UNITED STATES


SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549





FORM 10-K





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





For the fiscal year ended December 31, 2009





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)





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





(401) 847-5500


(Registrant’s telephone number, including area code)





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

Nasdaq Global Market





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  T





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  T





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  T       No   ̈





Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes   ̈     No    ̈





Indicate by check mark 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. T





Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.





Large accelerated filer
 ̈
Accelerated filer
 ̈Non-accelerated filer
 ̈
Smaller reporting company
T





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


Yes   ̈   No  T





The aggregate market value of the voting and non-voting common equity held by nonaffiliates as of June 30, 2009 was approximately $29,928,320.





The number of shares outstanding of the registrant’s common stock as of March 3, 2010 was 3,750,477.





DOCUMENTS INCORPORATED BY REFERENCE:







Portions of the Proxy Statement for the  Registrant’s Annual Meeting of Stockholders to be held on May 20, 2010 are incorporated by reference in Part III of this Form 10-K.










INDEX





Part I


PageItem 1.
Business

2-14Item 1A.
Risk Factors

14-17Item 1B.
Unresolved Staff Comments

17Item 2.
Properties

17Item 3.
Legal Proceedings

17Item 4.
(Removed and Reserved)Part IIItem 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

18-19Item 6.
Selected Financial Data

20Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations

20-42Item 7A.
Quantitative and Qualitative Disclosures About Market Risk

43Item 8.
Financial Statements and Supplementary Data

43Item 9.
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure

43Item 9A(T).
Controls and Procedures

43-44Item 9B.
Other Information

44Part IIIItem 10.
Directors, Executive Officers and Corporate Governance

44Item 11.
Executive Compensation

44Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

45Item 13.
Certain Relationships and Related Transactions, and Director Independence

45Item 14.
Principal Accounting Fees and Services

45Part IVItem 15.
Exhibits and Financial Statement Schedules

46-47SIGNATURES

48-49


Index


This report contains certain “forward-looking statements” within the meaning of the federal securities laws.  These statements are not historical facts; rather, they are statements based on Newport Bancorp, Inc.’s current expectations regarding its business strategies, intended results and future performance.  Forward-looking statements are preceded by terms such as “expects,” “believes,” “anticipates,” “intends” and similar expressions.





Management’s ability to predict results or the effect of future plans or strategies is inherently uncertain.  Factors which could affect actual results include interest rate trends, the general economic climate in the market area in which Newport Bancorp, Inc. operates, as well as nationwide, Newport Bancorp, Inc.’s ability to control costs and expenses, competitive products and pricing, loan delinquency rates and changes in federal and state legislation and regulation.  For further discussion of factors that may affect the results, see “Item 1A. Risk Factors” in this Annual Report on Form 10-K (“Form 10-K”). These factors should be considered in evaluating the forward-looking statements and undue reliance should not be placed on such statements





PART I





Item 1.
BUSINESS





General





Newport Bancorp, Inc. (“Newport Bancorp” or the “Company”) is a Maryland chartered company established in March 2006 to become the holding company for Newport Federal Savings Bank (“Newport Federal” or the “Bank”).  Newport Bancorp’s business activity is the ownership of the outstanding capital stock of Newport Federal.  Newport Bancorp does not own or lease any property but instead uses the premises, equipment and other property of Newport Federal with the payment of appropriate rental fees, as required by applicable law and regulations, under the terms of an expense allocation agreement.  In the future, Newport Bancorp may acquire or organize other operating subsidiaries; however, there are no current plans, arrangements, agreements or understandings, written or oral, to do so.





Newport Federal is a federally chartered savings bank originally founded as a Rhode Island institution in 1888.  In October 2005, Newport Federal merged with Westerly Savings Bank, a Rhode Island mutual financial institution with two branch locations in Westerly, Rhode Island. The Bank operates as a community-oriented financial institution offering financial services to consumers and businesses in the Bank’s market area.  Newport Federal attracts deposits from the general public and uses those funds to originate one-to-four family residential loans, commercial real estate loans, home equity loans and lines of credit, multi-family loans, construction loans and consumer loans. At December 31, 2009, 97.2% of the loans in our portfolio were collateralized by real estate.





In connection with the intial stock offering, in July 2006, the Company established and funded the Newportfed Charitable Foundation (the “Foundation”) with shares of Company common stock equal to 7.4% of the shares sold in the stock offering.  The Foundation provides funding to support charitable causes and community development activities in the communities served by the Company.





Available Information





The Bank’s website address is www.newportfederal.com.  Information on this website should not be considered a part of this Form 10-K.


2
 Index


Market Area





Newport Federal is headquartered in Newport, Rhode Island.  In addition to its main office located in Newport, the Bank operates five full-service branch offices located in Middletown, Wakefield, Westerly and Portsmouth, Rhode Island, and Stonington, Connecticut.  The Bank opened its Portsmouth, Rhode Island branch in January 2009, and its Stonington, Connecticut branch in May 2009.  The Bank considers Newport and Washington Counties, Rhode Island to be its primary market area.  The economy in our market area is primarily oriented to the retail and hospitality industries.





Competition





Newport Federal faces significant competition for the attraction of deposits and origination of loans.  The Bank’s competition for loans comes primarily from financial institutions and credit unions in our market area. The Bank’s most direct competition for deposits has historically come from the several financial institutions operating in its market area and, to a lesser extent, from other financial service companies such as brokerage firms, credit unions and insurance companies.  Newport Federal also faces competition for investors’ funds, from money market funds, mutual funds and other corporate and government securities.  At June 30, 2009, which is the most recent date for which data is available from the FDIC, the Bank held approximately 11.45% of the deposits in Newport County, Rhode Island and approximately 2.37% of the deposits in Washington County, Rhode Island.  In addition, banks owned by large holding companies such as Bank of America, Citizens and Sovereign also operate in our market area.  These institutions are significantly larger than the Bank and, therefore, have significantly greater resources.





Newport Federal expects competition to increase in the future as a result of legislative, regulatory and technological changes and the continuing trend of consolidation in the financial services industry.  Technological advances, for example, have lowered barriers to entry, allowed banks to expand their geographic reach by providing services over the Internet and made it possible for non-depository institutions to offer products and services that traditionally have been provided by banks.  Changes in federal law permit affiliation among banks, securities firms and insurance companies, which promotes a competitive environment in the financial services industry.  Competition for deposits and the origination of loans could limit our growth in the future.





Lending Activities





General.  The largest segment of the Bank’s loan portfolio is real estate mortgage loans, primarily one-to-four family residential loans. The other significant segment of the Bank’s loan portfolio is commercial real estate loans.  To a lesser degree, Newport Federal also originates home equity loans and lines of credit, multi-family loans and construction loans.  The Bank also offers consumer loans, which constituted 0.07% of total loans at December 31, 2009. The Bank originates loans for investment purposes, although the Bank occasionally may sell a portion of its one-to-four family residential loans into the secondary market.





One-to-Four Family Residential Loans.  The Bank’s origination of mortgage loans enables borrowers to purchase or refinance existing homes located in Rhode Island, Southeastern Connecticut and, to a lesser extent, Southeastern Massachusetts, although our primary lending market is Newport and Washington Counties, Rhode Island.





Newport Federal’s residential lending policies and procedures conform to the secondary market guidelines as we occasionally sell qualifying fixed-rate loans into the secondary market.  The Bank offers fixed-rate mortgage loans with terms of 10 to 30 years, and to a lesser extent, 40 years.  Newport Federal also offers adjustable-rate mortgage loans.  Borrower demand for adjustable-rate loans compared to fixed-rate loans is a function of the level of interest rates, the expectations of changes in the level of interest rates, and the difference between the interest rates and loan fees offered for fixed-rate mortgage loans as compared to an initially discounted interest rate and loan fees for multi-year adjustable-rate mortgages (“ARMs”).  The relative amount of fixed-rate mortgage loans and adjustable-rate mortgage loans that can be originated at any time is largely determined by the demand for each in a competitive environment.  The loan fees, interest rates and other provisions of mortgage loans are determined by us on the basis of our own pricing criteria and competitive market conditions.


3
 Index


Interest rates and payments on the Bank’s adjustable-rate mortgage loans generally adjust annually after an initial fixed period that typically ranges from one to three years.  Interest rates and payments on the Bank’s adjustable-rate loans generally are adjusted to a rate typically equal to a percentage above the one-year U.S. Treasury index.  The maximum amount by which the interest rate may be increased or decreased is generally 2% per adjustment period and the lifetime interest rate cap is generally 6% over the initial interest rate of the loan.





While one-to-four family residential real estate loans are normally originated with up to 30-year terms, such loans typically remain outstanding for substantially shorter periods because borrowers often prepay their loans in full either upon sale of the property pledged as security or upon refinancing the original loan.  Therefore, average loan maturity is a function of, among other factors, the level of purchase and sale activity in the real estate market, prevailing interest rates and the interest rates payable on outstanding loans.  Newport Federal does not offer loans with negative amortization and generally does not offer interest-only loans.





The Bank generally does not make conventional loans with loan-to-value ratios exceeding 95%.  Loans with loan-to-value ratios in excess of 80% generally require private mortgage insurance.  Newport Federal requires all properties securing first mortgage loans to be appraised by an independent appraiser, who is approved by the Board of Directors.  The Bank generally requires title insurance on all first mortgage loans.  Borrowers must obtain hazard insurance, and flood insurance is required for loans on properties located in a flood zone.





Multi-Family and Commercial Real Estate Loans.  Newport Federal offers fixed- and adjustable-rate mortgage loans secured by commercial and multi-family real estate.  The Bank’s commercial and multi-family real estate loans are generally secured by five to ten unit apartment buildings, small office buildings, two to four unit mixed-use retail and residential properties and hospitality establishments.  These properties are primarily located in Newport and Washington Counties in Rhode Island, and to a lesser extent other cities and towns in Rhode Island, Connecticut and Massachusetts.





Newport Federal originates a variety of fixed- and adjustable-rate commercial real estate and multi-family real estate loans generally for terms up to 10 years, and to a lesser extent, 20 years.  These adjustable-rate loans include loans that adjust based on the five-year FHLB Classic Rate Advance Index, adjustable every five years.  Loans are secured by first mortgages, and amounts generally do not exceed 75% of the property’s appraised value.





As of December 31, 2009, the Bank’s largest loan secured by commercial real estate was $4.0 million.  This loan is secured by retail commercial property.  This loan was performing in accordance with its original terms at December 31, 2009.





Home Equity Loans and Lines.Newport Federal offers home equity loans with a maximum combined loan to value ratio of 80% or less.  Home equity lines of credit have adjustable rates of interest that are indexed to the Prime Rate as published by The Wall Street Journal.  Home equity loans have fixed interest rates and terms that typically range from five to 15 years, but may have terms as long as 20 years.





Construction Loans.Newport Federal originates construction loans for one-to-four family homes and commercial, multi-family and other nonresidential purposes. The Bank’s residential construction loans generally provide for the payment of only interest during the construction phase, which is usually six to twelve months.  At the end of the construction phase, the loan converts to a permanent mortgage loan. One-to-four family residential construction loans are made with a maximum loan to value ratio of 80% of the market value of the real estate and improvements.  Commercial, multi-family and other nonresidential loans can be made with a maximum loan to value ratio of 75% of the upon completion market value of the real estate and improvements.  At December 31, 2009, the largest construction loan was for $2.9 million, of which $1.1 million was advanced.  This loan was performing according to its original terms at December 31, 2009.  Construction loans to individuals are generally made on the same terms as Newport Federal’s one-to-four family mortgage loans.





Consumer Loans.  The Bank offers a variety of consumer and other loans, including auto loans and loans secured by passbook savings or certificate accounts.  At December 31, 2009, consumer loans totaled $223,000, or 0.07% of total loans.


4
 Index


The procedures for underwriting consumer loans include an assessment of the applicant’s payment history on other debts and ability to meet existing obligations and payments on the proposed loan.  Although the applicant’s creditworthiness is a primary consideration, the underwriting process also includes a comparison of the value of the collateral, if any, to the proposed loan amount.





Loan Underwriting Risks.





Adjustable-Rate Loans.  While Newport Federal anticipates that adjustable-rate loans will better offset the adverse effects of an increase in interest rates as compared to fixed-rate mortgages, an increased monthly mortgage payment required of adjustable-rate loan borrowers in a rising interest rate environment could cause an increase in delinquencies and defaults.  The marketability of the underlying property also may be adversely affected in a high interest rate environment.  In addition, although adjustable-rate mortgage loans make our asset base more responsive to changes in interest rates, the extent of this interest sensitivity is limited by the annual and lifetime interest rate adjustment limits.





Multi-family and Commercial Real Estate Loans.  Loans secured by multi-family and commercial real estate generally have larger balances and involve a greater degree of risk than one-to-four family residential mortgage loans.  Of primary concern in multi-family and commercial real estate lending is the borrower’s creditworthiness and the feasibility and cash flow potential of the project.  Payments on loans secured by income properties often depend on successful operation and management of the properties.  As a result, repayment of such loans may be subject to a greater extent than residential real estate loans, to adverse conditions in the real estate market or the economy.  To monitor cash flows on income properties, the Bank requires borrowers and loan guarantors, if any, to provide annual financial statements on multi-family and commercial real estate loans.  In reaching a decision on whether to make a multi-family or commercial real estate loan, Newport Federal considers and reviews a global cash flow analysis of the borrower and considers the net operating income of the property, the borrower’s expertise, credit history and profitability and the value of the underlying property.  The Bank has generally required that the properties securing these real estate loans have debt service coverage ratios (the ratio of earnings before debt service to debt service) of at least 1.25.  An environmental survey or environmental risk insurance is obtained when the possibility exists that hazardous materials may have existed on the site, or the site may have been impacted by adjoining properties that handled hazardous materials.





Construction Loans.  Construction financing is generally considered to involve a higher degree of risk of loss than long-term financing on improved, occupied real estate.  Risk of loss on a construction loan depends largely upon the accuracy of the initial estimate of the property’s value at completion of construction and the estimated cost of construction.  During the construction phase, a number of factors could result in delays and/or cost overruns.  If the estimate of construction costs proves to be inaccurate, the Bank may be required to advance funds beyond the amount originally committed to permit completion of the building.  Also, the Bank may be confronted, at or before the maturity of the loan, with a building having a value that is insufficient to assure full repayment.  If Newport Federal is forced to foreclose on such a building before or at completion due to a default, there can be no assurance that the Bank will be able to recover all of the unpaid balance of, and accrued interest on, the loan as well as related foreclosure and holding costs.





Consumer Loans.  Consumer loans may entail greater risk than do residential mortgage loans, particularly in the case of consumer loans that are unsecured or secured by assets that depreciate rapidly, such as motor vehicles.  In the latter case, repossessed collateral for a defaulted consumer loan may not provide an adequate source of repayment for the outstanding loan and a small remaining deficiency often does not warrant further substantial collection efforts against the borrower.  Consumer loan collections depend on the borrower’s continuing financial stability, and therefore are likely to be adversely affected by various factors, including job loss, divorce, illness or personal bankruptcy.  Furthermore, the application of various federal and state laws, including federal and state bankruptcy and insolvency laws, may limit the amount that can be recovered on such loans.





Loan Originations, Purchases and Sales.  Loan originations come from a number of sources.  The primary source of loan originations are existing customers, walk-in traffic, advertising and referrals from customers.  Occasionally, Newport Federal sells loans that the Bank has originated.  The decision to sell loans is based on prevailing market interest rate conditions and interest rate management.  Newport Federal did not sell any loans in 2009 or 2008.


5
 Index


From time to time, Newport Federal will purchase whole loans or participation loans to supplement its lending portfolio.Whole loans purchased totaled $376,000 at December 31, 2009. The Bank performs its own underwriting analysis on each loan purchased using the same standards used for loans originated.  The Bank does not service purchased loans.





Loan participations, purchased and sold, totaled $2.1 million at December 31, 2009.  Loan participations are also subject to the same credit analysis and loan approvals as loans Newport Federal originates. The Bank is permitted to review all of the documentation relating to any loan in which Newport Federal participates.  However, as with purchased loans, the Bank does not service purchased participation loans.  Thus, with respect to purchased loans and participations, the Bank is subject to the policies and practices of the lead lender with regard to monitoring delinquencies, pursuing collections and instituting foreclosure proceedings.





Loan Approval Procedures and Authority.  Newport Federal’s lending activities follow written, non-discriminatory, underwriting standards and loan origination procedures established by the Board of Directors and management.  The President, Chief Lending Officer and Chief Operating Officer have authority to approve secured loans in amounts up to $2.8 million and unsecured loans up to $300,000.  Secured loans from $2.8 million to $3.2 million must be approved by four of the following persons: Commercial Loan Manager, Retail Loan Manager, Chief Lending Officer, President, Chief Operating Officer or one non-employee member of the Board of Directors.  Secured loans from $3.2 million to $3.6 million must be approved by a majority of the Executive Committee of the Board of Directors.  Unsecured loans over $600,000 and secured loans greater than $3.6 million up to the legal lending limit must be approved by a majority vote of the Board of Directors.  Smaller loans may be approved by individual loan officers.





Loans to One Borrower.  The maximum amount the Bank may lend to one borrower and the borrower’s related entities is limited, by regulation, to generally 15% of its unimpaired capital and surplus.  At December 31, 2009, Newport Federal’s regulatory limit on loans to one borrower was $6.5 million.  At that date, the Bank’s largest lending relationship was $4.1 million and was secured by real property.  This relationship consists of three commercial loans, which were performing in accordance with their original terms at December 31, 2009.





Loan Commitments.  The Bank issues commitments for fixed- and adjustable-rate mortgage loans conditioned upon the occurrence of certain events.  Commitments to originate mortgage loans are legally binding agreements to lend to our customers.  Generally, these loan commitments expire after 60 days.





Investment Activities





Newport Federal has legal authority to invest in various types of liquid assets, including U.S. Treasury obligations, securities of various Government-sponsored enterprises and of state and municipal governments, mortgage-backed securities and certificates of deposit of federally insured institutions.  Within certain regulatory limits, the Bank also may invest a portion of its assets in corporate securities and mutual funds.  Newport Federal also is required to maintain an investment in Federal Home Loan Bank of Boston stock.





At December 31, 2009, the Bank’s investment portfolio consisted of mortgage-backed securities issued primarily by Fannie Mae and mutual funds, the underlying assets of which consist of short-term agency securities and mortgage-backed securities.





Newport Federal’s investment objectives are to provide and maintain liquidity, to establish an acceptable level of interest rate and credit risk, to provide an alternate source of low-risk investments when demand for loans is weak and to generate a favorable return.  The Bank’s Board of Directors has the overall responsibility for the investment portfolio, including approval of the investment policy.  The Chief Executive Officer and Chief Financial Officer are responsible for implementation of the investment policy and monitoring the Bank’s investment performance.The Board of Directors of Newport Federal reviews the status of the investment portfolio on a quarterly basis, or more frequently if warranted.


6
 Index


Deposit Activities and Other Sources of Funds





General.  Deposits, borrowings and loan repayments are the major sources of Newport Federal’s funds for lending and other investment purposes.  Scheduled loan repayments are a relatively stable source of funds, while deposit inflows and outflows and loan prepayments are significantly influenced by general interest rates and money market conditions.





Deposit Accounts.  Substantially all of the Bank’s depositors are residents of Rhode Island.  Deposits are attracted from within our market area through the offering of a broad selection of deposit instruments, including non-interest-bearing demand deposits (such as checking accounts), interest-bearing demand accounts (such as NOW and money market accounts), regular savings accounts and certificates of deposit. Deposit account terms vary according to the minimum balance required, the time periods the funds must remain on deposit and the interest rate, among other factors.  In determining the terms of Newport Federal’s deposit accounts, the Bank considers the rates offered by the Bank’s competition, Newport Federal’s liquidity needs, profitability to the Bank, matching deposit and loan products and customer preferences and concerns.  Newport Federal generally reviews the deposit mix and pricing weekly.  The Bank’s current strategy is to offer competitive rates and to be in the middle of the market for rates on all types of deposit products; however, the Bank selectively competes for various certificates of deposit.





In addition to deposit accounts for individuals, Newport Federal also offers deposit accounts designed for the businesses operating in our market area.  The Bank’s business banking deposit products include commercial checking accounts and money market accounts.





Borrowings.  Newport Federal utilizes advances from the Federal Home Loan Bank of Boston to supplement the Bank’s investable funds.  The Federal Home Loan Bank functions as a central reserve bank providing credit for member financial institutions.  As a member, the Bank is required to own capital stock in the Federal Home Loan Bank and is authorized to apply for advances on the security of such stock and certain of the Bank’s mortgage loans and other assets (principally securities which are obligations of, or guaranteed by, the United States), provided certain standards related to creditworthiness have been met.  Advances are made under several different programs, each having its own interest rate and range of maturities.  Depending on the program, limitations on the amount of advances are based either on a fixed percentage of an institution’s net worth or on the Federal Home Loan Bank’s assessment of the institution’s creditworthiness.





Personnel





At December 31, 2009, the Bank had 65 full-time employees and 21 part-time employees, none of whom is represented by a collective bargaining unit.  Newport Federal believes that its relationship with its employees is good.





Subsidiaries





Newport Bancorp conducts its principal business activities through its wholly-owned subsidiary, Newport Federal Savings Bank.  The Newport Federal Savings Bank has one wholly-owned subsidiary, NewportFed Investments, Inc., which was established to hold certain investments, consisting primarily of commercial mortgages and loans.





REGULATION AND SUPERVISION





General





Newport Federal is subject to extensive regulation, examination and supervision by the Office of Thrift Supervision, as its primary federal regulator, and the Federal Deposit Insurance Corporation (“FDIC”) as its deposit insurer.  Newport Federal is a member of the Federal Home Loan Bank System and, with respect to deposit insurance, of the Deposit Insurance Fund managed by the FDIC.  Newport Federal must file reports with the Office of Thrift Supervision and the FDIC concerning its activities and financial condition in addition to obtaining regulatory approvals prior to entering into certain transactions such as mergers with, or acquisitions of, other savings institutions.  The Office of Thrift Supervision and the FDIC conduct periodic examinations to test Newport


7
 Index


Federal’s safety and soundness with various regulatory requirements.  Newport Federal is also regulated, to a lesser extent, by the Board of Governors of the Federal Reserve System (the “Federal Reserve Board”), which governs reserves to be maintained against deposits and other matters.  This regulation and supervision establishes a comprehensive framework of activities in which Newport Federal may engage and is intended primarily for the protection of the Deposit Insurance Fund and depositors.  The regulatory structure also gives the regulatory authorities extensive discretion in connection with their supervisory and enforcement activities and examination policies, including policies with respect to the classification of assets and the establishment of adequate loan loss reserves for regulatory purposes.





As a savings and loan holding company, Newport Bancorp is subject to regulation, examination and supervision by the Office of Thrift Supervision.  Newport Bancorp must file reports with the Office of Thrift Supervision concerning its activities and financial condition, and must also obtain regulatory approval of the Office of Thrift Supervision prior to entering into certain activities and transactions.  Newport Bancorp is also subject to the rules and regulations of the Securities and Exchange Commission under the federal securities laws.





Any change in these regulatory requirements and policies, whether by the Office of Thrift Supervision, the Federal Deposit Insurance Corporation, the Federal Reserve Board or Congress, could have a material adverse impact on Newport Bancorp, Newport Federal and their operations.





Set forth below is a brief description of certain regulatory requirements applicable to Newport Bancorp and Newport Federal.  The description below is limited to certain material aspects of the statutes and regulations addressed, and is not a complete description of such statutes and regulations and their effects on Newport Bancorp and Newport Federal.





Proposed Federal Legislation





Legislation has been introduced in the United States Senate and House of Representatives that would implement sweeping changes to the current bank regulatory structure described in this section.  The House Bill (H.R. 4173) would eliminate our current primary federal regulator, the Office of Thrift Supervision, by merging the Office of Thrift Supervision into the Comptroller of the Currency (the primary federal regulator for national banks). The proposed legislation would authorize the Comptroller of the Currency to charter mutual and stock savings banks and mutual holding companies, which would be under the supervision of the Division of Thrift Supervision of the Comptroller of the Currency.  The proposed legislation would also establish a Financial Services Oversight Council and grant the Board of Governors of the Federal Reserve System exclusive authority to regulate all bank and thrift holding companies.  If the proposed legislation is enacted, Newport Bancorp would become a holding company subject to supervision by the Federal Reserve Board as opposed to the Office of Thrift Supervision, and would become subject to the Federal Reserve’s regulations.





Federal Banking Regulation





Business Activities.A federal savings bank derives its lending and investment powers from the Home Owners’ Loan Act, as amended, and the regulations of the Office of Thrift Supervision.  Under these laws and regulations, Newport Federal may invest in mortgage loans secured by residential and nonresidential real estate, commercial business loans and consumer loans, certain types of debt securities and certain other assets, subject to applicable limits.  Newport Federal also may establish subsidiaries that may engage in activities not otherwise permissible for Newport Federal, including real estate investment and securities and insurance brokerage.





Capital Requirements.  Office of Thrift Supervision regulations require savings banks to meet four minimum capital standards: a 1.5% tangible capital ratio, a 4% leverage ratio (3% for savings banks receiving the highest rating on the CAMELS rating system), a 4% Tier 1 risk-based capital ratio, and an 8% total risk-based capital ratio.





The risk-based capital standard for savings banks requires the maintenance of Tier 1 (core) and total capital (which is defined as core capital and supplementary capital) to risk-weighted assets of at least 4% and 8%, respectively.  In determining the amount of risk-weighted assets, all assets, including certain off-balance sheet assets, are multiplied by a risk-weight factor of 0% to 100%, assigned by the Office of Thrift Supervision, based on


8
 Index


the risks believed inherent in the type of asset.  Core capital is defined as common stockholders’ equity (including retained earnings), certain noncumulative perpetual preferred stock and related surplus and minority interests in equity accounts of consolidated subsidiaries, less intangibles other than certain mortgage servicing rights and credit card relationships.  The components of supplementary capital currently include cumulative preferred stock, long-term perpetual preferred stock, mandatory convertible securities, subordinated debt and intermediate preferred stock, the allowance for loan and lease losses limited to a maximum of 1.25% of risk-weighted assets and up to 45% of net unrealized gains on available-for-sale equity securities with readily determinable fair values.  Overall, the amount of supplementary capital included as part of total capital cannot exceed 100% of core capital.  Additionally, a savings bank that retains credit risk in connection with an asset sale may be required to maintain additional regulatory capital because of the recourse back to the savings bank.  Newport Federal does not typically engage in asset sales.  At December 31, 2009, Newport Federal’s capital exceeded all applicable requirements.





U.S. Treasury’s TARP Capital Purchase Program.In October 2008 the U.S. Treasury created the Capital Purchase Program (“CPP”) under which Treasury purchased securities from qualified financial institutions in an effort to stabilize the financial system.  Institutions electing to participate in the CPP became subject to a number of restrictions, including limits on executive compensation, stock redemptions and dividends.  Newport Federal elected not to participate in the CPP.





Loans-to-One Borrower. Generally, a federal savings bank may not make a loan or extend credit to a single or related group of borrowers in excess of 15% of unimpaired capital and surplus.  An additional amount may be loaned, equal to 10% of unimpaired capital and surplus, if the loan is secured by readily marketable collateral, which generally does not include real estate.  As of December 31, 2009, Newport Federal was in compliance with its loans-to-one borrower limitations.





Qualified Thrift Lender Test.As a federal savings bank, Newport Federal must satisfy the qualified thrift lender, or “QTL,” test.  Under the QTL test, Newport Federal must maintain at least 65% of its “portfolio assets” in “qualified thrift investments” in at least nine months of the most recent 12 months.  “Portfolio assets” generally means total assets of a savings institution, less the sum of specified liquid assets up to 20% of total assets, goodwill and other intangible assets, and the value of property used in the conduct of the savings bank’s business.





“Qualified thrift investments” include various types of loans made for residential and housing purposes, investments related to such purposes, including certain mortgage-backed and related securities, and loans for personal, family, household and certain other purposes up to a limit of 20% of portfolio assets.  “Qualified thrift investments” also include 100% of an institution’s credit card loans, education loans and small business loans.  Newport Federal also may satisfy the QTL test by qualifying as a “domestic building and loan association” as defined in the Internal Revenue Code.





A savings bank that fails the qualified thrift lender test must either convert to a bank charter or operate under specified restrictions.  At December 31, 2009, Newport Federal satisfied the QTL test.





Capital Distributions.Office of Thrift Supervision regulations govern capital distributions by a federal savings bank, which include cash dividends, stock repurchases and other transactions charged to the capital account.  A savings bank must file an application for approval of a capital distribution if:





·
the total capital distributions for the applicable calendar year exceed the sum of the bank’s net income for that year to date plus the bank’s retained net income for the preceding two years;





·
the bank would not be at least adequately capitalized following the distribution;





·
the distribution would violate any applicable statute, regulation, agreement or Office of Thrift Supervision-imposed condition; or





·
the bank is not eligible for expedited treatment of its filings.


9
 Index


Even if an application is not otherwise required, every savings bank that is a subsidiary of a holding company must still file a notice with the Office of Thrift Supervision at least 30 days before the Board of Directors declares a dividend or approves a capital distribution.





The Office of Thrift Supervision may disapprove a notice or application if:





·
the bank would be undercapitalized following the distribution;





·
the proposed capital distribution raises safety and soundness concerns; or





·
the capital distribution would violate a prohibition contained in any statute, regulation or agreement.





In addition, the Federal Deposit Insurance Act provides that an insured depository institution may not make any capital distribution, if after making such distribution the institution would be undercapitalized.





Liquidity.  A federal savings bank is required to maintain a sufficient amount of liquid assets to ensure its safe and sound operation.





Community Reinvestment Act and Fair Lending Laws.  All savings banks have a responsibility under the Community Reinvestment Act and related regulations of the Office of Thrift Supervision to help meet the credit needs of their communities, including low- and moderate-income neighborhoods. In connection with its examination of a federal savings bank, the Office of Thrift Supervision is required to assess the bank’s record of compliance with the Community Reinvestment Act.  In addition, the Equal Credit Opportunity Act and the Fair Housing Act prohibit lenders from discriminating in their lending practices on the basis of characteristics specified in those statutes.  A bank’s failure to comply with the provisions of the Community Reinvestment Act could, at a minimum, result in denial of certain corporate applications such as branches or mergers, or in restrictions on its activities.  The failure to comply with the Equal Credit Opportunity Act and the Fair Housing Act could result in enforcement actions by the Office of Thrift Supervision, as well as other federal regulatory agencies and the Department of Justice.  Newport Federal received a “satisfactory” Community Reinvestment Act rating in its most recent federal examination.





Transactions with Related Parties.  A federal savings bank’s authority to engage in transactions with its affiliates is limited by Office of Thrift Supervision regulations and by Sections 23A and 23B of the Federal Reserve Act and its implementing Regulation W.  An affiliate is a company that controls, is controlled by, or is under common control with an insured depository institution such as Newport Federal.  Newport Bancorp Corporation is an affiliate of Newport Federal.  In general, loan transactions between an insured depository institution and its affiliate are subject to certain quantitative and collateral requirements.  In addition, Office of Thrift Supervision regulations prohibit a savings bank from lending to any of its affiliates that are engaged in activities that are not permissible for bank holding companies and from purchasing the securities of any affiliate, other than a subsidiary.  Finally, transactions with affiliates must be consistent with safe and sound banking practices, not involve low-quality assets and be on terms that are as favorable to the institution as comparable transactions with non-affiliates.  The Office of Thrift Supervision requires savings banks to maintain detailed records of all transactions with affiliates.





Newport Federal’s authority to extend credit to its directors, executive officers and 10% stockholders, as well as to entities controlled by such persons, is currently governed by the requirements of Sections 22(g) and 22(h) of the FRA and Regulation O of the Federal Reserve Board.  Among other things, these provisions require that extensions of credit to insiders (i) be made on terms that are substantially the same as, and follow credit underwriting procedures that are not less stringent than, those prevailing for comparable transactions with unaffiliated persons and that do not involve more than the normal risk of repayment or present other unfavorable features, and (ii) not exceed certain limitations on the amount of credit extended to such persons, individually and in the aggregate, which limits are based, in part, on the amount of Newport Federal’s capital.  In addition, extensions of credit in excess of certain limits must be approved by Newport Federal’s Board of Directors.





Enforcement.  The Office of Thrift Supervision has primary enforcement responsibility over federal savings banks and has the authority to bring enforcement action against all “institution-affiliated parties,” including


10
 Index


stockholders, and attorneys, appraisers and accountants who knowingly or recklessly participate in wrongful action likely to have an adverse effect on an insured federal savings bank.  Formal enforcement action by the Office of Thrift Supervision may range from the issuance of a capital directive or cease and desist order, to removal of officers and/or directors of the institution and the appointment of a receiver or conservator.  Civil penalties cover a wide range of violations and actions, and range up to $25,000 per day, unless a finding of reckless disregard is made, in which case penalties may be as high as $1 million per day.  The Federal Deposit Insurance Corporation also has the authority to terminate deposit insurance or to recommend to the Director of the Office of Thrift Supervision that enforcement action be taken with respect to a particular savings institution.  If action is not taken by the Director, the Federal Deposit Insurance Corporation has authority to take action under specified circumstances.





Standards for Safety and Soundness.  Federal law requires each federal banking agency to prescribe certain standards for all insured depository institutions.  These standards relate to, among other things, internal controls, information systems and audit systems, loan documentation, credit underwriting, interest rate risk exposure, asset growth, compensation, and other operational and managerial standards as the agency deems appropriate.  The federal banking agencies adopted Interagency Guidelines Prescribing Standards for Safety and Soundness to implement the safety and soundness standards required under federal law.  The guidelines set forth the safety and soundness standards that the federal banking agencies use to identify and address problems at insured depository institutions before capital becomes impaired.  The guidelines address internal controls and information systems, internal audit systems, credit underwriting, loan documentation, interest rate risk exposure, asset growth, compensation, fees and benefits.  If the appropriate federal banking agency determines that an institution fails to meet any standard prescribed by the guidelines, the agency may require the institution to submit to the agency an acceptable plan to achieve compliance with the standard.  If an institution fails to meet these standards, the appropriate federal banking agency may require the institution to submit a compliance plan.





Prompt Corrective Action Regulations.  Under the prompt corrective action regulations, the Office of Thrift Supervision is required and authorized to take supervisory actions against undercapitalized savings banks.  For this purpose, a savings bank is placed in one of the following five categories based on the savings bank’s capital:





·
well-capitalized (at least 5% leverage capital, 6% Tier 1 risk-based capital and 10% total risk-based capital);





·
adequately capitalized (at least 4% leverage capital, 4% Tier 1 risk-based capital and 8% total risk-based capital);





·
undercapitalized (less than 8% total risk-based capital, 4% Tier 1 risk-based capital or 3% leverage capital);





·
significantly undercapitalized (less than 6% total risk-based capital, 3% Tier 1 risk-based capital or 3% leverage capital); and





·
critically undercapitalized (less than 2% tangible capital).





Generally, the Office of Thrift Supervision is required to appoint a receiver or conservator for a savings bank that is “critically undercapitalized” within specific time frames.  The regulations also provide that a capital restoration plan must be filed with the Office of Thrift Supervision within 45 days of the date a savings bank receives notice that it is “undercapitalized,” “significantly undercapitalized” or “critically undercapitalized.”  Any holding company for the savings bank required to submit a capital restoration plan must guarantee the lesser of: an amount equal to 5% of a savings bank’s assets at the time it was notified or deemed to be undercapitalized by the Office of Thrift Supervision, or the amount necessary to restore the savings bank to adequately capitalized status.  This guarantee remains in place until the Office of Thrift Supervision notifies the savings bank that it has maintained adequately capitalized status for each of four consecutive calendar quarters, and the Office of Thrift Supervision has the authority to require payment and collect payment under the guarantee.  Failure by a holding company to provide the required guarantee will result in certain operating restrictions on the savings bank, such as restrictions on the ability to declare and pay dividends, pay executive compensation and management fees, and increase assets or expand operations. The Office of Thrift Supervision may also take any one of a number of discretionary supervisory


11
 Index


actions against undercapitalized savings banks, including the issuance of a capital directive and the replacement of senior executive officers and directors.  At December 31, 2009, Newport Federal met the criteria for being considered “well-capitalized.”





Insurance of Deposit Accounts.In October 2008, in response to the global financial crisis, deposit insurance by the FDIC was increased to a maximum of $250,000 per depositor.  On January 1, 2014, the maximum insurance amount will return to $100,000 per depositor for all deposit accounts except certain retirement accounts, which will remain at $250,000 per depositor. In addition, under the FDIC’s Transaction Account Guarantee Program, most non-interest-bearing transaction accounts are guaranteed regardless of amount until June 30, 2010.





Pursuant to the Federal Deposit Insurance Reform Act of 2005 (the “Reform Act”), the FDIC is authorized to set the reserve ratio for the Deposit Insurance Fund annually at between 1.15% and 1.5% of estimated insured deposits. As of June 30, 2008, the reserve ratio had decreased to 1.01% as a result of bank failures.  As part of a plan to restore the reserve ratio to 1.15%, the FDIC imposed a special assessment equal to five basis points of assets less Tier 1 capital as of June 30, 2009. The Company recorded an expense of $205,000 for the special assessment.  In addition, the FDIC has increased its quarterly assessment rates and amended the method by which rates are calculated.  Beginning in the second quarter of 2009, institutions are assigned an initial base assessment rate ranging from 12 to 45 basis points of deposits depending on risk category. The initial base assessment is then adjusted based upon the institution’s level of unsecured debt, secured liabilities, and brokered deposits to establish a total base assessment rate ranging from seven to 77.5 basis points.  As a result of these changes, the Bank’s quarterly assessment for 2009 increased to a total of $392,000 from a total of $139,000 in 2008.





On November 12, 2009, the FDIC approved a final rule requiring insured depository institutions to prepay on December 30, 2009, their estimated risk-based assessments for the fourth quarter of 2009 and for all of 2010, 2011, and 2012.  Prepaid assessments are to be applied against the actual quarterly assessments until exhausted, and may not be applied to any special assessments that may occur in the future.  Any unused prepayments will be returned to the institution on June 30, 2013.  On December 30, 2009, Newport Federal prepaid $1.5 million in estimated assessment fees for 2010 through 2012.  Because the prepaid assessments represent the prepayment of future expense, they do not affect Newport Federal’s capital (the prepaid asset will have a risk-weighting of 0%) or tax obligations.





In addition to the FDIC assessments, the Financing Corporation (“FICO”) is authorized to impose and collect, with the approval of the FDIC, assessments for anticipated payments, issuance costs and custodial fees on bonds issued by the FICO in the 1980s to recapitalize the former Federal Savings and Loan Insurance Corporation. The bonds issued by the FICO are due to mature in 2017 through 2019. During the year ended December 31, 2009, Newport Federal paid $21,000 in fees related to the FICO.





Insurance of deposits may be terminated by the FDIC upon a finding that an institution has engaged in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations or has violated any applicable law, regulation, rule, order or condition imposed by the FDIC. We do not currently know of any practice, condition or violation that may lead to termination of our deposit insurance.





Prohibitions Against Tying Arrangements.  Federal savings banks are prohibited, subject to some exceptions, from extending credit to or offering any other service, or fixing or varying the consideration for such extension of credit or service, on the condition that the customer obtain some additional service from the institution or its affiliates or not obtain services of a competitor of the institution.





Federal Home Loan Bank System.  Newport Federal is a member of the Federal Home Loan Bank System, which consists of 12 regional Federal Home Loan Banks.  The Federal Home Loan Bank System provides a central credit facility primarily for member institutions as well as other entities involved in home mortgage lending.  As a member of the Federal Home Loan Bank of Boston, Newport Federal is required to acquire and hold shares of capital stock in the Federal Home Loan Bank.  As of December 31, 2009, Newport Federal was in compliance with this requirement.


12
 Index


The Federal Home Loan Bank of Boston suspended its dividend payment for the first quarter of 2009 and has not paid a dividend since that time.  In addition, the Federal Home Loan Bank of Boston declared a moratorium on excess stock repurchases in December 2008, which continues.





Federal Reserve System





Federal Reserve Board regulations require savings banks to maintain noninterest-earning reserves against their transaction accounts, such as negotiable order of withdrawal and regular checking accounts.  At December 31, 2009, Newport Federal was in compliance with these reserve requirements.





Other Regulations





Interest and other charges collected or contracted for by Newport Federal are subject to state usury laws and federal laws concerning interest rates.  Newport Federal’s operations are also subject to federal laws applicable to credit transactions and rules and regulations of the various federal agencies charged with the responsibility of implementing such federal laws.  In addition, the operations of Newport Federal are subject to statutes and regulations relating to the privacy of consumer financial records, customers’ rights arising from the use of automated teller machines and other electronic banking services, and anti-money laundering compliance programs.





Holding Company Regulation





General.  Newport Federal is a non-diversified savings and loan holding company within the meaning of the Home Owners’ Loan Act.  As such, Newport Federal is registered with the Office of Thrift Supervision and is subject to Office of Thrift Supervision regulations, examinations, supervision and reporting requirements.  In addition, the Office of Thrift Supervision has enforcement authority over Newport Federal and its subsidiaries.  Among other things, this authority permits the Office of Thrift Supervision to restrict or prohibit activities that are determined to be a serious risk to the subsidiary savings institution.  Unlike bank holding companies, federal savings and loan holding companies are not subject to any regulatory capital requirements or to supervision by the Federal Reserve Board.





Permissible Activities. Under present law, the business activities of Newport Federal is generally limited to those activities permissible for financial holding companies under Section 4(k) of the Bank Holding Company Act of 1956, as amended, or for multiple savings and loan holding companies.  A financial holding company may engage in activities that are financial in nature, including underwriting equity securities and insurance as well as activities that are incidental to financial activities or complementary to a financial activity.  A multiple savings and loan holding company is generally limited to activities permissible for bank holding companies under Section 4(c)(8) of the Bank Holding Company Act, subject to the prior approval of the Office of Thrift Supervision, and certain additional activities authorized by Office of Thrift Supervision regulations.





Federal law prohibits a savings and loan holding company, including Newport Federal, directly or indirectly, or through one or more subsidiaries, from acquiring more than 5% of another savings institution or holding company thereof, without prior written approval of the Office of Thrift Supervision.  It also prohibits the acquisition or retention of, with certain exceptions, more than 5% of a nonsubsidiary company engaged in activities that are not closely related to banking or financial in nature, or acquiring or retaining control of an institution that is not federally insured.  In evaluating applications by holding companies to acquire savings institutions, the Office of Thrift Supervision must consider the financial and managerial resources, future prospects of the company and institution involved, the effect of the acquisition on the risk to the federal deposit insurance fund, the convenience and needs of the community and competitive factors.





The Office of Thrift Supervision is prohibited from approving any acquisition that would result in a multiple savings and loan holding company controlling savings institutions in more than one state, subject to two exceptions:





(i)
the approval of interstate supervisory acquisitions by savings and loan holding companies; and





(ii)
the acquisition of a savings institution in another state if the laws of the state of the target savings institution specifically permit such acquisition.


13
 Index


The states vary in the extent to which they permit interstate savings and loan holding company acquisitions.





Federal Securities Laws





Newport Bancorp’s common stock is registered with the Securities and Exchange Commission under the Securities Exchange Act of 1934.  Newport Bancorp is subject to the information, proxy solicitation, insider trading restrictions and other requirements under the Securities Exchange Act of 1934.





ITEM 1A.
RISK FACTORS





The United States economy remains weak and unemployment levels are high.  The prolonged economic downturn will adversely affect our business and financial results.





The United States experienced a severe economic recession in 2008 and 2009.  While economic growth has resumed recently, the rate of growth has been slow and unemployment remains at very high levels and is not expected to improve in the near future.  Loan portfolio quality has deteriorated at many financial institutions reflecting, in part, the weak U.S. economy and high unemployment.  In addition, the values of real estate collateral supporting many commercial loans and home mortgages have declined and may continue to decline.  The continuing real estate downturn also has resulted in reduced demand for the construction of new housing and increased delinquencies in construction, residential and commercial mortgage loans. Bank and bank holding company stock prices have declined substantially, and it is significantly more difficult for banks and bank holding companies to raise capital or borrow in the debt markets.





Continued negative developments in the financial services industry and the domestic and international credit markets may continue to significantly affect the markets in which we do business, the market for and value of our loans and investments, and our ongoing operations, costs and profitability.  Moreover, continued declines in the stock market in general, or stock values of financial institutions and their holding companies specifically, could adversely affect our stock performance.





A continued decline in real estate values could impact our profits.





Nearly all of Newport Federal’s loans are secured by real estate in the State of Rhode Island.  As a result of this concentration, a downturn in the local economy could cause significant increases in nonperforming loans, which would impact the Bank’s profits.  A continued decline in real estate values could also cause some of Newport Federal’s mortgage loans to become inadequately collateralized, which would expose the Bank to a greater risk of loss and could require additions to our allowance for loan losses through increased provisions for loan losses.  Additionally, a decline in real estate values could adversely impact the Bank’s portfolio of commercial real estate loans and could result in a decline in the origination of such loans.





Changes in interest rates may reduce our profits.





Net interest income is our largest source of income.  Changes in interest rates can affect the level of net interest income. The Company’s interest rate sensitivity is discussed in more detail in Item 7 of this report.  We principally manage interest rate risk by managing our volume and mix of our earning assets and funding liabilities. In a changing interest rate environment, we may not be able to manage this risk effectively. If we are unable to manage interest rate risk effectively, our business, financial condition and results of operations could be materially harmed.  Changes in interest rates can also affect the demand for our products and services, and the supply conditions in the U.S. financial and capital markets.  Changes in the level of interest rates may negatively affect our ability to originate real estate loans, the value of our assets and our ability to realize gains from the sale of our assets, all of which ultimately affect our earnings.





If we do not achieve profitability on new branches, they may negatively impact our earnings.





We opened our Portsmouth, Rhode Island branch office in January 2009, and our Stonington, Connecticut branch office in May 2009.   Numerous factors contribute to the performance of a new branch, such as a suitable


14
 Index


location, qualified personnel and an effective marketing strategy.  Additionally, it takes time for a new branch to generate significant deposits and make sufficient loans to produce enough income to offset expenses, some of which, like salaries and occupancy expense, are relatively fixed costs. We expect that it may take a period of time before the new branch offices can become profitable. During this period, operating these new branch offices may negatively impact our net income.





Strong competition within our market area could affect our profits and slow growth.





Newport Federal faces intense competition both in making loans and attracting deposits.  This competition has made it more difficult for the Bank to make new loans and attract deposits.  Price competition for loans and deposits might result in the Bank earning less on the Bank’s loans and paying more on the Bank’s deposits, which would reduce net interest income.  Competition also makes it more difficult to grow loans and deposits.  At June 30, 2009, which is the most recent date for which data is available from the FDIC, Newport Federal held approximately 11.45% of the deposits in Newport County, Rhode Island and approximately 2.37% of the deposits in Washington County, Rhode Island.  Some of the institutions with which the Bank competes have substantially greater resources and lending limits than Newport Federal has and may offer services that the Bank does not provide.  Newport Federal expects competition to increase in the future as a result of legislative, regulatory and technological changes and the continuing trend of consolidation in the financial services industry.





Due to the interventions of the federal government, some of the institutions that we compete with are receiving substantial federal financial support which may not be available to our Company.  Many institutions have been allowed to convert to banking charters and to offer insured deposits for the first time.  The federal government has guaranteed money market funds which traditionally compete with bank deposits.  The federal government has offered significant guarantees of new debt issuances to some of the Company’s competitors to help them fund their operations.  The federal government now controls Fannie Mae and Freddie Mac and may operate directly as a competitor in some lending markets in the future.  Emergency measures designed to support some of the Company’s competitors may provide no advantage to the Company or place it at a disadvantage.   Emergency changes in deposit insurance, financial market regulation, bank regulation, and policy of the Federal Home Loan Bank system may all affect the competitive environment for the Company and other market participants.  Our profitability depends upon our continued ability to compete successfully in our market area.





Our allowance for loan losses may prove to be insufficient to absorb losses in our loan portfolio.





Like all financial institutions, we maintain an allowance for loan losses to provide for loans in our portfolio that may not be repaid in their entirety. We believe that our allowance for loan losses is maintained at a level adequate to absorb probable losses inherent in our loan portfolio as of the corresponding balance sheet date. However, our allowance for loan losses may not be sufficient to cover actual loan losses, and future provisions for loan losses could materially and adversely affect our operating results.  The accounting measurements related to impairment and the loan loss allowance require significant estimates which are subject to uncertainty and changes relating to new information and changing circumstances.  Our estimates of the risk of loss and amount of loss on any loan are complicated by the significant uncertainties surrounding our borrowers’ abilities to successfully execute their business models through changing economic environments, competitive challenges and other factors. Because of the degree of uncertainty and susceptibility of these factors to change, our actual losses may vary from our current estimates.





Our regulators, as an integral part of their examination process, periodically review our allowance for loan losses and may require us to increase our allowance for loan losses by recognizing additional provisions for loan losses charged to expense, or to decrease our allowance for loan losses by recognizing loan charge-offs, net of recoveries. Any such additional provisions for loan losses or charge-offs, as required by these regulatory agencies, could have a material adverse effect on our financial condition and results of operations.





Our expenses have increased as a result of increases in Federal Deposit Insurance Corporation insurance premiums.  Any future special assessments, increases in premiums or required prepayments will adversely affect our earnings.


15
 Index


The Federal Deposit Insurance Corporation has adopted a rule that will require us to prepay insurance premiums.  As part of a plan to restore the reserve ratio of the Deposit Insurance Fund, the FDIC imposed a special assessment equal to five basis points of assets less Tier 1 capital as of June 30, 2009, which was payable on September 30, 2009.  We recorded an expense of $205,000 during the quarter ended June 30, 2009, to reflect the special assessment.  The FDIC has also increased its maximum quarterly assessment rates and amended the method by which rates are calculated. Quarterly premium assessments paid by Newport Federal for 2009 equaled $392,000, compared to $139,000 for 2008.  Any further special assessments or increases to quarterly assessment rates will adversely affect our earnings.





In addition, in November 2009 the Federal Deposit Insurance Corporation adopted a rule requiring insured depository institutions to prepay, on December 30, 2009, their estimated quarterly risk-based assessments for the fourth quarter of 2009, and for all of 2010, 2011, and 2012.  On December 30, 2009, Newport Federal prepaid $1.5 million in estimated quarterly assessment fees for the first quarter of 2010 through the fourth quarter of 2012.  Because the prepaid assessments represent the prepayment of future expense, they do not affect Newport Federal’s capital or tax obligations.  For further discussion of how changes in insurance premiums could impact us, see “—Federal Regulations—Insurance of Deposit Accounts.”





Continued or further declines in the value of certain investment securities could require write-downs, which would reduce our earnings.





During the years ended December 31, 2009 and 2008, the Company recognized impairment charges of $76,000 and $706,000 impairment charges, respectively, for the Bank’s holding in the AMF Ultra Short Mortgage Fund.  The AMF Ultra Short Mortgage Fund has invested in private label mortgage-backed securities and US Government Agency and government sponsored agency securities. Although management believes it is possible that all principal and interest payments will be received, general market concerns over these and similar types of securities has caused the fair value to decline severely enough to warrant an other-than-temporary impairment charge.  At December 31, 2009, this fund had an unrealized gain of $66,000.





If dividends paid on our investment in the Federal Home Loan Bank of Boston continue to be suspended, or if our investment is classified as other-than-temporarily impaired or as permanently impaired, our earnings and/or stockholders’ equity could decrease.





The Bank owns common stock of the Federal Home Loan Bank of Boston (“FHLBB”) to qualify for membership in the Federal Home Loan Bank System and to be eligible to borrow funds under the FHLBB’s advance program.  As a result of losses, the FHLBB has not paid a dividend since the fourth quarter of 2008, which has decreased our earnings.  In addition, future dividend levels paid by the FHLBB may be different from past levels, and a reduction or elimination of this dividend would reduce our earnings.  Based on redemption provisions of the FHLBB common stock, the stock has no quoted market value and is carred at cost. The Bank reviews for impairment based on the ultimate recoverability of the cost basis in the FHLBB stock.  As of December 31, 2009, no impairment has been recognized on the FHLBB common stock.





A legislative proposal has been introduced that would require the Company to become a bank holding company and the Bank to convert to a national bank, state bank or state savings association.





Legislation has been proposed that would implement sweeping changes to the current bank regulatory structure. The proposal would, among other things, eliminate federal savings associations and require all federal savings associations, such as Newport Federal, to convert to a national bank, state bank or state savings association.  In addition, the OTS would be merged into the Office of the Comptroller of the Currency, and the Company would become a bank holding company subject to the supervision and regulation of the Board of Governors of the Federal Reserve System, including holding company regulatory capital requirements to which the Company is not currently subject.





Future legislative or regulatory actions responding to perceived financial and market problems could impair our rights against borrowers.


16
 Index


As a result of the recent financial crisis, the potential exists for the promulgation of new federal or state laws and regulations regarding lending and funding practices and liquidity standards, and bank regulatory agencies are expected to be active in responding to concerns and trends identified in examinations, which are expected to result in the issuance of many formal enforcement orders. Negative developments in the financial services industry and the credit markets, and the impact of new legislation in response to these developments, may negatively affect our operations by restricting our business operations, including our ability to originate or sell loans and pursue business opportunities. Compliance with such regulation also will likely increase our costs.





There have been proposals made by members of Congress and others that would reduce the amount distressed borrowers are otherwise contractually obligated to pay under their mortgage loans and limit an institution’s ability to foreclose on mortgage collateral. Were proposals such as these, or other proposals limiting our rights as a creditor, to be implemented, we could experience increased credit losses or increased expense in pursuing our remedies as a creditor.




ITEM 1B.
UNRESOLVED STAFF COMMENTS





None.





ITEM 2.
PROPERTIES





We conduct our business through our main office and branch offices.  The following table sets forth certain information relating to these facilities as of December 31, 2009.





Location

Year

Opened

Square

Footage


Date of

Lease

Expiration

Owned/

Leased

Net Book Value(Dollars in thousands)Main Office:100 Bellevue Avenue

Newport, RI  02840
1964


12,000


N/A

Owned

$
3,620Branches:165 East Main Road

Middletown, RI  02842
1978


3,000


05/30/2020

Leased

$
4991430 East Main Road

Portsmouth, RI  02871
2009


6,754


N/A

Owned

$
3,559121 Old Tower Hill Road

Wakefield, RI  02879
1996


3,000


05/14/2011

Leased

$
782 Wilder Avenue

Westerly, RI  02891
2001


1,200


N/A

Owned

$
505445 Liberty Street

Stonington, CT 06379
2009


3,500


4/30/2029

Leased

$
2,003




ITEM 3.
LEGAL PROCEEDINGS





Periodically, there have been various claims and lawsuits against us, such as claims to enforce liens, condemnation proceedings on properties in which we hold security interests, claims involving the making and servicing of real property loans and other issues incident to our business.  Newport Federal is not a party to any pending legal proceedings that we believe would have a material adverse effect on our financial condition, results of operations or cash flows.


17
 Index


PART II





ITEM 5.
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES





Market and Dividend Information.





The Company’s common stock is listed on the Nasdaq Global Market (“NASDAQ”) under the trading symbol “NFSB.”





The following table sets forth the high and low sales prices of the Company’s common stock as reported by NASDAQ.  The Company has not paid any dividends to stockholders to date.  See “Dividends” below.





High


Low2009:First Quarter

$
11.96


$
11.00Second Quarter

$
12.25


$
11.00Third Quarter

$
12.99


$
11.80Fourth Quarter

$
12.80


$
11.082008:First Quarter

$
12.85


$
11.40Second Quarter

$
13.00


$
11.60Third Quarter

$
12.54


$
11.60Fourth Quarter

$
12.29


$
10.63





Holders.





As of March 9, 2010, there were approximately 589 holders of record of the Company’s common stock.





Dividends.





The Company has not paid any dividends to its stockholders to date.  The payment of dividends in the future will depend upon a number of factors, including capital requirements, the Company’s financial condition and results of operations, tax considerations, statutory and regulatory limitations and general economic conditions.  In addition, the Company’s ability to pay dividends is dependent on dividends received from Newport Federal.  For more information regarding restrictions on the payment of cash dividends by the Company and by Newport Federal, see “Business—Regulation and Supervision—Holding Company Regulation” and “— Regulation and Supervision—Federal Savings Institution Regulation—Limitation on Capital Distributions” and Note 9 to the Consolidated Financial Statements included in this Annual Report.  No assurances can be given that any dividends will be paid or that, if paid, will not be reduced or eliminated in the future.





Securities Authorized for Issuance under Equity Compensation Plans.





See Part III,  Item 12(d) Equity Compensation Plan  Information, in this Annual Report on Form 10-K, for the table providing information as of December 31, 2009 about Company common stock that may be issued upon the exercise of options under the Newport Bancorp, Inc. 2007 Equity Incentive Plan.


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 Index


Recent Sales of Unregistered Securities; Use of Proceeds from Registered Securities.


Not applicable.





Purchases of Equity Securities by the Issuer and Affiliated Purchasers.





The following table provides certain information with regard to shares repurchased by the Company in the fourth quarter of 2009.





Period


(a)

Total Number of

Shares

Purchased


(b)

Average Price Paid

per Share


(c)

Total Number of

Shares Purchased as

Part of Publicly

Announced Plans or

Programs(1)


(d)

Maximum Number of

Shares that May Yet Be

Purchased Under the

Plans or Programs(1)October 1 - October 31


-


$
-



-



145,352November 1 - November 30


73,200


$
12.31



73,200



72,152December 1 - December 31


72,152


$
12.18



72,152



-Total


145,352


$
12.25



145,352


_________________________________


(1)  On May 14, 2009, the Company announced the commencement of a stock repurchase program to acquire up to 199,852 shares, or 5%, of the Company’s then outstanding common stock.  On December 16, 2009, the Company completed the repurchase program, with 199,852 shares acquired at an average price of approximately $12.21 per share.  Repurchases, which were conducted through open market purchases or privately negotiated transactions, were made from time to time depending on market conditions and other factors.  On February 12, 2010, the Company announced the commencement of a stock repurchase program to acquire up to 191,508 shares, or 5%, of the Company’s then outstanding common stock.  The program, which is the Company’s fourth repurchase program, will be conducted through open market purchases or privately negotiated transactions made from time to time depending on market conditions and other factors.  There is no guarantee as to the exact number of shares to be repurchased by the Company.  Repurchased shares will be held in treasury.  As of March 3, 2010, the Company had purchased 79,700 shares under this stock repurchase program, at an average cost of $12.03 per share.


19
 Index


ITEM 6.
SELECTED FINANCIAL DATA





At or For the Year Ended December 31,2009


2008


2007Performance Ratios:Return on average assets


0.16
%


(0.22
)%


0.24
%Return on average equity


1.34



(1.47
)


1.25Interest rate spread (1)


2.95



2.76



2.68Net interest margin (2)


3.27



3.32



3.55Non-interest expense to average assets


2.99



3.29



3.46Efficiency ratio (3)


85.92



90.08



85.90Average interest-earning assets to average interest-bearing liabilities


114.07



121.01



132.77Average equity to average assets


11.77



14.66



19.28Capital Ratios (Bank Only):Tangible capital


8.6



8.9



10.8Leverage capital


8.6



8.9



10.8Total risk-based capital


14.1



14.3



16.9Asset Quality Ratios:Allowance for loan losses as a percent of total loans (4)


0.98



0.87



0.81Allowance for loan losses as a percent of nonperforming loans


403.14



N/M



264.21Net charge-offs to average outstanding loans during the period


0.01



0.01



0.00Non-performing loans as a percent of total loans (4)


0.24



0.00



0.31





___________________________


(1)
Represents the difference between the weighted average yield on average interest-earning assets and the weighted average cost of average interest-bearing liabilities.


(2)
Represents net interest income as a percent of average interest-earning assets.


(3)
The December 31, 2009 and 2008 ratio represents non-interest expense divided by the sum of net interest income and non-interest income, excluding the $76,000 and $706,000 impairment charge incurred in 2009 and 2008, respectively.


(4)
Loans are presented before the allowance for loan losses but include deferred costs/fees.  Construction loans are included net of unadvanced funds.


N/M
Not meaningful because there are no nonperforming loans and, consequently, the denominator in the ratio was zero.




ITEM 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION





Overview





Income.Newport Federal’s primary source of pre-tax income is net interest income.  Net interest income is the difference between interest income, which is the income that we earn on our loans and investments, and interest expense, which is the interest that the Bank pays on deposits and borrowings.  Other significant sources of


20
 Index


pre-tax income are service charges (mostly from service charges on deposit accounts, loan servicing fees and income from bank-owned life insurance).  In some years, Newport Federal recognizes income from the sale of loans and securities.





Allowance for Loan Losses.  The allowance for loan losses is a valuation allowance for probable losses inherent in the loan portfolio.  The Bank evaluates the need to establish allowances against losses on loans on a quarterly basis.  When additional allowances are necessary, a provision for loan losses is charged to earnings.





Expenses.  The non-interest expenses Newport Federal incurs in operating the Bank’s business consist of compensation and employee benefits expenses, occupancy expenses, data processing expenses and other miscellaneous expenses.





Compensation and employee benefits consist primarily of salaries and wages paid to the Bank’s employees, stock-based compensation, payroll taxes, expenses for health insurance, retirement plans, and other employee benefits.





Occupancy expenses, which are the fixed and variable costs of buildings and equipment, consist primarily of depreciation charges, furniture and equipment expenses, maintenance, real estate taxes and costs of utilities. Depreciation of premises and equipment is computed using the straight-line method based on the useful lives of the related assets, which range from three to forty years.  Leasehold improvements are amortized over the shorter of the useful life of the asset or the expected term of the lease.  The expected term includes lease option periods to the extent that the exercise of such options is reasonably assured.





Data processing expenses are the fees paid to third parties for processing customer information, deposits and loans.





Other expenses include expenses for professional services, advertising, office supplies, postage, telephone, insurance, charitable contributions, regulatory assessments, FDIC deposit insurance and other miscellaneous operating expenses.





Critical Accounting Policies





Newport Bancorp considers accounting policies involving significant judgments and assumptions by management that have, or could have, a material impact on the carrying value of certain assets or on results of operations to be critical accounting policies. The Company considers the allowance for loan losses, other-than-temporary impairment of securities and the valuation of the net deferred tax asset to be our critical accounting policies.





Allowance for Loan Losses.





The allowance for loan losses is the amount estimated by management as necessary to cover losses inherent in the loan portfolio at the balance sheet date. The allowance is established through the provision for loan losses, which is 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.





Determining the amount of the allowance for loan losses necessarily involves a high degree of judgment. Management evaluates the level of the allowance at least quarterly and establishes the provision for loan losses based upon a review of the collectability 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, prevailing economic conditions and other factors related to the collectability of the loan portfolio. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available. Although management uses the best information available to establish the allowance for loan losses, future adjustments to the allowance may be necessary if economic conditions differ substantially from the assumptions used in making the evaluation. In addition, the Office of Thrift Supervision, as an integral part of its examination process, periodically reviews Newport Federal’s allowance for loan losses. Such agency may require the Bank to recognize adjustments to the allowance based on its judgments about information available to it


21
 Index


at the time of its examination. A large loss could deplete the allowance and require increased provisions to replenish the allowance, which would adversely affect earnings.





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-impaired 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.





Other-Than-Temporary Impairment of Securities.





Declines in the value of marketable equity securities below their cost are evaluated for other-than-temporary impairment (“OTTI”) based on the severity and duration of the impairment.  For debt securities OTTI is required to be recognized (1) if the Company intends to sell the security; (2) if it is “more likely than not” that the Company will be required to sell the security before recovery of its amortized cost basis; or (3) the present value of expected cash flows is not sufficient to recover the entire amortized cost basis.





Income Taxes.





Management considers accounting for income taxes as a critical accounting policy due to the subjective nature of certain estimates that are involved in the calculation.  Newport Federal uses the asset and liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases.  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.  The Bank 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 Bank generating federal and state taxable income, as applicable, in future periods in amounts sufficient to offset the deferred tax charges they are expected to reverse.  Adjustments to increase or decrease the valuation allowance are generally charged or credited, respectively, to income tax expense.





Balance Sheet Analysis





Overview.During 2009, the Company’s assets increased by $26.5 million, or 6.1%, to $458.9 million.  The majority of the asset growth was concentrated in net loans, which increased by $18.5 million, short-term investments, which increased by $8.7 million, premises and equipment, which increased by $2.7 million, and the new prepaid FDIC insurance assesment, which increased by $1.5 million. The prepaid FDIC insurance assessment was recorded as a prepaid asset and will be recognized in expense in the appropriate quarters over the next three years.  The growth in assets was partially offset by a decrease of $7.4 million in securities.  The asset growth was principally funded by a $32.8 million, or 14.3%, increase in deposits, partially offset by a $4.0 million decrease in FHLB advances.





Loans.Newport Federal’s primary lending activity is the origination of loans secured by real estate.  The


22
 Index


Bank originates one-to-four family residential loans, commercial real estate and multi-family loans and home equity loans.  To a lesser extent, Newport Federal originates construction loans and consumer loans.  Net loans increased from $333.0 million at December 31, 2008 to $351.5 million at December 31, 2009, or 5.5%.  Net loans represented 76.60% of total assets at December 31, 2009.





The largest segment of the Bank’s loan portfolio is one-to-four family residential loans, which increased by $7.4 million in 2009.  The percentage of one-to-four family loans as a percentage of total loans decreased in both 2009 and 2008.  During 2009 and 2008, the Bank increased other lending, particularly, multi-family and commercial real estate lending.





One-to-four family loans totaled $191.2 million, which represented 53.7% of total loans at December 31, 2009, compared to $183.8 million, which represented 54.5% of total loans at December 31, 2008.  The Bank offers fixed and adjustable rate one-to-four family residential loans. At December 31, 2009, the Bank had $176.5 million in fixed rate and $14.6 million in adjustable rate one-to-four family loans.





Commercial real estate loans totaled $106.6 million and represented 29.9% of total loans at December 31, 2009, compared to $93.6 million, representing 27.8% of total loans at December 31, 2008.  The increase of $13.0 million, or 13.9%, was a result of the Company’s continued efforts to expand its commercial real estate loan portfolio.  From December 31, 2005 to December 31, 2009, commercial real estate loans as a percentage of total loans increased from 20.3% to 29.9%. respectively.





Multi-family loans totaled $22.5 million, or 6.3% of total loans at December 31, 2009, compared to $17.4 million, or 5.2% of total loans at December 31, 2008.  Construction loans totaled $9.7 million, representing 2.7% of total loans at December 31, 2009, compared to $11.2 million, representing 3.3% of total loans at December 31, 2008.





Home equity loans and lines totaled $25.9 million, representing 7.3% of total loans at December 31, 2009, a decrease of $4.5 million from $30.4 million at December 31, 2008.





The Bank also originates consumer loans secured by automobiles or passbook or certificate accounts.  Consumer loans totaled $223,000 at December 31, 2009, compared to $601,000 at December 31, 2008.


23
 Index


The following table sets forth the composition of the Bank’s loan portfolio at the dates indicated.





At December 31,2009


2008


2007


2006


2005Amount


Percent


Amount


Percent


Amount


Percent


Amount


Percent


Amount


Percent(Dollars in thousands)Real estate-mortgage:One-to-four family

$
191,154



53.67
%

$
183,767



54.53
%

$
169,179



57.08
%

$
157,448



60.67
%

$
152,385



64.90
%Multi-family


22,535



6.33



17,379



5.16



9,494



3.20



9,360



3.61



6,726



2.87Commercial


106,605



29.93



93,632



27.78



76,919



25.95



57,650



22.21



47,742



20.33Home equity loans and lines


25,891



7.27



30,425



9.03



30,934



10.44



29,275



11.28



23,538



10.02Total real estate-mortgage


346,185



97.20



325,203



96.50



286,526



96.67



253,733



97.77



230,391



98.12Construction


9,736



2.73



11,204



3.32



9,427



3.18



4,685



1.80



3,151



1.34Consumer


223



0.07



601



0.18



442



0.15



1,112



0.43



1,263



0.54Total loans


356,144



100.00
%


337,008



100.00
%


296,395



100.00
%


259,530



100.00
%


234,805



100.00
%Allowance for losses


(3,467
)






(2,924
)






(2,399
)






(1,973
)






(1,853
)Net deferred loan fees


(1,178
)






(1,055
)






(912
)






(791
)






(626
)Loans, net

$
351,499






$
333,029






$
293,084






$
256,766






$
232,326


24
 Index


The following table sets forth certain information at December 31, 2009 regarding the dollar amount of loan principal repayments coming due during the periods indicated.  The table does not include any estimate of prepayments, which significantly shorten the average life of all loans and may cause our actual repayment experience to differ from that shown below.  Demand loans having no stated schedule of repayments and no stated maturity are reported as due in one year or less.





One-to-Four

Family Real

Estate

Loans


Multi-

Family

Real Estate

Loans


Commercial

Real Estate

Loans


Home

Equity Loans

&

Lines(Dollars in thousands)Amounts due in:One year or less

$
14


$
1,100


$
4,815


$
79More than one year to five years


3,469



1,871



14,780



3,019More than five years to ten years


18,084



18,578



81,684



10,797More than ten years to twenty years


37,644



761



5,326



11,996More than twenty years


131,943



225



-



-Total

$
191,154


$
22,535


$
106,605


$
25,891





Construction

Loans


Consumer

Loans


Total

Loans(Dollars in thousands)Amounts due in:One year or less

$
6,333


$
164


$
12,505More than one year to five years


1,890



59



25,088More than five years to ten years


1,513



-



130,656More than ten years to twenty years


-



-



55,727More than twenty years


-



-



132,168Total

$
9,736


$
223


$
356,144





The following table sets forth the dollar amount of all loans at December 31, 2009 that are due after December 31, 2010 and have either fixed interest rates or floating or adjustable interest rates.  The amounts shown below exclude the allowance for loan losses and net deferred loan fees.





Fixed Rates


Floating or

Adjustable Rates


Total(Dollars in thousands)Real estate-mortgage loans:One-to-four family

$
176,493


$
14,648


$
191,141Multi-family


4,276



17,159



21,435Commercial


39,179



62,612



101,791Home equity loans and lines


13,233



12,578



25,811Construction


-



3,402



3,402Consumer


35



24



59Total

$
233,216


$
110,423


$
343,639


25
 Index


Securities.The securities portfolio consists of mutual funds and mortgage-backed securities.





At December 31,2009


2008


2007Amortized

Cost


Fair

Value


Amortized

Cost


Fair

Value


Amortized

Cost


Fair

Value(Dollars in thousands)Securities available for sale:Mutual funds

$
6,388


$
6,249


$
6,651


$
6,390


$
7,117


$
6,966Securities held to maturity:Mortgage-backed securities

$
44,898


$
46,940


$
52,162


$
54,198


$
30,886


$
30,751





All mortgage-backed securities are backed by residential mortgage loans and are issued by government sponsored enterprises.  Newport Federal had no investments in one issuer that had an aggregate book value in excess of 10% of our equity at December 31, 2009.





During the years ended December 31, 2009 and 2008, the Company recognized impairment charges of $76,000 and $706,000, respectively, for the Bank’s holding in a mutual fund, which has invested in private-label mortgage-backed securities and US Government Agency and government sponsored agency securities. Although management believes it is possible that all principal and interest payments will be received, general market concerns over these and similar types of securities has caused the fair value to decline severely enough to warrant an other-than-temporary impairment charge.  Given the uncertainty and illiquidity in the markets for such securities, the Bank cannot be certain that future impairment charges will not be required against this investment. This fund has a remaining cost basis of $1.7 million and an unrealized gain of $66,000 at December 31, 2009.





At December 31, 2009, one mutual fund had an unrealized loss with aggregate depreciation of 11.6% from the Company’s cost basis.  This fund did not reduce or eliminate its dividend payments.  As of December 31, 2009, this fund had 94.4% invested in mortgage-backed securities and 5.6% in repurchase agreements.  The Company has determined that this unrealized loss relates primarily to illiquidity in the market for the securities underlying this fund and not to credit issues.  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.  The effective duration of this fund is 1.6 years.  The Company has reviewed the financial condition of the issuers and has determined that the decline is temporary.


26
 Index


The following table sets forth the stated maturities and weighted average yields of debt securities at December 31, 2009.





One Year

or Less


More than

One Year to

Five Years


More than

Five Years to

Ten Years


More than

Ten Years


TotalCarrying

Value


Weighted

Average

Yield


Carrying

Value


Weighted

Average

Yield


Carrying

Value


Weighted

Average

Yield


Carrying

Value


Weighted

Average

Yield


Carrying

Value


Weighted

Average

Yield(Dollars in thousands)Securities held to maturity:Mortgage-backed securities

$
732



3.50
%

$
-



-
%

$
-



-
%

$
44,166



4.94
%

$
44,898



4.91
%


27
 Index


Deposits.  Newport Federal’s deposit base is comprised of demand deposits, money market and savings accounts and time deposits.  The Bank considers demand deposits, money market and savings accounts to be core deposits.  Deposits increased$32.8 million, or 14.3%, for the year ended December 31, 2009.  Deposit growth in 2009 was focused in NOW/Demand accounts, which increased by $18.4 million or 20.2%, money market accounts, which increased by $7.4 million or 18.8%, time deposit accounts, which increased by $5.8 million, or 7.9%, and savings accounts, which increased by $1.2 million, or 4.7%. Time deposits represented 30.2% of the Company’s total deposit balances at December 31, 2009, compared to 32.0% at December 31, 2008.  NOW/Demand accounts represented 41.7% and 39.6% of the Company’s total deposit balances at December 31, 2009 and 2008, respectively.  The Bank’s rewards checking account is responsible for the majority of the increase in the NOW/Demand deposit category.





The following table sets forth the balances of the Bank’s deposit products at the dates indicated.





At December 31,2009


2008


2007(Dollars in thousands)Noninterest-bearing demand deposits

$
34,520


$
32,776


$
31,162Interest-bearing demand deposits


74,589



57,982



28,061Money market deposit accounts


46,991



39,540



28,763Regular savings


26,793



25,591



25,963Certificates of deposit


79,053



73,234



79,336Total

$
261,946


$
229,123


$
193,285





The following table indicates the amount of jumbo certificates of deposit by time remaining until maturity as of December 31, 2009.  Jumbo certificates of deposit require minimum deposits of $100,000.  The Bank does not offer special rates for jumbo certificates.





Maturity Period

Certificates of

Deposit(Dollars in thousands)Three months or less

$
12,307Over three through six months


6,234Over six through twelve months


6,627Over twelve months


2,224Total

$
27,392








Borrowings.Newport Federal utilizes borrowings from the Federal Home Loan Bank of Boston and repurchase agreements to supplement the Bank’s supply of funds for loans and investments.





Federal Home Loan Bank advances decreased by $4.0 million to $141.5 million at December 31, 2009, due to excess liquidity available as borrowings matured.  Federal Home Loan Bank advancesincreased by $25.0 million to $105.4 million during 2008.  During 2007 and 2008, the Bank borrowed $40.0 million using repurchase agreements.  These borrowings were used to help fund loan originations and to purchase securities held to maturity.  For additional information regarding our borrowings, see Note 7 to the notes to Consolidated Financial Statements included in this Annual Report.


28
 Index


Results of Operations for the Years Ended December 31, 2009 and 2008





Overview.





2009


2008(Dollars in thousands)Net income (loss)

$
708


$
(848
)Return on average assets


0.16
%


(0.22
)%Return on average equity


1.34
%


(1.47
)%Average equity to average assets


11.77
%


14.66
%





Net income  in 2009 was $708,000 compared to a net loss of $848,000 in 2008. The $1.4 million increase in the Bank’s net interest income, the $554,000 increase in non-interest income and the $167,000 decrease in the tax provision, partially offset by the $545,000 increase in non-interest expenses, contributed to the increase in net income in 2009.  The $1.4 million increase in net interest income was primarily the result of higher levels of interest-earning assets and an increase in the interest rate spread.  The $554,000 increase in non-interest income is primarily a result of the $706,000 impairment charge recorded in 2008 for the Bank’s holding in the AMF Ultra Short Mortgage Fund, as compared to the $76,000 impairment charge recorded in 2009.  Non-interest expense for 2009 increased to $13.5 million from $12.9 million in 2008, an increase of 4.2%.  The increase in non-interest expense between the two years is attributable to an increase in occupancy and equipment expense, data processing fees, and FDIC insurance costs, offset by a decrease in salaries and employee benefits and marketing expense.  The increase in occupancy and equipment expense and data processing fees is due to the overall increase in operating costs associated with the opening of two new branch locations during 2009.  The increase in FDIC deposit insurance expense is due to the Company’s increased premium costs, coupled with the $205,000 FDIC special assessment charge in the second quarter of 2009.  The decrease in salaries and benefits is primarily due to the reduction in the stock-based compensation expense associated with option grants and restricted stock awards.  The accelerated method of expense recognition was adopted at the inception of the equity incentive plan on October 1, 2007, resulting in a higher stock-based compensation expense in 2008 compared to 2009. Effective tax rates were 53.9% and 673.0% for 2009 and 2008, respectively.  The higher effective tax rate in 2008, was primarily due to an increase in the valuation reserve against deferred tax assets and the write-down of the state deferred tax assets in conjunction with the formation of a passive investment company subsidiary.


29
 Index


Average Balances and Yields.The following table presents information regarding average balances of assets and liabilities, the total dollar amounts of interest income and dividends from average interest-earning assets, the total dollar amounts of interest expense on average interest-bearing liabilities, and the resulting annualized average yields and costs.  The yields and costs for the periods indicated are derived by dividing income or expense by the average balances of assets or liabilities, respectively, for the periods presented.  For purposes of this table, average balances have been calculated using daily average balances, nonaccrual loans are included in average balances only, and loan fees are included in interest income on loans.  None of the income reflected in the following table is tax-exempt income.





Year Ended December 31,2009


2008


2007Average

Balance


Interest

And

Dividends


Yield/

Cost


Average

Balance


Interest

And

Dividends


Yield/

Cost


Average

Balance


Interest

And

Dividends


Yield/

Cost(Dollars in thousands)Assets:Interest-earning assets:Loans

$
346,022


$
20,287



5.86
%

$
313,126


$
19,296



6.16
%

$
272,615


$
17,195



6.31
%Securities


55,054



2,709



4.92



40,778



2,079



5.10



11,203



567



5.06Other interest-earning assets


10,043



12



0.12



9,467



269



2.83



5,975



226



3.78Total interest-earning assets


411,119



23,008



5.60



363,371



21,644



5.96



289,793



17,988



6.21Bank-owned life insurance


10,105











9,667











9,024Noninterest-earning assets


28,329











19,549











14,480Total assets

$
449,553










$
392,587










$
313,297Liabilities and equity:Interest-bearing liabilities:Interest-bearing demand deposits

$
67,691



1,347



1.99


$
43,333



983



2.27


$
26,011



98



0.38Savings accounts


25,783



69



0.27



25,527



83



0.33



29,131



94



0.32Money market accounts


44,517



694



1.56



34,655



1,004



2.90



23,123



900



3.89Certificates of deposit


82,807



2,199



2.66



78,232



2,751



3.52



83,593



3,796



4.54Total interest-bearing deposits


220,798



4,309



1.95



181,747



4,821



2.65



161,858



4,888



3.02Borrowings


139,601



5,238



3.75



118,538



4,767



4.02



56,412



2,806



4.97Total interest-bearing liabilities


360,399



9,547



2.65



300,285



9,588



3.19



218,270



7,694



3.52Demand deposits


31,954











32,258











32,400Noninterest-bearing liabilities


4,309











2,479











2,221Total liabilities


396,662











335,022











252,891Equity


52,891











57,565











60,406Total liabilities and equity

$
449,553










$
392,587










$
313,297Net interest income





$
13,461










$
12,056










$
10,294Interest rate spread










2.95
%










2.77
%










2.69
%Net interest margin










3.27
%










3.32
%










3.55
%Average interest-earning assets to average interest- bearing liabilities










114.07
%










121.01
%










132.77
%


30
 Index


Rate/Volume Analysis.  The following table sets forth the effects of changing rates and volumes on our net interest income.  The rate column shows the effects attributable to changes in rate (changes in rate multiplied by prior volume).  The volume column shows the effects attributable to changes in volume (changes in volume multiplied by prior rate).  The net column represents the sum of the prior columns.  For purposes of this table, changes attributable to changes in both rate and volume that cannot be segregated have been allocated proportionately based on the changes due to rate and the changes due to volume.





2009 Compared to 2008Increase (Decrease)

Due toVolume


Rate


Net(Dollars in thousands)Interest and dividend income:Loans

$
1,960


$
(970
)

$
990Securities


705



(75
)


630Other interest-earning assets


15



(271
)


(256
)Total interest-earning assets


2,680



(1,316
)


1,364Interest expense:Deposits


913



(1,425
)


(512
)Borrowings


806



(335
)


471Total interest-bearing liabilities


1,719



(1,760
)


(41
)Net change in interest income

$
961


$
444


$
1,405





Net Interest Income.Net interest income for the year ended December 31, 2009 was $13.5 million, compared to $12.1 million for year December 31, 2008, an increase of 11.7%.  The increase in net interest income is due to the increase in the average balance of interest-earning assets of $47.7 million, or 13.1%, and a decrease in total interest expense, partially offset by the decrease in the yield on interest-earning assets. The yield on interest-earning assets decreased to 5.60% in 2009 from 5.96% in 2008, a decrease of 36 basis points.  The cost of interest-bearing liabilities decreased to 2.65% in 2009 from 3.19% in 2008, a decrease of 54 basis points.  The average cost of interest-bearing deposits decreased by 70 basis points, as a result of the continued low interest rate environment in 2009.  With decreases in short-term market interest rates, customers have increasingly shown a preference for higher-yielding core accounts and short-term time deposits, rather than the longer-term time deposit accounts.   Despite the fact that the average balance of borrowings increased $21.1 million in 2009, the low interest rate environment  has also contributed towards the 27 basis points decrease in total cost of borrowings from 2008 to 2009.  As the older and higher-cost borrowings matured, newer and lower-cost borrowings were purchased, which contributed towards the decrease in cost of borrowings in 2009. The Company’s interest rate spread increased 18 basis points to 2.95% at December 31, 2009 from 2.77% at December 31, 2008.





Provision for Loan Losses.The loan loss provision for the years ended December 31, 2009 and December 31, 2008 was $593,000 and $568,000, respectively.  The provision was increased primarily due to the changes in the composition of the loan portfolio, including the increase in commercial real estate mortgages and changes in general economic conditions including the slowing economy and decreasing housing prices.


31
 Index


Non-Interest Income.The following table shows the components of non-interest income and the percentage changes from year to year.





Year Ended December 31,2009


2008


% Change(Dollars in thousands)Customer service fees

$
1,740


$
1,801



(3.4
)%Gain on sale of available-for-sale securities


10



-



-Impairment loss on available-for-sale securities


(76
)


(706
)


(89.2
)Bank-owned life insurance


400



409



(2.2
)Other


56



72



(22.2
)Total

$
2,130


$
1,576



35.2
%





Non-interest income for 2009 totaled $2.1 million, an increase of $554,000, or 35.2%, compared to 2008.  The increase in non-interest income is primarily due to the $706,000 impairment charge recorded in 2008 for the Bank’s holdings in the AMF Ultra Short Mortgage Fund, as compared to the $76,000 impairment charge recorded in 2009.





Non-Interest Expense.The following table shows the components of non-interest expense and the percentage changes for the years indicated.





2009


2008


% Change(Dollars in thousands)Salaries and employee benefits

$
7,560


$
7,836



(3.5
)%Occupancy and equipment, net


1,798



1,372



31.0Data processing


1,388



1,103



25.8Professional fees


476



490



(2.9
)Marketing


898



1,245



(27.9
)FDIC insurance


597



139



329.5All other.


744



731



1.8Total

$
13,461


$
12,916



4.2Efficiency ratio


85.92
%


90.08
%


4.16
%





Total  non-interest expenses for 2009 increased to $13.5 million from $12.9 million for 2008, an increase of 4.2%.  The increase between the two years is attributable to an increase in occupancy and equipment expense, data processing fees, and FDIC insurance costs, offset by a decrease in salaries and employee benefits and marketing expense.  The increase in occupancy and equipment expense and data processing fees is due to the overall increase in operating costs associated with the opening of two new branch locations during 2009.  The increase in FDIC deposit insurance expense is due to the Company’s increased premium costs, coupled with the $205,000 FDIC special assessment charge in the second quarter of 2009.  The decrease in salaries and benefits is primarily due to the reduction in the stock-based compensation expense associated with option grants and restricted stock awards.  The accelerated method of expense recognition was adopted at the inception of the equity incentive plan on October 1, 2007, resulting in a higher stock-based compensation expense in 2008 compared to 2009.





Income Tax Expense.The incometax expense for 2009 was $829,000 compared to the income tax expense of $996,000 for 2008.  The effective tax rates were 53.9% and 673.0% in 2009 and 2008, respectively.  The effective tax rate in 2009 and 2008 include the non-deductible compensation expense recorded for a portion of the incentive stock options and additional valuation reserves against the Company’s deferred tax assets (discussed below), and in 2008, the write-down of state deferred tax assets in conjunction with the formation of a passive investment company subsidiary, which were partially offset by non-taxable BOLI income.


32
 Index


The deferred tax assets applicable to loss carry forwards relating to the deduction for the donation to the charitable foundation in 2006 are recoverable, only to the extent that 10% pre-tax of income exceeds the deduction during the five-year carry forward period.  At December 31, 2007, Newport Bancorp had recognized a valuation allowance of $492,000 against the deferred tax asset related to this loss carry forward. This valuation allowance is assessed quarterly for recoverability, and based on management’s assessments during  2009 and 2008, the valuation allowance was increased by $201,000 and $250,000, respectively, due to changes in projected future taxable income.  At December 31, 2009, the valuation allowance for this deferred tax asset amounted to $943,000.








Risk Management





Overview.  Managing risk is an essential part of successfully managing a financial institution.  Newport Bancorp’s most prominent risk exposures are credit risk, interest rate risk and market risk.  Credit risk is the risk of not collecting the interest and/or the principal balance of a loan or investment when it is due.  Interest rate risk is the potential reduction of interest income as a result of changes in interest rates.  Market risk arises from fluctuations in interest rates that may result in changes in the values of financial instruments, such as available-for-sale securities that are accounted for on a mark-to-market basis.  Other risks that the Company faces are operational risks, liquidity risks and reputation risk.  Operational risks include risks related to fraud, regulatory compliance, processing errors, technology and disaster recovery.  Liquidity risk is the possible inability to fund obligations to depositors, lenders or borrowers.  Reputation risk is the risk that negative publicity or press, whether true or not, could cause a decline in our customer base or revenue.





Credit Risk Management.  Newport Federal’s strategy for credit risk management focuses on having well-defined credit policies and uniform underwriting criteria and providing prompt attention to potential problem loans.





When a borrower fails to make a required loan payment, the Bank takes a number of steps to have the borrower cure the delinquency and restore the loan to current status.  When the loan becomes 15 days past due a late notice is sent to the borrower.  When the loan becomes 18 days past due, a more formal letter is sent.  When a loan becomes 25 days past due, the borrower is typically called.  After 30 days, the Bank regards the borrower as in default.  The borrower is promptly sent a letter from the Bank’s attorney and the Bank may commence collection proceedings.  If a foreclosure action is instituted and the loan is not brought current, paid in full, or refinanced before the foreclosure sale, the real property securing the loan generally is sold at foreclosure.  Generally, when a consumer loan becomes 60 days past due, the Bank institutes collection proceedings and attempts to repossess any personal property that secures the loan.  Management informs the board of directors monthly of the amount of loans delinquent more than 30 days, all loans in foreclosure and repossessed property that it owns.





Analysis of Nonperforming and Classified Assets.  Newport Bancorp considers repossessed assets and loans that are 90 days or more past due to be nonperforming assets.  Loans are generally placed on nonaccrual status when they become 90 days delinquent at which time the accrual of interest ceases and the allowance for any uncollectible accrued interest is established and charged against operations.  Typically, payments received on a nonaccrual loan are applied to the outstanding principal and interest as determined at the time of collection of the loan.


33
 Index


The following table provides information with respect to the Bank’s nonperforming assets at the dates indicated.





At December 31,2009


2008


2007


2006


2005(Dollars in thousands)Nonaccrual loans:Commercial real estate

$
860


$
–


$
908


$
–


$
–Total


860



–



908



–



–Accruing loans past due 90 days or more


–



–



–



–



–Total nonperforming loans


860



–



908



–



–Real estate owned


–



–



–



–



–Other nonperforming assets


–



–



–



–



–Total nonperforming assets

$
860


$
–


$
908


$
–


$
–Total nonperforming loans to total loans


0.24
%


0.00
%


0.31
%


0.00
%


0.00
%Total nonperforming loans to total assets


0.19
%


0.00
%


0.25
%


0.00
%


0.00
%Total nonperforming assets to total assets


0.19
%


0.00
%


0.25
%


0.00
%


0.00
%





Gross interest income that would have been recorded for 2009 had nonaccruing loans been current according to their original terms, amounted to $17,000. The amount of interest income on such loans that was included in net income in 2009 was $31,000.





The Bank did not have any troubled debt restructurings at any of the dates presented.





Nonaccrual loans at December 31, 2009, consist of one commercial real estate loan and there are no losses expected on this loan.





Federal regulations require the Newport Federal to review and classify the Bank’s assets on a regular basis.  In addition, the Office of Thrift Supervision has the authority to identify problem assets and, if appropriate, require them to be classified.  There are three classifications for problem assets:  substandard, doubtful and loss.  “Substandard assets” must have one or more defined weaknesses and are characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected.  “Doubtful assets” have the weaknesses of substandard assets with the additional characteristic that the weaknesses make collection or liquidation in full on the basis of currently existing facts, conditions and values questionable, and there is a high possibility of loss.  An asset classified “loss” is considered uncollectible and of such little value that continuance as an asset of the institution is not warranted.  The regulations also provide for a “special mention” category, described as assets which do not currently expose us to a sufficient degree of risk to warrant classification but do possess credit deficiencies or potential weaknesses deserving our close attention.  When the Bank classifies an asset as substandard or doubtful, the asset is assessed for impairment, and if impaired, a specific valuation allowance for loan losses is established.  If classified loans are not deemed to be impaired, the Bank applies a general reserve as further described below.  If Newport Federal classifies an asset as loss, it is charged off at an amount equal to 100% of the portion of the asset classified loss.


34
 Index


The following table shows the aggregate amounts of our classified assets at the dates indicated.





At December 31,2009


2008


2007(Dollars in thousands)Special mention loans

$
6,242


$
73


$
-Substandard loans


4,570



-



908Substandard securities


3,582



-



-Doubtful assets


-



-



-Loss assets


-



-



-Total classified assets

$
14,394


$
73


$
908





At December 31, 2009, loans classified as substandard, which the Company considers to be potential problem loans, consist of commercial real estate mortgages.





Delinquencies.  The following table provides information about delinquencies under 90 days in our loan portfolio at the dates indicated.





At December 31,2009


2008


200730-59

Days

Past Due


60-89

Days

Past Due


30-59

Days

Past Due


60-89

Days

Past Due


30-59

Days

Past Due


60-89

Days

Past Due(Dollars in thousands)Real estate mortgage:One-to-four family

$
229


$
-


$
688


$
118


$
468


$
82Commercial


-



-



336



-



-



76Home equity loans and lines


146



-



-



-



-



-Consumer


-



-



-



-



-



7Total

$
375


$
-


$
1,024


$
118


$
468


$
165Delinquent loans to total loans


0.11
%


0.00
%


0.31
%


0.04
%


0.16
%


0.06
%





Analysis and Determination of the Allowance for Loan Losses.The allowance for loan losses is a valuation allowance for probable losses inherent in the loan portfolio.  Newport Federal evaluates the need to establish allowances against losses on loans on a quarterly basis.  When additional allowances are necessary, a provision for loan losses is charged to earnings.





Our methodology for assessing the appropriateness of the allowance for loan losses consists of:  (1) a specific valuation allowance on identified impaired loans; and (2) a general valuation allowance on the remainder of the loan portfolio.  Although the Bank determines the amount of each element of the allowance separately, the entire allowance for loan losses is available to absorb losses in the loan portfolio.





Specific Valuation Allowance on Identified Impaired Loans.  Newport Federal identifies impaired loans by reviewing all delinquent loans, classified loans and other loans that management may have concerns about collectability.  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 either the present value of expected future cash flows discounted at the loan’s effective interest rate or the fair value of the collateral if the loan is collateral dependent.





General Valuation Allowance on the Remainder of the Loan Portfolio.  Newport Federal establishes a general allowance for loans that are not impaired loans, to recognize the inherent losses associated with lending


35
 Index


activities.  This general valuation allowance is determined by segregating the loans by loan type and risk classification and assigning allowance percentages to each category.  The percentages are adjusted for significant changes in factors that, in management’s judgment, affect the collectability of the portfolio as of the evaluation date.  These significant factors may include changes in lending policies and procedures, changes in existing general economic and business conditions affecting our primary lending areas, credit quality trends, collateral value, loan volumes and concentrations, seasoning of the loan portfolio, recent loss experience in particular segments of the portfolio, duration of the current business cycle and bank regulatory examination results.  The applied loss factors are reevaluated periodically to ensure their relevance in the current economic environment.





The Bank engages an independent third party to conduct an annual review of its commercial real estate portfolio.  This loan review, which typically includes a 50% penetration of the commercial real estate portfolio, provides a credit evaluation of individual loans to determine whether the risk ratings assigned are appropriate.





The Office of Thrift Supervision, as an integral part of its examination process, periodically reviews our allowance for loan losses.  The Office of Thrift Supervision may require the Bank to make additional provisions for loan losses based on judgments different from ours.





At December 31, 2009 and 2008, the allowance for loan losses represented 0.98% and 0.87% of total loans, respectively.  No portion of the allowance was allocated to impaired loans at December 31, 2009 or 2008.  The allowance for loan losses increased from $2.9 million at December 31, 2008, to $3.5 million at December 31, 2009, or 18.6%.  The increase in 2009, was primarily due to the growth and changes in the composition of the loan portfolio and changes in economic conditions.  The increase in the allowance for loan losses as a percentage of the loan portfolio was primarily due to additional general reserves provided for an increase in classified loans that, although currently performing, represent increased risk. The Bank has not originated and does not own any sub-prime residential mortgage loans. There are $10.8 million of classified and criticized commercial loans that are under watch by management.  Total classified and criticized loans consist of $4.6 million in the sub-standard category and $6.2 million in the special mention category.  Total classified and criticized loans represent 3.1% of the Company’s total gross loans.





The following table sets forth the breakdown of the allowance for loan losses by loan category at the dates indicated.





At December 31,2009


2008Amount


% of

Allowance

to Total

Allowance


% of

Loans in

Category

to Total

Loans


Amount


% of

Allowance

to Total

Allowance


% of

Loans in

Category

to Total

Loans(Dollars in thousands)Real estate mortgage:One-to-four family

$
956



27.57
%


53.67
%

$
916



31.33
%


54.53
%Multi-family


338



9.75



6.33



260



8.89



5.16Commercial


1,881



54.25



29.93



1,404



48.02



27.78Home equity loans and lines


142



4.10



7.27



167



5.71



9.03Construction


146



4.21



2.73



168



5.74



3.32Other consumer


4



0.12



0.07



9



0.31



0.18Total allowance for loan losses

$
3,467



100.00
%


100.00
%

$
2,924



100.00
%


100.00
%


36
 Index




At December 31,2007


2006


2005Amount


% of

Allowance

to Total

Allowance


% of

Loans in

Category

to Total

Loans


Amount


% of

Allowance

to Total

Allowance


% of

Loans in

Category

to Total

Loans


Amount


% of

Allowance

to Total

Allowance


% of

Loans in

Category

to Total

Loans(Dollars in thousands)Real estate mortgage:One-to-four family

$
835



34.80
%


57.08
%

$
787



39.89
%


60.67
%

$
912



49.22
%


64.90
%Multi-family


137



5.71



3.20



121



6.13



3.61



81



4.37



2.87Commercial


1,115



46.48



25.95



749



37.96



22.21



573



30.92



20.33Home equity loans and lines


170



7.09



10.44



241



12.22



11.28



234



12.63



10.02Construction


136



5.67



3.18



61



3.09



1.80



38



2.05



1.34Other consumer


6



0.25



0.15



14



0.71



0.43



15



0.81



0.54Total allowance for loan losses

$
2,399



100.00
%


100.00
%

$
1,973



100.00
%


100.00
%

$
1,853



100.00
%


100.00
%





Although management believes the best information available was used to establish the allowance for loan losses, future adjustments to the allowance for loan losses may be necessary and our results of operations could be adversely affected if circumstances differ substantially from the assumptions used in making the determinations.  Furthermore, while management believes it has established the allowance for loan losses in conformity with generally accepted accounting principles, there can be no assurance that regulators, in reviewing the loan portfolio, will not require an increase in the allowance for loan losses.  In addition, because future events affecting borrowers and collateral cannot be predicted with certainty, there can be no assurance that the existing allowance for loan losses is adequate or that increases will not be necessary should the quality of any loans deteriorate as a result of the factors discussed above.  Any material increase in the allowance for loan losses may adversely affect our financial condition and results of operations.


37
 Index


Analysis of Loan Loss Experience.  The following table sets forth an analysis of the allowance for loan losses for the periods indicated.  Where specific loan loss allowances have been established, any difference between the loss allowance and the amount of loss realized has been charged or credited to current income.








Years Ended December 31,2009


2008


2007


2006


2005(Dollars in thousands)Balance at beginning of year

$
2,924


$
2,399


$
1,973


$
1,853


$
1,655Provision for loan losses


593



568



426



120



198Charge offs:Real estate mortgage:One-to-four family


–



–



–



–



–Non-residential


–



–



–



–



–Home equity loans and lines


50



40



–



–



–Consumer loans


–



7



–



–



–Total charge-offs


50



47



–



–



–Recoveries:Real estate mortgage:One-to-four family


–



–



–



–



–Non-residential


–



–



–



–



–Home equity loans and lines


–



–



–



–



–Consumer loans


–



4



–



–



–Total recoveries


–



4



–



–



–Net charge-offs


50



43



–



–



–Balance at end of year

$
3,467


$
2,924


$
2,399


$
1,973


$
1,853Net charge-offs to average loans outstanding during the year


0.01
%


0.01
%


0.00
%


0.00
%


0.00
%





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





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





Quantitative Aspects of Market Risk.The Company uses an interest rate sensitivity analysis prepared by the Office of Thrift Supervision to review our level of interest rate risk.  This analysis measures interest rate risk by computing changes in net portfolio value of our cash flows from assets, liabilities and off-balance sheet items in the event of a range of assumed changes in market interest rates.  Net portfolio value represents the market value of portfolio equity and is equal to the market value of assets minus the market value of liabilities, with adjustments made for off-balance sheet items.  This analysis assesses the risk of loss in market risk sensitive instruments in the


38
 Index


event of a sudden and sustained 100 to 300 basis point increase or 100 basis point decrease in market interest rates with no effect given to any steps that we might take to counter the effect of that interest rate movement.  Newport Bancorp measures interest rate risk by modeling the changes in net portfolio value over a variety of interest rate scenarios.





The following table presents the change in the net portfolio value at September 30, 2009 (the most current information available), that would occur in the event of an immediate change in interest rates based on Office of Thrift Supervision assumptions, with no effect given to any steps that we might take to counteract that change. The Bank expects that its net portfolio value at December 31, 2009 is consistent with the table below.





Net Portfolio Value

(Dollars in thousands)


Net Portfolio Value as % of

Portfolio Value of AssetsBasis Point (“bp”)

Change in Rates


Amount


Change


% Change


NPV Ratio


Change (bp)300


$
40,221


$
-15,753



-28



8.88
%


-283200



46,884



-9,090



-16



10.15



-157100



52,746



-3,228



-6



11.20



-5250



54,546



-1,428



-3



11.49



-230



55,974



0



0



11.71



0(50)



55,837



-138



0



11.63



-8(100)



54,853



-1,121



-2



11.41



-30





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





The Committee also measures and evaluates interest rate risk using income simulation analysis. This analysis considers the maturity and repricing characteristics of assets and liabilities, as well as the relative sensitivities of these balance sheet components over a range of interest rate scenarios. Interest rate scenarios tested generally include instantaneous rate shocks, rate ramps over a one-year period, and static (or flat) rates. The simulation analysis is used to measure the exposure of net interest income to changes in interest rates over a specified time horizon, usually a two-year period.





The table below sets forth, as of November 30, 2009, the estimated changes in Newport Bancorp’s net interest income that would result from the designated instantaneous changes in the U.S. Treasury yield curve. Computations of prospective effects of hypothetical interest rate changes are based on numerous assumptions including relative levels of market interest rates, loan prepayments and deposit decay, and should not be relied upon as indicative of actual results. The Bank expects that its percentage change in estimated net interest income over the next 12 months and from months 13-24 at December 31, 2009 is consistent with the table below.


39
 Index




% Change in Estimated

Net Interest Income Over

the Next 12 Months


% Change in Estimated

Net Interest Income Over

Months 13-24200 basis point increase in rates


(1.3
)%


(8.4
)%Flat interest rates


0.0
%


0.6
%100 basis point decrease in rates


1.7
%


4.2
%


As indicated in the table above, the result of an immediate 200 basis point parallel increase in interest rates is estimated to decrease net interest income by 1.3% over a 12-month horizon, and decrease net interest income by 8.4% for months 13-24, when compared to the flat rate scenario, which assumes no increase in interest-bearing checking rates except for high balance interest bearing checking which increase 75 basis points (BP), an increase in savings rates of 50-75 BP and an increase in money market rates of 150 basis points.  These assumptions are based on the Bank’s past experience with the changes in rates paid on these non-maturity deposits coincident with changes in market interest rates.  The estimated change in net interest income from the flat rate scenario for a 100 basis point parallel decline in the level of interest rates is an increase of 1.7% over the 12 month horizon and an increase of 4.2% for months 13-24, which assumes no decrease in interest-bearing checking rates, except for high balance accounts which decrease 30-50 BP, savings rates decreasing 20-33 BP and a decrease in money market rates of 100 basis points. These assumptions are based on the Bank’s past experience with the changes in rates paid on these non-maturity deposits coincident with changes in market interest rates.





There are inherent shortcomings in income simulation, given the number and variety of assumptions that must be made in performing the analysis. The assumptions relied upon in making these calculations of interest rate sensitivity include the level of market interest rates, the shape of the yield curve, the degree to which certain assets and liabilities with similar maturities or periods to repricing react to changes in market interest rates, the degree to which non-maturity deposits react to changes in market rates, the expected prepayment rates on loans and mortgage-backed securities, the degree to which early withdrawals occur on certificates of deposit and the volume of other deposit flows. As such, although the analysis shown above provides an indication of Newport Bancorp’s sensitivity to interest rate changes at a point in time, these estimates are not intended to and do not provide a precise forecast of the effect of changes in market interest rates on Newport Bancorp’s net interest income and will differ from actual results.





The table below shows Newport Bancorp’s interest rate sensitivity gap position at December 31, 2009, indicating the amount of interest-earning assets and interest-bearing liabilities that are anticipated to mature or reprice in each of the future time periods shown. Generally, these assets and liabilities are shown in the table based on the earlier of the time remaining to repricing or contractual maturity. However, savings, money market deposit and interest bearing deposit accounts are assumed to have an annual rate of withdrawal (decay rate) of 10%.


40
 Index


Repricing Gap as of December 31, 2009





Up to

One Year


More than

One Year to

Two Years


More than

Two Years

to Three Years


More than

Three Years

to Five Years


More than

Five Years


Total(Dollars in thousands)Interest-earning assets:Loans

$
12,505


$
6,049


$
4,180


$
14,859


$
318,551


$
356,144Securities


6,249



732



-



-



44,166



51,147Short-term investments


11,750



-



-



-



-



11,750Total interest-earning assets


30,504



6,781



4,180



14,859



362,717



419,041Interest-bearing liabilities:Savings deposits


2,679



2,411



2,170



1,953



17,579



26,792Money market deposits


4,699



4,229



3,806



3,426



30,831



46,991Interest-bearing demand deposits


10,911



9,820



8,838



7,954



71,586



109,109Certificates of deposits


72,569



3,592



2,208



618



66



79,053Borrowings


92,000



17,644



14,324



7,000



10,500



141,468Total interest-bearing liabilities


182,858



37,696



31,346



20,951



130,562



403,413Interest rate sensitivity gap

$
(152,354
)

$
(30,915
)

$
(27,166
)

$
(6,092
)

$
232,155


$
15,628Interest rate sensitivity gap as a % of total assets


(33.20
%)


(6.74
%)


(5.92
%)


(1.33
%)


50.59
%Cum. interest rate sensitivity gap

$
(152,354
)

$
(183,269
)

$
(210,435
)

$
(216,527
)

$
15,628Cum. interest rate sensitivity gap as a % of total assets


(33.20
%)


(39.94
%)


(45.86
%)


(47.19
%)


3.41
%





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





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





The most liquid assets are cash and cash equivalents and interest-bearing deposits.  The levels of these assets depend on the operating, financing, lending and investing activities during any given period.  At December 31, 2009, cash and cash equivalents totaled $19.4 million.  Securities classified as available for sale and whose market value exceeds their cost provide an additional source of liquidity.  Securities classified as available for sale totaled $6.2 million at December 31, 2009.  In addition, at December 31, 2009, we had the ability to borrow a total of approximately $36.8 million of additional advances from the Federal Home Loan Bank of Boston.  On December 31, 2009, we had $101.5 million of advances outstanding.


41
 Index


At December 31, 2009, the Bank had $25.6 million in loan commitments outstanding, which consisted of $2.9 million of real estate loan commitments, $14.5 million in unused home equity lines of credit, $4.4 million in construction loan commitments and $3.8 million in commercial lines of credit commitments.  Certificates of deposit due within one year of December 31, 2009 totaled $72.6 million, or 91.8% of certificates of deposit.  The large percentage of certificates of deposit that mature within one year reflects customer’s hesitancy to invest their funds for long periods in the recent low interest rate environment.  If these maturing deposits do not remain with us, we will be required to seek other sources of funds, including other certificates of deposit and borrowings.  Depending on market conditions, Newport Federal may be required to pay higher rates on such deposits or other borrowings than we currently pay on the certificates of deposit due on or before December 31, 2010.  The Bank believes, however, based on past experience, that a significant portion of our certificates of deposit will remain with the Bank.  Newport Federal has the ability to attract and retain deposits by adjusting the interest rates offered.





The Bank’s primary investing activities are the origination and purchase of loans and the purchase of securities.  The primary financing activities consist of activity in deposit accounts and Federal Home Loan Bank advances.  Deposit flows are affected by the overall level of interest rates, the interest rates and products offered by Newport Federal and our local competitors and other factors.  The Bank generally manages the pricing of our deposits to be competitive.  Occasionally, promotional rates are offered on certain deposit products to attract deposits.





Capital Resources.  The Bank is subject to various regulatory capital requirements administered by the Office of Thrift Supervision, including a risk-based capital measure.  The risk-based capital guidelines include both a definition of capital and a framework for calculating risk-weighted assets by assigning balance sheet assets and off-balance sheet items to broad risk categories.  At December 31, 2009, we exceeded all of our regulatory capital requirements.  We are considered “well capitalized” under regulatory guidelines.





The initial public stock offering in 2006 increased the Company’s equity by approximately $43.6 million, which significantly increased liquidity and capital resources.  The financial condition and results of operations were enhanced by the capital from the offering, resulting in increased net interest-earning assets and net income.  However, the large increase in equity resulting from the capital raised in the offering will, initially, have an adverse impact on our return on equity.  The Company may use capital management tools such as cash dividends and common share repurchases.   All repurchases are prohibited, however, if the repurchase would reduce Newport Federal’s regulatory capital below regulatory required levels.





Off-Balance Sheet Arrangements.  In the normal course of operations, Newport Federal engages in a variety of financial transactions that, in accordance with generally accepted accounting principles, are not recorded in our financial statements. These transactions involve, to varying degrees, elements of credit, interest rate and liquidity risk. Such transactions are used primarily to manage customers’ requests for funding and take the form of loan commitments and lines of credit.  For information about the Company’s loan commitments and unused lines of credit, see Note 11 to the Consolidated Financial Statements included in this Annual Report.





For the year ended December 31, 2009, the Company did not engage in any off-balance sheet transactions reasonably likely to have a material effect on our financial condition, results of operations or cash flows.








Effect of Inflation and Changing Prices





The financial statements and related financial data presented in this Form 10-K have been prepared in accordance with generally accepted accounting principles, which require the measurement of financial position and operating results in terms of historical dollars without considering the change in the relative purchasing power of money over time due to inflation. The primary impact of inflation on our operations is reflected in increased operating costs. Unlike most industrial companies, virtually all the assets and liabilities of a financial institution are monetary in nature.  As a result, interest rates generally have a more significant impact on a financial institution’s performance than do general levels of inflation.  Interest rates do not necessarily move in the same direction or to the same extent as the prices of goods and services.


42
 Index


ITEM 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK





The information required by this item is incorporated herein by reference to Part II, Item 7,  “Management’s Discussion and Analysis of Financial Condition and Results of Operation.”





ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA





The Consolidated Financial Statements, including supplemental data, of Newport Bancorp, Inc. begin on page F-1 of this Annual Report.





ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE





None.





ITEM 9A(T).
CONTROLS AND PROCEDURES





Evaluation of Disclosure Controls and Procedures.


The Company’s President and Chief Executive Officer, its Chief Financial Officer, and other members of its senior management team have evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) or 15d-15(e)), as of December 31, 2009. Based on such evaluation, the President and Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures, as of the end of the period covered by this report, were adequate and effective to provide reasonable assurance that information required to be disclosed by the Company, including Newport Federal, in reports that are filed or submitted under the Exchange Act, is recorded, processed, summarized and reported, within the time periods specified in the Commission’s rules and forms.




Changes in Internal Controls Over Financial Reporting.




There have been no changes in the Company’s internal control over financial reporting during the quarter ended December 31, 2009 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.





Management’s Report on Internal Control Over Financial Reporting.




The management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting. The internal control process has been designed under our supervision to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the Company’s financial statements for external reporting purposes in accordance with accounting principles generally accepted in the United States of America.





Management conducted an assessment of the effectiveness of the Company’s internal control over financial reporting as of December 31, 2009, utilizing the framework established in Internal Control — Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on this assessment, management has determined that the Company’s internal control over financial reporting as of December 31, 2009 is effective.




Our internal control over financial reporting includes policies and procedures that pertain to the maintenance of records that accurately and fairly reflect, in reasonable detail, transactions and dispositions of assets; and provide reasonable assurances that: (1) transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States of America; (2) receipts and expenditures are being made only in accordance with authorizations of management and the directors of the Company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company’s assets that could have a material effect on the Company’s financial statements.


43
 Index


All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.





This annual report does not include an attestation report of the Company’s independent registered public accounting firm regarding internal control over financial reporting.  Management’s report was not subject to attestation by the Company’s independent registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit the Company to provide only management’s report in this annual report.








ITEM 9B.
OTHER INFORMATION





Not applicable.





PART III





ITEM 10.
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE





The information relating to the directors and officers of the Company, information regarding compliance with Section 16(a) of the Exchange Act and information regarding the audit committee and audit committee financial expert is incorporated herein by reference to the Company’s Proxy Statement for the Registrant’s Annual Meeting of Stockholders, to be held on May 20, 2010 (the “Proxy Statement”).





The Company has adopted a code of ethics that applies to its principal executive officer, the principal financial officer and principal accounting officer.  The Code of Ethics is posted on the Company’s Internet Web site at www.newportfederal.com.





ITEM 11.
EXECUTIVE COMPENSATION





The information regarding executive compensation, compensation committee interlocks and insider participation is incorporated herein by reference to the Proxy Statement.


44
 Index


ITEM 12.
SECURITY OWNERSHIP OFCERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDERS MATTERS





(a)
Security Ownership of Certain Beneficial Owners





Information required by this item is incorporated herein by reference to the section captioned “Stock Ownership” in the Proxy Statement.





(b)
Security Ownership of Management





Information required by this item is incorporated herein by reference to the section captioned “Stock Ownership” in the Proxy Statement.





(c)
Changes in Control





Management of the Company knows of no arrangements, including any pledge by any person or securities of the Company, the operation of which may at a subsequent date result in a change in control of the registrant.





(d)
Equity Compensation Plan Information





The following table sets forth information as of December 31, 2009 about Company common stock that may be issued upon the exercise of options under the Newport Bancorp, Inc. 2007 Equity Incentive Plan.  The plan was approved by the Company’s stockholders.





Plan Category

Number of securities

to be issued upon

the exercise of

outstanding options,

warrants and rights


Weighted-average

exercise price of

outstanding options,

warrants and rights


Number of securities

remaining available

for future issuance

under equity

compensation plans

(excluding securities

reflected in the first

column)Equity compensation plans approved by security holders


437,900


$
12.53



49,934Equity compensation plans not approved by security holders


N/A



N/A



N/ATotal


437,900


$
12.53



49,934





ITEM 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE





The information relating to certain relationships and related transactions and director independence is incorporated herein by reference to the Proxy Statement.





ITEM 14.
PRINCIPAL ACCOUNTING FEES AND SERVICES





The information relating to the principal accounting fees and expenses is incorporated herein by reference to the Proxy Statement.


45
 Index


PART IV





ITEM 1.
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)
Exhibits





3.1
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
Amended and Restated Supplemental Executive Retirement Plan (3)


10.2
First Amendment to Form of Newport Federal Savings Bank Supplemental Director Retirement Agreement


10.3
Form of Amended and Restated Employment Agreement between Newport Federal Savings Bank and Executives


10.4
Form of Amended and Restated Employment Agreement between Newport Bancorp, Inc. and Executives


10.5
Form of First Amendment to 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 (3)


10.6
Executive Split Dollar Life Insurance Agreements between Newport Federal Savings Bank and Kevin M. McCarthy, Nino Moscardi and Bruce A. Walsh (3)


10.7
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 (3)


10.8
Form of 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 (3)


21.0
List of Subsidiaries


23.0
Consent of Wolf & Company, P.C.


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


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


32.0
Section 1350 Certification of Chief Executive Officer and Chief Financial Officer


46
 Index


______________________________





(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 the Company’s Annual Report on Form 10-K for the year ended December 31, 2008.


(3)
Incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2007.


47
 Index


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: March 18, 2010
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,
March 18, 2010Kevin M. McCarthy

and Director(principal executive officer)/s/ Bruce A. Walsh

Senior Vice President and Chief
March 18, 2010Bruce A. Walsh

Financial Officer(principal accounting andfinancial officer)/s/ John N. Conti

Director
March 18, 2010John N. Conti/s/ Peter T. Crowley

Director
March 18, 2010Peter T. Crowley/s/ William R. Harvey

Director
March 18, 2010William R. Harvey/s/ Michael J. Hayes

Director
March 18, 2010Michael J. Hayes/s/ Donald N. Kaull

Director
March 18, 2010Donald N. Kaull/s/ Arthur H. Lathrop

Director
March 18, 2010Arthur H. Lathrop/s/ Robert S. Lazar

Director
March 18, 2010Robert S. Lazar


48
 Index




/s/ Arthur P. Macauley

Director
March 18, 2010Arthur P. Macauley/s/ Nino Moscardi

Director
March 18, 2010Nino Moscardi/s/ Kathleen A. Nealon

Director
March 18, 2010Kathleen A. Nealon/s/ Michael S. Pinto

Director
March 18, 2010Michael S. Pinto/s/ Alicia S. Quirk

Director
March 18, 2010Alicia S. Quirk/s/ Peter W. Rector

Director
March 18, 2010Peter W. Rector/s/ Barbara Saccucci Radebach

Director
March 18, 2010Barbara Saccucci Radebach


49
 Index


NEWPORT BANCORP, INC.





CONSOLIDATED FINANCIAL STATEMENTS


Years Ended December 31, 2009 and 2008





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-43


F-1
 Index


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, 2009 and 2008, 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, 2009 and 2008, 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 24, 2010


F-2
 Index


NEWPORT BANCORP, INC. AND SUBSIDIARY





CONSOLIDATED BALANCE SHEETS





December 31, 2009 and 2008





ASSETS





2009


2008(In thousands)Cash and due from banks

$
7,618


$
6,628Short-term investments


11,750



3,037Cash and cash equivalents


19,368



9,665Securities available for sale, at fair value


6,249



6,390Securities held to maturity, at amortized cost


44,898



52,162Federal Home Loan Bank stock, at cost


5,730



5,556Loans


354,966



335,953Allowance for loan losses


(3,467
)


(2,924
)Loans, net


351,499



333,029Premises and equipment, net


13,393



10,722Accrued interest receivable


1,478



1,429Net deferred tax asset


2,538



2,342Bank-owned life insurance


10,318



9,918Prepaid FDIC insurance


1,472



-Other assets


1,936



1,122Total assets

$
458,879


$
432,335LIABILITIES AND STOCKHOLDERS' EQUITYDeposits

$
261,946


$
229,123Short-term borrowings


-



4,000Long-term borrowings


141,468



141,438Accrued expenses and other liabilities


4,074



3,461Total liabilities


407,488



378,022Commitments and contingencies (Notes 10 and 11)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


50,504



50,438Retained earnings


17,032



16,324Unearned compensation (402,975 and 468,320 sharesat December 31, 2009 and 2008, respectively)


(3,465
)


(4,294
)Treasury stock (1,048,172 and 655,935 shares atat December 31, 2009 and 2008, respectively)


(12,590
)


(7,943
)Accumulated other comprehensive loss


(139
)


(261
)Total stockholders' equity


51,391



54,313Total liabilities and stockholders' equity

$
458,879


$
432,335





See accompanying notes to consolidated financial statements.


F-3
 Index


NEWPORT BANCORP, INC. AND SUBSIDIARY





CONSOLIDATED STATEMENTS OF OPERATIONS





Years Ended December 31, 2009 and 2008





2009


2008(Dollars in thousands, except share data)Interest and dividend income:Loans

$
20,287


$
19,296Securities


2,709



2,079Federal Home Loan Bank stock


-



174Other interest-earning assets


12



95Total interest and dividend income


23,008



21,644Interest expense:Deposits


4,309



4,821Short-term borrowings


9



40Long-term borrowings


5,229



4,727Total interest expense


9,547



9,588Net interest income


13,461



12,056Provision for loan losses


593



568Net interest income, after provisionfor loan losses


12,868



11,488Non-interest income (loss) :Customer service fees


1,740



1,801Gain on sale of securities available for sale


10



-Impairment loss on equity securities


(76
)


(706
)Bank-owned life insurance


400



409Miscellaneous


56



72Total non-interest income


2,130



1,576Non-interest expenses:Salaries and employee benefits


7,560



7,836Occupancy and equipment


1,798



1,372Data processing


1,388



1,103Professional fees


476



490Marketing


898



1,245FDIC insurance


597



139Other general and administrative


744



731Total non-interest expenses


13,461



12,916Income before income taxes


1,537



148Provision for income taxes


829



996Net income (loss)

$
708


$
(848
)Weighted average shares outstanding:Basic


3,847,009



4,314,159Diluted


3,847,009



4,314,159Earnings (loss) per share:Basic

$
0.18


$
(0.20
)Diluted

$
0.18


$
(0.20
)





See accompanying notes to consolidated financial statements.


F-4
 Index


NEWPORT BANCORP, INC. AND SUBSIDIARY





CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY





Years Ended December 31, 2009 and 2008





Common StockShares


Amount


Additional

Paid-in

Capital


Retained

Earnings


Unearned

Compensation


Treasury

Stock


Accumulated

Other

Comprehensive

Loss


Total(Dollars in thousands)Balance at December 31, 2007


4,878,349


$
49


$
50,023


$
17,234


$
(5,548
)

$
(2,655
)

$
(151
)

$
58,952Comprehensive loss:Net loss


-



-



-



(848
)


-



-



-



(848
)Net unrealized loss on securities availablefor sale, net of reclassification adjustment of $706,000


-



-



-



-



-



-



(110
)


(110
)Total comprehensive loss






























(958
)Impact of adoption of accounting change for split dollar insurance plan


-



-



-



(62
)


-



-



-



(62
)Share-based compensation - restricted stock


-



-



-



-



994



-



-



994Share-based compensation - options


-



-



858



-



-



-



-



858Release of ESOP shares (26,018 shares)


-



-



49



-



260



-



-



309Issuance of treasury stock in connection withrestricted stock plan (39,027 shares)


-



-



(492
)


-



-



492



-



-Purchase of treasury shares (481,302 shares)


-



-



-



-



-



(5,780
)


-



(5,780
)Balance at December 31, 2008


4,878,349



49



50,438



16,324



(4,294
)


(7,943
)


(261
)


54,313Comprehensive income:Net income


-



-



-



708



-



-



-



708Net unrealized gain on securities availablefor sale, net of reclassification adjustment of $66,000


-



-



-



-



-



-



122



122Total comprehensive income






























830Share-based compensation - restricted stock


-



-



-



-



567



-



-



567Share-based compensation - options


-



-



490



-



-



-



-



490Release of ESOP shares (26,018 shares)


-



-



45



-



260



-



-



305Issuance of treasury stock in connection withrestricted stock plan (38,927 shares)


-



-



(467
)


-



-



467



-



-Forfeiture of restricted stock (400 shares)


-



-



(2
)


-



2



-



-



-Purchase of treasury shares (431,164 shares)


-



-



-



-



-



(5,114
)


-



(5,114
)Balance at December 31, 2009


4,878,349


$
49


$
50,504


$
17,032


$
(3,465
)

$
(12,590
)

$
(139
)

$
51,391





See accompanying notes to consolidated financial statements.


F-5
 Index


NEWPORT BANCORP, INC. AND SUBSIDIARY





CONSOLIDATED STATEMENTS OF CASH FLOWS





Years Ended December 31, 2009 and 2008





2009


2008(In thousands)Cash flows from operating activities:Net income (loss)

$
708


$
(848
)Adjustments to reconcile net income (loss) tonet cash provided by operating activities:Provision for loan losses


593



568Accretion of securities held to maturity


(102
)


(106
)Gain on sale of securities available for sale


(10
)


-Impairment loss on equity securities


76



706Amortization of net deferred loan fees


(281
)


(249
)Depreciation and amortization of premisesand equipment


808



608Share-based compensation and ESOP allocation


1,362



2,161Deferred income tax benefit


(196
)


(29
)Income from bank-owned life insurance


(400
)


(409
)Net change in:Accrued interest receivable


(49
)


(160
)Prepaid FDIC insurance


(1,472
)


-Other assets


(814
)


(607
)Accrued expenses and other liabilities


613



(267
)Net cash provided by operating activities


836



1,368Cash flows from investing activities:Purchase of securities held to maturity


(2,957
)


(24,253
)Principal payments received on securities held to maturity


10,323



3,083Sale of securities available for sale


250



-Reinvested dividends on mutual funds


(53
)


(240
)Purchase of Federal Home Loan Bank stock


(174
)


(1,393
)Loan originations, net of principal payments


(18,782
)


(40,264
)Additions to premises and equipment


(4,271
)


(5,481
)Proceeds from sales of premises and equipment


792



-Net cash used by investing activities


(14,872
)


(68,548
)





(continued)





See accompanying notes to consolidated financial statements.


F-6
 Index


NEWPORT BANCORP, INC. AND SUBSIDIARY





CONSOLIDATED STATEMENTS OF CASH FLOWS (Concluded)





Years Ended December 31, 2009 and 2008





2009


2008(In thousands)Cash flows from financing activities:Net increase in deposits


32,823



35,838Net decrease in borrowings withmaturities of three months or less


(4,000
)


(1,809
)Proceeds from borrowings with maturities inexcess of three months


11,500



49,500Repayment of borrowings with maturities inexcess of three months


(11,470
)


(7,609
)Purchase of treasury stock


(5,114
)


(5,780
)Net cash provided by financing activities


23,739



70,140Net change in cash and cash equivalents


9,703



2,960Cash and cash equivalents at beginning of year


9,665



6,705Cash and cash equivalents at end of year

$
19,368


$
9,665Cash paid during the year for:Interest on deposit accounts

$
4,274


$
5,594Interest on borrowings


5,274



4,682Income taxes, net of refunds


1,102



1,258





See accompanying notes to consolidated financial statements.


F-7
 Index


NEWPORT BANCORP, INC. AND SUBSIDIARY





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS





Years Ended December 31, 2009 and 2008





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”).  The Bank has one wholly-owned subsidiary, NewportFed Investments, Inc., which was established in December 2008 to hold certain investments, consisting primarily of commercial mortgages and loans. 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.





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.





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, other-than-temporary impairment of securities and the valuation of deferred tax assets.


F-8
 Index


NEWPORT BANCORP, INC. AND SUBSIDIARY





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)





SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)





Fair Value Hierarchy





The Company groups its assets and liabilities generally measured at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value.





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





Level 2 – Valuation is based on observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.  For example, Level 2 assets and liabilities may include debt securities with quoted prices that are traded less frequently than exchange-traded instruments or mortgage loans held for sale, for which the fair value is based on what the securitization market is currently offering for mortgage loans with similar characteristics.





Level 3 – Valuation is based on unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.  Level 3 assets and liabilities include financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation.





Reclassification





Certain amounts in the 2008 consolidated financial statements have been reclassified to conform to the 2009 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.


F-9
 Index


NEWPORT BANCORP, INC. AND SUBSIDIARY





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)





SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)





Securities





Debt securities that management has the positive intent and ability to hold to maturity are classified as held to maturity and recorded at amortized cost.  All other securities are classified as available for sale and recorded at fair value with unrealized gains and losses excluded from earnings and reported in other comprehensive income/loss.





Purchase premiums and discounts are amortized to earnings by the interest method over the terms of the securities.  Gains and losses on disposition of securities are recorded on the trade date and are computed by the weighted average cost method for mutual funds and the specific identification method for other securities.





Each reporting period, the Company evaluates all securities classified as available-for-sale or held-to-maturity, with a decline in fair value below the amortized cost of the investment to determine whether or not the impairment is deemed to be other-than-temporary (“OTTI”).





Marketable equity securities are evaluated for OTTI based on the severity and duration of the impairment and, if deemed to be other than temporary, the declines in fair value are reflected in earnings as realized losses.  For debt securities, OTTI is required to be recognized (1) if the Company intends to sell the security; (2) if it is “more likely than not” that the Company will be required to sell the security before recovery of its amortized cost basis; or (3) if the present value of expected cash flows is not sufficient to recover the entire amortized cost basis. For all impaired debt securities that the Company intends to sell, or more likely than not will be required to sell, the full amount of the depreciation is recognized as OTTI through earnings. Credit-related OTTI for all other impaired debt securities is recognized through earnings. Non-credit related OTTI for such debt securities is recognized in other comprehensive income/loss, net of applicable taxes.





Federal Home Loan Bank Stock





The Bank, as a member of the Federal Home Loan Bank (“FHLB”) system, is required to maintain an investment in capital stock of the FHLB.  Based on redemption provisions of the FHLB, the stock has no quoted market value and is carried at cost.  At its discretion, the FHLB may declare dividends on the stock.  The Bank reviews for impairment based on the ultimate recoverability of the cost basis in the FHLB stock.  As of December 31, 2009, no impairment has been recognized.


F-10
 Index


NEWPORT BANCORP, INC. AND SUBSIDIARY





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)





SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)





Loans





The Company 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-11
 Index


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 allocated and general 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.





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 either the present value of expected future cash flows discounted at the loan’s effective interest rate or the fair value of the collateral if the loan is collateral dependent.





The Company periodically may agree to modify the contractual terms of loans.  When a loan is modified and a concession is made to a borrower experiencing financial difficulty, the modification is considered a troubled debt restructuring (“TDR”).  All TDRs are initially classified as impaired.





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, unless such loans are subject to a troubled debt restructuring agreement.





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.





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 operations and are not subject to income taxes.


F-12
 Index


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.





Share-based Compensation Plans





The Company measures and recognizes compensation cost relating to share-based compensation transactions based on the grant-date fair value of the equity instruments issued.  Share-based compensation is recognized over the period the employee is required to provide services for the award.  Reductions in compensation expense associated with forfeited options are estimated at the date of grant, and this estimated forfeiture rate is adjusted quarterly based on actual forfeiture experience.  The Company uses the Black-Scholes option-pricing model to determine the fair value of stock options granted.





Employee Stock Ownership Plan





Compensation expense for the Employee Stock Ownership Plan (“ESOP”) is recorded at an amount equal to the shares allocated by the ESOP multiplied by the average fair market value of the shares during the period.  The Company recognizes compensation expense ratably over the year based upon the Company’s estimate of the number of shares expected to be allocated by the ESOP.  Unearned compensation applicable to the ESOP is reflected as a reduction of stockholders’ equity in the consolidated balance sheet.  The difference between the average fair market value and the cost of the shares allocated by the ESOP is recorded as an adjustment to additional paid-in capital.





Treasury Stock





Common stock shares repurchased are recorded as treasury stock at cost.


F-13
 Index


NEWPORT BANCORP, INC. AND SUBSIDIARY





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)





SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)





Income Taxes





Deferred income tax assets and liabilities are determined using the liability (or balance sheet) method.  Under this method, the net deferred tax asset or liability is determined based on the tax effects of the temporary differences between the book and tax bases of the various balance sheet assets and liabilities and gives current recognition to changes in tax rates and laws.  A valuation allowance is established against deferred tax assets when, based upon the available evidence including historical and projected taxable income, it is more likely than not that some or all of the deferred tax assets will not be realized.  The Company does not have any uncertain tax positions at December 31, 2009 which require accrual or disclosure.





Income tax benefits related to stock compensation in excess of grant date fair value less any proceeds on exercise are recognized as an increase to additional paid-in capital upon vesting or exercising and delivery of the stock.  Any income tax effects related to stock compensation that are less than grant date fair value less any proceeds on exercise would be recognized as a reduction of additional paid in capital to the extent of previously recognized income tax benefits and then through income tax expense for the remaining amount.





Earnings per Share





Basic earnings per share (“EPS”) represents net income available to common stockholders divided by the weighted-average number of shares of common stock outstanding during the period.  If rights to dividends on unvested options/awards are non-forfeitable, these unvested awards/options are considered outstanding in the computation of basic earnings per share.  Diluted EPS reflects additional common shares (computed using the treasury stock method) that would have been outstanding if all potentially dilutive common stock equivalents (stock options and unvested restricted stock) were issued during the period.  Treasury shares and unallocated ESOP shares are not deemed outstanding for earnings per share calculations.


F-14
 Index


NEWPORT BANCORP, INC. AND SUBSIDIARY





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)





SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)





Earnings per Share (concluded)





Earnings per common share have been computed based on the following:





Years Ended December 31,2009


2008(In thousands)Net income (loss) applicable to common stock

$
708


$
(848
)Weighted average number of common shares issued


4,878



4,878Less:  Weighted average treasury shares


(878
)


(424
)Less:  Weighted average unallocated ESOP shares


(299
)


(325
)Add:  Weighted average unvested restricted stock plan shareswith non-forfeitable dividend rights


146



185Weighted average number of common shares outstandingused to calculate basic earnings per common share


3,847



4,314Effect of dilutive common stock equivalents


-



-Weighted average number of common shares outstandingused to calculate diluted earnings per common share


3,847



4,314





Options for 437,900 shares of common stock were not included in the computation of diluted EPS because they were anti-dilutive for each of the years ended December 31, 2009 and 2008.





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.


F-15
 Index


NEWPORT BANCORP, INC. AND SUBSIDIARY





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)





SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (concluded)





Recent Accounting Pronouncements





In June 2009, the Financial Accounting Standards Board (FASB) issued guidance changing the accounting principles and disclosures requirements related to securitizations and special-purpose entities. Specifically, this guidance eliminates the concept of a “qualifying special-purpose entity”, changes the requirements for derecognizing financial assets and changes how a company determines when an entity that is insufficiently capitalized or is not controlled through voting (or similar rights) should be consolidated.  This guidance also expands existing disclosure requirements to include more information about transfers of financial assets, including securitization transactions, and where companies have continuing exposure to the risks related to transferred financial assets.  The recognition and measurement provisions regarding transfers of financial assets shall be applied to transfers that occur on or after the effective date. The Company will adopt this new guidance on January 1, 2010, as required, and management does not expect the adoption to have a material impact on the Company’s consolidated financial statements.





In September 2009, the FASB amended its guidance on fair value measurements and disclosures relating to investments in certain entities that calculate net asset value per share (or its equivalent).  This guidance permits a reporting entity to measure the fair value of certain investments on the basis of the net asset value per share of the investment (or its equivalent). This guidance also requires new disclosures, by major category of investments, about the attributes of investments within the scope of this guidance.  This guidance is effective for interim and annual periods ending after December 15, 2009.  The adoption of this guidance did not 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, 2009 and 2008, these reserve balances amounted to $6,278,000 and $5,451,000, respectively.


F-16
 Index


NEWPORT BANCORP, INC. AND SUBSIDIARY





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)





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, 2009Securities Available for SaleMutual funds - bond funds

$
6,388


$
104


$
(243
)

$
6,249Securities Held to MaturityGovernment-sponsoredenterprise residentialmortgage-backed securities

$
44,898


$
2,076


$
(34
)

$
46,940December 31, 2008Securities Available for SaleMutual funds - bond funds

$
6,651


$
-


$
(261
)

$
6,390Securities Held to MaturityGovernment-sponsoredenterprise residentialmortgage-backed securities

$
52,162


$
2,040


$
(4
)

$
54,198





At December 31, 2009 and 2008, mortgage-backed securities were pledged to secure repurchase agreements (see Note 7).





For the year ended December 31, 2009, proceeds from the sale of securities available for sale amounted to $250,000, which realized gross gains of $10,000.  There were no sales of securities for the year ended December 31, 2008.


F-17
 Index


NEWPORT BANCORP, INC. AND SUBSIDIARY





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)





SECURITIES (continued)





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, 2009Securities Available for SaleMutual funds - bond funds

$
-


$
-


$
243


$
1,846Securities Held to MaturityGovernment-sponsoredenterprise residentialmortgage-backed securities


34



2,862



-



-Total temporarilyimpaired securities

$
34


$
2,862


$
243


$
1,846December 31, 2008Securities Available for SaleMutual funds - bond funds

$
-


$
-


$
261


$
4,404Securities Held to MaturityGovernment-sponsoredenterprise residentialmortgage-backed securities


-



-



4



1,293Total temporarilyimpaired securities

$
-


$
-


$
265


$
5,697





At December 31, 2009, one mutual fund had an unrealized loss with aggregate depreciation of 11.6% from the Company’s cost basis.  This fund has not eliminated its dividend payments and as of December 31, 2009, this fund had 94.4% invested in mortgage-backed securities (primarily government-sponsored enterprise mortgage-backed securities) and 5.6% in repurchase agreements.  The effective duration of this fund is 1.6 years.  The Company has determined that this unrealized loss relates primarily to illiquidity in the market for the securities underlying this fund and not to credit issues.  The Company has the intent and ability to hold the fund for a period of time sufficient to allow for an anticipated recovery of the fair value.  Management has reviewed the financial condition of the fund and has determined that the decline is temporary.


F-18
 Index


NEWPORT BANCORP, INC. AND SUBSIDIARY





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)





SECURITIES (concluded)





At December 31, 2009, one mortgage-backed security had an unrealized loss with aggregate depreciation of 1.2% from the Company’s amortized cost basis.  Because the decline in fair value is attributable to changes in interest rates and not to credit quality, and because the Company does not intend to sell the investment and it is more likely than not that the Company will not be required to sell the investment before recovery of its amortized cost basis, which may be maturity, the Company does not consider this investment to be other-than-temporarily impaired at December 31, 2009.





For the years December 31, 2009 and 2008, the Company recognized an impairment charge of $76,000 and $706,000, respectively, for the Bank’s holding in a mutual fund, which has invested in private-label mortgage-backed securities and U.S. Government agency and government-sponsored enterprise securities.  Although management believes it is possible that all principal and interest payments will be received, general market concerns over these and similar types of securities has caused the fair value to decline severely enough to warrant an other-than-temporary impairment charge.  At December 31, 2009, this fund had an unrealized gain of $66,000.





In February 2008, the redemption-in-kind provisions of two of the Company’s mutual fund investments were activated as a result of current market conditions.  In addition, cash redemptions for these funds have been restricted to $250,000 over any ninety day period.  Redemptions in excess of this amount may be done in-kind.  These two mutual fund investments had an aggregate carrying value of $3,758,000 and $4,074,000 at December 31, 2009 and 2008, respectively.


F-19
 Index


NEWPORT BANCORP, INC. AND SUBSIDIARY





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)





4.
LOANS





A summary of the balances of loans follows:





December 31,2009


2008(In thousands)Mortgage loans:One-to-four family residential

$
191,154


$
183,767Multi-family residential


22,535



17,379Commercial


106,605



93,632Equity loans and lines of credit


25,891



30,425Construction


9,736



11,204355,921



336,407Personal installment


223



601Total loans


356,144



337,008Less:  Allowance for loan losses


(3,467
)


(2,924
)Net deferred loan fees


(1,178
)


(1,055
)Loans, net

$
351,499


$
333,029




Loans sold and serviced for others amounted to $9,518,000 and $13,775,000 at December 31, 2009 and 2008, respectively, and have been sold without recourse.





An analysis of the allowance for loan losses follows:





Years Ended December 31,2009


2008(In thousands)Balance at beginning of year

$
2,924


$
2,399Provision for loan losses


593



568Loans charged-off


(50
)


(47
)Recoveries of loans previously charged-off


-



4Balance at end of year

$
3,467


$
2,924




At December 31, 2009, non-accrual and impaired loans amounted to $860,000, with no related valuation allowance.  There were no non-accrual or impaired loans at December 31, 2008.  There were no additional funds committed to be advanced in connection with impaired loans.  For the years ended December 31, 2009 and 2008, the average recorded investment in impaired loans amounted to $72,000 and $378,000, respectively.  The Company recognized no interest income on impaired loans during 2009.  There was $19,000 of interest income recognized on impaired loans on the cash basis during 2008.  At December 31, 2009 and 2008, there were no loans greater than ninety days past due and still accruing interest.


F-20
 Index


NEWPORT BANCORP, INC. AND SUBSIDIARY





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)





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,


Estimated2009


2008


Useful Life(In thousands)Land

$
3,093


$
3,093


N/ABuilding and improvements


8,254



5,180


20-40 yearsLeasehold improvements


3,009



1,285


10-20 yearsFurniture, fixtures and equipment


3,254



3,140


3-10 yearsConstruction in progress


35



3,000


N/A17,645



15,698Less accumulated depreciationand amortization


(4,252
)


(4,976
)$
13,393


$
10,722





Depreciation and amortization expense for each of the years ended December 31, 2009 and 2008 amounted to $808,000 and $608,000, respectively.





At December 31, 2009, the construction in progress primarily represents costs incurred to date in connection with a proposed re-location of the Westerly, RI branch.  There are no commitments related to construction in progress at December 31, 2009.  At December 31, 2008, construction in progress primarily represented costs incurred in connection with new branches in Portsmouth, RI, and Stonington, CT, and renovations to the main office in Newport, RI, which were all completed in 2009.


F-21
 Index


NEWPORT BANCORP, INC. AND SUBSIDIARY





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)





6.
DEPOSITS





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





December 31,2009


2008(In thousands)NOW and demand

$
109,109


$
90,758Money market


46,991



39,540Regular


26,793



25,591Total non-certificate accounts


182,893



155,889Term deposit certificates


79,053



73,234Total deposits

$
261,946


$
229,123





The aggregate amount of time deposit accounts with balances of $100,000 or more amounted to $27,392,000 and $21,966,000 at December 31, 2009 and 2008, respectively.  Brokered deposits at December 31, 2009 and 2008 amounted to $1,300,000 and $0, respectively, and are included in term deposit certificates.





A summary of certificate accounts is as follows:





December 31, 2009


December 31, 2008Weighted





WeightedAverage





AverageAmount


Rate


Amount


Rate(Dollars in thousands)Maturing in:2009

$
-



-
%

$
66,777



3.01
%2010


72,569



1.66



1,858



3.482011


3,592



3.25



3,178



3.532012


2,208



3.16



941



4.022013


618



3.35



480



3.662014


66



1.84



-



-$
79,053



1.79
%

$
73,234



3.06
%


F-22
 Index


NEWPORT BANCORP, INC. AND SUBSIDIARY





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)





7.
BORROWINGS





Short-term Borrowings





There were no short-term borrowings at December 31, 2009.  At December 31, 2008, short-term borrowings consisted of Federal Home Loan Bank of Boston (“FHLB”) advances, which mature within one year at a weighted average rate of 0.46%.





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, 2009 and 2008, this line of credit amounted to $3,000,000.  There were no amounts outstanding at December 31, 2009 and 2008.





Long-term Borrowings





FHLB Advances:





Long-term borrowings include the following FHLB advances:





December 31, 2009


December 31, 2008Weighted





WeightedAverage





AverageAmount


Rate


Amount


Rate(Dollars in thousands)Fixed-rate advances maturing:2009


$
-



-
%

$
11,248



4.98
%2010*



17,000



4.44



17,000



4.442011



17,644



3.79



14,218



4.182012



14,324



4.76



14,472



4.762013*



23,500



3.22



23,500



3.222014



10,500



3.37



2,500



4.68Thereafter*



18,500



3.81



18,500



3.81$
101,468



3.86
%

$
101,438



4.12
%





*
Includes advances callable by the FHLB within one year aggregating $35,500,000 with a weighted average rate of 3.39% at December 31, 2009.





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, 50% of the carrying value of certain pledged commercial mortgages and 65% of the carrying value of certain pledged multi-family real estate loans.  At December 31, 2009 and 2008, the carrying amount of assets qualifying as collateral for FHLB advances amounted to $198,886,000 and $194,185,000, respectively.


F-23
 Index


NEWPORT BANCORP, INC. AND SUBSIDIARY





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)





BORROWINGS (concluded)





Long-term Borrowings (concluded)





Repurchase Agreements:





During 2008, the Company entered into a repurchase agreement for $15,000,000 at a rate of 2.58%.  This agreement matures in November 2013, and is callable in November 2010 and each quarter thereafter.





During 2007, the Company entered into a repurchase agreement for $25,000,000 at a rate of 3.36%, subject to adjustment if 3-month LIBOR exceeds 5.05%.  In November 2009 the rate became fixed at 3.36%.  This agreement matures in November 2012, and is callable in November 2009 and each quarter thereafter.





The amount of securities collateralizing these agreements to repurchase remains in securities and the obligation to repurchase securities sold is reflected as a liability in the consolidated balance sheets.  Mortgage-backed securities pledged to secure these agreements have a carrying value of $45,595,000 and $52,121,000 and a fair value of $46,902,000 and $54,154,000 at December 31, 2009 and 2008, respectively.





8.
INCOME TAXES





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





Years Ended December 31,2009


2008(In thousands)Current tax provision:Federal

$
903


$
823State


122



2021,025



1,025Deferred tax benefit (provision):Federal


(420
)


(880
)State


(3
)


361(423
)


(519
)Change in valuation allowance


227



490(196
)


(29
)Total tax provision

$
829


$
996


F-24
 Index


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 provision and the actual income tax provision are summarized as follows:





Years Ended December 31,2009


2008(In thousands)Statutory tax provision at 34%

$
523


$
50Increase (decrease) resulting from:State taxes, net of federal tax benefit


56



72Impact of establishment of RI passiveinvestment corporation subsidiary


-



300Change in valuation allowance


227



490Bank-owned life insurance


(136
)


(139
)Share-based compensation and ESOP Plan


120



227Other


39



(4
)Total tax provision

$
829


$
996





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





December 31,2009


2008(In thousands)Deferred tax asset:Federal

$
3,605


$
3,183State


272



2713,877



3,454Valuation allowance


(1,209
)


(982
)2,668



2,472Deferred tax liability:Federal


(130
)


(130
)State


-



-(130
)


(130
)Net deferred tax asset

$
2,538


$
2,342


F-25
 Index


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 31,2009


2008(In thousands)Allowance for loan losses

$
1,048


$
863Depreciation and amortization


54



54Net deferred loan fees


401



349Charitable contribution carryover


1,171



1,171Stock options and awards


451



345Employee benefit plans


339



280Impairment loss on securities available for sale


266



240Other, net


17



223,747



3,324Valuation allowance


(1,209
)


(982
)Net deferred tax asset

$
2,538


$
2,342





At December 31, 2009, the Company has a charitable contribution carryforward in the amount of $2,935,000, 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 $943,000, $742,000 and $492,000 was required at December 31, 2009, 2008 and 2007, respectively, due to the possible limitation of the charitable contribution deduction.  In addition, as a result of the impairment loss on securities available for sale, a valuation reserve of $266,000 and $240,000 was required at December 31, 2009 and 2008.





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-26
 Index


NEWPORT BANCORP, INC. AND SUBSIDIARY





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)





9.
STOCKHOLDERS’ 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 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, 2009 and 2008, that the Bank met all capital adequacy requirements to which it was subject.


F-27
 Index


NEWPORT BANCORP, INC. AND SUBSIDIARY





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)





STOCKHOLDERS’ EQUITY (continued)





Minimum Regulatory Capital Requirement (concluded)





As of December 31, 2009, 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, 2009 and 2008 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, 2009Total capital to risk weighted assets

$
42,967



14.1
%

$
24,397



8.0
%

$
30,497



10.0
%Tier 1 capital to risk weighted assets


39,561



13.0



12,199



4.0



18,298



6.0Tier 1 capital to adjusted total assets


39,561



8.6



18,299



4.0



22,873



5.0Tangible capital to adjusted total assets


39,561



8.6



6,862



1.5



N/A



N/ADecember 31, 2008Total capital to risk weighted assets

$
41,128



14.3
%

$
22,973



8.0
%

$
28,717



10.0
%Tier 1 capital to risk weighted assets


38,265



13.3



11,487



4.0



17,230



6.0Tier 1 capital to adjusted total assets


38,265



8.9



17,263



4.0



21,578



5.0Tangible capital to adjusted total assets


38,265



8.9



6,474



1.5



N/A



N/A





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.


F-28
 Index


NEWPORT BANCORP, INC. AND SUBSIDIARY





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)





STOCKHOLDERS’ EQUITY (concluded)





Other Capital Restrictions (concluded)





At December 31, 2009 and 2008, the Bank’s retained net income available for the payment of dividends was $2,221,000 and $1,354,000, respectively.  Accordingly, $37,481,000 and $36,911,000 of the Company’s equity in the net assets of the Bank was restricted at December 31, 2009 and 2008, respectively.  At December 31, 2009 and 2008, funds available for loans or advances by the Bank to the Company amounted to $2,034,000 and $1,947,000, respectively.  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, 2009, the balance remaining in the liquidation account amounted to $11,302,000.





Share Repurchase Plan





During 2008 and 2009, the Board of Directors approved, and the Company completed, three repurchase programs and acquired 431,164 shares at an average cost of $11.86 per share for the year ended December 31, 2009 and 481,302 shares at an average cost of $12.01 per share for the year ended December 31, 2008.  Repurchases conducted through open market purchases or privately negotiated transactions, were made from time to time depending on market conditions and other factors.





On February 12, 2010, the Board of Directors approved a stock repurchase program to acquire up to 191,508 shares or 5% of the Company’s outstanding stock.


F-29
 Index


NEWPORT BANCORP, INC. AND SUBSIDIARY





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)





10.
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 $273,000 and $296,000 for the years ended December 31, 2009 and 2008, 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, 2009 and 2008 amounted to $174,000 and $206,000, 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, 2009 and 2008 amounted to $210,000 and $211,000, respectively.





Supplemental Executive and Director Retirement Plans





The Bank has 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, 2009 and 2008 amounted to $228,000 and $168,000, respectively.


F-30
 Index


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 has 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, 2009 and 2008 amounted to $44,000 and $41,000, respectively.





The accrued liability for these Plans is included in accrued expenses and other liabilities on the consolidated balance sheets and amounted to $1,094,000 and $822,000 at December 31, 2009 and 2008, 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.  In 2008, the Company adopted accounting guidance that requires the Company to accrue for these postretirement benefits over the expected service period of the employee.  As a result, the Company recognized a liability for future death benefits in the amount of $62,000 by cumulatively adjusting retained earnings as of January 1, 2008 and recognized related expense for the years ended December 31, 2009 and 2008 of $29,000 and $31,000, respectively.





Employee Stock Ownership Plan





The Company maintains an Employee Stock Ownership Plan (“ESOP”) to provide eligible employees the opportunity to own Company stock.  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-31
 Index


NEWPORT BANCORP, INC. AND SUBSIDIARY





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)





EMPLOYEE BENEFIT PLANS (continued)





Employee Stock Ownership Plan (continued)





At December 31, 2009, the remaining principal balance on the ESOP debt is payable as follows:








Years EndingDecember 31,

Amount(In thousands)2010

$
1862011


2012012


2182013


2362014


255Thereafter


2,041$
3,137





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.  Forfeited shares shall be reallocated among other participants in the Plan.  Cash dividends paid on allocated shares will 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 will be used to repay the outstanding debt of the ESOP.





Shares held by the ESOP include the following:





December 31,2009


2008Allocated


78,054



52,036Committed to be allocated


26,018



26,018Unallocated


286,196



312,214390,268



390,268


F-32
 Index


NEWPORT BANCORP, INC. AND SUBSIDIARY





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)





EMPLOYEE BENEFIT PLANS (continued)





Employee Stock Ownership Plan (concluded)





The fair value of unallocated ESOP shares was $3,506,000 and $3,587,000 at December 31, 2009 and 2008, respectively.





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 $305,000 and $309,000 for the years ended December 31, 2009 and 2008, respectively.





Share-based Compensation Plans





In accordance with the Company’s 2007 Equity Incentive Plan (the “2007 Plan”), the Company awarded 437,900 stock options and 195,133 shares of restricted stock to eligible participants on October 1, 2007.  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 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.  The exercise price of options granted under the plan is equal to the market value of the underlying common stock on the date of grant.  Stock options and restricted stock granted under the 2007 Plan vest over five years and options 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.


F-33
 Index


NEWPORT BANCORP, INC. AND SUBSIDIARY





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)





EMPLOYEE BENEFIT PLANS (continued)





Share-based Compensation Plans (continued)





The following table presents the activity for the 2007 Plan as of and for the year ended December 31, 2009:





Non-vestedStock Options


Restricted StockWeightedAverageWeighted


Remaining








WeightedAverage


Contractual


Aggregate





AverageNumber


Exercise


Term


Intrinsic


Number


Grant Dateof Shares


Price


(Years)


Value


of Shares


Fair ValueOutstanding at beginning of year


437,900


$
12.53









156,106


$
12.53Granted


-



-









-



-Vesting of restricted stock


-



-









(38,927
)


12.53Cancelled (forfeited and expired)


-



-









(400
)


-Outstanding at end of year


437,900


$
12.53



7.75


$
-



116,779


$
12.53Options exercisable atend of year


175,160


$
12.53



7.75


$
-





The aggregate intrinsic value in the table above represents the total pretax intrinsic value, based on the Company’s closing stock price of $12.25 as of December 31, 2009 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, 2009, therefore the options have no intrinsic value.  There were no stock options granted during the year ended December 31, 2008.


F-34
 Index


NEWPORT BANCORP, INC. AND SUBSIDIARY





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)





EMPLOYEE BENEFIT PLANS (concluded)





Share-based Compensation Plans (concluded)





For the years ended December 31, 2009 and 2008, the Company recognized compensation cost for stock options of $490,000 and $858,000, respectively, with a related tax benefit of $47,000 and $82,000, respectively.  For the years ended December 31, 2009 and 2008, the Company recognized compensation cost for restricted stock awards of $567,000 and $994,000, respectively, with a related tax benefit of $192,000 and $338,000, respectively.  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:





2010


2011


2012


Total(In thousands)Stock options

$
295


$
164


$
63


$
522Restricted stock


341



189



73



603$
636


$
353


$
136


$
1,125





11.
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.





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.


F-35
 Index


NEWPORT BANCORP, INC. AND SUBSIDIARY





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)





OTHER COMMITMENTS AND CONTINGENCIES (continued)





Loan Commitments (concluded)





At December 31, 2009 and 2008, the following financial instruments were outstanding whose contract amounts represent credit risk:





2009


2008(In thousands)Commitments to grant loans

$
2,867


$
8,853Unadvanced funds on equity lines of credit


14,479



14,890Unadvanced funds on construction loans


4,433



9,023Unadvanced funds on commercial lines of credit


3,810



3,533





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 premises, future minimum rent commitments are as follows:





Years EndingDecember 31,

Amount(In thousands)2010

$
2022011


2482012


2222013


2222014


236Thereafter


5,053$
6,183





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, 2009 and 2008 amounted to $178,000 and $104,000, respectively.


F-36
 Index


NEWPORT BANCORP, INC. AND SUBSIDIARY





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)





OTHER COMMITMENTS AND CONTINGENCIES (concluded)





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.





12.
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 31,2009


2008(In thousands)Balance at beginning of year

$
5,205


$
5,807Originations


1,287



216Principal payments


(910
)


(818
)Balance at end of year

$
5,582


$
5,205


F-37
 Index


NEWPORT BANCORP, INC. AND SUBSIDIARY





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)





13.
FAIR VALUE OF ASSETS AND LIABILITIES





The Company uses fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures.  The fair value of a financial instrument is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.  Fair value is best determined based upon quoted market prices.  However, in many instances, there are no quoted market prices for the Company’s various financial instruments.  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 fair value estimates may not be realized in an immediate settlement of the instrument.





The following methods and assumptions were used by the Company in estimating fair value disclosures:





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





Securities available for sale:  Fair values are based on the net asset values (“NAV”) of the mutual funds.  The NAV is determined based on the fair values of the individual securities within the fund divided by the number of shares outstanding.  The funds’ debt securities are valued at market quotations obtained from independent pricing services, or, for certain securities, a fixed income pricing methodology using factors such as 1) information obtained with respect to market transactions in such securities or comparable securities; (2) the price and extent of public trading in similar securities of the issuer or comparable securities; (3) the fundamental analytical data relating to the investment and; (4) quotations from broker/dealers, yields, maturities, ratings and various relationships between securities.  The valuation process also takes into consideration factors such as interest rate changes, movements in credit spreads, default rate assumptions, prepayment assumptions, type and quality of collateral, and security seasoning.





Securities held to maturity:  Fair values are based on pricing models that consider standard input factors such as observable market data, benchmark yields, interest rate volatilities, broker/dealer quotes, credit spreads and new issue data.





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


F-38
 Index


NEWPORT BANCORP, INC. AND SUBSIDIARY





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)





FAIR VALUE OF ASSETS AND LIABILITIES (continued)





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 market 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 market 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.





Long-term borrowings:  Fair values of long-term debt are estimated using discounted cash flow analyses based on the current incremental borrowing rates in the market 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.





Assets Measured at Fair Value on a Recurring Basis





Assets measured at fair value on a recurring basis are summarized below:





TotalLevel 1


Level 2


Level 3


Fair Value(In thousands)Securities available for sale:December 31, 2009

$
-


$
6,249


$
-


$
6,249December 31, 2008

$
-


$
6,390


$
-


$
6,390





The Company does not measure any liabilities at fair value on a recurring basis and does not measure any assets or liabilities at fair value on a non-recurring basis.


F-39
 Index


NEWPORT BANCORP, INC. AND SUBSIDIARY





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)





FAIR VALUE OF ASSETS AND LIABILITES (concluded)





Summary of Fair Value of Financial Instruments





The estimated fair values, and related carrying or notional amounts, of the Company’s financial instruments are as follows.  Certain financial instruments and all nonfinancial instruments are exempt from disclosure requirements.  Accordingly, the aggregate fair value amounts presented herein may not necessarily represent the underlying fair value of the Company.





December 31,2009


2008Carrying


Fair


Carrying


FairAmount


Value


Amount


Value(In thousands)Financial assets:Cash and cash equivalents

$
19,368


$
19,368


$
9,665


$
9,665Securities available for sale


6,249



6,249



6,390



6,390Securities held to maturity


44,898



46,940



52,162



54,198FHLB stock


5,730



5,730



5,556



5,556Loans, net


351,499



366,686



333,029



350,965Accrued interest receivable


1,478



1,478



1,429



1,429Financial liabilities:Deposits


261,946



262,584



229,123



229,640Short-term borrowings


-



-



4,000



4,000Long-term borrowings


141,468



142,917



141,438



142,966Accrued interest payable


661



661



661



661


F-40
 Index


NEWPORT BANCORP, INC. AND SUBSIDIARY





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)





14.
CONDENSED FINANCIAL STATEMENTS OF PARENT COMPANY





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





December 31,BALANCE SHEETS

2009


2008(In thousands)ASSETSCash and cash equivalents due from subsidiary

$
7,291


$
11,929Investment in common stock of subsidiary


39,561



38,265Loan to Newport Federal Savings Bank ESOP


3,137



3,309Net deferred tax asset


266



455Other assets


1,143



446Total assets

$
51,398


$
54,404LIABILITIES AND STOCKHOLDERS' EQUITYAccrued expenses and other liabilities

$
7


$
91Stockholders' equity


51,391



54,313Total liabilities and stockholders' equity

$
51,398


$
54,404








Years Ended December 31,STATEMENTS OF OPERATIONS

2009


2008(In thousands)Income:Interest and fees on loans

$
273


$
286Interest on cash and cash equivalents


150



317Total income


423



603Total non-interest expenses


339



430Income before income taxes and equity inundistributed net income of subsidiary


84



173Applicable income tax provision


245



336(161
)


(163
)Equity in undistributed net income (loss) of subsidiary


869



(685
)Net income (loss)

$
708


$
(848
)


F-41
 Index


NEWPORT BANCORP, INC. AND SUBSIDIARY





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)





CONDENSED FINANCIAL STATEMENTS OF PARENT COMPANY (Concluded)





Years Ended December 31,STATEMENT OF CASH FLOWS

2009


2008(In thousands)Cash flows from operating activities:Net income (loss)

$
708


$
(848
)Adjustments to reconcile net income (loss) to net cashprovided by operating activities:Equity in undistributed net (income) loss of subsidiary


(869
)


685Repayment of ESOP loan


172



159Stock-based compensation


57



96Repayment of stock-based compensation by subsidiary


1,000



1,756Deferred income tax provision


189



321Increase in other assets


(697
)


(17
)Increase (decrease) in other liabilities


(84
)


3Net cash provided by operating activities


476



2,155Cash flows from financing activities:Treasury stock purchased


(5,114
)


(5,780
)Net cash used by financing activities


(5,114
)


(5,780
)Net change in cash and cash equivalents


(4,638
)


(3,625
)Cash and cash equivalents at beginning of year


11,929



15,554Cash and cash equivalents at end of year

$
7,291


$
11,929


F-42
 Index


NEWPORT BANCORP, INC. AND SUBSIDIARY





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Concluded)





15.
QUARTERLY DATA (UNAUDITED)





Years Ended December 31,2009


2008Fourth


Third


Second


First


Fourth


Third


Second


FirstQuarter


Quarter


Quarter


Quarter


Quarter


Quarter


Quarter


Quarter(In thousands, except per share data)Interest and dividend income

$
5,718


$
5,736


$
5,836


$
5,718


$
5,647


$
5,374


$
5,402


$
5,221Interest expense


2,106



2,322



2,560



2,559



2,506



2,395



2,318



2,369Net interest income


3,612



3,414



3,276



3,159



3,141



2,979



3,084



2,852Provision for loan losses


146



160



101



186



223



119



115



111Net interest income, after provisionfor loan losses


3,466



3,254



3,175



2,973



2,918



2,860



2,969



2,741Impairment loss on available-for-salesecurities


-



-



-



(76
)


(226
)


(480
)


-



-Other non-interest income


589



561



545



511



528



599



596



559Non-interest expenses


3,044



3,473



3,574



3,370



3,165



3,396



3,235



3,120Income (loss) before income taxes


1,011



342



146



38



55



(417
)


330



180Provision for income taxes (1)


612



117



55



45



664



58



168



106Net income (loss)

$
399


$
225


$
91


$
(7
)

$
(609
)

$
(475
)

$
162


$
74Earnings (loss) per common share:Basic and diluted

$
0.11


$
0.06


$
0.02


$
0.00


$
(0.15
)

$
(0.11
)

$
0.04


$
0.02





(1)
The increase in the fourth quarter of 2009 is due to a $200,000 increase in the valuation reserve against deferred tax assets, primarily the charitable contribution carryover, for a change in projected profitability.  The increase in the fourth quarter of 2008 is due to a $250,000 increase in the valuation reserve against deferred tax assets for a change in projected profitability and a $300,000 write-down of the net deferred state tax asset in connection with the formation of a passive investment company subsidiary.





(2)
The total of the four quarters’ earnings (loss) per share does not agree to the year-to-date earnings (loss) per share due to rounding.







F-43