NEW PEOPLES BANKSHARES INC - Quarter Report: 2005 September (Form 10-Q)

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

For the quarterly period ended September 30, 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 by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

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

7,613,522 shares of common stock, par value $2.00 per share, outstanding as of November 7, 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 NINE MONTHS ENDED SEPTEMBER 30, 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 STATEMENTS OF INCOME

FOR THE THREE MONTHS ENDED SEPTEMBER 30, 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 STOCKHOLDERS’ EQUITY

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 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 NINE MONTHS ENDED SEPTEMBER 30, 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 September 30, 2005, and the results of operations for the three month and nine month periods ended September 30, 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 and nine month periods ended September 30, 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 loan.

Before adopting Statement 91, the Company recognized loan origination and commitment fees as income in the period the loan or commitment was granted. The related costs associated with originating those loans and commitments were recognized in salary expense in the period incurred. As a result of adopting Statement 91, as of September 30, 2005 the Company deferred net loan fees (costs) of $179 thousand that would have otherwise been reflected as income, thereby reducing the first nine months of 2005 net income by $118 thousand, or $0.02 per share. As of September 30, 2005, approximately $304.3 million, or 68.32% of the loans included in the Company’s financial statements were accounted for under the prior policy.

On December 16, 2004, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123R, “Share-Based Payment,” that addresses the accounting for share-based payment transactions in which a company receives employee services in exchange for either equity instruments of the company or liabilities that are based on the fair value of the company’s equity instruments or that may be settled by the issuance of such equity instruments. SFAS No. 123R eliminates the ability to account for share-based compensation transactions using the intrinsic method and requires that such transactions be accounted for using a fair-value-based method and recognized as expense in the consolidated statement of income. The effective date of SFAS No. 123R (as amended by the SEC) is for annual periods beginning after June 15, 2005. The provisions of SFAS No. 123R do not have an impact on the Company’s results of operations at the present time. All stock options issued through September 30, 2005 have fully vested and no compensation expense will be incurred in 2006. Any options issued after September 30, 2005 that are not fully vested prior to January 1, 2006 would increase compensation expense above this estimate for 2006.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 4 INVESTMENT SECURITIES:

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

As of September 30, 2005 and December 31, 2004, all securities were classified as available for sale.

The amortized cost and fair value of investment securities at September 30, 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 $3.0 million at September 30, 2005 and $3.1 million 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 $1.7 million and $1.4 million at September 30, 2005 and December 31, 2004, respectively.

NOTE 5 LOANS:

Loans receivable outstanding are summarized as follows:

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 5 LOANS (Continued):

The following is a summary of information at September 30, 2005 and December 31, 2004 pertaining to nonperforming loans:

NOTE 6 ALLOWANCE FOR LOAN LOSSES:

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

NOTE 7 COMMON STOCK DIVIDEND AND STOCK OPTIONS:

During the second quarter of 2005, the Board of Directors awarded a 10% stock dividend to shareholders of record on June 7, 2005 which resulted in the issuance of an additional 690,963 shares of common stock. The Board of Directors also elected to apply the 10% stock dividend to stock options outstanding. As a result, stock options increased by 10% per option holder at an exercise price discounted at 110%. Following is a table of the adjusted stock options as affected by the stock dividend.

Amounts presented for prior periods have been adjusted to retroactively reflect the effect of the June 2005 stock dividend on all share and per share amounts.

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 as determined by the Treasury Method. Amounts presented for prior periods have been adjusted to retroactively reflect the effect of the June 2005 stock dividend on all share and per share amounts.

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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: changes in interest rates and interest rate policies; 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; 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

During the third quarter of 2005, New Peoples Bankshares, Inc. (the “Company”), which is the parent company of New Peoples Bank, Inc. (the “Bank”), continued its prior pace of growth in deposits and loans and surpassed $500 million in total assets. The Bank opened its 21st full service branch in Cleveland, Virginia in August.

Net income for the quarter ended September 30, 2005 was $791 thousand, as compared to $840 thousand for the same period ended September 30, 2004. Net income for the first nine months of 2005 was $2.1 million as compared to $2.6 million as of September 30, 2004. The decrease in net income for the quarter and the first nine months is due primarily to an increased provision for loan losses, increases in salary and occupancy expenses from expansion, a decrease in the net interest margin from rising interest rates, and deferring interest fees and costs over the lives of the loans. Another reason for the decrease year-to-date is that during the second quarter of 2004, the Company realized a gain on the sale of fixed assets of $185 thousand which was not present in 2005.

During the third quarter of 2005, the Company continued to grow in assets, deposits and loans. At September 30, 2005, total assets increased to $511.0 million, an increase of $73.2 million, or 16.72%, over December 31, 2004. Total deposits grew $71.0 million, or 18.29%, to $459.1 million, and total loans were $445.3 million, an increase of $61.8 million, or 16.10%, 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.

Balance Sheet Changes

At September 30, 2005, total assets increased to $511.0 million, an increase of $73.2 million, or 16.72%, over December 31, 2004. This is a result of growth at the new Bluefield, Virginia office and continued growth in several of the other branches.

Loan growth remains strong as total loans increased $61.8 million, or 16.10% to $445.3 million at September 30, 2005 from $383.6 million at December 31, 2004. Asset quality remains strong as discussed in the section Provision for Loan Losses.

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We continued to have excellent growth in deposits, which totaled $459.1 million at September 30, 2005, an increase of $71.0 million, or 18.29%, from $388.1 million at December 31, 2004. The increase in deposits is the result of growth from our newest location in Bluefield, Virginia, as well as continued growth in several of the other branches. The largest area of deposit growth was in time deposits, which increased $60.4 million, or 21.77%.

Net Interest Income and Net Interest Margin

During the third quarter of 2005, our net interest margin was 4.33% as compared to 5.12% for the same period in 2004. The primary reason for the decrease is an increase in deposit costs due to rising interest rates. We anticipate continued pressure on the net interest margin due to expected further interest rate hikes.

The Company is sensitive to a rise in interest rates that increases the cost of funds. We have experienced an increase in the cost of funds from 1.98% in the third quarter of 2004 to 3.12% in the same quarter of 2005. Interest expense has increased from $1.7 million in the third quarter of 2004 to $3.1 million in the third quarter of 2005. With rising interest rates, and premium rates offered on short-term deposits at new branch locations, we have experienced an increase in interest expenses.

Interest expenses for the first nine months of 2005 increased to $7.7 million from $4.5 million for the same period of 2004. The increase in year-to-date interest expense is due to the same factors discussed above with regard to the quarter results.

Interest Sensitivity

At September 30, 2005, we had a negative cumulative gap rate sensitivity ratio of 33.23% for the one year re-pricing period, compared to 40.81% at December 31, 2004. The improvement in this ratio positions us better for continued interest rate increases in the future. Generally a negative cumulative gap rate sensitivity ratio 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. Management continues to closely monitor the Company’s interest rate risk. In light of expected future increases in the federal funds rate by the Federal Reserve, our strategy is to extend deposit maturities as practical and increase the frequency of asset repricing. This will continue to improve our interest rate sensitivity position for a rising interest rate environment.

Provision for Loan Losses

The provision for loan losses was $175 thousand for the third quarter of 2005 compared with $220 thousand for the same period in 2004. For year-to-date September 30, 2005 and 2004, the provision for loan losses was $857 thousand and $620 thousand, respectively. The increases in the provision for loan losses are due primarily to increased loan volume and replenishing the allowance for net charge-offs.

The allowance for loan losses was $3.8 million at September 30, 2005 as compared to $3.1 million at December 31, 2004. The ratio of the allowance for loan losses to total loans was .84% at September 30, 2005 and .81% at the end of 2004. Net loans charged-off during the first nine months of 2005 were $195 thousand, or .04% of total loans. Based on our evaluation of the loan portfolio, we believe we are adequately reserved for potential 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 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 our credit risk. We consider these factors to create an element of higher risk in the loan portfolio.

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 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 the 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.

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A majority of our 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 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.

All internal and external factors are considered in determining the adequacy of the allowance for loan losses. We believe that the methodology used to calculate the allowance provides sufficiently for potential losses present at the end of the period. The evaluation of individual 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. Such specific allowances totaled $16 thousand at September 30, 2005, or .42% of the allowance for loan losses, as compared to $4 thousand at December 31, 2004, or 0.13% of the allowance for loan losses. In addition, for these classified credits that are adequately secured by collateral, a general allocation is also made to allow for any inherent risks. 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.

Noninterest Income

Noninterest income increased to $767 thousand in the third quarter of 2005 from $642 thousand in the third quarter of 2004. The $125 thousand, or 19.49%, increase is related primarily to the increase in overdraft fees which began in the latter part of the second quarter. We anticipate noninterest income to continue to increase as deposit volumes increase.

Noninterest income for the nine months ended in 2005 and 2004 was $2.0 million and $1.8 million, respectively. The primary reasons for the increase relate to operational growth from overdraft fees and insurance and investment commissions generated at our subsidiary, NPB Financial Services, Inc.

Noninterest Expense

Noninterest expense increased from $3.7 million for the three months ended September 30, 2004 to $4.3 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 $2.3 million to $2.6 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 2005. Noninterest expense in the future will depend on our growth and the number of new branch locations.

Noninterest expenses for the first nine months of 2005 were $12.3 million as compared to $10.4 million, an increase of $1.9 million, or 18.61%. Salaries and benefits make up the largest portion of this increase. This category of expenses increased $1.0 million, or 16.25%, from $6.4 million to $7.4 million. This increase is related to additional staffing of branches and merit raises.

Capital

Total capital at the end of the third quarter of 2005 was $38.3 million as compared to $36.1 million at December 31, 2004. The increase is primarily the result of retained earnings from net income for the year. Capital as a percentage of total assets was 7.49% at September 30, 2005 as compared to 8.25% at December 31, 2004, both of which exceeded minimum regulatory requirements.

No cash dividends have been paid historically and none are anticipated in the foreseeable future; however, a 10% stock dividend was awarded to shareholders of record June 7, 2005. The Company’s strategic plan is to continue growing. To accommodate this growth and have sufficient capital, earnings will need to be retained.

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Liquidity

At September 30, 2005 and December 31, 2004, we had liquid assets in the form of cash, due from banks and federal funds sold of approximately $26.2 million and $17.4 million, respectively. At September 30, 2005, all of our investments are classified as available-for-sale providing an additional source of liquidity in the amount of $3.2 million, which is net of those securities pledged as collateral for public funds.

In the event we need additional funds, we have the ability to purchase federal funds under established lines of credit totaling $20.4 million. We may also borrow up to $71.9 million from the Federal Home Loan Bank under a credit line that is secured by a blanket lien on residential real estate loans. As of September 30, 2005, there were no borrowings on these lines of credit. 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.

Our loan to deposit ratio was 97.00% at September 30, 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, we believe we have adequate liquidity to meet our requirements and needs for the foreseeable future.

Off Balance Sheet Items

There have been no material changes to the off-balance sheet items disclosed in our annual report on Form 10-K for the fiscal year ended December 31, 2004.

Contractual Obligations

As of September 30, 2005, there have been no material changes outside the ordinary course of business to the contractual obligations disclosed in our annual report on Form 10-K for the fiscal year ended December 31, 2004.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

There have been no material changes in market risks faced by the Company since December 31, 2004. For information regarding the Company’s market risk, refer to the Company’s Annual Report on Form 10-K for the year ended December 31, 2004.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

The Company maintains 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, the Company carried out an evaluation, under the supervision and with the participation of the Company’s 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, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were not operating effectively to ensure that information required to be disclosed by the Company in reports that it files or submits under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms.

This conclusion was due to the fact, discussed below, that the previously disclosed material weakness in the Company’s internal control over financial reporting at December 31, 2004, stemming from control deficiencies in NPB Financial Services, Inc., a new startup division, had not been fully remediated as of September 30, 2005. As part of its evaluation of disclosure controls and procedures, the Company assessed whether the weakness in internal control over financial reporting continued to exist. Although the Company believes it has taken the necessary steps to mitigate the reported material weakness, it has not undertaken the testing of the changes in controls and procedures which it believes is necessary to conclude that the material weakness has been fully remediated.

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

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Internal Control Over Financial Reporting

In its Form 10-K and 10-K/A for the year ended December 31, 2004, the Company identified a material weakness due to control deficiencies in NPB Financial related to the design effectiveness of certain internal controls regarding segregation of duties in the processes of initiating, authorizing, recording, processing, and reporting certain insurance and brokerage transactions, as well as the design effectiveness of related fraud detection.

Since the discovery of the material weakness in internal control described above, the Company has taken various actions to remediate its internal control in this subsidiary. As previously disclosed, in the first quarter of 2005, the Company made management changes at NPB Financial, improved its process of segregating the function of production of and accounting for sold commissions by having all additional commissions sent directly to the accounting department and changed its recording procedures for sold items by requiring verification with the insurance companies prior to recording.

In the second quarter of 2005, the Company continued to implement other remedial initiatives it began in the first quarter of 2005, including improving its system of identifying sales through the finalization of pending contracts with insurance companies and consolidating its broker-dealer relationships to simplify oversight.

In the third quarter of 2005, the Company:

The Company believes that the corrective actions it has taken over the past three fiscal quarters, taken as a whole, have mitigated the material weakness related to NPB Financial. The Company cannot, however, be certain that these initiatives have in fact eliminated the material weakness until it completes its management’s report on internal control over financial reporting in conjunction with the close of its fiscal 2005. Accordingly, the Company will continue to monitor the effectiveness of its internal control over financial reporting related to NPB Financial and will make any further changes its management determines to be appropriate. Furthermore, the Company cannot assure you that either it or its independent accountants will not in the future identify further material weaknesses or significant deficiencies in the Company’s internal control over financial reporting that have not been discovered to date.

Other than the changes identified above, there have been no changes in the Company’s internal control over financial reporting identified in connection with the evaluation of it that occurred during the last fiscal quarter that materially affected, or are reasonably likely to materially affect, internal control over financial reporting. The Company expects the remedial changes discussed above to materially affect and improve its internal control over financial reporting.

Part II Other Information

Item 1. Legal Proceedings

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

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Not Applicable

Item 3. Defaults Upon Senior Securities

Not Applicable

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

No matters were voted upon.

Item 5. Other Information

Not applicable

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Item 6. Exhibits

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

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SIGNATURES

Pursuant to the requirements 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.

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