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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

For the quarterly period ended March 31, 2005

For the transition period from              to             

Commission file number: 000-33411

NEW PEOPLES BANKSHARES, INC.

(Exact name of registrant as specified in its charter)

(276) 873-7000

(Registrant’s telephone number, including area code)

n/a

(Former name, former address and former fiscal year, if changed since last report)

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

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:

6,910,304 shares of common stock, par value $2.00 per share, outstanding as of May 9, 2005

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NEW PEOPLES BANKSHARES, INC.

INDEX

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Part I Financial Information

Item 1 Financial Statements

NEW PEOPLES BANKSHARES, INC.

CONSOLIDATED STATEMENTS OF INCOME

FOR THE THREE MONTHS ENDED MARCH 31, 2005 AND 2004

(IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)

(UNAUDITED)

The accompanying notes are an integral part of this statement.

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NEW PEOPLES BANKSHARES, INC.

CONSOLIDATED BALANCE SHEETS

(IN THOUSANDS EXCEPT SHARE DATA)

The accompanying notes are an integral part of this statement.

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NEW PEOPLES BANKSHARES, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

FOR THE THREE MONTHS ENDED MARCH 31, 2005 AND 2004

(IN THOUSANDS INCLUDING SHARE DATA)

(UNAUDITED)

The accompanying notes are an integral part of this statement.

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NEW PEOPLES BANKSHARES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE THREE MONTHS ENDED MARCH 31, 2005 AND 2004

(IN THOUSANDS)

(UNAUDITED)

The accompanying notes are an integral part of this statement.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 NATURE OF OPERATIONS:

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

NOTE 2 ACCOUNTING PRINCIPLES:

The financial statements conform to U. S. generally accepted accounting principles and to general industry practices. In the opinion of management, the accompanying unaudited financial statements contain all adjustments (consisting of only normal recurring accruals) necessary to present fairly the financial position at March 31, 2005, and the results of operations for the three month periods ended March 31, 2005 and 2004. The notes included herein should be read in conjunction with the notes to financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2004. The results of operations for the three month periods ended March 31, 2005 and 2004 are not necessarily indicative of the results to be expected for the full year.

NOTE 3 ACCOUNTING CHANGE:

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

Before adopting Statement 91, the Company recognized loan origination and commitment fees as income in the period the loan or commitment was granted. The related costs associated with originating those loans and commitments were recognized in salary expense in the period incurred. As a result of adopting Statement 91, at March 31, 2005 the Company deferred net loan fees (costs) of $79 thousand that would have otherwise been reflected as income, thereby reducing first quarter 2005 net income by $52 thousand, or $0.01 per share. As of March 31, 2005, approximately $364.7 million, or 90.53% of the loans included in the Company’s financial statements were accounted for under the prior policy.

NOTE 4 INVESTMENT SECURITIES:

The amortized cost and estimated fair value of securities at the dates indicated are as follows:

At March 31, 2005 and December 31, 2004, all securities were classified as available for sale.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 4 INVESTMENT SECURITIES (Continued):

The amortized cost and fair value of investment securities at March 31, 2005, by contractual maturity, are shown in the following schedule. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

Investment securities with a carrying value of $3.1 million at March 31, 2005 and at December 31, 2004 were pledged to secure public deposits and for other purposes required by law.

The Bank, as a member of the Federal Reserve Bank and the Federal Home Loan Bank, is required to hold stock in each. These equity securities are restricted from trading and are recorded at a cost of $1.8 million and $1.4 million at March 31, 2005 and December 31, 2004, respectively.

NOTE 5 LOANS:

Loans receivable outstanding are summarized as follows:

The following is a summary of information at March 31, 2005 and December 31, 2004 pertaining to nonperforming assets:

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The following is a summary of information at March 31, 2005 and December 31, 2004 pertaining to impaired loans:

NOTE 6 ALLOWANCE FOR LOAN LOSSES:

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

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 7 COMMON STOCK:

During the first quarter of 2005, 135 options to purchase shares of common stock were exercised at $7.50 per share. At March 31, 2005, the following exercisable options were outstanding.

NOTE 8 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.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Caution About Forward Looking Statements

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

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

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

Overview

For the first quarter of 2005, New Peoples Bankshares, Inc. (the “Company”), which is the parent company of New Peoples Bank, Inc. (the “Bank”), continued growing to record levels in assets, loans and deposits.

Net income for the quarter ended March 31, 2005 was $688 thousand, as compared to $773 thousand for the same period ended March 31, 2004. Net income per share was $.10 for the quarter ended March 31, 2005, as compared to $.11 for the same period in 2004. The decrease in net income is due primarily to an increased provision for loan losses, trust preferred interest expense, the deferral of net loan origination fees, and a decreased net interest margin.

During the first quarter of 2005, strong growth was experienced in assets, deposits and loans. At March 31, 2005, total assets were $455.0 million, an increase of $17.2 million, or 3.93%, over December 31, 2004. Total deposits grew $12.6 million, or 3.26%, to $400.8 million, and total loans were $402.9 million, an increase of $19.3 million, or 5.03%, from the amounts at December 31, 2004.

Critical Accounting Policies

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

Net Interest Income and Net Interest Margin

During the first quarter of 2005, our net interest margin was 4.68%. Although, this is strong compared to peers, we did see a decrease from 5.31% for the same period in 2004. The primary reasons for the decrease are a lower yield on loans, an increase in deposit costs, and trust preferred interest expense incurred.

One reason for the lower yield on loans is the increased competition in more highly competitive markets; consequently, pricing is more competitive and sometimes lower than previous periods. In addition, the implementation of SFAS No. 91: “Accounting for Nonrefundable Fees and Costs Associated with Originating or Acquiring Loans and Initial Direct Costs of Leases” resulted in a net decrease in loan income as explained in Note 3 to the Company’s Consolidated Financial Statements. Loan fees realized in the first quarter of 2004 were $183 thousand as compared to a net realized loan fee income of $35 thousand in the first quarter of 2005. This is a reduction in the annualized loan yield of 20 basis points. Non interest expenses also decreased $92 thousand in the first quarter of 2005 related to the adoption of SFAS 91 as reflected in the decrease in noninterest expenses as a percentage of average assets. See discussion in non-interest expenses.

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Our primary source of funds for earning assets comes from deposits. With interest rate increases and premium rates paid at new branches in 2004, interest expense has increased to $2.1 million from $1.3 million. The average cost of funds has increased from 1.94% for the first quarter of 2004 to 2.41% for the first quarter of 2005.

Lastly, we incurred interest expense on trust preferred securities of $152 thousand in the first quarter of 2005 as compared to no trust preferred interest expense in the first quarter of 2004. Trust preferred securities were issued by our wholly owned subsidiary, NPB Capital Trust I in July 2004.

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

Net Interest Margin Analysis

Average Balances, Income and Expense, and Yields and Rates

(In Thousands of Dollars)

Loans

We have continued to have strong loan demand as evidenced by an increase in the first quarter of 2005 of $19.3 million to $402.9 million from $383.6 million at December 31, 2004. This increase results from new branches, additional loan officers and an improving economy. A schedule of loans by type is included in the notes to the financial statements. Approximately 69.10% of the loan portfolio at the end of the first quarter of 2005 is secured by real estate.

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Provision for Loan Losses

The provision for loan losses was $320 thousand for the first quarter of 2005 compared with $120 thousand for the same period in 2004. The allowance for loan losses was $3.4 million at March 31, 2005 as compared to $3.1 million at December 31, 2004. The ratio of the allowance for loan losses to total loans was .83% at March 31, 2005 and .81% at the end of 2004. Net loans charged off for the first quarter of 2005 remained low at $49 thousand, or .01% of average loans, as compared to $51 thousand for the first quarter of 2004, or .02% of average loans.

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

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

Loans delinquent greater than 90 days still accruing interest and loans in non-accrual status also present higher risk. At March 31, 2005, non-accrual loans totaled $488 thousand, or 0.12% of total loans as compared to $773 thousand, or .20% of total loans at March 31, 2004. The amount of interest that would have been recognized on these loans in the first quarter of 2005 was $19 thousand. Loans greater than 90 days past due and still accruing interest totaled $651 thousand at March 31, 2005 as compared to $115 thousand at March 31, 2004. The increase in the first quarter of 2005 is related to one credit totaling $588 thousand. This loan is in process of collection and is adequately collateralized with real estate. It is our policy to stop accruing interest on a loan, and classify that loan as non-accrual under the following circumstances: (a) whenever we are advised by the borrower that scheduled principal payments 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.

Loss experience in the loan portfolio has been minimal. Net loans charged-off over the five year period have not exceeded .10% of average loans in any year. In addition, non-performing assets as a percentage of total loans has not exceeded .34%. The trend has been consistent through the first quarter of 2005. We view these as positive indicators of the quality of those loans originated in the early years of the Bank.

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

All internal and external factors are considered in determining the adequacy of the allowance for loan losses. The methodology used to calculate the allowance provides sufficiently for potential losses present at the end of the period. The evaluation of individual 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.

Due to the risk factors previously mentioned, 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, which totaled $6 thousand at March 31, 2005, or 0.18 % of the allowance for loan loss, as compared to $4 thousand on December 31, 2004, or 0.13% of the allowance for loan losses. In addition, for these credits adequately secured by collateral, a general allocation is made to allow for any inherent risks. During the first quarter, new pools of loans with higher risk weights were used in the allowance for loan loss calculataion. This change, along with additional volume in the loan portfolio, are the reasons for the increased provision for loan loss in the first quarter of

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2005. As we continue to evaluate the loan portfolio and the risk factors present, we will continue to designate pools as deemed appropriate. We calculate an allowance for the remaining loan portfolio based upon an estimated loan loss percentage. The evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available. As economic conditions and performance of our loans change, it is possible that future increases may need to be made to the allowance for loan losses.

Deposits

We continued to have excellent growth in deposits, which totaled $400.8 million at March 31, 2005, an increase of $12.6 million, or 3.26 %, from $388.1 million at December 31, 2004. The increase in deposits is the result of continued growth in the new branches opened in 2004. The largest areas of growth were in time deposits, which increased $6.7 million, or 2.41%, and demand deposits, which increased $2.6 million, or 5.57%. Savings deposits increased $2.0 million, or 4.69%.

Time deposits of $100,000 or more equaled approximately 20.80% of deposits at March 31, 2005 and 20.59% of deposits at December 31, 2004. We do not have brokered deposits, and internet accounts are limited to customers located in the surrounding geographical area. The average balance of and the average rate paid on deposits is shown in the net interest margin analysis.

Capital

Total capital at the end of the first quarter of 2005 was $36.8 million as compared to $36.1 million at the end of December 31, 2004. The increase is primarily the result of net income for the quarter. There were 135 stock options exercised during the first quarter of 2005 at $7.50 per share. Capital as a percentage of total assets was 8.08 % at March 31, 2005 as compared to 8.25% at December 31, 2004, both of which exceeded regulatory requirements.

No dividends have been paid historically and none are anticipated in the foreseeable future. The Company’s strategic plan is to continue growing. To accommodate this growth and have sufficient capital, earnings will need to be retained.

Noninterest Income

Noninterest income increased to $622 thousand in the first quarter of 2005 from $485 thousand in 2004. The $137 thousand, or 28.25%, increase is related primarily to operational growth from deposit related charges and insurance commissions. Noninterest income as a percentage of average assets (annualized) remained the same for both periods at 0.55%. We anticipate this percentage to increase in 2005 as we increase overdraft fees during the second quarter of 2005.

Noninterest Expense

Noninterest expense increased from $3.3 million for the three months ended March 31, 2004 to $3.9 million for the same period in 2005. The increase was largely due to additional staffing and expenses associated with the new branches opened and the general growth in operations as salaries and benefits increased from $2.1 million to $2.4 million. We expect this number to increase for the remainder of 2005 as we realize a full-year’s effect of staffing for the new branches opened during 2004 and as we continue to add new branch locations. Noninterest expense as a percentage of average assets (annualized) decreased to 3.49% for the first quarter of 2005 as compared to 3.77% for the same period in 2004. This decrease is related to loan origination costs of $92 thousand being taken out of current expenses and deferred over the life of the loan as a result of the adoption of SFAS 91 and increased asset volume at the branches. Noninterest expense in the future will depend on our growth and the number of new branch locations.

Greater efficiencies will 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 74.94% for the first quarter of 2005 as compared to 71.95% for the same period in 2004. This was slightly higher as the result of additional staffing during the latter half of 2004 and a lower net interest margin during the first quarter of 2005. The ratio of assets to full-time equivalent employees was $1.8 million both at the end of the first quarter of 2005 and at December 31, 2004.

Liquidity

At March 31, 2005 and December 31, 2004, we had liquid assets in the form of cash, due from banks and federal funds sold of approximately $14.4 and $17.4 million, respectively. At March 31, 2005, all of our investments are classified as available-for-sale providing an additional source of liquidity in the amount of $2.7 million, which is net of those securities pledged as collateral for public funds.

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In the event we need additional funds, we have the ability to purchase federal funds under established lines of credit totaling $20.4 million. We may also borrow up to $62.5 million from the Federal Home Loan Bank in which the credit line is secured by a blanket lien on residential real estate loans. At March 31, 2005, we had Federal Home Loan Bank overnight borrowings totaling $3.7 million. Additional liquidity will 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. We anticipate opening a new office in Bluefield, Virginia in May 2005. We expect to raise additional deposits at this office that will reduce borrowings. Deposit interest rates have been increased at all of the branch locations to spur deposit growth during the second quarter of 2005.

Our loan to deposit ratio was 100.53% at March 31, 2005 and 98.83% at year end 2004. We can lower the ratio as management deems appropriate by managing the rate of growth in our loan portfolio. This can be done by changing interest rates charged or limiting the amount of new loans approved.

With the lines of credit available and the anticipated deposit growth from new and existing branches, we believe we have adequate liquidity to meet our requirements and needs for the foreseeable future.

Interest Sensitivity

At March 31, 2005, we had a negative cumulative gap rate sensitivity ratio of 40.09% for the one year re-pricing period, compared to 40.81% at December 31, 2004. This generally indicates that earnings would improve in a declining interest rate environment as liabilities re-price more quickly than assets. Conversely, earnings would probably decrease in periods during which interest rates are increasing. On a quarterly basis, management reviews our interest rate risk and has decided that the current position is an acceptable risk for a growing community bank operating in a rural environment. The table set forth below shows our interest sensitivity by period.

Interest Sensitivity Analysis

March 31, 2005

(In thousands of dollars)