                                      |  |               |       |           |   |                      |  |      |  
|Total                                 |  | $             | 6,185 |           | $ | 6,163                |  | 3.24 | %
|                                      |  |               |       |           |   |                      |  |      |  

Investment securities with a carrying value of $3.0 million and $3.1 million at December 31, 2005 and 2004,
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 $2.3 million and $1.4 million as of December 31, 2005 and 2004, respectively.



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##### Table of Contents

NEW PEOPLES BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 5 LOANS:

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



|                                       |  |      |         |      |   |        
|-------------------------------------- |  | ---- | ------- | ---- | - | -------
|(Dollars are in thousands)             |  | 2005 |         | 2004
|Commercial, financial and agricultural |  | $    | 93,987  |      | $ | 70,915 
|Real estate - construction             |  |      | 26,267  |      |   | 11,332 
|Real estate - mortgages                |  |      | 301,740 |      |   | 255,925
|Installment loans to individuals       |  |      | 46,051  |      |   | 45,395 
|                                       |  |      |         |      |   |        
|Total Loans                            |  | $    | 468,045 |      | $ | 383,567
|                                       |  |      |         |      |   |        

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



|                                                       |  |      |     |      |   |    
|------------------------------------------------------ |  | ---- | --- | ---- | - | ---
|(Dollars are in thousands)                             |  | 2005 |     | 2004
|Principal:                                             |  |      |     |      |   |    
|Nonaccrual Loans                                       |  | $    | 446 |      | $ | 773
|Loans past due 90 days or more still accruing interest |  |      | 116 |      |   | 115
|                                                       |  |      |     |      |   |    
|Total Non-performing Loans                             |  | $    | 562 |      | $ | 888
|                                                       |  |      |     |      |   |    

At the end of 2005, impaired loans totaled $677 with a valuation allowance of $52 thousand. 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 $19 thousand and $75 thousand for the years ending 2005 and 2004, respectively. The average investment in impaired
loans was $1.1 million in 2005 and $902 thousand in 2004.

NOTE 6 ALLOWANCE FOR LOAN LOSSES:

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



|                                |  |      |       |   |      |   |       |      |  |   |       |  
|------------------------------- |  | ---- | ----- | - | ---- | - | ----- | ---- |  | - | ----- | -
|(Dollars are in thousands)      |  | 2005 |       |   | 2004 |   |       | 2003 | 
|Balance, beginning of year      |  | $    | 3,090 |   |      | $ | 2,432 |      |  | $ | 2,224 |  
|Provision for loan losses       |  |      | 1,130 |   |      |   | 990   |      |  |   | 364   |  
|Recoveries of loans charged off |  |      | 21    |   |      |   | 20    |      |  |   | 31    |  
|Loans charged off               |  |      | (298  | ) |      |   | (352  | )    |  |   | (187  | )
|                                |  |      |       |   |      |   |       |      |  |   |       |  
|Balance, End of Year            |  | $    | 3,943 |   |      | $ | 3,090 |      |  | $ | 2,432 |  
|                                |  |      |       |   |      |   |       |      |  |   |       |  
|Percentage of Loans             |  |      | 0.84  | % |      |   | 0.81  | %    |  |   | 0.82  | %

NOTE 7 BANK PREMISES AND EQUIPMENT:

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



|                              |  |      |        |   |      |   |        |  
|----------------------------- |  | ---- | ------ | - | ---- | - | ------ | -
|(Dollars are in thousands)    |  | 2005 |        |   | 2004 |  
|Land                          |  | $    | 4,202  |   |      | $ | 3,784  |  
|Buildings and improvements    |  |      | 13,396 |   |      |   | 12,237 |  
|Furniture and equipment       |  |      | 8,934  |   |      |   | 7,481  |  
|Vehicles                      |  |      | 414    |   |      |   | 344    |  
|Construction in progress      |  |      | 1,631  |   |      |   | 234    |  
|                              |  |      |        |   |      |   |        |  
|                              |  |      | 28,577 |   |      |   | 24,080 |  
|Less accumulated depreciation |  |      | (6,531 | ) |      |   | (4,677 | )
|                              |  |      |        |   |      |   |        |  
|Bank Premises and Equipment   |  | $    | 22,046 |   |      | $ | 19,403 |  
|                              |  |      |        |   |      |   |        |  

Depreciation expense for 2005, 2004 and 2003 was $1.9 million, $1.4 million, and $1.1 million respectively.

At December 31, 2005, construction in progress included the costs of buildings and land for new branches in Esserville and Pound, Virginia. Each
location is anticipated to be complete and operational as full service branches during 2006 at an additional total cost of $528 thousand. At December 31, 2004, construction in progress included the costs of building and land purchased for a new
branch at Bluefield, Virginia which has been completed and placed in service.



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NEW PEOPLES BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 8 OTHER TIME DEPOSITS:

The aggregate amount of time deposits with a minimum denomination of $100,000 was $98.5 million and $79.9 million at December 31, 2005 and 2004, respectively

At December 31, 2005, the scheduled maturities of certificates of deposit are as follows (dollars are in thousands):



|                 |  |   |        
|---------------- |  | - | -------
|2006             |  | $ | 254,261
|2007             |  |   | 24,284 
|2008             |  |   | 5,903  
|2009             |  |   | 5,144  
|2010             |  |   | 48,556 
|After five years |  |   |       
|                 |  |   |        
|Total            |  | $ | 338,148
|                 |  |   |        

NOTE 9 INCOME TAX EXPENSE:

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



|                           |  |      |       |   |      |   |       |  |   |      
|-------------------------- |  | ---- | ----- | - | ---- | - | ----- |  | - | -----
|(Dollars are in thousands) |  | 2005 |       |   | 2004 |   | 2003 
|Current expense            |  | $    | 1,728 |   |      | $ | 1,437 |  | $ | 1,161
|Deferred expense (benefit) |  |      | (241  | ) |      |   | 245   |  |   | 286  
|                           |  |      |       |   |      |   |       |  |   |      
|Net Income Tax             |  | $    | 1,487 |   |      | $ | 1,682 |  | $ | 1,447
|                           |  |      |       |   |      |   |       |  |   |      

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



|                                        |  |      |      |   |      |   |      |      |  |   |      |  
|--------------------------------------- |  | ---- | ---- | - | ---- | - | ---- | ---- |  | - | ---- | -
|(Dollars are in thousands)              |  | 2005 |      |   | 2004 |   |      | 2003 | 
|Organization and start-up cost          |  | $    | 2    |   |      | $ | 2    |      |  | $ | 7    |  
|Provision for loan losses               |  |      | (268 | ) |      |   | (257 | )    |  |   | (105 | )
|Depreciation                            |  |      | (64  | ) |      |   | 420  |      |  |   | 284  |  
|Deferred compensation expense           |  |      | (30  | ) |      |   | (29  | )    |  |   | (23  | )
|Unrealized accretion income             |  |      |     |   |      |   |     |      |  |   | (4   | )
|Earnings on bank owned life insurance   |  |      | 114  |   |      |   | 114  |      |  |   | 126  |  
|Capitalized interest and repair expense |  |      | 5    |   |      |   | (5   | )    |  |   | 1    |  
|                                        |  |      |      |   |      |   |      |      |  |   |      |  
|Deferred Income Tax Expense (Benefit)   |  | $    | (241 | ) |      | $ | 245  |      |  | $ | 286  |  
|                                        |  |      |      |   |      |   |      |      |  |   |      |  

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



|                                                 |  |      |       |   |      |   |       |      |  |   |       |  
|------------------------------------------------ |  | ---- | ----- | - | ---- | - | ----- | ---- |  | - | ----- | -
|(Dollars are in thousands)                       |  | 2005 |       |   | 2004 |   |       | 2003 | 
|Deferred Tax Assets:                             |  |      |       |   |      |   |       |      |  |   |       |  
|Organization and start-up cost                   |  | $    | 5     |   |      | $ | 7     |      |  | $ | 9     |  
|Allowance for loan losses                        |  |      | 1,238 |   |      |   | 970   |      |  |   | 713   |  
|Deferred compensation                            |  |      | 110   |   |      |   | 80    |      |  |   | 51    |  
|Unrealized loss on securities Available for sale |  |      | 7     |   |      |   | 9     |      |  |   |      |  
|Capitalized interest and repair expense          |  |      | 19    |   |      |   | 24    |      |  |   | 19    |  
|                                                 |  |      |       |   |      |   |       |      |  |   |       |  
|Total Assets                                     |  |      | 1,379 |   |      |   | 1,090 |      |  |   | 792   |  
|                                                 |  |      |       |   |      |   |       |      |  |   |       |  
|Deferred Tax Liabilities:                        |  |      |       |   |      |   |       |      |  |   |       |  
|Accelerated depreciation                         |  |      | 1,366 |   |      |   | 1,430 |      |  |   | 1,010 |  
|Unrealized gain on securities Available for sale |  |      |      |   |      |   |      |      |  |   | 2     |  
|Unrealized income on bank owned life insurance   |  |      | 520   |   |      |   | 406   |      |  |   | 292   |  
|                                                 |  |      |       |   |      |   |       |      |  |   |       |  
|Total Liabilities                                |  |      | 1,886 |   |      |   | 1,836 |      |  |   | 1,304 |  
|                                                 |  |      |       |   |      |   |       |      |  |   |       |  
|Net Deferred Tax Asset (Liability)               |  | $    | (507  | ) |      | $ | (746  | )    |  | $ | (512  | )
|                                                 |  |      |       |   |      |   |       |      |  |   |       |  



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##### Table of Contents

NEW PEOPLES BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 9 INCOME TAX EXPENSE (CONTINUED):

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)                        |  | 2005 |       |   | 2004 |   |       | 2003 | 
|Income tax expense at the applicable federal rate |  | $    | 1,431 |   |      | $ | 1,680 |      |  | $ | 1,450 |  
|Permanent differences resulting from:             |  |      |       |   |      |   |       |      |  |   |       |  
|Nondeductible expenses                            |  |      | 22    |   |      |   | 15    |      |  |   | 3     |  
|Tax exempt interest income                        |  |      | (90   | ) |      |   | (63   | )    |  |   | (17   | )
|State income taxes less federal tax effect        |  |      | 42    |   |      |   | 32    |      |  |   | 12    |  
|Other adjustments                                 |  |      | 82    |   |      |   | (18   | )    |  |   | (1    | )
|                                                  |  |      |       |   |      |   |       |      |  |   |       |  
|Income Tax Expense                                |  | $    | 1,487 |   |      | $ | 1,682 |      |  | $ | 1,447 |  
|                                                  |  |      |       |   |      |   |       |      |  |   |       |  

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 $11.7 million at
December 31, 2005 and $10.8 million at December 31, 2004. During the year ended December 31, 2005, total principal additions were $11.3 million and principal payments were $10.4 million. 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 $12.9 million and $11.7 million at the end of years 2005 and 2004, respectively.

During the latter part of 2005, the board
of directors approved the purchase of a lot for $450 thousand in Jonesborough, Tennessee from a partnership involving Director B. Scott White. The approval was subject to the receipt of an independent certified appraisal substantiating the fair
market value. The board of directors approved the transaction without participation by Director White and he abstained from the vote. Subsequent to year-end 2005, the appraisal was obtained that substantiated the sales price as a fair market value.
The purchase will be complete during the first quarter of 2006.

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 $310 thousand, $264 thousand, and $178 thousand to the defined contribution plan for 2005, 2004 and 2003, 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 $86 thousand, $87 thousand, and
$69 thousand for 2005, 2004, and 2003, respectively.

NOTE 12 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 990,000 shares of the Companys common stock may be issued to employees and directors as adjusted for the 10 percent stock dividend on June 7, 2005. 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 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, 2005, there were 136,757 additional shares available for
grant under the Plan. All options granted and outstanding are fully vested.



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##### Table of Contents

NEW PEOPLES BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 12 STOCK OPTION PLAN (CONTINUED):

The weighted fair value of each option was $5.14 in 2005, $4.14 in 2004 and $3.30 in 2003 and was 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 2005, 2004 and 2003.



|                         |  |         |   |  |          |   |  |          |  
|------------------------ |  | ------- | - |  | -------- | - |  | -------- | -
|Years Ended December 31, |  | 2005    |   |  | 2004     |   |  | 2003     |  
|Dividend yield           |  | 0.00    | % |  | 0.00     | % |  | 0.00     | %
|Expected life            |  | 7 years |   |  | 10 years |   |  | 10 years |  
|Expected volatility      |  | 20.00   | % |  | 13.50    | % |  | 0.00     | %
|Risk free interest rate  |  | 4.41    | % |  | 4.30     | % |  | 4.01     | %

Information about stock options outstanding at December 31, 2005 follows:



|              |        |                                     |         |                                             |             |                                 |   |      
|------------- | ------ | ----------------------------------- | ------- | ------------------------------------------- | ----------- | ------------------------------- | - | -----
|ExercisePrice |        | Number Outstanding and Exerciseable |         | Weighted Average Remaining Contractual Life |             | Weighted Average Exercise Price
|$             | 6.82   |                                     | 242,143 |                                             | 6.00 years  |                                 | $ | 6.82 
|$             | 9.09   |                                     | 179,450 |                                             | 7.52 years  |                                 | $ | 9.09 
|$             | 12.27  |                                     | 109,300 |                                             | 9.00 years  |                                 | $ | 12.27
|$             | 15.00  |                                     | 322,350 |                                             | 10.00 years |                                 | $ | 15.00
|              |        |                                     |         |                                             |             |                                 |   |      
|              | Totals |                                     | 853,243 |                                             | 8.11 years  |                                 | $ | 11.09

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



|                                               |  |                  |   |  |                              |       |      |                  |         |   |                              |   |                  |  |         |                              |  |   |      
|---------------------------------------------- |  | ---------------- | - |  | ---------------------------- | ----- | ---- | ---------------- | ------- | - | ---------------------------- | - | ---------------- |  | ------- | ---------------------------- |  | - | -----
|                                               |  | 2005             |   |  | 2004                         |       | 2003
|                                               |  | Number of Shares |   |  | WeightedAverageExercisePrice |       |      | Number of Shares |         |   | WeightedAverageExercisePrice |   | Number of Shares |  |         | WeightedAverageExercisePrice
|Outstanding and exercisable, Beginning of year |  | 501,900          |   |  | $                            | 11.32 |      |                  | 319,966 |   |                              | $ | 8.12             |  | 252,466 |                              |  | $ | 7.50 
|Granted                                        |  | 322,350          |   |  |                              | 15.00 |      |                  | 189,000 |   |                              |   | 11.91            |  | 79,500  |                              |  |   | 10.00
|Effect of 10% June 7, 2005 Stock Dividend      |  | 50,016           |   |  |                              | (0.87 | )    |                  |         |   |                              |   |                  |  |         |                              |  |   |      
|Exercised                                      |  | (18,323          | ) |  |                              | 7.69  |      |                  | (7,066  | ) |                              |   | 7.85             |  | (10,000 | )                            |  |   | 7.50 
|Forfeited                                      |  | (2,700           | ) |  |                              | 10.73 |      |                  |        |   |                              |   |                 |  | (2,000  | )                            |  |   | 7.50 
|                                               |  |                  |   |  |                              |       |      |                  |         |   |                              |   |                  |  |         |                              |  |   |      
|Outstanding and exercisable, end of year       |  | 853,243          |   |  | $                            | 11.09 |      |                  | 501,900 |   |                              | $ | 11.32            |  | 319,966 |                              |  | $ | 8.12 
|                                               |  |                  |   |  |                              |       |      |                  |         |   |                              |   |                  |  |         |                              |  |   |      

NOTE 13 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.



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##### Table of Contents

The following is a schedule by years of future minimum rental payments in thousands, required under non-cancelable
operating leases that have initial or remaining non-cancelable lease terms in excess of one year as of December 31, 2005:

NEW PEOPLES BANKSHARES,
INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 13 LEASING ACTIVITIES (CONTINUED):



|                                |  |   |    
|------------------------------- |  | - | ---
|Year ending December 31:        |  |   |    
|2006                            |  | $ | 49 
|2007                            |  |   | 44 
|2008                            |  |   | 45 
|2009                            |  |   | 34 
|2010                            |  |   | 19 
|Thereafter                      |  |   | 85 
|                                |  |   |    
|Total minimum payments required |  | $ | 276

Rental commitments of less than one year are not included in the above schedule. Rentals charged to operations
under operating leases were $55 thousand, $55 thousand, and $46 thousand for the years ended 2005, 2004, and 2003, respectively.

NOTE 14 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 December 31, 2005, approximately $9.9 million was available for dividend distribution.

NOTE 15 AVAILABLE LINES OF CREDIT AND FEDERAL HOME LOAN BANK ADVANCES:

The Bank has federal funds lines of credit with correspondent banks
totaling $20.4 million as of December 31, 2005. In addition, the Bank may borrow up to an additional $59.6 million from the Federal Home Loan Bank under a line of credit which is secured by a blanket lien on residential real estate loans.

As of December 31, 2005, the Bank had total borrowings from the Federal Home Loan Bank totaling $11.6 million. These borrowings are overnight and
interest rates adjust daily.

NOTE 16 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)   |  | 2005 |        | 2004
|Commitments to extend credit |  | $    | 46,459 |      | $ | 31,596
|Standby letters of credit    |  |      | 2,988  |      |   | 1,342 

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.



47



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##### Table of Contents

NEW PEOPLES BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 17 LEGAL CONTINGENCIES:

Various legal claims also arise from time to time in the normal course of business which, in the opinion of management, will have no material effect on the Companys
consolidated financial statements.

NOTE 18 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, 2005 and 2004, that the Company and the Bank meet all capital adequacy requirements to
which they are subject.

As of September 2005, the most recent date of notification, the Board of Governors of the Federal Reserve 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.

The Companys and
the Banks actual capital amounts and ratios are presented in the table as of December 31, 2005 and 2004, respectively.



|                                        |  |        |        |       |                           |   |        |                                                                        |        |  |   |        |  |       |        |  |     |  
|--------------------------------------- |  | ------ | ------ | ----- | ------------------------- | - | ------ | ---------------------------------------------------------------------- | ------ |  | - | ------ |  | ----- | ------ |  | --- | -
|                                        |  | Actual |        |       | MinimumCapitalRequirement |   |        | Minimum To Be Well Capitalized UnderPrompt CorrectiveAction Provisions |       
|(Dollars in thousands)                  |  | Amount |        | Ratio |                           |   | Amount |                                                                        | Ratio  |  |   | Amount |  | Ratio |       
|December 31, 2005:                      |  |        |        |       |                           |   |        |                                                                        |        |  |   |        |  |       |        |  |     |  
|Total Capital to Risk Weighted Assets   |  |        |        |       |                           |   |        |                                                                        |        |  |   |        |  |       |        |  |     |  
|The Company                             |  | $      | 53,922 |       | 11.82                     | % |        | $                                                                      | 36,482 |  | 8 | %      |  | $     | N/A    |  | N/A |  
|The Bank:                               |  |        | 46,376 |       | 10.17                     | % |        |                                                                        | 36,471 |  | 8 | %      |  |       | 45,589 |  | 10  | %
|Tier 1 Capital to Risk Weighted Assets: |  |        |        |       |                           |   |        |                                                                        |        |  |   |        |  |       |        |  |     |  
|The Company                             |  |        | 49,979 |       | 10.96                     | % |        |                                                                        | 18,241 |  | 4 | %      |  |       | N/A    |  | N/A |  
|The Bank                                |  |        | 42,433 |       | 9.31                      | % |        |                                                                        | 18,236 |  | 4 | %      |  |       | 27,354 |  | 6   | %
|Tier 1 Capital to Average Assets:       |  |        |        |       |                           |   |        |                                                                        |        |  |   |        |  |       |        |  |     |  
|The Company                             |  |        | 49,979 |       | 9.63                      | % |        |                                                                        | 20,760 |  | 4 | %      |  |       | N/A    |  | N/A |  
|The Bank                                |  |        | 42,433 |       | 8.22                      | % |        |                                                                        | 20,660 |  | 4 | %      |  |       | 25,825 |  | 5   | %
|                                        |  |        |        |       |                           |  
|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   | %



48



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##### Table of Contents

NEW PEOPLES BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED

NOTE 19 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 up to certain limits. The securities have a floating rate of 3 month LIBOR
plus 260 basis points, which resets quarterly, with a current rate at December 31, 2005 of 6.75%.

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, 2005 and 2004, are as follows:



|                               |  |                     |         |                   |   |                     |  |               |         |  |   |        
|------------------------------ |  | ------------------- | ------- | ----------------- | - | ------------------- |  | ------------- | ------- |  | - | -------
|                               |  | December 31, 2005   |         | December 31, 2004
|(Dollars are in thousands)     |  | EstimatedFair Value |         | CarryingValue     |   | EstimatedFair Value |  | CarryingValue
|Financial Assets               |  |                     |         |                   |   |                     |  |               |         |  |   |        
|Cash and due from bank         |  | $                   | 15,728  |                   | $ | 15,728              |  | $             | 15,281  |  | $ | 15,281 
|Federal funds sold             |  |                     | 2,922   |                   |   | 2,922               |  |               | 2,124   |  |   | 2,124  
|Investment securities          |  |                     | 6,163   |                   |   | 6,163               |  |               | 5,775   |  |   | 5,775  
|Equity securities (restricted) |  |                     | 2,309   |                   |   | 2,273               |  |               | 1,441   |  |   | 1,441  
|Loans                          |  |                     | 469,374 |                   |   | 468,045             |  |               | 384,672 |  |   | 383,567
|Accrued interest receivable    |  |                     | 3,005   |                   |   | 3,005               |  |               | 2,272   |  |   | 2,272  
|Life insurance investments     |  |                     | 9,031   |                   |   | 9,031               |  |               | 8,694   |  |   | 8,694  
|                               |  |                     |         |                  
|Financial Liabilities          |  |                     |         |                   |   |                     |  |               |         |  |   |        
|Demand Deposits:               |  |                     |         |                   |   |                     |  |               |         |  |   |        
|Non-interest bearing           |  |                     | 59,921  |                   |   | 59,921              |  |               | 45,924  |  |   | 45,924 
|Interest-bearing               |  |                     | 19,845  |                   |   | 19,845              |  |               | 21,518  |  |   | 21,518 
|Savings deposits               |  |                     | 44,778  |                   |   | 44,778              |  |               | 43,445  |  |   | 43,445 
|Time deposits                  |  |                     | 339,361 |                   |   | 338,148             |  |               | 277,608 |  |   | 277,233
|FHLB advances                  |  |                     | 11,570  |                   |   | 11,570              |  |               |        |  |   |       
|Accrued interest payable       |  |                     | 1,558   |                   |   | 1,558               |  |               | 891     |  |   | 891    
|Trust preferred securities     |  |                     | 11,341  |                   |   | 11,341              |  |               | 11,341  |  |   | 11,341 

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 2005 and 2004.

NOTE
21 ACCOUNTING CHANGE:

In December 1986, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 91,
Accounting for Nonrefundable Fees and Costs Associated with Originating or Acquiring Loans and Initial Direct Costs of Leases. As permitted, the Company adopted the provisions of this Statement for lending transactions entered into and
commitments granted on or after January 1, 2005. Accordingly, loan origination and commitment fees and certain direct loan origination costs are being deferred and the net amount amortized as an adjustment of the related loans yield. The
Company is generally amortizing these amounts over the contractual life of the related loan.



49



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##### Table of Contents

NEW PEOPLES BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 21 ACCOUNTING CHANGE (CONTINUED):

Before adopting Statement 91, the Company recognized loan origination and commitment fees as income in the period the loan or commitment was granted. The related costs
associated with originating those loans and commitments were recognized in salary expense in the period incurred. As a result of adopting Statement 91, as of December 31, 2005 the Company deferred net loan fees (costs) on loans originated
during 2005 of $230 thousand that would have otherwise been reflected as income, thereby reducing 2005 net income by $152 thousand, or $0.02 per share. As of December 31, 2005, approximately $274.0 million, or 58.55% of the loans included in
the Companys financial statements were accounted for under the prior policy.

NOTE 22 RECENT ACCOUNTING DEVELOPMENTS:

On December 12, 2003, the American Institute of Certified Public Accountants (AICPA) released Statement of Position (SOP) 03-03, Accounting for Certain Loans or Debt
Securities Acquired in a Transfer. This statement of position addresses accounting for differences between contractual cash flows and cash flows expected to be collected from investors initial investment in loans or debt securities (loans)
acquired in a transfer if those differences are attributable, at least in part, to credit quality. This SOP is effective for loans acquired in fiscal years beginning after December 15, 2004. The adoption of SOP 03-3 on January 1, 2005 did
not have a material impact on the consolidated financial statements.

In January 2003, the FASB issued FASB Interpretation No. 46 (FIN 46),
Consolidation of Variable Interest Entitiesan Interpretation of Accounting Research Bulletin 51Consolidated Financial Statements. This interpretation provides guidance related to identifying variable interest entities and
determining whether such entities should be consolidated. FIN 46 requires an enterprise to consolidate a variable interest entity when the enterprise (a) absorbs a majority of the variable interest entitys expected losses,
(b) receives a majority of the entitys expected residual returns, or both, as a result of ownership, contractual or other financial interests in the entity. Prior to the effective date of FIN 46, entities were generally consolidated by an
enterprise that had control through ownership of a majority voting interest in the entity. FIN 46 originally applied immediately to variable interest entities created or obtained after January 31, 2003. During 2003, the Bank did not participate
in the creation of, or obtain a new variable interest in, any variable interest entity. In December 2003, the FASB issued FIN 46R, a revision to FIN 46, which modified certain requirements of FIN 46 and allowed for the optional deferral of the
effective date of FIN 46R for annual or interim periods ending after March 15, 2004. 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.

On March 9, 2004, the SEC Staff issued Staff Accounting
Bulletin No. 105, Application of Accounting Principles to Loan Commitments (SAB 105). SAB 105 clarifies existing accounting practices relating to the valuation of issued loan commitments, including interest rate lock
commitments (IRLC), subject to SFAS No. 149 and Derivative Implementation Group Issue C13, Scope Exceptions: When a Loan Commitment is included in the Scope of Statement 133. Furthermore, SAB 105 disallows the inclusion
of the values of a servicing component and other internally developed intangible assets in the initial and subsequent IRLC valuation. The provisions of SAB 105 were effective for loan commitments entered into after March 31, 2004. The Company
adopted the provisions of SAB 105 effective April 1, 2004. Since the provisions of SAB 105 affect only the timing of the recognition of mortgage banking income, the adoption of SAB 105 did not have a material effect on either the Companys
consolidated financial position or consolidated results of operations.

In November 2003, the Emerging Issues Task Force (EITF) issued EITF
Issue No. 03-01, The Meaning of Other-Than-Temporary Impairment and its Application to Certain Investments (EITF 03-01). EITF 03-01 provided guidance for evaluating whether an investment is other-than-temporarily impaired and
requires certain disclosures with respect to these investments. In September 2004, the Financial Accounting Standards Board (FASB) issued a FASB Staff Position (FSP EITF 03-1-b) to delay the requirement to record impairment
losses. The guidance also included accounting considerations subsequent to the recognition of an other-than-temporary impairment and requirements for disclosures about unrealized losses that have not been recognized as other-than-temporary
impairments. In November 2005, the FASB issued FSP FAS 115-1 and FAS 124-1, which addresses the determination as to when an investment is considered impaired. This FSP nullifies certain requirements of EITF 03-01 and supersedes EITF Topic No. D-44,
Recognition of Other-Than-Temporary Impairment upon the Planned Sale of a Security Whose Cost Exceeds Fair Value. This FSP is to be applied to reporting periods beginning after December 15, 2005. The Company is in the process of
evaluating the impact of this FSP.



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##### Table of Contents

NEW PEOPLES BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 22 RECENT ACCOUNTING DEVELOPMENTS (C0NTINUED):

In December 2004, the FASB issued Statement of Financial Accounting Standards No. 123(R) (SFAS No. 123(R)), Share-Based Payment, which
is a revision of FASB Statement No. 123 Accounting for Stock-Based Compensation and supersedes APB Opinion No. 25 Accounting for Stock Issued to Employees. SFAS No. 123(R) requires companies to recognize in the
income statement the grant-date fair value of stock options and other equity-based compensation issued to employees over the period during which an employee is required to provide service in exchange for the award, which will often be the shorter of
the vesting period or the period the employee will be retirement eligible. SFAS No. 123(R) sets accounting requirements for share-based compensation to employees, including employee-stock purchase plans (ESPPs). Awards
to most nonemployee directors will be accounted for as employee awards. This Statement was to be effective for public companies that do not file as small business issuers as of the beginning of interim or annual reporting periods beginning after
June 15, 2005. In April 2005, the Securities and Exchange Commission (SEC) issued Release No. 2005-57, which defers the effective date of SFAS No. 123(R) for many registrants. Registrants that do not file as small business
users must adopt SFAS No. 123(R) as of the beginning of their first annual period beginning after June 15, 2005. Accordingly, the Company will adopt SFAS No. 123(R) on January 1, 2006. Since all outstanding options are fully
vested, there will be no effect on the Companys consolidated financial statements unless additional stock options are granted.

In March 2005, the
SEC issued Staff Accounting Bulletin No. 107 (SAB 107), which contains guidance on applying the requirements in SFAS No. 123(R). SAB 107 provides guidance on valuation techniques, development of assumptions used in valuing
employee share options and related MD&A disclosures. SAB 107 is effective for the period in which SFAS No. 123(R) is adopted. The Company will adopt SAB 107 on January 1, 2006, and is currently evaluating the effect on its consolidated
financial statements.

In May 2005, the FASB issued Statement of Financial Accounting Standards No. 154 (SFAS No. 154),
Accounting Changes and Error Corrections, which replaces APB Opinion No. 20 Accounting Changes and FASB Statement No. 3 Reporting Accounting Changes in Interim Financial Statements. SFAS No. 154
changes the requirements for the accounting for and reporting of a change in an accounting principle. SFAS No. 154 requires retrospective application for voluntary changes in an accounting principle unless it is impracticable to do so. SFAS
No. 154 is effective for accounting changes made in fiscal years beginning after December 15, 2005. The Company will adopt SFAS No. 154 on January 1, 2006 with no expected material effect on its consolidated financial statements.

From time to time, the FASB issues exposure drafts for proposed statements of financial accounting standards. Such exposure drafts are subject to comment
from the public, to revisions by the FASB and to final issuance by the FASB as statements of financial accounting standards. Management considers the effect of the proposed statements on the consolidated financial statements of the Company and
monitors the status of changes to and proposed effective dates of exposure drafts.

NOTE 23 OTHER REAL ESTATE OWNED

Other real estate owned is presented at net realizable value. No material expenses have been incurred regarding the properties.



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##### Table of Contents

NEW PEOPLES BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 24 PARENT CORPORATION ONLY FINANCIAL STATEMENTS:

CONDENSED BALANCE SHEETS

AS OF
DECEMBER 31, 2005 AND 2004

(In Thousands)



|                                                                                                                                                     |  |      |        |   |      |   |        |  
|---------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---- | ------ | - | ---- | - | ------ | -
|                                                                                                                                                     |  | 2005 |        |   | 2004 |  
|ASSETS                                                                                                                                               |  |      |        |   |      |   |        |  
|Due from banks                                                                                                                                       |  | $    | 7,012  |   |      | $ | 10,507 |  
|Investment in subsidiaries                                                                                                                           |  |      | 43,000 |   |      |   | 35,039 |  
|Premises and fixed assets                                                                                                                            |  |      |       |   |      |   | 2,163  |  
|Other assets                                                                                                                                         |  |      | 548    |   |      |   | 323    |  
|                                                                                                                                                     |  |      |        |   |      |   |        |  
|Total Assets                                                                                                                                         |  | $    | 50,560 |   |      | $ | 48,032 |  
|                                                                                                                                                     |  |      |        |   |      |   |        |  
|LIABILITIES                                                                                                                                          |  |      |        |   |      |   |        |  
|Accrued interest payable                                                                                                                             |  | $    | 162    |   |      | $ | 121    |  
|Accrued expenses and other liabilities                                                                                                               |  |      | 93     |   |      |   | 60     |  
|Due to subsidiaries                                                                                                                                  |  |      |       |   |      |   | 412    |  
|Trust preferred securities                                                                                                                           |  |      | 11,341 |   |      |   | 11,341 |  
|                                                                                                                                                     |  |      |        |   |      |   |        |  
|Total Liabilities                                                                                                                                    |  | $    | 11,596 |   |      | $ | 11,934 |  
|                                                                                                                                                     |  |      |        |   |      |   |        |  
|STOCKHOLDERS EQUITY                                                                                                                                 |  |      |        |   |      |   |        |  
|Common stock - $ 2.00 par value, 12,000,000 shares authorized; 7,619,355 and 6,910,069 shares issued and outstanding for 2005 and 2004,
respectively |  |      | 15,239 |   |      |   | 13,820 |  
|Additional paid in capital                                                                                                                           |  |      | 21,265 |   |      |   | 13,118 |  
|Retained earnings                                                                                                                                    |  |      | 2,475  |   |      |   | 9,177  |  
|Accumulated other comprehensive income (loss)                                                                                                        |  |      | (15    | ) |      |   | (17    | )
|                                                                                                                                                     |  |      |        |   |      |   |        |  
|Total Stockholders Equity                                                                                                                           |  |      | 38,964 |   |      |   | 36,098 |  
|                                                                                                                                                     |  |      |        |   |      |   |        |  
|Total Liabilities and Stockholders Equity                                                                                                           |  | $    | 50,560 |   |      | $ | 48,032 |  
|                                                                                                                                                     |  |      |        |   |      |   |        |  

CONDENSED STATEMENTS OF INCOME

FOR THE YEARS ENDED DECEMBER 31, 2005, 2004, AND 2003

(Dollars in Thousands)



|                                            |  |      |       |      |   |       |  |   |      
|------------------------------------------- |  | ---- | ----- | ---- | - | ----- |  | - | -----
|                                            |  | 2005 |       | 2004 |   | 2003 
|Income                                      |  |      |       |      |   |       |  |   |      
|Miscellaneous income                        |  | $    | 86    |      | $ | 28    |  | $ |     
|Undistributed income from subsidiaries      |  |      | 3,409 |      |   | 3,331 |  |   | 2,872
|                                            |  |      |       |      |   |       |  |   |      
|Total Income                                |  |      | 3,495 |      |   | 3,359 |  |   | 2,872
|                                            |  |      |       |      |   |       |  |   |      
|Expenses                                    |  |      |       |      |   |       |  |   |      
|Trust preferred securities interest expense |  |      | 669   |      |   | 232   |  |   |     
|Legal fees                                  |  |      | 34    |      |   | 42    |  |   | 7    
|Accounting fees                             |  |      | 166   |      |   | 69    |  |   | 45   
|Other operating expenses                    |  |      | 138   |      |   | 41    |  |   | 36   
|                                            |  |      |       |      |   |       |  |   |      
|Total Expenses                              |  |      | 1,007 |      |   | 384   |  |   | 88   
|                                            |  |      |       |      |   |       |  |   |      
|Income before Income Taxes                  |  |      | 2,488 |      |   | 2,975 |  |   | 2,784
|Income Tax Benefit                          |  |      | 235   |      |   | 283   |  |   | 30   
|                                            |  |      |       |      |   |       |  |   |      
|Net Income                                  |  | $    | 2,723 |      | $ | 3,258 |  | $ | 2,814
|                                            |  |      |       |      |   |       |  |   |      



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NEW PEOPLES BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 24 PARENT CORPORATION ONLY FINANCIAL STATEMENTS (CONTINUED):

CONDENSED STATEMENTS OF CASH FLOWS

FOR THE YEARS ENDED DECEMBER 31, 2005, 2004, AND 2003

(Dollars and Shares in Thousands)



|                                                                              |  |      |        |   |      |   |        |      |  |   |        |  
|----------------------------------------------------------------------------- |  | ---- | ------ | - | ---- | - | ------ | ---- |  | - | ------ | -
|                                                                              |  | 2005 |        |   | 2004 |   |        | 2003 | 
|Cash Flows From Operating Activities:                                         |  |      |        |   |      |   |        |      |  |   |        |  
|Net Income                                                                    |  | $    | 2,723  |   |      | $ | 3,258  |      |  | $ | 2,814  |  
|Adjustments to reconcile net income to net cash used in operating activities: |  |      |        |   |      |   |        |      |  |   |        |  
|Income of subsidiaries                                                        |  |      | (3,409 | ) |      |   | (3,331 | )    |  |   | (2,872 | )
|Depreciation                                                                  |  |      | 114    |   |      |   |       |      |  |   |       |  
|Net change in:                                                                |  |      |        |   |      |   |        |      |  |   |        |  
|Other assets                                                                  |  |      | (110   | ) |      |   | (281   | )    |  |   | (22    | )
|Other liabilities                                                             |  |      | (338   | ) |      |   | 584    |      |  |   | (4     | )
|                                                                              |  |      |        |   |      |   |        |      |  |   |        |  
|Net Cash Used in Operating Activities                                         |  |      | (1,020 | ) |      |   | 230    |      |  |   | (84    | )
|                                                                              |  |      |        |   |      |   |        |      |  |   |        |  
|Cash Flows From Investing Activities:                                         |  |      |        |   |      |   |        |      |  |   |        |  
|Payments for the purchase of property                                         |  |      | (177   | ) |      |   | (2,164 | )    |  |   |       |  
|Proceeds from the sale of property                                            |  |      | 2,111  |   |      |   |       |      |  |   |       |  
|Investment in subsidiary                                                      |  |      | (4,550 | ) |      |   | (2,400 | )    |  |   | (2,772 | )
|                                                                              |  |      |        |   |      |   |        |      |  |   |        |  
|Net Cash Used in Investing Activities                                         |  |      | (2,616 | ) |      |   | (4,564 | )    |  |   | (2,772 | )
|                                                                              |  |      |        |   |      |   |        |      |  |   |        |  
|Cash Flows From Financing Activities:                                         |  |      |        |   |      |   |        |      |  |   |        |  
|Net proceeds from common stock offering                                       |  |      |       |   |      |   |       |      |  |   | 3,431  |  
|Net proceeds for trust preferred securities                                   |  |      |       |   |      |   | 11,000 |      |  |   |       |  
|Exercise of stock options                                                     |  |      | 141    |   |      |   | 56     |      |  |   | 75     |  
|                                                                              |  |      |        |   |      |   |        |      |  |   |        |  
|Net Cash Provided by Financing Activities                                     |  |      | 141    |   |      |   | 11,056 |      |  |   | 3,506  |  
|                                                                              |  |      |        |   |      |   |        |      |  |   |        |  
|Net Increase in Cash and Cash Equivalents                                     |  |      | (3,495 | ) |      |   | 6,722  |      |  |   | 650    |  
|Cash and Cash Equivalents, Beginning of Year                                  |  |      | 10,507 |   |      |   | 3,785  |      |  |   | 3,135  |  
|                                                                              |  |      |        |   |      |   |        |      |  |   |        |  
|Cash and Cash Equivalents, End of Year                                        |  | $    | 7,012  |   |      | $ | 10,507 |      |  | $ | 3,785  |  
|                                                                              |  |      |        |   |      |   |        |      |  |   |        |  

NOTE 25 SELECTED QUARTERLY INFORMATION (UNAUDITED)



|                                                     |  |               |         |       |   |         |  |       |         |  |   |        
|---------------------------------------------------- |  | ------------- | ------- | ----- | - | ------- |  | ----- | ------- |  | - | -------
|                                                     |  | 2005 Quarters
|(Dollars and shares in thousands)                    |  | Fourth        |         | Third |   | Second  |  | First
|Income statement                                     |  |               |         |       |   |         |  |       |         |  |   |        
|Interest income                                      |  | $             | 8,579   |       | $ | 7,955   |  | $     | 7,252   |  | $ | 6,721  
|Interest expense                                     |  |               | 3,547   |       |   | 3,131   |  |       | 2,470   |  |   | 2,131  
|Net interest income                                  |  |               | 5,032   |       |   | 4,824   |  |       | 4,782   |  |   | 4,590  
|Noninterest income                                   |  |               | 767     |       |   | 767     |  |       | 640     |  |   | 622    
|Total revenue                                        |  |               | 5,799   |       |   | 5,591   |  |       | 5,422   |  |   | 5,212  
|Provision for credit losses                          |  |               | 273     |       |   | 175     |  |       | 362     |  |   | 320    
|Noninterest expense                                  |  |               | 4,366   |       |   | 4,266   |  |       | 4,143   |  |   | 3,909  
|Income before income taxes                           |  |               | 1,160   |       |   | 1,150   |  |       | 917     |  |   | 983    
|Income tax expense                                   |  |               | 572     |       |   | 359     |  |       | 261     |  |   | 295    
|Net income                                           |  |               | 588     |       |   | 791     |  |       | 656     |  |   | 688    
|Average common shares issued and outstanding         |  |               | 7,615   |       |   | 7,605   |  |       | 7,601   |  |   | 7,601  
|Average diluted common shares issued and outstanding |  |               | 7,841   |       |   | 7,828   |  |       | 7,816   |  |   | 7,802  
|Period end balance sheet                             |  |               |         |       |   |         |  |       |         |  |   |        
|Total loans and leases                               |  | $             | 468,045 |       | $ | 445,338 |  | $     | 422,121 |  | $ | 402,868
|Total assets                                         |  |               | 527,770 |       |   | 510,963 |  |       | 481,838 |  |   | 454,960
|Total deposits                                       |  |               | 462,692 |       |   | 459,119 |  |       | 431,052 |  |   | 400,758
|Total shareholders equity                           |  |               | 38,964  |       |   | 38,280  |  |       | 37,442  |  |   | 36,778 



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NEW PEOPLES BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED

NOTE 25 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         |  |               | 7,600   |       |   | 7,600   |  |       | 7,597   |  |   | 7,596  
|Average diluted common shares issued and outstanding |  |               | 7,774   |       |   | 7,759   |  |       | 7,740   |  |   | 7,702  
|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 



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

None.

Item 9A. Controls and Procedures

Managements Report on Internal Control Over Financial Reporting

Managements Report on Internal Control Over Financial Reporting is included in Item 8 of this annual report and is incorporated herein by reference.
Managements assessment of the effectiveness of internal control over financial reporting as of December 31, 2005, has been audited by Brown, Edwards & Company, L.L.P., the independent registered public accounting firm which also
audited the Companys consolidated financial statements, as stated in its report which is included in Item 8 of this annual report and incorporated herein by reference.

Remediation of Prior Material Weakness

In our Form 10-K and 10-K/A for the year ended December 31, 2004, we
identified a material weakness in our internal control over financial reporting due to control deficiencies in NPB Financial Services, Inc., which was then a new startup division, related 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.

Subsequent to the discovery of that material weakness in internal control, we have taken various actions to remediate our internal control in this subsidiary, as
discussed in previous Form 10-Q filings. In the first three quarters of 2005, we made management changes at NPB Financial; improved its process of segregating the function of production of and accounting for sold commissions by having all additional
commissions sent directly to the accounting department; changed its recording procedures for sold items by requiring verification with the insurance companies prior to recording; improved our system of identifying sales through entry into contracts
with insurance companies; consolidated our broker-dealer relationships to simplify oversight; and obtained employee contracts from insurance and investment sales staff, creating direct accountability to NPB Financial.

In the fourth quarter of 2005, we continued to implement and monitor the initiatives undertaken in the first three quarters.

We believe that the corrective actions we have taken over the past four fiscal quarters, taken as a whole, have remediated the material weakness related to NPB
Financial. We cannot, however, assure you that either we or our independent accountants will not in the future identify further material weaknesses or significant deficiencies in our internal control over financial reporting that have not been
discovered to date. Accordingly, we will continue to monitor the effectiveness of our internal control over financial reporting, both generally and as it relates to NPB Financial specifically, and will make any further changes its management
determines to be appropriate.

Changes in Internal Control Over Financial Reporting

Other than the changes identified above, there have been no changes in our 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. We expect the remedial changes discussed above to materially affect and improve our internal control over financial reporting.

Disclosure Controls and Procedures

We 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 of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our management, including the Chief Executive Officer and
Chief Financial Officer, of the effectiveness of the design and operation of the disclosure controls and procedures pursuant to Rule 13a-15 under the Securities Exchange Act of 1934, as amended. Based on that evaluation, our Chief Executive Officer
and Chief Financial Officer concluded that our disclosure controls and procedures were 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.



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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

The following disclosures would otherwise have been filed on Form 8-K under the heading
Item 1.01. Entry into a Material Definitive Agreement:



| |  |  | On December 19, 2005, the Personnel Committee of New Peoples board of directors set 2006 annual base salaries, effective January 1, 2006, for Kenneth D. Hart, Frank
Sexton, Jr. and C. Todd Asbury, each of whom is a named executive officer of New Peoples for 2006, at $215,000, $135,000 and $110,000, respectively.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | On December 19, 2005, the board revised the fees to be paid non-employee directors effective January 1, 2006. The monthly fee was increased to $500 per month from the $400
per month paid in 2005. A committee fee was implemented, pursuant to which each member of a board committee will receive $100 per meeting, excluding Loan Committee meetings.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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 2006 Annual Meeting of Shareholders (2006 Proxy Statement) to be held on May 18, 2006.

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 2006 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 2006 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 2006 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 2006 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 2006 Proxy Statement that is required to be disclosed in this Item 14 is incorporated herein by reference.

Item 15. Exhibits, Financial Statement Schedules

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



|         |  |                                                                                                                                        
|-------- |  | ---------------------------------------------------------------------------------------------------------------------------------------
|Exhibits |  |                                                                                                                                        
|2        |  | Agreement and Plan of Share Exchange dated August 15, 2001 (incorporated by reference to Exhibit 2 to Form 8-K filed December 17, 2001)



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|      |  |                                                                                                                                                                                                                                                                          
|----- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|      | 
|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.
|      | 
|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 (incorporated by reference to Exhibit 10.5 to Annual Report on Form
10-K for the fiscal year ended December 31, 2004)                            
|      | 
|10.6* |  | Salary Continuation Agreement dated December 18, 2002 between New Peoples Bank, Inc. and Frank Sexton, Jr. (incorporated by reference to Exhibit 10.6 to Annual Report on Form 10-K for the
fiscal year ended December 31, 2004)                                         
|      | 
|10.7* |  | First Amendment dated June 30, 2003 to Salary Continuation Agreement between New Peoples Bank, Inc. and Frank Sexton, Jr. (incorporated by reference to Exhibit 10.7 to Annual Report on Form
10-K for the fiscal year ended December 31, 2004)                          
|      | 
|10.8* |  | Base Salaries of Named Executive                                                                                                                                                                                                                                         
|      | 
|10.9* |  | Director Compensation                                                                                                                                                                                                                                                    
|      | 
|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                                                                                                                                                                                                                                           
|      | 
|23.1  |  | Consent of Brown, Edwards and Company, L.L.P.                                                                                                                                                                                                                            
|      | 
|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.
|- | ----------------------------



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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. HartPresident and Chief Executive OfficerDate:

March 16, 2006By:

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

March 16, 2006


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, 2005 (the Report), and any and all amendments to such Report, 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/ C. TODD ASBURY C Todd
Asbury    |  | Senior Vice Presidentand Chief Financial Officer(Principal Financial andAccounting Officer) |  | March 16, 2006
|                                    |  |                                                                                            
|/s/ TIM BALL                        |  | Director                                                                                    |  | March 16, 2006
|Tim Ball                            |  |                                                                                             |  |               
|                                    |  |                                                                                            
|/s/ JOE CARTER                      |  | Director                                                                                    |  | March 16, 2006
|Joe Carter                          |  |                                                                                             |  |               
|                                    |  |                                                                                            
|/s/ JOHN D. COX                     |  | Director                                                                                    |  | March 16, 2006
|John D. Cox                         |  |                                                                                             |  |               
|                                    |  |                                                                                            
|/s/ CHARLES H. GENT                 |  | Director                                                                                    |  | March 16, 2006
|Charles H. Gent                     |  |                                                                                             |  |               
|                                    |  |                                                                                            
|/s/ KENNETH D. HART Kenneth D.
Hart |  | President andChief Executive Officer(Principal Executive Officer)                           |  | March 16, 2006
|                                    |  |                                                                                            
|/s/ HAROLD LYNNE KEENE              |  | Director                                                                                    |  | March 16, 2006
|Harold Lynne Keene                  |  |                                                                                             |  |               
|                                    |  |                                                                                            
|/s/ FRANK KILGORE                   |  | Director                                                                                    |  | March 16, 2006
|Frank Kilgore                       |  |                                                                                             |  |               
|                                    |  |                                                                                            
|/s/ JOHN MAXFIELD                   |  | Director                                                                                    |  | March 16, 2006
|John Maxfield                       |  |                                                                                             |  |               



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|                               |  |          |  |               
|------------------------------ |  | -------- |  | --------------
|/s/ MICHAEL G. MCGLOTHLIN      |  | Director |  | March 16, 2006
|Michael G. McGlothlin          |  |          |  |               
|                               |  |         
|/s/ FRED MEADE                 |  | Director |  | March 16, 2006
|Fred Meade                     |  |          |  |               
|                               |  |         
|/s/ BILL ED SAMPLE             |  | Director |  | March 16, 2006
|Bill Ed Sample                 |  |          |  |               
|                               |  |         
|/s/ EARNEST VIRGIL SAMPSON, JR |  | Director |  | March 16, 2006
|Earnest Virgil Sampson, Jr.    |  |          |  |               
|                               |  |         
|/s/ STEPHEN H. STARNES         |  | Director |  | March 16, 2006
|Stephen H. Starnes             |  |          |  |               
|                               |  |         
|/s/ PAUL VENCILL, JR.          |  | Director |  | March 16, 2006
|Paul Vencill, Jr.              |  |          |  |               
|                               |  |         
|/s/ WILLIAM C. WAMPLER, JR.    |  | Director |  | March 16, 2006
|William C. Wampler, Jr.        |  |          |  |               
|                               |  |         
|/s/ B. SCOTT WHITE             |  | Director |  | March 16, 2006
|B. Scott White                 |  |          |  |               



59