UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
DC 20549








FORM
10-Q





(Mark
One)


ý
            QUARTERLY
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934





For the
quarterly period ended June 30,
2008





OR





o
            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: 0-51856







Newport Bancorp,
Inc.


(Exact
name of registrant as specified in its charter)





United States of
      America
            20-4465271State
      or other jurisdiction of incorporation
    or organization)
            (I.R.S.
      Employer Identification No.)100 Bellevue Avenue,
      Newport, Rhode Island
            02840(Address
      of principal executive offices)
            (Zip
      Code)





(401)
847-5500


(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 ý                    No
o





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 definitions of “large accelerated filer,” “accelerated
filer” and “smaller reporting company” in Rule 12b-2 of the Exchange
Act).





Large
accelerated filer o          Accelerated
filer o          Non-accelerated
filer o          Smaller
Reporting Company ý





Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).


Yes o                    No
ý





As of
August 7, 2008 the registrant had 4,402,111 shares of common stock
outstanding.








NEWPORT
BANCORP, INC.


Table of Contents





PageNo.Part I.   Financial
    InformationItem 1.
            Financial Statements (Unaudited)Consolidated Balance Sheets at June 30, 2008 and December 31,
      2007
            
            1Consolidated Statements of Income for the Three and Six Months
      Ended June 30, 2008 and 2007
            
            2Consolidated Statements of Changes in Stockholders’ Equity for
      the Six Months Ended June 30, 2008 and 2007
            
            3Consolidated Statements of Cash Flows for the Six Months Ended
      June 30, 2008 and 2007
            
            4Notes to Consolidated Financial Statements
            
            5-7Item 2.
            Management’s Discussion and Analysis of Financial Condition and
      Results of Operations
            
            7-17Item 3.
            Quantitative and Qualitative Disclosures about Market
      Risk
            
            17-18Item 4T.
            Controls and Procedures
            
            18Part II.   Other
  InformationItem 1.
            Legal Proceedings
            
            18Item 1A.
            Risk Factors
            
            18Item 2.
            Unregistered Sales of Equity Securities and Use of
      Proceeds
            
            18-19Item 3.
            Defaults Upon Senior Securities
            
            19Item 4.
            Submission of Matters to a Vote of Security
      Holders
            
            19Item 5.
            Other Information
            
            19Item 6.
            Exhibits
            
            19Signatures
            
            20


Table of Contents


PART I.
            FINANCIAL
      INFORMATION





Item 1.
            Financial
      Statements





CONSOLIDATED BALANCE SHEETS


ASSETS


June
      30,2008
            
            
            December
      31,
              2007(Unaudited)
              (Dollars
      in thousands, except per share data)Cash
      and due from banks
            
            $
            8,482
            
            
            $
            6,646Short-term
      investments
            
            
            13,357
            
            
            
            59Cash
      and cash equivalents
            
            
            21,839
            
            
            
            6,705Securities
      available for sale, at fair value
            
            
            6,836
            
            
            
            6,966Securities
      held to maturity, at amortized cost
            
            
            29,362
            
            
            
            30,886Federal
      Home Loan Bank stock, at cost
            
            
            4,944
            
            
            
            4,163Loans
            
            
            317,660
            
            
            
            295,483Allowance
      for loan losses
            
            
            (2,622
            )
            
            
            (2,399
            )Loans, net
            
            
            315,038
            
            
            
            293,084Premises
      and equipment, net
            
            
            8,378
            
            
            
            5,849Accrued
      interest receivable
            
            
            1,302
            
            
            
            1,269Net
      deferred tax asset
            
            
            2,596
            
            
            
            2,313Bank-owned
      life insurance
            
            
            9,711
            
            
            
            9,274Other
      assets
            
            
            499
            
            
            
            750Total
      assets
            
            $
            400,505
            
            
            $
            361,259LIABILITIES
      AND STOCKHOLDERS’ EQUITYDeposits
            
            $
            225,311
            
            
            $
            193,285Short-term
      borrowings
            
            
            -
            
            
            
            5,809Long-term
      borrowings
            
            
            114,246
            
            
            
            99,547Accrued
      expenses and other liabilities
            
            
            3,913
            
            
            
            3,666Total
      liabilities
            
            
            343,470
            
            
            
            302,307Stockholders’
      equity:Preferred
      stock, $.01 par value; 1,000,000 shares authorized;
              none
      issued
            
            
            -
            
            
            
            -Common
      stock, $.01 par value; 19,000,000 shares authorized;
              4,878,349
      shares issued
            
            
            49
            
            
            
            49Additional
      paid-in capital
            
            
            50,533
            
            
            
            50,023Retained
      earnings
            
            
            17,408
            
            
            
            17,234Unearned
      compensation (520,356 and 533,365 shares atJune
      30, 2008 and December 31, 2007, respectively)
            
            
            (4,860
            )
            
            
            (5,548
            )Treasury
      stock, at cost (455,867 and 213,660 shares atJune
      30, 2008 and December 31, 2007, respectively)
            
            
            (5,662
            )
            
            
            (2,655
            )Accumulated
      other comprehensive loss
            
            
            (433
            )
            
            
            (151
            )Total stockholders’
      equity
            
            
            57,035
            
            
            
            58,952Total liabilities and
      stockholders’ equity
            
            $
            400,505
            
            
            $
            361,259





See
accompanying notes to unaudited consolidated financial
statements.


1
 Table of Contents


CONSOLIDATED STATEMENTS OF INCOME








Three
      Months Ended
              June
      30,
            
            
            Six
      Months Ended
              June
      30,2008
            
            
            2007
            
            
            2008
            
            
            2007(Unaudited)
              (Dollars
      in thousands, except per share data)Interest
      and dividend income:Loans
            
            $
            4,847
            
            
            $
            4,217
            
            
            $
            9,479
            
            
            $
            8,281Securities
            
            
            484
            
            
            
            105
            
            
            
            975
            
            
            
            209Federal Home Loan Bank
      stock
            
            
            47
            
            
            
            40
            
            
            
            105
            
            
            
            81Other interest-earning
      assets
            
            
            24
            
            
            
            5
            
            
            
            64
            
            
            
            17Total interest and dividend
      income
            
            
            5,402
            
            
            
            4,367
            
            
            
            10,623
            
            
            
            8,588Interest
      expenseDeposits
            
            
            1,176
            
            
            
            1,277
            
            
            
            2,365
            
            
            
            2,421Short-term
      borrowings
            
            
            -
            
            
            
            157
            
            
            
            28
            
            
            
            280Long-term
      borrowings
            
            
            1,142
            
            
            
            462
            
            
            
            2,294
            
            
            
            860Total interest
      expense
            
            
            2,318
            
            
            
            1,896
            
            
            
            4,687
            
            
            
            3,561Net
      interest income
            
            
            3,084
            
            
            
            2,471
            
            
            
            5,936
            
            
            
            5,027Provision
      for loan losses
            
            
            115
            
            
            
            47
            
            
            
            226
            
            
            
            160Net interest income, after
      provision for loan losses
            
            
            2,969
            
            
            
            2,424
            
            
            
            5,710
            
            
            
            4,867Non-interest
      income:Customer service
      fees
            
            
            470
            
            
            
            478
            
            
            
            903
            
            
            
            915Bank-owned
      life insurance
            
            
            101
            
            
            
            96
            
            
            
            202
            
            
            
            191Miscellaneous
            
            
            25
            
            
            
            24
            
            
            
            50
            
            
            
            47Total non-interest
      income
            
            
            596
            
            
            
            598
            
            
            
            1,155
            
            
            
            1,153Non-interest
      expenses:Salaries and employee
      benefits
            
            
            1,970
            
            
            
            1,384
            
            
            
            3,975
            
            
            
            2,822Occupancy and equipment,
      net
            
            
            326
            
            
            
            312
            
            
            
            658
            
            
            
            625Data processing
            
            
            255
            
            
            
            239
            
            
            
            517
            
            
            
            507Professional
    fees
            
            
            157
            
            
            
            144
            
            
            
            270
            
            
            
            265Marketing
            
            
            327
            
            
            
            271
            
            
            
            552
            
            
            
            541Other general and
      administrative
            
            
            200
            
            
            
            174
            
            
            
            383
            
            
            
            351Total non-interest
      expenses
            
            
            3,235
            
            
            
            2,524
            
            
            
            6,355
            
            
            
            5,111Income
      before income taxes
            
            
            330
            
            
            
            498
            
            
            
            510
            
            
            
            909Provision
      for income taxes
            
            
            168
            
            
            
            214
            
            
            
            274
            
            
            
            366Net
      income
            
            $
            162
            
            
            $
            284
            
            
            $
            236
            
            
            $
            543





Weighted-average
      shares outstanding:Basic
            
            
            4,189,622
            
            
            
            4,522,844
            
            
            
            4,235,875
            
            
            
            4,519,591Diluted
            
            
            4,189,622
            
            
            
            4,522,844
            
            
            
            4,235,875
            
            
            
            4,519,591Earnings
      per share:Basic
            
            $
            .04
            
            
            $
            .06
            
            
            $
            .06
            
            
            $
            .12Diluted
            
            $
            .04
            
            
            $
            .06
            
            
            $
            .06
            
            
            $
            .12





See
accompanying notes to unaudited consolidated financial
statements.


2
 Table of Contents


CONSOLIDATED
STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
 (Unaudited)
 (Dollars
in thousands)
 
 AccumulatedAdditional
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  Other
                  
                  
                  TotalCommon
      Stock
                  
                  
                  Paid-in
                  
                  
                  Retained
                  
                  
                  Unearned
                  
                  
                  Treasury
                  
                  Comprehensive
                  
                  Stockholders’Shares
                  
                  
                  Amount
                  
                  
                  Capital
                  
                  
                  Earnings
                  
                  
                  Compensation
                  
                  
                  Stock
                  
                  
                  Loss
                  
                  
                  EquityBalance
      at December 31, 2006
                  
                  
                  4,878,349
                  
                  
                  $
                  49
                  
                  
                  $
                  47,258
                  
                  
                  $
                  16,477
                  
                  
                  $
                  (3,643
                  )
                  
                  $
                  -
                  
                  
                  $
                  (161
                  )
                  
                  $
                  59,980Comprehensive
      income:Net
      income
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  543
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  543Net
      unrealized loss on
                    securities
      available for sale
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (21
                  )
                  
                  
                  (21
                  )Total
      comprehensive income
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  522ESOP
      shares committed to be
                    released
      (13,009 shares)
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  49
                  
                  
                  
                  -
                  
                  
                  
                  131
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  180Balance
      at June 30, 2007
                  
                  
                  4,878,349
                  
                  
                  $
                  49
                  
                  
                  $
                  47,307
                  
                  
                  $
                  17,020
                  
                  
                  $
                  (3,512
                  )
                  
                  $
                  -
                  
                  
                  $
                  (182
                  )
                  
                  $
                  60,682Balance
      at December 31, 2007
                  
                  
                  4,878,349
                  
                  
                  $
                  49
                  
                  
                  $
                  50,023
                  
                  
                  $
                  17,234
                  
                  
                  $
                  (5,548
                  )
                  
                  $
                  (2,655
                  )
                  
                  $
                  (151
                  )
                  
                  $
                  58,952Comprehensive
      loss:Net
      income
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  236
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  236Net
      unrealized loss on
                    securities
      available for sale
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (282
                  )
                  
                  
                  (282
                  )Total
      comprehensive loss
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  (46
                  )Adoption
      of EITF 06-04 for split
                    dollar
      insurance plan
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (62
                  )
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (62
                  )Stock-based
      compensation –
                    restricted
      stock
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  558
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  558Stock-based
      compensation –
                    options
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  482
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  482Purchase
      of treasury shares
                    (242,207
      shares)
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (3,007
                  )
                  
                  
                  -
                  
                  
                  
                  (3,007
                  )ESOP
      shares committed to be
                    released
      (13,009 shares)
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  28
                  
                  
                  
                  -
                  
                  
                  
                  130
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  158Balance
      at June 30, 2008
                  
                  
                  4,878,349
                  
                  
                  $
                  49
                  
                  
                  $
                  50,533
                  
                  
                  $
                  17,408
                  
                  
                  $
                  (4,860
                  )
                  
                  $
                  (5,662
                  )
                  
                  $
                  (433
                  )
                  
                  $
                  57,035





See
      accompanying notes to unaudited consolidated financial
      statements.


3
 Table of Contents


CONSOLIDATED
STATEMENTS OF CASH FLOWS


Six
      Months Ended
              June
      30,2008
            
            
            2007(Unaudited)
              (Dollars
      in thousands)Cash
      flows from operating activities:Net
      income
            
            $
            236
            
            
            $
            543Adjustments
      to reconcile net income to net cash provided by operating
      activities:Provision for loan
      losses
            
            
            226
            
            
            
            160Accretion of
      securities
            
            
            (75
            )
            
            
            (8
            )Amortization of net deferred
      loan fees
            
            
            (151
            )
            
            
            (67
            )Depreciation and amortization
      of premises and equipment
            
            
            294
            
            
            
            314Stock-based compensation and ESOP
      allocation
            
            
            1,198
            
            
            
            180Deferred income tax
      benefit
            
            
            (283
            )
            
            
            (74
            )Income from bank-owned life
      insurance
            
            
            (202
            )
            
            
            (191
            )Net change in:Accrued interest
      receivable
            
            
            (33
            )
            
            
            (88
            )Other, net
            
            
            201
            
            
            
            (229
            )Net cash provided by operating
      activities
            
            
            1,411
            
            
            
            540Cash
      flows from investing activities:Reinvested
      dividends on mutual funds
            
            
            (152
            )
            
            
            (169
            )Principal
      payments received on securities held to maturity
            
            
            1,599
            
            
            
            153Purchase
      of bank-owned life insurance
            
            
            -
            
            
            
            (3,500
            )Purchase
      of Federal Home Loan Bank stock
            
            
            (781
            )
            
            
            (494
            )Loan
      originations, net of principal payments
            
            
            (22,029
            )
            
            
            (13,169
            )Additions
      to premises and equipment
            
            
            (2,823
            )
            
            
            (189
            )Net cash used by investing
      activities
            
            
            (24,186
            )
            
            
            (17,368
            )Cash
      flows from financing activities:Net
      increase in deposits
            
            
            32,026
            
            
            
            3,650Net
      increase (decrease) in borrowings with maturities of three months or
      less
            
            
            (5,809
            )
            
            
            4,500Proceeds
      from borrowings with maturities in excess of three months
            
            
            22,000
            
            
            
            14,000Repayment
      of borrowings with maturities in excess of three months
            
            
            (7,301
            )
            
            
            (2,501
            )Purchase
      of treasury stock
            
            
            (3,007
            )
            
            
            -Net cash provided by financing
      activities
            
            
            37,909
            
            
            
            19,649Net
      change in cash and cash equivalents
            
            
            15,134
            
            
            
            2,821Cash
      and cash equivalents at beginning of period
            
            
            6,705
            
            
            
            7,272Cash
      and cash equivalents at end of period
            
            $
            21,839
            
            
            $
            10,093Supplementary
      information:Interest paid on deposit
      accounts
            
            $
            2,387
            
            
            $
            2,601Interest paid on short-term borrowings
            
            
            39
            
            
            
            275Interest paid on long-term borrowings
            
            
            2,283
            
            
            
            834Income taxes paid, net of refunds
            
            
            708
            
            
            
            654





See
accompanying notes to unaudited consolidated financial
statements.


4
 Table of Contents


NEWPORT BANCORP,
INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


(Unaudited)





NOTE
1 – BASIS OF PRESENTATION





The
accompanying unaudited consolidated interim financial statements include the
accounts of Newport Bancorp, Inc. (the “Company”) and its wholly-owned
subsidiary, Newport Federal Savings Bank (the “Bank” or “Newport
Federal”).  These financial statements have been prepared in
accordance with generally accepted accounting principles in the United States of
America (“GAAP”) for interim financial information and with the instructions to
Form 10-Q and Rule 10-01 of Regulation S-X.  Accordingly, they do not
include all of the information and footnotes required by GAAP for complete
financial statements.





In the
opinion of management, all adjustments (consisting only of normal recurring
accruals) considered necessary for a fair presentation have been
included.  The accompanying consolidated financial statements should
be read in conjunction with the audited consolidated financial statements and
notes thereto included in Newport Bancorp’s Annual Report on Form 10-K for the
year ended December 31, 2007.  The results for the three and six
months ended June 30, 2008 are not necessarily indicative of the results that
may be expected for the year ending December 31, 2008.





NOTE
2 – COMMITMENTS





Outstanding
loan commitments totaled $27.7 million at June 30, 2008, as compared to $27.0
million as of December 31, 2007.  Loan commitments consist of
commitments to originate new loans as well as the outstanding unused portions of
lines of credit.





On January 10, 2008, Newport Federal
purchased land for use as a new branch location in Portsmouth, Rhode Island for
$2.3 million.  In June 2008, the Bank entered into a $2.8 million
construction contract to perform general construction services to build a new
branch on the Portsmouth site, of which $2.7 million is outstanding at June 30,
2008.





On November 21, 2007, the Bank entered
into a twenty-year lease agreement for land in Stonington, Connecticut, on which
the Bank plans to construct a new branch.  This agreement is subject
to the Bank receiving the necessary governmental approvals, among other
conditions, to open the branch.





NOTE
3 – EARNINGS PER SHARE





Basic
earnings per share (“EPS”) excludes dilution and is calculated by dividing net
income available to common stockholders by the weighted-average number of shares
of common stock outstanding during the period.  Diluted EPS is
computed in a manner similar to that of basic EPS except that the
weighted-average number of common shares outstanding is increased to include the
number of incremental common shares (computed using the treasury stock method)
that would have been outstanding if all potentially dilutive common stock
equivalents (such as stock options and unvested restricted stock) were issued
during the period.  Common stock equivalents that could potentially
dilute basic EPS in the future were not included in the computation of diluted
EPS because to do so would have been antidilutive.  Treasury shares
and common shares held by the ESOP which have not been released or committed to
be released are shown as a reduction in stockholders’ equity and are not
included in the weighted-average number of common shares outstanding for either
basic or diluted earnings per share calculations. There were no potentially
dilutive common stock equivalents outstanding during the six months ended June
30, 2008.





NOTE
4 – STOCK REPURCHASE PLAN





On July 16, 2007, the Company announced
the approval by its Board of Directors of a stock repurchase program to acquire
up to 243,917 shares, or 5%, of its outstanding common stock.  The
initial repurchase program was completed on January 31, 2008.  In
addition, on February 19, 2008, the Company announced the commencement of a
second stock repurchase program to acquire up to 231,721 shares, or 5% of the
Company’s


5
 Table of Contents


outstanding
common stock.  On July 3, 2008, the Company announced it had completed
the second stock repurchase program, acquiring 231,721 shares at an average cost
of $12.45 per share.  On July 25, 2008, the Company announced the
approval by its Board of Directors of a stock repurchase program to acquire up
to 440,270 shares, or 10%, of its outstanding common stock.





NOTE
5 – FAIR VALUES OF ASSETS AND LIABILITIES





Effective January 1, 2008, the Company
adopted Statement of Financial Accounting Standards No. 157 (“SFAS 157”), “Fair
Value Measurements”, which provides a framework for measuring fair value under
generally accepted accounting principles.





The Company also adopted SFAS No. 159,
“The Fair Value Option for Financial Assets and Financial Liabilities, including
an amendment of FASB Statement No. 115.”  SFAS 159 allows an entity
the irrevocable option to elect fair value for the initial and subsequent
measurement for certain financial assets and liabilities on a
contract-by-contract basis.  The Company did not elect fair value
treatment for any financial assets or liabilities upon adoption.





In accordance with SFAS 157, the
Company groups its financial assets and financial liabilities measured at fair
value in three levels, based on the markets in which the assets and liabilities
are traded and the reliability of the assumptions used to determine fair
value.





Level 1 – Quoted prices in active
markets for identical assets or liabilities.  Level 1 assets and
liabilities include debt and equity securities that are traded in an active
exchange market.  Valuations are obtained from readily available
pricing sources for market transactions involving identical assets or
liabilities.





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 inputs that are observable or can be
corroborated by observable market data for substantially the full term of the
assets or liabilities.  For example, Level 2 assets and liabilities
may include debt securities with quoted prices that are traded less frequently
than exchange-traded instruments or mortgage loans held for sale, for which the
fair value is based on what the securitization market is currently offering for
mortgage loans with similar characteristics.





Level 3 – Unobservable inputs that are
supported by little or no market activity and that are significant to the fair
value of the assets or 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.  This category generally includes certain private equity
investments, residential mortgage servicing rights, and long-term derivative
contracts.





The Company does not measure any
liabilities at fair value.  The Company’s assets measured at fair
value are grouped in the Level 1 category because the valuation technique used
is from quoted daily prices in an actively tradedmarket and the Level 2
category because the valuation technique used is from quoted prices in markets
that are not active.





At June 30, 2008, assets measured at
fair value on a recurring basis consist of securities available for sale, and
are summarized below:








6
 Table of Contents





June
      30, 2008Level
      1
            
            Level
      2
            
            Level
      3
            
            Assets
      at Fair Value(Dollars
      in thousands)Securities
      available for sale
            
            $
            2,517
            
            
            $
            4,319
            
            
            $
            -
            
            
            $
            6,836








NOTE
6 – EFFECT OF RECENT ACCOUNTING PRONOUNCEMENTS





Effective
January 1, 2008, the Company adopted EITF 06-4, “Accounting for Deferred
Compensation and Postretirement Benefit Aspects of Endorsement Split-Dollar Life
Insurance Arrangements”, which addresses accounting for split-dollar life
insurance arrangements whereby the employer purchases a policy to insure the
life of an employee, and separately enters into an agreement to split the policy
benefits between the employer and the employee.  This EITF states that
an obligation arises as a result of a substantive agreement with an employee to
provide future postretirement benefits.  Under EITF 06-4, the
obligation is not settled upon entering into an insurance
arrangement.  Since the obligation is not settled, a liability should
be recognized in accordance with applicable authoritative
guidance.  The result of adopting this EITF on January 1, 2008 was a
decrease to retained earnings in the amount of $62,000.




In
December 2007, the FASB issued Statement No. 141 (revised), “Business
Combinations”, which replaces FASB Statement No. 141, and applies to all
business entities, including mutual entities that previously used the
pooling-of-interests method of accounting for certain business combinations.
This Statement makes significant amendments to other Statements and other
authoritative guidance, and applies prospectively to business combinations for
which the acquisition date is on or after the beginning of the first annual
reporting period beginning on or after December 15, 2008.  An entity
may not apply it before that date.  This Statement is not expected to
have a material impact on the Company’s consolidated financial
statements.




In March
2008, the FASB issued Statement No. 161, “Disclosures about Derivative
Instruments and Hedging Activities, an amendment of FASB Statement No. 133”,
which changes the disclosure requirements for derivative instruments and hedging
activities. This Statement is intended to enhance the current disclosure
framework in Statement 133. The Statement requires that objectives for using
derivative instruments be disclosed in terms of underlying risk and accounting
designation. This Statement is effective for the Company’s consolidated
financial statements issued for fiscal years and interim periods beginning after
November 15, 2008 and is not expected to have a material impact on the Company’s
consolidated financial statements.




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





Management’s
discussion and analysis of the financial condition and results of operations at
and for the three and six months ended June 30, 2008 and 2007 is intended to
assist in understanding the financial condition and results of operations of the
Company.  The information contained in this section should be read in
conjunction with the unaudited consolidated financial statements and the notes
thereto, appearing in Part I, Item 1 of this quarterly report on Form
10-Q.





Forward-Looking
Statements





This
report contains forward-looking statements that are based on assumptions and may
describe future plans, strategies and expectations of the
Company.  These forward-looking statements are generally identified by
use of the words “believe,” “expect,” “intend,” “anticipate,” “estimate,”
“project” or similar expressions.  The Company’s ability to predict
results or the actual effect of future plans or strategies is inherently
uncertain.  Factors which could have a material adverse effect on the
operations of the Company include, but are not limited to, changes in interest
rates, national and regional economic conditions, legislative and regulatory
changes, monetary and fiscal policies of the U.S. government, including policies
of the U.S. Treasury and the Federal Reserve Board, the quality and composition
of the loan or investment portfolios, demand for loan products, deposit flows,
competition, demand for financial services in the Company’s market area, changes
in real estate market values in the Company’s market


7
 Table of Contents


area, and
changes in relevant accounting principles and guidelines.  Additional
factors are discussed in the Company’s 2007 Annual Report on Form 10-K under
“Item 1A – Risk Factors.”  These risks and uncertainties should be
considered in evaluating forward-looking statements and undue reliance should
not be placed on such statements.  Except as required by applicable
law or regulation, the Company does not undertake, and specifically disclaims
any obligation, to release publicly the result of any revisions that may be made
to any forward-looking statements to reflect events or circumstances after the
date of the statements or to reflect the occurrence of anticipated or
unanticipated events.




Critical
Accounting Policies




Critical accounting policies are those
that involve significant judgments and assessments by management, and which
could potentially result in materially different results under different
assumptions and conditions. As discussed in the Company’s 2007 Annual Report on
Form 10-K, the Company considers the allowance for loan losses and the valuation
of the net deferred tax asset to be its critical accounting
policies.  The Company’s critical accounting policies have changed
since December 31, 2007 to also include the evaluation of securities for
other- than-temporary impairment.  Management evaluates securities for
other-than-temporary impairment at least on a quarterly basis, and more
frequently when economic or market concerns warrant such
evaluation.  Consideration is given to (1) the length of time and the
extent to which the fair value has been less than cost, (2) the financial
condition of the issuer, and (3) the intent and ability of the Company to retain
its investment in the issuer for a period of time sufficient to allow for any
anticipated recovery in fair value.





Comparison
of Financial Condition at June 30, 2008 and December 31, 2007





Total assets at June 30, 2008
were $400.5 million, an increase of $39.2 million, or 10.9%, compared to $361.3
million at December 31, 2007.  The asset growth was primarily
concentrated in the loan portfolio and in short-term investments.  The
percentage of gross loans to total assets decreased to 79.3% at June 30, 2008,
compared to 81.8% at December 31, 2007.





Cash and cash equivalents increased by
$15.1 million, or 225.7%, to a balance of $21.8 million at June 30, 2008 from
$6.7 million at December 31, 2007.   Customer deposit balances
increased during the quarter ended June 30, 2008 resulting in funds invested in
an overnight FHLB account.





The net loan portfolio increased by
$22.0 million, or 7.5%, during the first six months of 2008.  The
increase was principally a result of growth in residential mortgages (an
increase of $17.4 million or 9.8%) and commercial real estate mortgages (an
increase of $5.0 million or 6.5%).





Deposits increased $32.0 million from
$193.3 million at December 31, 2007 to $225.3 million at June 30,
2008.  Deposit growth was focused primarily in NOW/demand deposit
accounts (an increase of $18.8 million or 31.8%), money market accounts (an
increase of $10.6 million or 37.0%) and time deposit accounts (an increase of
$3.0 million or 3.8%), offset in part by a decrease in savings accounts (a
decrease of $453,000 or 1.7%).  The promotion of the Company’s new
high-interest earning rewards checking account is responsible for a majority of
the increase in the NOW/demand deposit category.  Time deposits
represented 36.5% of the Company’s total deposit balances at June 30, 2008,
compared to 41.0% at December 31, 2007.





Borrowings, consisting of FHLB advances
and a $25.0 million repurchase agreement, increased $8.9 million, or 8.4%, to
$114.2 million at June 30, 2008, compared to an outstanding balance of $105.4
million at December 31, 2007.   These borrowings were used to
help fund the Bank’s loan originations during the first six months of
2008.





Total
stockholders’ equity was $57.0 million at June 30, 2008, a decrease of $1.9
million, or 3.3%, when compared to the balance at December 31,
2007.  The decrease was primarily attributable to stock repurchases
under the Company’s stock repurchase plan and an increase in the unrealized loss
on securities available for sale, offset in part by net income and stock-based
compensation costs.


8
 Table of Contents


Comparison
of Operating Results for the Three and Six Months Ended June 30, 2008 and
2007





General.Net
income decreased by $122,000, or 43.0%, to $162,000 for the three months ended
June 30, 2008, compared to $284,000 for the three months ended June 30,
2007.  The decrease was primarily due to an increase in total
non-interest expenses, including a $520,000 increase in stock-based compensation
expense associated with option grants and restricted stock awards recorded in
the second quarter of 2008, offset by an increase in net interest
income.





Net income decreased by $307,000, or
56.5%, to $236,000 for the six months ended June 30, 2008, compared to $543,000
for the six months ended June 30, 2007.  The decrease was primarily
due to an increase in total non-interest expenses, including a total of $1.0
million increase in stock-based compensation expense associated with option
grants and restricted stock awards recorded during the first six months of 2008,
offset by an increase in net interest income.





Net Interest
Income.Net
interest income for the three months ended June 30, 2008 was $3.1 million, which
was $613,000, or 24.8%, more than net interest income of $2.5 million for the
three months ended June 30, 2007.  The increase of $1.0 million, or
23.7%, in interest and dividend income exceeded the increase of $422,000, or
22.3%, in total interest expense.





Net interest income for the six months
ended June 30, 2008 was $5.9 million, which was $909,000, or 18.1%, more than
net interest income of $5.0 million for the six months ended June 30,
2007.  The increase of $2.0 million, or 23.7%, in interest and
dividend income exceeded the increase of $1.1 million, or 31.6%, in total
interest expense.








9
 Table of Contents


The following table summarizes average
balances and average yields and costs for the three months ended June 30, 2008
and 2007.





Three
      Months Ended June 30,2008
            
            
            2007Average
              Balance
            
            
            Interest
              and
              Dividends
            
            
            Yield/
              Cost
            
            
            Average
              Balance
            
            
            Interest
              and
              Dividends
            
            
            Yield/
              Cost(Dollars
      in thousands)Assets:Interest-earning
      assets:Loans
            
            $
            309,259
            
            
            $
            4,847
            
            
            
            6.27
            %
            
            $
            267,171
            
            
            $
            4,217
            
            
            
            6.31
            %Securities
            
            
            36,908
            
            
            
            484
            
            
            
            5.25
            
            
            
            8,550
            
            
            
            105
            
            
            
            4.91Other
      interest-earning assets
            
            
            10,421
            
            
            
            71
            
            
            
            2.73
            
            
            
            6,859
            
            
            
            45
            
            
            
            2.62Total
      interest-earning assets
            
            
            356,588
            
            
            
            5,402
            
            
            
            6.06
            
            
            
            282,580
            
            
            
            4,367
            
            
            
            6.18Bank-owned
      life insurance
            
            
            9,645
            
            
            
            
            
            
            
            
            
            
            
            9,010Noninterest-earning
      assets
            
            
            17,935
            
            
            
            
            
            
            
            
            
            
            
            13,264Total
      assets
            
            $
            384,168
            
            
            
            
            
            
            
            
            
            
            $
            304,854Liabilities
      and equity:Interest-bearing
      liabilities:Interest-bearing
      demand deposits
            
            $
            38,590
            
            
            
            199
            
            
            
            2.06
            
            
            $
            26,786
            
            
            
            18
            
            
            
            0.27Savings
      accounts
            
            
            25,250
            
            
            
            20
            
            
            
            0.32
            
            
            
            29,562
            
            
            
            23
            
            
            
            0.31Money
      market accounts
            
            
            31,748
            
            
            
            221
            
            
            
            2.78
            
            
            
            20,148
            
            
            
            212
            
            
            
            4.21Certificates
      of deposit
            
            
            81,527
            
            
            
            736
            
            
            
            3.61
            
            
            
            87,351
            
            
            
            1,024
            
            
            
            4.69Total
      interest-bearing deposits
            
            
            177,115
            
            
            
            1,176
            
            
            
            2.66
            
            
            
            163,847
            
            
            
            1,277
            
            
            
            3.12Borrowings
            
            
            114,801
            
            
            
            1,142
            
            
            
            3.98
            
            
            
            47,065
            
            
            
            619
            
            
            
            5.26Total
      interest-bearing liabilities
            
            
            291,916
            
            
            
            2,318
            
            
            
            3.18
            
            
            
            210,912
            
            
            
            1,896
            
            
            
            3.60Demand
      deposits
            
            
            31,460
            
            
            
            
            
            
            
            
            
            
            
            31,063Noninterest-bearing
      liabilities
            
            
            2,424
            
            
            
            
            
            
            
            
            
            
            
            2,117Total
      liabilities
            
            
            325,800
            
            
            
            
            
            
            
            
            
            
            
            244,092Stockholders’
      equity
            
            
            58,368
            
            
            
            
            
            
            
            
            
            
            
            60,762Total
      liabilities and stockholders’equity
            
            $
            384,168
            
            
            
            
            
            
            
            
            
            
            $
            304,854Net
      interest income
            
            
            
            
            
            $
            3,084
            
            
            
            
            
            
            
            
            
            
            $
            2,471Interest
      rate spread
            
            
            
            
            
            
            
            
            
            
            2.88
            %
            
            
            
            
            
            
            
            
            
            
            2.59
            %Net
      interest margin
            
            
            
            
            
            
            
            
            
            
            3.46
            %
            
            
            
            
            
            
            
            
            
            
            3.50
            %Average
      interest-earning assets to
              average
      interest-bearing liabilities
            
            
            
            
            
            
            
            
            
            
            122.15
            %
            
            
            
            
            
            
            
            
            
            
            133.98
            %




Total interest and dividend income
increased 23.7% to $5.4 million for the three months ended June 30, 2008 from
$4.4 million for the three months ended June 30, 2007, primarily due to an
increase in interest earned on loans receivable and
securities.  Interest earned on loans receivable increased 14.9% to
$4.8 million for the three months ended June 30, 2008 from $4.2 million for the
three months ended June 30, 2007, due to an increase in the average balance of
loans.  Average loans increased 15.8% to $309.3 million for the three
months ended June 30, 2008 from $267.2 million for the three months ended June
30, 2007, while the yield earned on loans decreased from 6.31% for the three
months ended June 30, 2007 to 6.27% for the three months ended June 30,
2008.  Interest earned


10
 Table of Contents


on
securities totaled $484,000 for the three months ended June 30, 2008, compared
to $105,000 for the three months ended June 30, 2007, due to an increase in the
yield earned on securities to 5.25%, coupled with the increase in average
balance of securities to $36.9 million for the three months ended June 30, 2008,
compared to $8.6 million for the three months ended June 30,
2007.  The increase in interest and dividend income earned on
securities was due to the increase in the average balance of securities,
particularly the increase in the balance of mortgage-backed securities, which
earned a higher yield.  Interest earned on other-interest earning
assets increased to $71,000 for the three months ended June 30, 2008, compared
to $45,000 for the three months ended June 30, 2007, due to an increase in the
average balance and in the average yield to 2.73% from 2.62%.





Total interest expense increased
$422,000 to $2.3 million for the three months ended June 30, 2008 from $1.9
million for the three months ended June 30, 2007, primarily due to an increase
in the average balance of money market accounts of $11.6 million to $31.7
million from $20.1 million, and due to the increase in the average balance of
interest-bearing demand deposits of $11.8 million to $38.6 million from $26.8
million.  The average balance of interest-bearing demand deposits and
money market accounts increased as the average balance of certificates of
deposit and savings accounts declined for the three months ended June 30, 2008.
The average cost of interest bearing demand deposits increased by 179 basis
points due to the new high-interest rewards checking product. With decreases in
short-term market interest rates, customers have increasingly shown a preference
for higher-yielding core accounts, rather than the longer-term time deposit
accounts.  The cost of total borrowings increased 84.5% to $1.1
million for the three months ended June 30, 2008 from $619,000 for the three
months ended June 30, 2007, due to an increase in the average balance of $67.7
million to $114.8 million from $47.1 million, offset by a decrease in the cost
from 5.26% to 3.98%.












11
 Table of Contents


The following table summarizes average
balances and average yields and costs for the six months ended June 30, 2008 and
2007.





Six
      Months Ended June 30,2008
            
            
            2007Average
              Balance
            
            
            Interest
              and
              Dividends
            
            
            Yield/
              Cost
            
            
            Average
              Balance
            
            
            Interest
              and
              Dividends
            
            
            Yield/
              Cost(Dollars
      in thousands)Assets:Interest-earning
      assets:Loans
            
            $
            302,278
            
            
            $
            9,479
            
            
            
            6.27
            %
            
            $
            263,816
            
            
            $
            8,281
            
            
            
            6.28
            %Securities
            
            
            37,263
            
            
            
            975
            
            
            
            5.23
            
            
            
            8,533
            
            
            
            209
            
            
            
            4.90Other
      interest-earning assets
            
            
            10,730
            
            
            
            169
            
            
            
            3.15
            
            
            
            6,504
            
            
            
            98
            
            
            
            3.01Total
      interest-earning assets
            
            
            350,271
            
            
            
            10,623
            
            
            
            6.07
            
            
            
            278,853
            
            
            
            8,588
            
            
            
            6.16Bank-owned
      life insurance
            
            
            9,536
            
            
            
            
            
            
            
            
            
            
            
            8,886Noninterest-earning
      assets
            
            
            17,750
            
            
            
            
            
            
            
            
            
            
            
            13,230Total
      assets
            
            $
            377,557
            
            
            
            
            
            
            
            
            
            
            $
            300,969Liabilities
      and equity:Interest-bearing
      liabilities:Interest-bearing
      demand deposits
            
            $
            33,855
            
            
            
            289
            
            
            
            1.71
            
            
            $
            26,141
            
            
            
            37
            
            
            
            0.28Savings
      accounts
            
            
            25,283
            
            
            
            41
            
            
            
            0.32
            
            
            
            30,221
            
            
            
            48
            
            
            
            0.32Money
      market accounts
            
            
            31,567
            
            
            
            480
            
            
            
            3.04
            
            
            
            20,305
            
            
            
            351
            
            
            
            3.46Certificates
      of deposit
            
            
            80,561
            
            
            
            1,555
            
            
            
            3.86
            
            
            
            86,318
            
            
            
            1,985
            
            
            
            4.60Total
      interest-bearing deposits
            
            
            171,266
            
            
            
            2,365
            
            
            
            2.76
            
            
            
            162,985
            
            
            
            2,421
            
            
            
            2.97Borrowings
            
            
            114,200
            
            
            
            2,322
            
            
            
            4.07
            
            
            
            44,395
            
            
            
            1,140
            
            
            
            5.14Total
      interest-bearing liabilities
            
            
            285,466
            
            
            
            4,687
            
            
            
            3.28
            
            
            
            207,380
            
            
            
            3,561
            
            
            
            3.43Demand
      deposits
            
            
            30,929
            
            
            
            
            
            
            
            
            
            
            
            30,897Noninterest-bearing
      liabilities
            
            
            2,545
            
            
            
            
            
            
            
            
            
            
            
            2,148Total
      liabilities
            
            
            318,940
            
            
            
            
            
            
            
            
            
            
            
            240,425Stockholders’
      equity
            
            
            58,617
            
            
            
            
            
            
            
            
            
            
            
            60,544Total
      liabilities and stockholders’equity
            
            $
            377,557
            
            
            
            
            
            
            
            
            
            
            $
            300,969Net
      interest income
            
            
            
            
            
            $
            5,936
            
            
            
            
            
            
            
            
            
            
            $
            5,027Interest
      rate spread
            
            
            
            
            
            
            
            
            
            
            2.79
            %
            
            
            
            
            
            
            
            
            
            
            2.73
            %Net
      interest margin
            
            
            
            
            
            
            
            
            
            
            3.39
            %
            
            
            
            
            
            
            
            
            
            
            3.61
            %Average
      interest-earning assets to
              average
      interest-bearing liabilities
            
            
            
            
            
            
            
            
            
            
            122.70
            %
            
            
            
            
            
            
            
            
            
            
            134.46
            %





Total interest and dividend income
increased 23.7% to $10.6 million for the six months ended June 30, 2008 from
$8.6 million for the six months ended June 30, 2007 primarily due to an increase
in interest earned on loans receivable and securities.  Interest
earned on loans receivable increased 14.5% to $9.5 million for the six months
ended June 30, 2008 from $8.3 million for the six months ended June 30, 2007 due
to an increase in the average balance of loans.  Average loans
increased 14.6% to $302.3 million for the six months ended June 30, 2008 from
$263.8 million for the six months ended June 30, 2007, as the yield earned on
loans decreased slightly from 6.28% for the six months ended June 30, 2007 to
6.27% for the six months ended June 30, 2008.  Interest earned on
securities totaled $975,000 for the six months ended June 30, 2008 compared to
$209,000 for the six months ended June 30, 2007 due to an increase in the yield
earned on securities to 5.23%, coupled with the increase in
average


12
 Table of Contents


balance
of securities to $37.3 million for the six months ended June 30, 2008 compared
to $8.5 million for the six months ended June 30, 2007.  The increase
in interest and dividend income earned on securities was due to the increase in
the average balance of securities, particularly the increase in the balance of
mortgage-backed securities, which earned a higher yield.  Interest
earned on other-interest earning assets increased to $169,000 for the six months
ended June 30, 2008, compared to $98,000 for the six months ended June 30, 2007,
due to an increase in the average balance and in the average yield to 3.15% from
3.01%.





Total interest expense increased $1.1
million to $4.7 million for the six months ended June 30, 2008 from $3.6 million
for the six months ended June 30, 2007, primarily due to an increase in the
average balance of money market accounts of $11.3 million to $31.6 million from
$20.3 million, and due to the increase in the average balance of
interest-bearing demand deposits of $7.7 million to $33.9 million from $26.1
million.  The average balance of interest-bearing demand deposits and
money market accounts increased as the average balance of certificates of
deposit and savings accounts declined for the six months ended June 30, 2008.
The average cost of interest-bearing demand deposits increased by 143 basis
points due to the new high-interest rewards checking product offered. With
decreases in short-term market interest rates, customers have increasingly shown
a preference for higher-yielding core accounts, rather than the longer-term time
deposit accounts.  The cost of total borrowings increased 103.7% to
$2.3 million for the six months ended June 30, 2008 from $1.1 for the six months
ended June 30, 2007, due to an increase in the average balance of $69.8 million
to $114.2 million from $44.4 million, offset by a decrease in the cost from
5.14% to 4.07%.





Rate/Volume
Analysis.
The following table sets forth the effects of changing rates and volumes on our
net interest income.  The rate column shows the effects attributable
to changes in rates (changes in rate multiplied by prior volume).  The
volume column shows the effects attributable to changes in volume (changes in
volume multiplied by prior rate).  Changes due to both volume and rate
have been allocated proportionately to the volume and rate
changes.  The net column represents the sum of the prior
columns.








For
      the Three Months Ended June 30, 2008
              Compared
      to the
              Three
      Months Ended June 30, 2007Increase
      (Decrease)
              Due
      to(Dollars
      in thousands)Interest
      Income:
            
            Volume
            
            
            Rate
            
            
            NetLoans
            
            $
            659
            
            
            $
            (29
            )
            
            $
            630Securities
            
            
            371
            
            
            
            8
            
            
            
            379Other
      interest-earning assets
            
            
            24
            
            
            
            2
            
            
            
            26Total
      interest-earning assets
            
            
            1,054
            
            
            
            (19
            )
            
            
            1,035Interest
      Expense:Deposits
            
            
            122
            
            
            
            (223
            )
            
            
            (101
            )Borrowings
            
            
            630
            
            
            
            (107
            )
            
            
            523Total
      interest-bearing liabilities
            
            
            752
            
            
            
            (330
            )
            
            
            422Net
      change in interest income
            
            $
            302
            
            
            $
            311
            
            
            $
            613











13
 Table of Contents








For
      the Six Months Ended June 30, 2008 Compared to the
              Six
      Months Ended June 30, 2007Increase
      (Decrease)
              Due
      to(Dollars
      in thousands)Interest
      Income:
            
            Volume
            
            
            Rate
            
            
            NetLoans
            
            $
            1,206
            
            
            $
            (8
            )
            
            $
            1,198Securities
            
            
            751
            
            
            
            15
            
            
            
            766Other
      interest-earning assets
            
            
            66
            
            
            
            5
            
            
            
            71Total
      interest-earning assets
            
            
            2,023
            
            
            
            12
            
            
            
            2,035Interest
      Expense:Deposits
            
            
            145
            
            
            
            (201
            )
            
            
            (56
            )Borrowings
            
            
            1,362
            
            
            
            (180
            )
            
            
            1,182Total
      interest-bearing liabilities
            
            
            1,507
            
            
            
            (381
            )
            
            
            1,126Net
      change in interest income
            
            $
            516
            
            
            $
            393
            
            
            $
            909








Provision for
Loan Losses.  The following
table summarizes the activity in the allowance for loan losses for the three
months and six months ended June 30, 2008 and 2007, respectively.





Three
      Months
              Ended
      June 30,
            
            Six
      Months
              Ended
      June 30,2008
            
            
            2007
            
            
            2008
            
            
            2007(Dollars
      in thousands)Balance
      at beginning of period
            
            $
            2,503
            
            
            $
            2,086
            
            
            $
            2,399
            
            
            $
            1,973Provision
      for loan losses
            
            
            115
            
            
            
            47
            
            
            
            226
            
            
            
            160Total
      charge-offs
            
            
            –
            
            
            
            –
            
            
            
            (7
            )
            
            
            –Total
      recoveries
            
            
            4
            
            
            
            –
            
            
            
            4
            
            
            
            –Balance
      at end of period
            
            $
            2,622
            
            
            
            R2,133
            
            
            $
            2,622
            
            
            $
            2,133





The Bank’s management reviews the level
of the allowance for loan losses on a quarterly basis and establishes the
provision for loan losses based upon the volume and types of lending,
delinquency levels, loss experience, the amount of classified loans, economic
conditions and other factors related to the collectability of the loan
portfolio.  The Company’s provision was $115,000 and $226,000 for the
three and six months ended June 30, 2008, respectively compared to $47,000 and
$160,000 for the three and six months ended June 30, 2007,
respectively.  The increase in the provision for loan losses is
primarily due to the growth in the loan portfolio during the first six months of
2008 compared to the first six months of 2007.  There were no changes
in the methodology used to calculate the provision from the second quarter of
2007 through the second quarter of 2008. The Company has no exposure to subprime
loans.




14
 Table of Contents





The following table provides
information with respect to our non-performing assets at the dates
indicated.  There were no troubled debt restructurings, accruing loans
past due 90 days or more or foreclosed real estate at the dates
presented.




June
      30,
            
            
            December
      31,
            
            
            June
      30,2008
            
            
            2007
            
            
            2007(Dollars
      in thousands)Nonaccrual
      loans:Commercial
      real estate mortgages
            
            $
            -
            
            
            $
            908
            
            
            $
            -Total
      nonperforming assets
            
            $
            -
            
            
            $
            908
            
            
            $
            -Total
      non-performing loans to total loans
            
            
            -
            %
            
            
            0.31
            %
            
            
            -
            %Total
      non-performing loans to total assets
            
            
            -
            
            
            
            0.25
            
            
            
            -Total
      non-performing assets to total assets
            
            
            -
            
            
            
            0.25
            
            
            
            -





The $908,000 loans on nonaccrual status
at December 31, 2007 were secured by collateral sufficient to cover all
principal and interest due under the loan agreements and were paid in full
during the second quarter of 2008.  There were no restructured loans
included in nonaccrual loans at December 31, 2007, and there was no valuation
allowance allocated to impaired loans for this period.





Non-interest
Income.Income
earned from customer service fees decreased slightly by $8,000, or 1.7%, to
$470,000 for the three months ended June 30, 2008, primarily due to rebating
customer’s ATM charges as an incentive for satisfying the requirements of the
rewards checking account product launched in the fourth quarter of
2007.  The income related to bank-owned life insurance (BOLI)
increased by $5,000, or 5.2%, in the second quarter of 2008 when compared to the
same period in 2007, as a result of the increase in cash values of the life
insurance policies.





Income earned from customer service
fees decreased slightly by $12,000, or 1.3%, to $903,000 for the six months
ended June 30, 2008, primarily due to rebating customer’s ATM charges as an
incentive for satisfying the requirements of the rewards checking account
product launched in the fourth quarter of 2007.  The income related to
bank-owned life insurance (BOLI) increased by $11,000, or 5.8%, in the first six
months of 2008 when compared to the same period in 2007, as a result of the
increase in cash values of the life insurance policies.





Non-interest
Expense.   Salaries
and employee benefits expense increased 42.3% or $586,000 to $2.0 million for
the three months ended June 30, 2008, primarily due to $520,000 of stock-based
compensation expenses associated with option grants and restricted stock awards
recorded in the second quarter of 2008.  The Company’s initial
stock-based compensation awards were granted during the fourth quarter of 2007.
Occupancy and equipment increased $14,000 due to an increase in general repairs
and utility costs during the first three months of 2008.  Data
processing and professional fees increased $16,000 and $13,000, respectively,
due to an overall increase in costs for these services.  Marketing
fees increased $56,000 for the three months ended June 30, 2008, primarily due
to the strategic efforts devoted to marketing and advertising projects during
the second quarter of 2008.  All other expense increased to $200,000
for the three months ended June 30, 2008 from $174,000 for the three months
ended June 30, 2007.





Salaries and employee benefits
expense increased 40.9% or $1.2 million to $4.0 million for the six months ended
June 30, 2008, primarily due to $1.0 million of stock-based compensation
expenses associated with option grants and restricted stock awards recorded in
the first six months of 2008.  No stock-based compensation awards were
granted until the fourth quarter of 2007. Occupancy and equipment increased
$33,000 due to an increase in general repairs and utility costs during the first
six months of 2008.  Data processing and professional fees increased
$10,000 and $5,000, respectively, due to an overall increase in costs for these
services.  Marketing fees increased $11,000 for the six months ended
June 30, 2008, primarily due to the strategic efforts devoted to marketing and
advertising projects during the second quarter of 2008.  All other
expense increased to $383,000 for the six months ended June 30, 2008 from
$351,000 for the six months ended June 30, 2007.


15
 Table of Contents





Income
Taxes.The
provision for income taxes for the three months ended June 30, 2008 was
$168,000, compared to $214,000 for the three months ended June 30, 2007, due to
lower income before taxes of $330,000 for the three months ended June 30, 2008,
compared to $498,000 for the three months ended June 30, 2007.  The
effective tax rate for the second quarter of 2008 was 50.9%, versus 43.0% for
the 2007 period.  The percentage of non-taxable income to income
before taxes was higher for the three months ended June 30, 2007 as compared to
the three months ended June 30, 2008, resulting in a higher effective tax rate
for the second quarter of 2008.





The provision for income taxes for the
six months ended June 30, 2008 was $274,000, compared to $366,000 for the six
months ended June 30, 2007, due to lower income before taxes of $510,000 for the
six months ended June 30, 2008, compared to $909,000 for the six months ended
June 30, 2007.  The effective tax rate for the six month period of
2008 was 53.7%, versus 40.3% for the 2007 period.  The percentage of
non-taxable income to income before taxes was higher for the six months ended
June 30, 2007 as compared to the six months ended June 30, 2008, resulting in a
higher effective tax rate for the second quarter of 2008.





The effective tax rate in 2008 includes
the non-deductible compensation expense recorded for a portion of the incentive
stock options, which was partially offset by non-taxable BOLI
income.





Liquidity
Management.  Liquidity is the
ability to meet current and future financial obligations of a short-term nature.
Our primary sources of funds consist of deposit inflows, loan repayments,
maturities and sales of investment securities and borrowings from the Federal
Home Loan Bank of Boston.  While maturities and scheduled amortization
of loans and securities are predictable sources of funds, deposit flows and
mortgage prepayments are greatly influenced by general interest rates, economic
conditions and competition.





We regularly adjust our investments in
liquid assets based upon our assessment of (1) expected loan demand,
(2) expected deposit flows, (3) yields available on interest-earning
deposits and securities and (4) the objectives of our asset/liability management
policy.





Our most liquid assets are cash and
cash equivalents and interest-bearing deposits.  The levels of these
assets depend on our operating, financing, lending and investing activities
during any given period.  At June 30, 2008, cash and cash equivalents
totaled $21.8 million.  Securities classified as available for sale
provide additional sources of liquidity.  On June 30, 2008, we had
$89.2 million of borrowings outstanding with the Federal Home Loan Bank of
Boston.   At June 30, 2008 we had the ability to borrow an
additional $25.5 million from the Federal Home Loan Bank of Boston.





At June 30, 2008, we had $27.7 million
in loan commitments outstanding, which consisted of $5.4 million of real estate
loan commitments, $14.6 million in unused home equity lines of credit, $4.3
million in construction loan commitments and $3.5 million in commercial lines of
credit commitments.  Certificates of deposit due within one year of
June 30, 2008 totaled $79.0 million, or 95.9% of certificates of
deposit.  This percentage of certificates of deposit that mature
within one year reflects customers’ hesitancy to invest their funds for long
periods in the recent interest rate environment.  If these maturing
deposits do not remain with us, we will be required to seek other sources of
funds, including other certificates of deposit and
borrowings.  Depending on market conditions, we may be required to pay
higher rates on such deposits or other borrowings than we currently pay on the
certificates of deposit due on or before June 30, 2009.  We believe,
however, based on past experience that a significant portion of our certificates
of deposit will remain with us.  We have the ability to attract and
retain deposits by adjusting the interest rates offered.





Capital
Management.We are
subject to various regulatory capital requirements administered by the Office of
Thrift Supervision, including a risk-based capital measure.  The
risk-based capital guidelines include both a definition of capital and a
framework for calculating risk-weighted assets by assigning balance sheet assets
and off-balance sheet items to broad risk categories.  At June 30,
2008, we exceeded all of our regulatory capital requirements.  We are
considered “well capitalized” under regulatory guidelines.





Off-Balance Sheet
Arrangements.In the normal
course of operations, we engage in a variety of financial transactions that, in
accordance with generally accepted accounting principles, are not recorded in
our consolidated


16
 Table of Contents


financial
statements. These transactions involve, to varying degrees, elements of credit,
interest rate and liquidity risk. Such transactions are used primarily to manage
customers’ requests for funding and take the form of loan commitments and lines
of credit.





For the six months ended June 30, 2008,
we did not engage in any off-balance sheet transactions reasonably likely to
have a material effect on our financial condition, results of operations or cash
flows.





Item
3.    Quantitative and Qualitative Disclosures About Market Risk.





Qualitative Aspects of Market
Risk.The Company’s most significant form of market risk is
interest rate risk.  We manage the interest rate sensitivity of our
interest-bearing liabilities and interest-earning assets in an effort to
minimize the adverse effects of changes in the interest rate
environment.  Deposit accounts typically react more quickly to changes
in market interest rates than mortgage loans because of the shorter maturities
of deposits.  As a result, sharp increases in interest rates may
adversely affect our earnings while decreases in interest rates may beneficially
affect our earnings.  To reduce the potential volatility of our
earnings, we have sought to improve the match between asset and liability
maturities and rates, while maintaining an acceptable interest rate
spread.  Our strategy for managing interest rate risk
emphasizes:  adjusting the maturities of borrowings; adjusting the
investment portfolio mix and duration; and periodically selling fixed-rate
mortgage loans and available-for-sale investment securities.





We have an Asset Liability Management
Committee to communicate, coordinate and control all aspects involving
asset/liability management. The committee establishes and monitors the volume,
maturities, pricing and mix of assets and funding sources with the objective of
managing assets and funding sources to provide results that are consistent with
liquidity, growth, risk limits and profitability goals.





Quantitative Aspects of Market
Risk.We use an interest rate sensitivity analysis
prepared by the Office of Thrift Supervision to review our level of interest
rate risk.  This analysis measures interest rate risk by computing
changes in net portfolio value of our cash flows from assets, liabilities and
off-balance sheet items in the event of a range of assumed changes in market
interest rates.  Net portfolio value represents the market value of
portfolio equity and is equal to the market value of assets minus the market
value of liabilities, with adjustments made for off-balance sheet
items.  This analysis assesses the risk of loss in market risk
sensitive instruments in the event of a sudden and sustained 100 to 300 basis
point increase or 50 to 100 basis point decrease in market interest rates with
no effect given to any steps that we might take to counter the effect of that
interest rate movement.  We measure interest rate risk by modeling the
changes in net portfolio value over a variety of interest rate
scenarios.





The
following table presents the change in our net portfolio value at March 31, 2008
(the most current information available), that would occur in the event of an
immediate change in interest rates based on Office of Thrift Supervision
assumptions, with no effect given to any steps that we might take to counteract
that change. The Bank expects that its net portfolio value at June 30, 2008 is
consistent with the table below.





Net
      Portfolio Value
              (Dollars
      in thousands)
            
            Net
      Portfolio Value as % of
              Portfolio
      Value of AssetsBasic
      Point (“bp”)
              Change
      in Rates
            
            Amount
            
            Change
            
            %
      Change
            
            NPV
      Ratio
            
            Change
      (bp)300
            
            
            $
            36,716
            
            
            $
            -13,012
            
            
            
            -26
            %
            
            
            9.77
            %
            
            
            -270200
            
            
            
            41,542
            
            
            
            -8,186
            
            
            
            -16
            
            
            
            10.83
            
            
            
            -164100
            
            
            
            46,328
            
            
            
            -3,400
            
            
            
            -7
            
            
            
            11.82
            
            
            
            -6450
            
            
            
            48,275
            
            
            
            -1,454
            
            
            
            -3
            
            
            
            12.20
            
            
            
            -260
            
            
            
            49,728
            
            
            
            -
            
            
            
            -
            
            
            
            12.46
            
            
            
            -(50
            )
            
            
            50,328
            
            
            
            599
            
            
            
            1
            
            
            
            12.53
            
            
            
            6(100
            )
            
            
            50,542
            
            
            
            814
            
            
            
            2
            
            
            
            12.51
            
            
            
            4





17
 Table of Contents


The
Office of Thrift Supervision uses certain assumptions in assessing the interest
rate risk of savings associations.  These assumptions relate to
interest rates, loan prepayment rates, deposit decay rates, and the market
values of certain assets under differing interest rate scenarios, among
others.  As with any method of measuring interest rate risk, certain
shortcomings are inherent in the method of analysis presented in the foregoing
table.  For example, although certain assets and liabilities may have
similar maturities or periods to repricing, they may react in different degrees
to changes in market interest rates.  Also, the interest rates on
certain types of assets and liabilities may fluctuate in advance of changes in
market interest rates, while interest rates on other types may lag behind
changes in market rates.  Additionally, certain assets, such as
adjustable-rate mortgage loans, have features that restrict changes in interest
rates on a short-term basis and over the life of the asset.  Further,
in the event of a change in interest rates, expected rates of prepayments on
loans and early withdrawals from certificates could deviate significantly from
those assumed in calculating the table.





Item
      4T.
            Controls
      and Procedures





The
Company’s management, including the Company’s principal executive officer and
principal financial officer, have evaluated the effectiveness of the Company’s
“disclosure controls and procedures,” as such term is defined in Rule 13a-15(e)
promulgated under the Securities Exchange Act of 1934, as amended, (the
“Exchange Act”).  Based upon their evaluation, the principal executive
officer and principal financial officer concluded that, as of the end of the
period covered by this report, the Company’s disclosure controls and procedures
were effective for the purpose of ensuring that the information required to be
disclosed in the reports that the Company files or submits under the Exchange
Act with the Securities and Exchange Commission (the “SEC”) (1) is recorded,
processed, summarized and reported within the time periods specified in the
SEC’s rules and forms, and (2) is accumulated and communicated to the Company’s
management, including its principal executive and principal financial officers,
as appropriate to allow timely decisions regarding required
disclosure.  In addition, based on that evaluation, no change in the
Company’s internal control over financial reporting occurred during the quarter
ended June 30, 2008 that has materially affected, or is reasonably likely to
materially affect, the Company’s internal control over financial
reporting.





PART
      II.
            OTHER
      INFORMATION





Item
      1.
            Legal
      Proceedings.





From time
to time, we may be party to various legal proceedings incident to our
business.  At June 30, 2008, we were not a party to any pending legal
proceedings that we believe would have a material adverse effect on our
financial condition, results of operations or cash flows.





Item
      1A.
            Risk
      Factors.





Risk factors that may affect future
results were discussed in the Company’s 2007 Annual Report on Form
10-K.  The Company’s evaluation of its risk factors has not changed
materially since December 31, 2007.





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





a)
            Not
      applicable


b)
            Not
      applicable


c)
            The
      following table presents a summary of the Company’s share repurchases
      during the quarter ended June 30,
2008.


18
 Table of Contents





Period
            
            Total
      number of shares purchased
            
            
            Average
      price paid per share
            
            
            Total
      number of shares
              purchased
      as part
              of
      publicly announced
              program
      (1)
            
            
            Maximum
      number of
              shares
      that may yet be
              purchased
      under the
              program
      (1)April
      2008
            
            
            20,450
            
            
            $
            12.30
            
            
            
            20,450
            
            
            
            140,571May
      2008
            
            
            38,300
            
            
            
            12.95
            
            
            
            38,300
            
            
            
            102,271June
      2008
            
            
            82,500
            
            
            
            12.42
            
            
            
            82,500
            
            
            
            19,771Total
            
            
            141,250
            
            
            $
            12.55
            
            
            
            
            
            
            
            141,250





(1)
            On
      July 3, 2008, the Company announced the completion of its repurchase
      program to acquire 231,721shares of the Company’s outstanding
      stock.








Item
      3.
            Defaults
      Upon Senior
Securities.





Not applicable





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





The annual meeting of the stockholders
of the Company was held on May 15, 2008 at which time the five nominees for
director, as set forth in the proxy materials for the meeting, were elected by
the following vote:


FOR
            
            WITHHELDPeter
      T. Crowley
            3,597,777
            
            179,399Michael
      J. Hayes
            3,597,802
            
            179,374Arthur
      H. Lathrop
            3,599,802
            
            177,374Kathleen
      A. Nealon
            3,607,777
            
            169,399Peter
      W. Rector
            3,605,902
            
            171,274








In
addition, the stockholders ratified the appointment of Wolf & Company, P.C.
as our independent public accounting firm with the following votes
cast:





Ratification of Wolf
      & Company, P.C.For
            3,712,826Against
            45,600Abstentions
            18,750








Item
      5.
            Other
      Information.





None.





Item
      6.
            Exhibits.





31.1
            Rule
      13a-14(a)/15d-14(c) Certification of Chief Executive
    Officer





31.2
            Rule
      13a-14(a)/15d-14(c) Certification of Chief Financial
    Officer





32.0
            Section
      1350 Certifications


19
 Table of Contents


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.





Newport
      Bancorp, Inc.Date:  August
      14, 2008
            By:
            /s/
      Kevin M. McCarthyKevin
      M. McCarthyPresident
      and Chief Executive OfficerDate:   August
      14, 2008
            By:
            /s/
      Bruce A. WalshBruce
      A. WalshSenior
      Vice President and Chief Financial
Officer






20