UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

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

For the quarterly period ended June 30, 2012

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 of America	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)

N/A

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes S          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 during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes S          No £

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

Large accelerated filer £    Accelerated filer £    Non-accelerated filer £    Smaller Reporting Company S

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

Yes £           No S

As of August 2, 2012 the registrant had 3,502,488 shares of common stock outstanding.

NEWPORT BANCORP, INC.

Table of Contents

		Page No.
Part I. Financial Information
Item 1.	Consolidated Financial Statements (Unaudited)	1
	Consolidated Balance Sheets at June 30, 2012 and December 31, 2011	1
	Consolidated Statements of Income and Comprehensive Income for the Three and Six Months Ended June 30, 2012 and 2011	2
	Consolidated Statements of Changes in Stockholders’ Equity for the Six Months Ended June 30, 2012 and 2011	3
	Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2012 and 2011	4
	Notes to Unaudited Consolidated Financial Statements	5-17
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	17-26
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	26-27
Item 4.	Controls and Procedures	27
Part II. Other Information
Item 1.	Legal Proceedings	27
Item 1A.	Risk Factors	28
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	28
Item 3.	Defaults Upon Senior Securities	28
Item 4.	Mine Safety Disclosures	28
Item 5.	Other Information	28
Item 6.	Exhibits	28
	Signatures	29

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

CONSOLIDATED BALANCE SHEETS

ASSETS

	June 30, 2012			December 31, 2011
	(Unaudited)
	(Dollars in thousands, except per share data)
Cash and due from banks	$	22,436		$	19,739
Short-term investments		5,295			11,335
Cash and cash equivalents		27,731			31,074
Securities held to maturity, at amortized cost		37,309			36,220
Federal Home Loan Bank stock, at cost		5,588			5,730
Loans		367,500			352,201
Allowance for loan losses		(3,669	)		(3,709	)
Loans, net		363,831			348,492
Premises and equipment, net		14,318			14,706
Accrued interest receivable		1,213			1,268
Net deferred tax asset		2,809			2,809
Bank-owned life insurance		11,276			11,088
Foreclosed real estate		715			839
Prepaid FDIC insurance		592			734
Other assets		1,172			949
Total assets	$	466,554		$	453,909
LIABILITIES AND STOCKHOLDERS’ EQUITY
Deposits	$	271,762		$	264,769
Long-term borrowings		138,748			133,696
Accrued expenses and other liabilities		3,505			3,790
Total liabilities		414,015			402,255
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		50,390			50,282
Retained earnings		20,937			20,282
Unearned compensation (259,337 and 272,786 shares at June 30, 2012 and December 31, 2011, respectively)		(2,235	)		(2,413	)
Treasury stock, at cost (1,375,861 and 1,371,943 shares at June 30, 2012 and December 31, 2011, respectively)		(16,602	)		(16,546	)
Total stockholders’ equity		52,539			51,654
Total liabilities and stockholders’ equity	$	466,554		$	453,909

See accompanying notes to unaudited consolidated financial statements.

1

CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

	Three Months Ended June 30,				Six Months Ended June 30,
	2012		2011		2012		2011
	(Unaudited) (Dollars in thousands, except per share data)
Interest and dividend income:
Loans	$	4,432	$	4,862	$	8,991	$	9,714
Securities		394		509		827		1,081
Other interest-earning assets		17		9		35		16
Total interest and dividend income		4,843		5,380		9,853		10,811
Interest expense:
Deposits		302		477		621		971
Short-term borrowings		—		—		—		3
Long-term borrowings		1,134		1,147		2,264		2,286
Total interest expense		1,436		1,624		2,885		3,260
Net interest income		3,407		3,756		6,968		7,551
Provision for loan losses		341		207		622		522
Net interest income, after provision for loan losses		3,066		3,549		6,346		7,029
Non-interest income:
Customer service fees		489		505		926		948
Bank-owned life insurance		89		92		188		194
Miscellaneous		7		8		14		17
Total non-interest income		585		605		1,128		1,159
Non-interest expenses:
Salaries and employee benefits		1,697		1,935		3,471		3,886
Occupancy and equipment		564		535		1,092		1,110
Data processing		400		366		802		761
Professional fees		183		152		336		286
Marketing		164		185		311		379
FDIC insurance		72		106		148		234
Other general and administrative		205		220		359		435
Total non-interest expenses		3,285		3,499		6,519		7,091
Income before income taxes		366		655		955		1,097
Provision for income taxes		113		216		300		357
Net income and comprehensive income	$	253	$	439	$	655	$	740
Weighted-average shares outstanding:
Basic		3,317,471		3,314,598		3,315,234		3,311,609
Diluted		3,353,128		3,346,169		3,340,903		3,333,851
Earnings per share:
Basic	$	.08	$	.13	$	.20	$	.22
Diluted	$	.08	$	.13	$	.20	$	.22

See accompanying notes to unaudited consolidated financial statements

2

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(Unaudited)

(Dollars in thousands)

	Common Stock				Additional Paid-in			Retained		Unearned			Treasury			Total Stockholders’
	Shares		Amount		Capital			Earnings		Compensation			Stock			Equity
Balance at December 31, 2010		4,878,349	$	49	$	50,435		$	18,832	$	(2,864	)	$	(16,749	)	$	49,703
Net income		—		—		—			740		—			—			740
Share-based compensation – restricted stock		—		—		—			—		117			—			117
Share-based compensation – options		—		—		131			—		—			—			131
ESOP shares committed to be released (13,009 shares)		—		—		49			—		130			—			179
Balance at June 30, 2011		4,878,349	$	49	$	50,615		$	19,572	$	(2,617	)	$	(16,749	)	$	50,870
Balance at December 31, 2011		4,878,349	$	49	$	50,282		$	20,282	$	(2,413	)	$	(16,546	)	$	51,654
Net income		—		—		—			655		—			—			655
Share-based compensation – restricted stock		—		—		(4	)		—		48			—			44
Share-based compensation – options		—		—		69			—		—			—			69
Stock options exercised (1,982 shares)		—		—		—			—		—			25			25
ESOP shares committed to be released (13,009 shares)		—		—		43			—		130			—			173
Purchase of treasury shares (5,900 shares)		—		—		—			—		—			(81	)		(81	)
Balance at June 30, 2012		4,878,349	$	49	$	50,390		$	20,937	$	(2,235	)	$	(16,602	)	$	52,539

See accompanying notes to unaudited consolidated financial statements.

3

CONSOLIDATED STATEMENTS OF CASH FLOWS

	Six Months Ended June 30,
	2012			2011
	(Unaudited) (In thousands)
Cash flows from operating activities:
Net income	$	655		$	740
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses		622			522
Accretion of securities		(103	)		(81	)
Loss on sale of foreclosed real estate		10			—
Amortization of net deferred loan fees		(368	)		(149	)
Depreciation and amortization of premises and equipment		470			396
Share-based compensation and ESOP allocation		286			427
Income from bank-owned life insurance		(188	)		(194	)
Net change in:
Accrued interest receivable		55			(5	)
Prepaid FDIC insurance		142			224
Other assets		(223	)		31
Accrued expenses and other liabilities		(285	)		(93	)
Net cash provided by operating activities		1,073			1,818
Cash flows from investing activities:
Purchases of securities held to maturity		(7,995	)		—
Principal payments received on securities held to maturity		7,009			5,292
Redemption of Federal Home Loan stock		142			—
Net loan (originations) principal payments		(15,783	)		236
Proceeds from sales of foreclosed real estate		304			170
Additions to premises and equipment		(82	)		(762	)
Net cash provided (used) by investing activities		(16,405	)		4,936
Cash flows from financing activities:
Net increase in deposits		6,993			1,270
Net decrease in borrowings with maturities of three months or less		—			(3,000	)
Proceeds from borrowings with maturities in excess of three months		5,052			10,500
Repayment of borrowings with maturities in excess of three months		—			(5,619	)
Stock options exercised		25			—
Purchase of treasury stock		(81	)		—
Net cash provided by financing activities		11,989			3,151
Net change in cash and cash equivalents		(3,343	)		9,905
Cash and cash equivalents at beginning of period		31,074			9,375
Cash and cash equivalents at end of period	$	27,731		$	19,280
Supplementary information:
Interest paid on deposit accounts	$	625		$	1,059
Interest paid on borrowings		2,267			2,301
Income taxes paid, net of refunds		469			503
Transfers from loans to foreclosed real estate		193			265

See accompanying notes to unaudited consolidated financial statements.

4

NEWPORT BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 1 – BASIS OF PRESENTATION

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

In the opinion of management, all adjustments (consisting only of normal recurring accruals) considered necessary for a fair presentation have been included. The accompanying consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in Newport Bancorp’s Annual Report on Form 10-K for the year ended December 31, 2011. The results for the three and six months ended June 30, 2012 are not necessarily indicative of the results that may be expected for the year ending December 31, 2012.

NOTE 2 – EFFECT OF RECENT ACCOUNTING PRONOUNCEMENTS

On January 1, 2012, the Company adopted Financial Accounting Standards Board (FASB) Accounting Standards Update (ASU) 2011-05, Comprehensive Income (Topic 220), Presentation of Comprehensive Income. This ASU amends the disclosure requirements for the presentation of comprehensive income. The amended guidance eliminates the option to present components of other comprehensive income (OCI) as part of the statement of changes in stockholder’s equity. Under the amended guidance, all changes in OCI are to be presented either in a single continuous statement of comprehensive income or in two separate but consecutive financial statements. There was no impact to the consolidated financial results as the amendments relate only to changes in financial statement presentation.

On January 1, 2012, the Company adopted the FASB ASU 2011-03, Transfers and Servicing (Topic 860), Reconsideration of Effective Control for Repurchase Agreements. This Update provides additional guidance which affects all entities that enter into agreements to transfer financial assets that both entitle and obligate the transferor to repurchase or redeem the financial assets before their maturity. The amendment removes from the assessment of effective control (1) the criterion requiring the transferor to have the ability to repurchase or redeem the financial assets on substantially the agreed terms, even in the event of default by the transferee, and (2) the collateral maintenance implementation guidance related to that criterion. Adopting the Update did not have a significant impact on the Company’s consolidated financial statements.

On January 1, 2012, the Company adopted the FASB ASU 2011-04, Fair Value Measurement (Topic 820), Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS. This ASU clarifies and expands the disclosures pertaining to unobservable inputs used in Level 3 fair value measurements. The guidance also requires, for public companies, disclosure of the level within the fair value hierarchy for assets and liabilities not measured at fair value in the statement of financial position but for which the fair value is disclosed. The amendments in this ASU are to be applied prospectively. Relevant additional disclosures have been provided in Note 7 to the accompanying consolidated financial statements.

5

NOTE 3 –SECURITIES HELD TO MATURITY

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

			Gross		Gross
	Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		Losses			Value
	(In thousands)
June 30, 2012
U.S. Government obligations	$	7,996	$	—	$	(1	)	$	7,995
Government-sponsored enterprise residential mortgage-backed securities		29,313		2,778		—			32,091
Total	$	37,309	$	2,778	$	(1	)	$	40,086
December 31, 2011
Government-sponsored enterprise residential mortgage-backed securities	$	36,220	$	3,028	$	—		$	39,248

At June 30, 2012, the U.S. Government obligations mature within one year.

At June 30, 2012 and December 31, 2011, certain mortgage-backed securities and U.S. Government obligations were pledged to secure repurchase agreements (see Note 8).

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. There were no securities with gross unrealized losses at December 31, 2011.

		Less Than Twelve Months				Over Twelve Months
		Gross				Gross
		Unrealized		Fair		Unrealized		Fair
		Losses		Value		Losses		Value
		(In thousands)
June 30, 2012
U.S. Government obligations	$	1	$	7,995	$	-	$	-

6

NOTE 4 – LOANS AND ALLOWANCE FOR LOAN LOSSES

The following is a summary of the balances of loans at June 30, 2012 and December 31, 2011:

	June 30,			December 31,
	2012			2011
	(In thousands)
Mortgage loans:
One-to-four family residential	$	225,790		$	207,773
Equity loans and lines of credit		18,307			19,597
Commercial and multi-family residential		119,918			119,486
Construction		2,742			5,016
		366,757			351,872
Other loans:
Commercial loans		1,344			1,116
Consumer loans		547			399
Total loans		368,648			353,387
Less:  Allowance for loan losses		(3,669	)		(3,709	)
Net deferred loan fees		(1,148	)		(1,186	)
Loans, net	$	363,831		$	348,492

7

The following table provides further information pertaining to the allowance for loan losses and impaired loans:

	One-to-Four Family Residential			Equity Loans and Lines of Credit			Commercial and Multi-Family			Construction			Other Loans			Total
	(In thousands)
Three months ended June 30, 2012
Allowance for loan losses:
Balance at beginning of period	$	1,076		$	139		$	2,376		$	58		$	30		$	3,679
Provision for loans losses		47			(2	)		301			(6	)		1			341
Loans charged-off		—			—			(363	)		—			—			(363	)
Recoveries of loans previously charged-off		—			—			12			—			—			12
Balance at end of period	$	1,123		$	137		$	2,326		$	52		$	31		$	3,669
Six months ended June 30, 2012
Allowance for loan losses:
Balance at beginning of period	$	1,070		$	147		$	2,373		$	94		$	25		$	3,709
Provision for loans losses		53			15			590			(42	)		6			622
Loans charged-off		—			(25	)		(663	)		—			—			(688	)
Recoveries of loans previously charged-off		—			—			26			—			—			26
Balance at end of period	$	1,123		$	137		$	2,326		$	52		$	31		$	3,669
Three months ended June 30, 2011
Allowance for loan losses:
Balance at beginning of period	$	1,050		$	166		$	2,384		$	99		$	27		$	3,726
Provision for loans losses		42			(5	)		174			(2	)		(2	)		207
Loans charged-off		(60	)					(186	)		—			—			(246	)
Balance at end of period	$	1,032		$	161		$	2,372		$	97		$	25		$	3,687
Six months ended June 30, 2011
Allowance for loan losses:
Balance at beginning of period	$	1,028		$	173		$	2,353		$	89		$	29		$	3,672
Provision for loans losses		67			(12	)		463			8			(4	)		522
Loans charged-off		(63	)					(444	)		—			—			(507	)
Balance at end of period	$	1,032		$	161		$	2,372		$	97		$	25		$	3,687

8

	One-to-Four Family Residential		Equity Loans and Lines of Credit		Commercial and Multi-Family		Construction		Other Loans		Total
	(In thousands)
June 30, 2012
Amount of allowance for  loan losses for loans deemed to be impaired	$	—	$	—	$	87	$	—	$	—	$	87
Amount of allowance for  loan losses for loans not deemed to be impaired		1,123		137		2,239		52		31		3,582
Total allowance for loan losses	$	1,123	$	137	$	2,326	$	52	$	31	$	3,669
Recorded investment in:
Loans deemed to be impaired	$	1,134	$	57	$	5,414	$	—	$	—	$	6,605
Loans deemed not to be impaired		224,656		18,250		114,504		2,742		1,891		362,043
Total	$	225,790	$	18,307	$	119,918	$	2,742	$	1,891	$	368,648
December 31, 2011
Amount of allowance for  loan losses for loans deemed to be impaired	$	—	$	—	$	—	$	—	$	—	$	—
Amount of allowance for  loan losses for loans not deemed to be impaired		1,070		147		2,373		94		25		3,709
Total allowance for loan losses	$	1,070	$	147	$	2,373	$	94	$	25	$	3,709
Recorded investment in:
Loans deemed to be impaired	$	1,052	$	—	$	2,403	$	—	$	—	$	3,455
Loans deemed not to be impaired		206,721		19,597		117,083		5,016		1,515		349,932
Total	$	207,773	$	19,597	$	119,486	$	5,016	$	1,515	$	353,387

9

The following is a summary of past due and non-accrual loans at June 30, 2012 and December 31, 2011:

	30-59 Days Past Due		60-89 Days Past Due		Greater than 90 Days Past Due		Total Past Due		Loans on Non-accrual
June 30, 2012	(In thousands)
Mortgage loans:
One-to-four family residential	$	496	$	—	$	1,134	$	1,630	$	1,134
Equity loans and lines of credit				—		57		57		57
Commercial and multi-family residential		266		—		3,376		3,642		4,934
Total	$	762	$	—	$	4,567	$	5,329	$	6,125
December 31, 2011
Mortgage loans:
One-to-four family residential	$	149	$	690	$	446	$	1,285	$	1,052
Equity loans and lines of credit		57		150		—		207		—
Commercial and multi-family residential		199		—		858		1,057		858
Total	$	405	$	840	$	1,304	$	2,549	$	1,910

At June 30, 2012 and December 31, 2011, there were no loans greater than ninety days past due and still accruing interest.

The following is a summary of troubled debt restructurings for both the three and six months ended June 30, 2012. There were no troubled debt restructurings during the six months ended June 30, 2011.

				Pre-Modification		Post-Modification
				Outstanding		Outstanding
		Number of		Recorded		Recorded
		Contracts		Investment		Investment
	(Dollars in thousands)
Commercial and multi-family residential			5	$	1,008	$	1,008

Rate reductions ranging from 1.75% to 3.25% for periods of approximately 2 years to 7.5 years were granted for four commercial real estate mortgage loans. The other commercial real estate mortgage loan was modified to extend the maturity terms of the existing loan to October 2012. Management performs a discounted cash flow calculation to determine the amount of impairment reserve required on each of the troubled debt restructurings. Any reserve required is recorded through the provision for loan losses.

There were no troubled debt restructures that defaulted in the first twelve months after restructure during the six months ended June 30, 2012.

10

Further information pertaining to impaired loans follows:

	June 30, 2012				December 31, 2011
	Recorded Investment		Unpaid Principal Balance		Recorded Investment		Unpaid Principal Balance
	(In thousands)
Impaired loans without a valuation allowance:
Mortgage loans:
One-to-four family residential	$	1,134	$	1,134	$	1,052	$	1,053
Equity loans and lines of credit		57		57		—		—
Commercial and multi-family residential		4,406		4,746		2,403		2,480
Total	$	5,597	$	5,937	$	3,455	$	3,533

	June 30, 2012
		Recorded Investment		Unpaid Principal Balance		Related Allowance
		(In thousands)
Impaired loans with a valuation allowance:
Mortgage loans:
Commercial and multi-family  residential	$	1,008	$	1,008	$	87

There were no impaired loans with a valuation allowance at December 31, 2011.

	Three Months Ended June 30, 2012						Six Months Ended June 30, 2012
	Average Recorded Investment		Interest Income Recognized		Interest Income Recognized on Cash Basis		Average Recorded Investment		Interest Income Recognized		Interest Income Recognized on Cash Basis
	(In thousands)
Mortgage loans:
One-to-four family residential	$	1,129	$	—	$	—	$	1,123	$	6	$	6
Equity loans and lines of credit		134		—		—		125		—		—
Commercial and multi-family residential		3,824		5		5		3,300		28		23
Total	$	5,087	$	5	$	5	$	4,548	$	34	$	29

	Three Months Ended June 30, 2011						Six Months Ended June 30, 2011
	Average Recorded Investment		Interest Income Recognized		Interest Income Recognized on Cash Basis		Average Recorded Investment		Interest Income Recognized		Interest Income Recognized on Cash Basis
	(In thousands)
Mortgage loans:
One-to-four family residential	$	55	$	—	$	—	$	78	$	—	$	—
Equity loans and lines of credit		6		—		—		3		—		—
Commercial and multi-family residential		506		5		5		349		5		5
Total	$	567	$	5	$	5	$	430	$	5	$	5

11

Credit Quality Information:

The Company utilizes a nine grade internal loan rating system for multi-family mortgages, commercial mortgages, construction mortgages and commercial loans as follows:

Loans rated 1 – 4: Loans in these categories are considered “pass” rated loans with low to average risk.

Loans rated 5: Loans in this category are considered “watch” loans. Loans classified as watch are pass rated loans that management is monitoring more closely but remain acceptable credit.

Loans rated 6: Loans in this category are considered “special mention.” These loans are starting to show signs of potential weakness and are being closely monitored by management.

Loans rated 7: Loans in this category are considered “substandard.” Generally, a loan is considered substandard if it is inadequately protected by the current net worth and paying capacity of the obligors and/or the collateral pledged. There is a distinct possibility that the Company will sustain some loss if the weakness is not corrected.

Loans rated 8: Loans in this category are considered “doubtful.” Loans classified as doubtful have all the weaknesses inherent in those classified substandard with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, highly questionable and improbable.

Loans rated 9: Loans in this category are considered uncollectible (“loss”) and of such little value that their continuance as loans is not warranted.

On a quarterly basis, or more often if needed, the Company formally reviews the ratings on all multi-family residential real estate, commercial real estate, construction and commercial loans. Annually, the Company engages an independent third-party to review a significant portion of loans within these segments. Management uses the results of these reviews as part of its review process.

Information pertaining to the Company’s loans by risk rating follows:

	Commercial and
	Multi-family
	Residential				Commercial
	Mortgages		Construction		Loans		Total
	(Dollars in thousands)
June 30, 2012
Loans rated 1 - 4	$	84,579	$	652	$	993	$	86,224
Loans rated 5		18,681		2,090		318		21,089
Loans rated 6		8,790		—		33		8,823
Loans rated 7		7,868		—		—		7,868
Loans rated 8		—		—		—		—
Loans rated 9		—		—		—		—
	$	119,918	$	2,742	$	1,344	$	124,004
December 31, 2011
Loans rated 1 - 4	$	88,036	$	1,210	$	922	$	90,168
Loans rated 5		15,470		3,806		150		19,426
Loans rated 6		10,250		—		44		10,294
Loans rated 7		5,730		—		—		5,730
Loans rated 8		—		—		—		—
Loans rated 9		—		—		—		—
	$	119,486	$	5,016	$	1,116	$	125,618

12

The Company utilizes a rating scale of pass, special mention, substandard or doubtful for one-to-four family mortgages and equity loans and lines of credit. On a quarterly basis, or more often if needed, the Company reviews the ratings of these loans and makes adjustments as deemed necessary. At June 30, 2012, residential one-to-four family mortgage loans rated substandard amounted to $1.1 million and equity loans and lines of credit rated substandard amounted to $57,000. At December 31, 2011, one-to-four family residential mortgage loans rated substandard amounted to $1.1 million. All other one-to-four family residential real estate and equity loans and lines of credit were classified as pass at June 30, 2012 and December 31, 2011.

NOTE 5 – COMMITMENTS

Outstanding loan commitments totaled $29.2 million at June 30, 2012, as compared to $24.9 million as of December 31, 2011. Loan commitments consist of commitments to originate new loans as well as the outstanding unused portions of lines of credit.

NOTE 6 – 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.

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

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2012			2011			2012			2011
	(In thousands)
Net income applicable to common stock	$	253		$	439		$	655		$	740
Weighted average number of common shares issued		4,878			4,878			4,878			4,878
Less:  Weighted average treasury shares		(1,373	)		(1,390	)		(1,372	)		(1,390	)
Less:  Weighted average unallocated ESOP shares		(224	)		(250	)		(228	)		(254	)
Add:  Weighted average unvested restricted stock plan shares with non-forfeitable dividend rights		36			77			37			78
Weighted average number of common shares outstanding used to calculate basic earnings per common share		3,317			3,315			3,315			3,312
Effect of dilutive stock options		36			31			26			22
Weighted average number of common shares outstanding used to calculate diluted earnings per common share		3,353			3,346			3,341			3,334

Options for 441,908 and 451,896 shares of common stock were not included in the computation of diluted EPS because they were anti-dilutive for the three and six month periods ended June 30, 2012, respectively. Options for 456,264 and 465,591 shares of common stock were not included in the computation of diluted EPS because they were anti-dilutive for the three and six month periods ended June 30, 2011, respectively.

13

NOTE 7 – FAIR VALUES OF ASSETS AND LIABILITIES

The Company groups its assets and liabilities measured or disclosed 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. 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.

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.

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 held to maturity: All fair value measurements are obtained from a third-party pricing service and are not adjusted by management. 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 Federal Home Loan Bank of Boston (“FHLB”) stock approximates fair value based on the redemption provisions of the FHLB.

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.

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 commitments 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 and Liabilities Measured at Fair Value on a Recurring Basis

There were no assets or liabilities measured at fair value on a recurring basis at June 30, 2012 and December 31, 2011.

14

Assets and Liabilities Measured at Fair Value on a Non-recurring Basis

The Company may be required, from time to time, to measure certain assets on a non-recurring basis in accordance with generally accepted accounting principles. These adjustments to fair value usually result from application of lower-of-cost-or-market accounting or write-downs of individual assets. There were no liabilities measured at fair value on a non-recurring basis at June 30, 2012 and December 31, 2011.

The following table summarizes the fair value hierarchy used to determine each adjustment and the carrying value of the related individual assets carried at fair value on a non-recurring basis as of June 30, 2012 and December 31, 2011. The losses represent the amounts recorded during 2012 and 2011 on the assets held at June 30, 2012 and December 31, 2011, respectively.

							Total Losses
							Three Months  Ended				Six Months  Ended
							June 30,				June 30,
	Level 1		Level 2		Level 3		2012		2011		2012		2011
	(In thousands)
June 30, 2012
Impaired loans	$	—	$	—	$	1,534	$	302	$	—	$	627	$	—
Foreclosed real estate		—		—		715		61		—		61		261
	$	—	$	—	$	2,249	$	363	$	—	$	688	$	261

							Total Losses
	At December 31, 2011						Year Ended
	Level 1		Level 2		Level 3		December 31, 2011
	(In thousands)
December 31, 2011
Impaired loans	$	—	$	—	$	858	$	80
Foreclosed real estate		—		—		839		413
	$	—	$	—	$	1,697	$	493

Losses on impaired loans and foreclosed real estate are based on the appraised value of the underlying collateral, adjusted for selling costs, and may be discounted based on management's estimates of changes in market conditions from time of valuation.

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 excluded from disclosure requirements. Accordingly, the aggregate fair value amounts presented herein may not necessarily represent the underlying fair value of the Company.

15

	June 30, 2012
	Carrying		Fair Value
	Amount		Level 1		Level 2		Level 3		Total
	(In thousands)
Financial assets:
Cash and cash equivalents	$	27,731	$	27,731	$	—	$	—	$	27,731
Securities held to maturity		37,309		7,995		32,091		—		40,086
FHLB stock		5,588		—		—		5,588		5,588
Loans, net		363,831		—		—		378,343		378,343
Accrued interest receivable		1,213		—		—		1,213		1,213
Financial liabilities:
Deposits		271,762		—		—		272,706		272,706
Long-term borrowings		138,748		—		—		141,742		141,742
Accrued interest payable		405		—		—		405		405

	December 31, 2011
	Carrying		Fair
	Amount		Value
	(In thousands)
Financial assets:
Cash and cash equivalents	$	31,074	$	31,074
Securities held to maturity		36,220		39,248
FHLB stock		5,730		5,730
Loans, net		348,492		367,043
Accrued interest receivable		1,268		1,268
Financial liabilities:
Deposits		264,769		265,716
Long-term borrowings		133,696		136,690
Accrued interest payable		413		413

NOTE 8 – SECURED BORROWINGS AND ASSETS PLEDGED AS COLLATERAL

FHLB borrowings at June 30, 2012 and December 31, 2011 amounted $98.7 million and $93.7 million, respectively. 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 June 30, 2012 and December 31, 2011, the carrying amount of assets qualifying as collateral for FHLB advances amounted to $217.4 million and $205.4 million, respectively.

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 on a quarterly basis.

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 on a quarterly basis.

The amounts of securities collateralizing these repurchase agreements are classified as securities held to maturity and the obligation to repurchase securities sold is reflected as a liability in the consolidated balance sheets. Government-sponsored enterprise residential mortgage-backed securities and U.S. Government obligations pledged

16

to secure these agreements have a carrying value of $37.3 million and $36.2 million and a fair value of $40.1 million and $39.2 million at June 30, 2012 and December 31, 2011, respectively. These securities are held-to-maturity and cannot be sold until the liability that they are pledged against has been paid. In addition, at June 30, 2012 and December 31, 2011, due from banks pledged to secure these agreements amounted to $7.0 million and $6.0 million, respectively.

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

Management’s discussion and analysis of the financial condition and results of operations at June 30, 2012 and for the three and six months ended June 30, 2012 and 2011 is intended to assist in understanding the financial condition and results of operations of the Company. The information contained in this section should be read in conjunction with the unaudited consolidated financial statements and the notes thereto, appearing in Part I, Item 1 of this quarterly report on Form 10-Q.

Forward-Looking Statements

This report contains forward-looking statements that are based on assumptions and may describe future plans, strategies and expectations of the Company. These forward-looking statements are generally identified by use of the words “believe,” “expect,” “intend,” “anticipate,” “estimate,” “project” or similar expressions. The Company’s ability to predict results or the actual effect of future plans or strategies is inherently uncertain. Factors which could have a material adverse effect on the operations of the Company include, but are not limited to, changes in interest rates, national and regional economic conditions, legislative and regulatory changes, monetary and fiscal policies of the U.S. government, including policies of the U.S. Treasury and the Federal Reserve Board, the quality and composition of the loan or investment portfolios, demand for loan products, deposit flows, competition, demand for financial services in the Company’s market area, changes in real estate market values in the Company’s market area, and changes in relevant accounting principles and guidelines. Additional factors are discussed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011 under “Item 1A – Risk Factors.” These risks and uncertainties should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements. Except as required by applicable law or regulation, the Company does not undertake, and specifically disclaims any obligation, to release publicly the result of any revisions that may be made to any forward-looking statements to reflect events or circumstances after the date of the statements or to reflect the occurrence of anticipated or unanticipated events.

Critical Accounting Policies

Critical accounting policies are those that involve significant judgments and assessments by management, and which could potentially result in materially different results under different assumptions and conditions. As discussed in the Company’s 2011 Annual Report on Form 10-K, the Company considers the allowance for loan losses and the valuation of the net deferred tax asset to be our critical accounting policies. The Company’s critical accounting policies have not changed since December 31, 2011.

17

Comparison of Financial Condition at June 30, 2012 and December 31, 2011

Total assets at June 30, 2012 were $466.6 million, an increase of $12.6 million, or 2.8%, compared to $453.9 million at December 31, 2011. The increase in assets was primarily concentrated in net loans, partially offset by a decrease in cash and cash equivalents.

Cash and cash equivalents decreased by $3.3 million, or 10.8%, due to an increase in loan originations, partially offset by an increase in deposits and borrowings.

The net loan portfolio increased by $15.3 million, or 4.4%, during the first six months of 2012. The loan portfolio increase was attributable to increases in one-to-four family residential mortgages (an increase of $18.0 million, or 8.7%), commercial mortgages (an increase of $432,000, or 0.4%), commercial loans (an increase of $228,000, or 20.4%) and consumer loans (an increase of $148,000, or 37.1%), partially offset by decreases in home equity loans and lines (a decrease of $1.3 million, or 6.6%), and construction loans (a decrease of $2.3 million, or 45.3%).

During the first half of 2012, deposit balances increased by $7.0 million, or 2.6%. The increase in deposits was primarily due to increases in NOW/Demand accounts (an increase of $11.1 million, or 9.8%) and savings accounts (an increase of $3.2 million, or 9.8%), partially offset by decreases in money market accounts (a decrease of $5.9 million, or 12.1%) and time deposit accounts (a decrease of $1.3 million, or 1.9%).

Borrowings, consisting of FHLB advances, and two repurchase agreements totaling $40.0 million, increased $5.0 million, or 3.8%, to $138.7 million at June 30, 2012, compared to an outstanding balance of $133.7 million at December 31, 2011.

Total stockholders’ equity at June 30, 2012 was $52.5 million compared to $51.7 million at December 31, 2011. The increase was primarily attributable to net income and stock-based compensation credits.

Comparison of Operating Results for the Three and Six Months Ended June 30, 2012 and 2011

Net income decreased by $186,000, or 42.4%, to $253,000 for the three months ended June 30, 2012, compared to $439,000 for the three months ended June 30, 2011. The decrease was primarily due to a decrease in net interest income and an increase in the provision for loan losses, partially offset by a decrease in non-interest expenses.

Net income decreased by $85,000, or 11.5%, to $655,000 for the six months ended June 30, 2012, compared to $740,000 for the six months ended June 30, 2011. The decrease was primarily due to a decrease in net interest income and an increase in the provision for loan losses, partially offset by a decrease in non-interest expenses.

Net Interest Income. Net interest income was $3.4 million and $3.8 million for the quarters ended June 30, 2012 and June 30, 2011, respectively. The decrease in net interest income is due to a decrease in the interest earned on loans and securities, partially offset by a decrease in expense from deposits and borrowings. The Company’s second quarter 2012 interest rate spread decreased to 3.11% from 3.51% for the second quarter of 2011, a decrease of 40 basis points.

Net interest income for the six months ended June 30, 2012 was $7.0 million, which was $583,000, or 7.7%, less than net interest income of $7.6 million for the six months ended June 30, 2011. The decrease in net interest income is due to a decrease in the interest earned on loans and securities, partially offset by a decrease in expense from deposits and borrowings. For the six months ended June 30, 2012, the interest rate spread decreased to 3.25% from 3.51% for the six months ended June 30, 2011, a decrease of 26 basis points.

18

The following table summarizes average balances and average yields and costs for the three months ended June 30, 2012 and 2011.

	Three Months Ended June 30,
	2012							2011
	Average Balance		Interest and Dividends		Yield/ Cost			Average Balance		Interest and Dividends		Yield/ Cost
	(Dollars in thousands)
Assets:
Interest-earning assets:
Loans	$	360,419	$	4,432		4.92	%	$	356,096	$	4,862		5.46	%
Securities		36,227		394		4.35			42,895		509		4.75
Other interest-earning assets		18,031		17		0.38			6,097		9		0.59
Total interest-earning assets		414,677		4,843		4.67			405,088		5,380		5.31
Bank-owned life insurance		11,216							10,837
Noninterest-earning assets		39,470							36,073
Total assets	$	465,363						$	451,998
Liabilities and equity:
Interest-bearing liabilities:
Interest-bearing demand deposits	$	77,405		57		0.29		$	71,993		128		0.71
Savings accounts		34,499		7		0.08			30,492		13		0.17
Money market accounts		47,346		31		0.26			52,155		93		0.71
Certificates of deposit		69,876		208		1.19			69,711		243		1.39
Total interest-bearing deposits		229,126		303		0.53			224,351		477		0.85
Borrowings		138,763		1,133		3.27			136,006		1,147		3.37
Total interest-bearing liabilities		367,889		1,436		1.56			360,357		1,624		1.80
Demand deposits		40,769							36,831
Noninterest-bearing liabilities		4,020							3,941
Total liabilities		412,678							401,129
Stockholders’ equity		52,685							50,869
Total liabilities and stockholders’ equity	$	465,363						$	451,998
Net interest income			$	3,407						$	3,756
Interest rate spread						3.11	%						3.51	%
Net interest margin						3.29	%						3.71	%
Average interest-earning assets to average interest-bearing liabilities						112.72	%						112.41	%

Total interest and dividend income decreased $537,000, or 10.0%, between the two periods primarily due to a decrease in interest earned on loans and securities. Interest earned on loans decreased $430,000, or 8.8%, for the three months ended June 30, 2012 due to a decrease in the average yield earned on loans, partially offset by an increase in the average balance of loans. Average loans increased 1.2% to $360.4 million for the three months ended June 30, 2012 from $356.1 million for the three months ended June 30, 2011, and the yield earned on loans decreased to 4.92% for the three months ended June 30, 2012 from 5.46% for the three months ended June 30, 2011. Interest earned on securities decreased $115,000 due to the decrease in the average balance of securities to $36.2 million for the three months ended June 30, 2012 from $42.9 million for the three months ended June 30, 2011, in addition to the 40 basis point decrease in the average yield earned on securities. Interest earned on other-interest earning assets increased to $17,000 for three months ended June 30, 2012 from $9,000 for the three months ended June 30, 2011, due to the increase in the average balance of other interest-earning assets, offset by the decrease in the yield earned on such assets.

19

Total interest expense decreased $188,000 to $1.4 million for the three months ended June 30, 2012 from $1.6 million for the three months ended June 30, 2011, due to a 24 basis point decrease in the total average cost of interest-bearing liabilities, including a 32 basis point decrease in the total average cost of interest-bearing deposits. The reductions in interest expense related to interest-bearing deposits were seen in interest-bearing demand deposit accounts (a decrease of $71,000, or 42 basis points in the average cost), savings accounts (a decrease of $6,000, or 45 basis points in the average cost), money market accounts (a decrease of $62,000, or 45 basis points in the average cost), and certificate of deposit accounts (a decrease of $35,000, or 20 basis points in the average cost). The cost of total borrowings for the three months ended June 30, 2012 totaled $1.1 million and decreased $14,000, or 0.1%, from the three months ended June 30, 2011, due to a 10 basis point decrease in the average cost, offset by a $2.8 million increase in the average balance to $138.8 million from $136.0 million.

20

The following table summarizes average balances and average yields and costs for the six months ended June 30, 2012 and 2011.

	Six Months Ended June 30,
	2012							2011
	Average Balance		Interest and Dividends		Yield/ Cost			Average Balance		Interest and Dividends		Yield/ Cost
	(Dollars in thousands)
Assets:
Interest-earning assets:
Loans	$	354,643	$	8,991		5.07	%	$	356,215	$	9,714		5.45	%
Securities		36,425		827		4.54			44,180		1,081		4.89
Other interest-earning assets		16,631		35		0.42			6,159		16		0.52
Total interest-earning assets		407,699		9,853		4.83			406,554		10,811		5.32
Bank-owned life insurance		11,171							10,791
Noninterest-earning assets		41,779							34,335
Total assets	$	460,649						$	451,680
Liabilities and equity:
Interest-bearing liabilities:
Interest-bearing demand deposits	$	74,916		114		0.30		$	72,293		267		0.74
Savings accounts		33,618		14		0.08			30,021		28		0.19
Money market accounts		48,610		63		0.26			52,443		195		0.74
Certificates of deposit		69,959		430		1.23			69,540		481		1.38
Total interest-bearing deposits		227,103		621		0.55			224,297		971		0.87
Borrowings		136,386		2,264		3.32			136,387		2,289		3.36
Total interest-bearing liabilities		363,489		2,885		1.59			360,684		3,260		1.81
Demand deposits		40,103							36,507
Noninterest-bearing liabilities		4,603							3,871
Total liabilities		408,195							401,062
Stockholders’ equity		52,454							50,618
Total liabilities and stockholders’ equity	$	460,649						$	451,680
Net interest income			$	6,968						$	7,551
Interest rate spread						3.25	%						3.51	%
Net interest margin						3.42	%						3.71	%
Average interest-earning assets to average interest-bearing liabilities						112.16	%						112.72	%

Total interest and dividend income decreased $958,000, or 8.9%, between the two six-month periods primarily due to a decrease in interest earned on loans and securities. Interest earned on loans decreased $723,000, or 7.4%, for the six months ended June 30, 2012 due to a decrease in the average yield earned on loans and a decrease in the average balance of loans. Average loans decreased 0.4% to $354.6 million for the six months ended June 30, 2012 from $356.2 million for the six months ended June 30, 2011. The yield earned on loans decreased to 5.07% for the six months ended June 30, 2012 from 5.45% for the six months ended June 30, 2011. Interest earned on securities decreased $254,000 due to the decrease in the average balance of securities to $36.4 million for the six months ended June 30, 2012 from $44.2 million for the six months ended June 30, 2011, in addition to the 35 basis point decrease in the average yield earned on securities. Interest earned on other-interest earning assets increased to $35,000 for six months ended June 30, 2012 from $16,000 for the six months ended June 30, 2011, primarily due to the increase in the average balance of other interest-earning assets.

21

Total interest expense decreased $375,000 to $2.9 million for the six months ended June 30, 2012 from $3.3 million for the six months ended June 30, 2011, due to a 22 basis point decrease in the total average cost of interest-bearing liabilities, including a 32 basis point decrease in the total average cost of interest-bearing deposits. The reductions in interest expense related to interest-bearing deposits were seen in interest-bearing demand deposit accounts (a decrease of $153,000, or 44 basis points in the average cost), savings accounts (a decrease of $14,000, or 11 basis points in the average cost), money market accounts (a decrease of $132,000, or 48 basis points in the average cost), and certificate of deposit accounts (a decrease of $51,000, or 15 basis points in the average cost). The cost of total borrowings for the six months ended June 30, 2012 totaled $2.3 million and decreased $25,000, or 1.1%, from the six months ended June 30, 2011, primarily due to 4 basis point decrease in the average cost.

22

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

	For the Three Months Ended June 30, 2012 Compared to the Three Months Ended June 30, 2011
	Increase (Decrease) Due to
	Volume			Rate			Net
	(In thousands)
Interest Income:
Loans	$	374		$	(804	)	$	(430	)
Securities		(75	)		(40	)		(115	)
Other interest-earning assets		29			(21	)		8
Total interest-earning assets		328			(865	)		(537	)
Interest Expense:
Deposits		68			(242	)		(174	)
Borrowings		108			(122	)		(14	)
Total interest-bearing liabilities		176			(364	)		(188	)
Change in net interest income	$	152		$	(501	)	$	(349	)

	For the Six Months Ended June 30, 2012 Compared to the Six Months Ended June 30, 2011
	Increase (Decrease) Due to
	Volume			Rate			Net
	(In thousands)
Interest Income:
Loans	$	(43	)	$	(680	)	$	(723	)
Securities		(180	)		(74	)		(254	)
Other interest-earning assets		28			(9	)		19
Total interest-earning assets		(195	)		(763	)		(958	)
Interest Expense:
Deposits		35			(385	)		(350	)
Borrowings		—			(25	)		(25	)
Total interest-bearing liabilities		35			(410	)		(375	)
Change in net interest income	$	(230	)	$	(353	)	$	(583	)

Provision for Loan Losses. The Company’s management reviews the level of the allowance for loan losses on a quarterly basis and establishes the provision for loan losses based upon the volume and types of lending, delinquency levels, loss experience, the amount of impaired and classified loans, economic conditions and other factors related to the collectability of the loan portfolio. The Company’s loan loss provision for the three months

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ended June 30, 2012 was $341,000 compared to $207,000 for the three months ended June 30, 2011. The Company’s loan loss provision for the six months ended June 30, 2012 was $622,000 compared to $522,000 for the six months ended June 30, 2011. The provision for the 2012 periods increased compared to the provision for the 2011 periods, due to an increase in the loan portfolio and an increase in problem loans and charge-offs. At June 30, 2012, there were $17.9 million of classified and criticized loans that are under watch by management. At June 30, 2012, loans classified as special mention totaled $8.8 million, which consisted primarily of commercial and multi-family residential mortgages, compared to $10.3 million at December 31, 2011. Loans classified as substandard, including all impaired loans, totaled $9.1 million at June 30, 2012, compared to $6.8 million at December 31, 2011. The decrease in special mention loans is due to a shift in some of the 2011 special mention loans into the substandard and impaired category, resulting in the increase in the substandard and impaired loans at June 30, 2012. Total classified and criticized loans represent 4.9% of the Company’s total gross loans at June 30, 2012, compared to 4.8% at June 30, 2011.

There were no changes in the methodology of calculating the allowance for loan losses from the first six months of 2011 through the first six months of 2012. The percentages used to calculate the required reserves for the non-classified loan portfolio and substandard loans were consistent for the periods. The percentages used to calculate the required reserves for the watch and special mention loans were higher in the first six months of 2012, when compared to the same period in 2011, due to an increase in the trend of charge-offs and delinquencies. The allowance for loan losses to total loans was 1.00%, 1.05% and 1.03% at June 30, 2012, December 31, 2011 and June 30, 2011, respectively.

The following table provides information with respect to our non-performing assets at the dates indicated. There were no accruing loans past due 90 days or more at the dates indicated. All nonaccrual loans are impaired.

	June 30,			December 31,			June 30,
	2012			2011			2011
	(Dollars in thousands)
Nonaccrual loans:
Real estate – mortgage:
One-to-four family residential	$	1,133		$	1,052		$	—
Home equity loans and lines of credit		57			—			21
Commercial and multifamily		4,935			858			1,087
Total nonaccrual loans		6,125			1,910			1,108
Foreclosed real estate		715			839			195
Total non-performing assets	$	6,840		$	2,749		$	1,303
Total non-performing loans to total loans		1.68	%		0.55	%		0.31	%
Total non-performing loans to total assets		1.31	%		0.42	%		0.24	%
Total non-performing assets to total assets		1.47	%		0.61	%		0.29	%

Non-performing assets were $6.8 million at June 30, 2012, an increase of $4.1 million from December 31, 2011. There were $1.3 million of non-performing assets at June 30, 2011. Non-performing loans have increased in the first half of 2012 as the deterioration in general economic conditions continues, including decreased real estate values, which have resulted in significant challenges for some residential and commercial borrowers.

At June 30, 2012, the Company had two one-to-four family residential properties valued at an aggregate of $647,000 and one multi-family real estate property, valued at $68,000, classified as foreclosed real estate. Net loan charge-offs totaling $351,000 and $662,000 were recognized during the quarter and six months ended June 30, 2012, respectively.

Non-interest Income. Non-interest income for the three months ended June 30, 2012 totaled $585,000, a decrease of $20,000, or 3.3%, compared to $605,000 for the three months ended June 30, 2011. The decrease in non-interest income for the quarter ended June 30, 2012 from the quarter ended June 30, 2011 is primarily attributable to the $16,000 decrease in customer service fees.

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Non-interest income for the first six months of 2012 totaled $1.1 million, a decrease of $31,000, or 2.7%, compared to the first six months of 2011. The decrease in non-interest income for the six months ended June 30, 2012 when compared to the same period in 2011 is primarily due to a $22,000 decrease in customer service fees.

Non-interest Expense. Non-interest expenses totaled $3.3 million for the quarter ended June 30, 2012 compared to $3.5 million for the quarter ended June 30, 2011. The $238,000 decrease in salaries and employee benefits in the second quarter of 2012 is the primary reason for the decrease in non-interest expenses.

For the six months ended June 30, 2012, non-interest expenses totaled $6.5 million, a decrease of $572,000, or 8.1%, compared to the same period in 2011. The decrease in non-interest expenses for the first six months of 2012 when compared to the first six months of 2011 is attributable to decreases in salaries and employee benefits, occupancy and equipment expense, marketing costs, FDIC insurance costs and other general and administrative expenses, partially offset by increases in data processing fees and professional fees.

The decrease in salaries and benefits for both the three and six month periods is primarily due to a decrease in salary costs and a 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 the 2011 period compared to the 2012 period. The decrease in occupancy and equipment expense for the six month period is due to a milder winter during the beginning of 2012 compared to the beginning of 2011, which resulted in a decrease of operating costs associated with the maintenance of the Bank’s branches. The decrease in marketing costs is a result of a continued effort by management to control advertising and marketing expenses. The decrease in FDIC insurance was a result of the FDIC rulemaking that changed its assessment system for deposit insurance coverage from one based on domestic deposits to one based on consolidated total assets less tangible equity and revised the assessment rate schedule. The new rules, effective for the quarter ended June 30, 2011, resulted in a lower expense in deposit insurance coverage in the first six months of 2012 compared to the first six months of 2011. The decrease in other general and administrative expenses is primarily due to decreases in foreclosed real estate and stationery and office supply expenses. The increase in professional costs is due to an increase in legal expenses related to matters associated with problem loans.

Income Taxes. The provision for income taxes for the three months ended June 30, 2012 was $113,000 compared to $216,000 for the three months ended June 30, 2011. The decrease in the tax provision is due to lower income before taxes of $366,000 for the three months ended June 30, 2012, compared to net income before income taxes of $655,000 for the three months ended June 30, 2011. The effective tax rate for the second quarter of 2012 was 30.9%, versus 33.0% for the 2011 period.

The provision for income taxes for the six months ended June 30, 2012 was $300,000, compared to $357,000 for the six months ended June 30, 2011. The decrease in the tax provision is due to lower income before taxes of $955,000 for the six months ended June 30, 2012, compared to net income before income taxes of $1.1 million for the six months ended June 30, 2011. The effective tax rate for the six month period of 2012 was 31.4%, versus 32.5% for the 2011 period.

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

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

Our most liquid assets are cash and cash equivalents and interest-bearing deposits. The levels of these assets depend on our operating, financing, lending and investing activities during any given period. At June 30, 2012, cash and cash equivalents totaled $27.7 million. On June 30, 2012, we had $98.7 million of borrowings outstanding with the Federal Home Loan Bank of Boston and we had the ability to borrow an additional $55.7 million from the Federal Home Loan Bank of Boston, subject to pledging requirements.

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At June 30, 2012, we had $29.2 million in loan commitments outstanding, which consisted of $7.4 million of real estate loan commitments, $14.6 million in unused home equity lines of credit, $2.9 million in construction loan commitments and $3.1 million in commercial lines of credit commitments. Certificates of deposit due within one year of June 30, 2012 totaled $45.0 million, or 65.0% of certificates of deposit. This percentage of certificates of deposit that mature within one year reflects customers’ hesitancy to invest their funds for long periods in the current 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, we may be required to pay higher rates on such deposits or other borrowings than we currently pay on the certificates of deposit due on or before June 30, 2012. We believe, however, based on past experience that a significant portion of our certificates of deposit will remain with us. We have the ability to attract and retain deposits by adjusting the interest rates offered.

Capital Management. At June 30, 2012, Newport Federal was subject to various regulatory capital requirements administered by the Office of the Comptroller of the Currency (OCC), including a risk-based capital measure. The risk-based capital guidelines include both a definition of capital and a framework for calculating risk-weighted assets by assigning balance sheet assets and off-balance sheet items to broad risk categories. At June 30, 2012, we exceeded all of our regulatory capital requirements. We are considered “well capitalized” under regulatory guidelines.

Off-Balance Sheet Arrangements. In the normal course of operations, we engage in a variety of financial transactions that, in accordance with generally accepted accounting principles, are not recorded in our consolidated financial statements. These transactions involve, to varying degrees, elements of credit, interest rate and liquidity risk. Such transactions are used primarily to manage customers’ requests for funding and take the form of loan commitments and lines of credit.

For the three months ended June 30, 2012, we did not engage in any off-balance sheet transactions reasonably likely to have a material effect on our financial condition, results of operations or cash flows.

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

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

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

Quantitative Aspects of Market Risk. We use an interest rate sensitivity analysis to review our level of interest rate risk. This analysis measures interest rate risk by computing changes in net economic value of equity (EVE) 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 EVE represents the market value of portfolio equity and is equal to the market value of assets minus the market value of liabilities, with adjustments made for off-balance sheet items. This analysis assesses the risk of loss in market risk sensitive instruments in the event of a sudden and sustained 100 to 400 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. We measure interest rate risk by modeling the changes in EVE over a variety of interest rate scenarios.

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The following table presents the change in our net EVE at May 31, 2012 (the most current information available), that would occur in the event of an immediate change in interest rates with no effect given to any steps that we might take to counteract that change. The Bank expects that its net EVE at June 30, 2012 is consistent with the table below.

Basis Point (“bp”)	Net EVE (Dollars in thousands)						Net EVE as % of Economic Value of Assets
Change in Rates	Amount		Change		% Change		EVE Ratio			Change (bp)
400	$	40,202	$	-17,786		-30.7		9.27	%		-274
300		45,629		-12,359		-21.3		10.23	%		-178
200		50,969		-7,019		-12.1		11.11	%		-90
100		55,473		-2,515		-4.3		11.76	%		-24
0		57,988		—		—		12.01	%		—
(100)		52,625		-5,363		-9.2		10.79	%		-121

As with any method of measuring interest rate risk, certain shortcomings are inherent in the method of analysis presented in the foregoing table. For example, although certain assets and liabilities may have similar maturities or periods to repricing, they may react in different degrees to changes in market interest rates. Also, the interest rates on certain types of assets and liabilities may fluctuate in advance of changes in market interest rates, while interest rates on other types may lag behind changes in market rates. Additionally, certain assets, such as adjustable-rate mortgage loans, have features that restrict changes in interest rates on a short-term basis and over the life of the asset. Further, in the event of a change in interest rates, expected rates of prepayments on loans and early withdrawals from certificates could deviate significantly from those assumed in calculating the table.

Item 4. Controls and Procedures

The Company’s management, including the Company’s principal executive officer and principal financial officer, have evaluated the effectiveness of the Company’s “disclosure controls and procedures,” as such term is defined in Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended, (the “Exchange Act”). Based upon their evaluation, the principal executive officer and principal financial officer concluded that, as of the end of the period covered by this report, the Company’s disclosure controls and procedures were effective for the purpose of ensuring that the information required to be disclosed in the reports that the Company files or submits under the Exchange Act with the Securities and Exchange Commission (the “SEC”) (1) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and (2) is accumulated and communicated to the Company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. In addition, no change in the Company’s internal control over financial reporting occurred during the quarter ended June 30, 2012 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings.

From time to time, we may be party to various legal proceedings incident to our business. At June 30, 2012, we were not a party to any pending legal proceedings that we believe would have a material adverse effect on our financial condition, results of operations or cash flows.

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Item 1A. Risk Factors.

Risk factors that may affect future results were discussed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011. The Company’s evaluation of its risk factors has not changed materially since December 31, 2011.

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

a)	Not applicable
b)	Not applicable
c)	The following table presents a summary of the Company’s share repurchases during the quarter ended June 30, 2012.

Period	Total number of shares purchased		Average price paid per share		Total number of shares purchased as part of publicly announced program (1)		Maximum number of shares that may yet be purchased under the program (1)
April 2012		—	$	—		—		160,870
May 2012		3,900		13.73		3,900		156,970
June 2012		1,800		13.58		1,800		155,170
Total		5,700	$	13.68		5,700

(1) On November 18, 2011, the Company announced the commencement of a stock repurchase program to acquire up to 176,070 shares, or 5%, of the Company’s then 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. There is no guarantee as to the exact number of shares to be repurchased by the Company.

Item 3. Defaults Upon Senior Securities.

Not applicable

Item 5. Other Information.

None.

Item 6. Exhibits.

31.1	Rule 13a-14(a)/15d-14(c) Certification of Chief Executive Officer*
31.2	Rule 13a-14(a)/15d-14(c) Certification of Chief Financial Officer*
32.1	Section 1350 Certifications*
101	Interactive data files pursuant to Rule 405 of Regulation S-T: (i) the Consolidated Balance Sheets as of June 30, 2012 and December 31, 2011, (ii) the Consolidated Statements of Income and Comprehensive Income for the three and six months ended June 30, 2012 and 2011, (iii) the Consolidated Statements of Changes in Stockholders’ Equity for the six months ended June 30, 2012 and 2011, (iv) the Consolidated Statements of Cash Flows for the six months ended June 30, 2012 and 2011, and (v) the notes to the Consolidated Financial Statements.*
*	This information is furnished and not filed for purposes of Sections 11 and 12 of the Securities Act of 1933 and Section 18 of the Securities Exchange Act of 1934.

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Signatures

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	Newport Bancorp, Inc.
Date: August 10, 2012	By:	/s/ Kevin M. McCarthy
		Kevin M. McCarthy
		President and Chief Executive Officer
Date: August 10, 2012	By:	/s/ Bruce A. Walsh
		Bruce A. Walsh
		Executive Vice President and Chief Financial Officer
		(Principal Financial and Chief Accounting Officer)

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