United StatesSecurities and Exchange CommissionWashington, D.C. 20549 FORM 10-K x
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
 EXCHANGE ACT OF 1934 For fiscal year ended December
31, 2008 Commission
File Number 000-33411 New Peoples Bankshares, Inc.(Exact
 name of registrant as specified in its charter)  Virginia

31-1804543(State
 or other jurisdiction of
 incorporation or organization)

(I.R.S.
 Employer
 Identification No.)67 Commerce Drive

24260Honaker, VA

(Zip
 Code)(Address
 of principal executive offices) Registrants telephone number, including area
code (276)
873-7000 Securities registered pursuant
to Section 12(b) of the Act:
None Securities registered pursuant
to Section 12(g) of the Act:
Common Stock - $2 Par Value Indicate by check mark 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  ̈
No x Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files). Yes  ̈
No  ̈ Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K Section 229.405 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, a non-accelerated filer, or a smaller reporting company. See
the definitions of large accelerated filer, accelerated filer, and
smaller reporting company in Rule 12b-2 of the Exchange Act. (Check one):
 Large accelerated filer
 ̈
Accelerated filer
xNon-accelerated
 filer
 ̈
Smaller
 reporting company
 ̈(Do not
 check if smaller reporting company) 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 $9.00 per share on the last business day of the
second quarter of 2008 was $78,066,765.00. The
number of shares outstanding of the registrants common stock was 10,008,902 as
of May 12, 2009. DOCUMENTS INCORPORATED BY REFERENCE:
 None
 1    TABLE OF
CONTENTS

PagePART
 IItem 1.
Business

3Item 1A.
Risk
Factors

12Item 1B.
Unresolved Staff
 Comments

17Item 2.
Properties

18Item 3.
Legal
Proceedings

18Item 4.
Submission of
 Matters to a Vote of Security Holders

18PART IIItem 5.
Market for
 Registrants Common Equity, Related Stockholder Matters and Issuer Purchases
 of Equity Securities

18Item 6.
Selected
 Financial Data

20Item 7.
Managements
 Discussion and Analysis of Financial Condition and Results of Operations

21Item 7A.
Quantitative and
 Qualitative Disclosures About Market Risk

34Item 8.
Financial
 Statements and Supplementary Data

36Item 9.
Changes in and
 Disagreements with Accountants on Accounting and Financial Disclosure

60Item 9A.
Controls and
 Procedures

60Item 9B.
Other
 Information

61PART
 IIIItem 10.
Directors,
 Executive Officers and Corporate Governance

61Item 11.
Executive
 Compensation

63Item 12.
Security
 Ownership of Certain Beneficial Owners and Management and Related Stockholder
 Matters

68Item 13.
Certain
 Relationships, Related Transactions and Director Independence

70Item 14.
Principal
 Accounting Fees and Services

70PART IVItem 15.
Exhibits,
 Financial Statement Schedules

71SIGNATURES
722

PART I

Item 1.
BusinessGeneral

New Peoples Bankshares, Inc. (New Peoples) is a bank holding
company
operating under the laws of Virginia and is headquartered in Honaker, Virginia.
New Peoples subsidiaries include: New Peoples Bank, Inc., a Virginia banking
corporation (the Bank) and NPB Web Services, Inc., a web design and hosting
company (NPB Web). In July 2004, NPB Capital Trust I was formed for the
issuance of trust preferred securities. In September 2006, NPB Capital Trust 2
was formed for the issuance of trust preferred securities. NPB Financial
Services, Inc., an insurance and investment services corporation (NPB
Financial) was a subsidiary of New Peoples until January 1, 2009 when it became
a subsidiary of the Bank. Also, effective January 1, 2009, New Peoples became a
bank holding company. Previously, New Peoples was a financial holding company.

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 31 full
service offices in the southwestern Virginia counties of Russell, Scott,
Washington, Tazewell, Buchanan, Dickenson, Wise, Lee, Smyth, and Bland; Mercer
County in southern West Virginia and the eastern Tennessee counties of Sullivan
and Washington. The close proximity and mobile nature of individuals and
businesses in adjoining counties and nearby cities in Virginia, West Virginia
and Tennessee 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 enable
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.

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.

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.

In September 2006, NPB Capital Trust 2 was formed to issue $5.2
million
in trust preferred securities.

NPB Financial Services, Inc., an insurance and investment services
corporation (NPB Financial) was a subsidiary of New Peoples until January 1,
2009 when it became a subsidiary of the Bank. Also, effective January 1, 2009,
New Peoples became a bank holding company. Previously, New Peoples was a
financial holding company.

3

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. During
2006, we opened full service branches in Esserville, Pound, and Lee County,
Virginia and Jonesborough, Tennessee. During 2007, we opened three full service
offices in Bland, and Chilhowie, Virginia; and Bramwell, West Virginia. We
purchased two operating branch banks, including deposits and loans located in
Norton and Pennington Gap, Virginia in June 2007. During 2008, we opened one
full service office in Bluewell, West Virginia. 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, free
of charge, 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, personal investments and other
purposes.

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.

We obtain short-to-medium term commercial and personal loans
through
direct solicitation of business owners and continued business from existing
customers. Completed loan applications are reviewed by our loan officers. As
part

4

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 31,2008

2007

2006

2005

2004Commercial, financial and
 agricultural


15.26
%

17.77
%

18.34
%

20.08
%

18.49
%Real estate 
construction


8.96
%

5.63
%

6.63
%

5.61
%

2.95
%Real estate 
mortgage


67.04
%

67.87
%

65.18
%

64.47
%

66.72
%Installment loans to
 individuals


8.74
%

8.73
%

9.85
%

9.84
%

11.83
%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 minimize the risk of loss and to compensate for fluctuations
in the real estate market. 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 depreciating 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 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

5

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 similar 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
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.

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, 2008, 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  29.88%, Scott County, VA  33.68%, Dickenson County, VA  24.86%,
Tazewell County, VA  8.10%, Smyth County, VA  3.36%, Lee County, VA  7.15%,
Buchanan County, VA  9.94%, Wise County, VA  10.13%, city of Norton, VA 
20.77%, Bland County, VA  28.00%, combined Washington County, VA and the City
of Bristol, VA  3.22%, Mercer County, WV  5.13%, Sullivan County, TN 0.65%,
and Washington County, TN 0.65%,

Employees

As of December 31, 2008, we had 377 total employees, of which 352
were
full-time employees. None of our employees is covered by a collective
bargaining agreement, and we consider relations with employees to be excellent.

Supervision
and Regulation

GeneralAs a bank holding company, we are
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

6

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, with the cost of any such examination paid by New Peoples. New
Peoples 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.

Payment of DividendsNew Peoples is a legal
entity separate and distinct from its banking and other subsidiaries. New
Peoples derives the majority of its revenues from dividends paid to the company
by its subsidiaries. The Bank is subject to laws and regulations that limit the
amount of dividends it can pay. In addition, both New Peoples and the Bank are
subject to various regulatory restrictions relating to the payment of
dividends, including requirements to maintain capital at or above regulatory
minimums. Banking regulators have indicated that banking organizations should
generally pay dividends only if the organizations net income available to
common shareholders over the past year has been sufficient to fully fund the
dividends and the prospective rate of earnings retention appears consistent
with the organizations capital needs, asset quality 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, 2008 the Bank, however, did not declare any
dividends to New Peoples in order to retain earnings to fund future loan growth
and branch expansion efforts. For additional discussion of restriction on
dividends see Note 16 in the notes to the consolidated financial statements.

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.

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

7

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,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, 2008, New Peoples and the Bank were well capitalized, with
Total Capital ratios of 10.78% and 11.36%, respectively; Tier 1 Capital ratios
of 9.50% and 10.28%, respectively; and leverage ratios of 7.72% and 8.35%,
respectively.

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.

Interstate Banking and BranchingCurrent
federal law authorizes interstate acquisitions of banks and bank holding
companies without geographic limitation. 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 June 1997. 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

8

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 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 are 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 13,
2007.

The GLBA (see below) 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

9

depository institutions alleging discrimination against borrowers.
Many
of these suits have been settled, in some cases on material terms, short of a
full trial.

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.

Gramm-Leach-Bliley Act of 1999The
Gramm-Leach-Bliley Act of 1999 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 permits 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.

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 bank holding
companies, but bank 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

10

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 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.

Privacy and Fair Credit Reporting Financial
institutions, such as the Bank, are required to disclose their privacy policies
to customers and consumers and require that such customers or consumers be
given a choice (through an opt-out notice) to forbid the sharing of nonpublic
personal information about them with nonaffiliated third persons. The Bank has
a written privacy policy that is delivered to each of its customers when
customer relationships begin and annually thereafter. In accordance with the
privacy policy, the Bank will protect the security of information about its
customers, educate its employees about the importance of protecting customer
privacy, and allow its customers to remove their names from the solicitation lists
they use and share with others. The Bank requires business partners with whom
it shares such information to have adequate security safeguards and to abide by
the redisclosure and reuse provisions of applicable law. The Bank has programs
to fulfill the expressed requests of customers and consumers to opt out of
information sharing subject to applicable law. In addition to adopting federal
requirements regarding privacy, individual states are authorized to enact more
stringent laws relating to the use of customer information. To date, Virginia
has not done so, but is authorized to consider proposals that would impose
additional requirements or restrictions on the Bank. If the federal or state
regulators establish further guidelines for addressing customer privacy issues,
the Bank may need to amend its privacy policies and adapt its internal
procedures.

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.

Emergency Economic Stabilization Act of 2008In
response to the financial crises affecting the banking system and financial
markets and going concern threats to investment banks and other financial
institutions, the EESA was signed into law on October 3, 2008. Pursuant to the
EESA, the U.S. Treasury was given the authority to, among other things,
purchase up to $700 billion of mortgages, mortgage-backed securities and
certain other financial instruments from financial institutions for the purpose
of stabilizing and providing liquidity to the U.S. financial markets.

11

On October 14, 2008, Treasury Secretary Paulson, after consulting
with
the Federal Reserve and the FDIC, announced that the Department of the Treasury
will purchase equity stakes in certain banks and thrifts. Under this program,
known as the Troubled Asset Relief Program Capital Purchase Program (the TARP
Capital Purchase Program), the Treasury will make $250 billion of capital
available to U.S. financial institutions in the form of preferred stock (from
the $700 billion authorized by the EESA). In conjunction with the purchase of
preferred stock, the Treasury will receive warrants to purchase common stock
with an aggregate market price equal to 15% of the preferred investment.
Participating financial institutions will be required to adopt the Treasurys standards
for executive compensation and corporate governance for the period during which
the Treasury holds equity issued under the TARP Capital Purchase Program.
Secretary Paulson also announced that nine large financial institutions agreed
to participate in the TARP Capital Purchase Program. The standards include a
prohibition against incentives to take unnecessary and excessive risks,
recovery of bonuses paid to senior executives based on materially inaccurate
earnings or other statements and a prohibition against agreements for the
payment of golden parachutes. Institutions that sell more than $300 million in
assets under TARP auctions or participate in the TARP Capital Purchase Program
will not be entitled to a tax deduction for compensation in excess of $500,000
paid to its chief executive or chief financial official or any of its other
three most highly compensated officers. In addition, any severance paid to such
officers for involuntary termination or termination in connection with a
bankruptcy or receivership will be subject to the golden parachute rules under
the Internal Revenue Code. Additional standards with respect to executive
compensation and corporate governance for institutions that have participated
or will participate in the TARP Capital Purchase Program were enacted as part
of ARRA, described below.

American Recovery and Reinvestment Act of 2009The
ARRA was enacted on February 17, 2009. The ARRA includes a wide variety of
programs intended to stimulate the economy and provide for extensive
infrastructure, energy, health, and education needs. In addition, the ARRA
imposes certain new executive compensation and corporate governance obligations
on all current and future TARP Capital Purchase Program recipients until the
institution has redeemed the preferred stock, which TARP Capital Purchase
Program recipients are now permitted to do under the ARRA without regard to the
three year holding period and without the need to raise new capital, subject to
approval of its primary federal regulator.

Federal Deposit Insurance CorporationThe
Banks deposits are insured by the Deposit insurance Fund, as administered by
the FDIC, to the maximum amount permitted by law. Pursuant to the EESA, the
maximum deposit insurance amount per depositor has been increased from $100,000
to $250,000 until December 31, 2009. Additionally, on October 14, 2008, after
receiving a recommendation from the boards of the FDIC and the Federal Reserve,
and consulting with the President, the Secretary of the Treasury signed the systemic
risk exception to the FDIC Act, enabling the FDIC to establish its Temporary
Liquidity Guarantee Program (TLGP). Under the transaction account guarantee
program of the TLGP, the FDIC will fully guarantee, until the end of 2009, all
non-interest-bearing transaction accounts, including NOW accounts with interest
rates of 0.5 percent or less and IOLTAs (lawyer trust accounts). The TLGP also
guarantees all senior unsecured debt of insured depository institutions or
their qualified holding companies issued between October 14, 2008 and June 30,
2009 with a stated maturity greater than 30 days. All eligible institutions
were permitted to participate in both of the components of the TLGP without
cost for the first 30 days of the program. Following the initial 30 day grace
period, institutions were assessed at the rate of ten basis points for
transaction account balances in excess of $250,000 for the transaction account
guarantee program and at the rate of either 50, 75, or 100 basis points of the
amount of debt issued, depending on the maturity date of the guaranteed debt,
for the debt guarantee program. Institutions were required to opt-out of the
TLGP if they did not wish to participate. [We elected to participate in the
transaction account guarantee program of the TLGP.]

Future Regulatory UncertaintyBecause federal and state
regulation of
financial institutions changes regularly and is the subject of constant
legislative debate, New Peoples cannot forecast how 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 FactorsDifficult market
conditions have adversely affected our industry.

Dramatic declines in the housing market over the past year, with
falling home prices and increasing foreclosures, unemployment and
under-employment, have negatively impacted the credit performance of real
estate related loans and resulted in significant write-downs of asset values by
financial institutions. These write-downs, initially of asset-backed securities
but spreading to other securities and loans, have caused many financial
institutions to seek additional capital, to reduce or eliminate dividends, to
merge with larger and stronger institutions and, in some cases,

12

to fail. Reflecting concern about the stability of the financial
markets generally and the strength of counterparties, many lenders and
institutional investors have reduced providing funding to borrowers, including
to other financial institutions. This market turmoil and tightening of credit
have led to an increased level of commercial and consumer delinquencies, lack
of consumer confidence, increased market volatility and widespread reduction of
business activity generally. The resulting economic pressure on consumers and
lack of confidence in the financial markets may adversely affect our business
and results of operations. Market developments may affect consumer confidence
levels and may cause adverse changes in payment patterns, causing increases in
delinquencies and default rates, which may impact our charge-offs and provision
for credit losses. A worsening of these conditions would likely exacerbate the
adverse effects of these difficult market conditions on us and others in the
financial institutions industry.

Current levels of
market volatility are unprecedented.

The capital and credit markets have been experiencing volatility
and
disruption for more than 12 months. In 2008, the volatility and disruption has
reached unprecedented levels. In some cases, the markets have produced downward
pressure on stock prices and credit availability for certain issuers without
regard to those issuers underlying financial strength. If current levels of
market disruption and volatility continue or worsen, there can be no assurance
that we will not experience an adverse effect, which may be material, on our
ability to access capital and on our business, financial condition and results
of operations.

The soundness of
other financial institutions could adversely affect us.

Our ability to engage in routine funding transactions could be
adversely affected by the actions and commercial soundness of other financial
institutions. Financial services institutions are interrelated as a result of
trading, clearing, counterparty or other relationships. We have exposure to
many different industries and counterparties, and we routinely execute
transactions with counterparties in the financial industry. As a result,
defaults by, or even rumors or questions about, one or more financial services
institutions, or the financial services industry generally, have led to
market-wide liquidity problems and could lead to losses or defaults by us or by
other institutions. Many of these transactions expose us to credit risk in the
event of default of our counterparty or client. In addition, our credit risk
may be exacerbated when the collateral held by us cannot be realized upon or is
liquidated at prices not sufficient to recover the full amount of the financial
instrument exposure due us. There is no assurance that any such losses would
not materially and adversely affect our results of operations.

There can be no
assurance that recently enacted legislation will stabilize the U.S. financial
system.

On October 3, 2008, President Bush signed into law the
Emergency
Economic Stabilization Act of 2008 (the EESA). The legislation was the result
of a proposal by Treasury Secretary Henry Paulson to the U.S. Congress in
response to the financial crises affecting the banking system and financial
markets and threats to investment banks and other financial institutions.
Pursuant to the EESA, the U.S. Treasury will have the authority to, among other
things, purchase up to $700 billion of mortgages, mortgage-backed securities
and certain other financial instruments from financial institutions for the
purpose of stabilizing and providing liquidity to the U.S. financial markets.
On October 14, 2008, the U.S. Department of Treasury announced a program
under the EESA pursuant to which it would make senior preferred stock
investments in participating financial institutions (the TARP Capital Purchase
Program). On October 14, 2008, the Federal Deposit Insurance Corporation
announced the development of a guarantee program under the systemic risk
exception to the Federal Deposit Act (FDA) pursuant to which the FDIC would
offer a guarantee of certain financial institution indebtedness in exchange for
an insurance premium to be paid to the FDIC by issuing financial institutions
(the FDIC Temporary Liquidity Guarantee Program). On February 17, 2009,
President Obama signed into law the American Recovery and Reinvestment Act of
2009 (the ARRA), which amends certain provisions of the EESA and contains a
wide array of provisions aimed at stimulating the U.S. economy.

There can be no assurance, however, as to the actual impact that
the
EESA and AARA and their implementing regulations, the FDIC programs, or any
other governmental program will have on the financial markets. The failure of
the EESA, the AARA, the FDIC, or the U.S. government to stabilize the financial
markets and a continuation or worsening of current financial market conditions
could materially and adversely affect our business, financial condition,
results of operations, access to credit or the trading price of our common
stock.

The impact on us of
recently enacted legislation, in particular the Emergency Economic
Stabilization Act of 2008 and American Recovery and Reinvestment Act of 2009
and their implementing regulations, and actions by the FDIC, cannot be
predicted at this time.

13

The programs established or to be established under the EESA, ARRA
and
Troubled Asset Relief Program may have adverse effects upon us. We may face
increased regulation of our industry. Compliance with such regulation may
increase our costs and limit our ability to pursue business opportunities.
Also, participation in specific programs may subject us to additional
restrictions. The affects of participating or not participating in any such
programs and the extent of our participation in such programs cannot reliably
be determined at this time.

Because there is no
market for New Peoples common stock, your ability to readily sell any shares
you hold is doubtful.

Our stock is not listed on a stock market, and we have no
intention of
listing it. If you want to sell shares of our stock, you will need to find a
buyer and negotiate the price.

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.

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, 2008, approximately 76.00% 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.

If we
need additional capital in the future to continue our growth, we may not be
able to obtain it on terms that are favorable. This could negatively affect our
performance and the value of our common stock.

Our business strategy calls for continued growth. We anticipate
that we
will be able to support this growth through retained earnings, additional trust
preferred security issuances, sale of additional common stock, or other
alternative capital sources. We may need to raise additional capital in the
future to support our continued growth and to

14

maintain our capital levels. Our ability to raise capital through
the
sale of additional securities will depend primarily upon our financial
condition and the condition of financial markets at that time. We may not be
able to obtain additional capital in the amounts or on terms satisfactory to
us. Our growth may be constrained if we are unable to raise additional capital
as needed.

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 executives and senior
lending officers. From time to time we enter into employment agreements with
certain of our executives. The existence of such agreements, however, does not
necessarily assure that we will be able to continue to retain the services of
such executives. The unexpected loss of any of our key employees could have a
material adverse effect on our business and possibly result in reduced revenues
and earnings.

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

15

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 our 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. Various statutes and regulations limit the availability of
dividends from the Bank. 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 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.

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, 2008,
approximately 76.00% 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. Deterioration in real estate values in larger metropolitan areas
of the country have not severely impacted the markets

16

served by the Bank at this time, although if
there is a significant decline in real estate values in our local markets, 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.

We may be
adversely affected by economic conditions in our market area.

Our banking operations are located primarily
in the Virginia counties of Buchanan, Dickenson, Lee, Russell, Scott, Smyth,
Tazewell, Washington, and Wise, the West Virginia county of Mercer and the
Tennessee counties of Sullivan and Washington. Because our lending is
concentrated in this market, we will be affected by the general economic
conditions in the area. Changes in the economy may influence the growth rate of
our loans and deposits, the quality of the loan portfolio and loan and deposit
pricing. A significant decline in general economic conditions caused by
inflation, recession, unemployment or other factors beyond our control would
impact the demand for banking products and services generally, which could
negatively affect our financial condition and performance.

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. Under the PCAOB standards, a material weakness is a
deficiency, or a combination of deficiencies, in internal control over
financial reporting, such that there is a reasonable possibility that
a material misstatement of the companys annual or interim financial statements
will not be prevented or detected on a timely basis. We have in the past
discovered, and may in the future discover, areas of our internal controls that
need improvement. As discussed in Item 9A. Controls and Procedures,
we identified certain material weaknesses as a result of our assessment of
internal controls over financial reporting. We have taken the remedial actions
discussed in Item 9A. We are continuing to work to improve our internal
controls. We cannot be certain that these measures will ensure that we
implement and maintain adequate controls over our financial processes and
reporting in the future. 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.

Item 1B.
Unresolved Staff
 CommentsAs of June 10, 2009, there were no unresolved comments from the
staff
of the SEC with respect to any of New Peoples periodic or current reports.

17

Item 2.
PropertiesAt December 31, 2008, the Companys net investment in
premises and
equipment in service was $36.8 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.

The Bank owns 28 of its 31 full service branches. The owned
properties
in Virginia are located in Abingdon, Big Stone Gap, Bluefield, Bland, Bristol,
Castlewood, Chilhowie, Clintwood, Gate City, Grundy, Haysi, Honaker,
Jonesville, Lebanon, Norton, Pennington Gap, Pound, Pounding Mill, Richlands,
Tazewell, and Weber City. Offices in Princeton, West Virginia and Bloomingdale
and Jonesborough, Tennessee are also owned by the Bank.

The Bank has three operating lease arrangements of varying lengths.
These full service branches are located in Bramwell, West Virginia and in
Cleveland and Davenport, Virginia.

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

We are in various stages of construction or development of branch
locations in Princeton, West Virginia and Duffield, Virginia. We anticipate
opening the Princeton, West Virginia location in 2009 subject to regulatory
approval. In December 2008, the Board of Directors resolved to sell the
Duffield location. It is being marketed at a projected net sales price greater
than book value; however, the length of time it will take to find a qualified
buyer is not known.

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 in 2009 will depend on the decision to open additional
branches.

Item 3.
Legal ProceedingsIn 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
HoldersNone

PART
II

Item 5.         Market
for Registrants Common Equity, Related
 Stockholder Matters and Issuer Purchases of Equity Securities(a)
Market
 InformationThe 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 bids known to us of our common stock for each
quarter
in the past two years are set forth in the table below. These bids are obtained
through inquiry by our stock transfer agent of shareholders transferring stock.
Other transactions may have occurred at prices about which we are not aware.

2008

2007High

Low

High

Low1st
 quarter

$
15.00

$
10.00

$
15.00

$
10.002nd
 quarter


13.00


6.00


21.00


10.003rd
 quarter


13.00


8.68


17.00


10.004th
 quarter


12.50


9.00


15.00


4.00The most
recent sales price of which management is aware was $11.00 per share on April
17, 2009.

(b)
HoldersOn June 10,
2009, there were approximately 4,395 shareholders of record.

18

(c)
DividendsOn September 12, 2007, we issued a 13 for 10 stock spit effected
in the
form of a stock dividend to all shareholders of record on September 4, 2007. 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 2009. See Note 16 and Note 23 of the Notes to the Consolidated
Financial Statements for further discussion of dividend limitations and capital
requirements.

(d)
Stock
 Performance GraphThere currently is not a public trading market for the
Companys Common
Stock. The Company, however, is frequently informed of the sales price at which
shares of Common Stock are exchanged in privately negotiated transactions.
Because shares of Common Stock are not listed or traded on an exchange or in
the over-the-counter market, the Company cannot be certain that the prices at
which such shares have historically sold are not higher than the prices that
would prevail in an active market where securities professionals participate.
As a result, the comparisons presented in the following graph do not reflect
similar market conditions.

The following graph compares the Companys cumulative
shareholder
return on its Common Stock, assuming an initial investment of $100 and
reinvestment of all dividends, with the cumulative return on the S&P 500,
the NASDAQ Composite, and SNL Securities Bank and Thrift Index using the same
assumptions, as of December 31st of each year since December 31,
2003.

New Peoples Bankshares, Inc.

(LINE GRAPH)

Period EndingIndex

12/31/03

12/31/04

12/31/05

12/31/06

12/31/07

12/31/08New Peoples
Bankshares, Inc.


100.00


140.00


150.00


154.00


171.60


178.75S&P
500


100.00


110.88


116.33


134.70


142.10


89.53NASDAQ
Composite


100.00


108.59


110.08


120.56


132.39


78.72SNL Bank and
Thrift Index


100.00


111.98


113.74


132.90


101.34


58.2819

Item 6.
Selected Financial DataThe 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. The following is
qualified in its entirety by the detailed information and the financial
statements included elsewhere in this Form 10-K.

For the Years Ended December 31,(Amounts
 in thousands, except per share data)

2008

2007

2006

2005

2004Income Statement
DataGross interest income

$
52,317

$
51,447

$
41,280

$
30,507

$
24,265Gross interest expense


23,095


25,738


19,393


11,279


6,471Net interest income


29,222


25,709


21,887


19,228


17,794Provision for possible loan
losses


1,500


3,840


1,277


1,130


990Non-interest income


6,162


4,651


3,460


2,822


2,605Non-interest expense


27,231


23,674


19,805


16,710


14,469Net income


4,737


2,870


3,090


2,723


3,258Per Share Data and Shares
Outstanding (1)Net income, basic


0.47


0.29


0.31


0.27


0.33Net income, diluted


0.46


0.28


0.30


0.26


0.32Cash dividends














Book value at end of
period


5.03


4.54


4.25


3.93


4.02Tangible book value at period
end


4.56


4.06


4.25


3.93


4.02Period-End Balance Sheet
DataTotal assets


807,898


765,951


635,819


527,770


437,751Total loans


721,174


682,260


569,198


468,045


383,567Total allowance for loan
losses


(6,904
)

(6,620
)

(4,870
)

(3,943
)

(3,090
)Total deposits


705,688


657,033


572,187


462,692


388,120Shareholders
equity


50,323


45,249


42,346


38,964


36,098Performance
RatiosReturn on average
assets


0.61
%

0.42
%

0.54
%

0.56
%

0.83
%Return on average
shareholders equity


9.98
%

6.60
%

7.61
%

7.28
%

9.58
%Average shareholders
equity to average
 assets


6.09
%

6.34
%

7.06
%

7.72
%

8.64
%Net interest margin
(2)


4.13
%

4.11
%

4.11
%

4.38
%

5.00
%Asset Quality
RatiosNet charge-offs to average
loans


0.17
%

0.34
%

0.07
%

0.07
%

0.10
%Allowance to period-end gross
loans


0.96
%

0.97
%

0.86
%

0.84
%

0.81
%Nonperforming loans to gross
loans


0.89
%

0.47
%

0.21
%

0.12
%

0.23
%Capital and Liquidity
RatiosRisk-based:Tier 1
capital


9.50
%

8.73
%

10.81
%

11.78
%

12.88
%Total
capital


10.78
%

10.29
%

12.20
%

12.71
%

13.72
%Leverage capital ratio


7.72
%

7.22
%

8.94
%

9.63
%

10.64
%Total equity to total
assets


6.23
%

5.91
%

6.66
%

7.38
%

8.25
%(1)
We have
 adjusted all share amounts and per share data to reflect, a 10% stock dividend
 in June 2005 and a 13 for 10 stock split effected in the form of a stock
 dividend in September 2007.(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.20

Item 7.
Managements Discussion and Analysis of Financial Condition and
 Results of OperationsCaution 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 difficult market conditions in our industry; the
unprecedented levels of market volatility; the effects of soundness of other
financial institutions; the uncertain outcome of recently enacted legislation to
stabilize the U.S. financial system; the potential impact on us of recently
enacted legislation; the lack of a market for our common stock; 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,
2008 and 2007 as well as results of operations for the years ended December 31,
2008, 2007 and 2006. 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
and investment products sold.

Overview

New Peoples did not apply to participate in the
federal Troubled Asset Relief Program, or TARP. Our region did not experience a
rapid rise in real estate prices in recent years and, likewise, our region has
not experienced the deterioration on real estate prices that has occurred
recently in many other regions and nationally. As of December 31, 2008,
economic trends for the southwestern Virginia, southern West Virginia, and
northeastern Tennessee regions, remain steady despite deterioration at the national
level. The impact of the current recession on our business has been primarily
limited to slower loan growth and slight deterioration in asset quality. At
December 31,

21

2008, New Peoples Bank is well capitalized as defined by regulatory
guidance with a tier 1 leverage ratio of 8.35%, tier 1 risk based capital ratio
of 10.28%, and a total risk based capital ratio of 11.36%.

New
Peoples Bankshares, Inc. reports total net income after tax of $4.7 million or
$0.47 per basic share and $0.46 per diluted share for the year ended December
31, 2008 as compared to $2.9 million, or $0.29 per basic share and $0.28 per
diluted share for the year ended December 31, 2007. At December 31, 2008, total
assets were $807.9 million, total loans were $721.2 million, and total deposits
were $705.7 million. The annualized return on average assets for the fiscal
year 2008 was 0.61% as compared to 0.42% for the same period in 2007. The
annualized return on average equity was 9.98% for the fiscal year 2008 and
6.60% for the same period in 2007.

The
increase in earnings is due primarily to a strong net interest income resulting
from increased loan production and a continued decrease in the cost of funds.
The net interest income for the year 2008 was $29.2 million as compared to
$25.7 million for the period ended December 31, 2007, which is an increase of
$3.5 million, or 13.66%. The net interest margin for the year ending December
31, 2008 was 4.13% as compared to 4.11% for the same period in 2007.

In
addition to the strong growth in net interest income, non interest income
increased to $5.6 million for 2008 as compared to $4.7 million in 2007. The
$899 thousand, or 19.33% increase, is the result of increased deposit service
fees, retail investment sales and insurance commissions.

Noninterest
expenses increased $2.9 million, or 12.44%, in 2008 to $26.6 million from $23.7
million in 2007. The majority of the increase is related to additional
operating expenses from a new branch location in 2008, and five new branches in
2007. During 2008, we realized a full year effect of the 2007 branch expansion
expenses. Included in year 2008 are net gains from the sales of other real
estate owned properties totaling $612 thousand.

Total
assets at December 31, 2008 were $807.9 million compared to $766.0 million at
the end of 2007, an increase of $41.9 million, or 5.48%. Deposits grew from
$657.0 million at December 31, 2007 to $705.7 million at the end of 2008, for
an increase of $48.7 million, or 7.41%. Total loans increased from $682.3 million
at December 31, 2007 to $721.2 million at December 31, 2008, an increase of
$38.9 million, or 5.70%. The increase in deposits and loans can be attributed
to an increased presence in the market at new and existing branches and the
Banks reputation for quality service.

Asset
quality has shown a slight deterioration during the present recession. However,
impaired loans have decreased from $9.6 million, with a valuation allowance of
$1.2 million at December 31, 2007. This decrease is the result of the payoff of
certain loans that were classified as impaired at year-end 2007 and improved
collateral positions in certain other previously impaired loans. At the end of
2008, total impaired loans were $6.8 million with a valuation allowance of $218
thousand. Of the $6.8 million recorded as impaired loans, $6.4 million were
nonperforming loans, which includes nonaccrual loans and past due 90 days or
more. At the end of 2008, these nonperforming loans as a percentage of total
loans were 0.89% as compared to $3.2 million, or 0.47% of total loans, at
December 31, 2007. The increase is primarily due to nonperformance of two real
estate development loans located in the coastal region of North and South
Carolina totaling $4.4 million, or 68.43% of nonperforming loans. Other real
estate owned increased from $2.1 million at December 31, 2007 to $2.5 million
at December 31, 2008. The provision for loan losses totaled $1.5 million during
2008 as compared to $3.8 million in the same period in 2007. The allowance for
loan losses of $6.9 million, or 0.96% of total loans at the end of 2008, is
considered adequate by management given the quality of the loan portfolio. The
allowance for loan losses was $6.6 million, or 0.97% of total loans, at
December 31, 2007. Additional provisions may be made in the future as deemed
necessary.

Net charge-offs for the year ending December 31, 2008 were $1.2
million
as compared to $2.1 million for the same period in 2007. This represents 0.17%
of average loans at year-end 2008 as compared to 0.34% at December 31, 2007.
Peer data provided by the FDIC reported this ratio of similar sized banks as of
December 31, 2008 at 0.49%.

New Peoples is headquartered in Honaker, Virginia, and operates
through
31 branch locations located in Virginia, West Virginia and Tennessee. Its most
recent branch to open was in Bluewell, West Virginia in August 2008.

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

22

the allowance for loan losses, we refer you to the section on
Provision for Loan Losses in this discussion. For further discussion of our
other critical accounting policies, see Note 2, Summary of Significant
Accounting Policies, to our Consolidated Financial Statements, found in Item 8
to this annual report on Form 10-K.

Net Interest Income and Net Interest Margin

The
increase in earnings is due primarily to a strong net interest income resulting
from increased loan production and a continued decrease in the cost of funds.
The net interest income for the year 2008 was $29.2 million as compared to
$25.7 million for the period ended December 31, 2007, which is an increase of
$3.5 million, or 13.66%. The net interest margin for the year ending December
31, 2008 was 4.13% as compared to 4.11% for the same period in 2007.

Net interest income for the year ended 2007 increased to $25.7
million
from $21.9 million in 2006. This was an increase of $3.8 million, or 17.35%.
The majority of the growth was related to the increased loan volume during the
fiscal 2007. Loan income increased to $50.9 million for 2007 from $40.8 million
for 2006, which was an increase of $10.1 million, or 24.83%. Total interest
expense was $25.7 million for 2007 as compared to $19.4 million for 2006. This
$6.3 million, or 32.47%, increase resulted mainly from an increase in volume of
time deposits with a premium interest rate originating at the newer branch
locations.

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, 2008

For the Year Ended
 December 31, 2007

For the Year Ended
 December 31, 2006Average
 Balance

Income/
 Expense

Yields/
 Rates

Average
 Balance

Income/
 Expense

Yields/
 Rates

Average
 Balance

Income/
 Expense

Yields/
 RatesASSETSLoans (1), (2),
 (3)

$
697,733

$
51,911


7.44
%

$
611,101

$
50,884


8.33
%

$
521,629

$
40,762


7.81
%Federal funds
 sold


1,881


35


1.86
%


2,779


129


4.64
%


3,926


191


4.87
%Other investments
 (3)


8,525


371


4.35
%


7,421


254


3.42
%


6,524


327


5.01
%Total Earning
 Assets


708,139


52,317


7.39
%


621,301


51,267


8.25
%


532,079


41,280


7.76
%Less: Allowance
 for loans losses


(6,756
)








(5,280
)








(4,509
)Non-earning
 assets


78,723









69,372









56,988Total Assets

$
780,106








$
685,393








$
584,558LIABILITIES AND
 STOCKHOLDERS EQUITYDepositsDemand  Interest
 bearing

$
32,192

$
240


0.75
%

$
20,957

$
164


0.78
%

$
18,907

$
142


0.75
%Savings


58,784


682


1.16
%


45,135


485


1.07
%


43,637


489


1.12
%Time deposits


489,788


19,817


4.05
%


458,369


22,949


5.01
%


380,658


17,004


4.47
%Other Borrowings


37,511


1,351


3.60
%


15,820


857


5.42
%


14,534


754


5.19
%Trust Preferred
 Securities


16,496


1,005


6.09
%


16,496


1,283


7.78
%


12,683


1,004


7.92
%Total interest
 bearing liabilities


634,771


23,095


3.64
%


556,777


25,738


4.62
%


470,419


19,393


4.12
%Non-interest
 bearing deposits


92,677









79,932









69,267Other liabilities


5,186









5,206









4,264Total Liabilities


732,634









641,915









543,950Stockholders
 Equity


47,472









43,477









40,608Total Liabilities
 and Stockholders Equity

$
780,106








$
685,393








$
584,558Net Interest
 Income




$
29,222








$
25,529








$
21,887Net Interest
 Margin








4.13
%








4.11
%








4.11
%Net Interest
 Spread








3.75
%








3.63
%








3.64
%(1)
Non-accrual loans have been
 included in the average balance of loans outstanding.(2)
Loan fees have been
 included in interest income on loans.(3)
Tax exempt
 income is not significant and has been treated as fully taxable.23

Net interest income is affected by changes in both average interest
rates and 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.

Volume and
Rate Analysis(Dollars in thousands)

2008
 Compared to 2007

2007
 Compared to 2006Increase
 (Decrease)

Increase
 (Decrease)Volume
 Effect

Rate
 Effect

Change
 in
 Interest
 Income/
 Expense

Volume
 Effect

Rate
 Effect

Change
 in
 Interest
 Income/
 ExpenseInterest Income:Loans

$
7,214

$
(6,187
)
$
1,027

$
6,992

$
3,130

$
10,122Federal funds
sold


(42
)

(52
)

(94
)

(56
)

(6
)

(62
)Other
investments


38


79


117


45


(118
)

(73
)Total Earning
Assets


7,210


(6,160
)

1,050


6,981


3,006


9,987Interest Bearing
 Liabilities:Demand


88


(12
)

76


15


7


22Savings


147


50


197


17


(21
)

(4
)All other time
deposits


1,573


(4,705
)

(3,132
)

3,471


2,474


5,945Other
borrowings


1,175


(681
)

494


67


36


103Trust Preferred
Securities





(278
)

(278
)

302


(23
)

279Total Interest
Bearing Liabilities


2,983


(5,626
)

(2,643
)

3,872


2,473


6,345Change in Net
Interest Income

$
4,227

$
(534
)
$
3,693

$
3,109

$
533

$
3,642Loans

Our primary source of income comes from interest earned on loans
receivable. Loan production slowed in 2008 as evidenced by total loans
increasing $38.9 million, or 5.70%. We have purposely kept loan growth at a
minimum as we remain focused on minimizing credit risks in the loan portfolio
in the current economic downturn. Total loans increased $113.1 million and
$101.2 million for the years 2007 and 2006, respectively. A schedule of loans
by type is set forth immediately below. Approximately 76.00% of the loan
portfolio is secured by real estate at the end of 2008.

Loans
receivable outstanding are summarized as follows:

Loan PortfolioDecember 31,(Dollars in thousands)

2008

2007

2006

2005

2004Commercial, financial and
 agricultural

$
110,060

$
121,198

$
104,372

$
93,987

$
70,915Real estate  construction


64,595


38,420


37,716


26,267


11,332Real estate  mortgage


483,471


463,079


371,021


301,740


255,925Installment loans to
 individuals


63,048


59,563


56,089


46,051


45,395Total

$
721,174

$
682,260

$
569,198

$
468,045

$
383,56724

Our loan
maturities as of December 31, 2008 are shown in the following table:

Maturities of Loans(Dollars in thousands)

Less
 than
 One Year

One
 to Five
 Years

After
 Five
 Years

TotalCommercial and agriculture

$
46,797

$
45,378

$
17,885

$
110,060Real estate


170,072


229,663


148,331


548,066Consumer- installment/
 other


6,779


51,856


4,413


63,048Total

$
223,648

$
326,897

$
170,629

$
721,174Loans with fixed rates

$
33,679

$
148,181

$
163,693

$
345,553Loans with variable rates


189,969


178,716


6,936


375,621Total

$
223,648

$
326,897

$
170,629

$
721,174This above table reflects the earlier of the maturity or re-pricing
dates for loans at December 31, 2008. 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 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
included in our evaluation of 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.

The allowance for loan losses increased to $6.9 million at
December 31,
2008 as compared to $6.6 million at December 31, 2007. The allowance for loan
losses at the end of 2008 was approximately 0.96% of total loans as compared to
0.97% at the end of 2007. Net loans charged off for 2008 were $1.2 million, or
0.17% of average loans, and $2.1 million, or 0.34% of average loans, at the end
of 2007. The provision for loan losses was $1.5 million for 2008 as compared
with $3.8 million for 2007 and $1.3 million in 2006.

Certain risks 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. Recent expansions into
new markets increase potential credit risk. In addition, a majority of the
loans are collateralized by real estate located in our market area. It is our
policy to sufficiently collateralize loans to minimize loss exposures in case
of default. The recent negative trends in the national real estate market and
economy pose potential threats. Local real estate market values have been and
remain stable, while national real estate markets have experienced a downturn.
It is uncertain as to when or if local real estate values will be impacted. We
do not believe that there will be a severely negative effect in our market
area, but we deem it prudent to assign more of the allowance to these types of
loans. Prior to 2008, we had purchased participation construction loans in the
Myrtle Beach, South Carolina area. The total of these credits at December 31,
2008 was $13.7 million as compared to $14.4 million at December 31, 2007. This
market area has posed some higher risk, but decreased collateral values still
provide adequate coverage on these credits. Our market area is somewhat
diverse, but certain areas are 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. We consider these factors to be the primary higher risk characteristics
of the loan portfolio.

An evaluation of individual loans is performed by the internal loan
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 loan
review personnel. Guidance for the evaluation is established by the regulatory
authorities who periodically review the Banks loan portfolio for compliance.
Classifications used by the Bank are exceptional, very good, standard,
acceptable, transitory risk, other assets especially mentioned, substandard,
doubtful and loss.

All loans classified as other assets especially mentioned,
substandard,
doubtful and loss are 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. The evaluation is inherently subjective as it requires
estimates that are susceptible to significant revision as more information
becomes available.

25

Impaired loans decreased to $6.8 million with a valuation
allowance of
$218 thousand at December 31, 2008 as compared to $9.6 million with a valuation
allowance of $1.2 million at December 31, 2007. Of the $6.8 million recorded as impaired
loans, $6.4 million were nonperforming loans, which includes nonaccrual loans
and past due 90 days or more. At the end of 2008, these nonperforming loans as
a percentage of total loans were 0.89% as compared to $3.2 million, or 0.47% of
total loans, at December 31, 2007. The increase is primarily due to
nonperformance of two real estate development loans located in the coastal
region of North and South Carolina totaling $4.4 million, or 68.43% of
nonperforming loans. Other real estate owned increased from $2.1 million at
December 31, 2007 to $2.5 million at December 31, 2008. 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

2008

2007

2006

2005

2004Beginning Balance

$
6,620

$
4,870

$
3,943

$
3,090

$
2,432Provision charged to expense


1,500


3,840


1,277


1,130


990Loan Losses:Installment
loans to individuals


(420
)

(284
)

(223
)

(266
)

(285
)Real estate -
construction


(44
)

(2
)




(12
)

Real estate
 mortgage


(256
)

(179
)

(148
)

(16
)

(8
)Commercial
loans


(591
)

(1,701
)

(52
)

(4
)

(59
)Recoveries:Installment
loans to individuals


60


50


29


19


20Real estate
 construction














Real estate -
mortgage


17


6


44


2


Commercial
loans


18


20








Net charge offs


(1,216
)

(2,090
)

(350
)

(277
)

(332
)Balance at End of Period

$
6,904

$
6,620

$
4,870

$
3,943

$
3,090Net charge offs as a % of
 average loans


0.17
%

0.34
%

0.07
%

0.07
%

0.10
%Loans delinquent greater than 90 days still accruing interest and
loans
in non-accrual status present higher risks. At December 31, 2008, there were 36
loans in non-accrual status totaling $6.4 million, or 0.89% of total loans. The
amount of interest that would have been recognized on these loans in the year
2008 was $221 thousand. There were 3 loans greater than 90 days past due and
still accruing interest totaling $33 thousand. 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
 31,2008

2007

2006

2005

2004Non-accruing loans

$
6,414

$
2,946

$
1,206

$
446

$
773Loans past due 90 days or more
and still accruing


33


267


9


116


115Total

$
6,447

$
3,213

$
1,215

$
562

$
888Percent of
total loans


0.89
%

0.47
%

0.21
%

0.12
%

0.23
%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.

26

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 10.00% of the allowance to cover real estate loans, which constituted
67.04% of our loan portfolio at December 31, 2008. The allocation reflects
their lower risk. 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 3.98% of the allowance to cover real estate
construction loans, which constituted 8.96% of our loan portfolio at December
31, 2008. Construction loans are secured by real estate with values that are
dependent upon market and economic conditions. Values may not always 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 56.06% of the allowance to commercial loans,
which
constituted 15.26% of our loan portfolio at December 31, 2008. 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 accounts receivable, equipment and
inventory. As a result, the availability of funds for the repayment of
commercial business loans may be substantially dependent on the success of the
business itself.

We have allocated 29.96% of the allowance to consumer installment
loans, which constituted 8.74% of our loan portfolio at December 31, 2008.
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 2007, we changed the allocations to assign greater risk to real
estate loans and commercial loans. The reason for the changes to these two
categories is the increased growth in these areas over the past years 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 those mentioned above.

The following table shows the balance and percentage of our
allowance
for loan losses (or ALLL) allocated to each major category of loans.

Allocation
of the Allowance for Loan Losses 
December 31, 2004 through December 31, 2008(Dollars in
thousands)

December
 31, 2008

December
 31, 2007

December
 31, 2006Amount

%
 of
 ALLL

% of
 Loans

Amount

%
 of
 ALLL

% of
 Loans

Amount

%
 of
 ALLL

%
 of
 LoansCommercial

$
3,866


56
%

15.26
%
$
3,254


49
%

17.76
%
$
1,704


35
%

18.34
%R/E const.


621


9
%

8.96
%

199


3
%

5.63
%

146


3
%

6.63
%R/E-mortg.


1,036


15
%

67.04
%

1,200


18
%

67.88
%

828


17
%

65.18
%Installment


1,381


20
%

8.74
%

1,967


30
%

8.73
%

2,192


45
%

9.85
%Total

$
6,904


100
%

100.00
%
$
6,620


100
%

100.00
%
$
4,870


100
%

100.00
%December
 31, 2005

December
 31. 2004Amount

%
 of
 ALLL

% of
 Loans

Amount

%
 of
 ALLL

% of
 LoansCommercial

$
1,380


35
%

20.08
%
$
1,081


35
%

18.49
%R/E- const.


118


3
%

5.61
%

93


3
%

2.95
%R/E mortg.


671


17
%

64.47
%

525


17
%

66.73
%Installment


1,774


45
%

9.84
%

1,391


45
%

11.83
%Total

$
3,943


100
%

100.00
%

3,090


100
%

100.00
%Investment Securities

Total investment securities decreased to $3.4 million at December
31,
2008 from $5.0 million at December 31, 2007. The portfolio is made up mainly of
U. S. Government Agency securities with fairly short maturities and one
mortgage backed security. All securities are classified as available for sale
for liquidity purposes. The carrying amount of certain securities pledged by us
to secure public deposits totaled $400 thousand at December 31, 2008 as
compared to $3.5 million at December 31, 2007. In fiscal year 2008, the
Commonwealth of Virginia permitted the use of a letter

27

of credit from the Federal Home Loan Bank to secure public funds.
As a
result, we were able to issue a letter of credit for $7.0 million and release
the majority of our collateral securing public deposits.

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 $3.9 million and $4.3
million as of December 31, 2008 and 2007, respectively.

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

Investment
Securities Portfolio(Dollars in thousands)

December 31,

2008

2007

2006Amortized
 
 Cost

Fair
 Value

Amortized
 
 Cost

Fair
 Value

Amortized
 
 Cost

Fair
 ValueAvailable for
SaleU.S. Government
Agencies

$
3,000

$
3,063

$
4,495

$
4,502

$
3,490

$
3,493Mortgage backed
securities


378


386


467


472





Total Securities AFS

$
3,378

$
3,449

$
4,962

$
4,974

$
3,490

$
3,493The amortized cost, fair value and weighted average yield of
investment
securities at December 31, 2008, 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


Amortized
 Cost

Fair 
 Value

Weighted
 Average
 YieldDue in one year or
less

$


$




%Due after one year through five
years


3,378


3,449


3.53
%Due after five years through ten
years









%Due after ten years









%Total

$
3,378

$
3,449


3.53
%Deposits

Total deposits increased $48.7 million, or 7.41% to $705.7 million
at
December 31, 2008 as compared to $657.0 million at December 31, 2007. This
growth is attributed to the new branch in Bluewell, West Virginia and from
continued growth in various branches. We have developed some new consumer and
commercial deposit products that have contributed to core deposit growth.

The largest areas of growth were in demand and savings deposits.
Noninterest bearing demand deposits increased $11.8 million, or 14.06%, to
$95.4 million in 2008 from $83.7 million in 2007. Interest-bearing demand
deposits increased by $7.6 million, or 28.45%, to $34.5 million in 2008 from
$26.9 million in 2007. Savings deposits increased $45.1 million, or 100.77%, to
$89.9 million in 2008 from $44.7 million in 2007. A large portion of the
savings growth was in money market accounts with a tiered interest rate
structure. Other demand deposits increased as we promoted commercial checking
accounts and Freedom 50 checking accounts. Time deposits actually decreased by
$15.8 million, or 3.15%, from $501.8 million in 2007 to $486.0 million in 2008.
During 2008, the competition for certificates of deposit was very aggressive in
marketing efforts and pricing. As a result of the shift in deposit mix, we have
been able to decrease our overall interest expense.

Time deposits of $100,000 or more equaled approximately 23.47% of
deposits at the end of 2008 and 26.65% of deposits at the end of 2007. 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:

28

Maturities
of Time Deposits of $100 Thousand and More(Dollars in thousands)
December 31, 2008

Three months or less

$
49,224Over three months through six
months


44,896Over six months through twelve
months


29,870Over one year


41,642Total

$
165,632Noninterest Income

Noninterest
income increased $899 thousand, or 19.33%, to $5.5 million for 2008 as compared
to $4.7 million in 2007. Deposit service fees, retail investment sales and
insurance commissions increased as a result of increased volume. Service
charges on deposit accounts are primarily overdraft fees. This category
increased to $2.7 million in 2008 from $2.5 million in 2007. Fees, commissions
and other income increased to $1.4 million in 2008 from $1.0 million in 2007.
This increase is primarily related to ATM and bank card interchange fees.
Insurance and investment commissions also increased in 2008 to $973 thousand
from $769 thousand in 2007. This is the result of additional sales staff,
stronger customer relationships, and meeting customer needs that is underserved
in these types of products in some of our markets.

Noninterest income increased from $3.5 million in 2006 to $4.7
million
in 2007. This is an increase of $1.2 million for the year, or 34.41%. Service
charges, including overdraft fees, increased from $2.0 million for 2006 to $2.5
million for 2007, an increase of $423 thousand, or 20.81%. This increase is due
to increased volume in demand deposit accounts. Fees increased to $994 thousand
in 2007 from $414 thousand in 2006, an increase of $580 thousand, or 140.10%.
This is largely due to reclassifying ATM service fees from net fees to gross
fees. Noninterest expenses are adjusted accordingly. Insurance and investment
fees are fees generated primarily from the sale of life insurance, annuities,
mutual funds, health insurance and other investments. Insurance and investment
commissions continued to increase from $606 thousand in 2006 to $769 thousand
in 2007.

Noninterest income as a percentage of average assets increased to
0.79%
in 2008 from 0.68% in 2007 and from 0.59% in 2006. We anticipate this percentage
to increase in 2009 as we increase noninterest income from our nonbank
subsidiaries and from increased volume.

Noninterest Expense

Noninterest expenses increased $2.9 million, or 12.44%, in 2008 to
$26.6 million from $23.7 million in 2007. The majority of the increase is
related to additional operating expenses from a new branch location in 2008,
and a full year of expenses for the five new branches opened in 2007.
Noninterest expenses totaled $23.7 million in 2007 as compared to $19.8 million
in 2006, an increase of $3.9 million, or 19.53%. The increase in noninterest
expense from 2006 to 2007 directly related to the new branches opened. We are
continuing to build our branch network in the market areas we serve and
contiguous markets, but at a much slower pace than previous years. A net gain
of $612 thousand from the sale of other real estate owned was realized in 2008
and reduced noninterest expenses for the year.

Salaries and benefits expense are our largest noninterest expense.
The
total salaries and benefits expense in the year 2008 was $15.6 million which is
a $1.7 million, or 11.80%, increase over $14.0 million in the year 2007. Total
salaries and benefits increased $2.1 million, or 17.98%, from $11.8 million in
2006 to year-end 2007. Each years increase is primarily related to the new
branches opened, a full recognition of salaries and benefits of employees added
in prior years and annual raises for existing employees.

Occupancy and equipment expenses directly correlate with branch
expansion. Occupancy expense increased $439 thousand, or 24.72%, to $2.2
million for 2008 as compared to $1.8 million for 2007. An increase of $347
thousand, or 24.28% occurred in 2007 from $1.4 million in 2006. Equipment
expense for the period of 2008 increased $91 thousand, or 4.04% from $2.3
million in 2007 as compared to $2.0 million in 2006.

An increase of FDIC assessment fees of $357 thousand for the period
2008 to $724 thousand from $367 thousand in 2007 was realized. The FDIC
assessment increased $307 thousand from $60 thousand in 2006 to $367 thousand
for the period of 2007. These are the results of new regulations. We anticipate
this expense to continue to increase as new assessments are being considered
for the banking industry by the FDIC. At the end of June 2009, a one time
assessment for all banks will be imposed at a rate of 5 basis points for total
assets less tier 1 capital. This is to be paid during the third quarter of
2009. This is estimated to be an additional pre-tax assessment of nearly $375

29

thousand. In addition, we opted into the governments
Temporary
Liquidity Guarantee Program which insures all noninterest bearing demand
deposits with unlimited FDIC insurance through December 31, 2009. An increase
in FDIC premiums will be incurred in 2009 as a result of this option as well.

Other operating expenses increased $646 thousand, or 17.36%, from
$3.7
million for the year 2007 to $4.4 million in the year 2008. Legal expenses
increased during the year as we pursued various capital raising initiatives
that were not implemented due to market conditions during both 2007 and 2008.
Other operating expenses increased $705 thousand, or 23.38%, from the year 2006
to 2007. Other operating expenses have increased as our branch network has
expanded. We are currently evaluating our operations to determine areas where
efficiency can be obtained.

The ratio of noninterest expense as a percentage of average assets
slightly increased in 2008 to 3.49% from 3.45% in 2007. The prior period for
the year ending 2007 increased from 3.39% in 2006. 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 76.96% for 2008 as compared to
77.98% for 2007 and 78.14% for 2006.

Life Insurance and Related Change of Accounting
Estimate

We have life insurance policies on the lives of four key officers.
The
Bank is the beneficiary under each policy. The total cash surrender value of
the policies was $10.2 million and $9.7 million at December 31, 2008 and
December 31, 2007, respectively. Total income for the policies during 2008 was
$475 thousand as compared to $433 thousand and $408 thousand for the years
ending 2007 and 2006, respectively. As described below, we transferred 4
policies totaling $8.1 million to separate account insurance products. The
remaining policies are general account products and total $2.0 million at
December 31, 2008.

In the latter part of 2006 and in January 2007, management began
exploring the option to purchase additional bank owned life insurance to
financially protect the Company in case of the death of other key employees.
During the first half of 2007, due diligence was conducted on products and
companies. During this process, the option to purchase separate account bank
owned life insurance became available to the Company in addition to the
traditional general account bank owned life insurance product. The primary
difference between the two is that the separate account product offers the
Company greater flexibility in investing the funds to yield a higher return and
also a larger variety of investments to choose. The earnings stream of the
investment is managed through a stable wrap provider. General account products
are sold directly by a particular insurance company which makes the investment
choices and gives substantially less flexibility in investment options. In
addition, separate account products may be classified as a 20% risk weight for
capital regulatory calculations as opposed to 100% risk weights for the general
account products. The separate account product has typically been offered to
large financial institutions, but now it is available to smaller community
banks. The Companys past asset size and capital levels did not qualify us for
separate account bank owned life insurance. But since the Company experienced
asset and capital growth, the option to purchase and like-kind exchange, or
1035 exchange, the existing policies became available. As a result, management
decided to purchase the separate account product and 1035 exchange the existing
policies.

Up until this time, the intention of management left the option
open to
cash in the existing policies before the death of the insured officers. This
created a deferred tax liability on the earnings of the policies which
typically would be tax exempt since they are life insurance proceeds.
Management, the Bank Owned Life Insurance and Compensation Committees met and
decided in August 2007 to change existing policies and any new purchases of
bank owned life insurance to the separate account product. The Board of
Directors ratified this decision in September 2007. As a result, management
changed its intention to keep the life insurance policies until the death of
the insured.

This resulted in a change of accounting estimate. As a result, the
deferred taxes were adjusted by $638 thousand and income tax expense was
reduced by the same amount during the third quarter of 2007.

Income
Taxes

Due to timing differences between book and tax treatment of several
income and expense items, a deferred tax asset of $1.2 million existed at
December 31, 2008 as compared to a deferred tax asset of $1.1 million at
December 31, 2007. The deferred tax asset represents decreases to future income
tax liabilities from future increased deductions for 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.

30

Capital

Total capital at the end of 2008 was $50.3 million compared to
$45.2
million in 2007. The increase was $5.1 million, or 11.21%. We remain
well-capitalized at the end of 2008, as defined by the capital guidelines of
our regulatory agencies. Capital as a percentage of total assets was 6.23% at
December 31, 2008 compared to 5.91% at December 31, 2007.

New Peoples did not apply to participate in the federal Troubled
Asset
Relief Program, or TARP, funds as we thought participation might not be in the
best long-term interest of our stockholders. Our region did not experience a
rapid rise in real estate prices in recent years. Likewise, real estate values
have not declined precipitously like many other regions of the country.
Regional rates of unemployment have held fairly steady compared to other
regions.

Total asset growth for 2008 slowed and we anticipate this slower
rate
of growth to continue in the near future. We still have targeted markets that
we plan to enter in the future, and additional capital may be needed to
implement those strategic plans. However, our primary source of capital for
asset growth comes from retained earnings. Our strategic plan, including
geographic growth, can be supported by projected retained earnings. If earnings
do not meet projections, additional sources of capital may have to be obtained.
Currently we have no plans to raise additional capital for our strategic
purposes.

In June 2008, a majority of New Peoples stockholders voted
to amend
the Articles of Incorporation to authorize 50 million shares of common stock.
Prior to this approval, 12 million shares of common stock were authorized.

No cash dividends have been paid historically and none are
anticipated
in the foreseeable future. New Peoples strategic plan is to continue growing
but at a slower pace. Earnings will continue to be retained to support our
growth until the board of directors considers it prudent to pay cash dividends.

Liquidity and Capital Resources

We have not had liquidity issues during 2008 and do not expect our
liquidity position to deteriorate materially in the future. We closely monitor
our liquidity and have a variety of ways to increase liquidity levels as
needed. At December 31, 2008 and December 31, 2007, we had liquid assets in the
form of cash, due from banks and federal funds sold of approximately $23.9
million and $22.3 million, respectively.

At December 31, 2008, we had borrowings from the Federal Home Loan
Bank
totaling $26.6 million as compared to $42.4 million at December 31, 2007. Of
these borrowings at December 31, 2008, none are overnight and subject to daily
interest rate changes. Term notes of $15.2 million mature in the year 2012. Two
additional borrowings totaling $12.0 million have a maturity date in the year
2018, but reduce in principal amounts monthly. We also used our line of credit
with the Federal Home Loan Bank to issue a letter of credit for $7.0 million to
the Treasury Board of Virginia for collateral on public funds. An additional
$64.5 million was available on December 31, 2008 on the $95.0 million line of
credit which is secured by a blanket lien on our residential real estate loans.

At December 31, 2008, all of our investments are classified as
available-for-sale, providing an additional source of liquidity in the amount
of $3.0 million, which is net of those securities pledged as collateral. As
mentioned above, in the second quarter of 2008, we utilized $7.0 million of our
Federal Home Loan Bank line of credit as a letter of credit for public funds
collateral.. This was authorized by the state legislature in the 2008 session,
and we have taken advantage of this efficient way to secure these deposits. We
do not have any Fannie Mae or Freddie Mac equity securities.

Our loan to deposit ratio was 102.19% at December 31, 2008 and
103.84%
at year end 2007. We anticipate this ratio to decrease as we continue to grow
deposits in our branch network. We can further lower the ratio as management
deems appropriate by managing the rate of growth in our loan portfolio and by
offering special promotions to entice new deposits. This can be done by
changing interest rates charged or limiting the amount of new loans approved.

On November 21, 2008, the Board of Directors of the Federal
Deposit Insurance Bank (FDIC) adopted a final rule relating to the Temporary
Liquidity Guarantee Program (TLG Program). The TLG Program was announced
by the FDIC on October 14, 2008, preceded by the determination of systemic
risk by the Secretary of the Department of Treasury (after consultation with
the President), as an initiative to counter the system-wide crisis in the
nations financial sector. Under the TLG Program the FDIC will
(i) guarantee, through the earlier of maturity or June 30, 2012, certain
newly issued senior unsecured debt issued by participating institutions on or
after October 14, 2008,

31

and before June 30, 2009 and (ii) provide full FDIC
deposit
insurance coverage for non-interest bearing transaction deposit accounts,
Negotiable Order of Withdrawal (NOW) accounts paying less than 0.5% interest
per annum and Interest on Lawyers Trust Accounts (IOLTA) accounts held at
participating FDIC- insured institutions through December 31, 2009.
Coverage under the TLG Program was available for the first 30 days
without charge. The fee assessment for coverage of senior unsecured debt ranges
from 50 basis points to 100 basis points per annum, depending on the
initial maturity of the debt. The fee assessment for deposit insurance coverage
is 10 basis points per quarter on amounts in covered accounts exceeding
$250,000. In December 2008, the Bank elected to participate in both guarantee
programs, which provide the Bank with an additional source of liquidity.

In the event we need additional funds, we have the ability to
purchase
federal funds under established lines of credit totaling $20.4 million. In
addition, in the third quarter of 2008 we joined with the Promontory
Interfinancial Network, LLC, otherwise known as CDARS. CDARS allows our customers to access FDIC
insurance protection on multi-million dollar certificates of deposit through
our Bank. When a customer places a large deposit through CDARS, we place their
funds into certificates of deposit with other banks in the CDARS network in
increments of less than $100,000 so that principal and interest are eligible
for FDIC insurance protection. At December 31, 2008, we had $7.3 million in
CDARS deposits.

Another source of liquidity available to us is through the brokered
deposits market. Though this has not been a strategy in the past, we may
utilize this source in the future as a lower cost source of funds.

Additional liquidity is expected to be provided by the future
growth
that management expects in deposit accounts and from loan repayments. We
believe that this future growth will result from an increase in market share in
our targeted trade area.

With the lines of credit available, anticipated deposit growth,
CDARs,
the TLG Program, and other external sources of funding, we believe we have
adequate liquidity and capital resources to meet our requirements and needs for
the foreseeable future.

Financial
Instruments with Off-Balance-Sheet Risk

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, 2008 and 2007 is as follows:

(Dollars in
 thousands)

2008

2007Financial instruments whose
 contract amounts represent credit risk:Commitments to extend
 credit

$
51,190

$
57,032Standby letters of credit


4,022


3,150Commitments 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.

32

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

Contractual Obligations

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

Payments
 Due by Period(Dollars in
 thousands)

Total

Less than
 1 year

1-3 years

3-5 years

More than
 5 yearsTrust preferred securities
indebtedness

$
16,496

$


$


$


$
16,496Federal Home Loan Bank
advances


26,582


168


5,336


10,561


10,517Line of credit


4,913





4,913





Operating Lease
Obligations


244


30


60


60


94Total

$
48,235

$
198

$
10,309

$
10,621

$
27,107Interest Sensitivity

At December 31, 2008, we had a negative cumulative gap rate
sensitivity
ratio of 40.27% for the one year re-pricing period, compared to 32.86% at
December 31, 2007. A negative cumulative gap generally indicates that net
interest income would improve in a declining interest rate environment as
liabilities re-price more quickly than assets. Conversely, net interest income
would probably decrease in periods during which interest rates are increasing.
We are closely monitoring our position and make adjustments periodically to
strategically position ourselves to enhance earnings in current and anticipated
interest rate environments. On a quarterly basis, management reviews our
interest rate risk and has decided that the current position is an acceptable
risk.

Interest Sensitivity
AnalysisDecember 31, 2008(Dollars in thousands)

1-
 90
 Days

91-365
 Days

1-3
 Years

4-5
 Years

6-15
 Years

Over
 15
 years

TotalUses of funds:Loans

$
127,828

$
95,821

$
116,025

$
210,873

$
116,072

$
54,555

$
721,174Federal funds sold


1,813

















1,813Investments


3,073





3,449








1,326


7,848Bank owned life
insurance


10,153

















10,153Total earning assets

$
142,867

$
95,821

$
119,474

$
210,873

$
116,072

$
55,881

$
740,988Sources of funds:Interest Bearing DDA

$
34,498

$


$


$


$


$


$
34,498Savings & MMDA


89,787

















89,787Time Deposits


158,344


233,029


76,586


17,996








485,955Trust preferred
securities


16,496

















16,496Other borrowings


4,913





5,000


10,225


11,357





31,495Total interest bearing
liabilities

$
304,038

$
233,029

$
81,586

$
28,221

$
11,357

$


$
658,231Discrete Gap

$
(161,171
)
$
(137,208
)
$
37,888

$
182,652

$
104,715

$
55,881

$
82,757Cumulative Gap

$
(161,171
)
$
(298,379
)
$
(260,491
)
$
(77,839
)
$
26,876

$
82,757Cumulative Gap as % of Total
Earning Assets


(21.75
%)

(40.27
%)

(35.15
%)

(10.50
%)

3.63
%

11.17
%33

Item 7A.
Quantitative
 and Qualitative Disclosures About Market RiskMarket 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 five 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 tables summarize 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, 2008 and 2007. During 2008, we reduced some of our established
limitations to match our interest risk tolerance. The changes of percentages of
modeled changes in net interest income from 2007 to 2008 are reflective of the
strategies implemented during a historically low interest rate environment. Our
position changed from 2007 to 2008 to be in line with an interest rate decline
to best enhance earnings. As interest rates increase, we will implement different
strategies to enhance our earnings. At both dates, our interest rate risk is
within the established limitations.

2008Immediate
 Estimated Increase
 Basis Point Change
 In Interest Rates

%
 Increase
 (Decrease) in Net
 Interest Income

Established
 Limitation+300



(10.90
)%

(15.00
)%+200



(7.69
)%

(10.00
)%+100



(3.99
)%

(7.00
)%-100



9.38
%

(7.00
)%-200



11.32
%

(10.00
)%-300



17.06
%

(15.00
)%2007Immediate
 Estimated Increase
 Basis Point Change
 In Interest Rates

%
 Increase
 (Decrease) in Net
 Interest Income

Established
 Limitation+300



16.15
%

(20.00
)%+200



11.17
%

(15.00
)%+100



5.53
%

(7.00
)%-100



(5.31
)%

(7.00
)%-200



(10.42
)%

(15.00
)%-300



(13.25
)%

(20.00
)%The type of modeling used to generate the above tables 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

34

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.35

Item 8.
Financial Statements and Supplementary DataFINANCIAL
STATEMENTS

CONTENTS

PageReports of the Independent Registered
 Public Accounting Firm

37Consolidated Balance Sheets as of December
 31, 2008 and 2007

39Consolidated Statements of Income  Years
 Ended December 31, 2008, 2007, and 2006

40Consolidated Statements of Stockholders
 Equity  Years Ended December 31, 2008, 2007 and 2006

41Consolidated Statements of Cash Flows 
 Years Ended December 31, 2008, 2007 and 2006

42Notes to Consolidated Financial Statements

4336

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING
FIRM

To the Board
of Directors and
Stockholders of New Peoples Bankshares, Inc.
Honaker, Virginia

We have
audited the accompanying consolidated balance sheets of New Peoples Bankshares,
Inc. as of December 31, 2008 and 2007, 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, 2008. New Peoples Bankshares, Inc.s
management is responsible for these consolidated financial statements. Our responsibility
is to express an opinion on these consolidated 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 audit 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. as of December 31, 2008 and 2007, and the results of its
operations and its cash flows for each of years in the three-year period ended
December 31, 2008 in conformity with accounting principles generally accepted
in the United States of America.

We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), New Peoples Bankshares, Inc.s internal
control over financial reporting as of December
31, 2008, 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 10, 2009 expressed an adverse opinion.

/S/
BROWN,
 EDWARDS AND COMPANY, L. L. P.CERTIFIED
 PUBLIC ACCOUNTANTSBluefield,
 West Virginia
 March 10, 200937

REPORT OF INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM

To the Board
of Directors and
Stockholders of New Peoples Bankshares, Inc.
Honaker, Virginia

We have
audited New Peoples Bankshares, Inc.s internal control over financial
reporting as of December 31, 2008,
based on criteria established in Internal ControlIntegrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission
(COSO). New Peoples Bankshares, Inc.s management is responsible for
maintaining effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over financial reporting,
included in the accompanying Managements Annual Report on Internal Control
over Financial Reporting. Our responsibility is to express an opinion on 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 of internal control over financial reporting
included obtaining an understanding of internal control over financial
reporting, assessing the risk that a material weakness exists, and testing and
evaluating the design and operating effectiveness of internal control based on
the assessed risk. Our audit also included 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.

A
material
weakness is a control deficiency, or combination of deficiencies, in internal
control over financial reporting, such that there is a reasonable possibility that
a material misstatement of the Companys annual or interim financial statements
will not be prevented or detected on a timely basis. The following material
weaknesses have been identified and included in managements assessment.

At year
end, the Company was in the process of updating loan classifications in its
financial reporting systems to reflect new guidance related to required
quarterly reports filed with the FDIC. As this had been an ongoing process,
loan classifications were reported incorrectly on quarterly reports for each
quarter of 2008. The classification errors amounted to approximately $5.8
million on the quarterly report filed January 31, 2009 for the period ended
December 31, 2008. The Company implemented a program to address these
mis-classifications and amended the report for the period ended December 31,
2008. The Company has also included the corrected information in its December
31, 2008 financial statements. This material weakness was considered in
determining the nature, timing, and extent of audit tests applied in our audit
of the 2008 financial statements, and this report does not affect our report
dated March 10, 2009 on those financial statements.

A
material
weakness has been identified with regard to the design and operating
effectiveness of certain entity level controls, including the Companys Codes
of Ethics and Conduct. The Company has addressed these matters and has plans to
strengthen controls in these areas. This material weakness was considered in determining
the nature, timing, and extent of audit tests applied in our audit of the 2008
consolidated financial statements, and this report does not affect our report
dated March 10, 2009 on those consolidated financial statements.

In our
opinion, because of the effect of the material weaknesses described above on
the achievement of the objectives of the control criteria, New Peoples
Bankshares, Inc. has not maintained effective internal control over financial
reporting as of December 31, 2008,
based on criteria established in Internal ControlIntegrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission
(COSO).

We have
also audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated balance sheets and the
related consolidated statements of income, stockholders equity, and cash flows
of New Peoples Bankshares, Inc., and our report dated March 10, 2009 expressed
an unqualified opinion.

/S/
BROWN,
 EDWARDS AND COMPANY, L. L. P.CERTIFIED
 PUBLIC ACCOUNTANTSBluefield,
 West VirginiaMarch 10,
 200938

CONSOLIDATED
BALANCE SHEETS
DECEMBER 31, 2008 AND 2007(IN THOUSANDS EXCEPT SHARE and SHARE DATA)

2008

2007ASSETSCash and due from
banks

$
22,099

$
20,195Federal funds sold


1,813


2,062Total Cash and
Cash
 Equivalents


23,912


22,257Investment SecuritiesAvailable-for-sale


3,449


4,974Loans receivable


721,174


682,260Allowance for
loan losses


(6,904
)

(6,620
)Net
Loans


714,270


675,640Bank premises and equipment,
 net


36,829


34,892Equity securities
(restricted)


3,903


4,258Other real estate
owned


2,496


2,051Accrued interest
receivable


4,537


4,969Life insurance
investments


10,153


9,745Goodwill and other
intangibles


4,633


4,829Other assets


3,716


2,336Total
Assets

$
807,898

$
765,951LIABILITIESDepositsDemand
depositsNoninterest
bearing

$
95,448

$
83,680Interest-bearing


34,498


26,857Savings
deposits


89,787


44,721Time
deposits


485,955


501,775Total
Deposits


705,688


657,033FHLB advances


26,582


42,434Accrued interest
payable


2,155


2,822Accrued expenses and other
 liabilities


1,741


1,917Line of credit
borrowing


4,913


Trust preferred
securities


16,496


16,496Total
Liabilities


757,575


720,702STOCKHOLDERS
EQUITYCommon stock - $2.00 par
 value; 50,000,000 shares authorized;10,008,902 and
9,959,477
 shares issued and outstanding for 2008 and 2007, respectively


20,017


19,919Additional paid-in-capital


21,683


21,484Retained earnings


8,576


3,839Accumulated other
 comprehensive income (loss)


47


7Total
Stockholders Equity


50,323


45,249Total
Liabilities and
 Stockholders Equity

$
807,898

$
765,951The accompanying notes are an
integral part of this statement.

39

NEW PEOPLES BANKSHARES, INC.
CONSOLIDATED STATEMENTS OF
INCOME
FOR THE YEARS ENDED DECEMBER 31, 2008, 2007 AND 2006(IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)

2008

2007

2006INTEREST AND
DIVIDEND INCOMELoans including
fees

$
51,911

$
50,884

$
40,762Federal funds
sold


35


129


191Investments


208


254


172Dividends on
equity securities
 (restricted)


163


180


155Total Interest
and Dividend
 Income


52,317


51,447


41,280INTEREST
EXPENSEDepositsDemand


240


164


142Savings


682


485


489Time deposits
below $100,000


12,556


14,851


11,295Time deposits
above $100,000


7,261


8,098


5,709FHLB
advances


1,217


857


754Other
borrowings


134





Trust Preferred
Securities


1,005


1,283


1,004Total Interest
Expense


23,095


25,738


19,393NET INTEREST
 INCOME


29,222


25,709


21,887PROVISION FOR LOAN LOSSES
(Note 6)


1,500


3,840


1,277NET INTEREST INCOME AFTER
PROVISION FOR
 LOAN LOSSES


27,722


21,869


20,610NONINTEREST
INCOMEService
charges


2,704


2,455


2,032Fees,
commissions and other
 income


1,398


994


414Insurance and
investment fees


973


769


606Life insurance
investment
 income


475


433


408Total
Noninterest Income


5,550


4,651


3,460NONINTEREST
EXPENSESSalaries and
employee benefits
 (Note 14)


15,628


13,978


11,848Occupancy
expense


2,215


1,776


1,429Equipment
expense


2,345


2,254


1,971Advertising and
public
 relations


477


437


381Data processing
and
 telecommunications


1,341


1,114


1,047FDIC
Assessment


724


367


60Other real
estate owned and
 repossessed vehicles


134


27


53Net gains on
sale of other
 real estate owned


(612
)




Other operating
expenses


4,367


3,721


3,016Total
Noninterest Expenses


26,619


23,674


19,805INCOME BEFORE INCOME
TAXES


6,653


2,846


4,265INCOME TAX
 EXPENSE (Note 9)Current income
tax expense


1,916


614


1,175Change of
accounting estimate (Note 13)





(638
)

Total Income
Tax Expense (benefit)


1,916


(24
)

1,175NET INCOME

$
4,737

$
2,870

$
3,090Earnings Per
 ShareBasic

$
0.47

$
0.29

$
0.31Fully
Diluted

$
0.46

$
0.28

$
0.30Average
 Weighted Shares of Common StockBasic


9,980,348


9,957,949


9,931,713Fully
Diluted


10,234,909


10,371,577


10,384,100The accompanying notes are an integral part
of this statement.

40

NEW PEOPLES BANKSHARES, INC.CONSOLIDATED STATEMENTS OF
STOCKHOLDERS EQUITYFOR THE YEARS ENDED DECEMBER 31, 2008,
2007 AND 2006(IN
THOUSANDS INCLUDING SHARE DATA)

Shares
 of
 Common
 Stock

Common
 Stock

Additional
 Paid in
 Capital

Retained
 Earnings

Accumu-
 lated Other
 Compre-
 hensive Income 
 (Loss)

Total StockholdersEquity

Compre-
 hensive 
 IncomeBalance, December 31,
2005


7,619

$
15,239

$
21,265

$
2,475

$
(15
)
$
38,964Net Income











3,090





3,090


3,090Unrealized gain (net of deferred
tax of $8) on available-for-sale
 securities














17


17


17Stock Options
Exercised


38


75


200








275Balance, December 31,
2006


7,657

$
15,314

$
21,465

$
5,565

$
2

$
42,346

$
3,107Net Income











2,870





2,870


2,87013-for-10 stock split, September
12, 2007


2,298

$
4,596





(4,596
)Unrealized gain (net of deferred
tax of $4) on available-for-sale
 securities














5


5


5Stock Options
Exercised


4


9


19








28Balance, December 31,
2007


9,959

$
19,919

$
21,484

$
3,839

$
7

$
45,249

$
2,875Net Income











4,737





4,737


4,737Unrealized gain(net of deferred
tax of $21) on available-for-sale
 securities














40


40


40Stock Options
Exercised


49


98


199








297Balance, December 31,
2008


10,008

$
20,017

$
21,683

$
8,576

$
47

$
50,323

$
4,777The accompanying notes are an
integral part of this statement.

41

NEW
PEOPLES BANKSHARES, INC.CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2008, 2007 AND 2006(IN THOUSANDS)

2008

2007

2006CASH
 FLOWS FROM OPERATING ACTIVITIESNet
Income

$
4,737

$
2,870

$
3,090Adjustments to
reconcile net
 income to net cash provided by operating activities:Depreciation


3,000


2,598


2,300Provision for
Loan Losses


1,500


3,840


1,277Income (less
expenses) on Life
 Insurance


(408
)

(368
)

(346
)Loss on sale of
fixed assets


3





(Gain) loss on
sale of
 foreclosed real estate


(612
)




30Accretion of
bond premiums/discounts


(6
)

(19
)

(29
)Deferred tax
(benefit) expense


112


(1,375
)

(267
)Amortization of
core deposit
 intangible


196


103


Net change
in:Interest
receivable


432


(829
)

(1,135
)Other
Assets


(1,492
)

867


(570
)Accrued
interest payable


(667
)

39


1,225Accrued
expense and other
 liabilities


(176
)

(90
)

630Net Cash Provided by Operating
 Activities


6,619


7,636


6,205CASH FLOWS FROM INVESTING
ACTIVITIESNet increase in
loans


(41,766
)

(102,228
)

(101,318
)Purchase of
securities
 available for sale


(4,000
)

(4,990
)

(2,985
)Proceeds from
sale and maturities of
 securities available-for-sale


5,570


3,533


5,700Purchase of
Federal Reserve Bank stock


(120
)

(128
)

(76
)(Purchase) sale
of Federal Home Loan Bank
 stock


475


(1,978
)

197Acquisition of
branchesLoans
acquired





(13,691
)

Deposits
assumed





60,380


Bank
premises





(1,178
)

Goodwill and
other intangibles





(4,932
)

Payments for
the purchase of property


(4,940
)

(6,874
)

(9,692
)Proceeds from
sales of other real estate
 owned


1,804





Net Cash Used
in Investing Activities


(42,977
)

(72,086
)

(108,174
)CASH FLOW FROM FINANCING
ACTIVITIESCommon stock
options exercised


297


28


275Issuance of
trust preferred securities








5,000Net increase in
line of credit borrowings


4,913





Net change
in:Demand
deposits


19,409


12,582


11,062Savings
deposits


45,066


(3,425
)

(1,884
)Time
deposits


(15,820
)

15,310


100,317Net increase
(decrease) in FHLB borrowings


(15,852
)

42,434


(11,570
)Net Cash
Provided by Financing Activities


38,013


66,929


103,200Net increase in
cash and cash equivalents


1,655


2,376


1,231Cash and Cash Equivalents,
Beginning of
 Year


22,257


19,881


18,650Cash and Cash Equivalents, End
of Year

$
23,912

$
22,257

$
19,881Supplemental Disclosure of Cash
Paid During
 the Year for:Interest

$
22,428

$
25,777

$
20,619Taxes

$
1,625

$
1,153

$
1,490Supplemental Disclosure of Non
 Cash Transactions:Other real
estate acquired in settlement of
 foreclosed loans

$
1,637

$
521

$
749Loans made to
finance sale of foreclosed
 real estate

$
50

$
828

$
455The accompanying notes are an integral part
of this statement.

42

NEW PEOPLES BANKSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1
NATURE OF OPERATIONSNature of Operations  New Peoples Bankshares, Inc.
(The
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
member bank, the Bank is subject to regulation 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. On September 27, 2006, the
Company established NPB Capital Trust 2 for the purpose of issuing additional
trust preferred securities. On January
1, 2009, NPB Financial Services, Inc. was transferred from New Peoples
Bankshares, Inc. to become a subsidiary of New Peoples Bank, Inc.

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 and 2 are 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 case 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.

43

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 $12.6 million as of December 31, 2008. 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.
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 that, 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 environmental factors and 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 collateral values and changes in estimates of 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.

Stock Split - All share and per share amounts reflected
herein have been adjusted
to retroactively reflect those stock splits effected in the form of stock
dividends.

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 lifeBuildings

39 yearsPaving and landscaping

15 yearsComputer equipment and
 software

3 to 5 yearsVehicles

5 yearsFurniture and other
 equipment

5 to 7 yearsAdvertising Cost Advertising costs are expensed in the period
incurred.

Stock Options Effective January 1, 2006, the Company
adopted Statement of Financial
Accounting Standards (SFAS) No. 123(R), Share-based Payment, using the
modified prospective transition method. No stock options were granted in 2008,
2007 and 2006. However, if stock
options had been granted, the Company would have recognized the expense of the
stock-based employee compensation by using the fair value method directly
against net income.

44

NEW PEOPLES BANKSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 2
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):Income Taxes Deferred income tax assets and
liabilities are determined using the
liability (or balance sheet) method.
Under this method, the net deferred tax asset or liability is determined
based on the tax effects of the temporary differences between the book and tax
bases of the various balance sheet assets and liabilities and gives current
recognition to changes in tax rates and laws.

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

Comprehensive Income 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 and are
determined by the Treasury Method.

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.

Business Combinations- For purchase acquisitions accounted
for as
a business combination, the Company is required to record the assets acquired,
including identified intangible assets and liabilities assumed at their fair
value, which in many instances involves estimates based on third party
valuations, such as appraisals, or internal valuations based on discounted cash
flow analyses or other valuation techniques. The determination of the useful
lives of intangible assets is subjective, as is the appropriate amortization
method for such intangible assets. In addition, purchase acquisitions may
result in goodwill, which is subject to ongoing periodic impairment testing
based on the fair value of net assets acquired compared to the carrying value
of goodwill. Changes in acquisition multiples, the overall interest rate
environment, or the continuing operations of the assets acquired could have a
significant impact on the periodic impairment testing. For additional
discussion concerning our valuation of intangible assets, see Note 12,
Intangible Assets.

Reclassification of Financial Statement Presentation 
Certain reclassifications in the 2007 and
2006 Income Statements have been made regarding data processing and
telecommunications expenses that was previously classified as other operating expenses. Certain reclassifications in the Statement
of Cash Flows have been made to the 2006 financial statements regarding trust
preferred securities issued and other assets to conform to the 2007 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 $1.8 million and $11.3 million at December 31, 2008 and 2007,
respectively. Deposit amounts at other
commercial banks may, at times, exceed federally insured limits.

45

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)

Amortized
 Cost

Gross
 Unrealized
 Gains

Gross
 Unrealized
 Losses

Approximate
 Fair
 ValueDecember 31, 2008Available for SaleU.S. Government Agencies

$
3,000

$
63

$


$
3,063Mortgage backed securities


378


7





386Total Securities AFS

$
3,378

$
70

$


$
3,449December 31, 2007Available for SaleU.S. Government Agencies

$
4,494

$
8

$


$
4,502Mortgage backed securities


468


4





472Total Securities AFS

$
4,962

$
12

$


$
4,974At
December 31, 2008 and 2007, the available for sale portfolio included no
individual investments for which the fair market value was less than amortized
cost. No securities had an other than
temporary impairment.

The
amortized cost and fair value of investment securities at December 31, 2008, 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)

Amortized
 Cost

Fair
 Value

Weighted
 Average
 YieldSecurities Available for
 SaleDue in one year or less

$


$



Due after one year through
 five years


3,378


3,449


3.53
%Total

$
3,378

$
3,449


3.53
%Investment
securities with a carrying value of $414 thousand and $3.5 million at December
31, 2008 and 2007, 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 $3.9 million and $4.3 million as of
December 31, 2008 and 2007, respectively.

NOTE 5
LOANS:Loans receivable outstanding
at December 31, are summarized as follows:

(Dollars are in thousands)

2008

2007Commercial, financial and
 agricultural

$
110,060

$
121,198Real estate-construction


64,595


38,420Real estate-mortgages


483,471


463,079Installment loans to
 individuals


63,048


59,563Total loans

$
721,174

$
682,260The
following is a summary of information at December 31, pertaining to
nonperforming loans:

(Dollars are in thousands)

2008

2007Principal:Nonaccrual Loans

$
6,414

$
2,946Loans past due 90 days or more
still accruing interest


33


267Total
Non-performing Loans

$
6,447

$
3,21346

NEW PEOPLES BANKSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 5
LOANS (CONTINUED):The
following table presents the Companys investment in loans considered to be
impaired and related information on those impaired loans:

(Dollars are in thousands)

2008

2007

2006Recorded investments in
 loans considered to be impaired

$
6,844

$
9,627

$
1,382Loans considered to be
 impaired that were on a non-accrual basis


6,414


2,946


1,206Recorded investment in
 impaired loans with related allowance


642


7,450


261Allowance for loan losses
 related to loans considered to be impaired


218


1,273


82Average recorded investment
 in impaired loans


6,239


6,130


912Total interest income not
 recognized on impaired loans


221


227


65Recorded investment in
 impaired loans with no related allowance


6,202


2,177


1,121NOTE 6
ALLOWANCE FOR LOAN LOSSES:A summary of transactions in
the allowance for loan losses is as follows:

(Dollars are in thousands)

2008

2007

2006Balance, beginning of year

$
6,620

$
4,870

$
3,943Provision for loan losses


1,500


3,840


1,277Recoveries of loans
 charged off


95


76


73Loans charged off


(1,311
)

(2,166
)

(423
)Balance, End of Year

$
6,904

$
6,620

$
4,870Percentage of Loans


0.96
%

0.97
%

0.86
%NOTE 7
BANK PREMISES AND EQUIPMENT:Bank premises and equipment
at December 31, are summarized as follows:

(Dollars are in thousands)

2008

2007Land

$
10,423

$
9,394Buildings and improvements


22,113


20,658Furniture and equipment


15,971


13,780Vehicles


668


665Construction in progress


1,999


1,77651,174


46,273Less accumulated
 depreciation


(14,345
)

(11,381
)Bank Premises and
 Equipment

$
36,829

$
34,892Depreciation
expense for 2008, 2007, and 2006 was $3.0 million, $2.6 million, and $2.3
million, respectively.

At
December 31, 2008, construction in progress included the costs of buildings and
land purchased for new branches in Duffield, Virginia and Princeton, West
Virginia. In December 2008, the Board
of Directors resolved to sell the Duffield location. It is being marketed at a projected net sales price greater than
book value; however, the length of time it will take to find a qualified buyer
is not known. The Duffield property is
not being depreciated. The Princeton
location is anticipated to operate as a full service branch location in 2009 at
no additional cost to complete. At
December 31, 2007, construction in progress included the costs of building and
land purchased for new branches in Duffield, Virginia; and Bluewell and
Princeton, West Virginia. The Bluewell
location opened in August 2008 as a full service branch.

47

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
$165.6 million and $175.1 million at December 31, 2008 and 2007, respectively

At December 31, 2008, the
scheduled maturities of certificates of deposit are as follows (dollars are in
thousands):

2009

$
123,9902010


30,4552011


5,8482012


4,3172013


1,022After five years


Total

$
165,632NOTE 9
INCOME TAX EXPENSE:The components of income tax
expense for the years ended December 31, are as follows:

(Dollars are in thousands)

2008

2007

2006Current expense

$
1,804

$
1,512

$
1,442Deferred expense (benefits)


112


(1,536
)

(267
)Net income Tax

$
1,916

$
(24
)
$
1,175The deferred tax expense
(benefit) resulting from temporary differences for the years ended December 31
is as follows:

(Dollar are in thousands)

2008

2007

2006Organization and start-up
cost

$
2

$
2

$
Provision for loan
losses


(127
)

(642
)

(299
)Depreciation


143


(74
)

(54
)Deferred compensation
expense


(39
)

(34
)

(32
)Accrued employee
benefits


81


(172
)

Amortization of core
deposits





(26
)

Amortization of
goodwill


46


47


Earnings on bank owned life
insurance





(638
)

118Capitalized interest and repair
expense


6


1


Deferred Income Tax Expenses
(Benefit)

$
112

$
(1,536
)
$
(267
)The net deferred tax assets
and liabilities resulting from temporary differences as of December 31 are
summarized as follows:

(Dollars are in thousands)

2008

2007

2006Deferred Tax Assets:Organization and start-up
cost

$
1

$
3

$
5Allowance for loan
losses


2,306


2,179


1,537Deferred compensation


215


176


142Accrued employee
benefits


91


172


Amortization of core
deposits


26


26


Capitalized interest and repair
expense


12


18


19Total Assets


2,651


2,574


1,703Deferred Tax
LiabilitiesAccelerated
depreciation


1,381


1,238


1,312Amortization of
goodwill


93


47


Unrealized gain on securities
available for sale


24


4


1Unrealized income on bank owned
life insurance








638Total Liabilities


1,498


1,289


1,951Net deferred Tax Asset
(Liability)

$
1,153

$
1,285

$
(248
)48

NEW PEOPLES BANKSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (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)

2008

2007

2006Income tax expense at the
applicable federal rate

$
2,262

$
968

$
1,450Permanent differences resulting
from:Nondeductible expenses


15


40


31Tax exempt interest
income


(160
)

(190
)

(191
)State income taxes less federal
tax effect


51


40


24Bank owned life
insurance


(139
)

(125
)

Change of accounting
estimate





(638
)

Other adjustments


(113
)

(119
)

(139
)Income Tax Expense
(benefit)

$
1,916

$
(24
)
$
1,175NOTE 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 $12.4 million at December 31, 2008 and $11.2 million
at December 31, 2007. During the year ended December 31, 2008, total principal
additions were $11.7 million and principal payments were $10.6 million,
including renewals. During the year ended December 31, 2007, total principal
additions were $11.5 million and principal payments were $12.3 million,
including renewals. 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 $16.9 million and
$19.8 million at the end of years 2008 and 2007, respectively.


NOTE 11
SIGNIFICANT ACQUISITION:On
June 29, 2007, the Bank finalized the purchase of assets and assumption of
liabilities of two branches of FNB Southeast. The acquisition of the branches
was accounted for as a business combination and, as the purchase price exceeded
the value of the net identified tangible and intangible assets acquired,
resulted in $4.1 million of goodwill being recorded as an intangible asset on
the accompanying balance sheet. The acquisition provided, in addition to other
factors, a strategic opportunity to expand into these markets without the delay
normally experienced in building a branch and future growth.

The
acquisition transaction resulted in an estimated fair value of $13.7 million in
loans acquired and $60.4 million in deposits assumed. The resulting goodwill
was $4.1 million. The estimated core deposit premium is $810 thousand and is
being amortized over 6.84 years.

In
October 2007, the Bank agreed to purchase the $6.5 million remaining loan
portfolio and interest receivable from FNB Southeast at a 28.42% discount. In
addition, the Bank also obtained the right to collect on previously charged-off
credits of FNB Southeast in the market area totaling $658 thousand. At the time
of settlement, November 2, 2007, the outstanding balance of the notes purchased
was $6.2 million and the discount recorded was $2.2 million.

The
outstanding balance of the notes purchased was $3.2 million and $5.5 million at
December 31, 2008 and 2007, respectively. The discount balance was $1.2 million
and $2.1 million at December 31, 2008 and 2007, respectively.

49

NEW PEOPLES BANKSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 12
INTANGIBLE ASSETS:In,
2007, the Bank completed the acquisition of two branches in which certain
intangible assets were identified related to the value of core deposits. The
estimated fair value of the core deposits was determined based on the present
value of future cash flow related to those deposits considering the industry
standard financial instrument type present value methodology. All-in costs
and runoff balances by year are discounted by term specific Federal Home Loan
Bank advance rates used as a measure of the best available approximate
alternative costs of funds. The estimated economic advantage embedded in the
acquired deposits as compared to alternative values is the core deposit
intangible.

(Dollars are in thousands)

Gross
 Carrying
 Value

Accumulated
 Amortization

Net
 Carrying
 ValueDecember 31, 2008Amortizable core deposit
 intangibles

$
810

$
299

$
511Unamortizable goodwill

$
4,122

$


$
4,122December 31, 2007Amortizable core deposit
 intangibles

$
810

$
103

$
707Unamortizable goodwill

$
4,122

$


$
4,122Amortization
expense related to these intangibles is based upon the average economic life of
the core deposits. The estimates of expense for the periods are as indicated
below using the sum of the years digits method of amortization.

(Dollars are in thousands)Estimated amortization
 expenseFor year ended December 31,
 2009

$
154For year ended December 31,
 2010


131For year ended December 31,
 2011


101For year ended December 31,
 2012


71For year ended December 31,
 2013


45For year ended December 31,
 2014


9Total

$
511Goodwill
is tested at least annually to determine if there is any impairment. The first
test conducted in accordance with SFAS. No. 142 occurred as of November 30,
2008 and will continue hereafter on an annual basis on this date unless it is
deemed necessary to test for impairment on a more frequent basis. No impairment
was recognized in 2008.

NOTE 13
CHANGE OF ACCOUNTING ESTIMATE:During
the third quarter of 2007, the Company changed its intention related to its
ownership of bank owned life insurance on members of management. When the life
insurance was purchased, the determination was made that the insurance policies
may be cashed in before the death of an insured employee creating a potential
taxable event at that time. During September 2007, the Board of Directors
restructured the life insurance program and decided that the policies in
existence at that time as well as any additional policies to be purchased would
be held to the death of the insured at which time the Company will receive the
proceeds in a tax free transaction. Therefore, as a result deferred taxes were
adjusted by $638 thousand which had been previously provided and income tax
expense was reduced by the same amount during the third quarter of 2007. The
adjustment was reflected as a change of accounting estimate in accordance with
Financial Accounting Standards Board Statement No. 154, (As Amended) Accounting Changes and Error Corrections.

NOTE 14
RETIREMENT PLANS:The
Company has established a qualified defined contribution plan that 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 $479 thousand,
$393 thousand, and $356 thousand to the defined contribution plan for 2008,
2007 and 2006, respectively.

50

NEW PEOPLES BANKSHARES, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)NOTE 14
RETIREMENT PLANS (CONTINUED):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
$113 thousand, $101 thousand, and $95 thousand, for 2008, 2007 and 2006,
respectively.

NOTE 15
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
1,287,000 shares of the Companys common stock may be issued to employees and
directors as adjusted for the 13-for-10 stock split effected in the form of a
stock dividend on September 12, 2007 and a 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 regulator. The Plan will expire on
May 31, 2011, unless terminated earlier by the board of directors. At December
31, 2008, there were 192,777 additional shares available for grant under the
Plan. All options granted and outstanding are fully vested. The Company did not
grant any options in 2008, 2007 and 2006. The intrinsic values of stock options
exercised were $343 thousand, $31 thousand, and $296 thousand for 2008, 2007
and 2006.

Information about stock
options outstanding at December 31, 2008 follows:

Exercise
 Price



Number
 Outstanding
 and
 Exercisable

Weighted
 Average
 Remaining Contractual Life

Weighted
 Average
 Exercise$
5.25



230,613


3.00
 years

$
5.25$
6.99



200,250


4.52
 years

$
6.99$
9.44



132,145


6.00
 years

$
9.44$
11.54



399,912


7.00
 years

$
11.54Totals


962,920


6.11
 years

$
8.80A summary of the status of
the Companys stock option plan is presented below:

2008

2007

2006Number
 of
 Shares

Weighted
 Average
 Exercise
 Price

Number
 of
 Shares

Weighted
 Average
 Exercise
 Price

Number
 of
 Shares

Weighted
 Average
 Exercise
 PriceOutstanding and exercisable,
Beginning of year


1,036,850

$
8.68


809,062

$
11.28


851,792

$
11.10Effect of 13 for 10 stock split
effected in the form of a stock
 dividend








239,388


(2.60
)Exercised


(49,425
)

6.03


(4,250
)

6.93


(37,705
)

7.29Forfeited


(24,505
)

9.55


(7,350
)

13.03


(5,025
)

11.37Outstanding and exercisable, end
of year


962,920

$
8.80


1,036,850

$
8.68


809,062

$
11.28NOTE 16
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,
2008, approximately $13.9 million was available for dividend distribution.

51

NEW PEOPLES BANKSHARES, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)NOTE 17
LEASING ACTIVITIES:The Companys leasing
activities consist of the leasing of land and buildings under agreements in
which the Bank is lessee. These leases have been classified as operating
leases.

The following is a schedule
by years of future minimum rental payments 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, 2008:

Year ending December 31:2009

$
302010


302011


302012


302013


30Thereafter


94Total minimum payments
 required

$
244Rental commitments of less
than one year are not included in the above schedule. Rentals charged to operations
under operating leases were $34 thousand, $60 thousand, and $60 thousand, for
the years ended 2008, 2007, and 2006, respectively.

NOTE 18
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, 2008. In addition, the Bank may borrow up to an additional $61.5 million
from the Federal Home Loan Bank under a line of credit which is secured by a
blanket lien on residential real estate loans.

The Bank had no overnight
borrowings subject to daily rate changes from the Federal Home Loan Bank at
December 31, 2008. The Bank had borrowings of $32.2 million that were overnight
with interest rates that change daily as of December 31, 2007. All other
borrowings are at fixed rates.

The Bank had $26.6 million in
term borrowings with the Federal Home Loan Bank at December 31, 2008 and $10.2
million at December 31, 2007. The borrowings consist of convertible notes
totaling $15.2 million and $10.2 million at December 31, 2008 and 2007,
respectively with a weighted average interest rate of 3.76% and 4.03%. The
convertible notes have a quarterly Bermudan call feature beginning in 2008 and
mature in 2012. Two additional borrowings totaling $11.4 million at December
31, 2008 were obtained in 2008 to fund various real estate loans. These
borrowings have fixed rates with an average weighted interest rate of 4.07%,
principal reducing to $0 at the maturity in 2018. A letter of credit for $7.0
million was issued in 2008 to the Treasury Board of Virginia for collateral on
public funds. No draws on the letter of credit have been issued.

NOTE 19
LEGAL CONTINGENCIES:Various legal claims 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 20
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)

2008

2007Commitments to extend
 credit

$
51,190

$
57,032Standby letters of credit


4,022


3,15052

NEW PEOPLES BANKSHARES, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)NOTE 20
FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK (CONTINUED):Commitments to extend credit
are agreements to lend to a customer at either a fixed or variable interest
rate as long as there is no violation of any condition established in the
contract. Commitments generally have fixed expiration dates or other
termination clauses and may require payment of a fee. Since many of the commitments
are expected to expire without being drawn upon, the total commitment amounts
do not necessarily represent future cash requirements. The Bank evaluates each
customers creditworthiness on a case-by-case basis. The amount of collateral
obtained, if deemed necessary by the Bank upon extension of credit, is based on
managements credit evaluation. Collateral held varies but may include accounts
receivable, inventory, property and equipment, and income-producing commercial
properties.

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

NOTE 21
LINE OF CREDIT:In June 2008, the Company
obtained a three year revolving line of credit totaling $6.5 million from
Silverton Bank. This line of credit replaced the existing line of credit
totaling $1.5 million. The interest rate is priced at Wall Street Journal
Prime, or 5.00% at December 31, 2008, and will change as the Wall Street
Journal Prime rate changes, subject to a floor rate of 5.00%. Collateral for
the line of credit is the subsidiary, New Peoples Bank, Inc. common stock. The
balance at December 31, 2008 was $4.9 million with $1.6 million available for
future draws. The purpose of the line of credit is for general operations and
capital injections to the subsidiaries.

NOTE 22
TRUST PREFERRED SECURITIES:On September 27, 2006, the
Company completed the issuance of $5.2 million in floating rate trust preferred
securities offered by its wholly owned subsidiary, NPB Capital Trust 2. The
proceeds of the funds were used for general corporate purposes, which Include
capital management for affiliates and the acquisition of two branch banks. The
securities have a floating rate of 3 month LIBOR plus 177 basis points, which
resets quarterly, with a current rate at December 31, 2008 of 6.59%.

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 were used for general corporate purposes which included
capital management for affiliates, retirement of indebtedness and other
investments. The securities have a floating rate of 3 month LIBOR plus 260
basis points, which resets quarterly, with a current rate at December 31, 2008
of 7.42%.

Under the terms of the
subordinated debt transactions, 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.

NOTE 23
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 that, as of December 31, 2008, the Company and the Bank
meet all capital adequacy requirements to which they are subject.

53

NEW PEOPLES BANKSHARES, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)NOTE 23
REGULATORY MATTERS (CONTINUED):As of July 2008, the most
recent date of notification, the Federal Reserve Bank of Richmond 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,
2008 and 2007, respectively.

Minimum
 to Be
 Well Capitalized
 Under Prompt
 Corrective Action
 ProvisionsActual

Minimum
 Capital
 Requirement(Dollars are in thousands)

Amount

Ratio

Amount

Ratio

Amount

RatioDecember 31, 2008:Total Capital to Risk
 Weighted AssetsThe
Company

$
69,043


10.78
%

51,234


8
%
$
N/A


N/AThe
Bank


72,696


11.36
%

51,181


8
%

63,976


10
%Tier 1 Capital Risk
 Weighted Assets:The
Company


60,857


9.50
%

25,617


4
%

N/A


N/AThe
Bank


65,792


10.28
%

25,590


4
%

38,386


6
%Tier 1 Capital to Average
 Assets:The
Company


60,857


7.72
%

31,519


4
%

N/A


N/AThe
Bank


65,792


8.35
%

31,519


4
%

39,399


5
%December 31,2007:Total Capital to Risk
 Weighted AssetsThe
Company

$
63,542


10.29
%

49,392


8
%
$
N/A


N/AThe
Bank


62,681


10.11
%

49,591


8
%

61,989


10
%Tier 1 Capital to Risk
 Weighted Assets:The
Company


53,901


8.73
%

24,696


4
%

N/A


N/AThe
Bank


56,061


9.04
%

24,795


4
%

37,193


6
%Tier 1 Capital to Average
 Assets:The
Company


53,901


7.22
%

29,863


4
%

N/A


N/AThe
Bank


56,061


7.52
%

29,818


4
%

37,272


5
%NOTE 24
COMMON STOCK:On June 5, 2008, a majority
of the shareholders voted in favor of amending the articles of incorporation to
increase the authorized number of shares of common stock from 12 million to 50
million shares. The amendment to the articles of incorporation was made on June
24, 2008.

NOTE 25
DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS:Effective January 1, 2008,
the Company adopted SFAS No. 157, Fair Value Measurements (SFAS157) which
provides a framework for measuring and disclosing the fair value under
generally accepted accounting principles. SFAS 157 requires disclosures about
the fair value of assets and liabilities recognized in the balance sheet in
periods subsequent to initial recognition, whether the measurements are made on
a recurring basis (for example, available for sale investment securities) or on
a nonrecurring basis (for example, impaired loans).

SFAS 157 defines fair value
as the exchange price that would be received for an asset or paid to transfer a
liability (an exit price) in the principal or most advantageous market for the
asset or liability in an orderly transaction between market participants on the
measurement date. SFAS 157 also establishes fair value hierarchy which requires
an entity to maximize the use of observable inputs and minimize the use of
unobservable inputs when measuring fair value. The standard describes three
levels of inputs that may be used to measure fair value:

54

NEW PEOPLES BANKSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 25
DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
(CONTINUED):Level
1: Quoted prices in active markets for identical assets or liabilities. Level 1
assets and liabilities include debt and equity securities and derivative
contracts that are traded in an exchange market, as well as U. S. Treasury,
other U. S. Government and agency mortgage-backed debt securities that are
highly liquid and are actively traded in over-the-counter markets.

Level
2: Observable inputs other than Level 1 prices such as quoted prices for
similar assets or liabilities; quoted prices in markets that are not active; or
other inputs that are observable or can be corroborated by observable market
data for substantially the full term of the assets or liabilities. Level 2
assets and liabilities include debt securities with quoted prices that are
traded less frequently than exchange-traded instruments and derivative
contracts whose value is determined using a pricing model with inputs that are
observable in the market or can be derived principally from or corroborated by
observable market data. This category generally includes certain derivative
contracts and impaired loans.

Investment Securities Available for Sale
Investment securities available for sale are
recorded at fair value on a recurring basis. Fair value measurement is based
upon quoted prices. The Companys available for sale securities, totaling $3.5
million at December 31, 2008, are the only assets whose fair values are
measured on a recurring basis using Level 2 inputs from an independent pricing
service.

Loans -The Company does not record
loans at fair value on a recurring basis.
The Company is predominantly an asset based lender with real estate serving as
collateral on a substantial majority of loans. From time to time a loan is
considered impaired and an allowance for loan losses is established. Loans
which are deemed to be impaired are primarily valued on a non-recurring basis
at the fair values of the underlying real estate collateral. Such fair values
are obtained using independent appraisals, which the Company considers to be
Level 2 inputs. The aggregate carrying amount of impaired loans at December 31,
2008 was $6.8 million.

Level
3: Unobservable inputs that are supported by little or no market activity and
that are significant to the fair value of the assets and liabilities. Level 3
assets and liabilities include financial instruments whose value is determined
using pricing models, discounted cash flow methodologies, or similar
techniques, as well as instruments for which the determination of fair value
requires significant management judgment or estimation. For example, this
category generally includes certain private equity investments, retained
residual interests in securitizations, residential mortgage servicing rights,
and highly structured or long-term derivative contracts.

Assets
and liabilities measured at fair value are as follows as of December 31, 2008:

(Dollars are in thousands)

Quoted
 market price
 in active
 markets
 (Level 1)

Significant
 other
 observable inputs(Level 2)

Significant
 unobservableinputs(Level 3)Available for sale
 investments

$


$
3,449

$
Impaired loans





6,844


Total

$


$
10,293

$
Fair Value of Financial Instruments

Fair
value information about financial instruments, whether or not recognized in the
balance sheet, for which it is practical to estimate the value is based upon
the characteristics of the instruments and relevant market information.
Financial instruments include cash, evidence of ownership in an entity, or
contracts that convey or impose on an entity that contractual right or obligation
to either receive or deliver cash for another financial instrument. Fair value
is the amount at which a financial instrument could be exchanged in a current
transaction between willing parties, other than in a forced sale or
liquidation, and is best evidenced by a quoted market price if one exists.

The
following summary presents the methodologies and assumptions used to estimate
the fair value of the Companys financial instruments presented below. The
information used to determine fair value is highly subjective and judgmental in
nature and, therefore, the results may not be precise. Subjective factors
include, among other things, estimates of cash flows, risk characteristics,
credit quality, and interest rates, all of which are subject to change. Since the
fair value is estimated as of the balance sheet date, the amounts that will
actually be realized or paid upon settlement or maturity on these various
instruments could be significantly different.

55

NEW PEOPLES BANKSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 25
DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
(CONTINUED):The
carrying value of cash and due from banks, federal funds sold, interest-bearing
deposits, deposits with no stated maturities, trust preferred securities and
accrued interest approximates fair value. The estimated fair value of
investment securities was based on closing market prices. The remaining
financial instruments were valued based on the present value of estimated
future cash flows, discounted at various rates in effect for similar
instruments during the months of December 2008 and 2007.

December
 31, 2008

December
 31, 2007(Dollars are in thousands)

Estimated
 Fair Value

Carrying
 Value

Estimated
 Fair Value

Carrying
 ValueFinancial AssetsCash and due from bank

$
22,099

$
22,099

$
20,195

$
20,195Federal funds sold


1,813


1,813


2,062


2,062Investment securities


3,449


3,449


4,974


4,974Equity securities (restricted)


3,903


3,903


4,258


4,258Loans


728,940


721,174


685,667


682,260Accrued Interest
 receivable


4,537


4,537


4,969


4,969Life insurance investments


10,153


10,153


9,745


9,745Financial LiabilitiesDemand DepositsNon-interest bearing


95,448


95,448


83,680


83,680Interest-bearing


34,498


34,498


26,857


26,857Savings deposits


89,787


89,787


44,721


44,721Time deposits


487,638


485,955


503,890


501,775FHLB advances


25,851


26,582


42,346


42,434Accrued interest payable


2,155


2,155


2,822


2,822Line of credit borrowing


4,913


4,913





Trust preferred securities


16,496


16,496


16,496


16,496NOTE 26
RECENT ACCOUNTING DEVELOPMENTS:In
December 2007, the FASB issued SFAS No. 141(R), Business Combinations, (SFAS
141(R)) which replaces SFAS 141. SFAS 141(R) establishes principles and
requirements for how an acquirer in a business combination recognizes and
measures in its financial statements the identifiable assets acquired, the
liabilities assumed, and any controlling interest; recognizes and measures
goodwill acquired in the business combination or a gain from a bargain
purchase; and determines what information to disclose to enable users of the
financial statements to evaluate the nature and financial effects of the
business combination. FAS 141(R) is effective for acquisitions by the Company
taking place on or after January 1, 2009. The Company will assess the impact of
SFAS 141(R) if and when a future acquisition occurs.

Also,
in December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in
Consolidated Financial Statements  an amendment of ARB No. 51, (SFAS 160).
SFAS 160 establishes new accounting and reporting standards for the
noncontrolling interest in a subsidiary and for the deconsolidation of a
subsidiary. SFAS 160 requires the recognition of a noncontrolling interest
(minority interest) as equity in the consolidated financials statements and
separate from the parents equity. The amount of net income attributable to the
noncontrolling interest will be included in consolidated net income on the face
of the income statement. SFAS 160 clarifies that changes in a parents
ownership interest in a subsidiary that do not result in deconsolidation are
equity transactions if the parent retains its controlling financial interest.
In addition, this statement requires that a parent recognize gain or loss in
net income when a subsidiary is deconsolidated. SFAS 160 also includes expanded
disclosure requirements regarding the interests of the parent and its
noncontrolling interests. SFAS 160 will be effective for the Company on January
1, 2009 and will not have any impact on the Companys financial position,
results of operations or cash flows.

56

NEW PEOPLES BANKSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 26
RECENT ACCOUNTING DEVELOPMENTS (CONTINUED):In
February 2008, the FASB issued FASB Staff Position No. 140-3, Accounting for
Transfers of Financial Assets and Repurchase Financing Transactions, (FSP
140-3). This FSP provides guidance on accounting for a transfer of a financial
asset and the transferors repurchase financing of the asset. This FSP presumes
that an initial transfer of a financial asset and a repurchase financing are
considered part of the same arrangement (linked transaction) under SFAS 140.
However, if certain criteria are met, the initial transfer and repurchase
financing are not evaluated as a linked transaction and are evaluated
separately under SFAS 140. FSP 140-3 will be effective for the Company on
January 1, 2009. The adoption of FSP 140-3 is not anticipated to impact on the
Companys financial position, results of operations or cash flows.

In
May, 2008, the FASB issued SFAS No. 162, The Hierarchy of Generally Accepted
Accounting Principles, (SFAS 162). SFAS 162 identifies the sources of
accounting principles and the framework for selecting the principles used in the
preparation of financial statements of nongovernmental entities that are
presented in conformity with generally accepted accounting principles (GAAP) in
the United States (the GAAP hierarchy). SFAS 162 is effective November 15,
2008. The FASB has stated that it does not expect SFAS 162 will result in a
change in current practice. The application of SFAS 162 had no effect on the
Companys financial position, results of operations or cash flows.

In
June 2008, the FASB issued FASB Staff Position No. EITF 03-6-1, Determining
Whether Instruments Granted in Share-Based Payment Transactions are
Participating Securities, (FSP EITF 03-6-1). The Staff Position provides
that unvested share-based payment awards that contain nonforfeitable rights to
dividends or dividend equivalents are participating securities and must be
included in the earnings per share computation. FSP EITF 03-6-1 will be
effective January 1, 2009 and will not affect on the Companys financial
position, results of operations, earnings per share or cash flows.

The
SECs Office of the Chief Accountant and the staff of the FASB issued press
release 2008-234 on September 30, 2008 (Press Release) to provide
clarifications on fair value accounting. The press release includes guidance on
the use of managements internal assumptions and the use of market quotes. It
also reiterates the factors in SEC Staff Accounting Bulletin (SAB) Topic 5M
which should be considered when determining other-than-temporary impairment
such as the length of time and extent to which the market value has been less
than cost, financial condition and near-term prospects of the issuer, and the
intent and ability of the holder to retain its investment for a period of time
sufficient to allow for any anticipated recovery in market value.

In
September 2008, the FASB issued FASB Staff Position No. 133-1 and FIN 45-4,
Disclosures about Credit Derivatives and Certain Guarantees: An Amendment of
FASB Statement No. 133 and FASB Interpretation No. 45; and Clarification of the
Effective Date of FASB Statement No. 161, (FSP SFAS 133-1 and FIN 45-4),
effective for reporting periods (annual or interim) ending after November 15,
2008. FSP SFAS 133-1 and FIN 45-4 amends SFAS 133 to require the seller of
credit derivatives to disclose the nature of the credit derivative, the maximum
potential amount of future payments, fair value of the derivative, and the
nature of any recourse provisions. Disclosures must be made for entire hybrid
instruments that have embedded credit derivatives. The staff position also
amends FIN 45 to require disclosure of the current status of the
payment/performance risk of the credit derivative guarantee. The adoption of
this Staff Position had no material effect on the Companys financial position,
results of operations or cash flows.

On
October 10, 2008, the FASB issued FASB Staff Position No. 157-3, Determining
the Fair Value of a Financial Asset When the Market for That Asset Is Not
Active (FSP SFAS 157-3). This FSP clarifies the application of SFAS No. 157,
Fair Value Measurements (see Note 24) in a market that is not active and
provides an example to illustrate key considerations in determining the fair
value of a financial asset when the market for that asset is not active. The
FSP was effective upon issuance. For the Company, this FSP was effective for
the quarter ended September 30, 2008.

57

NEW PEOPLES BANKSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 26
RECENT ACCOUNTING DEVELOPMENTS (CONTINUED):In
January 2009, FSP EITF 99-20-1, Amendments to the Impairment Guidance of EIFT
Issue No. 99-20, (FSP EITF 99-20-1) was issued. To achieve a more consistent
determination of other-than-temporary impairment, the Staff Position amends
EITF 99-20 to determine any other-than-temporary impairment based on the
guidance in SFAS 115, allowing management to use more judgment in determining
any other-than-temporary impairment. The Staff Position is effective for
interim and annual reporting periods ending after December 15, 2008 and shall
be applied prospectively. Retroactive application is not permitted.

Other
accounting standards that have been issued or proposed by the FASB or other
standards-setting bodies are not expected to have a material impact on the
Companys financial position, results of operations and cash flows.

NOTE 28
PARENT CORPORATION ONLY FINANCIAL
STATEMENTS:CONDENSED BALANCE SHEETS
AS OF DECEMBER 31, 2008 AND 2007(Dollars in Thousands)

2008

2007ASSETSDue from
banks

$
615

$
107Investment
in subsidiaries


71,415


61,676Other
assets


89


1,139Total
Assets

$
72,119

$
62,922LIABILITIESAccrued
interest payable

$
341

$
289Accrued
expenses and other liabilities


46


888Other
borrowed money


4,913


Trust
preferred securities


16,496


16,496Total
Liabilities


21,796


17,673STOCKHOLDERS EQUITYCommon
stock-$2.00 par value, 50,000,000 shares authorized;
 10,008,902 and 9,959,477 shares issued and outstanding for 2008 and 2007,
 respectively


20,017


19,919Additional
paid capital


21,683


21,484Retained
earnings


8,576


3,839Accumulated
other comprehensive income


47


7Total
Stockholders Equity


50,323


45,249Total
Liabilities and Stockholders Equity

$
72,119

$
62,922CONDENSED STATEMENTS OF INCOMEFOR THE
YEARS ENDED DECEMBER 31, 2008, 2007, AND 2006

(Dollars in Thousands)

2008

2007

2006IncomeMiscellaneous income

$
30

$
38

$
29Undistributed income of
 subsidiaries


5,669


3,853


3,844Total Income


5,699


3,891


3,873ExpensesOther borrowed money
 interest expense


134





Trust preferred securities
 interest expense


1,005


1,283


1,004Legal fees


211


47


47Accounting fees


32


104


129Other operating expenses


102


101


93Total Expenses


1,484


1,535


1,273Income
 before Income Taxes


4,215


2,356


2,600Income Tax Benefit


522


514


490Net
 Income

$
4,737

$
2,870

$
3,09058

NEW PEOPLES BANKSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 28
PARENT CORPORATION ONLY FINANCIAL STATEMENTS (CONTINUED):CONDENSED STATEMENTS OF CASH FLOWSFOR THE
YEARS ENDED DECEMBER 31, 2008, 2007, AND 2006

(Dollars and Shares in Thousands)

2008

2007

2006Cash
Flows From Operating ActivitiesNet
Income

$
4,737

$
2,870

$
3,090Adjustments
to reconcile net income to net cash provided by (used) in
 operating activities:Income of
subsidiaries


(5,669
)

(3,853
)

(3,844
)Net change
in:Other
assets


969


(453
)

(139
)Other
liabilities


(789
)

774


149Net Cash
Used in Operating Activities


(752
)

(662
)

(736
)Cash
Flows From Investing ActivitiesInvestment
in subsidiary


(3,950
)

(4,300
)

(6,510
)Net Cash
Used Investing Activities


(3,950
)

(4,300
)

(6,510
)Cash
Flows From Financing ActivitiesProceeds
from line of credit


4,913





Net proceeds
for trust preferred securities








5,000Exercise of
stock options


297


28


275Net Cash
Provided by Financing Activities


5,210


28


5,275Net
Increase in Cash and Cash Equivalents


508


(4,934
)

(1,971
)Cash and
Cash Equivalents, Beginning of year


107


5,041


7,012Cash and
Cash Equivalents, End of Year

$
615

$
107

$
5,041NOTE 29
SELECTED QUARTERLY INFORMATION (UNAUDITED)2008 Quarters(Dollars in thousands)

Fourth

Third

Second

FirstIncome
 statementNet interest income

$
7,410

$
7,951

$
7,139

$
6,721Noninterest income


2,046


1,387


1,429


1,384Provision for credit
 losses


600


350


300


250Noninterest expense


7,051


6,886


6,590


6,790Net income


1,414


1,395


1,162


766Period
 end balance sheetTotal loans and leases

$
721,174

$
708,556

$
702,425

$
680,350Total assets


807,898


792,314


793,050


766,589Total deposits


705,688


685,534


659,752


677,430Total shareholders equity


50,323


48,871


47,385


46,0612007 Quarters(Dollars in thousands)

Fourth

Third

Second

FirstIncome
 statementNet interest income

$
6,835

$
6,833

$
6,260

$
5,782Noninterest income


1,344


1,258


1,047


1,001Provision for credit
 losses


1,300


1,800


440


300Noninterest expense


6,338


6,372


5,602


5,360Net income


542


625


901


802Period
 end balance sheetTotal loans and leases

$
682,260

$
661,377

$
635,362

$
591,370Total assets


765,951


745,483


740,474


661,125Total deposits


657,033


663,825


635,700


586,621Total shareholders equity


45,249


44,709


44,066


43,16359

Item 9.
Changes in and Disagreements with Accountants on Accounting and
 Financial DisclosureNone.Item 9A.
Controls and ProceduresManagements 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
Peoples 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 Peoples
internal control
over financial reporting as of December 31, 2008. 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.

A material weakness is a control deficiency, or combination of
control
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. Based on managements assessment, management has
identified the following material weaknesses in New Peoples internal control
over financial reporting as of December 31, 2008:

(i)
          New
Peoples did not effectively update loan classification codes for certain real
estate and construction loans to reflect new guidance from the Federal Deposit
Insurance Corporation (the FDIC); and

(ii)          New
Peoples did not maintain an effective control environment, including the
design and operating effectiveness of New Peoples Code of Ethics.

Each of the aforementioned material weaknesses in internal control
over
financial reporting individually resulted in more than a remote likelihood that
a material misstatement of New Peoples interim or annual financial statements
would not have been prevented or detected.

The effectiveness of internal control over financial reporting as
of
December 31, 2008, 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 of internal control over financial reporting is included
elsewhere in this annual report.

Remediation of Material Weaknesses

In response to the identified material weaknesses, management and
the
Board of Directors have undertaken a number of remedial actions. Specific
remedial actions taken by management regarding the improper loan
classifications include:


hiring a loan operations specialist;
developing new listing codes based on the FDICs revised
 classification guidance and new coding procedures;
training all loan operations personnel on the new coding system and
 procedures;
reorganizing all loan files;
reviewing and correcting loan classifications, as necessary, of all
 loans for greater than $500,000; and
expanding internal audit procedures to assess compliance of the new
 coding procedures.The review and reclassification, as necessary, of all loans for
less
than $500,000 is expected to be complete in the third quarter of 2009.

60

Specific remedial actions taken or to be taken by New
Peoples new
President and Chief Executive Officer and other management personnel and the
Board of Directors regarding New Peoples ineffective control environment
include:


adopting a revised employee handbook, with specific policies on
 business ethics, whistleblower procedures, fraud, conflicts of interest,
 bribery, trading in New Peoples common stock and other topics;
training classes for all employees on the revised handbook and the
 policies contained therein;
expanding internal audit procedures to increase compliance testing;
 and
expanding and strengthening of internal audit and financial
reporting
 departments by hiring an additional internal audit staff member, with
 compliance experience, and an additional financial reporting staff member.Changes in Internal Control Over Financial
Reporting

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.

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 not operating effectively
as of December 31, 2008 due to the material weaknesses described above in
Managements Report on Internal Control Over Financial Reporting.

Item 9B.
Other
 InformationNonePART IIIItem 10.
Directors,
 Executive Officers and Corporate GovernanceRecent Developments

On May 18, 2009 Kenneth Hart, 62, President and CEO of New Peoples
and
its subsidiaries, including the Bank, notified the Board of Directors of his
retirement from those positions, effective on that date.

Jonathan H. Mullins, 52, was appointed by the Board of Directors as
President and CEO of the Company and its subsidiaries, including the Bank,
effective May 19, 2009. Mr. Mullins served as Senior Vice President, Chief
Lending Officer and Regional Manager for the Bank from July 2004 to May 18,
2009. His responsibilities included oversight of all lending activities and of
10 offices in Southwest Virginia. Prior to this role, Mr. Mullins joined the
Bank as Vice President and Branch Manager on February 1, 1999. The contractual
arrangements relating to Mr. Mullins appointment have not been determined at
this time.

C.
Todd Asbury, 38, was promoted to Executive Vice President, Chief Financial
Officer and Treasurer of the Company and its subsidiaries, including the Bank,
effective May 19, 2009. Mr. Asbury was previously Senior Vice President, Chief
Financial Officer and Treasurer of the Company and its subsidiaries.

Directors

The
Board of Directors consists of 13 current members, four of whom are expected to
be nominated for election as directors at the 2009 Annual Meeting to serve for
terms of three years each expiring on the date of the annual meeting of
shareholders in 2012. Nine other directors are serving terms that end in either
2010 or 2011, as indicated below.

The
following biographical information discloses each directors age and business
experience for the past five years, unless otherwise noted, and the year that
each individual was first elected to our Board of Directors or earlier to the
Board of Directors of New Peoples Bank, Inc. (the Bank), the predecessor to
and now a wholly owned subsidiary of the Company.

61

Directors Whose Terms Expire in 2009

Joe
M. Carter, 71, is retired. Prior to his retirement, Mr. Carter was the General
Manager of Daugherty Chevrolet in Gate City, Virginia. He has been a director
since 1998.

Harold
Lynn Keene, 54, is President of Keene Carpet, Inc. and Harold Keene Coal Co.,
Inc. in Honaker, Virginia. He has been a director since 1998.

John
D. Maxfield, 66, is a private investor. He is Secretary of the Company and has
been a director since 1998.

Fred
W. Meade, 75, is President of Big M Stores, Inc. and West Hills Estates, Inc.
in St. Paul, Virginia. He has been a director since 1998.

Directors Whose Terms Expire in 2010

Tim
W. Ball, 49, is self-employed as a farmer in Honaker, Virginia. He has been a
director since 1999.

Michael
G. McGlothlin, 57, is an attorney with Michael G. McGlothlin, Attorney-at-Law
in Grundy, Virginia. He has been a director since 1998.

Bill
Ed Sample, 75, is self-employed as a farmer in Honaker, Virginia. He has been a
director since 1998.

B.
Scott White, 63, is self-employed as a farmer in Castlewood, Virginia. He is
Chairman of the Board of Directors of the Company and the Bank. He has been a
director since 1998.

Directors Whose Terms Expire in 2011

John
D. Cox, 52, is the Vice President with Cox Tractor, Inc., a tractor and
equipment business, in Kingsport, Tennessee. He has been a director since 1998.

Charles
H. Gent, Jr., 49, is self-employed in the logging and farming industry in
Honaker, Virginia. He has been a director since 1998.

A.
Frank Kilgore, 56, is an attorney with Frank Kilgore, P.C. in St. Paul,
Virginia. He has been a director since 1998.

Stephen
H. Starnes, 52, is the owner of Gentech, Inc., in Abingdon, Virginia, since
2003. He has been a director since 1998.

William
C. Wampler, Jr., 49, is Managing Member of Wampler Consulting Group, LLC. He is
a director of Bassett Furniture Industries, Inc. He has been a member of the
State Senate in the Virginia General Assembly since 1988. He has been a
director since 2005.

Executive Officers Who Are Not Directors

The following is a list of names and ages of all executive
officers;
their terms of office as officers; the positions and offices within New Peoples
held by each officer; and each persons principal occupation or employment
during the past five years.

Jonathan H. Mullins, 52, has served as the Companys
and the Banks President and Chief
Executive Officer since May 19, 2009. He had previously served as the Banks
Senior Vice President, Chief Lending Officer and Regional Manager from July
2004 until May 2009. Prior to this, Mr. Mullins served as the Banks Vice
President and Branch Manager starting in 1999.

Frank Sexton, Jr., 59, has served as Executive Vice
President and Chief Operating
Officer of both the Company and the Bank since December 2003. He had previously
served as the Companys Executive Vice President, Chief Financial Officer and
Secretary since 2001 and the Banks Executive Vice President and Cashier since
1998.

C. Todd Asbury, 38,
has served as Executive Vice President, Chief Financial Officer, and Treasurer
of both the Company and the Bank since May 2009. He previously served as Senior
Vice President, Chief Financial Officer, and Treasurer starting in December
2003.

62

CORPORATE GOVERNANCE AND THE BOARD OF DIRECTORS

General

Our
business and affairs are managed under the direction of the Board of Directors
in accordance with the Virginia Stock Corporation Act and our Articles of
Incorporation and Bylaws. Members of the Board are kept informed of our
business through discussions with our executive officers and other officers, by
reviewing materials provided to them and by participating in meetings of the
Board and its committees.

Code of Ethics

The
Board of Directors has adopted a Code of Ethics for our directors, executive
officers, and senior officers who have financial responsibilities. The Code of
Ethics is designed to promote, among other things, honest and ethical conduct, proper
disclosure of financial information in our periodic reports, and compliance
with applicable laws, rules and regulations by our senior officers who have
financial responsibilities. A copy of the Code of Ethics was attached as
Exhibit 14 to our Annual Report on Form 10-K for the year ended December 31,
2003.

Board and Committee Meeting Attendance

There
were 13 meetings of the Board of Directors in 2008. Each of our directors
attended at least 75% of the aggregate of the total number of meetings of the Board
of Directors and the total number of meetings of committees on which the
director served, with the exception of Mr. Ball who attended 69% of such
meetings.

Committees of the Board

The
Board has a Personnel Committee, an Audit Committee, and a standing Nominating
Committee.

Audit
Committee

The Audit Committee assists the Board of Directors in fulfilling
the
Boards oversight responsibility to the shareholders relating to the integrity
of our financial statements, our compliance with legal and regulatory
requirements, the qualifications, independence and performance of our
independent public accountants and the performance of the internal audit
function. The Audit Committee is directly responsible for the appointment,
compensation, retention and oversight of the work of the independent public
accountants engaged for the purpose of preparing or issuing an audit report or
performing other audit, review or attestation services for us. The Board of
Directors has adopted a written charter for the Audit Committee.

The members of the Audit Committee are Messrs. Cox, Gent,
Keene
and White. The Board in its business judgment has determined that all of the
members of the Audit Committee are independent as defined by NASDAQ listing
standards and applicable SEC regulations. The Board of Directors also has
determined that all of the members of the Audit Committee have sufficient
knowledge in financial and auditing matters to serve on the Audit Committee and
that Mr. Keene qualifies as an audit committee financial expert as defined by
SEC regulations.

Section 16(a) Beneficial Ownership Reporting
Compliance

Section
16(a) of the Securities Exchange Act of 1934 requires our directors and certain
of our officers to file reports with the Securities and Exchange Commission
(SEC) indicating their holdings of, or transactions in, our equity
securities. Based on a review of these reports and written representations
furnished to us, we believe that our directors and officers complied with all
Section 16(a) filing requirements with respect to 2008.

Item 11.
Executive
 CompensationEXECUTIVE COMPENSATION AND RELATED PARTY
TRANSACTIONS

Compensation Discussion & Analysis

The
Personnel Committee of the Board of Directors reviews and establishes the
salary and other compensation of our Senior Management, including the named
executive officers. The Committee consists entirely of independent directors
who are not our officers or employees. Currently,
the individuals serving as Chief Executive Officer and as executive officers
also serve in the same capacities, respectively, for the Bank. These executive
officers are presently compensated for services rendered by them to the Bank,
but not for services rendered by them to the Company. The Committee also
makes recommendations to the Board of Directors with respect to the executive
officers bonuses and long-term incentive
awards under our stock option plan.

The
objectives of the Banks executive compensation programs are to fairly reward
and retain effective and experienced management. The compensation programs are
designed to reward effectiveness, experience and ability. The Committee
establishes current compensation based primarily on review of competitive
salary practices by similarly sized bank organizations in Virginia as listed in
the Virginia Bankers Association Salary Survey, giving

63

appropriate
consideration to regional cost of living differences and strategies. This
survey is used as a guide to determine the base salary and bonus of executive
officers. The elements of compensation are as follows: base salary, bonuses,
stock options, deferred compensation, insurance benefits and 401(K) matching
contributions. As of December 31, 2008, there were also salary continuation
agreements with the Chief Executive Officer and the Chief Operating Officer
designed as an incentive to keep them as employees with their unique and
valuable abilities as our executive officers. We pay each element of
compensation to maximize the continuity of management and investment return.
The Committee determines the amount of each element of compensation based on
the following factors: regional and statewide comparisons, individual efforts,
success and our overall performance. The Committees decisions regarding each element relate to our overall
compensation objectives and affect decisions regarding other elements.

The Committee has developed and implemented compensation
policies and plans that seek to enhance our profitability and maximize
shareholder value by aligning the financial interests of our senior officers
with those of our shareholders. The policies are designed to provide
competitive levels of compensation to attract and retain high quality corporate
officers and key employees with outstanding abilities and to motivate them to
perform to the full extent of their abilities. The compensation program is
designed to provide levels of compensation that reflect both the individuals
and the organizations performance in achieving the organizations goals and
objectives and in helping to build value for our shareholders. The components
of the compensation of our executive officers and the Bank include salaries and
bonuses paid by the Bank and long-term incentives through stock options granted
by us. Although no stock options were awarded to the named executive officers
in 2008, each executive has outstanding unexercised options that the Committee
believes help align the executives interests directly to the shareholders
interests. In addition, annual bonus decisions take into account the achievement of corporate strategic goals,
such as profitability, rates of return, asset growth and asset quality, further aligning the interests of executive officers and shareholders.

Base Salary and Bonus

Our performance, in general, is considered in
determining the amount of annual salary increases. The Committee sets base
salaries at levels competitive with amounts paid to senior executives with
comparable qualifications, experience and responsibilities after comparing
salary ranges of similarly sized banks. The Virginia Bankers Association Salary
Survey was used for comparison of salaries paid for similar positions and
responsibilities. The Committee also takes into consideration our growth and
performance, including but not limited to, branch expansion, asset quality,
asset growth, and earnings.

The Committee approves the named executive officers annual salary based on the
above criteria and its assessment of their past performance and expected future contributions. In addition to
the internal measures above, the Board of Directors also reviews our financial
performance in relation to peer group averages in the Virginia Bankers
Association Salary Survey. A subjective approach is used in its evaluation of
these factors, and therefore the Committee does not rely on a formula or
weights of specific factors.

For  bonuses,  at the  beginning  of the year the  Committee  recommends  a target  bonus pool for senior management  to the Board of Directors for approval.  To set the bonus pool the Committee  considers  peer
group bonuses,  relying on the Virginia  Bankers  Association  Salary  Survey, base salaries and overall Company  performance.  For 2008 the senior management  target bonus pool was set at $170,000.  At the end of the year the Committee revisits the target bonus pool considering  actual overall Company  performance
for the year, while also taking into account the current  economic  atmosphere and other factors that the Committee deems relevant.  As a result the senior  management bonus pool the Committee  recommends to the
Board of  Directors at the end of the year may be larger or smaller than the target bonus pool set at the beginning of the year.  For 2008, the bonus pool was not adjusted from the $170,000  target  amount.  The
Committee then prepares individual bonus recommendations for each member of senior management,  including the named executive officers.  Generally,  the bonus recommendations are set as a proportional percentage
of the final bonus pool based on relative base salary.  However,  individual bonus recommendations may be adjusted up or down based on the Committees  evaluation of the  individuals  performance over the year.
For  2008 no such  adjustments  were  made.  The  Board of  Directors  then  considers  the  Committees  recommendations and sets the actual bonus pool and individual bonuses.

The Chief Executive Officer does not set his own
salary or bonus or the salaries or bonuses of the other named executive officers. The CEO is involved in the other named executive officers
compensation, and provides input to the Committee regarding his own. However, recommendations are made by the Committee and
the final decision resides with the Board of Directors.

Stock Options

The stock option plan is intended to provide a means for selected
key employees to increase their personal financial interest in us, thereby
stimulating the efforts of these employees and strengthening their desire to
remain with us. The stock option plan permits the award of incentive stock
options and non-qualified stock options to directors and eligible officers and
key employees. The Board of Directors makes grants under the stock option plan
on a discretionary basis, taking into consideration the respective scope of
accountability and contributions of each director and employee, including the
Chief Executive Officer, to us. In 2008, the Committee did not award any stock
options to any of the executive officers or other employees. Since the change
in accounting regulations in 2005 regarding expensing stock options, no stock
options have been awarded to any individuals.

There
is no set time for the awarding of stock options, however, for the years in
which options were granted, the options have been granted in January or
December. The stock option plan allows for the awarding of stock options, but
no set levels of criteria or performance thresholds are necessary before
options can be granted. We have no set policy regarding recapturing awards if
based on financial results that have been misstated.

64

Other Elements of
Compensation

Each named executive
officer is provided with the use of a company vehicle.

On
December 18, 2002, the Bank entered into salary continuation agreements with
Kenneth D. Hart and Frank Sexton, Jr. The agreement with Mr. Hart provides that
the Bank will pay Mr. Hart, upon the termination of his employment on or after
his 65th birthday for reasons other than his death, $59,063 per year for 15
years. The agreement with Mr. Sexton provides that the Bank will pay Mr.
Sexton, upon the termination of his employment on or after his 65th birthday
for reasons other than his death, $40,500 per year for 15 years. The Banks
Board of Directors has the sole discretion to increase these benefits. The
agreements provide for adjusted benefits in the event that employment
terminates prior to the individuals 65th birthday (except for termination for
cause) for reasons such as death, disability or a change of control of the
Bank. If Mr. Hart were to terminate his employment prior to his 65th birthday,
his benefit would be $28,943 annually to be paid in 180 month installments over
15 years for a total value of $434,145 (as of November 1, 2008). If Mr. Sexton
were to terminate his employment prior to his 65th birthday, his benefit would
be $16,782 annually to be paid in 180 month installments for 15 years; total
value is $251,730 (as of November 1, 2008).

Compensation Committee Report

The
Personnel Committee acts as the Compensation Committee of the Company and the
Bank and reviews managements performance and compensation, and reviews and
sets guidelines for compensation of all employees. All decisions by the
Personnel Committee relating to the compensation of our executive officers are
reported to the full Board of Directors. The Personnel Committee does not have
a charter.

The
members of the Personnel Committee are Messrs. Cox, Gent, Kilgore, Meade, and
Wampler, all of whom the Board in its business judgment has determined are
independent as defined by the NASDAQ listing standards. The Personnel Committee
held four meetings in 2008.

The Personnel Committee of the Board of
Directors has furnished the following report on executive compensation.

The
Compensation Committee has reviewed and discussed the Compensation Discussion
and Analysis with the management of the Company. Based on that review and
discussion, the Committee has recommended to the Board of Directors that the
Compensation Discussion and Analysis be included in our Annual Report on Form
10-K for the year ended December 31, 2007 and in this Proxy Statement.

Members of the Personnel/Compensation CommitteeJohn D. Cox
(Chairman)
Charles H. Gent, Jr.
A. Frank Kilgore
Fred W. Meade
William C. Wampler, Jr.

Compensation Committee Interlocks and Insider
Participation

No
member of the Personnel Committee is a current or former executive officer or
employee of the Company or any of its subsidiaries. In addition, there are no
Compensation Committee interlocks with other entities with respect to any such
member.

Executive Compensation

The following table shows, for the fiscal years ended December 31,
2008, 2007 and 2006, the cash compensation that we paid to the named executive
officers in all capacities in which they served:

65

Summary
 Compensation Table
 Fiscal Years 2008, 2007 and 2006Name and
 Principal Position

Year

Salary ($)

Bonus
 ($)

Change in
 Pension Value
 and Nonqualified
 Deferred
 Compensation
 Earnings ($)(1)

All Other
 Compensation
 ($)(2)

Total ($)Kenneth D. Hart
(3)

2008

234,780

28,174


60,334


11,739



335,027President and Chief

2007

225,750

9,030


51,792


11,287



297,859Executive
Officer

2006

215,000

15,050


48,061


10,750



288,861Frank Sexton, Jr.

2008

146,016

17,522


27,185


7,240



197,963Executive Vice
President

2007

140,400

5,616


25,226


6,960



178,202and Chief
Operating

2006

135,000

9,450


23,409


6,750



174,609OfficerC. Todd Asbury

2008

135,200

16,224





6,684



158,108Senior Vice President,

2007

114,400

4,576





5,620



124,596Chief Financial
Officer,

2006

110,000

7,700





5,459



123,159and
Treasurer(1)
These amounts represent the change in the actuarial present value
of
 the accumulated benefit under the salary continuation agreements for Messrs.
 Hart and Sexton.(2)
All benefits that might be considered of a personal nature did not
exceed
 $10,000. All other compensation includes amounts for Mr. Hart representing
 matching contributions in 2008, 2007 and 2006 under the Banks defined
 contribution plan of $11,739, $11,287 and $10,750, respectively; amounts for
 Mr. Sexton representing matching contributions in 2008, 2007 and 2006 under
 the Banks defined contribution plan of $7,240, $6,960 and $6,750,
 respectively; and amounts for Mr. Asbury representing matching contributions
 in 2008, 2007 and 2006 for the Banks defined contribution plan of $6,684,
 $5,620 and $5,459, respectively.(3)
Mr. Hart retired from the positions of President and Chief Executive Officer in May
 2009.Grants of Plan-Based Awards

The named executive officers did not receive any grants of
plan-based awards during fiscal 2008.

For additional information regarding the compensation described
above, see Item 11, Compensation Discussion and Analysis.

Outstanding Equity Awards at Fiscal Year-End

The following table sets forth for the year ended December 31,
2008, the outstanding equity awards at fiscal year-end to the named executive
officers. The named executive officers have not received other stock awards:

Outstanding
 Equity Awards at Fiscal Year-End 2008Option AwardsName

Number of
 Securities
 Underlying
 Unexercised
 Options
 (#)
 Exercisable(1)

Option
 Exercise
 Price(2)($)

Option
 Expiration
 DateKenneth D. Hart

18,590


5.25


12/31/11President and
Chief Executive

10,725


6.99


12/31/12Officer

7,150


6.99


12/31/137,150


9.44


12/13/1421,450


11.54


12/20/15Frank Sexton, Jr.

14,300


5.25


12/31/11Executive Vice
President and

7,150


6.99


12/31/12Chief Operating
Officer

5,362


6.99


12/31/135,363


9.44


12/13/1416,088


11.54


12/20/15C. Todd Asbury

5,362


9.44


12/13/14Senior Vice
President, Chief

16,088


11.54


12/20/15Financial
Officer and Treasurer(1)
The amounts have been adjusted for the 10% stock dividend granted
on
 June 7, 2005 and the 13-for-10 stock split effected in the form of a stock
 dividend on September 4, 2007.(2)
Stock options were granted at the fair market value of the shares
of
 Common Stock at the grant dates. The grants are exercisable immediately after
 they are granted.66

Option Exercises and Stock Vested

There were no exercises of stock option awards or stock awards that
vested for the named executive officers in 2008. None of the named executive
officers have exercised any of their stock options to date.

Pension Benefits

The following table sets forth for the year ended December 31,
2008,
information with respect to the salary continuation agreements, which provide
for payments following retirement.

Pension Benefits
 Fiscal Year 2008Name

Plan Name

Number of Years 
 of Credited 
 Service
 (#)

Present Value of
 Accumulated 
 Benefit
 ($)(1)Kenneth D. Hart 
 President and Chief Executive Officer

Salary
 Continuation Agreement

N/A


326,075Frank Sexton, Jr. 
 Executive Vice President and Chief 
 Operating Officer

Salary
 Continuation Agreement

N/A


156,621C. Todd Asbury 
 Senior Vice President, Chief Financial Officer and Treasurer

N/A




(1)
Assumes for Messrs. Hart and Sexton the following: a retirement age
 of 65, fixed principal payments for 180 months following retirement, at a
 discount rate of 7.50%. Under APB 12, the interest method of accounting is
 used.For further information on the salary continuation plans of Messrs.
Hart and Sexton, please refer to Item 11, Compensation Discussion and Analysis
- Other Elements of Compensation above.

Nonqualified Deferred Compensation

We do not have a nonqualified deferred compensation plan for the
named
executive officers.

Employment or Change in Control Agreements

Neither the Company nor the Bank has entered into an employment
agreement or change in control agreement with any of the named executive
officers.

Director Compensation

The following table sets forth, as of December 31, 2008, certain
information
with respect to director compensation for each of the members of the Board of
Directors. The directors did not receive any other compensation during 2008 for
their services as directors on the Board.

67

Director Compensation for 2008Name

Fees Earned or 
 Paid in Cash (1)($)

Total ($)Tim W. Ball


6,000


6,000Joe M. Carter


6,400


6,400John D. Cox


6,600


6,600Charles H. Gent, Jr.


6,600


6,600Harold Lynn Keene, Jr.


7,000


7,000A. Frank Kilgore


6,100


6,100John D. Maxfield


6,000


6,000Michael G. McGlothlin


6,000


6,000Fred W. Meade


6,100


6,100Bill Ed Sample


6,000


6,000Stephen H. Starnes


6,400


6,400William C. Wampler,
Jr.


6,100


6,100B. Scott White


7,000


7,000In 2008, each director was paid $500 per month for service on the
Board
of Directors and a maximum of $100 per committee meeting for each committee of
which a director is a member (excluding Loan Committee meetings). For 2009,
each director will be paid $700 per month for service on the Board of Directors
and $100 per committee meeting.

Item 12.       
 Security
 Ownership of Certain Beneficial Owners and Management and Related Stockholder
 MattersSecurity Ownership of Management

The following table sets forth, as of June 10, 2009, certain
information with respect to beneficial ownership of shares of Common Stock by
each of the members of the Board of Directors, by each of the executive
officers named in the Summary Compensation Table in Item 11 and by all
directors and executive officers as a group. Beneficial ownership includes
shares, if any, held in the name of the individuals spouse, minor children or
other relatives of the individual living in such persons home, as well as
shares, if any, held in the name of another person under an arrangement whereby
the director or executive officer can vest title in himself at once or at some
future time.

Name of
Beneficial Owner

Common Stock
 Beneficially Owned (1)

Exercisable
 Options
 Beneficially
 Owned(2)

Total Shares
 Beneficially
 Owned

Percent
 of Class (3)C. Todd Asbury




21,450


21,450



*Tim W. Ball

3,432


16,640


20,072



*Joe M. Carter

23,660
(4)

16,640


40,300



*John D. Cox

53,072
(5)

13,780


66,852



*Charles H. Gent, Jr.

27,170
(6)

10,920


38,090



*Kenneth D. Hart

80,080


65,065


145,145


1.41
%Harold Lynn Keene

44,330


8,060


52,390



*A. Frank Kilgore

96,720
(7)

10,920


107,640


1.04
%John D. Maxfield

63,492
(8)

16,640


80,132



*Michael G. McGlothlin

119,167


16,640


135,807


1.32
%Fred W. Meade

38,896
(9)

16,640


55,536



*Bill Ed Sample

29,744
(10)

16,640


46,384



*Frank Sexton, Jr.

32,461
(11)

48,262


80,723



*Stephen H. Starnes

20,810
(12)

16,640


37,450



*William C. Wampler,
Jr.

1,300


5,200


6,500



*B. Scott White

381,929
(13)

8,060


389,989


3.78
%All Directors and Executive
Officers as a
 group (16 persons)

1,016,263


308,197


1,324,460


12.84
%68

*
Percentage
 of ownership is less than one percent of the outstanding shares of Common
 Stock.(1)
Except as
 otherwise indicated, each director, director nominee or executive officer has
 sole voting power and investment power with respect to the shares shown.(2)
Includes
 options that will become exercisable within 60 days on June 10, 2009.(3)
Based on
 10,008,902 shares of Common Stock issued and outstanding on June 10, 2009(4)
Includes 6,901 shares held by
 Mr. Carters wife.(5)
Includes 12,584 shares held by
 Mr. Coxs wife and 31,336 shares held by Cox Ford Tractor, Inc. of which Mr.
 Cox is Vice President.(6)
Includes 2,860 shares held by
 Mr. Gents wife and 2,860 shares Mr. Gent holds as custodian for his child.(7)
Includes 5,200 shares Mr.
 Kilgore holds as trustee for his grandchildren.(8)
Includes 34,320 shares held by
 Mr. Maxfields wife, and 572 shares Mr. Maxfield holds as trustee for his
 grandchildren.(9)
Includes 36,036 shares Mr.
 Meade holds jointly with his wife.(10)
Includes 572 shares Mr.
 Samples wife holds.(11)
Includes 440 shares Mr. Sexton
 holds jointly with his child.(12)
Includes 3,660 shares held by
 Mr. Starnes wife and 4,004 shares Mr. Starnes holds as custodian for his
 children.(13)
Includes 57,200 shares held by
 Mr. Whites wife and 2,717 shares Mr. White holds as trustee for his child.Security Ownership of Certain Beneficial
Owners

As of June 10, 2009, the following persons are known to us that
beneficially own five percent or more of our Companys stock:

Name and Address of Beneficial
 Owner


Amount and Nature of
 Beneficial Ownership


Percent of ClassRichard G.
 Preservati and N. Karen Preservati


550,000


5.50%Post Office
 Box 1003Princeton,
 West Virginia 24740Equity Compensation Plan

The following table sets forth information as of December 31, 2008,
with respect to compensation plans under which shares of Common Stock are
authorized for issuance:

Equity Compensation Plan InformationPlan Category


Number of Securities 
 to Be Issued upon 
 Exercise of 
 Outstanding Options, 
 Warrants and Rights(1)

Weighted Average
 Exercise Price of 
 Outstanding 
 Options, Warrants 
 and Rights(1)

Number of Securities 
 Remaining Available
 for Future Issuance
 Under Equity
 Compensation Plans (1)Equity Compensation Plans
Approved by
 Shareholders:2001 Stock
Option Plan

962,920


$
8.80


192,777Equity Compensation Plans Not
Approved by
 Shareholders(2)








Total

962,920


$
8.80


192,77769

(1)
The total number of both the securities to be issued upon exercise
of
 outstanding options, warrants and rights and the securities remaining
 available for future issuance under equity compensation plans, as well as the
 weighted average exercise price, reflect the ten percent stock dividend paid
 on June 7, 2005 and the 13-for-10 stock split effected in the form of a stock
 dividend on September 4, 2007.(2)
The Company does not have any equity compensation plans that have
not
 been approved by shareholders.Item 13.
Certain Relationships, Related Transactions
 and Director IndependenceCertain of our directors and officers and persons with whom they
are
associated have had, and expect to have in the future, banking transactions
with us. Any extensions of credit to our directors and officers are made in the
ordinary course of business, were required to be on substantially the same
terms, including interest rates and collateral, as comparable transactions to
non-related parties at the time of the extension of credit, and did not involve
more than the normal risk of collectability or present other unfavorable features,
pursuant to Regulation O  Loans to Executive Officers, Directors and Principal
Shareholders of Member Banks.

The Board of Directors has determined that all of its thirteen
members
are independent as defined by the listing standards of the NASDAQ Stock Market
(NASDAQ). In reaching this conclusion, the Board of Directors considered that
the Company and its subsidiary banks conduct business with companies of which
certain members of the Board of Directors or members of their immediate
families are or were directors or officers. In making that determination, the
Board of Directors considered that Director Kilgore provides legal counsel to
the Company and subsidiaries; Director Starnes company provides maintenance
for heating and air units of the bank, and Director Meades company provided
carpet for branch locations.

We have not adopted a formal policy that covers the review and
approval
of related person transactions by our Board of Directors. The Board, however,
does review all such transactions that are proposed to it for approval. During
such a review, the Board will consider, among other things, the related
persons relationship to us, the facts and the circumstances of the proposed
transaction, the aggregate dollar amount of the transaction, the related
persons relationship to the transaction and any other material information.
Our Audit Committee has the responsibility to review significant conflicts of
interest involving directors or executive officers.

Item 14.
Principal Accountant Fees and ServicesFees of Independent Registered Public
Accountants

Audit Fees

The aggregate fees billed by Brown, Edwards for professional
services
rendered for the audit of our annual financial statements for the fiscal years
ended December 31, 2008 and 2007, and for the review of the financial
statements included in the Companys Quarterly Reports on Form 10-Q, and
services that are normally provided in connection with statutory and regulatory
filings and engagements, for fiscal years ending December 31, 2008 and 2007
were $84,550 and $81,200, respectively.

Audit
Related Fees

The
aggregate fees billed by Brown, Edwards for professional services for assurance
and related services that are reasonably related to the performance of the
audit or review of our financial statements and not reported under the heading
Audit Fees above for the fiscal years ended December 31, 2008 and 2007 were
$21,100 and $11,918, respectively. During 2008 and 2007, these services
included the performance of audits and attest services not required by statute
or regulations, information on Section 404 of the Sarbanes-Oxley Act, sample
sizes, Financial Accounting Standards Board No. 91 disclosures, an assessment
of the Banks compliance with Bank Secrecy Act regulations, audits of our
benefit plan, agreed upon procedures related to Virginia Enterprise Zone tax
credits, review of a proposed S-1 filing, and accounting consultations
regarding the application of generally accepted accounting principles to
proposed transactions.

Tax
Fees

The
aggregate fees billed by Brown, Edwards for professional services for tax
compliance, tax advice and tax planning for the fiscal years ended December 31,
2008 and 2007 were $13,055 and $9,800, respectively. During 2008 and 2007,
these services included preparation of tax returns as necessary and for NPB
Capital Trusts I & 2, as well as tax compliance services.

All Other Fees

None.

70

Pre-Approved Services

All audit related services, tax services and other services were
pre-approved by the Audit Committee, which concluded that the provision of such
services by Brown, Edwards was compatible with the maintenance of that firms
independence in the conduct of their auditing functions. The Audit Committee
has a policy that provides for the pre-approval of all services to be provided
by its independent registered public accounting firm. The Audit Committee does
not delegate to management its responsibility to pre-approve services performed
by the independent registered public accounting firm. All of the services
mentioned above were pre-approved by the Audit Committee.

Item 15.
Exhibits and Financial Statement Schedules(a)(1)
The
 response to this portion of Item 15 is included in Item 8 above.(a)(2)
The
 response to this portion of Item 15 is included in Item 8 above.(a)(3)
The
 following exhibits are filed as part of this Form 10-K:ExhibitsThe following exhibits are filed as part of this Form 10-K, and this
 list includes the exhibit index:2

Agreement and Plan of Share Exchange dated August 15, 2001
 (incorporated by reference to Exhibit 2 to Form 8-K filed December 17, 2001)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)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)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 Registrant23

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.(b)
See Item 15(a)(3) above.(c)
See Items 15(a)(1) and (2) above.71

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/ JONATHAN H. MULLINSJonathan H. MullinsPresident and Chief Executive OfficerDate:
July 2, 2009By:
/s/ C. TODD ASBURYC. Todd AsburyExecutive Vice President and Chief Financial OfficerDate:
July 2, 2009POWER OF ATTORNEY

Each of the undersigned hereby appoints
Jonathan H. Mullins 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, 2008 (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/ JONATHAN H. MULLINS

President and
Chief Executive Officer
(Principal Executive Officer)

July 2, 2009Jonathan H. Mullins/s/ C. TODD ASBURY

Executive Vice President
and Chief Financial Officer
(Principal Financial and
Accounting Officer)

July 2, 2009C. Todd Asbury/s/ TIM BALL

Director

July 2, 2009Tim Ball/s/ JOE CARTER

Director

July 2, 2009Joe Carter/s/ JOHN D. COX

Director

July 2, 2009John D. Cox/s/ CHARLES H. GENT

Director

July 2, 2009Charles H. Gent/s/ HAROLD LYNNE KEENE

Director

July 2, 2009Harold Lynne Keene/s/ FRANK KILGORE

Director

July 2, 2009Frank Kilgore/s/ JOHN MAXFIELD

Director, Secretary

July 2, 2009John Maxfield72

/s/ MICHAEL G. MCGLOTHLIN

Director

July 2, 2009Michael G. McGlothlin/s/ FRED MEADE

Director

July 2, 2009Fred Meade/s/ BILL ED SAMPLE

Director

July 2, 2009Bill Ed Sample/s/ STEPHEN H. STARNES

Director

July 2, 2009Stephen H. Starnes/s/ WILLIAM C. WAMPLER, JR.

Director

July 2, 2009William C. Wampler, Jr./s/ B. SCOTT WHITE

Chairman, Director

July 2, 2009B. Scott
 White73