UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K/A

Amendment No. 1

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

For the fiscal year ended December 31, 2007

OR

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

For the transition period from _________________________ to _____________

Commission File Number: 0-51856

NEWPORT BANCORP, INC.

(Exact name of registrant as specified in its charter)

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

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

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

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

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

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

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

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

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

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

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

Yes          No     X

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

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

DOCUMENTS INCORPORATED BY REFERENCE:

None.

Explanatory Note

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

PART IV

ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(1)	The financial statements required in response to this item are incorporated by reference from Item 8 of this report.
(2)	All financial statement schedules are omitted because they are not required or applicable, or the required information is shown in the consolidated financial statements or the notes thereto.
(3)	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	Supplemental Executive Retirement Plan* (3)
	10.2	Form of Newport Federal Savings Bank Supplemental Director Retirement Agreement, as Amended* (1)
	10.3	Employment Agreement between Newport Federal Savings Bank and Kevin M. McCarthy and Proposed Amendment* (1)
	10.4	Amendment to the Employment Agreement between Newport Federal Savings Bank and Kevin M. McCarthy* (3)
	10.5	Employment Agreement between Newport Bancorp, Inc. and Kevin M. McCarthy* (3)
	10.6	Employment Agreement between Newport Federal Savings Bank and Nino Moscardi and Proposed Amendment* (1)
	10.7	Amendment to the Employment Agreement between Newport Federal Savings Bank and Nino Moscardi* (3)
	10.8	Employment Agreement between Newport Bancorp, Inc. and Nino Moscardi* (3)
	10.9	Employment Agreement between Newport Federal Savings Bank and Ray Gilmore and Proposed Amendment* (1)
	10.10	Amendment to the Employment Agreement between Newport Federal Savings Bank and Ray Gilmore* (3)
	10.11	Employment Agreement between Newport Bancorp, Inc. and Bruce A. Walsh* (3)
	10.12	Change in Control Agreement between Newport Federal Savings Bank and Bruce A. Walsh* (3)
	10.13	Change in Control Agreement between Newport Federal Savings Bank and Carol R. Silven* (3)
	10.14	Change in Control Agreement between Newport Federal Savings Bank and Paul F. Nardone* (3)
	10.15	Supplemental Executive Retirement Agreement between Newport Federal Savings Bank and Carol R. Silven, Kevin M. McCarthy, Nino Moscardi, Bruce A. Walsh and Ray D. Gilmore, II *(5)
	10.16	Executive Split Dollar Life Insurance Agreements between Newport Federal Savings Bank and Kevin M. McCarthy, Nino Moscardi and Bruce A. Walsh *(5)
	10.17	Supplemental Director Retirement Agreements between Newport Federal Savings Bank and Peter W. Rector, William R. Harvey, Donald N. Kaull, Robert S. Lazar, Michael S. Pinto, Michael J. Hayes, Barbara Saccucci Radebach, Alicia S. Quirk, Peter T. Crowley, John N. Conti, Arthur H. Lathrop, Arthur H. Macauley and Kathleen A. Nealon *(5)
	10.18	Director Split Dollar Life Insurance Agreements between Newport Federal Savings Bank and Peter W. Rector, Donald N. Kaull, Robert S. Lazar, Michael S. Pinto, Michael J. Hayes, Barbara Saccucci Radebach, Alicia S. Quirk, Peter T. Crowley, Arthur H. Lathrop, Arthur H. Macauley and Kathleen A. Nealon *(5)
	21.0	List of Subsidiaries (4)
	23.0	Consent of Wolf & Company, P.C.
	31.1	Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer
	31.2	Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer

3

32.0	Section 1350 Certification of Chief Executive Officer and Chief Financial Officer
__________________________________
*	Management contract or compensatory plan, contract or arrangement.
(1)	Incorporated by reference to the Company’s Registration Statement on Form S-1, as amended, initially filed with the SEC on March 20, 2006.
(2)	Incorporated by reference to Exhibit 3.2 to the Company’s Current Report on Form 8-K filed with the SEC on for the quarter ended December 14, 2007.
(3)	Incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2006.
(4)	Incorporated by reference to Exhibit 21.0 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2006.
(5)	Incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2007.

4

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

	NEWPORT BANCORP, INC.
Date: January 8, 2009	By:	/s/ Kevin M. McCarthy
		Kevin M. McCarthy
		President and Chief Executive Officer

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

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

5

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

6 

NEWPORT BANCORP, INC.

CONSOLIDATED FINANCIAL STATEMENTS

Years Ended December 31, 2007 and 2006

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

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

F-1

Report of Independent Registered Public Accounting Firm

The Board of Directors

Newport Bancorp, Inc.

Newport, Rhode Island

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

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

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

/s/Wolf & Company, P.C.

Boston, Massachusetts

March  20, 2008

F-2

NEWPORT BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS

December 31, 2007 and 2006

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

See accompanying notes to consolidated financial statements.

F-3

NEWPORT BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF OPERATIONS

Years Ended December 31, 2007 and 2006

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

See accompanying notes to consolidated financial statements.

F-4

NEWPORT BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

Years Ended December 31, 2007 and 2006

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

See accompanying notes to consolidated financial statements.

F-5

NEWPORT BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS

Years Ended December 31, 2007 and 2006

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

(continued)

See accompanying notes to consolidated financial statements.

F-6

NEWPORT BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS (Concluded)

Years Ended December 31, 2007 and 2006

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

See accompanying notes to consolidated financial statements.

F-7

NEWPORT BANCORP, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended December 31, 2007 and 2006

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

  Principles of Consolidation

The consolidated financial statements include the accounts of Newport Bancorp, Inc. (the “Company”) and its wholly-owned subsidiary, Newport Federal Savings Bank (the “Bank”).  All significant intercompany balances and transactions have been eliminated in consolidation.

  Nature of Operations

The Company provides a variety of financial services to individuals and small businesses through its offices in Newport and Washington County, Rhode Island.  Its primary deposit products are savings, checking and term certificate accounts, and its primary lending products are residential and commercial mortgage loans.

  Stock Conversion

On July 6, 2006, in accordance with a Plan of Conversion, Newport Federal Savings Bank (the “Bank”), a federally chartered mutual savings bank, was reorganized into a federally-chartered stock savings bank under the operation of a stock holding company, Newport Bancorp, Inc. (the “Company”) which issued an aggregate of 4,878,349 shares of common stock, at an offering price of $10 per share.  The net proceeds from the stock offering, net of offering expenses of $1,573,000, amounted to $43,597,000.

In connection with the Conversion, the Company established and funded the NewportFed Charitable Foundation (the “Foundation”) with 361,359 shares of the Company’s common stock resulting in recognition of expense in the third quarter of 2006 based on the $10 per share offering price.  The Charitable Foundation will make grants and donations to non-profit and community groups and projects located within the Company’s market areas.

Also, in connection with the conversion, the Bank established an employee stock ownership plan (“ESOP”) which purchased 390,268 shares of the Company’s common stock at a price of $10.00 per share.

  Segment Reporting

Management evaluates the Company’s performance and allocates resources based on a single segment concept.  Accordingly, there are no separately identified operating segments for which discrete financial information is available.  The Company does not derive revenues from, or have assets located in, foreign countries, nor does it derive revenues from any single customer that represents 10% or more of the Company’s total revenues.

F-8

NEWPORT BANCORP, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

  Use of Estimates

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

  Reclassification

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

  Cash and Cash Equivalents

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

   Securities

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

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

Management evaluates securities for other-than-temporary impairment at least on a quarterly basis, and more frequently when economic or market concerns warrant such evaluation.  Consideration is given to (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition of the issuer, and (3) the intent and ability of the Company to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value.

F-9

NEWPORT BANCORP, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Loans

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

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

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

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

Allowance for Loan Losses

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

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

F-10

NEWPORT BANCORP, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Allowance for Loan Losses (concluded)

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

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

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

Transfers of Financial Assets

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

Mortgage Servicing Rights

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

Bank-owned Life Insurance

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

F-11

NEWPORT BANCORP, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

   Premises and Equipment

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

   Marketing Costs

Marketing costs are expensed as incurred.

   Pension Plan

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

Stock Compensation Plans

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

   Income Taxes

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

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

F-12

NEWPORT BANCORP, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

   Earnings per Share

Basic earnings per share (“EPS”) excludes dilution and is calculated by dividing net income available to common stockholders by the weighted-average number of shares of common stock outstanding during the period.  Diluted EPS is computed in a manner similar to that of basic EPS except that the weighted-average number of common shares outstanding is increased to include the number of incremental common shares (computed using the treasury stock method) that would have been outstanding if all potentially dilutive common stock equivalents (such as stock options and unvested restricted stock) were issued during the period.  Common stock equivalents that could potentially dilute basic EPS in the future were not included in the computation of diluted EPS because to do so would have been antidilutive for the year ended December 31, 2007.  Treasury shares and common shares held by the ESOP which have not been released or committed to be released are shown as a reduction in stockholders’ equity and are not included in the weighted-average number of common shares outstanding for either basic or diluted earnings per share calculations.

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

   Comprehensive Income/Loss

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

   Recent Accounting Pronouncements

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

F-13

NEWPORT BANCORP, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Recent Accounting Pronouncements (continued)

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

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

F-14

NEWPORT BANCORP, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Recent Accounting Pronouncements (continued)

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

In September 2006, the FASB ratified EITF 06-4, “Accounting for Deferred Compensation and Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance Arrangements” which addresses accounting for split-dollar life insurance arrangements whereby the employer purchases a policy to insure the life of an employee, and separately enters into an agreement to split the policy benefits between the employer and the employee.  This EITF states that an obligation arises as a result of a substantive agreement with an employee to provide future postretirement benefits.  Under EITF 06-4, the obligation is not settled upon entering into an insurance arrangement.  Since the obligation is not settled, a liability should be recognized in accordance with applicable authoritative guidance.  This EITF was adopted on January 1, 2008, resulting in a decrease to retained earnings in the amount of $61,000.

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

F-15

NEWPORT BANCORP, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (concluded)

   Recent Accounting Pronouncements (concluded)

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

2. RESTRICTIONS ON CASH AND AMOUNTS DUE FROM BANKS

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

3.            SECURITIES

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

			Gross		Gross
	Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		Losses			Value
	(In Thousands)
December 31, 2007
Securities Available for Sale
Mutual funds - bond funds	$	7,117	$	-	$	(151	)	$	6,966
Securities Held to Maturity
Mortgage-backed securities	$	30,886	$	3	$	(138	)	$	30,751

F-16

NEWPORT BANCORP, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

   SECURITIES (continued)

			Gross		Gross
	Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		Losses			Value
	(In Thousands)
December 31, 2006
Securities Available for Sale
Mutual funds - bond funds	$	6,775	$	-	$	(161	)	$	6,614
Securities Held to Maturity
Mortgage-backed securities	$	1,922	$	2	$	(55	)	$	1,869

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

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

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

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

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

F-17

NEWPORT BANCORP, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

   SECURITIES (continued)

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

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

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

F-18

NEWPORT BANCORP, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

4.            LOANS

A summary of the balances of loans follows:

	December 31,
	2007			2006
	(In Thousands)
Mortgage loans:
One-to-four family residential	$	169,179		$	157,448
Multi-family residential		9,494			9,360
Commercial		76,919			57,650
Equity loans and lines of credit		30,934			29,275
Construction		9,427			4,685
		295,953			258,418
Personal installment		442			1,112
Total loans		296,395			259,530
Less:  Allowance for loan losses		(2,399	)		(1,973	)
Net deferred loan fees		(912	)		(791	)
Loans, net	$	293,084		$	256,766

An analysis of the allowance for loan losses follows:

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

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

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

F-19

NEWPORT BANCORP, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                LOANS (concluded)

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

5.             PREMISES AND EQUIPMENT

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

	December 31,						Estimated
	2007			2006			Useful Life
	(In Thousands)
Land	$	538		$	538			-
Building and improvements		5,180			5,169		20-40 years
Leasehold improvements		1,272			1,267		10-20 years
Furniture, fixtures and equipment		2,977			3,282		3-10 years
Construction in progress		348			254
		10,315			10,510
Less accumulated depreciation
and amortization		(4,466	)		(4,411	)
	$	5,849		$	6,099

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

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

F-20

NEWPORT BANCORP, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

6.             DEPOSITS

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

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

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

A summary of certificate accounts is as follows:

	December 31, 2007					December 31, 2006
			Weighted					Weighted
			Average					Average
	Amount		Rate			Amount		Rate
	(Dollars in Thousands)
Maturing in:
2007	$	-		-	%	$	77,603		4.60	%
2008		76,058		4.41			3,288		2.91
2009		1,707		3.08			960		3.54
2010		1,189		4.17			770		4.78
2011		183		3.73			210		3.66
Thereafter		199		3.20			-		-
	$	79,336		4.37	%	$	82,831		4.52	%

7.            SHORT-TERM BORROWINGS

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

F-21

NEWPORT BANCORP, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

   SHORT-TERM BORROWINGS (concluded)

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

8.            LONG-TERM BORROWINGS

FHLB Advances

Long-term borrowings include the following FHLB advances:

	December 31, 2007					December 31, 2006
			Weighted					Weighted
			Average					Average
	Amount		Rate			Amount		Rate
	(Dollars in Thousands)
Fixed-rate advances maturing:
2007	$	-		-	%	$	2,320		4.64	%
2008		7,000		5.78			7,000		5.78
2009		11,642		4.96			3,019		3.79
2010*		9,500		5.16			2,500		5.47
2011		4,290		5.53			2,359		5.69
2012		14,615		4.75			5,752		5.00
Thereafter*		27,500		4.07			9,000		4.59
	$	74,547		4.72	%	$	31,950		5.00	%

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

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

F-22

NEWPORT BANCORP, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

   LONG-TERM BORROWINGS (concluded)

Repurchase Agreement

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

9.            INCOME TAXES

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

	Years Ended December 31,
	2007			2006
	(In Thousands)
Current tax provision:
Federal	$	821		$	575
State		237			166
		1,058			741
Deferred tax benefit:
Federal		(389	)		(1,223	)
State		(101	)		(353	)
		(490	)		(1,576	)
Change in valuation allowance		28			464
		(462	)		(1,112	)
Total tax provision (benefit)	$	596		$	(371	)

F-23

NEWPORT BANCORP, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                INCOME TAXES (continued)

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

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

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

	December 31,
	2007			2006
	(In Thousands)
Deferred tax asset:
Federal	$	2,336		$	2,036
State		679			592
		3,015			2,628
Deferred tax liability:
Federal		(164	)		(253	)
State		(46	)		(60	)
		(210	)		(313	)
Valuation allowance		(492	)		(464	)
		(702	)		(777	)
Net deferred tax asset	$	2,313		$	1,851

F-24

NEWPORT BANCORP, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

        INCOME TAXES (concluded)

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

	December 31,
	2007			2006
	(In Thousands)
Allowance for loan losses	$	804		$	634
Depreciation and amortization		(57	)		(160	)
Net deferred loan fees		351			300
Charitable contribution carryover		1,268			1,364
Stock options and awards		177			-
Employee benefit plans		246			156
Other, net		16			21
		2,805			2,315
Valuation allowance		(492	)		(464	)
Deferred tax asset	$	2,313		$	1,851

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

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

F-25

NEWPORT BANCORP, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

10.          STOCKHLDERS’ EQUITY

Minimum Regulatory Capital Requirement

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

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

F-26

NEWPORT BANCORP, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

STOCKHLDERS’ EQUITY (continued)

Minimum Regulatory Capital Requirement (concluded)

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

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

F-27

NEWPORT BANCORP, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

STOCKHLDERS’ EQUITY (concluded)

Other Capital Restrictions

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

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

Liquidation Account

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

Share Repurchase Plan

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

F-28

NEWPORT BANCORP, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

11.          EMPLOYEE BENEFIT PLANS

Defined Benefit Plan

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

401(k) Plan

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

Incentive Plan

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

Supplemental Executive and Director Retirement Plans

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

F-29

NEWPORT BANCORP, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

EMPLOYEE BENEFIT PLANS (continued)

Supplemental Executive and Director Retirement Plans (concluded)

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

Endorsement Split-Dollar Life Insurance Arrangements

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

Employee Stock Ownership Plan

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

F-30

NEWPORT BANCORP, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

EMPLOYEE BENEFIT PLANS (continued)

Employee Stock Ownership Plan (continued)

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

Year Ending
December 31,	Amount
	(In Thousands)
2008	$	159
2009		172
2010		186
2011		201
2012		218
Thereafter		2,532
	$	3,468

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

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

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

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

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

F-31

NEWPORT BANCORP, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

EMPLOYEE BENEFIT PLANS (continued)

Employee Stock Ownership Plan (concluded)

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

Stock Compensation Plans

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

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

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

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

F-32

NEWPORT BANCORP, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

EMPLOYEE BENEFIT PLANS (continued)

Stock Compensation Plans (continued)

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

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

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

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

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

										Non-Vested
	Stock Options Outstanding									Restricted Stock
						Weighted
						Average
				Weighted		Remaining						Weighted
				Average		Contractual		Aggregate				Average
		Number		Exercise		Term		Intrinsic		Number		Grant Date
		of Shares		Price		(Years)		Value		of Shares		Fair Value
Balance at December 31, 2006			-	$	-		-				-	$	-
Granted			437,900		12.53		9.75				195,133		12.53
Vesting of restricted stock											-		-
Cancelled (forfeited and expired)			-		-						-		-
Balance at December 31, 2007			437,900	$	12.53		9.75	$	-		195,133	$	12.53
Options vested or expected to
vest at December 31, 2007			437,900	$	12.53		9.75		-
Options exercisable at
December 31, 2007			-		-		9.75		-

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

F-33

NEWPORT BANCORP, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

     EMPLOYEE BENEFIT PLANS (concluded)

Stock Compensation Plans (concluded)

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

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

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

12.          OTHER COMMITMENTS AND CONTINGENCIES

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

Loan Commitments

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

F-34

NEWPORT BANCORP, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

OTHER COMMITMENTS AND CONTINGENCIES (continued)

Loan Commitments (concluded)

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

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

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

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

Operating Lease Commitments

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

Year Ending
December 31,	Amount
	(In Thousands)
2008	$	99
2009		102
2010		102
2011		63
2012		37
Thereafter		481
	$	884

F-35

NEWPORT BANCORP, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

OTHER COMMITMENTS AND CONTINGENCIES (concluded)

Operating Lease Commitments (concluded)

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

Employment and Change in Control Agreements

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

Other Contingencies

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

13.          RELATED PARTY TRANSACTIONS

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

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

F-36

NEWPORT BANCORP, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

14.          FAIR VALUE OF FINANCIAL INSTRUMENTS

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

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

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

Securities:  Fair values are based on quoted market prices.

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

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

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

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

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

F-37

NEWPORT BANCORP, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

FAIR VALUE OF FINANCIAL INSTRUMENTS (concluded)

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

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

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

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

F-38

NEWPORT BANCORP, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

15.         CONDENSED FINANCIAL STATEMENTS OF PARENT COMPANY

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

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

F-39

NEWPORT BANCORP, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

CONDENSED FINANCIAL STATEMENTS OF PARENT COMPANY (Continued)

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

F-40

NEWPORT BANCORP, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

CONDENSED FINANCIAL STATEMENTS OF PARENT COMPANY (Concluded)

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

F-41

NEWPORT BANCORP, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Concluded)

16.    QUARTERLY DATA (UNAUDITED)

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

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