UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549





FORM
10-K/A





Amendment
No. 1





[X]
            ANNUAL
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934





For
the fiscal year ended December 31, 2007





OR





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





Securities
registered pursuant to Section 12(b) of the Act:




Title of each
      class
            Name of each exchange
      on which registeredCommon
      Stock, par value $0.01 per share
            The
      Nasdaq Stock Market LLC


Securities
registered pursuant to Section 12(g) of the Act:  None





Indicate by check mark if the
registrant is a well-known seasoned issuer, as defined in Rule 405 of the
Securities
Act.  Yes        No  X





Indicate by check mark if the
registrant is not required to file reports pursuant to Section 13 or Section
15(d) of the
Act.  Yes       No  X





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





Indicate by check mark if disclosure of
delinquent filers pursuant to Item 405 of Regulation S-K is not contained
herein, and will not be contained, to the best of the registrant’s knowledge, in
definitive proxy or information statements incorporated by reference in Part III
of this Form 10-K or any amendment to this Form 10-K. [ X ]





Indicate by check mark whether the
registrant is a large accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company.  See the definitions of
“accelerated filer,” “large accelerated filer” and “smaller reporting company”
in Rule 12b-2 of the Exchange Act.


(Check
      one):
              Large
      accelerated
      filer     [    ]
              Accelerated
      filer                    [  
        ]Non-accelerated
      filer       [    ]
              Smaller
      reporting company  [X]





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


Yes          No     X





The aggregate market value of the
voting and non-voting common equity held by nonaffiliates as of June 29,
2007 was approximately $41,246,211.







The number of shares outstanding of the
registrant’s common stock as of March 11, 2008 was 4,568,732.




DOCUMENTS
INCORPORATED BY REFERENCE:




None.







Explanatory
Note




This Form
10-K/A is being filed by Newport Bancorp, Inc. (the “Company”) to amend its
Annual Report on Form 10-K for the year ended December 31, 2007, filed with the
Securities and Exchange Commission on March 24, 2008 to include a fully executed
Report of Independent
Registered Public Accounting Firm.



















PART
IV





ITEM
      15.
            EXHIBITS
      AND FINANCIAL STATEMENT SCHEDULES





(1)
                  The
      financial statements required in response to this item are incorporated by
      reference from Item 8 of this report.(2)
                  All
      financial statement schedules are omitted because they are not required or
      applicable, or the required information is shown in the consolidated
      financial statements or the notes thereto.(3)
                  Exhibits3.1
                  Articles
      of Incorporation of Newport Bancorp, Inc. (1)3.2
                  Bylaws
      of Newport Bancorp, Inc. (2)4.1
                  Specimen
      Stock Certificate of Newport Bancorp, Inc. (1)10.1
                  Supplemental
      Executive Retirement Plan* (3)10.2
                  Form
      of Newport Federal Savings Bank Supplemental Director Retirement
      Agreement, as Amended* (1)10.3
                  Employment
      Agreement between Newport Federal Savings Bank and Kevin M. McCarthy and
      Proposed Amendment* (1)10.4
                  Amendment
      to the Employment Agreement between Newport Federal Savings Bank and Kevin
      M. McCarthy* (3)10.5
                  Employment
      Agreement between Newport Bancorp, Inc. and Kevin M. McCarthy*
      (3)10.6
                  Employment
      Agreement between Newport Federal Savings Bank and Nino Moscardi and
      Proposed Amendment* (1)10.7
                  Amendment
      to the Employment Agreement between Newport Federal Savings Bank and Nino
      Moscardi* (3)10.8
                  Employment
      Agreement between Newport Bancorp, Inc. and Nino Moscardi*
    (3)10.9
                  Employment
      Agreement between Newport Federal Savings Bank and Ray Gilmore and
      Proposed Amendment* (1)10.10
                  Amendment
      to the Employment Agreement between Newport Federal Savings Bank and Ray
      Gilmore* (3)10.11
                  Employment
      Agreement between Newport Bancorp, Inc. and Bruce A. Walsh*
      (3)10.12
                  Change
      in Control Agreement between Newport Federal Savings Bank and Bruce A.
      Walsh* (3)10.13
                  Change
      in Control Agreement between Newport Federal Savings Bank and Carol R.
      Silven* (3)10.14
                  Change
      in Control Agreement between Newport Federal Savings Bank and Paul F.
      Nardone* (3)10.15
                  Supplemental
      Executive Retirement Agreement between Newport Federal Savings Bank and
      Carol R. Silven, Kevin M. McCarthy, Nino Moscardi, Bruce A. Walsh and Ray
      D. Gilmore, II *(5)10.16
                  Executive
      Split Dollar Life Insurance Agreements between Newport Federal Savings
      Bank and Kevin M. McCarthy, Nino Moscardi and Bruce A. Walsh
      *(5)10.17
                  Supplemental
      Director Retirement Agreements between Newport Federal Savings Bank and
      Peter W. Rector, William R. Harvey, Donald N. Kaull, Robert S. Lazar,
      Michael S. Pinto, Michael J. Hayes, Barbara Saccucci Radebach, Alicia S.
      Quirk, Peter T. Crowley, John N. Conti, Arthur H. Lathrop, Arthur H.
      Macauley and Kathleen A. Nealon *(5)10.18
                  Director
      Split Dollar Life Insurance Agreements between Newport Federal Savings
      Bank and Peter W. Rector, Donald N. Kaull, Robert S. Lazar, Michael S.
      Pinto, Michael J. Hayes, Barbara Saccucci Radebach, Alicia S. Quirk, Peter
      T. Crowley, Arthur H. Lathrop, Arthur H. Macauley and Kathleen A. Nealon
      *(5)21.0
                  List
      of Subsidiaries (4)23.0
                  Consent
      of Wolf & Company, P.C.31.1
                  Rule
      13a-14(a)/15d-14(a) Certification of Chief Executive
    Officer31.2
                  Rule
      13a-14(a)/15d-14(a) Certification of Chief Financial
    Officer                                         3
  32.0
                  Section
      1350 Certification of Chief Executive Officer and Chief Financial
      Officer__________________________________*
                  Management
      contract or compensatory plan, contract or arrangement.(1)
                  Incorporated
      by reference to the Company’s Registration Statement on Form S-1, as
      amended, initially filed with the SEC on March 20,
2006.(2)
                  Incorporated
      by reference to Exhibit 3.2 to the Company’s Current Report on Form 8-K
      filed with the SEC on for the quarter ended December 14,
    2007.(3)
                  Incorporated
      by reference to the Company’s Quarterly Report on Form 10-Q for the
      quarter ended June 30, 2006.(4)
                  Incorporated
      by reference to Exhibit 21.0 to the Company’s Annual Report on Form 10-K
      for the year ended December 31, 2006.(5)
                  Incorporated
      by reference to the Company’s Quarterly Report on Form 10-Q for the
      quarter ended March 31, 2007.










































4


SIGNATURES





Pursuant to the requirements of Section
13 or 15(d) 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:
      January 8, 2009
            By:
            /s/
      Kevin M. McCarthyKevin
      M. McCarthyPresident
      and Chief Executive Officer





Pursuant to the requirements of the
Securities Exchange Act of 1934, this report has been signed below by the
following persons on behalf of the Registrant and in the capacities and on the
dates indicated.





Name
            
            Title
            Date/s/
      Kevin M. McCarthy
            
            President,
      Chief Executive Officer,
            January
      8, 2009Kevin
      M. McCarthy
            
            and
      Director(principal
      executive officer)/s/
      Bruce A. Walsh
            
            Senior
      Vice President and Chief
            January
      8, 2009Bruce
      A. Walsh
            
            Financial
      Officer(principal
      accounting andfinancial
      officer)/s/
      John N. Conti
            
            Director
            January
      8, 2009John
      N. Conti/s/
      Peter T. Crowley
            
            Director
            January
      8, 2009Peter
      T. Crowley/s/
      William R. Harvey
            
            Director
            January
      8, 2009William
      R. Harvey/s/
      Michael J. Hayes
            
            Director
            January
      8, 2009Michael
      J. Hayes/s/
      Donald N. Kaull
            
            Director
            January
      8, 2009Donald
      N. Kaull/s/
      Arthur H. Lathrop
            
            Director
            January
      8, 2009Arthur
      H. Lathrop/s/
      Robert S. Lazar
            
            Director
            January
      8, 2009Robert
      S. Lazar







5







/s/
      Arthur P. Macauley
            
            Director
            January
      8, 2009Arthur
      P. Macauley/s/
      Nino Moscardi
            
            Director
            January
      8, 2009Nino
      Moscardi/s/
      Kathleen A. Nealon
            
            Director
            January
      8, 2009Kathleen
      A. Nealon/s/
      Michael S. Pinto
            
            Director
            January
      8, 2009Michael
      S. Pinto/s/
      Alicia S. Quirk
            
            Director
            January8,
      2009Alicia
      S. Quirk/s/
      Peter W. Rector
            
            Director
            January
      8, 2009Peter
      W. Rector/s/
      Barbara Saccucci Radebach
            
            Director
            January
      8, 2009Barbara
      Saccucci Radebach





6














NEWPORT
BANCORP, INC.





CONSOLIDATED
FINANCIAL STATEMENTS


Years Ended December 31, 2007 and
2006








INDEX
TO CONSOLIDATED FINANCIAL STATEMENTS










PageReport
      of Independent Registered Public Accounting Firm
                        F-2Consolidated
      Balance Sheets
                        F-3Consolidated
      Statements of Operations
                        F-4Consolidated
      Statements of Changes in Stockholders’ Equity
                        F-5Consolidated
      Statements of Cash Flows
                        F-6
      - F-7Notes
      to Consolidated Financial Statements
                        F-8
      -
F-42


























F-1


























Report
of Independent Registered Public Accounting Firm











The Board
of Directors


Newport
Bancorp, Inc.


Newport,
Rhode Island





We have
audited the accompanying consolidated balance sheets of Newport Bancorp, Inc.
and subsidiary as of December 31, 2007 and 2006, and the related
consolidated statements of operations, changes in stockholders’ equity and cash
flows for the years then ended.  These financial statements are the
responsibility of the Bank’s management.  Our responsibility is to
express an opinion on these financial statements based on our
audits.





We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States).  Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement.  An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements.  An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement
presentation.  We believe that our audits provide a reasonable basis
for our opinion.





In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of Newport Bancorp, Inc. and
subsidiary as of December 31, 2007 and 2006, and the results of its
operations and its cash flows for the years then ended in conformity with
accounting principles generally accepted in the United States of
America.











/s/Wolf
& Company, P.C.


Boston,
Massachusetts


March  20,
2008


F-2


NEWPORT
BANCORP, INC. AND SUBSIDIARY


CONSOLIDATED
BALANCE SHEETS


December 31,
2007 and 2006





ASSETS2007
                        
                        
                        2006(In Thousands, Except Share
      Data)Cash and due from
      banks
                        
                        $
                        6,646
                        
                        
                        $
                        3,705Short-term
      investments
                        
                        
                        59
                        
                        
                        
                        3,567Cash
      and cash equivalents
                        
                        
                        6,705
                        
                        
                        
                        7,272Securities available for sale, at
      fair value
                        
                        
                        6,966
                        
                        
                        
                        6,614Securities held to maturity, at
      amortized cost
                        
                        
                        30,886
                        
                        
                        
                        1,922Federal Home Loan Bank stock, at
      cost
                        
                        
                        4,163
                        
                        
                        
                        2,390Loans
                        
                        
                        295,483
                        
                        
                        
                        258,739Allowance for loan
      losses
                        
                        
                        (2,399
                        )
                        
                        
                        (1,973
                        )Loans,
      net
                        
                        
                        293,084
                        
                        
                        
                        256,766Premises and equipment,
      net
                        
                        
                        5,849
                        
                        
                        
                        6,099Accrued interest
      receivable
                        
                        
                        1,269
                        
                        
                        
                        1,027Net deferred tax
      asset
                        
                        
                        2,313
                        
                        
                        
                        1,851Bank-owned life
      insurance
                        
                        
                        9,274
                        
                        
                        
                        5,382Other
assets
                        
                        
                        750
                        
                        
                        
                        1,121Total
      assets
                        
                        $
                        361,259
                        
                        
                        $
                        290,444LIABILITIES AND STOCKHOLDERS'
      EQUITYDeposits
                        
                        $
                        193,285
                        
                        
                        $
                        192,974Short-term
      borrowings
                        
                        
                        5,809
                        
                        
                        
                        2,500Long-term
      borrowings
                        
                        
                        99,547
                        
                        
                        
                        31,950Accrued expenses and other
      liabilities
                        
                        
                        3,666
                        
                        
                        
                        3,040Total
      liabilities
                        
                        
                        302,307
                        
                        
                        
                        230,464Commitments and contingencies
      (Notes 5, 11 and 12)Stockholders'
      equity:Preferred
      stock, $.01 par value; 1,000,000 sharesauthorized;
      none issued
                        
                        
                        -
                        
                        
                        
                        -Common
      stock, $.01 par value; 19,000,000 sharesauthorized;
      4,878,349 shares issued
                        
                        
                        49
                        
                        
                        
                        49Additional
      paid-in capital
                        
                        
                        50,023
                        
                        
                        
                        47,258Retained
      earnings
                        
                        
                        17,234
                        
                        
                        
                        16,477Unearned
      compensation (971,265 and 364,250 sharesat
      December 31, 2007 and 2006, respectively)
                        
                        
                        (5,548
                        )
                        
                        
                        (3,643
                        )Treasury
      stock (213,660 shares at December 31, 2007)
                        
                        
                        (2,655
                        )
                        
                        
                        -Accumulated
      other comprehensive loss
                        
                        
                        (151
                        )
                        
                        
                        (161
                        )Total
      stockholders' equity
                        
                        
                        58,952
                        
                        
                        
                        59,980Total
      liabilities and stockholders' equity
                        
                        $
                        361,259
                        
                        
                        $
                        290,444





See
accompanying notes to consolidated financial statements.


F-3


NEWPORT
BANCORP, INC. AND SUBSIDIARY


CONSOLIDATED
STATEMENTS OF OPERATIONS


Years
Ended December 31, 2007 and 2006





2007
                    
                    
                    2006(In Thousands, Except Per Share
      Data)Interest and dividend
      income:Loans
                    
                    $
                    17,195
                    
                    
                    $
                    15,280Securities
                    
                    
                    567
                    
                    
                    
                    386Federal
      Home Loan Bank stock
                    
                    
                    177
                    
                    
                    
                    181Other
      interest-earning assets
                    
                    
                    49
                    
                    
                    
                    244Total
      interest and dividend income
                    
                    
                    17,988
                    
                    
                    
                    16,091Interest
      expense:Deposits
                    
                    
                    4,888
                    
                    
                    
                    3,868Short-term
      borrowings
                    
                    
                    349
                    
                    
                    
                    371Long-term
      borrowings
                    
                    
                    2,457
                    
                    
                    
                    1,972Total
      interest expense
                    
                    
                    7,694
                    
                    
                    
                    6,211Net interest
      income
                    
                    
                    10,294
                    
                    
                    
                    9,880Provision for loan
      losses
                    
                    
                    426
                    
                    
                    
                    120Net
      interest income, after provisionfor
      loan losses
                    
                    
                    9,868
                    
                    
                    
                    9,760Non-interest
      income:Customer
      service fees
                    
                    
                    1,839
                    
                    
                    
                    1,593Federal
      Home Loan Bank pre-payment penalties
                    
                    
                    -
                    
                    
                    
                    (367
                    )Bank-owned
      life insurance
                    
                    
                    392
                    
                    
                    
                    75Miscellaneous
                    
                    
                    88
                    
                    
                    
                    150Total
      non-interest income
                    
                    
                    2,319
                    
                    
                    
                    1,451Non-interest
      expenses:Salaries
      and employee benefits
                    
                    
                    6,171
                    
                    
                    
                    5,414Occupancy
      and equipment
                    
                    
                    1,282
                    
                    
                    
                    1,235Data
      processing
                    
                    
                    1,004
                    
                    
                    
                    1,022Professional
      fees
                    
                    
                    563
                    
                    
                    
                    387Marketing
                    
                    
                    1,085
                    
                    
                    
                    797Contribution
      to NewportFed Charitable Foundation
                    
                    
                    -
                    
                    
                    
                    3,614Other
      general and administrative
                    
                    
                    729
                    
                    
                    
                    769Total
      non-interest expenses
                    
                    
                    10,834
                    
                    
                    
                    13,238Income (loss) before income
      taxes
                    
                    
                    1,353
                    
                    
                    
                    (2,027
                    )Provision (benefit) for income
      taxes
                    
                    
                    596
                    
                    
                    
                    (371
                    )Net income
      (loss)
                    
                    $
                    757
                    
                    
                    $
                    (1,656
                    )Weighted average shares
      outstanding:Basic
                    
                    
                    4,481,203
                    
                    
                    
                    N/ADiluted
                    
                    
                    4,481,203
                    
                    
                    
                    N/AEarnings per
      share:Basic
                    
                    $
                    0.17
                    
                    
                    
                    N/ADiluted
                    
                    
                    0.17
                    
                    
                    
                    N/A





See
accompanying notes to consolidated financial statements.


F-4





NEWPORT
BANCORP, INC. AND SUBSIDIARY


CONSOLIDATED
STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY


Years
Ended December 31, 2007 and 2006




AccumulatedAdditional
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                OtherCommon
Stock
                                                                                                                                
                                                                                                                                
                                                                                                                                Paid-in
                                                                                                                                
                                                                                                                                
                                                                                                                                Retained
                                                                                                                                
                                                                                                                                
                                                                                                                                Unearned
                                                                                                                                
                                                                                                                                
                                                                                                                                Treasury
                                                                                                                                
                                                                                                                                
                                                                                                                                ComprehensiveShares
                                                                                                                                
                                                                                                                                
                                                                                                                                Amount
                                                                                                                                
                                                                                                                                
                                                                                                                                Capital
                                                                                                                                
                                                                                                                                
                                                                                                                                Earnings
                                                                                                                                
                                                                                                                                
                                                                                                                                Compensation
                                                                                                                                
                                                                                                                                
                                                                                                                                Stock
                                                                                                                                
                                                                                                                                
                                                                                                                                Loss
                                                                                                                                
                                                                                                                                
                                                                                                                                Total(Dollars in
      Thousands)Balance at December 31,
      2005
                                                                                                                                
                                                                                                                                
                                                                                                                                -
                                                                                                                                
                                                                                                                                
                                                                                                                                $
                                                                                                                                -
                                                                                                                                
                                                                                                                                
                                                                                                                                $
                                                                                                                                -
                                                                                                                                
                                                                                                                                
                                                                                                                                $
                                                                                                                                18,133
                                                                                                                                
                                                                                                                                
                                                                                                                                $
                                                                                                                                -
                                                                                                                                
                                                                                                                                
                                                                                                                                $
                                                                                                                                -
                                                                                                                                
                                                                                                                                
                                                                                                                                $
                                                                                                                                (149
                                                                                                                                )
                                                                                                                                
                                                                                                                                $
                                                                                                                                17,984Comprehensive
      loss:Net
      loss
                                                                                                                                
                                                                                                                                
                                                                                                                                -
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                -
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                -
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                (1,656
                                                                                                                                )
                                                                                                                                
                                                                                                                                
                                                                                                                                -
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                -
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                -
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                (1,656
                                                                                                                                )Net
      unrealized loss on securities availablefor
      sale
                                                                                                                                
                                                                                                                                
                                                                                                                                -
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                -
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                -
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                -
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                -
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                -
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                (12
                                                                                                                                )
                                                                                                                                
                                                                                                                                
                                                                                                                                (12
                                                                                                                                )Total
      comprehensive loss
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                (1,668
                                                                                                                                )Issuance of common stock for
      initialpublic
      stock offering, net of expensesof
      $1,573,000
                                                                                                                                
                                                                                                                                
                                                                                                                                4,516,990
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                45
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                43,552
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                -
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                -
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                -
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                -
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                43,597Issuance of common stock to
      NewportFedCharitable
      Foundation
                                                                                                                                
                                                                                                                                
                                                                                                                                361,359
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                4
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                3,610
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                -
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                -
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                -
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                -
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                3,614Common stock purchased by ESOP
      (390,268 shares)
                                                                                                                                
                                                                                                                                
                                                                                                                                -
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                -
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                -
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                -
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                (3,903
                                                                                                                                )
                                                                                                                                
                                                                                                                                
                                                                                                                                -
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                -
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                (3,903
                                                                                                                                )Release of ESOP shares (26,018
      shares)
                                                                                                                                
                                                                                                                                
                                                                                                                                -
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                -
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                96
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                -
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                260
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                -
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                -
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                356Balance at December 31,
      2006
                                                                                                                                
                                                                                                                                
                                                                                                                                4,878,349
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                49
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                47,258
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                16,477
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                (3,643
                                                                                                                                )
                                                                                                                                
                                                                                                                                
                                                                                                                                -
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                (161
                                                                                                                                )
                                                                                                                                
                                                                                                                                
                                                                                                                                59,980Comprehensive
      income:Net
      income
                                                                                                                                
                                                                                                                                
                                                                                                                                -
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                -
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                -
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                757
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                -
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                -
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                -
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                757Net
      unrealized gain on securities availablefor
      sale
                                                                                                                                
                                                                                                                                
                                                                                                                                -
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                -
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                -
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                -
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                -
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                -
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                10
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                10Total
      comprehensive income
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                767Issuance of common stock in
      connection withequity
      incentive plan (437,900 shares)
                                                                                                                                
                                                                                                                                
                                                                                                                                -
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                -
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                2,445
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                -
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                (2,445
                                                                                                                                )
                                                                                                                                
                                                                                                                                
                                                                                                                                -
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                -
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                -Stock-based compensation -
      restricted stock (195,133 shares)
                                                                                                                                
                                                                                                                                
                                                                                                                                -
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                -
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                -
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                -
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                279
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                -
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                -
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                279Stock-based compensation -
      options
                                                                                                                                
                                                                                                                                
                                                                                                                                -
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                -
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                241
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                -
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                -
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                -
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                -
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                241Release of ESOP shares (26,018
      shares)
                                                                                                                                
                                                                                                                                
                                                                                                                                -
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                -
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                79
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                -
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                261
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                -
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                -
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                340Purchase of treasury shares
      (213,660 shares)
                                                                                                                                
                                                                                                                                
                                                                                                                                -
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                -
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                -
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                -
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                -
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                (2,655
                                                                                                                                )
                                                                                                                                
                                                                                                                                
                                                                                                                                -
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                (2,655
                                                                                                                                )Balance at December 31,
      2007
                                                                                                                                
                                                                                                                                
                                                                                                                                4,878,349
                                                                                                                                
                                                                                                                                
                                                                                                                                $
                                                                                                                                49
                                                                                                                                
                                                                                                                                
                                                                                                                                $
                                                                                                                                50,023
                                                                                                                                
                                                                                                                                
                                                                                                                                $
                                                                                                                                17,234
                                                                                                                                
                                                                                                                                
                                                                                                                                $
                                                                                                                                (5,548
                                                                                                                                )
                                                                                                                                
                                                                                                                                $
                                                                                                                                (2,655
                                                                                                                                )
                                                                                                                                
                                                                                                                                $
                                                                                                                                (151
                                                                                                                                )
                                                                                                                                
                                                                                                                                $
                                                                                                                                58,952







F-5


NEWPORT
BANCORP, INC. AND SUBSIDIARY


CONSOLIDATED
STATEMENTS OF CASH FLOWS


Years
Ended December 31, 2007 and 2006





2007
                        
                        
                        2006(In
    Thousands)Cash flows from operating
      activities:Net income
      (loss)
                        
                        $
                        757
                        
                        
                        $
                        (1,656
                        )Adjustments
      to reconcile net income (loss) tonet
      cash provided by operating activities:Provision
      for loan losses
                        
                        
                        426
                        
                        
                        
                        120Accretion
      of securities
                        
                        
                        (23
                        )
                        
                        
                        (17
                        )Amortization
      of net deferred loan fees
                        
                        
                        (159
                        )
                        
                        
                        (123
                        )Depreciation
      and amortization of premisesand
      equipment
                        
                        
                        619
                        
                        
                        
                        619Stock-based
      compensation and ESOP allocation
                        
                        
                        860
                        
                        
                        
                        356Deferred
      income tax benefit
                        
                        
                        (462
                        )
                        
                        
                        (1,112
                        )Income
      from bank-owned life insurance
                        
                        
                        (392
                        )
                        
                        
                        (75
                        )Contribution
      of common stock to NewportFedCharitable
      Foundation
                        
                        
                        -
                        
                        
                        
                        3,614Net
      change in:Accrued
      interest receivable
                        
                        
                        (242
                        )
                        
                        
                        (118
                        )Other
      assets
                        
                        
                        371
                        
                        
                        
                        55Accrued
      expenses and other liabilities
                        
                        
                        626
                        
                        
                        
                        1,341Net
      cash provided by operating activities
                        
                        
                        2,381
                        
                        
                        
                        3,004Cash flows from investing
      activities:Proceeds
      from maturities of certificates of deposit
                        
                        
                        -
                        
                        
                        
                        3,000Purchase
      of held-to-maturity securities
                        
                        
                        (29,421
                        )
                        
                        
                        -Reinvested
      dividends on mutual funds
                        
                        
                        (342
                        )
                        
                        
                        (292
                        )Principal
      payments received on securities held to maturity
                        
                        
                        480
                        
                        
                        
                        387Purchase
      of bank-owned life insurance
                        
                        
                        (3,500
                        )
                        
                        
                        (3,500
                        )Redemption
      (purchase) of Federal Home Loan Bank stock
                        
                        
                        (1,773
                        )
                        
                        
                        650Loan
      originations, net of principal payments
                        
                        
                        (36,585
                        )
                        
                        
                        (24,587
                        )Additions
      to premises and equipment
                        
                        
                        (369
                        )
                        
                        
                        (718
                        )Net
      cash used by investing activities
                        
                        
                        (71,510
                        )
                        
                        
                        (25,060
                        )






(continued)








See
accompanying notes to consolidated financial statements.


F-6


NEWPORT
BANCORP, INC. AND SUBSIDIARY


CONSOLIDATED
STATEMENTS OF CASH FLOWS (Concluded)


Years
Ended December 31, 2007 and 2006





2007
                            
                            
                            2006(In
    Thousands)Cash flows from financing
      activities:Net
      increase in deposits
                            
                            
                            311
                            
                            
                            
                            393Net
      increase (decrease) in borrowings withmaturities
      of three months or less
                            
                            
                            3,309
                            
                            
                            
                            (3,733
                            )Proceeds
      from borrowings with maturities inexcess
      of three months
                            
                            
                            70,500
                            
                            
                            
                            -Repayment
      of borrowings with maturities inexcess
      of three months
                            
                            
                            (2,903
                            )
                            
                            
                            (11,940
                            )Net
      proceeds from common stock offering
                            
                            
                            -
                            
                            
                            
                            43,597Common
      stock purchased by ESOP
                            
                            
                            -
                            
                            
                            
                            (3,903
                            )Purchase
      of treasury stock
                            
                            
                            (2,655
                            )
                            
                            
                            -Net
      cash provided by financing activities
                            
                            
                            68,562
                            
                            
                            
                            24,414Net change in cash and cash
      equivalents
                            
                            
                            (567
                            )
                            
                            
                            2,358Cash and cash equivalents at
      beginning of year
                            
                            
                            7,272
                            
                            
                            
                            4,914Cash and cash equivalents at end
      of year
                            
                            $
                            6,705
                            
                            
                            $
                            7,272Supplementary
      information:Interest
      paid on deposit accounts
                            
                            $
                            4,943
                            
                            
                            $
                            3,048Interest
      paid on short-term borrowings
                            
                            
                            339
                            
                            
                            
                            375Interest
      paid on long-term borrowings
                            
                            
                            2,215
                            
                            
                            
                            2,037Income
      taxes paid, net of refunds
                            
                            
                            954
                            
                            
                            
                            826











See
accompanying notes to consolidated financial statements.


F-7


NEWPORT
BANCORP, INC. AND SUBSIDIARY


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


Years
Ended December 31, 2007 and 2006





1.
              SUMMARY
      OF SIGNIFICANT ACCOUNTING POLICIES
  Principles of
Consolidation
  The
consolidated financial statements include the accounts of Newport Bancorp, Inc.
(the “Company”) and its wholly-owned subsidiary, Newport Federal Savings Bank
(the “Bank”).  All significant intercompany balances and transactions
have been eliminated in consolidation.
  Nature of
Operations
  The
Company provides a variety of financial services to individuals and small
businesses through its offices in Newport and Washington County, Rhode
Island.  Its primary deposit products are savings, checking and term
certificate accounts, and its primary lending products are residential and
commercial mortgage loans.
  Stock Conversion
  On July
6, 2006, in accordance with a Plan of Conversion, Newport Federal Savings Bank
(the “Bank”), a federally chartered mutual savings bank, was reorganized into a
federally-chartered stock savings bank under the operation of a stock holding
company, Newport Bancorp, Inc. (the “Company”) which issued an aggregate of
4,878,349 shares of common stock, at an offering price of $10 per
share.  The net proceeds from the stock offering, net of offering
expenses of $1,573,000, amounted to $43,597,000.
  In
connection with the Conversion, the Company established and funded the
NewportFed Charitable Foundation (the “Foundation”) with 361,359 shares of the
Company’s common stock resulting in recognition of expense in the third quarter
of 2006 based on the $10 per share offering price.  The Charitable
Foundation will make grants and donations to non-profit and community groups and
projects located within the Company’s market areas.
  Also, in
connection with the conversion, the Bank established an employee stock ownership
plan (“ESOP”) which purchased 390,268 shares of the Company’s common stock at a
price of $10.00 per share.
  Segment Reporting
  Management
evaluates the Company’s performance and allocates resources based on a single
segment concept.  Accordingly, there are no separately identified
operating segments for which discrete financial information is
available.  The Company does not derive revenues from, or have assets
located in, foreign countries, nor does it derive revenues from any single
customer that represents 10% or more of the Company’s total
revenues.


F-8


NEWPORT
BANCORP, INC. AND SUBSIDIARY


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)




SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES (continued)





Use of Estimates




In
preparing financial statements in conformity with accounting principles
generally accepted in the United States of America, management is required to
make estimates and assumptions that affect the reported amounts of assets and
liabilities as of the date of the balance sheet and reported amounts of revenues
and expenses during the reporting period.  Actual results could differ
from those estimates.  Material estimates that are particularly
susceptible to significant changes in the near term relate to the determination
of the allowance for loan losses and the valuation of deferred tax
assets.




Reclassification




Certain
amounts in the 2006 consolidated financial statements have been reclassified to
conform to the 2007 presentation.




Cash and Cash
Equivalents




Cash and
cash equivalents include cash and balances due from banks and short-term
investments consisting of federal funds and interest-bearing deposits, all of
which mature within ninety days.




Securities




Securities
available for sale are carried at fair value with unrealized gains and losses
excluded from earnings and reported as a separate component of comprehensive
income/loss.  Securities held to maturity are reflected at amortized
cost.




Purchase
premiums and discounts are amortized to earnings by the interest method over the
terms of the securities.  Declines in the value of securities that are
deemed to be other than temporary are reflected in earnings when
identified.  Gains and losses on disposition of securities are
recorded on the trade date and are computed by the specific identification
method.




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.




F-9


NEWPORT
BANCORP, INC. AND SUBSIDIARY


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)




SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (continued)




Loans




The Bank
grants mortgage, commercial and consumer loans to customers and a substantial
portion of the loan portfolio consists of mortgage loans in Newport and
Washington County, Rhode Island.  The ability of the Company’s debtors
to honor their contracts is dependent upon the economy in general and the real
estate and construction economic sectors.




Loans
that management has the intent and ability to hold for the foreseeable future or
until maturity or pay-off are reported at their outstanding unpaid principal
balances adjusted for charge-offs, the allowance for loan losses, and any
deferred fees or costs on originated loans.  Interest income is
accrued on the unpaid principal balance.  Loan origination fees, net
of certain direct origination costs, are deferred and recognized as an
adjustment of the related loan yield using the interest method over the
contractual terms of the loan.




The
accrual of interest on mortgage loans is discontinued at the time the loan is 90
days past due unless the credit is well-secured and in process of
collection.  Past due status is based on contractual terms of the
loan.  In all cases, loans are placed on non-accrual or charged-off at
an earlier date if collection of principal or interest is considered
doubtful.




All
interest accrued but not collected for loans that are placed on non-accrual or
charged off is reversed against interest income.  The interest on
these loans is accounted for on the cash-basis or cost-recovery method, until
qualifying for return to accrual.  Loans are returned to accrual
status when all the principal and interest amounts contractually due are brought
current and future payments are reasonably assured.




Allowance for Loan
Losses




The
allowance for loan losses is established as losses are estimated to have
occurred through a provision for loan losses charged to
earnings.  Loan losses are charged against the allowance when
management believes the uncollectibility of a loan balance is
confirmed.  Subsequent recoveries, if any, are credited to the
allowance.




The
allowance for loan losses is evaluated on a regular basis by management and is
based upon management’s periodic review of the collectibility of the loans in
light of historical experience, the nature and volume of the loan portfolio,
adverse situations that may affect the borrower’s ability to repay, estimated
value of any underlying collateral and prevailing economic
conditions.  This evaluation is inherently subjective as it requires
estimates that are susceptible to significant revision as more information
becomes available.




F-10


NEWPORT
BANCORP, INC. AND SUBSIDIARY


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)




SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES (continued)





Allowance
for Loan Losses (concluded)




The
allowance consists of general and unallocated loss components.  For
loans that are classified as impaired, an allowance is established when the
collateral value of the impaired loan is lower than the carrying value of that
loan.  The general component covers non-classified loans and is based
on historical loss experience adjusted for qualitative factors.  An
unallocated component is maintained to cover uncertainties that could affect
management’s estimate of probable losses.  The unallocated component
of the allowance reflects the margin of imprecision inherent in the underlying
assumptions used in the methodologies for estimating the general losses in the
portfolio.




A loan is
considered impaired when, based on current information and events, it is
probable that the Company will be unable to collect the scheduled payments of
principal or interest when due according to the contractual terms of the loan
agreement.  Factors considered by management in determining impairment
include payment status, collateral value, and the probability of collecting
scheduled principal and interest payments when due.  Impairment is
measured on a loan by loan basis by the fair value of the
collateral.




Large
groups of smaller balance homogeneous loans are collectively evaluated for
impairment.  Accordingly, the Company does not separately identify
individual consumer and residential loans for impairment
disclosures.




Transfers
of Financial Assets




Transfers
of financial assets are accounted for as sales, when control over the assets has
been surrendered.  Control over transferred assets is deemed to be
surrendered when (1) the assets have been isolated from the Company, (2) the
transferee obtains the right to pledge or exchange the transferred assets, and
(3) the Company does not maintain effective control over the transferred assets
through an agreement to repurchase them before their maturity.




Mortgage
Servicing Rights




The
Company sells loans in the secondary market both with servicing retained and
servicing released.  Servicing assets are not recognized as separate
assets when rights are acquired through the sale of loans as such assets are not
deemed to be material.  Servicing income is recorded on the cash
basis.




Bank-owned
Life Insurance




Bank-owned
life insurance policies are reflected on the consolidated balance sheets at cash
surrender value.  Changes in cash surrender value are reflected in
non-interest income on the consolidated statements of income.




F-11


NEWPORT
BANCORP, INC. AND SUBSIDIARY


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)




SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES (continued)





Premises and
Equipment




Land is
carried at cost.  Premises and equipment are stated at cost, less
accumulated depreciation and amortization, computed on a straight-line method
over the estimated useful lives of the assets or the expected terms of the
leases, if shorter.  Expected terms include lease option periods to
the extent that the exercise of such options is reasonably assured.




Marketing
Costs




Marketing
costs are expensed as incurred.




Pension
Plan




It is the
Company’s policy to fund pension costs in the year of accrual.




Stock
Compensation Plans




Effective
January 1, 2006, the Company adopted Statement of Financial Accounting Standards
No. 123R, Share-Based
Payment (“SFAS 123R”) (revised 2004) which requires that the
compensation cost relating to share-based payment transactions be recognized in
financial statements.  That cost is measured based on the fair value
of the equity or liability instruments issued.  SFAS 123(R) covers a
wide range of share-based compensation arrangements including stock options,
restricted share plans, performance-based awards, share appreciation rights, and
employee share purchase plans.  The Statement requires the Company to
measure the cost of employee services received in exchange for stock options
based on the grant-date fair value of the award, and to recognize the cost over
the period the employee is required to provide services for the
award.  SFAS 123(R) permits the use of any option-pricing model that
meets the fair value objective in the Statement.




Income
Taxes




Deferred
tax assets and liabilities are reflected at currently enacted income tax rates
applicable to the period in which the deferred tax assets or liabilities are
expected to be realized or settled.  As changes in tax laws or rates
are enacted, deferred tax assets and liabilities are adjusted accordingly
through the provision for income taxes.  The Bank’s base amount of its
federal income tax reserve for loan losses is a permanent difference for which
there is no recognition of a deferred tax liability.  However, the
loan loss allowance maintained for financial reporting purposes is a temporary
difference with allowable recognition of a related deferred tax asset, if it is
deemed realizable.




A
valuation allowance related to deferred tax assets is established when, in the
judgment of management, it is more likely than not that all or a portion of such
deferred tax assets will not be realized.  (See Note
9.)


F-12


NEWPORT
BANCORP, INC. AND SUBSIDIARY


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)




SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES (continued)





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 for the year ended December
31, 2007.  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.




The
Company converted to a stock company on July 6, 2006, resulting in shares
outstanding for a period less than twelve months during the year ended December
31, 2006.  Earnings per share for the three-month period ended
December 31, 2006 can be found in Note 16 to the consolidated financial
statements.




Comprehensive
Income/Loss




Accounting
principles generally require that recognized revenue, expenses, gains and losses
be included in net income.  Although certain changes in assets and
liabilities, such as unrealized gains and losses on available-for-sale
securities, are reported as a separate component of the retained earnings
section of the balance sheet, such items, along with net income, are components
of comprehensive income/loss.  There is no tax benefit available on
the unrealized losses on the securities available for sale as the losses
represent capital losses for which the Company has no capital gain history to
offset such losses.




Recent Accounting
Pronouncements




In March
2006, the Financial Accounting Standards Board (“FASB”) issued Statement
No. 156, “Accounting for Servicing of Financial Assets”, which amends FASB
Statement No. 140 and requires that all separately recognized servicing
rights be initially measured at fair value, if practicable.  This
Statement was adopted on January 1, 2007 and did not have an impact on the
Company’s consolidated financial statements.


F-13


NEWPORT
BANCORP, INC. AND SUBSIDIARY


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)




SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES (continued)





Recent
Accounting Pronouncements (continued)




In July
2006, the FASB issued Financial Accounting Standards Interpretation No. 48,
“Accounting for Uncertainty in Income Taxes” (“FIN 48”) which clarifies the
accounting for uncertainty in income taxes recognized in an entity’s financial
statements in accordance with FASB Statement No. 109, “Accounting for Income
Taxes”.  FIN 48 prescribes a recognition threshold and measurement
attribute for the financial statement recognition and measurement of a tax
position taken or expected to be taken in a tax return and provides guidance on
derecognition, classification, interest and penalties, accounting in interim
periods, disclosures and transitions.  The Company adopted FIN 48 on
January 1, 2007 and it did not have a material impact on the Company’s
consolidated financial statements.




In
September 2006, the FASB issued Statement No. 157, “Fair Value
Measurements.”  This Statement defines fair value, establishes a
framework for measuring fair value in accordance with generally accepted
accounting principles, and expands disclosures about fair value
measurements.  The definition of fair value retains the exchange price
notion in earlier definitions of fair value.  This Statement clarifies
that the exchange price is the price in an orderly transaction between market
participants to sell the asset or transfer the liability in the market in which
the reporting entity would transact for the asset or liability, that is, the
principal or most advantageous market for the asset or
liability.  Emphasis is placed on fair value being a market-based
measurement, not an entity-specific measurement, and therefore a fair value
measurement should be determined based on the assumptions that market
participants would use in pricing the asset or liability.  As a basis
for considering these market participant assumptions, a fair value hierarchy has
been established to distinguish between (1) market participant assumptions
developed based on market data obtained from sources independent of the
reporting entity (observable inputs) and (2) the reporting entity's own
assumptions about market participant assumptions developed based on the best
information available in the circumstances (unobservable
inputs).  This Statement is effective for the Company on January 1,
2008, with a general deferral for non-financial assets and liabilities to
January 1, 2009.  The Company is in the process of evaluating the
impact on the consolidated financial statements.




F-14


NEWPORT
BANCORP, INC. AND SUBSIDIARY


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)




SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES (continued)





Recent
Accounting Pronouncements (continued)




In
February 2007, the FASB issued Statement No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities – Including an amendment of FASB
Statement No. 115.”  This Statement permits entities to choose to
measure many financial instruments and certain other items at fair value, with
the objective of improving financial reporting by providing entities with the
opportunity to mitigate volatility in reported earnings caused by measuring
related assets and liabilities differently without having to apply complex hedge
accounting provisions, and is expected to expand the use of fair value
measurement.  An entity will report unrealized gains and losses on
items for which the fair value option has been elected in earnings at each
subsequent reporting date.  The fair value option may generally be
applied instrument by instrument and is irrevocable.  This Statement
is effective for the Company on January 1, 2008 and is not expected to have a
material impact on the Company’s consolidated financial statements.




In
September 2006, the FASB ratified 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.  This EITF was adopted on January 1, 2008, resulting in a
decrease to retained earnings in the amount of $61,000.




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.




F-15


NEWPORT
BANCORP, INC. AND SUBSIDIARY


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)




SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (concluded)





Recent Accounting Pronouncements (concluded)




In
December 2007, the FASB issued Statement No. 160, “Noncontrolling Interests in
Consolidated Financial Statements, an amendment of ARB No. 51” which establishes
accounting and reporting standards for the noncontrolling interest in a
subsidiary and for the deconsolidation of a subsidiary, and clarifies that a
noncontrolling interest in a subsidiary is an ownership interest in the
consolidated entity that should be reported as equity in the consolidated
financial statements.  This Statement is effective for the Company’s
2009 fiscal year and is not expected to have a material impact on the Company’s
consolidated financial statements.




2.
            RESTRICTIONS ON CASH
      AND AMOUNTS DUE FROM BANKS




The Bank
is required to maintain average balances on hand or with the Federal Reserve
Bank.  At December 31, 2007 and 2006, these reserve balances
amounted to $2,904,000 and $3,624,000, respectively.




3.      
     SECURITIES




The
amortized cost and estimated fair value of securities, with gross unrealized
gains and losses, follows:




Gross
                          
                          
                          GrossAmortized
                          
                          
                          Unrealized
                          
                          
                          Unrealized
                          
                          
                          FairCost
                          
                          
                          Gains
                          
                          
                          Losses
                          
                          
                          Value(In
    Thousands)December
      31, 2007Securities
      Available for SaleMutual
      funds - bond funds
                          
                          $
                          7,117
                          
                          
                          $
                          -
                          
                          
                          $
                          (151
                          )
                          
                          $
                          6,966Securities
      Held to MaturityMortgage-backed
      securities
                          
                          $
                          30,886
                          
                          
                          $
                          3
                          
                          
                          $
                          (138
                          )
                          
                          $
                          30,751




F-16


NEWPORT
BANCORP, INC. AND SUBSIDIARY


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)







SECURITIES
(continued)




Gross
                        
                        
                        GrossAmortized
                        
                        
                        Unrealized
                        
                        
                        Unrealized
                        
                        
                        FairCost
                        
                        
                        Gains
                        
                        
                        Losses
                        
                        
                        Value(In
    Thousands)December
      31, 2006Securities
      Available for SaleMutual
      funds - bond funds
                        
                        $
                        6,775
                        
                        
                        $
                        -
                        
                        
                        $
                        (161
                        )
                        
                        $
                        6,614Securities
      Held to MaturityMortgage-backed
      securities
                        
                        $
                        1,922
                        
                        
                        $
                        2
                        
                        
                        $
                        (55
                        )
                        
                        $
                        1,869




Mortgage-backed
securities consist of participation certificates guaranteed by
government-sponsored enterprises such as the Federal National Mortgage
Association and the Government National Mortgage Association.




At
December 31, 2007, mortgage-backed securities with a fair value of $29,124,000
were pledged to secure repurchase agreements (see Note 8).




There
were no sales of securities for the years ended December 31, 2007 and
2006.




Information
pertaining to securities with gross unrealized losses aggregated by investment
category and length of time that individual securities have been in a continuous
loss position, follows:




Less Than Twelve
      Months
                                          
                                          
                                          Over Twelve
      MonthsGross
                                          
                                          
                                          
                                          
                                          
                                          GrossUnrealized
                                          
                                          
                                          Fair
                                          
                                          
                                          Unrealized
                                          
                                          
                                          FairLosses
                                          
                                          
                                          Value
                                          
                                          
                                          Losses
                                          
                                          
                                          Value(In
    Thousands)December
      31, 2007Securities
      Available for SaleMutual
      funds - bond funds
                                          
                                          $
                                          -
                                          
                                          
                                          $
                                          -
                                          
                                          
                                          $
                                          151
                                          
                                          
                                          $
                                          6,966Securities
      Held to MaturityMortgage-backed
      securities
                                          
                                          
                                          105
                                          
                                          
                                          
                                          29,124
                                          
                                          
                                          
                                          33
                                          
                                          
                                          
                                          1,571Total
      temporarily impaired securities
                                          
                                          $
                                          105
                                          
                                          
                                          $
                                          29,124
                                          
                                          
                                          $
                                          184
                                          
                                          
                                          $
                                          8,537






F-17


NEWPORT
BANCORP, INC. AND SUBSIDIARY


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)







SECURITIES
(continued)




Less Than Twelve
      Months
                                      
                                      
                                      Over Twelve
      MonthsGross
                                      
                                      
                                      
                                      
                                      
                                      GrossUnrealized
                                      
                                      Fair
                                      
                                      
                                      Unrealized
                                      
                                      
                                      FairLosses
                                      
                                      
                                      Value
                                      
                                      
                                      Losses
                                      
                                      
                                      Value(In
    Thousands)December
      31, 2006Securities
      Available for SaleMutual
      funds - bond funds
                                      
                                      $
                                      -
                                      
                                      
                                      $
                                      -
                                      
                                      
                                      $
                                      161
                                      
                                      
                                      $
                                      6,614Securities
      Held to MaturityMortgage-backed
      securities
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      55
                                      
                                      
                                      
                                      1,799Total
      temporarily impaired securities
                                      
                                      $
                                      -
                                      
                                      
                                      $
                                      -
                                      
                                      
                                      $
                                      216
                                      
                                      
                                      $
                                      8,413




At
December 31, 2007, three mutual funds and two mortgage-backed securities
had aggregate gross unrealized losses of 0.8% from the Company’s total amortized
cost.  Management evaluates securities for other-than-temporary
impairment on a quarterly basis.  The mutual funds with unrealized
losses for a period of greater than twelve months had aggregate depreciation of
less than 2.1% from the Company’s cost basis.  None of the funds have
been downgraded, and none of the funds have reduced or eliminated the dividend
payments.  The Company has determined that these unrealized losses
relate primarily to the changes in short-term interest rates and as short-term
interest rates decline, the value of the funds will increase.  The
Company has the intent and ability to hold the securities for a period of time
sufficient to allow for an anticipated recovery of the fair value, as short-term
rates decline in the future.  The effective duration of these funds
range from 0.7 years to 1.5 years.  Standard & Poor’s assigns
these funds a “AAA” credit quality rating (the highest credit rating
possible).  The Company has reviewed the financial condition of the
issuers and has determined that none of the declines are other than
temporary.




The
Company has the intent and ability to hold all of its mortgage-backed securities
until maturity, and no declines are deemed to be other than
temporary.




F-18


NEWPORT
BANCORP, INC. AND SUBSIDIARY


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)





4.            LOANS




A summary
of the balances of loans follows:




December
31,2007
                      
                      
                      2006(In
    Thousands)Mortgage
    loans:One-to-four
      family residential
                      
                      $
                      169,179
                      
                      
                      $
                      157,448Multi-family
      residential
                      
                      
                      9,494
                      
                      
                      
                      9,360Commercial
                      
                      
                      76,919
                      
                      
                      
                      57,650Equity
      loans and lines of credit
                      
                      
                      30,934
                      
                      
                      
                      29,275Construction
                      
                      
                      9,427
                      
                      
                      
                      4,685295,953
                      
                      
                      
                      258,418Personal
      installment
                      
                      
                      442
                      
                      
                      
                      1,112Total
      loans
                      
                      
                      296,395
                      
                      
                      
                      259,530Less:  Allowance for
      loan losses
                      
                      
                      (2,399
                      )
                      
                      
                      (1,973
                      )Net
      deferred loan fees
                      
                      
                      (912
                      )
                      
                      
                      (791
                      )Loans,
      net
                      
                      $
                      293,084
                      
                      
                      $
                      256,766




An
analysis of the allowance for loan losses follows:




Years Ended December
      31,2007
                            
                            
                            2006(In
    Thousands)Balance at beginning of
      year
                            
                            $
                            1,973
                            
                            
                            $
                            1,853Provision for loan
      losses
                            
                            
                            426
                            
                            
                            
                            120Balance at end of
      year
                            
                            $
                            2,399
                            
                            
                            $
                            1,973




At
December 31, 2007, non-accrual and impaired loans amounted to $908,000 and
there was no valuation allowance allocated to impaired loans.  For the
year ended December 31, 2007, the average recorded investment in impaired
loans amounted to $326,000.  The Bank recognized no interest income on
impaired loans during the period that they were impaired.  There were
no non-accrual or impaired loans at or during the year ended December 31,
2006.  At December 31, 2007 and 2006, there were no loans greater than
ninety days past due and still accruing interest.




There
were no additional funds committed to be advanced in connection with impaired
loans.


F-19


NEWPORT
BANCORP, INC. AND SUBSIDIARY


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)





LOANS (concluded)




Loans
sold and serviced for others amounted to $15,231,000 and $18,789,000 at
December 31, 2007 and 2006, respectively, which includes $5,072,000 and
$5,861,000 of loans sold with recourse provisions to the FHLB of
Boston.  When a realized loss on foreclosure occurs, losses will be
borne in priority order by the borrower, PMI insurance, FHLB of Boston and the
Bank.  At December 31, 2007 and 2006 and until the loans are paid
off, the maximum contingent liability to the Bank associated with these loans as
determined by the FHLB of Boston is $61,000.




5.       
     PREMISES AND EQUIPMENT




A summary
of the cost and accumulated depreciation and amortization and estimated useful
lives of premises and equipment follows:




December
31,
                          
                          
                          Estimated2007
                          
                          
                          2006
                          
                          
                          Useful Life(In
    Thousands)Land
                          
                          $
                          538
                          
                          
                          $
                          538
                          
                          
                          
                          -Building and
      improvements
                          
                          
                          5,180
                          
                          
                          
                          5,169
                          
                          
                          20-40 yearsLeasehold
      improvements
                          
                          
                          1,272
                          
                          
                          
                          1,267
                          
                          
                          10-20 yearsFurniture, fixtures and
      equipment
                          
                          
                          2,977
                          
                          
                          
                          3,282
                          
                          
                          3-10 yearsConstruction in
      progress
                          
                          
                          348
                          
                          
                          
                          25410,315
                          
                          
                          
                          10,510Less accumulated
      depreciationand
      amortization
                          
                          
                          (4,466
                          )
                          
                          
                          (4,411
                          )$
                          5,849
                          
                          
                          $
                          6,099




Depreciation
and amortization expense for each of the years ended December 31, 2007 and
2006 amounted to $619,000.




Construction
in progress primarily represents costs incurred to date in connection with
proposed new branches in Portsmouth, RI, and Stonington, CT, and renovations to
the main office in Newport, RI.  On December 29, 2005, the Bank
entered into an agreement to purchase property for the Portsmouth branch in the
amount of $2,250,000, of which $80,000 has been paid as of December 31, 2007 and
$2,170,000 was paid in connection with the closing on January 10,
2008.




F-20


NEWPORT
BANCORP, INC. AND SUBSIDIARY


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)





6.      
      DEPOSITS




A summary
of deposit balances, by type, is as follows:




December
31,2007
                              
                              
                              2006(In
    Thousands)NOW and
    demand
                              
                              $
                              59,223
                              
                              
                              $
                              58,288Money market
      deposits
                              
                              
                              28,763
                              
                              
                              
                              21,356Regular
                              
                              
                              25,963
                              
                              
                              
                              30,499Total
      non-certificate accounts
                              
                              
                              113,949
                              
                              
                              
                              110,143Term deposit
      certificates
                              
                              
                              79,336
                              
                              
                              
                              82,831Total
      deposits
                              
                              $
                              193,285
                              
                              
                              $
                              192,974




The
aggregate amount of time deposit accounts with balances over $100,000 amounted
to $23,916,000 and $25,648,000 at December 31, 2007 and 2006,
respectively.




A summary
of certificate accounts is as follows:




December 31,
      2007
                            
                            
                            December 31,
      2006Weighted
                            
                            
                            
                            
                            
                            WeightedAverage
                            
                            
                            
                            
                            
                            AverageAmount
                            
                            
                            Rate
                            
                            
                            Amount
                            
                            
                            Rate(Dollars in
      Thousands)Maturing
in:2007
                            
                            $
                            -
                            
                            
                            
                            -
                            %
                            
                            $
                            77,603
                            
                            
                            
                            4.60
                            %2008
                            
                            
                            76,058
                            
                            
                            
                            4.41
                            
                            
                            
                            3,288
                            
                            
                            
                            2.912009
                            
                            
                            1,707
                            
                            
                            
                            3.08
                            
                            
                            
                            960
                            
                            
                            
                            3.542010
                            
                            
                            1,189
                            
                            
                            
                            4.17
                            
                            
                            
                            770
                            
                            
                            
                            4.782011
                            
                            
                            183
                            
                            
                            
                            3.73
                            
                            
                            
                            210
                            
                            
                            
                            3.66Thereafter
                            
                            
                            199
                            
                            
                            
                            3.20
                            
                            
                            
                            -
                            
                            
                            
                            -$
                            79,336
                            
                            
                            
                            4.37
                            %
                            
                            $
                            82,831
                            
                            
                            
                            4.52
                            %




7.       
    SHORT-TERM BORROWINGS




Short-term
borrowings consist of Federal Home Loan Bank of Boston (“FHLB”) advances of
$5,809,000 and $2,500,000 maturing within one year at a weighted average rate of
4.41% and 5.58% at December 31, 2007 and 2006, respectively.




F-21


NEWPORT
BANCORP, INC. AND SUBSIDIARY


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)





SHORT-TERM BORROWINGS
(concluded)




The Bank
also has an available line of credit with the FHLB at an interest rate that
adjusts daily.  Borrowings under the line are limited to 2% of the
Bank’s total assets.  At December 31, 2007 and 2006, this line of
credit amounted to $3,000,000, of which $1,809,000 was outstanding and is
included in short-term borrowings at December 31, 2007.  There were no
amounts outstanding at December 31, 2006.




8.            LONG-TERM
BORROWINGS




FHLB
Advances




Long-term
borrowings include the following FHLB advances:




December 31,
      2007
                            
                            
                            December 31,
      2006Weighted
                            
                            
                            
                            
                            
                            WeightedAverage
                            
                            
                            
                            
                            
                            AverageAmount
                            
                            
                            Rate
                            
                            
                            Amount
                            
                            
                            Rate(Dollars in
      Thousands)Fixed-rate advances
      maturing:2007
                            
                            $
                            -
                            
                            
                            
                            -
                            %
                            
                            $
                            2,320
                            
                            
                            
                            4.64
                            %2008
                            
                            
                            7,000
                            
                            
                            
                            5.78
                            
                            
                            
                            7,000
                            
                            
                            
                            5.782009
                            
                            
                            11,642
                            
                            
                            
                            4.96
                            
                            
                            
                            3,019
                            
                            
                            
                            3.792010*
                            
                            
                            9,500
                            
                            
                            
                            5.16
                            
                            
                            
                            2,500
                            
                            
                            
                            5.472011
                            
                            
                            4,290
                            
                            
                            
                            5.53
                            
                            
                            
                            2,359
                            
                            
                            
                            5.692012
                            
                            
                            14,615
                            
                            
                            
                            4.75
                            
                            
                            
                            5,752
                            
                            
                            
                            5.00Thereafter*
                            
                            
                            27,500
                            
                            
                            
                            4.07
                            
                            
                            
                            9,000
                            
                            
                            
                            4.59$
                            74,547
                            
                            
                            
                            4.72
                            %
                            
                            $
                            31,950
                            
                            
                            
                            5.00
                            %




*
            Includes
      advances callable within one year aggregating $21,500,000 with a weighted
      average rate of 4.10% at December 31,
2007.




All FHLB
borrowings are secured by a blanket lien on certain qualified collateral,
defined principally as 75% of the carrying value of first mortgage loans on
owner-occupied residential property.  At December 31, 2007 and 2006,
the carrying amount of assets qualifying as collateral for FHLB advances
amounted to $143,520,000 and $132,661,000, respectively.




F-22


NEWPORT
BANCORP, INC. AND SUBSIDIARY


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)





LONG-TERM BORROWINGS
(concluded)




Repurchase
Agreement




During
2007, the Company entered into a repurchase agreement for $25,000,000 at a rate
of 3.36%, subject to downward adjustment if 3-month LIBOR is greater than
5.05%.  This agreement matures on November 29, 2012, and is callable
on February 29, 2008 and each quarter thereafter.  The agreement is
secured by government-sponsored enterprise obligations.  The amount of
securities collateralizing the agreements to repurchase remains in securities
and the obligation to repurchase securities sold is reflected as a liability in
the consolidated balance sheets.  Securities pledged to secure this
agreement have a carrying value of $29,804,000 and a fair market value of
$29,124,000 at December 31, 2007.




9.     
      INCOME TAXES




Allocation
of federal and state income taxes between current and deferred portions is as
follows:




Years Ended December
      31,2007
                              
                              
                              2006(In
    Thousands)Current tax
      provision:Federal
                              
                              $
                              821
                              
                              
                              $
                              575State
                              
                              
                              237
                              
                              
                              
                              1661,058
                              
                              
                              
                              741Deferred tax
      benefit:Federal
                              
                              
                              (389
                              )
                              
                              
                              (1,223
                              )State
                              
                              
                              (101
                              )
                              
                              
                              (353
                              )(490
                              )
                              
                              
                              (1,576
                              )Change in valuation
      allowance
                              
                              
                              28
                              
                              
                              
                              464(462
                              )
                              
                              
                              (1,112
                              )Total
      tax provision (benefit)
                              
                              $
                              596
                              
                              
                              $
                              (371
                              )


F-23


NEWPORT
BANCORP, INC. AND SUBSIDIARY


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)





INCOME TAXES (continued)




The
reasons for the differences between the statutory federal income tax rate and
the effective tax rates are summarized as follows:




Years Ended December
      31,2007
                        
                        
                        2006Statutory
    rate
                        
                        
                        34.0
                        %
                        
                        
                        (34.0
                        )%Increase (decrease) resulting
      from:State
      taxes, net of federal tax benefit
                        
                        
                        6.7
                        
                        
                        
                        (5.9
                        )Establishment
      of valuation allowance
                        
                        
                        2.1
                        
                        
                        
                        22.9Officers'
      life insurance
                        
                        
                        (9.7
                        )
                        
                        
                        (1.3
                        )Stock-based
      compensation and ESOP Plan
                        
                        
                        9.2
                        
                        
                        
                        -Other
                        
                        
                        1.8
                        
                        
                        
                        -Effective tax
      rates
                        
                        
                        44.1
                        %
                        
                        
                        (18.3
                        )%




The
components of the net deferred tax asset are as follows:




December
31,2007
                            
                            
                            2006(In
    Thousands)Deferred tax
      asset:Federal
                            
                            $
                            2,336
                            
                            
                            $
                            2,036State
                            
                            
                            679
                            
                            
                            
                            5923,015
                            
                            
                            
                            2,628Deferred tax
      liability:Federal
                            
                            
                            (164
                            )
                            
                            
                            (253
                            )State
                            
                            
                            (46
                            )
                            
                            
                            (60
                            )(210
                            )
                            
                            
                            (313
                            )Valuation
      allowance
                            
                            
                            (492
                            )
                            
                            
                            (464
                            )(702
                            )
                            
                            
                            (777
                            )Net deferred tax
      asset
                            
                            $
                            2,313
                            
                            
                            $
                            1,851


F-24


NEWPORT
BANCORP, INC. AND SUBSIDIARY


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)





INCOME
TAXES (concluded)




The tax
effects of each item that gives rise to deferred taxes are as
follows:




December
31,2007
                        
                        
                        2006(In
    Thousands)Allowance for loan
      losses
                        
                        $
                        804
                        
                        
                        $
                        634Depreciation and
      amortization
                        
                        
                        (57
                        )
                        
                        
                        (160
                        )Net deferred loan
      fees
                        
                        
                        351
                        
                        
                        
                        300Charitable contribution
      carryover
                        
                        
                        1,268
                        
                        
                        
                        1,364Stock options and
      awards
                        
                        
                        177
                        
                        
                        
                        -Employee benefit
      plans
                        
                        
                        246
                        
                        
                        
                        156Other, net
                        
                        
                        16
                        
                        
                        
                        212,805
                        
                        
                        
                        2,315Valuation
      allowance
                        
                        
                        (492
                        )
                        
                        
                        (464
                        )Deferred tax
      asset
                        
                        $
                        2,313
                        
                        
                        $
                        1,851




The
Company has a charitable contribution carryforward in the amount of $3,175,000
which will expire in 2011, if not fully utilized.  The Company reduces
deferred tax assets by a valuation allowance if, based on the weight of
available evidence, it is more likely than not that some portion or all of the
deferred tax assets will not be realized.  The Company assesses the
realizability of its deferred tax assets by (1) reviewing taxable income in
allowable federal carry-back periods, and (2) assessing the likelihood of the
Company generating federal and state taxable income, as applicable, in future
periods in amounts sufficient to offset the deferred tax charges in the periods
they are expected to reverse.  Based on this assessment, management
concluded that a valuation allowance of $492,000 and $464,000 was required for
the years ended December 31, 2007 and 2006, respectively, due to the possible
limitation of the charitable contribution.




The
federal income tax reserve for loan losses at the Bank’s base year amounted to
$1,032,000.  If any portion of the reserve is used for purposes other
than to absorb loan losses, approximately 150% of the amount actually used,
limited to the amount of the reserve, would be subject to taxation in the year
in which used.  As the Bank intends to use the reserve only to absorb
loan losses, a deferred income tax liability of $412,000 has not been
provided.




F-25


NEWPORT
BANCORP, INC. AND SUBSIDIARY


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)





10.      
   STOCKHLDERS’ EQUITY




Minimum
Regulatory Capital Requirement




The Bank
is subject to various regulatory capital requirements administered by the Office
of Thrift Supervision.  Failure to meet minimum capital requirements
can initiate certain mandatory and possibly additional discretionary actions by
regulators that, if undertaken, could have a direct material effect on the
Bank’s consolidated financial statements.  Under capital adequacy
guidelines and the regulatory framework for prompt corrective action, the Bank
must meet specific capital guidelines that involve quantitative measures of
assets, liabilities and certain off-balance-sheet items as calculated under
regulatory accounting practices.  The capital amounts and
classification are also subject to qualitative judgments by the regulators about
components, risk weightings, and other factors.  Federal Savings and
Loan Holding Companies are not subject to any regulatory capital requirements or
to supervision by the Office of Thrift Supervision.




Quantitative
measures established by regulation to ensure capital adequacy require the Bank
to maintain minimum amounts and ratios of Tier 1 and tangible capital (as
defined) to adjusted total assets (as defined) and of total and Tier 1
capital to risk-weighted assets (as defined).  Management believes, as
of December 31, 2007 and 2006, that the Bank met all capital adequacy
requirements to which it was subject.




F-26


NEWPORT
BANCORP, INC. AND SUBSIDIARY


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)




STOCKHLDERS’
EQUITY (continued)




Minimum
Regulatory Capital Requirement (concluded)




As of
December 31, 2007, the most recent notification from the Office of Thrift
Supervision categorized the Bank as well capitalized under the regulatory
framework for prompt corrective action.  To be categorized as well
capitalized, the Bank must maintain minimum total risk-based, Tier 1 risk-based,
Tier 1 leverage and tangible ratios as set forth in the following
table.  There are no conditions or events since that notification that
management believes have changed the Bank’s category.  The Bank’s
actual capital amounts and ratios as of December 31, 2007 and 2006 are also
presented in the table.




MinimumTo Be WellMinimum
                          
                          
                          Capitalized
      UnderCapital
                          
                          
                          Prompt
      CorrectiveActual
                          
                          
                          Requirement
                          
                          
                          Action
      ProvisionsAmount
                          
                          
                          Ratio
                          
                          
                          Amount
                          
                          
                          Ratio
                          
                          
                          Amount
                          
                          
                          Ratio(Dollars in
      Thousands)December
      31, 2007Total capital to risk weighted
      assets
                          
                          $
                          41,152
                          
                          
                          
                          16.9
                          %
                          
                          $
                          19,476
                          
                          
                          
                          8.0
                          %
                          
                          $
                          24,345
                          
                          
                          
                          10.0
                          %Tier 1 capital to risk weighted
      assets
                          
                          
                          38,814
                          
                          
                          
                          15.9
                          
                          
                          
                          9,738
                          
                          
                          
                          4.0
                          
                          
                          
                          14,607
                          
                          
                          
                          6.0Tier 1 capital to adjusted total
      assets
                          
                          
                          38,814
                          
                          
                          
                          10.8
                          
                          
                          
                          10,814
                          
                          
                          
                          3.0
                          
                          
                          
                          18,024
                          
                          
                          
                          5.0Tangible capital to adjusted total
      assets
                          
                          
                          38,814
                          
                          
                          
                          10.8
                          
                          
                          
                          5,407
                          
                          
                          
                          1.5
                          
                          
                          
                          N/A
                          
                          
                          
                          N/ADecember
      31, 2006Total capital to risk weighted
      assets
                          
                          $
                          39,391
                          
                          
                          
                          19.5
                          %
                          
                          $
                          16,193
                          
                          
                          
                          8.0
                          %
                          
                          $
                          20,242
                          
                          
                          
                          10.0
                          %Tier 1 capital to risk weighted
      assets
                          
                          
                          37,479
                          
                          
                          
                          18.5
                          
                          
                          
                          8,097
                          
                          
                          
                          4.0
                          
                          
                          
                          12,145
                          
                          
                          
                          6.0Tier 1 capital to adjusted total
      assets
                          
                          
                          37,479
                          
                          
                          
                          13.0
                          
                          
                          
                          8,682
                          
                          
                          
                          3.0
                          
                          
                          
                          14,471
                          
                          
                          
                          5.0Tangible capital to adjusted total
      assets
                          
                          
                          37,479
                          
                          
                          
                          13.0
                          
                          
                          
                          4,341
                          
                          
                          
                          1.5
                          
                          
                          
                          N/A
                          
                          
                          
                          N/A


F-27


NEWPORT
BANCORP, INC. AND SUBSIDIARY


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)





STOCKHLDERS’
EQUITY (concluded)




Other
Capital Restrictions




Federal
banking regulations place certain restrictions on dividends paid, stock
repurchases and other transactions charged to the capital accounts of the
Bank.  Capital distributions in the form of dividends paid to the
Bank’s stockholder for any one year may not exceed the Bank’s net income for the
year to date plus the Bank’s retained earnings for the preceding two years,
without regulatory approval.  Loans or advances are limited to 10
percent of the Bank’s capital stock and surplus on a secured basis.




At
December 31, 2007, the Bank’s retained net income available for the payment of
dividends was $2,039,000.  Accordingly, $36,774,000 of the Company’s
equity in the net assets of the Bank was restricted at December 31,
2007.  Funds available for loans or advances by the Bank to the
Company amounted to $2,022,000.  In addition, dividends paid would be
prohibited if the effect thereof would cause the Bank’s capital to be reduced
below applicable minimum capital requirements.




Liquidation
Account




As part
of the Conversion, the Bank established a liquidation account which was equal to
the net worth of the Bank as of the date of the latest consolidated balance
sheet appearing in the final prospectus distributed in connection with the
Conversion.  The liquidation account will be maintained for the
benefit of eligible account holders and supplemental eligible account holders
who maintain their accounts at the Bank after the Conversion.  The
liquidation account will be reduced annually to the extent that such account
holders have reduced their qualifying deposits as of each anniversary
date.  Subsequent increases will not restore an account holder’s
interest in the liquidation account.  In the event of a complete
liquidation, each eligible account holder will be entitled to receive balances
for accounts then held.  At December 31, 2007, the balance remaining
in the liquidation account amounted to $15,808,000.




Share
Repurchase Plan




On July
16, 2007, the Company announced the approval of its stock repurchase program to
acquire up to 243,917 shares, or 5%, of its outstanding common
stock.  At December 31, 2007, the Company had purchased 213,660 shares
under the stock repurchase program, leaving 30,257 shares available for possible
future repurchases. In addition, on February 19, 2008, the Company
announced the commencement of another stock repurchase program to acquire up to
231,721 shares, or 5% of the Company’s outstanding common
stock.  Repurchases, which will be conducted through open market
purchases or privately negotiated transactions, will be made from time to time
depending on market conditions and other factors.




F-28


NEWPORT
BANCORP, INC. AND SUBSIDIARY


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)





11.     
    EMPLOYEE BENEFIT PLANS




Defined
Benefit Plan




The Bank
is a participant in the defined benefit plan of the Financial Institutions
Retirement Fund.  The Plan is a multi-employer plan whereas the
contributions by each bank are not restricted to provide benefits to the
employees of the contributing bank.  Each employee reaching the age of
21 and having completed at least 1,000 hours of service in one consecutive
twelve-month period, beginning with such employee’s date of employment,
automatically becomes a participant in the Plan.  Participants become
vested after completion of five years of service measured from their date of
hire.  Pension expense under this Plan amounted to $318,000 and
$467,000 for the years ended December 31, 2007 and 2006,
respectively.




401(k)
Plan




The Bank
offers a 401(k) plan for eligible employees that provides for voluntary
contributions by participating employees up to fifty percent of their annual
compensation subject to certain limits based on federal tax
laws.  Each employee reaching the age of 21 and having completed at
least 500 hours of service in one six-month period beginning with such
employee’s date of employment, or anniversary thereof, becomes eligible to be a
participant in the plan.  The Bank matches the employees’ voluntary
contribution up to 3% of their compensation and will match one-half of the next
2%.  The Bank’s total contribution for the years ended
December 31, 2007 and 2006 amounted to $222,000 and $194,000,
respectively.




Incentive
Plan




The
Company has an Incentive Plan (the “Plan”) whereby officers and employees are
eligible to receive cash bonuses based upon Company performance against annual
established performance targets, including financial measures and other factors,
including individual performance.  The structure of the Plan is to be
reviewed on an annual basis by the Board of Directors and individual awards are
adjusted based on recommendations from the Compensation
Committee.  Incentive compensation expense for the years ended
December 31, 2007 and 2006 amounted to $322,000 and $304,000,
respectively.




Supplemental
Executive and Director Retirement Plans




The Bank
adopted a Supplemental Executive Retirement Plan, which provides for certain
executives of the Bank to receive monthly benefits upon retirement, subject to
certain limitations as set forth in the Plan.  The present value of
these future benefits is accrued over the executive’s term of service, taking
into consideration vesting provisions in these agreements.  The
related expense for the years ended December 31, 2007 and 2006 amounted to
$180,000 and $102,000, respectively.




F-29


NEWPORT
BANCORP, INC. AND SUBSIDIARY


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)





EMPLOYEE
BENEFIT PLANS (continued)




Supplemental
Executive and Director Retirement Plans (concluded)




In
addition, the Bank adopted a Supplemental Director Retirement Plan, which
provides for certain directors to receive annual benefits upon retirement,
subject to certain limitations set forth in the Plan.  The present
value of these benefits is accrued over the directors’ required service periods,
and the expense for the years ended December 31, 2007 and 2006 amounted to
$45,000 and $26,000, respectively.




Endorsement
Split-Dollar Life Insurance Arrangements




The
Company is the sole owner of life insurance policies pertaining to certain
executives and directors of the Company.  The Company has entered into
agreements with these executives whereby the Company will pay to the executives’
estates or beneficiaries a portion of the death benefit that the Company will
receive as beneficiary of such policies.  No liability has been
recognized on the consolidated balance sheet for such death
benefits.  In September 2006, the Emerging Issues Task Force reached a
consensus on Issue No. 06-4, “Accounting for Deferred Compensation and
Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance
Arrangements.”  As a result, effective January 1, 2008, the Company
will be required to recognize a liability for future death benefits, and may
choose to retroactively apply the accounting change to all periods presented, or
to cumulatively adjust the financial statements as of the beginning of the year
of adoption.  See Note 1 – Recent Accounting
Pronouncements.




Employee
Stock Ownership Plan




As part
of the Conversion, the Bank established an Employee Stock Ownership Plan
(“ESOP”) for the benefit of its eligible employees.  On July 6, 2006,
the Company provided a loan to the Newport Federal Savings Bank Employee Stock
Ownership Trust of $3,903,000, which was used to purchase 390,268 shares of the
Company’s common stock at a price of $10.00 per share.  The loan bears
interest equal to 8.25% and provides for annual payments of interest and
principal over the 15-year term of the loan.




F-30


NEWPORT
BANCORP, INC. AND SUBSIDIARY


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)





EMPLOYEE
BENEFIT PLANS (continued)




Employee
Stock Ownership Plan (continued)




At
December 31, 2007, the remaining principal balance on the ESOP debt is payable
as follows:




Year EndingDecember
31,
                            
                            Amount(In
    Thousands)2008
                            
                            $
                            1592009
                            
                            
                            1722010
                            
                            
                            1862011
                            
                            
                            2012012
                            
                            
                            218Thereafter
                            
                            
                            2,532$
                            3,468




The Bank
has committed to make contributions to the ESOP sufficient to support the debt
service of the loan.  The loan is secured by the shares purchased,
which are held in a suspense account until released for allocation to
participants, as principal and interest payments are made by the ESOP to the
Company.




Shares
released are allocated to each eligible participant based on the ratio of each
such participant's compensation, as defined in the ESOP, to the total
compensation of all eligible plan participants.  Cash dividends paid
on allocated shares can be distributed, at the direction of the Bank, to
participants’ accounts or used to repay the principal and interest on the ESOP
loan used to acquire Company stock on which dividends were paid.  Cash
dividends on unallocated shares are used to repay the outstanding debt of the
ESOP.




The fair
value of unallocated ESOP shares at December 31, 2007 is
$3,991,000.




Shares
held by the ESOP include the following at December 31, 2007:




Years Ended December
      31,2007
                        
                        
                        2006Allocated
                        
                        
                        26,018
                        
                        
                        
                        -Committed to be
      allocated
                        
                        
                        26,018
                        
                        
                        
                        26,018Unallocated
                        
                        
                        338,232
                        
                        
                        
                        364,250Ending
    balance
                        
                        
                        390,268
                        
                        
                        
                        390,268


F-31


NEWPORT
BANCORP, INC. AND SUBSIDIARY


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)





EMPLOYEE
BENEFIT PLANS (continued)





Employee
Stock Ownership Plan (concluded)




As ESOP
shares are earned by the participants, the Company recognizes compensation
expense equal to the fair value of the earned ESOP shares during the periods in
which they become committed to be released.  Total compensation
expense recognized in connection with the ESOP was $340,000 and $356,000 for the
years ended December 31, 2007 and 2006, respectively.




Stock
Compensation Plans




In
accordance with the Company’s 2007 Equity Incentive Plan (the “2007 Plan”),
approved by shareholders on August 16, 2007, the Company awarded 437,900 stock
options and 195,133 shares of restricted stock to eligible participants on
October 1, 2007.  The exercise price of the options and the fair value
of the stock at the date of grant was $12.53 per share.  The 2007 Plan
provides for total awards of 487,834 stock options and 195,133 shares of
restricted stock, leaving 49,934 stock options available for future
awards.  The exercise price of options granted under the plan is equal
to the fair market value of the underlying common stock on the date of
grant.  Options granted under the 2007 Plan vest over five years and
expire no later than ten years from the date of grant.  Upon a change
in control (as defined in the plan) or the death or disability of the individual
to whom options or shares were awarded, all options and restricted shares
awarded immediately vest.




The
Company estimates the fair value of stock options using the Black-Scholes
valuation model.  Key input assumptions used to estimate the fair
value of stock options include the exercise price of the award, the expected
option term, expected volatility of the Company’s stock over the option’s
expected term, the risk-free interest rate over the option’s expected term, and
the Company’s expected annual dividend yield.  The Company believes
that the valuation technique and the approach utilized to develop the underlying
assumptions are appropriate in calculating the fair values of the Company’s
stock options granted in the three months ended December 31,
2007.  Estimates of fair value are not intended to predict actual
future events or the value ultimately realized by persons who receive equity
awards.




The fair
value of the stock options granted was estimated on the date of grant using a
Black-Scholes option valuation model with the following weighted-average
assumptions:




Expected volatility
      (1)
                      
                      
                      28
                      %Expected option term
      (2)
                      
                      6.5
yearsInterest rate (risk free)
      (3)
                      
                      
                      4.31
                      %Expected annual dividend yield
      (4)
                      
                      
                      0
                      %


F-32


NEWPORT
BANCORP, INC. AND SUBSIDIARY


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)





EMPLOYEE BENEFIT PLANS
(continued)




Stock
Compensation Plans (continued)




(1)
            The
      expected volatility for each grant is determined based on the review of
      the experience of peer companies who are similar in size.  The
      volatility is calculated over the expected term of the
    grant.




(2)
            The
      expected term for each grant is determined using the average of the
      mathematical mean of the vesting period and the full term of the option
      rather than estimating based on historical
  experience.




(3)
            The
      risk-free interest rate for periods equal to the expected term of the
      share option is based on the U.S. Treasury yield curve in effect at the
      time of grant.




(4)
            The
      dividend yield assumption is based on the Company’s history and
      expectation of dividend payouts.




The
following table presents the activity for the 2007 Plan as of December 31,
2007:




Non-VestedStock Options
      Outstanding
                              
                              
                              Restricted
      StockWeightedAverageWeighted
                              
                              
                              Remaining
                              
                              
                              
                              
                              
                              
                              
                              
                              WeightedAverage
                              
                              
                              Contractual
                              
                              
                              Aggregate
                              
                              
                              
                              
                              
                              AverageNumber
                              
                              
                              Exercise
                              
                              
                              Term
                              
                              
                              Intrinsic
                              
                              
                              Number
                              
                              
                              Grant Dateof Shares
                              
                              
                              Price
                              
                              
                              (Years)
                              
                              
                              Value
                              
                              
                              of Shares
                              
                              
                              Fair ValueBalance at December 31,
      2006
                              
                              
                              -
                              
                              
                              $
                              -
                              
                              
                              
                              -
                              
                              
                              
                              
                              
                              
                              -
                              
                              
                              $
                              -Granted
                              
                              
                              437,900
                              
                              
                              
                              12.53
                              
                              
                              
                              9.75
                              
                              
                              
                              
                              
                              
                              195,133
                              
                              
                              
                              12.53Vesting of restricted
      stock
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              -
                              
                              
                              
                              -Cancelled (forfeited and
      expired)
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              -
                              
                              
                              
                              -Balance at December 31,
      2007
                              
                              
                              437,900
                              
                              
                              $
                              12.53
                              
                              
                              
                              9.75
                              
                              
                              $
                              -
                              
                              
                              
                              195,133
                              
                              
                              $
                              12.53Options vested or expected
      tovest at
      December 31, 2007
                              
                              
                              437,900
                              
                              
                              $
                              12.53
                              
                              
                              
                              9.75
                              
                              
                              
                              -Options exercisable
      atDecember
      31, 2007
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              9.75
                              
                              
                              
                              -




The
aggregate intrinsic value in the table above represents the total pretax
intrinsic value, based on the Company’s closing stock price of $11.80 as of
December 31, 2007 which would have been received by the option holders had all
option holders exercised their options as of that date.  There were no
in-the-money options exercisable as of December 31, 2007.  The
weighted-average grant-date fair values of options granted during the year ended
December 31, 2007 was $4.82.


F-33


NEWPORT
BANCORP, INC. AND SUBSIDIARY


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)




EMPLOYEE BENEFIT PLANS
(concluded)




Stock
Compensation Plans (concluded)




The
shares of common stock underlying any awards that are forfeited, cancelled or
otherwise terminated (other than by exercise), shares that are tendered or
withheld in payment of the exercise price of any award, and shares that are
tendered or withheld for tax withholding obligations will be added back to the
shares of common stock with respect to which new awards may be granted under the
plan.




For the
year ended December 31, 2007, the Company recognized compensation cost of
$241,000 for stock options with a related tax benefit of $27,000, and $279,000
for restricted stock awards with a related tax benefit of
$111,000.  The Company is employing an accelerated method of expense
recognition for options and restricted stock awards.  The estimated
amount and timing of future compensation cost (pre-tax) to be recognized for
awards to date under the plan is as follows:




2008
                                                
                                                
                                                2009
                                                
                                                
                                                2010
                                                
                                                
                                                2011
                                                
                                                
                                                2012
                                                
                                                
                                                Total(In
    Thousands)Stock
option
                                                
                                                $
                                                858
                                                
                                                
                                                $
                                                489
                                                
                                                
                                                $
                                                295
                                                
                                                
                                                $
                                                164
                                                
                                                
                                                $
                                                63
                                                
                                                
                                                $
                                                1,869Restricted
      stock
                                                
                                                
                                                994
                                                
                                                
                                                
                                                566
                                                
                                                
                                                
                                                342
                                                
                                                
                                                
                                                189
                                                
                                                
                                                
                                                73
                                                
                                                
                                                
                                                2,164$
                                                1,852
                                                
                                                
                                                $
                                                1,055
                                                
                                                
                                                $
                                                637
                                                
                                                
                                                $
                                                353
                                                
                                                
                                                $
                                                136
                                                
                                                
                                                $
                                                4,033




12.         
OTHER COMMITMENTS AND CONTINGENCIES




In the
normal course of business there are outstanding commitments and contingencies
which are not reflected in the accompanying financial statements.




Loan
Commitments




The Bank
is a party to financial instruments with off-balance-sheet risk in the normal
course of business to meet the financing needs of its customers. These financial
instruments include commitments to extend credit.  Such commitments
involve, to varying degrees, elements of credit and interest rate risk in excess
of the amount recognized in the accompanying balance sheets.




F-34


NEWPORT
BANCORP, INC. AND SUBSIDIARY


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)





OTHER
COMMITMENTS AND CONTINGENCIES (continued)




Loan
Commitments (concluded)




The
Bank’s exposure to credit loss is represented by the contractual amount of these
commitments.  The Bank uses the same credit policies in making
commitments as it does for on-balance-sheet instruments.




At
December 31, 2007 and 2006, the following financial instruments were
outstanding whose contract amounts represent credit risk:




2007
                      
                      
                      2006(In
    Thousands)Commitments to grant
      loans
                      
                      $
                      4,778
                      
                      
                      $
                      1,276Unadvanced funds on equity lines
      of credit
                      
                      
                      14,934
                      
                      
                      
                      15,450Unadvanced funds on construction
      loans
                      
                      
                      4,482
                      
                      
                      
                      2,466Unadvanced funds on commercial
      lines of credit
                      
                      
                      2,771
                      
                      
                      
                      2,467





Commitments
to extend credit are agreements to lend to a customer as long as there is no
violation of any condition established in the contract.  Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee.  The commitments for lines of credit may
expire without being drawn upon.  Therefore, the total commitment
amounts do not necessarily represent future cash requirements.  The
Bank evaluates each customer’s credit worthiness on a case-by-case basis and the
commitments are collateralized by real estate.




Operating
Lease Commitments




Pursuant
to the terms of noncancelable lease agreements in effect pertaining to banking
premises, future minimum rent commitments are as follows:




Year EndingDecember
31,
                      
                      Amount(In
    Thousands)2008
                      
                      $
                      992009
                      
                      
                      1022010
                      
                      
                      1022011
                      
                      
                      632012
                      
                      
                      37Thereafter
                      
                      
                      481$
                      884


F-35


NEWPORT
BANCORP, INC. AND SUBSIDIARY


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)





OTHER
COMMITMENTS AND CONTINGENCIES (concluded)




Operating
Lease Commitments (concluded)




The
leases contain options to extend for periods from five to fifty
years.  The cost of such rentals is not included
above.  Total rent expense for the years ended December 31, 2007
and 2006 amounted to $97,000 and $90,000, respectively.




Employment
and Change in Control Agreements




The
Company and the Bank have entered into employment agreements with certain
executive officers which provide for a specific salary and continuation of
benefits in the event the executive is terminated without
cause.  However, such employment may be terminated for cause, as
defined, without incurring any continuing obligations.  The agreements
also provide for a lump sum severance payment, subject to certain conditions,
following a “change in control” as defined in the agreement.  In
addition, the Bank has entered into change in control agreements with certain
other executive officers which provide for a lump sum severance payment, subject
to certain conditions.




Other
Contingencies




Various
legal claims also arise from time to time in the normal course of business
which, in the opinion of management, will have no material effect on the
Company’s financial position.




13.      
   RELATED PARTY TRANSACTIONS




In the
ordinary course of business, the Bank has granted loans to its directors and
officers and affiliates.  Activity is as follows:




Years Ended December
      31,2007
                              
                              
                              2006(In
    Thousands)Balance at beginning of
      year
                              
                              $
                              5,608
                              
                              
                              $
                              4,426Originations
                              
                              
                              1,013
                              
                              
                              
                              2,133Payments and change in
      status
                              
                              
                              (814
                              )
                              
                              
                              (951
                              )Balance at end of
      year
                              
                              $
                              5,807
                              
                              
                              $
                              5,608


F-36


NEWPORT
BANCORP, INC. AND SUBSIDIARY


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)





14.       
  FAIR VALUE OF FINANCIAL INSTRUMENTS




Statement
of Financial Accounting Standards (“SFAS”) No. 107, “Disclosures about Fair
Value of Financial Instruments,” requires disclosure of estimated fair values of
all financial instruments where it is practicable to estimate such
values.  In cases where quoted market prices are not available, fair
values are based on estimates using present value or other valuation
techniques.  Those techniques are significantly affected by the
assumptions used, including the discount rate and estimates of future cash
flows.  Accordingly, the derived fair value estimates cannot be
substantiated by comparison to independent markets and, in many cases, could not
be realized in immediate settlement of the instrument.  SFAS
No. 107 excludes certain financial instruments and all nonfinancial
instruments from its disclosure requirements.  Accordingly, the
aggregate fair value amounts presented do not represent the underlying value of
the Bank.




The
following methods and assumptions were used by the Bank in estimating fair value
disclosures for financial instruments:




Cash and cash
equivalents:  The carrying amounts of cash and cash equivalents
approximate fair values.




Securities:  Fair
values are based on quoted market prices.




FHLB
stock:  The carrying value of FHLB stock approximates fair
value based on the redemption provisions of the Federal Home Loan Bank of
Boston.




Loans:  For
variable rate loans that reprice frequently and with no significant change in
credit risk, fair values are based on carrying values.  Fair values
for other loans are estimated using discounted cash flow analyses, using
interest rates currently being offered for loans with similar terms, adjusted
for credit risk.




Accrued
interest:  The carrying amounts of accrued interest approximate
fair values.




Deposits:  The
fair values for non-certificate accounts are, by definition, equal to the amount
payable on demand at the reporting date which is the carrying
amount.  Fair values for certificates of deposit are estimated using a
discounted cash flow calculation that applies interest rates currently being
offered on certificates to a schedule of aggregated expected monthly maturities
on time deposits.




Short-term
borrowings:  The carrying amounts of short-term borrowings
approximate fair value.




F-37


NEWPORT
BANCORP, INC. AND SUBSIDIARY


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)







FAIR VALUE OF FINANCIAL INSTRUMENTS
(concluded)




Long-term
borrowings:  Fair values of long-term debt are estimated using
discounted cash flow analyses based on the Company’s current incremental
borrowing rates for similar types of borrowing arrangements.




Off-balance-sheet
instruments:  Fair values for off-balance-sheet lending
com-mitments are based on fees currently charged to enter into similar
agreements, taking into account the remaining terms of the agreements and the
counterparties’ credit standing.  The estimated fair values of
off-balance-sheet instruments are immaterial.




The
estimated fair values, and related carrying amounts, of the Bank’s financial
instruments at December 31, 2007 and 2006 are as follows:




2007
                                        
                                        
                                        2006Carrying
                                        
                                        
                                        Fair
                                        
                                        
                                        Carrying
                                        
                                        
                                        FairAmount
                                        
                                        
                                        Value
                                        
                                        
                                        Amount
                                        
                                        
                                        Value(In
    Thousands)Financial
      assets:Cash and cash
      equivalents
                                        
                                        $
                                        6,705
                                        
                                        
                                        $
                                        6,705
                                        
                                        
                                        $
                                        7,272
                                        
                                        
                                        $
                                        7,272Securities
      available for sale
                                        
                                        
                                        6,966
                                        
                                        
                                        
                                        6,966
                                        
                                        
                                        
                                        6,614
                                        
                                        
                                        
                                        6,614Securities held
      to maturity
                                        
                                        
                                        30,886
                                        
                                        
                                        
                                        30,751
                                        
                                        
                                        
                                        1,922
                                        
                                        
                                        
                                        1,869FHLB
      stock
                                        
                                        
                                        4,163
                                        
                                        
                                        
                                        4,163
                                        
                                        
                                        
                                        2,390
                                        
                                        
                                        
                                        2,390Loans,
      net
                                        
                                        
                                        293,084
                                        
                                        
                                        
                                        292,229
                                        
                                        
                                        
                                        256,766
                                        
                                        
                                        
                                        256,020Accrued interest
      receivable
                                        
                                        
                                        1,269
                                        
                                        
                                        
                                        1,269
                                        
                                        
                                        
                                        1,027
                                        
                                        
                                        
                                        1,027Financial
      liabilities:Deposits
                                        
                                        
                                        193,285
                                        
                                        
                                        
                                        194,078
                                        
                                        
                                        
                                        192,974
                                        
                                        
                                        
                                        193,802Short-term
      borrowings
                                        
                                        
                                        5,809
                                        
                                        
                                        
                                        5,809
                                        
                                        
                                        
                                        2,500
                                        
                                        
                                        
                                        2,500Long-term
      borrowings
                                        
                                        
                                        99,547
                                        
                                        
                                        
                                        99,896
                                        
                                        
                                        
                                        31,950
                                        
                                        
                                        
                                        31,662Accrued interest
      payable
                                        
                                        
                                        1,350
                                        
                                        
                                        
                                        1,350
                                        
                                        
                                        
                                        1,153
                                        
                                        
                                        
                                        1,153


F-38


NEWPORT
BANCORP, INC. AND SUBSIDIARY


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)





15.        
CONDENSED FINANCIAL STATEMENTS OF PARENT COMPANY




Financial
information pertaining only to Newport Bancorp, Inc. is as follows:




December
31,BALANCE
      SHEETS
                          
                          2007
                          
                          
                          2006(In
    Thousands)ASSETSCash and cash equivalents due from
      subsidiary
                          
                          $
                          15,554
                          
                          
                          $
                          17,859Investment in common stock of
      subsidiary
                          
                          
                          38,813
                          
                          
                          
                          37,478Loan to Newport Federal Savings
      Bank ESOP
                          
                          
                          3,468
                          
                          
                          
                          3,614Net deferred tax
      asset
                          
                          
                          776
                          
                          
                          
                          900Other
assets
                          
                          
                          429
                          
                          
                          
                          134Total
      assets
                          
                          $
                          59,040
                          
                          
                          $
                          59,985LIABILITIES
      AND STOCKHOLDERS' EQUITYAccrued expenses and other
      liabilities
                          
                          $
                          88
                          
                          
                          $
                          5Stockholders'
      equity
                          
                          
                          58,952
                          
                          
                          
                          59,980Total
      liabilities and stockholders' equity
                          
                          $
                          59,040
                          
                          
                          $
                          59,985




F-39


NEWPORT
BANCORP, INC. AND SUBSIDIARY


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)




CONDENSED FINANCIAL STATEMENTS OF
PARENT COMPANY (Continued)




For the
                              
                              
                              July 6,
2006Year Ended
                              
                              
                              ThroughDecember
31,
                              
                              
                              December
31,STATEMENTS
      OF OPERATIONS
                              
                              2007
                              
                              
                              2006(In
    Thousands)Income:Interest
      and fees on loans
                              
                              $
                              298
                              
                              
                              $
                              157Interest
      on cash and cash equivalents
                              
                              
                              50
                              
                              
                              
                              -Total
      income
                              
                              
                              348
                              
                              
                              
                              157Non-interest
      expenses:Salaries
      and employee benefits
                              
                              
                              391
                              
                              
                              
                              225Professional
      fees
                              
                              
                              194
                              
                              
                              
                              51Contribution
      to NewportFed Charitable Foundation
                              
                              
                              -
                              
                              
                              
                              3,614Other
      general and administrative
                              
                              
                              61
                              
                              
                              
                              4Total
      non-interest expenses
                              
                              
                              646
                              
                              
                              
                              3,894Loss before income taxes and
      equity in undistributed netincome
      of subsidiary
                              
                              
                              (298
                              )
                              
                              
                              (3,737
                              )Applicable income tax
      benefit
                              
                              
                              (69
                              )
                              
                              
                              (1,028
                              )(229
                              )
                              
                              
                              (2,709
                              )Equity in undistributed net income
      of subsidiary
                              
                              
                              986
                              
                              
                              
                              1,053Net
      income (loss)
                              
                              $
                              757
                              
                              
                              $
                              (1,656
                              )




F-40


NEWPORT
BANCORP, INC. AND SUBSIDIARY


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)




CONDENSED FINANCIAL STATEMENTS OF
PARENT COMPANY (Concluded)





For the
                            
                            
                            July 6,
2006Year Ended
                            
                            
                            ThroughDecember
31,
                            
                            
                            December
31,STATEMENT
      OF CASH FLOWS
                            
                            2007
                            
                            
                            2006(In
    Thousands)Cash flows from operating
      activities:Net income
      (loss)
                            
                            $
                            757
                            
                            
                            $
                            (1,656
                            )Adjustments to
      reconcile net income (loss) to net cashprovided
      (used) by operating activities:Equity
      in undistributed net income of subsidiary
                            
                            
                            (986
                            )
                            
                            
                            (1,053
                            )Contribution
      to NewportFed Charitable Foundation
                            
                            
                            -
                            
                            
                            
                            3,614Loan
      to ESOP
                            
                            
                            -
                            
                            
                            
                            (3,903
                            )Repayment
      of ESOP loan
                            
                            
                            146
                            
                            
                            
                            289Stock-based
      compensation
                            
                            
                            28
                            
                            
                            
                            -Repayment
      of stock-based compensation by subsidiary
                            
                            
                            493
                            
                            
                            
                            -Deferred
      income tax (benefit) provision
                            
                            
                            124
                            
                            
                            
                            (900
                            )Increase
      in other assets
                            
                            
                            (295
                            )
                            
                            
                            (134
                            )Increase
      in other liabilities
                            
                            
                            83
                            
                            
                            
                            5Net
      cash provided (used) by operating activities
                            
                            
                            350
                            
                            
                            
                            (3,738
                            )Cash flows from investing
      activities:Investment
      in subsidiary
                            
                            
                            -
                            
                            
                            
                            (22,000
                            )Net
      cash used by investing activities
                            
                            
                            -
                            
                            
                            
                            (22,000
                            )Cash flows from financing
      activities:Proceeds from
      issuance of common stock
                            
                            
                            -
                            
                            
                            
                            43,597Treasury stock
      purchased
                            
                            
                            (2,655
                            )
                            
                            
                            -Net
      cash provided (used) by financing activities
                            
                            
                            (2,655
                            )
                            
                            
                            43,597Net change in cash and cash
      equivalents
                            
                            
                            (2,305
                            )
                            
                            
                            17,859Cash and cash equivalents at
      beginning of period
                            
                            
                            17,859
                            
                            
                            
                            -Cash and cash equivalents at end
      of period
                            
                            $
                            15,554
                            
                            
                            $
                            17,859








F-41


NEWPORT
BANCORP, INC. AND SUBSIDIARY


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Concluded)







16.    QUARTERLY
DATA (UNAUDITED)







Years
      Ended December 31,2007
                                                  
                                                  
                                                  2006Fourth
                                                  
                                                  
                                                  Third
                                                  
                                                  
                                                  Second
                                                  
                                                  
                                                  First
                                                  
                                                  
                                                  Fourth
                                                  
                                                  
                                                  Third
                                                  
                                                  
                                                  Second
                                                  
                                                  
                                                  FirstQuarter
                                                  
                                                  
                                                  Quarter
                                                  
                                                  
                                                  Quarter
                                                  
                                                  
                                                  Quarter
                                                  
                                                  
                                                  Quarter
                                                  
                                                  
                                                  Quarter
                                                  
                                                  
                                                  Quarter
                                                  
                                                  
                                                  Quarter(In
      Thousands, Except Per Share Data)Interest
      and dividend income
                                                  
                                                  $
                                                  4,864
                                                  
                                                  
                                                  $
                                                  4,536
                                                  
                                                  
                                                  $
                                                  4,367
                                                  
                                                  
                                                  $
                                                  4,221
                                                  
                                                  
                                                  $
                                                  4,182
                                                  
                                                  
                                                  $
                                                  4,245
                                                  
                                                  
                                                  $
                                                  3,998
                                                  
                                                  
                                                  $
                                                  3,666Interest
      expense
                                                  
                                                  
                                                  2,203
                                                  
                                                  
                                                  
                                                  1,930
                                                  
                                                  
                                                  
                                                  1,896
                                                  
                                                  
                                                  
                                                  1,665
                                                  
                                                  
                                                  
                                                  1,514
                                                  
                                                  
                                                  
                                                  1,398
                                                  
                                                  
                                                  
                                                  1,767
                                                  
                                                  
                                                  
                                                  1,532Net
      interest income
                                                  
                                                  
                                                  2,661
                                                  
                                                  
                                                  
                                                  2,606
                                                  
                                                  
                                                  
                                                  2,471
                                                  
                                                  
                                                  
                                                  2,556
                                                  
                                                  
                                                  
                                                  2,668
                                                  
                                                  
                                                  
                                                  2,847
                                                  
                                                  
                                                  
                                                  2,231
                                                  
                                                  
                                                  
                                                  2,134Provision
      for loan losses
                                                  
                                                  
                                                  140
                                                  
                                                  
                                                  
                                                  126
                                                  
                                                  
                                                  
                                                  47
                                                  
                                                  
                                                  
                                                  113
                                                  
                                                  
                                                  
                                                  38
                                                  
                                                  
                                                  
                                                  50
                                                  
                                                  
                                                  
                                                  12
                                                  
                                                  
                                                  
                                                  20Net
      interest income, after provision for loan losses
                                                  
                                                  
                                                  2,521
                                                  
                                                  
                                                  
                                                  2,480
                                                  
                                                  
                                                  
                                                  2,424
                                                  
                                                  
                                                  
                                                  2,443
                                                  
                                                  
                                                  
                                                  2,630
                                                  
                                                  
                                                  
                                                  2,797
                                                  
                                                  
                                                  
                                                  2,219
                                                  
                                                  
                                                  
                                                  2,114Non-interest
      income
                                                  
                                                  
                                                  582
                                                  
                                                  
                                                  
                                                  584
                                                  
                                                  
                                                  
                                                  598
                                                  
                                                  
                                                  
                                                  555
                                                  
                                                  
                                                  
                                                  531
                                                  
                                                  
                                                  
                                                  125
                                                  
                                                  
                                                  
                                                  406
                                                  
                                                  
                                                  
                                                  389Non-interest
      expenses
                                                  
                                                  
                                                  3,096
                                                  
                                                  
                                                  
                                                  2,627
                                                  
                                                  
                                                  
                                                  2,524
                                                  
                                                  
                                                  
                                                  2,587
                                                  
                                                  
                                                  
                                                  2,335
                                                  
                                                  
                                                  
                                                  6,123
                                                  (1)
                                                  
                                                  
                                                  2,312
                                                  
                                                  
                                                  
                                                  2,468Income
      (loss) before income taxes
                                                  
                                                  
                                                  7
                                                  
                                                  
                                                  
                                                  437
                                                  
                                                  
                                                  
                                                  498
                                                  
                                                  
                                                  
                                                  411
                                                  
                                                  
                                                  
                                                  826
                                                  
                                                  
                                                  
                                                  (3,201
                                                  )
                                                  
                                                  
                                                  313
                                                  
                                                  
                                                  
                                                  35Provision
      (benefit) for income taxes
                                                  
                                                  
                                                  54
                                                  
                                                  
                                                  
                                                  176
                                                  
                                                  
                                                  
                                                  214
                                                  
                                                  
                                                  
                                                  152
                                                  
                                                  
                                                  
                                                  358
                                                  
                                                  
                                                  
                                                  (855
                                                  )
                                                  
                                                  
                                                  116
                                                  
                                                  
                                                  
                                                  10Net
      income (loss)
                                                  
                                                  $
                                                  (47
                                                  )
                                                  
                                                  $
                                                  261
                                                  
                                                  
                                                  $
                                                  284
                                                  
                                                  
                                                  $
                                                  259
                                                  
                                                  
                                                  $
                                                  468
                                                  
                                                  
                                                  $
                                                  (2,346
                                                  )
                                                  
                                                  $
                                                  197
                                                  
                                                  
                                                  $
                                                  25Earnings
      (loss) per common share:Basic
      and diluted
                                                  
                                                  $
                                                  (0.01
                                                  )
                                                  
                                                  $
                                                  0.06
                                                  
                                                  
                                                  $
                                                  0.06
                                                  
                                                  
                                                  $
                                                  0.06
                                                  
                                                  
                                                  $
                                                  0.10
                                                  
                                                  
                                                  
                                                  N/A
                                                  
                                                  
                                                  
                                                  N/A
                                                  
                                                  
                                                  
                                                  N/A(1)Includes $3,614 contribution to Newport Charitable
      Foundation.







F-42