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

Caution About Forward Looking Statements

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

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

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

Overview

At June 30, 2008, the Company’s total assets were $793.1 million as compared to $766.0 million at December 31, 2007. Total loans increased to $702.4 million at June 30, 2008 from $682.3 million at year end 2007. Total deposits were $660.0 million at June 30, 2008 from $657.0 million at December 31, 2007.

The Company had a record net income for the quarter ended June 30, 2008 of $1.2 million, as compared to $901 thousand for the same period ended June 30, 2007. Net income for the six months ended June 30, 2008 was $1.9 million as compared to $1.7 million for the same period in 2007. Basic net income per share was $0.12 for the quarter ended June 30, 2008 as compared to $0.09 for the quarter ended June 30, 2007. Basic net income per share was $0.19 for the six months ended June 30, 2008 as compared to $0.17 for the same period in 2007.

We intend to expand our franchise in southern West Virginia and open our 31 ^st office in Bluewell, West Virginia in August 2008.

Critical Accounting Policies

Certain critical accounting policies affect the more significant judgments and estimates used in the preparation of our financial statements. 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” below.

Balance Sheet Changes

At June 30, 2008, total assets were $793.0 million, an increase of $27.1 million, or 3.54%, over December 31, 2007.

Total loans increased $20.1 million, or 2.96%, to $702.4 million at June 30, 2008 from $682.3 million at December 31, 2007. We have purposely kept loan growth at a minimum as we remain focused on minimizing credit risks in the loan portfolio in the current economic downturn.

Demand and savings deposits have grown steadily in 2008. Total demand and savings deposits have increased $19.1 million, or 12.30%, during the first half of 2008. This is the result of increased core deposits as newer branches mature, as well as success from new demand deposit products and stronger commercial relationships. Time deposits have decreased in the first six months of 2008 from $501.8 million at December 31, 2007 to $485.4 million at June 30, 2008. We have intentionally reduced our time deposits as they are relatively more expensive in the current environment than other financing options, such as demand deposits. Overall, total deposits increased slightly to $659.8 million at June 30, 2008 from $657.0 million at December 31, 2007.

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We increased borrowings from the Federal Home Loan Bank by $17.6 million, or 41.53%, to $60.1 million at June 30, 2008 from $42.4 million at December 31, 2007. The borrowings include two ten year fixed rate principal reducing borrowings totaling $12.0 million that were obtained in the second quarter of 2008 at an average interest rate of 4.07%. These funds were used to fund real estate loans. The overnight borrowings from the Federal Home Loan Bank have been used to replace higher cost time deposits.

Net Interest Income, Net Interest Margin, and Interest Sensitivity

Net interest income increased $879 thousand, or 14.05%, to $7.1 million for the second quarter of 2008 from $6.3 million for the same period in 2007. Net interest income for the first six months of 2008 increased $1.8 million, or 15.12%, to $13.9 million from $12.0 million in 2007. The increase is the result of increased loan volume and lower cost deposits.

Total interest income increased $430 thousand, or 3.45%, to $12.9 million for second quarter 2008 from $12.5 million in the second quarter of 2007. Total interest income increased $2.1 million for the first six months of 2008 to $26.2 million as compared to $24.2 million for the same period in 2007. Interest income grew at a slower pace in the second quarter of 2008 as a result of the realization of the effects of interest rate cuts by the Federal Reserve in late 2007 and early 2008.

Interest expense was significantly lower at $5.8 million for the quarter ending June 30, 2008 from $6.2 million in the same quarter of 2007. This represents a decrease of $449 thousand, or 7.23%, for the quarterly comparisons. Interest expense of $12.4 million for the first six months of 2008 was $236 thousand higher than $12.1 million for the same period in 2007. As we continue to lower interest expense on our deposits and source of funds, we anticipate interest expense to grow only slightly as a result of volume and not due to interest rates, subject to interest rate volatility.

The net interest margin for the first six months of 2008 was 3.98% and was virtually the same as the same period in 2007, which was 3.99%.   With the Federal Reserve interest rate cuts to help stimulate the economy during the first quarter of 2008, the immediate impact of these changes resulted in a lower rate for earning assets as they repriced more quickly than our deposits. However, we have begun to benefit from these rate cuts as our short term certificates of deposit reprice at lower interest rates. We anticipate the net interest margin to slightly improve throughout 2008 as short term certificates of deposit reprice at lower interest rates and as loan volume increases.

At June 30, 2008, we had a negative cumulative gap rate sensitivity ratio of 32.14% for the one year re-pricing period, compared to a negative cumulative gap of 32.86% at December 31, 2007. This generally indicates that earnings would improve in a declining interest rate environment as liabilities re-price more quickly than assets. Conversely, earnings would probably decrease in periods during which interest rates are increasing. We believe as our liabilities reprice more quickly than our assets in the near future, our cost of funds will decrease more quickly than our yield on earning assets. We are strategically positioned to improve earnings in this low interest rate environment. We are closely monitoring the interest rate environment and will make changes as deemed necessary.

Provision for Loan Losses

The provision for loan losses was $300 thousand for the second quarter of 2008 compared with $440 thousand for the same period in 2007. For the six months ended June 30, 2008, the provision for loan losses was $550 thousand as compared to $740 thousand in 2007. The allowance for loan losses was $6.7 million at June 30, 2008 and $6.6 million at December 31, 2007. The ratio of the allowance for loan losses to total loans was 0.95% at June 30, 2008 and 0.97% at the end of 2007. Net loans charged off for the first half of 2008 were $522 thousand as compared to $246 thousand for the first half of 2007. Of the $522 thousand net charge offs in 2008, $223 thousand, or 74.33%, were related to three credits that were charged off as the result of a similar related suspected fraud incident. Recovery efforts on these credits are being aggressively pursued by legal counsel.

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 risks exist in the Bank’s loan portfolio. Since the Bank began in 1998, we have experienced significant loan growth each year. Although we have experienced lenders who are familiar with their customer base, some of the loans are too new to have exhibited signs of weakness. Recent expansions into new markets increase potential credit risk. In addition, a majority of the loans are collateralized by real estate located in our market area. It is our policy to sufficiently collateralize loans to minimize loss exposures in case of default. The recent negative trends in the national real estate market and economy pose potential threats. Local real estate market values have been and remain stable, while national real estate markets have experienced a downturn. It is uncertain as to when or if local real estate values will be impacted. We do not believe that there will be a severely negative effect in our market area, but we deem it prudent to assign more of the allowance to these types of loans. In addition, higher fuel costs may have an impact upon small businesses and consumers. The market area is somewhat diverse, but certain areas are more reliant upon agriculture and coal mining. As

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a result, increased risk of loan impairments is possible if these industries experience a significant downturn. However, we do not foresee this happening in the near future. We consider these factors to be the primary higher risk characteristics of the loan portfolio.

Given the current market environment and the risks in the Bank’s loan portfolio, we are addressing them by making the following improvements to the credit administration process. In January 2008, we hired a Chief Credit Officer to oversee the credit administration function of the Bank. We also have further evaluated our loan portfolio by engaging a third party loan review company who conducted a loan review in January 2008. We are currently reorganizing the credit administration area to create greater efficiency and to enhance the credit underwriting process. In addition, a new loan policy is being developed better addressing the risk factors.

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 and these credits are considered impaired. The evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available. Impaired loans decreased to $3.3 million with a valuation allowance of $912 thousand at June 30, 2008 as compared to $9.6 million in impaired loans with a $1.2 million valuation allowance at December 31, 2007. Great efforts are being made to minimize future losses on these credits. As economic conditions and performance of our loans change, it is possible that future increases may be needed to the allowance for loan losses.

As of June 30, 2008, there were 48 loans in non-accrual status totaling $2.7 million, or 0.39% of total loans. At December 31, 2007, there were 57 non-accrual loans totaling $2.9 million, or 0.43% of total loans. Loans past due greater than 90 days and still accruing interest totaled $32 thousand, or 0.005% of total loans, at June 30, 2008 as compared to $267 thousand, or 0.04% of total loans at December 31, 2007. 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 principal or interest payments cannot be met, (b) when our best judgment indicates that payment in full of principal and interest can no longer be expected, or (c) when any such loan or obligation becomes delinquent for 90 days unless it is both well secured and in the process of collection. Non-accrual loans did not have a significant impact on interest income in any of the periods presented. No loans are classified as troubled debt restructurings as defined by Financial Accounting Standards Board’s (FASB) Statement of Financial Accounting Standards (SFAS) No. 15, “Accounting by Debtors and Creditors for Troubled Debt Restructurings.” There are also no loans identified as “potential problem loans.” We do not have any commitments to lend additional funds to non-performing debtors.

Noninterest Income

Noninterest income increased to $1.4 million in the second quarter of 2008 from $1.0 million in 2007. For the six months ending June 30, 2008, noninterest income was $2.8 million as compared to the same period in 2007 of $2.1 million. The increase is primarily related to increased overdraft fee income on deposit accounts generated through operational growth and increased fee income earned by our subsidiary, NPB Financial Services. Noninterest income as a percentage of average assets (annualized) was 0.73% and 0.62% for the six months ended June 30, 2008 and 2007, respectively.

Noninterest Expense

Noninterest expense totaled $6.6 million for the second quarter of 2008 as compared to $5.6 million for the second quarter of 2007. Noninterest expense year-to-date June 30, 2008 was $13.4 million as compared to $11.0 million in 2007. The increase was largely due to additional staffing and expenses associated with the 3 new branches opened, 2 branches purchased, the general growth in operations, and increased FDIC assessments. Salaries and benefits increased $500 thousand, or 15.16%, from $3.3 million for the second quarter of 2007 to $3.8 million for the same period in 2008. We have been evaluating noninterest expenses and making reductions as deemed necessary. This has already resulted in a $123 thousand reduction in salary and benefits expenses when comparing the first quarter of 2008 to the second quarter of 2008. This is being accomplished through attrition. We expect noninterest expense to increase for the remainder of 2008 but at a lesser pace than prior years as we continue to implement cost reductions in operations. Noninterest expense as a percentage of average assets (annualized) increased to 3.48% for the first six months of 2008 as compared to 3.31% for the first six months of 2007.

Our efficiency ratio, which is defined as noninterest expense less intangible expenses divided by the sum of net interest income plus noninterest income, was 76.30% for the second quarter of 2008 as compared to 76.67% for the same period in 2007. The efficiency ratios for the first six months of 2008 and 2007 are 79.61% and 77.81%, respectively. The ratio was higher as the result of additional staffing for new branches in 2007. We anticipate this ratio to continue to improve. The ratio of assets to full-time equivalent employees was $2.2 million and $2.1 million at June 30, 2008 and December 31, 2007, respectively.

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Capital

Total capital at the end of the second quarter of 2008 was $47.4 million as compared to $45.2 million at the end of December 31, 2007. The increase is the result of retained earnings for the quarter. Regulatory capital ratios remain in excess of regulatory requirements.

No cash dividends have been paid historically and none are anticipated in the foreseeable future. The Company’s strategic plan is to grow at a much slower pace than in the earlier years of operation. To accommodate this growth and have sufficient capital, earnings will need to be retained.

Line of Credit

On June 30, 2008, the Company obtained a $6.5 million revolving line of credit for operating purposes and future growth. This line of credit replaced a closed end line of credit totaling $1.5 million. The line has a term of 3 years and a variable interest rate equal to Wall Street Journal Prime, subject to a floor rate of 5.00%. The Company pledged as collateral the common stock of its subsidiary, New Peoples Bank, Inc. The total outstanding borrowing on the line of credit is $4.5 million as of June 30, 2008. The Company borrowed against the line $4.0 million and injected this as capital in its subsidiary, New Peoples Bank, Inc. Available credit remaining on the line is $2.0 million.

Liquidity

At June 30, 2008 and December 31, 2007, we had liquid assets in the form of cash, due from banks and federal funds sold of approximately $27.0 and $22.3 million, respectively. At June 30, 2008, all of our investments are classified as available-for-sale, providing an additional source of liquidity in the amount of $519 thousand, which is net of those securities pledged as collateral for public funds. In the second quarter of 2008, we utilized $7.0 million of our Federal Home Loan Bank line of credit as a letter of credit for public funds. Subsequent to quarter end June 30, 2008, available for sale securities provide $4.0 million in additional sources of liquidity.

At June 30, 2008, we had borrowings from the Federal Home Loan Bank totaling $60.1 million as compared to $42.4 million at December 31, 2007. Of these borrowings, $32.9 million are overnight and subject to interest rate changes daily. Term notes of $15.2 million mature in the year 2012. Two additional borrowings totaling $12.0 million were obtained during the second quarter to fund various real estate loans. These two borrowings are fixed rate, principal reducing to $0 at the maturity in 2018. As mentioned above, we also used the line of credit to issue a letter of credit for $7.0 million to the Treasury Board of Virginia for collateral on public funds. An additional $47.9 million were available on June 30, 2008 on the $103.6 million line of credit which is secured by a blanket lien on residential real estate loans.

Our loan to deposit ratio was 106.47% at June 30, 2008 and 103.84% at year end 2007. We anticipate this ratio to decrease as we open the new branch in Bluewell, West Virginia in the third quarter of 2008. 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 event we need additional funds, we have the ability to purchase federal funds under established lines of credit totaling $20.4 million.

Additional liquidity is expected to be provided by the future growth that management expects in deposit accounts and from loan repayments. We believe that this future growth will result from an increase in market share in our targeted trade area.   With the lines of credit available 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, 2007.

Contractual Obligations

There have been no other material changes to the contractual obligations disclosed in our annual report on Form 10-K for the fiscal year ended December 31, 2007.