NEW PEOPLES BANKSHARES INC - Quarter Report: 2011 March (Form 10-Q)

NEW PEOPLES BANKSHARES INC - Quarter Report: 2011 March (Form 10-Q)

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FORM 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

x	Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended March 31, 2011

¨	Transition Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from to

Commission file number: 000-33411

NEW PEOPLES BANKSHARES, INC.

(Exact name of registrant as specified in its charter)


Virginia		31-1804543
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

67 Commerce Drive Honaker, Virginia		24260
(Address of principal executive offices)		(Zip Code)

(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 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 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):

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:

10,010,178 shares of common stock, par value $2.00 per share, outstanding as of June 28, 2011.

NEW PEOPLES BANKSHARES, INC.

INDEX


		Page

PART I	FINANCIAL INFORMATION		2

Item 1.	Financial Statements		2

	Consolidated Statements of Income – Three Months Ended March 31, 2011 and 2010 (Unaudited)		2

	Consolidated Balance Sheets – March 31, 2011 (Unaudited) and December 31, 2010		3

	Consolidated Statements of Changes in Stockholders’ Equity Three Months Ended March 31, 2011 and 2010 (Unaudited)		4

	Consolidated Statements Of Cash Flows – Three Months Ended March 31, 2011 and 2010 (Unaudited)		5

	Notes to Consolidated Financial Statements		6

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		17

Item 3.	Quantitative and Qualitative Disclosures about Market Risk		22

Item 4.	Controls and Procedures		22

PART II	OTHER INFORMATION		23

Item 1.	Legal Proceedings		23

Item 1A.	Risk Factors		23

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		23

Item 3.	Defaults upon Senior Securities		23

Item 4.	(Removed and Reserved)		23

Item 5.	Other Information		23

Item 6.	Exhibits		23

SIGNATURES			24

Part I

Financial Information

Item 1

Financial Statements

NEW PEOPLES BANKSHARES, INC.

CONSOLIDATED STATEMENTS OF INCOME

FOR THE THREE MONTHS ENDED MARCH 31, 2011 AND 2010

(IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)

(UNAUDITED)


	2011		2010
INTEREST AND DIVIDEND INCOME
Loans including fees	$	10,888	$	12,195
Federal funds sold		9		10
Interest-earning deposits with banks		26		—
Investments		39		23
Dividends on equity securities (restricted)		22		21

Total Interest and Dividend Income		10,984		12,249


INTEREST EXPENSE
Deposits
Demand		45		73
Savings		186		200
Time deposits below $100,000		1,388		1,980
Time deposits above $100,000		805		1,219
FHLB Advances		221		261
Other borrowings		61		63
Trust Preferred Securities		108		107

Total Interest Expense		2,814		3,903


NET INTEREST INCOME		8,170		8,346
PROVISION FOR LOAN LOSSES		1,145		1,990


NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES		7,025		6,356


NONINTEREST INCOME
Service charges		552		610
Fees, commissions and other income		574		541
Insurance and investment fees		98		120
Life insurance investment income		87		106

Total Noninterest Income		1,311		1,377


NONINTEREST EXPENSES
Salaries and employee benefits		3,913		3,501
Occupancy and equipment expense		1,025		1,204
Advertising and public relations		85		78
Data processing and telecommunications		406		415
FDIC insurance premiums		675		750
Other real estate owned and repossessed vehicles, net		244		146
Other operating expenses		1,265		1,057

Total Noninterest Expenses		7,613		7,151


INCOME BEFORE INCOME TAXES		723		582

INCOME TAX EXPENSE		174		169


NET INCOME	$	549	$	413


Earnings (Loss) Per Share
Basic	$	0.05	$	0.04

Fully Diluted	$	0.05	$	0.04


Average Weighted Shares of Common Stock
Basic		10,010,178		10,009,037

Fully Diluted		10,010,178		10,050,093

The accompanying notes are an integral part of this statement.

NEW PEOPLES BANKSHARES, INC.

CONSOLIDATED BALANCE SHEETS

(IN THOUSANDS EXCEPT PER SHARE AND SHARE DATA)


	March 31, 2011			December 31, 2010
	(Unaudited)			(Audited)
ASSETS
Cash and due from banks	$	19,038		$	14,369
Interest-bearing deposits with banks		91,963			42,549
Federal funds sold		14			25,611

Total Cash and Cash Equivalents		111,015			82,529

Investment securities
Available-for-sale		6,072			4,658

Loans receivable		683,025			707,794
Allowance for loan losses		(19,660	)		(25,014	)

Net Loans		663,365			682,780

Bank premises and equipment, net		34,333			34,141
Equity securities (restricted)		3,878			3,878
Other real estate owned		13,553			12,346
Accrued interest receivable		3,466			3,700
Life insurance investments		11,098			11,011
Goodwill and other intangibles		4,317			4,346
Deferred taxes		6,464			8,037
Other assets		7,104			5,201


Total Assets	$	864,665		$	852,627


LIABILITIES

Deposits:
Demand deposits:
Noninterest bearing	$	102,811		$	87,839
Interest-bearing		56,116			60,022
Savings deposits		115,318			108,119
Time deposits		508,166			510,100

Total Deposits		782,411			766,080

Federal Home Loan Bank advances		18,883			24,183
Accrued interest payable		1,760			1,720
Accrued expenses and other liabilities		1,579			1,475
Line of credit borrowing		—			4,900
Other borrowings		5,450			250
Trust preferred securities		16,496			16,496


Total Liabilities		826,579			815,104


STOCKHOLDERS’ EQUITY

Common stock - $2.00 par value; 50,000,000 shares authorized; 10,010,178 shares issued and outstanding		20,020			20,020
Additional paid-in-capital		21,689			21,689
Retained earnings (deficit)		(3,626	)		(4,175	)
Accumulated other comprehensive income (loss)		3			(11	)


Total Stockholders’ Equity		38,086			37,523


Total Liabilities and Stockholders’ Equity	$	864,665		$	852,627

The accompanying notes are an integral part of this statement.

NEW PEOPLES BANKSHARES, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

FOR THE THREE MONTHS ENDED MARCH 31, 2011 AND 2010

(IN THOUSANDS INCLUDING SHARE DATA)

(UNAUDITED)


	Shares of Common Stock		Common Stock		Additional Paid in Capital		Retained Earnings (Deficit)			Accumulated Other Comprehensive Income (Loss)			Total Shareholders’ Equity			Comprehensive Income (Loss)

Balance, December 31, 2009		10,009	$	20,018	$	21,683	$	4,890		$	28		$	46,619
Net Income								413						413		$	413
Unrealized loss on available-for-sale securities, net of $8 tax											(16	)		(16	)		(16	)

Balance, March 31, 2010		10,009	$	20,018	$	21,683	$	5,303		$	12		$	47,016		$	397


Balance, December 31, 2010		10,010	$	20,020	$	21,689	$	(4,175	)	$	(11	)	$	37,523
Net Income								549						549		$	549
Unrealized gain on available-for-sale securities, net of $7 tax											14			14			14

Balance, March 31, 2011		10,010	$	20,020	$	21,689	$	(3,626	)	$	3		$	38,086		$	563

The accompanying notes are an integral part of this statement.

NEW PEOPLES BANKSHARES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE THREE MONTHS ENDED MARCH 31, 2011 AND 2010

(IN THOUSANDS)

(UNAUDITED)


	2011			2010
CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$	549		$	413
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation		580			686
Provision for loan losses		1,145			1,990
Income (less expenses) on life insurance		(87	)		(106	)
Loss on sale of fixed assets		4			—
(Gain) loss on sale of foreclosed real estate		(1	)		4
Accretion of bond premiums/discounts		3			—
Deferred tax expense		1,564			—
Amortization of core deposit intangible		29			73
Net change in:
Interest receivable		234			(249	)
Other assets		(1,903	)		(922	)
Accrued interest payable		40			34
Accrued expenses and other liabilities		104			72

Net Cash Provided by Operating Activities		2,261			1,995


CASH FLOWS FROM INVESTING ACTIVITIES
Net decrease in loans		16,916			1,397
Purchase of securities available-for-sale		(2,455	)		(1,103	)
Proceeds from sale and maturities of securities available-for-sale		1,061			69
Purchase of Federal Reserve Bank stock		—			(19	)
Payments for the purchase of property and equipment		(781	)		(1,079	)
Proceeds from sales of property and equipment		5			—
Proceeds from sales of other real estate owned		148			225

Net Cash Provided by (Used in) Investing Activities		14,894			(510	)


CASH FLOWS FROM FINANCING ACTIVITIES
Net decrease in line of credit borrowings		(4,900	)		—
Net increase in other borrowings		5,200			—
Repayments to Federal Home Loan Bank		(5,300	)		(300	)
Net change in:
Demand deposits		11,066			16,111
Savings deposits		7,199			(1,900	)
Time deposits		(1,934	)		(4,641	)

Net Cash Provided by Financing Activities		11,331			9,270


Net increase in cash and cash equivalents		28,486			10,755
Cash and Cash Equivalents, Beginning of Period		82,529			39,560

Cash and Cash Equivalents, End of Period	$	111,015		$	50,315


Supplemental Disclosure of Cash Paid During the Period for:

Interest	$	2,854		$	3,937
Taxes	$	—		$	—

Supplemental Disclosure of Non Cash Transactions:

Other real estate acquired in settlement of foreclosed loans	$	1,354		$	2,563
Loans made to finance sale of foreclosed real estate	$	—		$	—

The accompanying notes are an integral part of this statement.

NEW PEOPLES BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 NATURE 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, Inc. (“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. NPB Financial Services, Inc. was a subsidiary of the Company until January 1, 2009 when it became a subsidiary of the Bank.

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, 2011, and the results of operations for the three month periods ended March 31, 2011 and 2010. 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/A Amendment No. 2 for the year ended December 31, 2010. The results of operations for the three month periods ended March 31, 2011 and 2010 are not necessarily indicative of the results to be expected for the full year.

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.

NOTE 3 FORMAL WRITTEN AGREEMENT:

Effective July 29, 2010, the Company and the Bank entered into a written agreement with the Federal Reserve Bank of Richmond (“Reserve Bank”) and the Virginia State Corporation Commission Bureau of Financial Institutions (the “Bureau”) called (the “Written Agreement”).

Under the terms of the Written Agreement, the Bank has agreed to develop and submit for approval within specified time periods written plans to: (a) strengthen board oversight of management and the Bank’s operation; (b) if appropriate after review, to strengthen the Bank’s management and board governance; (c) strengthen credit risk management policies; (d) enhance lending and credit administration; (e) enhance the Bank’s management of commercial real estate concentrations; (f) conduct ongoing review and grading of the Bank’s loan portfolio; (g) improve the Bank’s position with respect to loans, relationships, or other assets in excess of $1 million which are now or in the future become past due more than 90 days, which are on the Bank’s problem loan list, or which are adversely classified in any report of examination of the Bank; (h) review and revise, as appropriate, current policy and maintain sound processes for maintaining an adequate allowance for loan and lease losses; (i) enhance management of the Bank’s liquidity position and funds management practices; (j) revise its contingency funding plan; (k) revise its strategic plan; and (l) enhance the Bank’s anti-money laundering and related activities.

In addition, the Bank has agreed that it will: (a) not extend, renew, or restructure any credit that has been criticized by the Reserve Bank or the Bureau absent prior board of directors approval in accordance with the restrictions in the Written Agreement; (b) eliminate all assets or portions of assets classified as “loss” and thereafter charge off all assets classified as “loss” in a federal or state report of examination, unless otherwise approved by the Reserve Bank.

Under the terms of the Written Agreement, both the Company and the Bank have agreed to submit capital plans to maintain sufficient capital at the Company, on a consolidated basis, and the Bank, on a stand-alone basis, and to refrain from declaring or paying dividends without prior regulatory approval. The Company has agreed that it will not take any other form of payment representing a reduction in the Bank’s capital or make any distributions of interest, principal, or other sums on subordinated debentures or trust preferred securities without prior regulatory approval. The Company may not incur, increase or guarantee any debt without prior regulatory approval and has agreed not to purchase or redeem any shares of its stock without prior regulatory approval.

NEW PEOPLES BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 3 FORMAL WRITTEN AGREEMENT (CONTINUED):

Under the terms of the Written Agreement, the Company and the Bank have appointed a committee to monitor compliance with the Written Agreement. The directors of the Company and the Bank have recognized and unanimously agree with the common goal of financial soundness represented by the Written Agreement and have confirmed the intent of the directors and executive management to diligently seek to comply with all requirements of the Written Agreement.

NOTE 4 CAPITAL REQUIREMENTS:

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 March 31, 2011, the Company and the Bank meet all capital adequacy requirements to which they are subject.

As of March 31, 2011 the Bank was 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 March 31, 2011 and December 31, 2010, respectively.


	Actual					Minimum Capital Requirement					Minimum to Be Well Capitalized Under Prompt Corrective Action Provisions
(Dollars are in thousands)	Amount		Ratio			Amount		Ratio			Amount		Ratio
March 31, 2011:
Total Capital to Risk Weighted Assets
The Company	$	53,455		9.20	%		46,484		8	%	$	N/A		N/A
The Bank		59,033		10.16	%		46,467		8	%		58,084		10	%
Tier 1 Capital Risk Weighted Assets:
The Company		40,052		6.89	%		23,242		4	%		N/A		N/A
The Bank		51,619		8.89	%		23,233		4	%		34,850		6	%
Tier 1 Capital to Average Assets:
The Company		40,052		4.65	%		34,426		4	%		N/A		N/A
The Bank		51,619		6.04	%		34,197		4	%		42,747		5	%

December 31, 2010:
Total Capital to Risk Weighted Assets
The Company	$	53,020		8.87	%		47,825		8	%	$	N/A		N/A
The Bank		58,466		9.79	%		47,786		8	%		59,732		10	%
Tier 1 Capital Risk Weighted Assets:
The Company		39,108		6.54	%		23,913		4	%		N/A		N/A
The Bank		50,777		8.50	%		23,893		4	%		35,839		6	%
Tier 1 Capital to Average Assets:
The Company		39,108		4.62	%		33,857		4	%		N/A		N/A
The Bank		50,777		6.00	%		33,857		4	%		42,321		5	%

NEW PEOPLES BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 5 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 Value
March 31, 2011
Available for Sale
U.S. Government Agencies	$	4,456	$	2	$	30	$	4,428
Taxable municipals		894		22		—		916
Mortgage backed securities		718		10		—		728

Total Securities AFS	$	6,068	$	34	$	30	$	6,072


December 31, 2010
Available for Sale
U.S. Government Agencies	$	3,001	$	—	$	31	$	2,970
Taxable municipals		894		5		—		899
Mortgage backed securities		781		8		—		789

Total Securities AFS	$	4,676	$	13	$	31	$	4,658

The following table details unrealized losses and related fair values in the available for sale portfolio. This information is aggregated by the length of time that individual securities have been a continuous unrealized loss passion as of March 31, 2011 and December 31, 2010.


	Less than 12 Months				12 Months or More				Total
(Dollars are in thousands)	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
March 31, 2011
U.S. Government Agencies	$	2,676	$	30	$	—	$	—	$	2,676	$	30


December 31, 2010
U.S. Government Agencies	$	2,970	$	31	$	—	$	—	$	2,970	$	31

At March 31, 2011, the available for sale portfolio included three investments for which the fair market value was less than amortized cost. At December 31, 2010, the available for sale portfolio included four 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 March 31, 2011, 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		Fair		Weighted Average
Securities Available for Sale	Cost		Value		Yield
Due in one year or less	$	—	$	—
Due after one year through five years		261		264		3.28	%
Due after five years through fifteen years		5,807		5,808		3.03	%

Total	$	6,068	$	6,072		3.03	%

Investment securities with a carrying value of $1.1 million and $892 thousand at March 31, 2011 and December 31, 2010, 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 as of March 31, 2011 and December 31, 2010, respectively.

NEW PEOPLES BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 6 LOANS:

Loans receivable outstanding are summarized as follows:


	March 31,		December 31,
(Dollars are in thousands)	2011		2010
Commercial, financial and agricultural	$	101,249	$	109,551
Real estate-construction		47,088		52,307
Real estate-mortgages		483,624		489,314
Installment loans to individuals		51,064		56,622

Total loans	$	683,025	$	707,794

The following table presents information concerning the Company’s investment in loans considered impaired as of March 31, 2011 and December 31, 2010:


As of March 31, 2011 (Dollars are in thousands)	Average Recorded Investment		Interest Income Recognized			Recorded Investment		Unpaid Principal Balance		Related Allowance
With no related allowance recorded:
Commercial, financial and agricultural	$	12,627	$	192		$	15,989	$	16,688	$	—
Real estate-construction		13,124		85			17,662		25,394		—
Real Estate-mortgages		31,206		329			35,273		36,676		—
Installment loans to individuals		—		—			—		—		—
With an allowance recorded:
Commercial, financial and agricultural		7,331		(14	)		2,933		2,968		836
Real estate-construction		8,931		(4	)		2,948		2,948		1,123
Real Estate-mortgages		15,121		80			11,269		11,884		2,070
Installment loans to individuals		45		1			43		43		21

Total	$	88,385	$	669		$	86,117	$	96,601	$	4,050


As of December 31, 2010 (Dollars are in thousands)	Recorded Investment		Unpaid Principal Balance		Related Allowance
With no related allowance recorded:
Commercial, financial and agricultural	$	9,264	$	9,785	$	—
Real estate-construction		8,585		12,594		—
Real Estate-mortgages		27,138		27,997		—
Installment loans to individuals		—		—		—
With an allowance recorded:
Commercial, financial and agricultural		11,729		11,729		4,042
Real estate-construction		14,913		16,253		3,926
Real Estate-mortgages		18,973		19,142		4,842
Installment loans to individuals		46		46		23

Total	$	90,648	$	97,546	$	12,833

The average recorded investment in impaired loans was $63.4 million for the year ended December 31, 2010.

Loans receivable on nonaccrual status are summarized as follows:


	March 31,		December 31,
(Dollars are in thousands)	2011		2010
Commercial, financial and agricultural	$	4,858	$	5,970
Real estate-construction		12,841		15,460
Real estate-mortgages		23,012		22,986
Installment loans to individuals		1,269		1,365

Total loans receivable on nonaccrual status	$	41,980	$	45,781

Total interest income not recognized on nonaccrual loans for three months ended March 31, 2011 and 2010 was $455 thousand and $171 thousand, respectively.

NEW PEOPLES BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 6 LOANS (CONTINUED):

An age analysis of past due loans receivable was as follows:


As of March 31, 2011 (Dollars are in thousands)	Loans 30-89 Days Past Due		Loans 90 or More Days Past Due		Total Past Due Loans		Current Loans		Total Loans		Accruing Loans 90 or More Days Past Due
Commercial, financial and agricultural	$	2,453	$	4,224	$	6,677	$	94,572	$	101,249	$	315
Real estate-construction		6,279		3,115		9,394		37,694		47,088		—
Real Estate-mortgages		9,715		13,125		22,840		460,784		483,624		972
Installment loans to individuals		2,143		721		2,864		48,200		51,064		220

Total	$	20,590	$	21,185	$	41,775	$	641,250	$	683,025	$	1,507


As of December 31, 2010 (Dollars are in thousands)	Loans 30-89 Days Past Due		Loans 90 or More Days Past Due		Total Past Due Loans		Current Loans		Total Loans		Accruing Loans 90 or More Days Past Due
Commercial, financial and agricultural	$	5,622	$	2,690	$	8,312	$	101,239	$	109,551	$	90
Real estate-construction		2,079		8,150		10,229		42,078		52,307		—
Real Estate-mortgages		22,251		12,227		34,478		454,836		489,314		1,332
Installment loans to individuals		2,584		337		2,921		53,701		56,622		270

Total	$	32,536	$	23,404	$	55,940	$	651,854	$	707,794	$	1,692

The Company categorizes loans receivable into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. The Company analyzes loans and leases individually by classifying the loans receivable as to credit risk. The Company uses the following definitions for risk ratings:

Pass - Loans in this category are considered to have a low likelihood of loss based on relevant information analyzed about the ability of the borrowers to service their debt and other factors.

Special Mention - Loans in this category are currently protected but are potentially weak, including adverse trends in borrower’s operations, credit quality or financial strength. Those loans constitute an undue and unwarranted credit risk but not to the point of justifying a substandard classification. The credit risk may be relatively minor yet constitute an unwarranted risk in light of the circumstances. Special mention loans have potential weaknesses which may, if not checked or corrected, weaken the loan or inadequately protect the Company’s credit position at some future date.

Substandard - A substandard loan is inadequately protected by the current sound net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans classified as substandard must have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt; they are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.

Doubtful - Loans classified Doubtful have all the weaknesses inherent in loans classified Substandard, plus the added characteristic that the weaknesses make collection or liquidation in full on the basis of currently existing facts, conditions, and values highly questionable and improbable.

Based on the most recent analysis performed, the risk category of loans receivable was as follows:


As of March 31, 2011 (Dollars are in thousands)	Pass		Special Mention		Substandard		Doubtful		Total
Commercial, financial and agricultural	$	73,305	$	7,139	$	18,248	$	2,557	$	101,249
Real estate-construction		26,141		3,969		16,978		—		47,088
Real Estate-mortgages		397,418		23,699		57,921		4,586		483,624
Installment loans to individuals		49,850		183		992		39		51,064

Total	$	546,714	$	34,990	$	94,139	$	7,182	$	683,025

NEW PEOPLES BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 6 LOANS (CONTINUED):


As of December 31, 2010 (Dollars are in thousands)	Pass		Special Mention		Substandard		Doubtful		Total
Commercial, financial and agricultural	$	83,482	$	5,561	$	18,619	$	1,889	$	109,551
Real estate-construction		28,802		4,095		19,410		—		52,307
Real Estate-mortgages		418,166		20,113		47,389		3,646		489,314
Installment loans to individuals		56,037		122		434		29		56,622

Total	$	586,487	$	29,891	$	85,852	$	5,564	$	707,794

At March 31, 2011 there were $20.6 million in loans that are classified as troubled debt restructurings compared to $13.9 million at December 31, 2010.

NOTE 7 ALLOWANCE FOR LOAN LOSSES:

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


	For the Three Months Ended
	March 31,			March 31,
(Dollar are in thousands)	2011			2010
Balance, beginning of year	$	25,014		$	18,588
Provision for loan losses		1,145			1,990
Advances made on loans with off balance sheet provision		153			—
Recoveries of loans charged off		456			116
Loans charged off		(7,108	)		(1,362	)

Balance, End of Year	$	19,660		$	19,332

Percentage of Loans		2.88	%		2.55	%

The following table details activity in the allowance for loan losses by portfolio segment for the periods ended March 31, 2011 and December 31, 2010. Allocation of a portion of the allowance to one category of loans does not preclude its availability to absorb losses in other categories.


As of March 31, 2011 (Dollars are in thousands)	Commercial, Financial and Agricultural			Real Estate Construction			Real Estate Mortgages			Installment Loans to Individuals			Unallocated		Total
Allowance for loan losses:
Beginning balance	$	5,323		$	4,913		$	6,882		$	1,733		$	6,163	$	25,014
Charge offs		(2,171	)		(2,239	)		(1,603	)		(1,095	)		—		(7,108	)
Recoveries		3			400			2			51			—		456
Advances		—			153			—			—			—		153
Provisions		(122	)		(390	)		1			1,442			214		1,145

Ending balance	$	3,033		$	2,837		$	5,282		$	2,131		$	6,377	$	19,660


Ending balance allocated to:
Individually evaluated for impairment	$	836		$	1,123		$	2,070		$	21		$	—	$	4,050
Collectively evaluated for impairment		2,197			1,714			3,212		$	2,110			6,377		15,610

Ending balance	$	3,033		$	2,837		$	5,282		$	2,131		$	6,377	$	19,660


Loans ending balances:
Individually evaluated for impairment	$	18,922		$	20,610		$	46,542		$	43		$	—	$	86,117
Collectively evaluated for impairment		82,327			26,478			437,082			51,021			—		596,908

Total	$	101,249		$	47,088		$	483,624		$	51,064		$	—	$	683,025

NEW PEOPLES BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 7 ALLOWANCE FOR LOAN LOSSES (CONTINUED):


As of December 31, 2010 (Dollars are in thousands)	Commercial, Financial and Agricultural			Real Estate Construction			Real Estate Mortgages			Installment Loans to Individuals			Unallocated		Total
Allowance for loan losses:
Beginning balance	$	1,710		$	8,036		$	3,525		$	1,501		$	3,816	$	18,588
Charge offs		(1,425	)		(10,002	)		(3,867	)		(1,214	)		—		(16,508	)
Recoveries		509			—			7			90			—		606
Provisions		4,529			6,879			7,217			1,356			2,347		22,328

Ending balance	$	5,323		$	4,913		$	6,882		$	1,733		$	6,163	$	25,014


Ending balance allocated to:
Individually evaluated for impairment	$	4,042		$	3,926		$	4,842		$	23		$	—	$	12,833
Collectively evaluated for impairment		1,281			987			2,040		$	1,710			6,163		12,181

Ending balance	$	5,323		$	4,913		$	6,882		$	1,733		$	6,163	$	25,014


Loans ending balances:
Individually evaluated for impairment	$	20,993		$	23,497		$	46,112		$	46		$	—	$	90,648
Collectively evaluated for impairment		88,558			28,810			443,202			56,576			—		617,146

Total	$	109,551		$	52,307		$	489,314		$	56,622		$	—	$	707,794

In determining the amount of our allowance, we rely on an analysis of our loan portfolio, our experience and our evaluation of general economic conditions, as well as the requirements of the written agreement and other regulatory input. If our assumptions prove to be incorrect, our current allowance may not be sufficient to cover future loan losses and we may experience significant increases to our provision.

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 reflect 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. For the three months ended March 31, 2011, potential common shares were anti-dilutive and were not included in the calculation. Basic and diluted net income per common share calculations follows:


(Amounts in Thousands, Except Share and Per Share Data)	For the three months ended March 31,
	2011		2010
Net income	$	549	$	413
Weighted average shares outstanding		10,010,178		10,009,037
Dilutive shares for stock options		—		41,156

Weighted average dilutive shares outstanding		10,010,178		10,050,193


Basic earnings per share	$	0.05	$	0.04
Diluted earnings per share	$	0.05	$	0.04

NEW PEOPLES BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 9 FAIR VALUES:

ASC 820, “Fair Value Measurements and Disclosures” provides a framework for measuring fair value under generally accepted accounting principles and 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 and other real estate acquired through foreclosure).

Fair value is 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. Fair Value Measurements and Disclosures 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:

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.

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.

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 $6.1 million and $4.7 million at March 31, 2011 and December 31, 2010, respectively, 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 management used to determine the current value of the collateral. If further impairment below the appraised value is warranted based on changes in market conditions and there is no observable market price, or an appraised value does not include estimated costs of disposition, then management must make an estimate of these costs. In that case, the Company records the impaired loan as nonrecurring Level 3. The aggregate carrying amount of impaired loans were $86.1 million and $90.6 million at March 31, 2011 and December 31, 2010, respectively.

Foreclosed Assets - Foreclosed assets are adjusted to fair value upon transfer of the loans to foreclosed assets. Foreclosed assets are carried at the lower of the carrying value or fair value. Fair value is based upon independent observable market prices or appraised values of the collateral with a third party estimate of disposition costs, which the Company considers to be level 2 inputs. When the appraised value is not available, management determines the fair value of the collateral is further impaired below the appraised value and there is no observable market price, or an appraised value does not include estimated costs of disposition and management must make an estimate, the Company records the foreclosed asset as nonrecurring Level 3.

NEW PEOPLES BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 9 FAIR VALUES (CONTINUED):

Assets and liabilities measured at fair value are as follows as of March 31, 2011:


(Dollars are in thousands)	Quoted market price in active markets (Level 1)		Significant other observable inputs (Level 2)		Significant unobservable inputs (Level 3)
(On a recurring basis)
Available for sale investments
U.S. Government Agencies	$	—	$	4,428	$	—
Taxable municipals		—		916		—
Mortgage backed securities		—		728		—
(On a non-recurring basis)
Other real estate owned		—		—		13,553
Impaired loans
Commercial, financial and agricultural				—		18,922
Real estate-construction				—		20,610
Real estate-mortgages				—		46,542
Installment loans to individuals		—		—		43

Total	$	—	$	6,072	$	99,670

Assets and liabilities measured at fair value are as follows as of December 31, 2010:


(Dollars are in thousands)	Quoted market price in active markets (Level 1)		Significant other observable inputs (Level 2)		Significant unobservable inputs (Level 3)
(On a recurring basis)
Available for sale investments
U.S. Government Agencies	$	—	$	2,970	$	—
Taxable municipals		—		899		—
Mortgage backed securities		—		789		—
(On a non-recurring basis)
Other real estate owned		—		—		12,346
Impaired loans
Commercial, financial and agricultural				—		20,993
Real estate-construction				—		23,497
Real estate-mortgages				—		46,112
Installment loans to individuals		—		—		46

Total	$	—	$	4,658	$	102,994

For the three months ended March 31, 2011 and 2010, the changes in Level 3 assets measured at fair value on a nonrecurring basis are summarized as follows (dollars in thousands):


(Dollars are in thousands)	March 31, 2011 Other Real Estate Owned			March 31, 2010 Other Real Estate Owned
Balance, January 1	$	12,346		$	3,675
Acquired in settlement of loans		1,354			2,563
Proceeds from sale of other real estate owned		(148	)		(225	)
Gain (Loss) on sale of other real estate owned		1			(5	)
Adjustments to carrying value		—			—

Balance, March 31	$	13,553		$	6,008

NEW PEOPLES BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 9 FAIR VALUES (CONTINUED):

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.

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.

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 March 2011 and December 2010.


	March 31, 2011				December 31, 2010
(Dollars are in thousands)	Estimated Fair Value		Carrying Value		Estimated Fair Value		Carrying Value
Financial Assets
Cash and due from bank	$	19,038	$	19,038	$	14,369	$	14,369
Interest bearing deposits with banks		91,963		91,963		42,549		42,549
Federal funds sold		14		14		25,611		25,611
Investment securities		6,072		6,072		4,658		4,658
Equity securities (restricted)		3,878		3,878		3,878		3,878
Net Loans		669,172		663,365		700,420		682,780
Accrued Interest receivable		3,466		3,466		3,700		3,700
Life insurance investments		11,098		11,098		11,011		11,011

Financial Liabilities
Demand Deposits
Non-interest bearing		102,811		102,811		87,839		87,839
Interest-bearing		56,116		56,116		60,022		60,022
Savings deposits		115,318		115,318		108,119		108,119
Time deposits		510,833		508,166		513,090		510,100
FHLB advances		18,393		18,883		23,611		24,183
Accrued interest payable		1,760		1,760		1,720		1,720
Line of credit borrowing		—		—		4,900		4,900
Other borrowings		5,450		5,450		250		250
Trust preferred securities		16,496		16,496		16,496		16,496

NOTE 10 RECENT ACCOUNTING DEVELOPMENTS:

The following is a summary of recent authoritative announcements:

In July 2010, the Receivables topic of the Accounting Standards Codification (“ASC”) was amended by Accounting Standards Update (“ASU”) 2010-20 to require expanded disclosures related to a company’s allowance for credit losses and the credit quality of its financing receivables. The amendments require the allowance disclosures to be provided on a disaggregated basis. The Company is required to include these disclosures in their interim and annual financial statements. See Notes 5 and 6 to the consolidated financial statements for the required disclosures.

NEW PEOPLES BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 10 RECENT ACCOUNTING DEVELOPMENTS (CONTINUED):

Disclosures about Troubled Debt Restructurings (“TDRs”) required by ASU 2010-20 were deferred by the Financial Accounting Standards Board (“FASB”) in ASU 2011-01 issued in January 2011. In April 2011 FASB issued ASU 2011-02 to assist creditors with their determination of when a restructuring is a TDR. The determination is based on whether the restructuring constitutes a concession and whether the debtor is experiencing financial difficulties as both events must be present.

Disclosures related to TDRs under ASU 2010-20 will be effective for reporting periods beginning after June 15, 2011.

In December 2010, the Intangibles topic of the ASC was amended to modify Step 1 of the goodwill impairment test for reporting units with zero or negative carrying amounts. For those reporting units, an entity is required to perform Step 2 of the goodwill impairment test if it is more likely than not that a goodwill impairment exists. Any resulting goodwill impairment should be recorded as a cumulative-effect adjustment to beginning retained earnings upon adoption. Impairments occurring subsequent to adoption should be included in earnings.

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 or cash flows.

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, business 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.

Certain information contained in this discussion may include “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended and Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements contain the Company’s expectations, plans, future financial performance, and other statements that are not historical facts. These forward-looking statements are generally identified by phrases such as “the Company expects,” “the Company believes” or words of similar importance. Such forward-looking statements involve known and unknown risks including, but not limited to, changes in general economic and business conditions, interest rate fluctuations, competition within and from outside the banking industry, new products and services in the banking industry, risk inherent in making loans such as repayment risks and fluctuating collateral values, problems with technology utilized by the Company, changing trends in customer profiles and changes in laws and regulations applicable to the Company. Although the Company believes that its expectations with respect to the forward-looking statements are based upon reasonable assumptions within the bounds of its knowledge of its business and operations, there can be no assurance that actual results, performance or achievements of the Company will not differ materially from any future results, performance or achievements expressed or implied by such forward-looking statements.

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

The Company had net income for the quarter ended March 31, 2011 of $549 thousand as compared to net income of $413 thousand for the period ended March 31, 2010. Basic net income per share was $0.05 for the quarter ended March 31, 2011 as compared to basic net income of $0.04 for the quarter ended March 31, 2010.

In the first quarter of 2011, we experienced a decrease in our net interest margin to 4.21%, as compared to 4.22% for the same period in 2010. This is reflected in the $176 thousand decrease in net interest income during the first quarter of 2011 as compared to the same period in 2010. The provision for loan losses decreased $845 million, or 42.46%, to $1.1 million for the first quarter of 2011 as compared to $2.0 million in the same period for 2010. At March 31, 2011 our allowance for loan losses totaled $19.7 million, or 2.88% of total loans, as compared to $25.0 million, or 3.53% of total loans as of December 31, 2010. At March 31, 2010 our allowance for loan losses totaled $19.3 million, or 2.55% of total loans. The allowance for loan losses are being maintained at a level that management deems appropriate to absorb any potential future losses and known impairments with the loan portfolio whether or not the losses are actually ever realized.

At March 31 2011, the Company’s total assets increased $12.1 million, or 1.41%, to $864.7 million from $852.6 million at December 31, 2010. Total loans decreased to $683.0 million at March 31, 2011 from $707.8 million at year end 2010. This is the result of charge offs of $7.1 million for the first quarter of 2011, resolution of problem loans, and the intentional shrinking of the loan portfolio to increase regulatory capital ratios. We continue to serve our customers, and although the total loan portfolio has shrunk, we have renewed existing credits and have made new loans to qualified borrowers as well. We plan to decrease the loan portfolio in the near future as we reduce our exposure to certain risks and decrease nonperforming loans. Total deposits increased $16.3 million from $766.1 million at December 31, 2010 to $782.4 million at March 31, 2011. We continue to experience growth in core deposits through attractive consumer and commercial deposit products.

The deterioration of the residential and commercial real estate markets, as well as the extended recessionary period, have resulted in increases to our nonperforming assets. However, we are identifying potential problems early in an effort to minimize losses. The ratio of nonperforming assets to total assets is 6.60% at March 31, 2011 in comparison to 7.02% at December 31, 2010. Nonperforming assets, which include nonaccrual loans, other real estate owned and past due loans greater than 90 days still accruing interest, were $57.0 million at March 31, 2011 and $59.8 million at December 31, 2010. The majority of these assets are real estate development projects and commercial real estate secured loans. We are working aggressively to reduce these totals primarily by working with the customer for additional collateral, restructuring the debt, but we also may have to foreclose, repossess collateral and other prudent measures, however, it is uncertain how long this will take. In the first quarter, net charge offs were $7.1 million as compared to $1.3 million in the first quarter of 2010. The majority of the charge offs in the first quarter of 2011 were related to real estate construction loans and commercial loans with collateral values that are dependent upon market and economic conditions. Values may not always be easily ascertainable as evidenced by the current market conditions.

The Bank was well capitalized for regulatory purposes at March 31, 2011 as compared to adequately capitalized at December 31, 2010. The following ratios existed at March 31, 2011: Tier 1 leverage ratio of 6.04%, Tier 1 risk based capital ratio of 8.89%, and Total risk based capital ratio of 10.16%. The ratios were as follows at December 31, 2010: Tier 1 leverage ratio of 6.00%, Tier 1 risk based capital ratio of 8.50%, and Total risk based capital ratio of 9.79%.

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 further 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” below. For discussion of our significant accounting policies see our Annual Report on Form 10-K/A Amendment No. 2 for the year ended December 31, 2010.

Balance Sheet Changes

At March 31, 2010, total assets were $864.7 million, an increase of $12.1 million, or 1.41%, over December 31, 2010. Total deposits grew $16.3 million, or 2.13%, for the first three months of 2011 to $782.4 million from $766.1 million at December 31, 2010. Total loans decreased $24.8 million, or 3.50%, to $683.0 million at March 31, 2011 from $707.8 million at December 31, 2010.

We continue to experience an increase in core deposits as noninterest bearing deposits increased 17.08%, or $15.0 million, from $87.8 million at December 31, 2010 to $102.8 million at March 31, 2011. This was partially offset by a $3.9 million decrease in interest bearing demand deposits. We continue to experience growth in core deposits through attractive consumer and commercial deposit products.

We experienced an increase in savings deposits of $7.2 million and a decrease in time deposits of $1.9 million. The decrease in time deposits is due to customer desires to be more liquid in the current rate environment. Subsequent to quarter end, some larger liquid and rate sensitive deposits have withdrawn to seek other investment opportunities. We expect to continue to lose higher cost and rate sensitive deposits in the near future. This has resulted in total assets decreasing by nearly $32.5 million subsequent to March 31, 2011. However, we monitor deposits to ensure that we maintain adequate liquidity levels. We believe despite the deposit decrease, we have adequate liquidity.

Total loans decreased to $683.0 million at March 31, 2011 from $707.8 million at year end 2010. This is the result of charge offs of $7.1 million for the first quarter of 2011 and resolution of problem loans. We plan to decrease the loan portfolio as we manage our capital levels to maintain a well-capitalized status, reduce certain risks to various industry sectors that have posed higher risks in recent times, and resolve nonperforming loans. Even as we decrease our loan portfolio, we still are committed to serving our customers. We have hired commercial lending personnel and continue to train our loan officers to meet the needs of our customers and develop new business with qualified borrowers that will ensure a stronger loan portfolio in the future.

Net Interest Income and Net Interest Margin

Net interest income decreased $176 thousand, or 2.11%, to $8.2 million for the first quarter of 2011 from $8.3 million for the same period in 2010. Our net interest margin decreased to 4.21% in the first quarter of 2011 as compared to 4.22% for the same period in 2010. This is the result of nonaccrual loans of $42.0 million at March 31, 2011 which negatively affects the net interest margin as these loans are nonearning assets. If non-accruing loans increase, it may reduce our net interest margin further. We continue to manage our yields on assets and our costs of funds to improve the net interest margin.

Noninterest Income

Noninterest income decreased $66 thousand, or 4.79%, to $1.3 million in the first quarter of 2011 from $1.4 million in 2010. The decrease is the result of a $58 thousand decrease in services charges on deposit accounts and a $19 thousand decrease in life insurance investment income from bank owned life insurance policies. We expect noninterest income to remain flat throughout 2011 as a result of regulatory changes; however, we continue to seek opportunities to improve noninterest income without gouging our customers.

Noninterest Expense

Noninterest expense totaled $7.6 million for the first quarter of 2011 as compared to $7.2 million for the first quarter of 2010. The primary contributors to the increase in noninterest expenses for the quarter are the increase in other real estate owned expenses of $98 thousand and the increase in other operating expenses of $208 thousand. Other operating expenses increased mainly due to the result of complying with the terms of the Written Agreement entered into during 2010.

Salaries and benefits increased in the quarter-to-quarter comparison. In the first quarter of 2010, $400 thousand was reversed from expense as the accrued salary continuation agreement with the former President and CEO was terminated. Otherwise, salaries and benefits would have been approximately the same. We have decreased staffing during the first quarter of 2011 and in the subsequent period to improve earnings. In the future, we should continue to see improvements in salary and benefits expenses.

Our efficiency ratio, which is defined as noninterest expense divided by the sum of net interest income plus noninterest income, was 80.30% for the first quarter of 2011 as compared to 73.55% for the same period in 2010. We anticipate this ratio to improve in 2011 as we realize cost savings from branch closings in 2010, less staffing and engage fewer consultants.

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 decreased to $19.7 million at March 31, 2011 as compared to $25.0 million at December 31, 2010. The allowance for loan losses at March 31, 2011 was approximately 2.88% of total loans as compared to 3.53% at December 31, 2010 and 2.55% at March 31, 2010. Net loans charged off for the first quarter of 2011 were $6.7 million, or 0.95% of average loans, and $1.3 million, or 0.16% of average loans, for the first quarter of 2010. The provision for loan losses was $1.1 million for the first quarter of 2011 as compared with $2.0 million in the same period for 2010.

Certain risks exist in the Bank’s loan portfolio. Historically, we have experienced significant annual loan growth until the past couple of years. However, there might be loans too new to have exhibited signs of weakness. Also, recent expansions into new markets, although greatly reduced, increase potential credit risk. A majority of our loans are collateralized by real estate located in our market area. It is our policy to sufficiently collateralize loans to help minimize loss exposures in case of default. The recent negative trends in the national real estate market and economy pose threats to our portfolio. With the exception of real estate development type properties which have experienced more deterioration in market values, the local residential and commercial real estate market values have shown some deterioration but remain relatively stable. National real estate markets have experienced a more significant downturn and this has impacted our portfolio for certain out-of-market loans in the Coastal Carolina, northeastern Tennessee, and eastern West Virginia markets. Prior to 2008, we had purchased participation construction loans in the Coastal Carolina area. The totals of these credits were $7.2 million at March 31, 2011 and $7.6 million at December 31, 2010. At March 31, 2011 $705 thousand of the allowance for loan losses was allocated to these credits compared to $1.2 million at December 31, 2010. The $400 thousand decrease in these credits was the result of charge offs during the first quarter of 2011. This market area poses higher risk to potential future writedowns if the real estate market conditions do not show improvements. It is uncertain as to when or if local real estate values will be more significantly impacted. We do not believe that there will be a severely negative effect in our market area, but because of the uncertainty we deem it prudent to assign more of the allowance to these types of loans. Our market area is somewhat diverse, but certain areas are more reliant upon agriculture, coal mining and natural gas. As a result, increased risk of loan impairments is possible if these industries experience a significant downturn, although we do not believe this to be likely at least 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 loan review function. 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 reviewers. 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. For the year 2010 and 2011, we have engaged a third party loan review firm to conduct quarterly loan reviews.

All loans classified as special mention, substandard, doubtful and loss are individually reviewed for impairment. If collateral appraisals are outdated, we obtain updated appraisals. 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 in addition to estimated liquidation and disposal costs. The evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available. Impaired loans decreased to $86.1 million with a valuation allowance of $4.1 million at March 31, 2011 as compared to $90.6 million with a valuation allowance of $12.8 million at December 31, 2010. Of the $86.1 million recorded as impaired loans, $43.5 million were nonperforming loans, which includes nonaccrual loans and past due 90 days or more and still accruing. We determined we had $17.2 million in loans that required a valuation allowance of $4.1 million at March 31, 2011. At December 31, 2010 we had $45.7 million in loans that required a valuation allowance of $12.8 million. The $28.5 million decrease in loans requiring a valuation allowance was the result of $8.8 million decrease in commercial loans, $7.7 million decrease in real estate loans, and a decrease of $12.0 million in real estate construction loans that required a valuation allowance. Management is aggressively working to reduce the impaired credits at minimal loss.

Loans delinquent greater than 90 days still accruing interest and loans in non-accrual status present higher risks. At March 31, 2011, there were 129 loans in non-accrual status totaling $42.0 million, or 6.15% of total loans. At December 31, 2010, there were 113 loans in non-accrual status totaling $45.8 million, or 6.47% of total loans. It is our policy to stop accruing interest on a loan, and to classify that loan as non-accrual, under the following circumstances: (a) whenever we are advised by the borrower that scheduled payment or interest payments cannot be met, (b) when our best judgment indicates that payment in full of principal and interest can no longer be expected, or (c) when any such loan or obligation becomes delinquent for 90 days unless it is both well secured and in the process of collection. At March 31, 2011 there were $20.6 million in loans that are classified as troubled debt restructurings compared to $13.9 million at December 31, 2010. There are also no loans identified as “potential problem loans.” We do not have any commitments to lend additional funds to non-performing debtors.

Liquidity

We closely monitor our liquidity and from March 31, 2011 to December 31, 2010 we increased liquid assets in the form of cash, due from banks, federal funds sold, and unpledged available for sale investments to $116.0 million from $86.3 million respectively. We plan to maintain surplus short-term assets at levels adequate to meet potential liquidity needs during 2011.

At March 31, 2011, all of our investments are classified as available-for-sale, providing an additional source of liquidity in the amount of $5.0 million, which is net of those securities pledged as collateral. We anticipate developing an investment portfolio in the near future as we shrink our loan portfolio and increase deposits. This will primarily serve as a source of liquidity while yielding a higher return than other short term investment options, such as federal funds sold and overnight deposits with the Federal Reserve Bank.

Our loan to deposit ratio was 87.30% at March 31, 2011 and 92.39% at year end 2010. We anticipate this ratio to remain below 90% as we continue to decrease our loan portfolio throughout 2011. 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.

In the year 2010, we lost various contingent liquidity sources from third parties. With regards to unsecured federal funds lines of credit, during 2010, our $27.4 million lines from correspondent banks were terminated due to our asset quality issues. In addition, we no longer have available to us the one-way funds purchasing option and are restricted on the total amount of funds that we can process through Promontory Interfinancial Network, LLC, otherwise known as CDARS. CDARS allows depositors to access FDIC insurance protection on multi-million dollar certificates of deposit through a member 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. CDARS also permits its members to use their treasury desk for one-way funds purchasing to meet liquidity needs on a term-basis. The restriction has been set to $17.0 million. We anticipate both of these sources of contingent funding to become available again in the future as we improve asset quality issues.

Available third party sources of liquidity remain intact at March 31, 2011 which includes the following: our line of credit with the Federal Home Loan Bank of Atlanta, the brokered certificates of deposit markets, internet certificates of deposit, and the discount window at the Federal Reserve Bank of Richmond.

At March 31, 2011, we had borrowings from the Federal Home Loan Bank totaling $18.9 million as compared to $24.2 million at December 31, 2010. The $5.3 million decrease was due to a $5.0 million term note which matured in January 2011 and we paid off this note with liquid funds and the remaining $300 thousand decrease was due to regular monthly principal payments. Of these borrowings at March 31, 2011, none are overnight and subject to daily interest rate changes. Term notes of $10.2 million mature in the year 2012. Two additional borrowings totaling $8.7 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 in 2008 and $3.0 million in 2010 to the Treasury Board of Virginia for collateral on public funds. An additional $32.6 million was available on March 31, 2011 on the $61.5 million line of credit which is secured by a blanket lien on our residential real estate loans. Recently, the Federal Home Loan Bank conducted a collateral review and we anticipate our available line of credit to increase slightly by the end of the second quarter of 2011.

We have access to the brokered deposits market. Currently we have $2.7 million in 10 year term time deposits comprised of $3 thousand incremental deposits which yield an interest rate of 4.10%. We utilized this low cost source of funds to match funding for a 10 year balloon mortgage product. With the exception of CDARS time deposits, we have no other brokered deposits. 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.

During 2010 we joined an internet certificate of deposit network whereby we may obtain funds from other financial institutions at auction. We may invest funds through this network as well. Currently, we only intend to use this source of liquidity in a liquidity crisis event.

In September 2009, the Bank obtained approval for the Federal Reserve Bank discount window for overnight funding needs. We may collateralize this line with investment securities and loans at our discretion. We currently do not have collateral pledged, but we may physically deliver collateral to the Federal Reserve and obtain funding. We do not, however, anticipate using this funding source except as a last resort.

Additional liquidity is expected to be provided by loan repayments and core deposit growth that will result from an increase in market share in our targeted trade area.

With the increased asset liquidity and other external sources of funding, we believe at the Bank level we have adequate liquidity and capital resources to meet our requirements and needs for the foreseeable future. However, liquidity can be further affected by a number of factors such as counterparty willingness or ability to extend credit, regulatory actions and customer preferences, some of which are beyond our control.

Concerning the Company’s liquidity, we borrowed $500 thousand from two directors at $250 thousand each. One borrowing occurred at the end of 2010 and the other in January 2011. The use of these funds is to meet current liquidity needs of the Company. At December 31, 2010, there was a $4.9 million Silverton line of credit that management was diligently working to eliminate and to increase liquidity at the Company level. As reported in the Subsequent Event Section in Item 1. Business of the December 31, 2010 10-K, on March 16, 2011 we received additional borrowings from two directors totaling $4.95 million and were able to retire the Silverton line of credit that was to mature in June 2011 and we continue to work on enhancing the Company’s liquidity.

Capital Resources

Total capital at the end of the first quarter of 2011 was $38.1 million as compared to $37.5 million at the end of December 31, 2010. The increase was due to the net income of $549 thousand for the first quarter of 2011. The Bank returned to well capitalized as of March 31, 2011, as defined by the capital guidelines of bank regulations. The Company’s capital as a percentage of total assets was 4.41% at March 31, 2011 compared to 4.40% at December 31, 2010.

Our primary source of capital for asset growth comes from retained earnings. We continue to implement and follow our strategic plan and capital plan. Under current economic conditions, we believe it is prudent to increase capital to absorb potential losses that may occur if asset quality deteriorates further. We are aware that capital needs and requirements are affected by the level of problem assets, growth, earnings and other factors. Retained earnings are not alone sufficient to provide for this economic cycle and we believe we will need access to additional sources of capital. As part of our initiative to improve regulatory capital ratios, we are reducing our higher risk assets, which results in a shrinking loan portfolio. Deposit growth is primarily focused on growing core deposits, which are mainly transaction accounts, commercial relationships and savings products. We are focused on improving earnings by maintaining a strong net interest margin and decreasing overhead expenses. These options we are fully implementing to increase capital. However, these efforts alone may not provide us adequate capital if further loan losses are realized. We are exploring a common stock offering.

No cash dividends have been paid historically and none are anticipated in the foreseeable future. Earnings will continue to be retained to build capital.

Off Balance Sheet Items and Contractual Obligations

There have been no material changes during the quarter ended March 31, 2011 to the off-balance sheet items and the contractual obligations disclosed in our annual report on Form 10-K/A Amendment No. 2 for the fiscal year ended December 31, 2010.

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

There have been no material changes in market risks faced by the Company during the quarter ended March 31, 2011. For information regarding the Company’s market risk, refer to the Company’s Annual Report on Form 10-K/A Amendment No. 2 for the year ended December 31, 2010.

Item 4.

Controls and Procedures

We have carried out an evaluation, under the supervision and with the participation of our management, including our President and Chief Executive Officer (our “CEO”) and our Executive Vice President and Chief Financial Officer (our “CFO”), of the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by this report. Based upon that evaluation, our CEO and CFO concluded that our disclosure controls and procedures were not operating effectively in providing reasonable assurance that (a) the information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and (b) such information is accumulated and communicated to our management, including our CEO and CFO, as appropriate to allow timely decisions regarding required disclosure. Our CEO and CFO based this conclusion on the fact that the Company identified a material weakness in New Peoples’ internal control over financial reporting relating to the system of monitoring the real estate collateral values of impaired loans and other real estate owned properties at the Bank and while internal control procedures have been implemented to remediate this material weakness, no testing has been performed to determine the effectiveness of the new procedures. Additional information with respect to this issue is included in the discussion below.

Changes in Internal Control Over Financial Reporting

There were no changes in the Company’s internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) during the quarter ended March 31, 2011 that have materially affected or are reasonably likely to materially affect the Company’s internal control over financial reporting. During May 2011, after management discovered the material weakness in its internal control over financial reporting described above, management implemented the following internal control procedures to ensure timely reporting of changes in collateral values on impaired loans and other real estate owned properties at the Bank to management responsible for financial reporting of the Company:

A Disclosure Control Committee has been established consisting of the following officers: Chief Executive Officer, Chief Financial Officer, Chief Credit Officer, Chief Operating Officer, Senior Lending Officer, Controller, In-house Legal Counsel, and Director of Internal Audit. This Committee will meet quarterly to discuss loan portfolio and problem asset quality issues, operation risks, legal issues, subsequent events, suspicious activities, and reported disclosures.

The Chief Credit Officer (“CCO”) of the Bank is assigned the responsibility for monitoring all assets classified as impaired. The CCO will also be responsible for determining when appraisals or evaluations will be needed on impaired loans and other real estate owned properties, and for reporting any reductions in collateral values to the Chief Financial Officer (“CFO”) on a quarterly basis prior to the filing of the quarterly and annual reports with the SEC.

When appraisals are received from the third party appraisal firm, a copy of the appraisal will promptly be logged on a register designating the date of receipt and provided to the Loan Officer and the Loan Operations Department, with the Loan Officer responsible to promptly place the appraisal in the customer file, update valuations on the Bank’s database and forward a copy to the CCO.

The independent appraisal review department of the Bank will immediately notify the CCO and the Loan Officer of the results of an appraisal on an impaired or suspected impaired loan or other real estate owned property. After the CCO and Loan Officer review the appraisal, a determination will be made as to the reasonableness of the appraisal. The final determination as to reasonableness will be the responsibility of the CCO. Upon a determination of reasonableness, then the CCO will notify the CFO, Controller and Allowance for Loan Loss model coordinator of any deterioration in the appraised value. A new impairment test will be performed and reviewed by the CCO and CFO to determine if an additional allowance reserve is needed for this credit relationship, which will be provided to the Controller to make general ledger adjustments and financial statement revisions prior to issuance.

Prior to release of financial information, the CFO will contact the CCO to insure no appraisals have been received or are being reviewed, the result of which might be material to the financial statement of the Company.

Part II Other Information

Item 1.

Legal Proceedings

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

Item 1A.

Risk Factors

There have been no other material changes in the risk factors faced by the Company from those disclosed in the Company’s Amendment No. 2 on Form 10-K/A for the year ended December 31, 2010.

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

Not Applicable

Item 3.

Defaults Upon Senior Securities

Not Applicable

Item 4.

(Removed and Reserved).

Item 5.

Other Information

Not Applicable

Item 6.

Exhibits

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


No.		Description

31.1		Certification by Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 2004.

31.2		Certification by Chief Financial Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 2004.

32		Certification by Chief Executive Officer and Chief Financial Officer, as required by Section 906 of the Sarbanes-Oxley Act of 2002.

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.


		NEW PEOPLES BANKSHARES, INC.
		(Registrant)

By:		/s/ JONATHAN H. MULLINS
		Jonathan H. Mullins
		President and Chief Executive Officer

Date:		June 28, 2011

By:		/s/ C. TODD ASBURY
		C. Todd Asbury
		Executive Vice President and Chief Financial Officer

Date:		June 28, 2011

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