UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

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

For the fiscal year ended December 31, ~~2011~~2012

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

For the transition period from _______________ to _______________

Commission File Number: 0-51856

NEWPORT BANCORP, INC.

(Exact name of registrant as specified in its charter)

MARYLAND

(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)

(401) 847-5500

(Registrant’s telephone number, including area code)

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

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

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

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

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

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 ý No £ o

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

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. Sý

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

Large accelerated filer £o Accelerated filer £o Non-accelerated filer £o Smaller reporting company Sý

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

Yes £ o No S ý

The aggregate market value of the voting and non-voting common equity held by nonaffiliates as of June 30, ~~2011~~2012 was approximately $2829,~~651~~691,~~800~~862.

The number of shares outstanding of the registrant’s common stock as of March 64, ~~2012~~2013 was 3,~~506~~499,~~406~~722.

DOCUMENTS INCORPORATED BY REFERENCE:

~~Portions of the Proxy Statement for the Registrant’s Annual Meeting of Stockholders to be held on May 17, 2012 are incorporated by reference in Part III of this Form 10-K~~None.

INDEX

Part I

		Page
Item 1.	Business	2-1615
Item 1A.	Risk Factors	1716-20
Item 1B.	Unresolved Staff Comments	20
Item 2.	Properties	~~20-~~21
Item 3.	Legal Proceedings	21
Item 4.	Mine Safety ~~Disclosuers~~Disclosures	21
Part II
Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	22-23
Item 6.	Selected Financial Data	23
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	23-4344
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk	4344
Item 8.	Financial Statements and Supplementary Data	4344
Item 9.	Changes in and Disagreements With Accountants on Accounting and Financial Disclosure	4445
Item 9A.	Controls and Procedures	4445-46
Item 9B.	Other Information	4546
Part III
Item 10.	Directors, Executive Officers and Corporate Governance	4546-48
Item 11.	Executive Compensation	4549-53
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	4553-4656
Item 13.	Certain Relationships and Related Transactions, and Director Independence	4656-57
Item 14.	Principal Accounting Fees and Services	4658
Part IV
Item 15.	Exhibits and Financial Statement Schedules	4759-60
SIGNATURES		4861-4962

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

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

PART I

Item 1.

BUSINESS

General

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

Newport Federal is a federally chartered savings bank originally founded as a Rhode Island institution in 1888. The Bank operates as a community-oriented financial institution offering financial services to consumers and businesses in the Bank’s market area. Newport Federal attracts deposits from the general public and uses those funds to originate one-to-four family residential mortgage loans, commercial ~~real~~and ~~estate~~multi-family residential mortgage loans, ~~home~~ equity loans and lines of credit, ~~multi-family loans,~~ construction loans, commercial loans and consumer loans. At December 31, ~~2011~~2012, 9998.65% of the loans in our portfolio were collateralized by real estate.

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

Available Information

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

Market Area

~~Newport~~We ~~Federal~~are is headquartered in Newport, ~~Rhode~~ Rhode Island. In addition to ~~its~~our main office located in Newport, ~~the~~we ~~Bank~~operate ~~operates~~ five full-service branch offices located in Middletown, Wakefield, Westerly and Portsmouth, Rhode Island, and Stonington, Connecticut. InWe ~~January~~consider ~~2011, the Bank opened a new branch in Westerly, Rhode Island, and closed its previous Westerly branch location. The Bank considers~~ Newport and Washington Counties, Rhode Island to be ~~its~~our primary market area. The economy in our market area is primarily oriented to the retail and hospitality industries.

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Competition

~~Newport~~We ~~Federal~~face ~~faces~~ significant competition for the attraction of deposits and origination of loans. ~~The~~Our ~~Bank’s~~ competition for loans comes primarily from financial institutions and credit unions in our market area.

~~The~~Our ~~Bank’s~~ most direct competition for deposits has historically come from the several financial institutions operating in ~~its~~our market area and, to a lesser extent, from other financial service companies such as brokerage firms, credit unions and insurance companies. ~~Newport~~We ~~Federal~~ also ~~faces~~ face competition for investors’ funds, from money market funds, mutual funds and other corporate and government securities. At June 30, ~~2011~~2012, which is the most recent date for which data is available from the FDIC, ~~the~~Newport ~~Bank~~Federal held approximately 1112.9110% of the deposits in Newport County, Rhode Island, and approximately 2.3936% of the deposits in Washington County, Rhode Island. In addition, banks owned by large holding companies such as Bank of America, Citizens and Sovereign also operate in our market area. These institutions are significantly larger than ~~the~~us ~~Bank~~ and, therefore, have significantly greater resources.

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

Lending Activities

General. The largest segment of ~~the~~our ~~Bank’s~~ loan portfolio is real estate mortgage loans, primarily one-to-four family residential loans. The other significant ~~segment~~ segment of ~~the~~our ~~Bank’s~~ loan portfolio is commercial ~~real~~and ~~estate~~multi-family residential mortgage loans. To a lesser degree, ~~Newport~~we ~~Federal~~ also ~~originates home~~originate equity loans and lines of credit, ~~multi-family loans~~ and construction loans. ~~The~~We ~~Bank~~ also ~~offers~~offer commercial business loans and consumer loans, which constituted 0.3228% and 0.1109%, ~~respecitively~~respectively, of total loans at December 31, ~~2011~~2012. ~~The~~We ~~Bank~~originate ~~originates~~ loans for investment purposes, although ~~the~~we ~~Bank~~ occasionally may sell a portion of ~~its~~our one-to-four family residential loans into the secondary market.

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

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

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

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

~~Table of Contents~~Index

~~While~~We ~~one-to-four~~generally ~~family~~do ~~residential real~~not ~~estate~~make conventional loans ~~are normally originated~~ with up loan-to 30-~~year~~value ~~terms,~~ratios ~~such~~exceeding ~~loans~~95%. ~~typically~~Loans ~~remain~~with ~~outstanding~~loan-to-value ~~for~~ratios ~~substantially shorter periods because borrowers often prepay their loans~~ in ~~full~~excess ~~either upon sale~~ of ~~the~~80% ~~property~~generally ~~pledged~~require asprivate ~~security or upon refinancing~~mortgage ~~the original loan~~insurance. ~~Therefore,~~We ~~average~~require ~~loan~~all ~~maturity~~properties issecuring afirst ~~function~~mortgage ~~of,~~loans ~~among~~to ~~other~~be ~~factors,~~appraised ~~the~~by ~~level~~an ofindependent ~~purchase~~appraiser ~~and~~who ~~sale~~is ~~activity~~approved inby the ~~real~~Board ~~estate~~of ~~market,~~Directors. ~~prevailing~~We ~~interest~~generally ~~rates~~require ~~and~~title ~~the~~insurance ~~interest~~on ~~rates~~all ~~payable~~first onmortgage ~~outstanding~~ loans. ~~Newport~~Borrowers ~~Federal~~must ~~does~~obtain hazard insurance, ~~not~~and ~~offer~~flood ~~loans~~insurance ~~with~~is ~~negative~~required ~~amortization~~for ~~and~~loans ~~generally~~on ~~does~~properties ~~not~~located ~~offer~~in ~~interest-only~~a ~~loans~~flood zone.

~~The~~Equity ~~Bank~~Loans ~~generally~~and ~~does~~Lines ~~not~~of ~~make conventional~~Credit. ~~loans~~We ~~with~~offer ~~loan-to-value~~home ~~ratios~~equity ~~exceeding~~loans ~~95%.~~with ~~Loans~~a ~~with~~maximum combined loan- to- value ~~ratios~~ratio ~~in excess~~ of 80% ~~generally~~or ~~require private mortgage insurance~~less. ~~Newport~~Our ~~Federal~~home ~~requires~~equity ~~all~~lines ~~properties~~of ~~securing~~credit have ~~first~~adjustable ~~mortgage~~rates ~~loans~~of tointerest bethat ~~appraised~~are byindexed anto ~~independent~~the ~~appraiser,~~Prime ~~who is~~Rate ~~approved~~as published by ~~the~~The ~~Board~~Wall ofStreet ~~Directors~~Journal. ~~The~~Home ~~Bank~~equity loans ~~generally~~have ~~requires~~fixed ~~title~~interest ~~insurance~~rates onand ~~all~~terms ~~first~~that ~~mortgage~~typically ~~loans.~~range ~~Borrowers~~from ~~must obtain~~five ~~hazard~~to ~~insurance~~15 years, ~~and~~but ~~flood~~may ~~insurance~~have isterms ~~required~~as ~~for~~long ~~loans~~as on20 ~~properties located in a flood zone~~years.

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

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

As of December 31, ~~2011~~2012, ~~the~~our ~~Bank’s~~ largest loan secured by commercial real estate was $3.98 million. This loan is secured by retail commercial property. ~~This~~and ~~loan~~ was performing in accordance with its original terms at December 31, ~~2011~~2012.

~~Home~~Construction ~~Equity~~ Loans. We originate construction loans for one-to-four family homes and ~~Lines~~commercial, multi-family and other nonresidential purposes. Our ~~Newport~~residential construction loans generally provide for the payment of only interest during the construction phase, which is usually ~~Federal~~six ~~offers~~to ~~home~~twelve ~~equity~~months. At the end of the construction phase, the loan converts to a permanent mortgage loan. One-to-four family residential construction loans are made with a maximum ~~combined~~ loan to value ratio of 80% orof ~~less.~~the ~~Home~~market ~~equity~~value ~~lines~~ of ~~credit~~the ~~have~~real ~~adjustable~~estate ~~rates~~and ofimprovements. ~~interest~~Commercial, ~~that~~multi-family ~~are~~and ~~indexed~~other nonresidential loans can be made with a maximum loan to value ratio of 75% of the ~~Prime~~upon ~~Rate~~completion asmarket ~~published~~value byof ~~The~~the ~~Wall~~real ~~Street~~estate ~~Journal~~and improvements. ~~Home~~At ~~equity~~December ~~loans~~31, ~~have~~2012, ~~fixed~~our largest construction loan was ~~interest~~for ~~rates~~$1.4 million, of which $982,000 was advanced. This loan was secured by a real property and was performing according to its original terms ~~that~~at ~~typically~~December ~~range~~31, ~~from~~2012. ~~five~~Construction loans to 15individuals ~~years,~~are ~~but~~generally ~~may~~made ~~have~~on the same terms as ~~long~~our asone-to-four family 20mortgage ~~years~~loans.

~~Construction~~Commercial Business Loans. ~~Newport~~We ~~Federal~~occasionally ~~originates~~offer ~~construction loans for one-to-four family homes and~~ commercial, ~~multi-family and other nonresidential purposes. The Bank’s residential construction~~ loans ~~generally provide for the payment of only interest during the construction phase~~, which isare ~~usually~~secured ~~six~~by tobusiness ~~twelve~~assets ~~months.~~or ~~At the end of the construction phase, the loan converts to a permanent mortgage loan. One-to-four family residential construction loans~~ are ~~made with a maximum loan to value ratio of 80% of the market value of the real estate and improvements~~unsecured. ~~Commercial, multi-family and other nonresidential loans can be made with a maximum loan to value ratio of 75% of the upon completion market value of the real estate and improvements.~~ At December 31, ~~2011~~2012, commercial ~~the~~business ~~largest~~loans ~~construction~~totaled ~~loan was for~~ $~~1.8 million~~998,000, ~~which~~or ~~was fully advanced~~0.28% ~~This~~of ~~loan~~total ~~was performing according to its original terms at December 31, 2011. Construction~~ loans ~~to individuals are generally made on the same terms as Newport Federal’s one-to-four family mortgage loans~~.

~~Commercial~~Consumer ~~Business~~ Loans. We offer ~~The~~a ~~Bank~~variety ~~occasionally~~of ~~offers~~consumer ~~commercial~~and other loans, ~~which~~including ~~are~~auto loans and loans secured by ~~business~~passbook ~~assets~~savings or ~~are~~certificate ~~unsecured~~accounts. At December 31, ~~2011~~2012, ~~commercial business~~consumer loans totaled $~~1.1 million~~311,000, or 0.3209% of total loans.

~~Consumer~~The ~~Loans.~~procedures ~~The~~for ~~Bank~~underwriting consumer ~~offers~~loans ainclude ~~variety~~an assessment of ~~consumer~~the ~~and~~applicant’s ~~other~~payment ~~loans,~~history ~~including~~on ~~auto~~other ~~loans~~debts and ~~loans~~ability ~~secured~~to bymeet ~~passbook~~existing ~~savings~~obligations orand payments ~~certificate~~on ~~accounts~~the proposed loan. At ~~December~~Although ~~31,~~the ~~2011~~applicant’s creditworthiness is a primary consideration, ~~consumer~~the ~~loans~~underwriting ~~totaled~~process also ~~$399~~includes a comparison of the value of the collateral,~~000~~ if any, orto ~~0.11%~~the ofproposed ~~total~~loan ~~loans~~amount.

The procedures for underwriting consumer loans include an assessment of the applicant’s payment history on other debts and ability to meet existing obligations and payments on the proposed loan. Although the applicant’s

~~Table of Contents~~Index

creditworthiness is a primary consideration, the underwriting process also includes a comparison of the value of the collateral, if any, to the proposed loan amount.

Loan Underwriting Risks.

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

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

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

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

Loan Originations, Purchases and Sales. Loan originations come from a number of sources. The primary source of loan originations are existing customers, walk-in traffic, advertising and referrals from customers. Occasionally, ~~Newport~~we ~~Federal~~ sells ~~loans~~loan that ~~the~~we ~~Bank~~have ~~has~~ originated. The decision to sell loans is based on prevailing market interest rate conditions and interest rate management. ~~Newport~~We ~~Federal~~ did not sell any loans in ~~2011~~2012 or ~~2010~~2011.

From time to time, we will purchase whole loans or participation loans to supplement our lending portfolio. Whole loans purchased totaled $541,000 at December 31, 2012. We perform our own underwriting analysis on each loan purchased using the same standards used for loans originated.

~~Table of Contents~~Index

~~From~~Loan ~~time~~participations toin ~~time,~~which ~~Newport~~we ~~Federal~~are ~~will~~not ~~purchase~~the ~~whole~~lead ~~loans~~lender, orwhich ~~participation~~we ~~loans~~refer to ~~supplement~~as ~~its~~purchased ~~lending~~participation ~~portfolio. Whole~~ loans, ~~purchased~~ totaled $~~1.5~~260,000 ~~million~~ at December 31, ~~2011~~2012. ~~The~~Loan ~~Bank~~participations are ~~performs~~also ~~its~~subject ~~own~~to ~~underwriting~~the same credit analysis onand ~~each~~loan approvals as loans that we originate. We are permitted to review all of the documentation relating to any loan in which we participate. However, as with purchased ~~using~~whole ~~the~~loans, ~~same~~we ~~standards~~do ~~used~~not ~~for~~service purchased participation loans. ~~originated~~Thus, with respect to purchased whole loans and purchased participations, we are subject to the policies and practices of the lead lender with regard to monitoring delinquencies, pursuing collections and instituting foreclosure proceedings.

Loan ~~participations~~Approval inProcedures ~~which~~and weAuthority. Our ~~are~~lending ~~not~~activities follow written, non-discriminatory, underwriting standards and loan origination procedures established by the ~~lead~~Board ~~lender~~of Directors and management. The President, ~~which~~Chief weLending ~~refer~~Officer toand asChief ~~purchased~~Operating ~~participation~~Officer have authority to approve secured loans, ~~totaled~~in amounts up to $2.08 million atand ~~December~~unsecured 31loans up to $300,000. ~~2011~~Secured loans from $2.8 ~~Loan~~million ~~participations~~to $3.2 million ~~are~~must ~~also~~be ~~subject~~approved toby four of the ~~same~~following ~~credit~~persons: ~~analysis~~Commercial ~~and~~Loan ~~loan~~Manager, ~~approvals~~Retail asLoan ~~loans~~Manager, ~~Newport~~Chief ~~Federal~~Lending ~~originates.~~Officer, ~~The~~President, Chief ~~Bank~~Operating isOfficer ~~permitted~~or toone ~~review all~~non-employee member of the ~~documentation~~Board ~~relating~~of toDirectors. ~~any~~Secured ~~loan~~loans infrom ~~which~~$3.2 ~~Newport~~million ~~Federal~~to ~~participates~~$3.6 ~~However,~~million asmust be ~~with~~approved ~~purchased~~by ~~whole~~a ~~loans,~~majority of the ~~Bank~~ ~~does~~Executive ~~not~~Committee ~~service~~of ~~purchased~~the ~~participation~~Board ~~loans~~of Directors. ~~Thus,~~Unsecured ~~with~~loans ~~respect~~over to$600,000 ~~purchased~~and ~~whole~~secured loans greater ~~and~~than ~~purchased~~$3.6 ~~participations,~~ million up to the ~~Bank~~legal islending ~~subject~~limit tomust ~~the~~be ~~policies~~approved ~~and~~by ~~practices~~a majority vote of the ~~lead~~Board ~~lender~~of ~~with~~Directors. ~~regard~~Smaller loans tomay ~~monitoring~~be ~~delinquencies,~~approved ~~pursuing~~by ~~collections and~~individual ~~instituting~~loan ~~foreclosure proceedings~~officers.

~~Loan~~Loans ~~Approval~~to ~~Procedures~~One ~~and Authority~~Borrower. ~~Newport~~ ~~Federal’s~~The ~~lending~~maximum amount ~~activities~~we ~~follow~~may ~~written,~~lend ~~non-discriminatory,~~to ~~underwriting~~one ~~standards~~borrower and ~~loan origination procedures established by~~ the ~~Board~~borrower’s ofrelated ~~Directors~~entities ~~and~~is ~~management.~~limited, ~~The~~by ~~President~~regulation, ~~Chief~~to ~~Lending~~generally ~~Officer~~15% ~~and~~of ~~Chief~~the Bank’s ~~Operating~~unimpaired ~~Officer~~capital ~~have~~and ~~authority to~~surplus. ~~approve~~At ~~secured~~December ~~loans~~31, in2012, ~~amounts~~the upBank’s toregulatory ~~$2.8~~limit ~~million~~on ~~and unsecured~~ loans up to ~~$300,000.~~one ~~Secured~~borrower ~~loans from~~ was $27.84 million ~~to $3~~.~~2 million~~ ~~must~~At bethat ~~approved by four of the following persons: Commercial Loan Manager~~date, ~~Retail~~our ~~Loan~~largest ~~Manager,~~lending ~~Chief~~relationship ~~Lending~~was ~~Officer, President, Chief Operating Officer or one non-employee member of the Board of Directors. Secured loans from~~ $34.2 million toand ~~$3.6 million~~was ~~must~~secured ~~be approved~~ by areal ~~majority~~property. ofThis ~~the~~relationship consisted ~~Executive Committee~~ of ~~the~~three ~~Board~~construction ~~of Directors. Unsecured~~ loans ~~over $600,000~~ and ~~secured~~ ~~loans~~one ~~greater~~commercial ~~than~~real ~~$3.6~~estate ~~million~~loan, upeach toof ~~the~~which ~~legal~~was ~~lending~~performing ~~limit~~in ~~must~~accordance bewith ~~approved by a majority vote of the Board of Directors.~~its ~~Smaller~~original ~~loans~~terms ~~may~~at beDecember ~~approved~~31, ~~by individual loan officers~~2012.

~~Loans~~Loan ~~to One Borrower~~Commitments. ~~The~~We ~~maximum~~issue commitments ~~amount~~for ~~the~~fixed- ~~Bank~~and ~~may~~adjustable-rate ~~lend~~mortgage toloans ~~one~~conditioned ~~borrower~~upon ~~and~~ the ~~borrower’s~~occurrence ~~related~~of ~~entities~~certain isevents. ~~limited,~~Commitments ~~by regulation,~~ to ~~generally~~originate ~~15%~~mortgage ofloans ~~its~~are ~~unimpaired~~legally ~~capital~~binding ~~and~~agreements ~~surplus.~~to Atlend ~~December 31, 2011, Newport Federal’s regulatory limit on loans~~ to ~~one~~our ~~borrower was $7~~customers.1 ~~million. At that date~~Generally, ~~the~~these ~~Bank’s largest lending relationship was $4.1 million and was secured by real property. This relationship consists of three construction loans and one commercial real estate~~ loan, ~~which~~commitments ~~were~~expire ~~performing~~after in60 ~~accordance with their original terms at December 31, 2011~~days.

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

Investment Activities

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

At December 31, ~~2011~~2012, ~~the~~our ~~Bank’s~~ investment portfolio consisted of mortgage-backed securities issued ~~primarily~~ by U.S. government-sponsored enterprises, primarily Fannie Mae.

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

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Deposit Activities and Other Sources of Funds

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

Deposit Accounts. The majority of the Bank’s depositors are residents of Rhode Island. Deposits are attracted from within our market area through the offering of a broad selection of deposit instruments, including non-interest-bearing demand deposits (such as checking accounts), interest-bearing demand accounts (such as NOW and money market accounts), regular savings accounts and certificates of deposit. Deposit account terms vary according to the minimum balance required, the time periods the funds must remain on deposit and the interest rate, among other factors. In determining the terms of Newport Federal’s deposit accounts, the Bank considers the rates offered by the Bank’s competition, Newport Federal’s liquidity needs, profitability to the Bank, matching deposit and loan products and customer preferences and concerns. Newport Federal generally reviews the deposit mix and pricing weekly. The Bank’s current strategy is to offer competitive rates and to be in the middle of the market for rates on all types of deposit products; however, the Bank selectively competes for various certificates of deposit.6

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

~~Borrowings~~Deposit Accounts. ~~Newport~~The ~~Federal~~majority ~~utilizes~~of ~~advances~~our ~~from~~depositors ~~the~~are ~~Federal~~residents ~~Home Loan Bank~~ of ~~Boston~~Rhode toIsland. ~~supplement~~Deposits ~~the~~are ~~Bank’s~~attracted ~~investable~~from ~~funds.~~within ~~The~~our ~~Federal~~market ~~Home~~area ~~Loan Bank~~through ~~functions~~the asoffering of a ~~central~~broad selection ~~reserve~~of ~~bank~~deposit ~~providing~~instruments, ~~credit~~including ~~for~~non-interest-bearing ~~member~~demand ~~financial~~deposits ~~institutions.~~(such Asas achecking ~~member~~accounts), ~~the~~interest-bearing demand ~~Bank~~accounts is(such ~~required to~~as ~~own~~NOW ~~capital~~and ~~stock~~money inmarket ~~the~~accounts), ~~Federal~~regular ~~Home~~savings ~~Loan~~accounts ~~Bank~~ and iscertificates ~~authorized~~of todeposit. Deposit account ~~apply~~terms ~~for~~vary ~~advances~~according onto the ~~security~~minimum ofbalance ~~such~~required, ~~stock~~the ~~and~~time ~~certain of~~periods the ~~Bank’s~~funds ~~mortgage~~must ~~loans~~remain on deposit and ~~other~~the ~~assets~~interest rate, ~~(principally~~among ~~securities~~other ~~which~~factors. ~~are~~In ~~obligations~~determining the terms of deposit accounts, orwe ~~guaranteed~~consider the rates offered by, ~~the~~our ~~United States)~~competition, ~~provided~~our liquidity ~~certain~~needs, ~~standards~~the ~~related~~profitability toof ~~creditworthiness~~such ~~have~~deposits, ~~been~~matching ~~met.~~deposit ~~Advances~~and ~~are~~loan ~~made~~products ~~under~~and ~~several~~customer ~~different~~preferences ~~programs,~~and concerns. ~~each~~We ~~having~~generally ~~its~~review ~~own~~the ~~interest~~deposit ~~rate~~mix and ~~range~~pricing ~~of maturities~~weekly. ~~Depending~~Our oncurrent ~~the~~strategy ~~program,~~is ~~limitations~~to onoffer ~~the~~competitive ~~amount~~rates ofand ~~advances~~to ~~are based~~be ~~either~~in onthe amiddle of ~~fixed~~the ~~percentage~~market offor anrates ~~institution’s~~on ~~net~~all ~~worth~~types orof ondeposit ~~the~~products; ~~Federal~~however, ~~Home~~we ~~Loan~~selectively ~~Bank’s~~compete ~~assessment~~for ofvarious ~~the institution’s~~certificates ~~creditworthiness~~of deposit.

In addition to deposit accounts for individuals, we offer deposit accounts designed for the businesses operating in our market area. Our business banking deposit products include commercial checking accounts and money market accounts.

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

Personnel

At December 31, ~~2011~~2012, ~~the~~we ~~Bank~~ had 71 66 full-time employees and 1617 part-time employees, none of whom is represented by a collective bargaining unit. ~~Newport~~We ~~Federal~~believe ~~believes~~ that ~~its~~our relationship with ~~its~~our employees is good.

Subsidiaries

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

REGULATION AND SUPERVISION

General

Newport Federal isSavings ~~primarily~~Bank is examined and supervised by the Office of the Comptroller of the Currency (“OCC”) and is ~~also~~ subject to examination by the ~~FDIC. The OCC assumed regulatory authority over federally chartered savings banks such as Newport~~ Federal ~~when~~Deposit ~~the Office of Thrift Supervision~~Insurance ~~was~~Corporation ~~abolished in July 2011~~(FDIC). ~~Federal~~This ~~institution~~ regulation and supervision establishes a comprehensive framework of activities in which an institution may engage and is intended primarily for the protection of the ~~FDIC~~Federal Deposit Insurance Corporation’s deposit insurance fund ~~funds~~ and depositors. Under this system of federal regulation, financial institutions are periodically examined to ensure that they satisfy applicable standards with respect to their capital adequacy, assets, management, earnings, liquidity and sensitivity to market interest rates. Following completion of its examination, the federal agency critiques the institution’s operations and assigns its rating (known as an institution’s CAMELS rating). Under federal law, an institution may not disclose its CAMELS rating to the public. Newport Federal also is a member of and owns stock in the Federal Home Loan Bank of Boston, which is one of the twelve regional banks in the Federal Home Loan Bank System. Newport Federal is also regulated to a lesser extent by the Board of Governors of the Federal Reserve System (the “Federal Reserve Board”) governing reserves to be maintained against deposits and other matters. The Office of the Comptroller of the Currency examines Newport Federal and prepares reports for the consideration of its board of directors on any operating deficiencies. Newport Federal’s relationship with its depositors and borrowers is also regulated to a great extent by federal law and, to a much lesser extent, state law, especially in matters concerning the ownership of deposit accounts and the form and content of Newport Federal’s mortgage documents.

~~Table of Contents~~Index

~~they~~As ~~satisfy applicable~~a ~~standards~~savings ~~with respect to their capital adequacy, assets, management, earnings, liquidity~~ and ~~sensitivity~~loan toholding ~~market interest rates. Following completion of its examination~~company, ~~the federal agency critiques the institution’s operations and assigns~~ ~~its~~Newport ~~rating (known as an institution’s CAMELS rating). Under Federal law~~Bancorp, ~~an institution may not disclose its CAMELS rating to the public~~Inc. ~~Newport Federal also~~ is ~~regulated~~required to acomply ~~lesser~~with ~~extent by~~ the ~~Board~~rules ofand ~~Governors~~regulations of the Federal Reserve ~~System (the “Federal Reserve~~ Board~~”),~~ ~~which~~and ~~regulates reserves~~ to befile ~~maintained~~certain ~~against deposits and other matters. Newport Federal’s~~reports ~~relationship~~ with ~~its depositors~~ and ~~borrowers also~~ is ~~regulated~~subject to aexamination ~~great extent~~ by ~~federal law and, to a much lesser extent, state law, especially in matters concerning~~ the ~~ownership of deposit accounts and the form and content of Newport~~ Federal~~’s mortgage~~ ~~documents~~Reserve Board. Newport ~~Federal~~Bancorp ~~also~~ is aalso ~~member~~subject ofto ~~and owns stock in~~ the ~~Federal~~rules ~~Home~~and ~~Loan~~regulations ~~Bank~~ of ~~Boston, which is one of~~ the ~~twelve~~Securities ~~regional~~and ~~banks~~Exchange inCommission under the ~~Federal~~federal ~~Home~~securities ~~Loan Bank System~~laws.

~~Newport~~Any ~~Bancorp,~~change ain ~~savings~~these ~~and~~laws ~~loan~~or ~~holding company~~regulations, whether isby ~~required~~the ~~to file certain reports with~~FDIC, ~~and~~the ~~is subject to regulation and examination by~~OCC, the Federal Reserve Board~~. The~~ ~~Federal~~or ~~Reserve~~Congress, ~~Board~~could ~~assumed~~have ~~regulatory~~a ~~authority~~material ~~over~~adverse ~~savings~~impact ~~and~~on ~~loan holding companies such as~~ Newport Bancorp ~~when the~~and ~~Office of Thrift Supervision was abolished in July 2011.~~ Newport ~~Bancorp~~Federal ~~is also subject to the rules~~ and ~~regulations~~their ~~of the Securities and Exchange Commission under the federal securities laws~~operations.

~~Certain~~The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the ~~regulatory~~“Dodd-Frank ~~requirements that~~Act”) ~~are~~made ~~applicable~~extensive tochanges in the regulation of federal savings banks such as Newport Federal. Under the Dodd-Frank Act, the Office of Thrift Supervision was eliminated and ~~Newport~~responsibility ~~Bancorp~~for the ~~are~~supervision ~~described~~and ~~below~~regulation of federal savings banks has been transferred to the OCC, which is also primarily responsible for the regulation and supervision of national banks. ~~This~~Responsibility ~~description~~for the regulation and supervision of ~~statutes~~savings and ~~regulations~~loan isholding ~~not~~companies, ~~intended~~such as Newport Bancorp was transferred to bethe Federal Reserve Board, which also supervises bank holding companies. Additionally, a ~~complete~~new ~~explanation~~Consumer Financial Protection Bureau has been established as an independent bureau of ~~such~~the ~~statutes~~Federal Reserve Board. The Consumer Financial Protection Bureau has assumed responsibility for the implementation of the federal financial consumer protection and ~~regulations~~fair lending laws and ~~their~~regulations, ~~effects~~a onfunction ~~Newport~~previously ~~Federal~~assigned to prudential regulators, and ~~Newport~~has ~~Bancorp.~~authority to impose new Inrequirements. ~~addition~~However, ~~any~~institutions ~~change~~of less than $10 billion in ~~applicable~~assets such as Newport Federal continue to be examined for compliance with consumer protection and fair lending laws orand regulations ~~described~~by, ~~below~~and are subject to the primary enforcement authority of, ~~whether~~their primary byregulator rather than the ~~OCC~~Consumer Financial Protection Bureau. The Dodd-Frank Act also, among other things, changed the base for FDIC insurance assessments, provided for originators of certain securitized loans to retain a percentage of the risk for transferred credits, directed the Federal Reserve Board or ~~Congress,~~to ~~could~~regulate ~~have~~pricing aof ~~material~~certain ~~adverse~~debit ~~impact~~card oninterchange ~~Newport~~fees ~~Bancorp~~ and ~~Newport~~contained a ~~Federal~~number ~~and~~of ~~their~~reforms ~~operations~~related to mortgage originations.

Set forth below is a brief description of certain regulatory requirements that are applicable to Newport Bancorp and Newport Federal. The ~~Dodd-Frank~~description ~~Act~~below is limited to certain material aspects of the statutes and regulations addressed, and is not intended to be a complete description of such statutes and regulations and their effects on Newport Bancorp and Newport Federal.

OnFederal ~~July~~Banking 21, 2010, financial regulatory reform legislation commonly referred to as the Dodd-Frank Act was signed into law. As the Dodd-Frank Act is implemented, it is resulting in far-reaching changes across the financial regulatory landscape, including, among other things:Regulation

·Business ~~Centralized~~Activities. ~~responsibility~~A federal ~~for~~savings ~~consumer~~bank ~~financial~~derives ~~protection~~its bylending ~~creating~~and ainvestment ~~new~~powers ~~agency,~~from the ~~Consumer~~Home ~~Financial~~Owners’ ~~Protection~~Loan ~~Bureau~~Act, ~~responsible~~as ~~for implementing~~amended, ~~examining~~ and ~~enforcing~~the ~~compliance~~regulations of ~~with~~the ~~federal~~OCC. ~~consumer~~Under ~~financial~~these laws and ~~having~~regulations, ~~the~~Newport ~~authority~~Federal tomay ~~promulgate~~invest ~~rules~~in ~~intended~~mortgage toloans ~~protect~~secured ~~consumers~~by inresidential ~~the~~and ~~financial~~nonresidential real ~~product~~estate, commercial business loans and ~~services~~consumer ~~market.~~loans, ~~Institutions~~certain types of ~~under~~debt ~~$10~~securities ~~billion~~and incertain other assets, ~~such~~subject asto applicable limits. Newport Federal, ~~will~~also ~~continue~~may toestablish besubsidiaries ~~examined~~that ~~for~~may ~~consumer~~engage ~~compliance~~in byactivities ~~their~~not ~~primary~~otherwise ~~banking~~permissible ~~regulatory~~for Newport ~~agency. However~~Federal, ~~the~~including ~~creation~~real ofestate ~~this~~investment ~~independent~~and ~~bureau~~securities ~~could~~and ~~result~~insurance inbrokerage. ~~new~~The ~~regulatory~~Dodd-Frank ~~requirements~~Act ~~and~~authorized ~~raise~~ the ~~cost~~ payment of ~~regulatory~~interest ~~compliance~~on commercial checking accounts, effective July 21, 2011.

·Capital ~~Required~~Requirements. ~~new~~OCC regulations ~~minimum~~require ~~capital~~federal ~~levels~~savings ~~for~~banks ~~depository~~to ~~institution~~meet ~~holding~~three ~~companies~~minimum ~~that~~capital ~~are~~standards: asa ~~stringent as those required for their insured depository subsidiaries, and restricted the components of Tier~~ 1.5% ~~capital~~tangible to capital ~~instruments~~ratio, ~~that~~a ~~are~~4% ~~currently~~leverage ratio ~~considered~~(3% ~~to be Tier 1 capital~~ for ~~insured~~savings ~~depository~~banks ~~institutions.~~receiving ~~However,~~the ~~there~~highest israting aon ~~five-year transition period before~~ the ~~capital~~CAMELS ~~requirements~~rating ~~will~~system) ~~apply to savings~~ and ~~loan~~an ~~holding~~8% ~~companies,~~risk-based ~~such~~capital ~~as Newport Bancorp~~ratio.

·The ~~Excluded~~risk-based ~~from~~capital standard for federal savings banks requires the maintenance of Tier 1 (core) and total capital (which is defined as core capital and supplementary capital) to risk-weighted assets of at least 4% and 8%, respectively. In determining the ~~proceeds~~amount of ~~trust~~risk-weighted ~~preferred~~assets, ~~securities~~all ~~unless~~assets, ~~such~~including certain ~~securities~~off-balance ~~were~~sheet ~~issued~~assets, ~~prior~~are tomultiplied ~~May~~by 19a risk-weight factor of 0% to 100%, ~~2010~~assigned by ~~bank~~the orOCC, ~~savings~~based on the risks believed inherent in the type of asset. Core capital is defined as common stockholders’ equity (including retained earnings), certain noncumulative perpetual preferred stock and ~~loan~~related ~~holding~~surplus ~~companies~~and ~~with~~minority interests in equity accounts of consolidated subsidiaries, less intangibles other than ~~$15~~certain ~~billion~~mortgage servicing rights and credit card relationships. The components of supplementary capital currently include cumulative preferred stock, long-term perpetual preferred stock, mandatory convertible securities, subordinated debt and intermediate preferred stock, the allowance for loan and lease losses limited to a maximum of 1.25% of risk-weighted assets and up to 45% of net unrealized gains on available-for-sale equity securities with readily determinable fair values. Overall, the amount of supplementary capital included as part of total capital cannot exceed 100% of core capital. Additionally, a savings bank that retains credit risk in connection with an asset sale may be required to maintain additional regulatory capital because of the purchaser’s recourse to the savings bank. Newport Federal does not typically engage in asset sales.

· As of July 21, 2011, transferred the federal regulation of Newport Federal from the Office of Thrift Supervision to the OCC, the primary federal regulator for national banks.

· As of July 21, 2011, transferred supervision of all savings and loan holding companies, including Newport Bancorp, to the Federal Reserve Board.

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·At ~~Changed~~December ~~the assessment base for federal deposit insurance from the amount of insured deposits to consolidated assets less tangible capital effective for the quarter ended June 30~~31, ~~2011~~2012, ~~eliminated~~Newport ~~the~~Federal’s capital ~~ceiling~~exceeded onall ~~the~~applicable ~~size of the Deposit Insurance Fund and increased the floor to the size of that fund~~requirements.

·On ~~Implemented~~June ~~corporate~~6, ~~governance revisions~~2012, ~~including~~the ~~new~~OCC and the other federal bank regulatory agencies issued a series of proposed rules ~~regarding~~that ~~executive~~would ~~compensation,~~revise their leverage and risk-based capital requirements and the method for calculating risk-weighted assets to make them consistent with agreements that were reached by the Basel Committee on Banking Supervision and certain provisions of the Dodd-Frank Act. The proposed rules would apply to all ~~public~~depository institutions, top-tier bank holding companies with total consolidated assets of $500 million or more and top-tier savings and loan holding companies. Among other things, the proposed rules establish a new common equity Tier 1 minimum capital requirement (4.5% of risk-weighted assets) and a higher minimum Tier 1 capital to risk-based assets requirement (6% of risk-weighted assets) and assign higher risk weight (150%) to exposures that are more than 90 days past due or are on nonaccrual status and certain commercial real estate facilities that finance the acquisition, development or construction of real property. The proposed rules also require unrealized gains and losses on certain securities holdings to be included for purposes of calculating regulatory capital requirements. The proposed rules limit a banking organization’s capital distributions and certain discretionary bonus payments if the banking organization does not ~~just~~hold ~~financial~~a ~~institutions~~“capital conservation buffer” consisting of a specified amount of common equity Tier 1 capital in addition to the amount necessary to meet its minimum risk-based capital requirements. The proposed rules indicated that the final rules would become effective on January 1, 2013, and the changes set forth in the final rules will be phased in from January 1, 2013 through January 1, 2019. However, the agencies have recently indicated that, due to the volume of public comments received, the final rule would be delayed past January 1, 2013.

·Loans ~~Made~~to ~~permanent~~One ~~the~~Borrower. ~~$250~~ Generally,~~000~~ ~~per~~a ~~account~~federal ~~limit~~savings ~~for~~bank ~~federal~~may ~~deposit~~not ~~insurance~~make a loan or extend credit to a single or related group of borrowers in excess of 15% of unimpaired capital and ~~provided~~surplus. ~~unlimited~~An ~~federal~~additional ~~deposit~~amount ~~insurance~~may ~~until~~be ~~December~~loaned, 31equal to 10% of unimpaired capital and surplus, ~~2012~~if ~~for~~the ~~non-interest~~loan is ~~bearing~~secured ~~demand~~by ~~transaction~~readily ~~accounts~~marketable atcollateral, ~~all~~which ~~insured~~generally ~~depository~~does ~~institutions~~not include real estate. As of December 31, 2012, Newport Federal was in compliance with the loans-to-one-borrower limitations.

·Qualified ~~Repealed~~Thrift ~~the~~Lender Test. As a federal ~~prohibitions~~savings onbank, Newport Federal must satisfy the ~~payment~~qualified ofthrift ~~interest~~lender, onor ~~demand~~“QTL,” ~~deposits~~test. Under the QTL test, ~~effective~~Newport ~~July~~Federal 21must maintain at least 65% of its “portfolio assets” in “qualified thrift investments” in at least nine months of the most recent 12 months. A savings bank that fails the qualified thrift lender test must operate under specified restrictions. The Dodd-Frank Act made noncompliance with the QTL Test potentially subject to agency enforcement action for a violation of law. At December 31, ~~2011~~2012, ~~thereby~~Newport ~~permitting~~Federal ~~depository~~held ~~institutions~~96.9% toof ~~pay~~its ~~interest~~“portfolio onassets” ~~business~~in ~~transaction~~“qualified thrift investments,” and ~~other~~satisfied ~~accounts~~the QTL Test.

·Capital ~~Required~~Distributions. ~~that~~OCC regulations ~~originators~~govern ofcapital ~~certain~~distributions ~~securitized~~by ~~loans~~a ~~retain~~federal asavings ~~portion~~bank, ofwhich ~~the~~include ~~credit~~cash ~~risk~~dividends, ~~established~~stock ~~reforms~~repurchases onand ~~mortgage~~other ~~loan~~transactions charged ~~origination~~to ~~and~~the ~~mandated~~capital ~~regulatory~~account. ~~rate-setting~~A savings bank must file an application for ~~certain~~approval ~~debit~~of ~~card~~a ~~interchange~~capital ~~fees.~~distribution if:

Many aspects of the Dodd-Frank Act are subject to rulemaking and are taking effect over several years, making it difficult to anticipate the overall financial impact on Newport Bancorp, its customers or the financial industry more generally. Provisions in the legislation that affect the payment of interest on demand deposits and interchange fees are likely to increase the costs associated with deposits as well as place limitations on certain revenues those deposits may generate. Provisions in the legislation that increase capital requirements of Newport Bancorp and/or Newport Federal could require additional sources of capital in the future. We cannot determine the full impact of the new law on our business and operations at this time. Any legislative or regulatory changes in the future could adversely affect our operations and financial condition.

Federal Savings Insitution Regulation

Business Activities. A federal savings bank derives its lending and investment powers from the Home Owners’ Loan Act, as amended, and from the regulations of the OCC. Under these laws and regulations, Newport Federal may invest in mortgage loans secured by residential real estate without limitations as a percentage of assets, and may invest in non-residential real estate loans up to 400% of capital in the aggregate, commercial business loans up to 20% of assets in the aggregate and consumer loans up to 35% of assets in the aggregate, and in certain types of debt securities and certain other assets. Newport Federal also may establish subsidiaries that may engage in certain activities not otherwise permissible for Newport Federal, including real estate investment and securities and insurance brokerage.

Capital Requirements. Federal regulations require savings banks to meet three minimum capital standards: a 1.5% tangible capital ratio, a 4% leverage ratio (3% for savings banks receiving the highest rating on the CAMELS rating system) and an 8% risk-based capital ratio.

The risk-based capital standard for savings banks requires the maintenance of Tier 1 (core) and total capital (which is defined as core capital and supplementary capital) to risk-weighted assets of at least 4% and 8%, respectively. In determining the amount of risk-weighted assets, all assets, including certain off-balance sheet assets, are multiplied by a risk-weight factor of 0% to 100%, assigned by the regulations based on the risks believed inherent in the type of asset. Core capital is defined as common stockholders’ equity (including retained earnings), certain noncumulative perpetual preferred stock and related surplus and minority interests in equity accounts of consolidated subsidiaries, less intangibles other than certain mortgage servicing rights and credit card relationships. The components of supplementary capital currently include cumulative preferred stock, long-term perpetual preferred stock, mandatory convertible securities, subordinated debt and intermediate preferred stock, the allowance for loan and lease losses limited to a maximum of 1.25% of risk-weighted assets and up to 45% of net unrealized gains on available-for-sale equity securities with readily determinable fair values. Overall, the amount of

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supplementary capital included as part of total capital cannot exceed 100% of core capital. Additionally, a savings bank that retains credit risk in connection with an asset sale may be required to maintain additional regulatory capital because of the recourse back to the savings bank. In assessing an institution’s capital adequacy, the OCC takes into consideration not only these numeric factors but also qualitative factors as well, and has the authority to establish higher capital requirements for individual banks where necessary.

At December 31, 2011, Newport Federal’s capital exceeded all applicable requirements.

Loans-to-One Borrower. Generally, a federal savings bank may not make a loan or extend credit to a single or related group of borrowers in excess of 15% of unimpaired capital and surplus. An additional amount may be loaned, equal to 10% of unimpaired capital and surplus, if the loan is secured by readily marketable collateral, which generally does not include real estate. As of December 31, 2011, Newport Federal’s largest lending relationship with a single or related group of borrowers totaled $4.1 million, which represented 7.9% of unimpaired capital and surplus. Therefore, Newport Federal was in compliance with the loans-to-one borrower limitations.

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

Newport Federal also may satisfy the QTL test by qualifying as a “domestic building and loan association” as defined in the Internal Revenue Code.

A savings bank that fails the qualified thrift lender test must operate under specified restrictions set forth in the Home Owners’ Loan Act. The Dodd-Frank Act made noncompliance with the QTL test subject to agency enforcement action for a violation of law. At December 31, 2011, Newport Federal maintained approximately 96.39% of its portfolio assets in qualified thrift investments and met the QTL test in each of the prior twelve months.

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

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

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

· the distribution would violate any applicable statute, regulation, agreement or ~~regulatory~~OCC imposed condition; or

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

Even if an application is not otherwise required, every savings bank that is a subsidiary of a holding company, such as Newport Federal, must still file a notice with the Federal Reserve Board at least 30 days before the Board of Directors declares a dividend or approves a capital distribution.9

~~A notice or application may be disapproved if:~~Index

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

The Federal Reserve Board or the OCC may disapprove a notice or application if:

the savings bank would be undercapitalized following the distribution;

the proposed capital distribution raises safety and soundness concerns; or

the capital distribution would violate a prohibition contained in any statute, regulation, agreement with a federal banking regulatory agency or condition, imposed in connection with an application or notice.

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

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

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

Transactions with Related Parties. A federal savings bank’s authority to engage in transactions with its affiliates is limited by federal regulations and by Sections 23A and 23B of the Federal Reserve Act and its implementing Regulation W. An affiliate is a company that controls, is controlled by, or is under common control with an insured depository institution such as Newport Federal. Newport Bancorp is an affiliate of Newport Federal. In general, loan transactions between an insured depository institution and its affiliate are subject to certain quantitative and collateral requirements. In this regard, transactions between an insured depository institution and its affiliate are limited to 10% of the institution’s unimpaired capital and unimpaired surplus for transactions with any one affiliate and 20% of unimpaired capital and unimpaired surplus for transactions in the aggregate with all affiliates. Collateral in specified amounts ranging from 100% to 130% of the amount of the transaction must usually be provided by affiliates in order to receive loans from the insured depository institution. In addition, federal regulations prohibit a savings bank from lending to any of its affiliates that are engaged in activities that are not permissible for bank holding companies and from purchasing the securities of any affiliate, other than a subsidiary. Finally, transactions with affiliates must be consistent with safe and sound banking practices, not involve low-quality assets and be on terms that are as favorable to the institution as comparable transactions with non-affiliates. The OCC requires savings banks to maintain detailed records of all transactions with affiliates.

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

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·Enforcement. The OCC has primary enforcement responsibility over federal savings institutions and has the authority to bring enforcement action against all “institution-affiliated parties,” including stockholders, and attorneys, appraisers and accountants who knowingly or recklessly participate in wrongful action likely to have an adverse effect on an insured institution. Formal enforcement action by the OCC may range from the issuance of a capital ~~distribution~~directive ~~would~~or ~~violate~~cease and desist order, to removal of officers and/or directors of the institution and the appointment of a ~~prohibition~~receiver ~~contained~~or inconservator. ~~any~~Civil ~~statute~~penalties cover a wide range of violations and actions, and ~~regulation~~range up to $25,000 per day, unless a finding of reckless disregard is made, in which case penalties may be as high as $1 million per day. The FDIC also has the authority to terminate deposit insurance or ~~agreement~~to recommend to the OCC that enforcement action be taken with respect to a particular savings institution. If action is not taken by the Director, the FDIC has authority to take action under specified circumstances.

InStandards ~~addition~~for Safety and Soundness. Federal law requires each federal banking agency to prescribe certain standards for all insured depository institutions. These standards relate to, among other things, internal controls, information systems and audit systems, loan documentation, credit underwriting, interest rate risk exposure, asset growth, compensation, and other operational and managerial standards as the ~~Federal~~agency ~~Deposit~~deems ~~Insurance~~appropriate. ~~Act~~The ~~provides~~federal banking agencies adopted Interagency Guidelines Prescribing Standards for Safety and Soundness to implement the safety and soundness standards required under federal law. The guidelines set forth the safety and soundness standards that anthe federal banking agencies use to identify and address problems at insured depository ~~institution~~institutions ~~shall~~before ~~not~~capital ~~make~~becomes impaired. The guidelines address internal controls and information systems, internal audit systems, credit underwriting, loan documentation, interest rate risk exposure, asset growth, compensation, fees and benefits. If the appropriate federal banking agency determines that an institution fails to meet any ~~capital~~standard ~~distribution~~prescribed by the guidelines, ifthe agency may require the institution ~~would~~to besubmit ~~undercapitalized~~to the agency an acceptable ~~after~~plan ~~making~~to ~~such~~achieve ~~distribution~~compliance with the standard. If an institution fails to meet these standards, the appropriate federal banking agency may require the institution to submit a compliance plan.

Liquidity. A federal savings bank is required to maintain a sufficient amount of liquidity to ensure its safe and sound operation. The Bank's primary sources of liquidity to meet short-term and long-term fund needs are liquid assets, deposit generation and access to funding from the Federal Home Loan Bank of Boston.

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

Transactions with Related Parties. A federal savings bank’s authority to engage in transactions with its affiliates is limited by federal regulations and by Sections 23A and 23B of the Federal Reserve Act and its implementing Regulation W promulgated by the Federal Reserve Board. An affiliate is a company that controls, is controlled by, or is under common control with an insured depository institution such as Newport Federal. Newport Bancorp is an affiliate of Newport Federal. In general, loan transactions between an insured depository institution and its affiliates are subject to certain quantitative and collateral requirements. In this regard, transactions between an insured depository institution and its affiliates are limited to 10% of the institution’s unimpaired capital and unimpaired surplus for transactions with any one affiliate and 20% of unimpaired capital and unimpaired surplus for transactions in the aggregate with all affiliates. Collateral in specified amounts ranging from 100% to 130% of the amount of the transaction must usually be provided by affiliates in order to receive loans from the savings bank. In addition, federal regulations prohibit a savings bank from lending to any of its affiliates that are engaged in activities that are not permissible for bank holding companies and from purchasing the securities of any affiliate, other than a subsidiary. Finally, transactions with affiliates must be consistent with safe and sound banking practices, not involve low-quality assets and be on terms that are as favorable to the institution as comparable transactions with non-affiliates. The regulations require savings banks to maintain detailed records of all transactions with affiliates.

(i) be made on terms that are substantially the same as, and follow credit underwriting procedures that are not less stringent than, those prevailing for comparable transactions with unaffiliated persons and that do not involve more than the normal risk of repayment or present other unfavorable features; and

(ii) not exceed certain limitations on the amount of credit extended to such persons, individually and in the aggregate, which limits are based, in part, on the amount of Newport Federal’s capital.

In addition, extensions of credit in excess of certain limits must be approved by Newport Federal’s Board of Directors.

Enforcement. The OCC has primary enforcement responsibility over federal savings banks and has the

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authority to bring enforcement action against all “institution-affiliated parties,” including stockholders, and attorneys, appraisers and accountants who knowingly or recklessly participate in wrongful action likely to have an adverse effect on an insured institution. Formal enforcement action by the OCC may range from the issuance of a capital directive or cease and desist order, to removal of officers and/or directors of the institution and the appointment of a receiver or conservator. Civil penalties cover a wide range of violations and actions, and range up to $25,000 per day, unless a finding of reckless disregard is made, in which case penalties may be as high as $1 million per day. The OCC assumed the Office of Thrift Supervision’s enforcement authority as part of the Dodd-Frank Act regulatory restructuring. The FDIC also has the authority to terminate deposit insurance or to recommend to the OCC that enforcement action be taken with respect to a particular savings institution. If action is not taken by the OCC, the FDIC has authority to take action under specified circumstances.

Standards for Safety and Soundness. Pursuant to the Federal Deposit Insurance Act, each federal banking agency prescribed certain standards for all insured depository institutions. These standards relate to, among other things, internal controls, information systems and audit systems, loan documentation, credit underwriting, interest rate risk exposure, asset growth, compensation, and other operational and managerial standards as the agency deems appropriate. The federal banking agencies adopted Interagency Guidelines Prescribing Standards for Safety and Soundness to implement the safety and soundness standards required under federal law. If the appropriate federal banking agency determines that an institution fails to meet any standard prescribed by the guidelines, the agency may require the institution to submit to the agency an acceptable plan to achieve compliance with the standard.

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

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

· adequately capitalized (– at least 4% leverage capital (3% for ~~institutions~~savings banks with a composite ~~CAMELS~~examination rating of 1), 4% Tier 1 risk-based capital and 8% total risk-based capital);

· undercapitalized – less than 4% leverage capital (less than 83% ~~total~~for ~~risk-based~~savings ~~capital~~banks with a composite examination rating of 1), 4% Tier 1 risk-based capital or 48% ~~leverage~~total risk-based capital);

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

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

Generally, the OCC is required to appoint a receiver or conservator for a ~~federal~~ savings bank that is “critically undercapitalized” within specific time frames. ~~The~~ The regulations also provide that a capital restoration plan must be filed with the OCC within 45 days of the date a ~~federal~~ savings bank receives notice that it is “undercapitalized,” “significantly undercapitalized” or “critically undercapitalized.” The criteria for an acceptable capital restoration plan include, among other things, the establishment of the methodology and assumptions for attaining adequately capitalized status on an annual basis, procedures for ensuring compliance with restrictions imposed by applicable federal regulations, the identification of the types and levels of activities ~~in which~~ the savings bank will engage ~~while~~in while the capital restoration plan is in effect, and assurances that the capital restoration plan will not appreciably increase the current risk profile of the savings bank. Any holding company for athe savings bank required to submit a capital restoration plan must guarantee ~~performance under~~ the ~~plan in an amount of the~~ lesser of: an amount equal to 5% of ~~the~~ a savings bank’s assets at the time it was notified or deemed to be undercapitalized by the OCC, or the amount necessary to restore the savings bank to adequately capitalized status. ~~The~~This guarantee remains in place until the OCC notifies the savings bank that it has maintained adequately capitalized status for each of four consecutive calendar quarters., ~~Institutions~~and ~~that~~the ~~are~~OCC ~~undercapitalized are~~has ~~subjected~~the authority to ~~additional~~require ~~supervisory~~payment ~~restrictions~~and ~~such~~collect aspayment under the guarantee. Failure by a ~~general~~holding ~~prohibition~~company to provide the required guarantee will result in certain operating restrictions on ~~capital~~the ~~distributions~~savings ~~and~~bank, such as restrictions on the ~~asset~~ability ~~growth~~to declare and ~~new~~pay ~~lines~~dividends, ofpay ~~business~~executive compensation and management fees, and increase assets or expand operations. The OCC may also take any one of a number of discretionary supervisory actions against undercapitalized savings banks, including the issuance of a capital directive and the replacement of senior executive officers and directors.

Index

The recently proposed rules that would increase regulatory capital requirements would adjust the prompt corrective categories accordingly.

At December 31, 2012, Newport Federal met the criteria for being considered “well-capitalized.”

Insurance of Deposit Accounts. Newport Federal’s deposits are insured up to applicable limits by the Deposit Insurance Fund of the FDIC. The Dodd-Frank Act permanently increased the deposit insurance limit to $250,000 per account owner. In addition, certain non-interest-bearing transaction accounts were fully insured, regardless of the dollar amount, until December 31, 2012.

Under the FDIC’s risk-based assessment system, insured institutions are assigned a risk category based on supervisory evaluations, regulatory capital levels and certain other factors. An institution’s assessment rate depends upon the category to which it is assigned, and certain adjustments specified by FDIC regulations. Institutions deemed less risky pay lower assessments. The FDIC may adjust the scale uniformly, except that no adjustment can deviate more than two basis points from the base scale without notice and comment. No institution may pay a dividend if in default of the federal deposit insurance assessment.

The Dodd-Frank Act required the FDIC to revise its procedures to base its assessments upon each insured institution’s total assets less tangible equity instead of deposits. The FDIC finalized a rule, effective April 1, 2011, that set the assessment range at 2.5 to 45 basis points of total assets less tangible equity.

The FDIC imposed on all insured institutions a special emergency assessment of five basis points of total assets minus Tier 1 capital (as of June 30, 2009), capped at ten basis points of an institution’s deposit assessment base, in order to cover losses to the Deposit Insurance Fund. That special assessment was collected on September 30, 2009. The FDIC provided for similar assessments during the final two quarters of 2009, if deemed necessary. In lieu of further special assessments, however, the FDIC required insured institutions to prepay estimated quarterly risk-based assessments for the fourth quarter of 2009 through the fourth quarter of 2012. The estimated assessments, which included an assumed annual assessment base increase of 5%, were recorded as a prepaid expense asset as of December 30, 2009. As of December 31, 2009, and each quarter thereafter, a charge to earnings has been recorded for each regular assessment with an offsetting credit to the prepaid asset.

In addition to the assessment for deposit insurance, institutions are required to make payments on bonds issued in the late 1980s by the Financing Corporation to recapitalize a predecessor deposit insurance fund. That payment is established quarterly and during the quarter ended December 31, 2012 equaled 0.66 basis points of total assets less tangible capital.

The Dodd-Frank Act increased the minimum target Deposit Insurance Fund ratio from 1.15% of estimated insured deposits to 1.35% of estimated insured deposits. The FDIC must seek to achieve the 1.35% ratio by September 30, 2020. Insured institutions with assets of $10 billion or more are supposed to fund the increase. The Dodd-Frank Act eliminated the 1.5% maximum fund ratio, instead leaving it to the discretion of the FDIC and the FDIC has recently exercised that discretion by establishing a long range fund ratio of 2%.

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~~savings~~The ~~banks,~~FDIC ~~including~~has ~~the~~authority ~~issuance~~to ofincrease ainsurance assessments. ~~capital~~A ~~directive~~significant ~~and~~increase in insurance premiums would likely have an adverse effect on the ~~replacement~~operating expenses and results of ~~senior~~operations ~~executive~~of ~~officers and~~Newport ~~directors~~Federal. We cannot predict what insurance assessment rates will be in the future.

AtInsurance ~~December~~of 31deposits may be terminated by the FDIC upon a finding that the institution has engaged in unsafe or unsound practices, ~~2011~~is in an unsafe or unsound condition to continue operations or has violated any applicable law, ~~Newport~~regulation, ~~Federal~~rule, order or regulatory condition imposed in writing. ~~met~~We ~~the~~do ~~criteria~~not ~~for~~know ~~being~~of ~~considered~~any ~~“well-capitalized~~practice, condition or violation that might lead to termination of deposit insurance.”

Insurance of Deposit Accounts. Deposit accounts at Newport Federal are insured by the Deposit Insurance Fund of the FDIC, generally up to a maximum of $250,000 for each separately insured depositor and up to a maximum of $250,000 for self-directed retirement accounts. Pursuant to the Dodd-Frank Act, certain noninterest bearing checking accounts have unlimited coverage through December 31, 2012.

The FDIC imposes an assessment for deposit insurance on all depository institutions. Under the FDIC’s risk-based assessment system, insured institutions are assigned to risk categories based on supervisory evaluations, regulatory capital levels and certain other factors. An institution’s assessment rate depends upon the category to which it is assigned and certain adjustments specified by FDIC regulations, with institutions deemed less risky paying lower rates. Assessment rates (inclusive of possible adjustments) currently range from 2½ to 45 basis points of each institution’s total assets less tangible capital. The FDIC may revise the scale uniformly, except that no adjustment can deviate more than two basis points from the base scale without notice and comment rulemaking. The FDIC’s current system represents a change, required by the Dodd-Frank Act, from its prior practice of basing the assessment on an institution’s volume of deposits.

In 2009, the FDIC, in response to pressures on the Deposit Insurance Fund caused by bank and savings association failures, required all insured depository institutions to prepay their estimated assessments for the fourth quarter of 2009, and for all of 2010, 2011 and 2012. As part of this prepayment, the FDIC assumed a 5% annual growth in the assessment base and applied a 3 basis point increase in assessment rates effective January 1, 2011. On December 31, 2009, Newport Federal prepaid $1.5 million in estimated fees for 2010 through 2012. The prepayment was recorded as a prepaid expense at December 31, 2009 and is being amortized to expense over three years. As of December 31, 2011, a total of $762,000 of this prepaid expense has been amortized into expense, representing actual assessments for 2010 and 2011. Any unused prepaid assessments would be returned to the institution in June 2013.

The Dodd-Frank Act increased the minimum target Deposit Insurance Fund ratio from 1.15% of estimated insured deposits to 1.35% of estimated insured deposits. The FDIC must seek to achieve the 1.35% ratio by September 30, 2020. Insured institutions with assets of $10 billion or more are supposed to fund the increase. The Dodd-Frank Act eliminated the 1.5% maximum fund ratio, instead leaving it to the discretion of the FDIC and the FDIC has exercised that discretion by establishing a long term fund ratio of 2%.

The FDIC has authority to increase insurance assessments. Any significant increases would have an adverse effect on the operating expenses and results of operations of Newport Federal. Management cannot predict what assessment rates will be in the future.

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

In addition to the FDIC assessments, the Financing Corporation (“FICO”) is authorized to impose and collect, through the auspices of the FDIC, assessments for anticipated payments, issuance costs and custodial fees on bonds issued by the FICO in the 1980s to recapitalize the now defunct Federal Savings and Loan Insurance Corporation. The bonds issued by the FICO are due to mature in 2017 through 2019. During the year ended December 31, 2011, Newport Federal paid $28,000 in fees related to the FICO.

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

13Federal Home Loan Bank System. Newport Federal is a member of the Federal Home Loan Bank System, which consists of 12 regional Federal Home Loan Banks. The Federal Home Loan Bank System provides a central credit facility primarily for member institutions as well as other entities involved in home mortgage lending. As a member of the Federal Home Loan Bank of Boston, Newport Federal is required to acquire and hold shares of capital stock in the Federal Home Loan Bank. As of December 31, 2012, Newport Federal was in compliance with this requirement.

~~Table~~Federal ofReserve ~~Contents~~System

Federal ~~Home~~Reserve ~~Loan~~Board ~~Bank~~regulations ~~System.~~require savings ~~Newport~~banks ~~Federal~~to ismaintain anoninterest-earning ~~member~~reserves ofagainst ~~the~~their ~~Federal~~transaction ~~Home Loan Bank System~~accounts, ~~which~~such ~~consists~~as ofnegotiable 12order ~~regional Federal Home Loan Banks. The Federal Home Loan Bank System provides a central credit facility primarily for member institutions. As a member~~ of ~~the Federal~~withdrawal ~~Home Loan Bank of Boston, Newport Federal is required to acquire~~ and ~~hold~~regular achecking ~~designated amount of shares of capital stock in the Federal Home Loan Bank~~accounts. AsAt of December 31, ~~2011~~2012, Newport Federal was in compliance with ~~this~~these ~~requirement~~reserve requirements.

Other Regulations

Interest and other charges collected or contracted for by Newport Federal are subject to state usury laws and federal laws concerning interest rates. Newport Federal’s operations are also subject to federal laws applicable to credit transactions, such as the:

Truth-In-Lending Act, governing disclosures of credit terms to consumer borrowers;

Home Mortgage Disclosure Act, requiring financial institutions to provide information to enable the public and public officials to determine whether a financial institution is fulfilling its obligation to help meet the housing needs of the community it serves;

Equal Credit Opportunity Act, prohibiting discrimination on the basis of race, creed or other prohibited factors in extending credit;

Fair Credit Reporting Act, governing the use and provision of information to credit reporting agencies;

Fair Debt Collection Act, governing the manner in which consumer debts may be collected by collection agencies;

· Truth in Savings Act~~, governing uniformity in the disclosure of terms and conditions regarding interest and fees on new savings accounts~~; and

Rules and regulations of the various federal agencies charged with the responsibility of implementing such federal laws.

The operations of Newport Federal also are subject to the:

Index

Right to Financial Privacy Act, which imposes a duty to maintain confidentiality of consumer financial records and prescribes procedures for complying with administrative subpoenas of financial records;

Electronic Funds Transfer Act and Regulation E promulgated thereunder, which govern automatic deposits to and withdrawals from deposit accounts and customers’ rights and liabilities arising from the use of automated teller machines and other electronic banking services;

· Check Clearing for the 21st Century Act (also known as “Check 21”), which gives “substitute checks,” such as digital check images and copies made from that image, the same legal standing as the original paper check;

· ~~Title III of~~ The ~~Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (referred to as the “~~USA PATRIOT Act”), which ~~significantly~~requires ~~expanded the responsibilities of financial institutions, including~~ savings banks, ~~in preventing the use of the American financial system~~ to, ~~fund~~among ~~terrorist activities. Among~~ other ~~provisions~~things, ~~the~~establish ~~USA~~broadened ~~PATRIOT Act and the related regulations required depository institutions operating in the United States to develop new~~ anti-money laundering compliance programs, and due diligence policies and controls to ensure the detection and reporting of money laundering. Such required compliance programs are intended to supplement existing compliance requirements, that also apply to financial institutions under the Bank Secrecy Act and the Office of Foreign Assets Control regulations; and

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applicable to financial institutions, under the Bank Secrecy Act and the Office of Foreign Assets Control regulations; and

The Gramm-Leach-Bliley Act, which places limitations on the sharing of consumer financial information by financial institutions with unaffiliated third parties. Specifically, the Gramm-Leach-Bliley Act requires all financial institutions offering financial products or services to retail customers to provide such customers with the financial institution’s privacy policy and provide such customers the opportunity to “opt out” of the sharing of certain personal financial information with unaffiliated third parties.

Holding Company Regulation

~~General.~~ Newport Bancorp is a ~~non-diversified~~unitary savings and loan holding company, ~~within~~subject ~~the~~to ~~meaning~~regulation ofand ~~the~~supervision ~~Home~~by ~~Owners’ Loan Act. As such, Newport Bancorp is registered with~~ the Federal Reserve Board ~~and subject to Federal Reserve Board regulations, examinations, supervision and reporting requirements~~. InThe ~~addition, the~~ Federal Reserve Board has enforcement authority over Newport Bancorp and its non-savings institution subsidiaries. Among other things, this authority permits the Federal Reserve Board to restrict or prohibit activities that are determined to be a ~~serious~~ risk to ~~the subsidiary savings bank. This regulatory oversight of savings and loan holding companies, including~~ Newport ~~Bancorp, was assumed by the~~ Federal ~~Reserve Board from the Office of Thrift Supervision in July 2011~~.

~~Permissible~~ Activities. ~~Under~~The activities ~~present~~of ~~law,~~a ~~the~~savings ~~business~~and ~~activities~~loan ofholding company, such as Newport Bancorp, are ~~generally~~ limited to those activities permissible for financial holding companies ~~under Section 4(k) of the Bank Holding Company Act of 1956, as amended,~~ or for multiple savings and loan holding companies. A financial holding company may engage in activities that are financial in nature, including underwriting equity securities and insurance, asincidental ~~well~~to asfinancial activities or complementary to a financial activity. The Dodd-Frank Act added that ~~are~~any ~~incidental~~savings and loan holding company that engages in activities permissible for a financial holding company must meet the qualitative requirements for a bank holding company to be a financial holding company and conduct the activities orin ~~complementary~~accordance with the requirements that would apply to a financial holding company’s conduct of the activity. A multiple savings and loan holding company is generally limited to activities permissible for bank holding companies under Section 4(c)(8) of the Bank Holding Company Act, subject to the prior approval of the Federal Reserve Board, and certain additional activities authorized by Federal Reserve Board regulations.

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

The Federal Reserve Board is prohibited from approving any acquisition that would result in a multiple savings and loan holding company controlling savings institutions in more than one state, subject to two exceptions:14

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

~~(ii)~~Capital Requirements. Savings and loan holding companies have not historically been subjected to consolidated regulatory capital requirements. However, the ~~acquisition~~Dodd-Frank Act ofrequires athe Federal Reserve Board to set, for all savings and loan holding companies, minimum consolidated capital levels that are as stringent as those required for their insured depository institution insubsidiaries. ~~another~~The ~~state~~components ifof Tier 1 capital would be restricted to capital instruments that are currently considered to be Tier 1 capital for insured depository institutions. That would exclude instruments such as trust preferred securities and cumulative preferred stock that are currently permitted for bank holding companies. The Dodd-Frank Act provides that instruments issued before May 19, 2010 will be grandfathered for companies of consolidated assets of $15 billion or less. The Dodd-Frank Act further provides that holding companies that were not regulated by the ~~laws~~Federal Reserve Board as of May 19, 2010 (which would include most savings and loan holding companies) are subject to a five-year transition period from the ~~state~~July 21, 2010 date of enactment of the ~~target~~Dodd-Frank Act before such capital requirements apply. The proposed capital rules discussed earlier would implement the consolidated capital requirements for savings ~~institution~~and ~~specifically~~loan ~~permit~~holding ~~such~~companies. ~~acquisition~~However, the proposed rules did not incorporate the referenced grandfather for instruments issued before May 19, 2010 or the transition period, notwithstanding the Dodd-Frank statutory language, so it is uncertain whether any final rule will do so.

Source of Strength. The Dodd-Frank ~~states~~Act ~~vary~~extended into savings and loan holding companies the ~~extent~~Federal Reserve Board’s “source of strength” doctrine, which has long applied to bank holding companies. The regulatory agencies must promulgate regulations implementing the “source of strength” policy, which requires holding companies to act as a source of strength to their subsidiary depository ~~they~~institutions ~~permit~~by ~~interstate~~providing ~~savings~~capital, liquidity and ~~loan~~other ~~holding~~support ~~company~~in ~~acquisitions~~times of financial stress.

Capital~~. Unlike~~ Distributions. The Federal Reserve Board has issued a policy statement regarding capital distributions by bank holding companies, that it has suggested is applicable to savings and loan holding companies ~~are~~as ~~not~~well. ~~currently~~In ~~subject~~general, tothe ~~specific~~policy ~~regulatory~~provides ~~capital requirements.~~that ~~The~~dividends ~~Dodd-Frank~~should ~~Act,~~be ~~however,~~paid ~~requires~~only ~~the~~out ~~Federal~~of ~~Reserve~~current ~~Board~~earnings toand ~~promulgate~~only ~~consolidated~~if ~~capital~~the ~~requirements~~prospective ~~for~~rate ~~depository institution~~of earnings retention by the holding company ~~companies~~appears ~~that~~consistent ~~are~~with nothe ~~less~~organization’s ~~stringent~~capital needs, ~~both~~asset ~~quantitatively~~quality and inoverall ~~terms~~financial ofcondition. ~~components~~Regulatory guidance ofprovides ~~capital,~~for ~~than~~prior ~~those applicable~~regulatory consultation with respect to ~~institutions~~capital ~~themselves.~~distributions ~~This~~in ~~will~~certain ~~eliminate~~circumstances such as where the ~~inclusion~~company’s net income for the past four quarters, net of ~~certain~~dividends ~~instruments~~previously ~~from~~paid ~~Tier~~over 1that ~~capital~~period, ~~such~~is asinsufficient ~~trust~~to ~~preferred~~fully ~~securities,~~fund ~~that~~the ~~are~~dividend ~~currently~~or ~~includable~~the ~~for~~company’s ~~bank~~overall rate of earnings retention is inconsistent with the company’s capital needs and overall financial condition. The ability of a holding ~~companies~~company to pay dividends may be restricted if a subsidiary depository institution becomes undercapitalized. ~~Instruments~~These ~~issued~~regulatory ~~before~~policies ~~May~~could ~~19,~~affect ~~2010~~the byability ~~holding~~of Newport Bancorp to pay dividends or ~~companies~~otherwise ~~with~~engage ~~less~~in capital distributions.

Table of Contents

than $15 billion in consolidated assets (as of December 31, 2009) are grandfathered. There is a five year transition period from the July 21, 2010 date of enactment of the Dodd-Frank Act before the capital requirements will apply to savings and loan holding companies.

The Dodd-Frank Act also extends the “source of strength” doctrine to savings and loans holding companies. The regulatory agencies must promulgate regulations implementing the “source of strength” policy that requires holding companies to act as a source of strength to their subsidiary depository institutions by providing capital, liquidity and other support in times of financial stress.

Dividends. The Federal Reserve Board has issued a policy statement regarding the payment of dividends by bank holding companies that it has indicated is generally applicable to savings and loan holding companies as well. The policy provides that dividends should be paid only out of current earnings and only if the prospective rate of earnings retention by the holding company appears consistent with the organization’s capital needs, asset quality and overall financial condition. Regulatory guidance provides for prior regulatory review of capital distributions in certain circumstances such as where the company’s net income for the past four quarters, net of dividends previously paid over that period, is insufficient to fully fund the dividend or the company’s overall rate of earnings retention is inconsistent with the company’s capital needs and overall financial condition. The ability of a holding company to pay dividends may be restricted if a subsidiary bank becomes undercapitalized. These regulatory policies could affect the ability of Newport Bancorp to pay dividends or otherwise engage in capital distributions.

Change in Control Laws and Regulations

Under the Change in Bank Control Act, no person may acquire control of a savings and loan holding company such as Newport Bancorp unless the Federal Reserve Board has been given 60 days’ prior written notice and has not disapproved the proposed acquisition, taking into consideration certain factors, including the financial and managerial resources of the acquirer and the competitive effects of the acquisition. Control, as defined under federal law, means ownership, control of or holding irrevocable proxies representing more than 25% of any class of voting stock, control in any manner of the election of a majority of the institution’s directors, or a determination by the regulator that the acquiror has the power to direct, or directly or indirectly to exercise a controlling influence over, the management or policies of the institution. Acquisition of more than 10% of any class of a savings and loan holding company’s voting stock constitutes a rebuttable determination of control under certain circumstances including where, as is the case with Newport Bancorp, the issuer has registered securities under Section 12 of the Securities Exchange Act of 1934.

Federal Securities Laws

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

16Sarbanes-Oxley Act of 2002

~~Table~~The Sarbanes-Oxley Act of ~~Contents~~2002 addresses, among other issues, corporate governance, auditing and accounting, executive compensation, and enhanced and timely disclosure of corporate information. Our Chief Executive Officer and Chief Financial Officer are required to certify, among other things, that our quarterly and annual reports do not contain any untrue statement of a material fact.

Index

ITEM 1A.

RISK FACTORS

Changes in interest rates may reduce our profits.

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

Historically low interest rates may adversely affect our net interest income and profitability.

During the past ~~three~~four years it has been the policy of the Federal Reserve Board to maintain interest rates at historically low levels through its targeted federal funds rate and the purchase of mortgage-backed securities. As a result, market rates on the loans we have originated and the yields on securities we have purchased have been at lower levels than available prior to 2008. As a general matter, our interest-bearing liabilities reprice or mature more quickly than our interest-earning assets, which ~~has~~was ~~been~~ one factor contributing to the increase in our interest rate spread ~~since~~between 2007 and 2011 as interest rates decreased. However, at current interest rate levels our ability to continue to lower our interest expense ~~may~~ beis relatively limited atcompared ~~current~~to ~~interest rate levels while~~ the average yield on our interest-earning assets which may continue to decrease. Our interest rate spread decreased to 3.21% for the year ended December 31, 2012, compared to 3.49% for the year ended December 31, 2011. The Federal Reserve Board has recently indicated its intention to maintain low interest rates until at least late 2014. Accordingly, our interest rate spread and net interest income may continue to be adversely affected ~~and may even decrease~~, which may have an adverse effect on our profitability.

~~The~~We ~~Dodd-Frank~~have ~~Act,~~been ~~among~~negatively ~~other~~affected ~~things,~~by ~~eliminated~~current ~~the Office~~market ~~of Thrift Supervision, tightened capital standards, created a new Consumer Financial Protection Bureau~~ and ~~will continue~~ toeconomic ~~result~~conditions. inA ~~new~~continuation ~~rules~~or ~~and~~worsening ~~regulations~~of ~~that~~these ~~are~~conditions ~~expected~~could toadversely ~~increase~~affect our ~~costs~~operations, offinancial ~~operations~~condition, and earnings.

The ~~Dodd-Frank~~severe ~~Act~~economic isrecession ~~significantly~~of ~~changing~~2008 ~~the~~and ~~current~~2009 ~~bank regulatory structure~~ and ~~affecting~~ the ~~lending,~~weak ~~investment,~~economic ~~trading~~recovery ~~and~~since ~~operating~~then ~~activities~~have ofresulted ~~financial~~in ~~institutions and~~continued ~~their~~uncertainty ~~holding~~in ~~companies. The Dodd-Frank Act eliminated our former primary federal regulator,~~ the ~~Office~~financial ofmarkets ~~Thrift Supervision,~~ and ~~required Newport Federal to be regulated by~~ the ~~OCC (the primary federal regulator for national banks). The Dodd-Frank Act~~expectation ~~also required the Board~~ of ~~Governors~~weak ofgeneral ~~the~~economic ~~Federal~~conditions, ~~Reserve~~including ~~System~~high ~~(the~~levels ~~“Federal~~of ~~Reserve~~unemployment. ~~Board”)~~The toresulting ~~supervise~~economic ~~and~~pressure ~~regulate all~~on ~~savings~~consumers and ~~loan holding companies, like Newport Bancorp, in addition to bank holding companies which it currently regulates.~~businesses Ashas aadversely ~~result,~~affected ~~the~~our ~~Federal Reserve Board’s current regulations applicable to bank holding companies~~business, ~~including~~financial ~~holding company capital requirements~~condition, ~~will apply to savings~~ and ~~loan~~results ~~holding~~of ~~companies like Newport Bancorp, unless an exemption exists~~operations. ~~Bank~~The ~~holding companies~~credit ~~with~~quality ~~assets~~ of ~~less~~loan ~~than~~and ~~$500 million are exempt from these capital requirements. These capital requirements are substantially~~investment ~~similar~~securities toportfolios ~~the~~has ~~capital~~deteriorated ~~requirements~~at ~~currently~~many ~~applicable~~financial toinstitutions ~~Newport Federal, as described in “Supervision~~ and ~~Regulation—Federal Banking Regulation—Capital Requirements.” The Dodd-Frank Act also required~~ the ~~Federal~~values ~~Reserve~~of ~~Board~~real toestate ~~set~~collateral ~~minimum~~supporting many ~~capital~~commercial ~~levels~~real ~~for~~estate ~~bank~~loans and ~~savings~~home ~~and~~mortgages ~~loan~~have ~~holding~~declined ~~companies that are as stringent as those required for insured depository institutions,~~ and ~~the~~may ~~components~~continue ~~of Tier 1 capital must be restricted~~ to ~~capital~~decline. ~~instruments~~Financial ~~that~~companies’ ~~are~~stock ~~currently considered to be Tier 1 capital~~prices ~~for~~have ~~insured~~been ~~depository~~negatively ~~institutions~~affected. ~~However,~~A ~~there~~continuation isor aworsening ~~five-year~~of ~~transition~~these ~~period~~conditions ~~before~~could ~~the~~result ~~capital~~in ~~requirements~~reduced ~~will~~loan ~~apply to~~demand ~~savings~~ and ~~loan~~further increases ~~holding~~in ~~companies~~loan delinquencies, ~~such~~loan ~~as Newport Bancorp. Under the Dodd-Frank Act~~losses, ~~the~~loan ~~proceeds~~loss ~~of trust preferred securities are excluded from Tier 1 capital unless such securities were issued prior to May 19~~provisions, ~~2010~~costs byassociated ~~bank or savings and loan holding companies~~ with ~~less~~monitoring ~~than~~delinquent ~~$15~~loans ~~billion~~and disposing of ~~assets.~~foreclosed ~~The~~property, legislation also established a floor for capital of insured depository institutions that cannot be lower than the standards in effect today. It also directed the federal banking regulators to implement new leverage and ~~capital~~ ~~requirements~~otherwise ~~that~~negatively ~~take~~affect ~~into~~our ~~account~~operations, ~~off-balance~~financial ~~sheet activities and other risks~~condition, ~~including risks relating to securitized products~~ and ~~derivatives~~earnings.

~~The~~Our ~~Dodd-Frank~~allowance ~~Act~~for ~~also~~loan ~~creates~~losses amay ~~new Consumer~~prove ~~Financial~~to ~~Protection~~be ~~Bureau with broad powers~~ insufficient to ~~supervise~~absorb ~~and~~losses ~~enforce~~in ~~consumer~~our ~~protection~~loan ~~laws~~portfolio. ~~The Consumer Financial Protection Bureau has broad rule-making~~

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

Index

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

If our problem assets increase, our earnings will decrease.

At December 31, 2012, our non-performing assets (which consist of non-accrual loans, accruing loans 90 days or more delinquent and foreclosed real estate) consisted of $2.2 million. Our problem assets adversely affect our net income in various ways. We do not record interest income on non-accrual loans or foreclosed real estate. Based on our estimate of the level of allowance for loan losses required, we record a provision for loan losses as a charge to earnings to maintain the allowance for loan losses at an appropriate level. From time to time, we may be required to write down the value of properties in our foreclosed real estate portfolio to reflect changing market values. Additionally, there are legal fees associated with the resolution of problem assets as well as carrying costs such as taxes, insurance and maintenance related to our foreclosed real estate. Further, the resolution of problem assets requires the active involvement of management, which could detract from the overall supervision of our operations. Finally, if our estimate of the allowance for loan losses is inadequate, we will have to increase the allowance accordingly.

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

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

Strong competition and changing banking environment may limit growth and profitability.

Competition in the banking and financial services industry is intense. We compete with commercial banks, savings institutions, mortgage brokerage firms, credit unions, finance companies, mutual funds, insurance companies, brokerage and investment banking firms operating locally and elsewhere, and non-traditional financial institutions, including non-depository financial services providers. Many of these competitors (whether regional or national institutions) have substantially greater resources and lending limits than we have and may offer certain services that we do not or cannot provide. Additionally, non-traditional financial institutions may not have the same regulatory requirements or burdens as we do even while playing a rapidly increasing role in the financial services industry, which could ultimately limit our growth, profitability and stockholder value. Our profitability depends upon our ability to successfully compete in our market areas and adapt to the ever changing banking environment.

The short-term and long-term impact of the changing regulatory capital requirements and anticipated new capital rules are uncertain.

On June 7, 2012, the Federal Reserve Board approved proposed rules that would substantially amend the regulatory risk-based capital rules applicable to us. The OCC subsequently approved these proposed rules on June 12, 2012. The proposed rules implement the “Basel III” regulatory capital reforms and changes required by the Dodd-Frank Act. Basel III was initially intended to be implemented beginning January 1, 2013, however on November 9, 2012, the U.S. federal banking agencies announced that they do not expect that any of the proposed rules would become effective on January 1, 2013.

Various provisions of the Dodd-Frank Act increase the capital requirements of financial institutions. The proposed rules include new minimum risk-based capital and leverage ratios, which would be phased in during 2013 and 2014, and would refine the definition of what constitutes “capital” for purposes of calculating those ratios. The proposed new minimum capital level requirements applicable to Newport Federal under the proposals would be: (i) a new common equity Tier 1 capital ratio of 4.5%; (ii) a Tier 1 capital ratio of 6% (increased from 4%); (iii) a total capital ratio of 8% (unchanged from current rules); and (iv) a Tier 1 leverage ratio of 4% for all institutions. The proposed rules would also establish a “capital conservation buffer” of 2.5% above the new regulatory minimum capital ratios, and would result in the following minimum ratios: (i) a common equity Tier 1 capital ratio of 7.0%, (ii) a Tier 1 capital ratio of 8.5%, and (iii) a total capital ratio of 10.5%. The new capital conservation buffer requirement would be phased in beginning in January 2016 at 0.625% of risk-weighted assets and would increase each year until fully implemented in January 2019. An institution would be subject to limitations on paying dividends, engaging in share repurchases, and paying discretionary bonuses if its capital level falls below the buffer amount. These limitations would establish a maximum percentage of eligible retained income that could be utilized for such actions. While the proposed Basel III changes and other regulatory capital requirements will likely result in generally higher regulatory capital standards, it is difficult at this time to predict when or how any new standards will ultimately be applied to Newport Federal.

~~Table of Contents~~Index

~~authority~~In ~~for a wide range of consumer protection laws that apply to all banks and savings institutions such as Newport Federal~~addition, ~~including~~in the ~~authority~~current toeconomic and ~~prohibit~~regulatory ~~“unfair~~environment, ~~deceptive~~bank orregulators ~~abusive”~~may ~~acts~~impose ~~and~~capital ~~practices. The~~requirements ~~Consumer~~that ~~Financial~~are ~~Protection Bureau has examination and enforcement authority over all banks and savings institutions with~~ more stringent than ~~$10~~those ~~billion~~required ~~in assets. Banks and savings institutions with $10 billion or less in assets will be examined~~ by ~~their~~ applicable ~~bank~~existing ~~regulators~~regulations. The new legislation also weakens the federal preemption available for national banks and federal savings banks, and gives state attorneys general the ability to enforce applicable federal consumer protection laws.

InThe ~~addition,~~application ~~the~~of ~~Dodd-Frank~~more ~~Act~~stringent ~~will~~capital ~~increase~~requirements ~~stockholder~~for ~~influence~~Newport ~~over~~Federal ~~boards~~could, ofamong ~~directors~~other bythings, ~~requiring~~result ~~companies~~in tolower ~~give~~returns ~~stockholders~~on ainvested ~~non-binding~~capital, ~~vote~~require onthe ~~executive~~raising of ~~compensation~~additional capital, and ~~so-called~~result ~~“golden~~in ~~parachute”~~regulatory ~~payments.~~actions ~~The~~if ~~legislation~~our ~~also~~capital ~~directed~~levels ~~the~~were ~~Federal~~to ~~Reserve~~decline ~~Board~~and we were to be unable to comply with ~~promulgate~~such ~~rules~~requirements. ~~prohibiting~~Furthermore, ~~excessive~~the ~~compensation~~imposition ~~paid~~of liquidity requirements in connection with the implementation of Basel III could result in our having to ~~bank~~lengthen ~~holding~~the ~~company~~term ~~executives~~of our funding, ~~regardless~~restructure our business models, and/or increase our holdings of ~~whether~~liquid assets. ~~the~~Implementation ~~company~~of changes to asset risk weightings for risk based capital calculations, items included or deducted in calculating isregulatory ~~publicly~~capital ~~traded~~and/or additional capital conservation buffers, could result in management modifying its business strategy and could limit our ability to make distributions, including paying out dividends or ~~not~~buying back shares.

ItFinancial isreform ~~difficult~~legislation tohas, ~~predict~~among atother ~~this~~things, ~~time~~eliminated the ~~full~~Office ~~impact~~of ~~that~~Thrift ~~the Dodd Frank Act and its implementing regulations will have on community banks~~Supervision, ~~including~~tightened ~~the~~capital ~~lending~~standards and ~~credit~~ ~~practices~~created ofa ~~such~~new ~~banks.~~Consumer ~~Moreover,~~Financial ~~many~~Protection ~~of the provisions of the Dodd-Frank Act are not yet in effect~~Bureau, and ~~the legislation~~will ~~requires~~result ~~various~~in ~~federal~~new ~~agencies~~laws ~~to promulgate numerous~~ and ~~extensive implementing~~ regulations ~~over~~that ~~the~~are ~~next few years. Although the substance and scope of these regulations cannot be determined at this time, it is~~ expected ~~that the legislation and implementing regulations, particularly those provisions relating~~ to ~~the new Consumer Financial Protection Bureau, may materially~~ increase our ~~operating~~ ~~and compliance~~ costs ~~and~~of ~~restrict our ability to pay dividends, respectively~~operations.

The Dodd-Frank Act requires various federal agencies to adopt a broad range of new implementing rules and regulations, and to prepare numerous studies and reports for Congress. The federal agencies are given significant discretion in drafting the implementing rules and regulations, and consequently many of the details and much of the impact of the Dodd-Frank Act may not be known for many months or years.

Among other things, as a result of the Dodd-Frank Act:

the OCC became the primary federal regulator for federal savings associations such as Newport Federal (replacing the Office of Thrift Supervision), and the Federal Reserve Board now supervises and regulates all savings and loan holding companies that were formerly regulated by the Office of Thrift Supervision, including Newport Bancorp;

the Federal Reserve Board is required to set minimum capital levels for savings and loan holding companies that are as stringent as those required for their insured depository subsidiaries, and the components of Tier 1 capital are required to be restricted to capital instruments that are currently considered to be Tier 1 capital for insured depository institutions. There is a five-year transition period (from the July 21, 2010 effective date of the Dodd-Frank Act) before the capital requirements will apply to savings and loan holding companies. However, recently proposed rules would not provide such a transition period for savings and loan holding companies. See “Supervision and Regulation—Federal Banking Regulation—Capital Requirements;

the federal banking regulators are required to implement new leverage and capital requirements that take into account off-balance sheet activities and other risks, including risks relating to securitized products and derivatives;

Index

a new Consumer Financial Protection Bureau has been established, which has broad powers to supervise and enforce consumer protection laws. The Consumer Financial Protection Bureau has broad rule-making authority for a wide range of consumer protection laws that apply to all banks and savings institutions, including the authority to prohibit “unfair, deceptive or abusive” acts and practices. The Consumer Financial Protection Bureau has examination and enforcement authority over all banks and savings institutions with more than $10 billion in assets. Banks and savings institutions with $10 billion or less in assets, like Newport Federal, will be examined by their applicable bank regulators; and

federal preemption rules that have been applicable for national banks and federal savings banks have been weakened, and state attorneys general have the ability to enforce federal consumer protection laws.

In addition to the risks noted above, we expect that our operating and compliance costs, and possibly our interest expense, could increase as a result of the Dodd-Frank Act and the implementing rules and regulations. The need to comply with additional rules and regulations, as well as state laws and regulations to which we were not previously subject, will also divert management’s time from managing our operations. Higher capital levels would require us to maintain higher levels of assets that earn less interest and dividend income and returns on stockholders’ equity would suffer.

Government responses to economic conditions may adversely affect our operations, financial condition and earnings.

In addition to new rules promulgated under the Dodd Frank Act, bank regulatory agencies have been responding aggressively to concerns and adverse trends identified in examinations. Ongoing uncertainty and adverse developments in the financial services industry and the domestic and international credit markets, and the effect of new legislation and regulatory actions in response to these conditions, may adversely affect our operations by restricting our business activities, including our ability to originate or sell loans, modify loan terms, or foreclose on property securing loans. These measures are likely to increase our costs of doing business and may have a significant adverse effect on our lending activities, financial performance and operating flexibility. In addition, these risks could affect the performance and value of our loan and investment securities portfolios, which also would negatively affect our financial performance.

Furthermore, the Federal Reserve Board, in an attempt to help stabilize the economy, has, among other things, kept interest rates low through its targeted federal funds rate and the purchase of mortgage-backed securities. If the Federal Reserve Board increases the federal funds rate, overall interest rates will likely rise, which may negatively impact the housing markets and the U.S. economic recovery.

IfChanges wein dothe ~~not~~structure ~~achieve~~of ~~profitability~~Fannie onMae ~~new~~and ~~branches~~Freddie Mac (“GSEs”) and the relationship among the GSEs, ~~they~~the federal government and the private markets, or the conversion of ~~may~~the ~~negatively~~current ~~impact~~conservatorship of the GSEs into receivership, could result in significant changes to our ~~earnings~~securities portfolio.

WeThe ~~opened~~GSEs ~~our~~are ~~Portsmouth,~~currently ~~Rhode~~in ~~Island~~conservatorship, ~~branch~~with ~~office~~its inprimary ~~January 2009~~regulator, ~~and~~the ~~our~~Federal ~~Stonington~~Housing Finance Agency, ~~Connecticut~~acting ~~branch~~as ~~office~~conservator. inWe ~~May~~cannot ~~2009.~~predict ~~Numerous~~if, ~~factors~~when ~~contribute~~or tohow the ~~performance~~conservatorships ofwill ~~a new branch~~end, ~~such~~or asany aassociated ~~suitable~~changes ~~location,~~to ~~qualified~~the ~~personnel~~GSEs’ ~~and~~business anstructure ~~effective~~that ~~marketing~~could ~~strategy~~result. ~~Additionally,~~We italso ~~takes~~cannot ~~time for~~predict awhether ~~new~~the conservatorships ~~branch~~will toend ~~generate~~in ~~significant~~receivership. ~~deposits~~There ~~and~~are ~~make~~several ~~sufficient~~proposed ~~loans~~approaches to ~~produce~~reform ~~enough~~the ~~income~~GSEs towhich, ~~offset~~if ~~expenses~~enacted, ~~some~~could ofchange ~~which~~the structure of the GSEs and the relationship among the GSEs, ~~like~~the ~~salaries~~government and ~~occupancy~~the ~~expense~~private markets, ~~are~~including ~~relatively~~the ~~fixed~~trading ~~costs~~markets for agency conforming mortgage loans and markets for mortgage-related securities in which we participate. We ~~expect~~cannot ~~that~~predict itthe prospects ~~may~~for ~~take~~the aenactment, ~~period~~timing or content of ~~time~~legislative ~~before~~or rulemaking proposals regarding the future status of the GSEs. ~~new~~Accordingly, ~~branch~~there ~~offices~~continues ~~can~~to ~~become~~be ~~profitable~~uncertainty regarding the future of the GSEs, including whether they will continue to exist in their current form. ~~During~~GSE ~~this~~reform, ~~period~~if enacted, ~~operating~~could ~~these~~result ~~new~~in ~~branch~~a ~~offices~~significant ~~may~~change ~~negatively~~and adversely impact our ~~net income~~business operations.

~~Strong~~The ~~competition~~expiration ~~within~~of ~~our~~unlimited ~~market~~FDIC insurance ~~area~~on ~~could~~certain ~~affect~~ non-interest-bearing transaction accounts may increase our ~~profits~~costs and ~~slow~~reduce ~~growth~~our liquidity levels.

Newport Federal faces intense competition both in making loans and attracting deposits. This competition has made it more difficult for the Bank to make new loans and attract deposits. Price competition for loans and deposits might result in the Bank earning less on the Bank’s loans and paying more on the Bank’s deposits, which

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would reduce net interest income. Competition also makes it more difficult to grow loans and deposits. At June 30, 2011, which is the most recent date for which data is available from the FDIC, Newport Federal held approximately 11.91% of the deposits in Newport County, Rhode Island and approximately 2.39% of the deposits in Washington County, Rhode Island. Some of the institutions with which the Bank competes have substantially greater resources and lending limits than Newport Federal has and may offer services that the Bank does not provide. Newport Federal expects competition to increase in the future as a result of legislative, regulatory and technological changes and the continuing trend of consolidation in the financial services industry.

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

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

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

Our earnings have been negatively affected by the reduction in dividends paid by the Federal Home Loan Bank of Boston. In addition, any restrictions placed on the operations of the Federal Home Loan Bank of Boston could hinder our ability to use it as a liquidity source.

The Federal Home Loan Bank (“FHLB”) of Boston did not pay any dividends during the years 2009 and

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~~2010.~~On ~~Although~~December 31, ~~the~~2012, ~~FHLB~~unlimited ofFDIC ~~Boston~~insurance ~~began~~on ~~paying~~certain anon-interest-bearing ~~dividend~~transaction ~~again~~accounts inexpired. Unlimited insurance coverage ~~2011,~~does ~~the~~not ~~dividends~~apply ~~paid~~to ~~for~~money ~~2011~~market ~~were~~deposit ~~equal~~accounts toor ~~annualized~~negotiable ~~rate~~order of 30withdrawal ~~basis~~(NOW) ~~points~~accounts. ~~per~~The ~~share,~~reduction ~~far~~in ~~below~~FDIC ~~the~~insurance on ~~dividend~~other ~~paid~~types byof accounts to the ~~FHLB~~ ofstandard ~~Boston~~$250,000 ~~prior~~maximum amount may cause depositors to ~~2009.~~place ~~The~~such funds ~~failure~~in offully ~~the~~insured ~~FHLB~~interest-bearing ofaccounts, ~~Boston~~which towould ~~pay~~increase ~~full~~our ~~dividends~~costs ~~for~~of ~~any~~funds ~~quarter~~and ~~will~~negatively ~~reduce~~affect our ~~earnings~~results of ~~during~~operations, ~~that~~or ~~quarter.~~may Incause ~~addition,~~depositors ~~the~~to ~~FHLB~~withdraw oftheir ~~Boston~~deposits isand aninvest ~~important~~uninsured ~~source~~funds ofin ~~liquidity~~investments ~~for~~perceived ~~us,~~as ~~and~~being ~~any~~more secure, ~~restrictions~~such onas ~~their operations~~securities ~~may~~issued ~~hinder~~by ~~our~~the ~~ability~~United toStates ~~use~~Treasury. itThis asmay areduce our liquidity, ~~source.~~or Atrequire ~~December~~us ~~31,~~to ~~2011,~~pay ~~the~~higher ~~carrying~~interest rates ~~value~~to ofmaintain our ~~FHLB~~liquidity ofby ~~Boston stock,~~retaining ~~was $5~~deposits.7 ~~million.~~

The Federal Home Loan Bank (“FHLB”) of Boston did not pay any dividends during the years 2009 and 2010. Although the FHLB of Boston began paying a dividend again in 2011, the dividends paid for 2011 and 2012 were equal to annualized rates of approximately 30 and 50 basis points per share, respectively, far below the dividend paid by the FHLB of Boston prior to 2009. The failure of the FHLB of Boston to pay full dividends for any quarter will reduce our earnings during that quarter. In addition, the FHLB of Boston is an important source of liquidity for us, and any restrictions on their operations may hinder our ability to use it as a liquidity source. At December 31, 2012, the carrying value of our FHLB of Boston stock was $5.6 million.

Our information systems may experience an interruption or breach in security.

We rely heavily on communications and information systems to conduct our business. Any failure, interruption, or breach in security or operational integrity of these systems could result in failures or disruptions in our customer relationship management, general ledger, deposit, loan, and other systems. While we have policies and procedures designed to prevent or limit the effect of the failure, interruption, or security breach of our information systems, we cannot assure you that any such failures, interruptions, or security breaches will not occur or, if they do occur, that they will be adequately addressed. The occurrence of any failures, interruptions, or security breaches of our information systems could damage our reputation, result in a loss of customer business, subject us to additional regulatory scrutiny, or expose us to civil litigation and possible financial liability, any of which could have a material adverse effect on our financial condition and results of operations.

ITEM 1B.

UNRESOLVED STAFF COMMENTS

None.

ITEM 2. PROPERTIES

We conduct our business through our main office and branch offices. The following table sets forth certain information relating to these facilities as of December 31, 2011.

Location	Year Opened		Square Footage		Date of Lease Expiration		Owned/ Leased		Net Book Value
	(Dollars in thousands)
Main Office:
100 Bellevue Avenue Newport, RI 02840		1964		12,000		N/A		Owned	$	3,360
Branches:
165 East Main Road Middletown, RI 02842		1978		3,000		05/30/2020		Leased	$	421
1430 East Main Road Portsmouth, RI 02871		2009		6,754		N/A		Owned	$	3,273
121 Old Tower Hill Road Wakefield, RI 02879		1996		3,000		5/14/2021		Leased	$	316
18 Post Road (1) Westerly, RI 02891		2011		3,800		12/31/2041		Leased	$	2,074
445 Liberty Street Stonington, CT 06379		2009		3,500		4/30/2029		Leased	$	1,743
Other Properties:
2 Wilder Avenue (1) Westerly, RI 02891		2001		1,200		N/A		Owned	$	426

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~~(1) The~~ITEM ~~Bank opened its new branch on 18 Post Road in Westerly in January, 2011, and closed its branch at~~ 2 ~~Wilder Avenue, Westerly at the same time~~. ~~Currently, the Bank plans to hold onto the 2 Wilder Avenue property and it is being used as a storage facility.~~PROPERTIES

We conduct our business through our main office and branch offices. The following table sets forth certain information relating to these facilities as of December 31, 2012.

Location	Year Opened		Square Footage	Date of Lease Expiration	Owned/ Leased	Net Book Value
	(Dollars in thousands)

Main Office:
100 Bellevue Avenue Newport, RI 02840		1964	12,000	N/A	Owned	$	3,051

Branches:
165 East Main Road Middletown, RI 02842		1978	3,000	5/30/2020	Leased	$	362

1430 East Main Road Portsmouth, RI 02871		2009	6,754	N/A	Owned	$	3,151

121 Old Tower Hill Road Wakefield, RI 02879		1996	3,000	5/14/2021	Leased	$	281

18 Post Road ⁽¹⁾ Westerly, RI 02891		2011	3,800	12/31/2041	Leased	$	1,943

445 Liberty Street Stonington, CT 06379		2009	3,500	4/30/2029	Leased	$	1,608

⁽¹⁾ The Bank opened its new branch on 18 Post Road in Westerly in January, 2011, and closed its branch at 2 Wilder Avenue, Westerly at the same time. The Bank sold its 2 Wilder Avenue property in August 2012, for a net gain of $16,000.

ITEM 3.

LEGAL PROCEEDINGS

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

ITEM 4.

MINE SAFETY DISCLOSURES

~~None~~Not applicable.

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PART II

ITEM 5.

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

Market and Dividend Information.

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

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

	High		Low
2012:
First Quarter	$	14.07	$	12.47
Second Quarter	$	14.19	$	13.25
Third Quarter	$	14.85	$	13.70
Fourth Quarter	$	17.25	$	15.20
2011:
First Quarter	$	14.45	$	11.71
Second Quarter	$	14.48	$	13.41
Third Quarter	$	14.03	$	12.00
Fourth Quarter	$	13.39	$	12.25
2010:
First Quarter	$	12.50	$	11.24
Second Quarter	$	12.25	$	11.05
Third Quarter	$	12.52	$	11.35
Fourth Quarter	$	12.14	$	11.59

Holders.

As of March 24, ~~2012~~2013, there were approximately ~~544~~524 holders of record of the Company’s common stock.

Dividends.

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

Securities Authorized for Issuance under Equity Compensation Plans.

See Part III, Item 12~~(d)~~- Equity Compensation Plan Information, in this Annual Report on Form 10-K, for the table providing information as of December 31, ~~2011~~2012 about Company common stock that may be issued upon the exercise of options under the Newport Bancorp, Inc. 2007 Equity Incentive Plan.

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

Not applicable.

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Purchases of Equity Securities by the Issuer and Affiliated Purchasers.

~~The~~On ~~following~~November ~~table~~18, ~~provides~~2011, ~~certain~~the ~~information~~Company announced ~~with~~the ~~regard~~commencement of a stock repurchase program to acquire up to 176,070 shares, ~~repurchased~~or 5% of the Company’s then outstanding common stock. Repurchases, which are conducted through open market purchases or privately negotiated transactions, are 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. inAs of December 31, 2012, the ~~fourth~~Company ~~quarter~~had purchased 56,900 shares under this stock repurchase program, at an average cost of ~~2011~~$13.89 per share.

Period	(a) Total Number of Shares Purchased		(b) Average Price Paid per Share		(c) Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs(1)		(d) Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs(1)
October 1 - October 31		—	$	—		—		—
November 1 - November 30		—	$	—		—		176,070
December 1 - December 31		15,000	$	12.55		15,000		161,070
Total		15,000	$	12.55		15,000

There were no shares repurchased by the Company in the fourth quarter of 2012.

(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 6.

SELECTED FINANCIAL DATA

Not ~~Aplicable~~applicable.

ITEM 7.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION

Overview

Income. Newport Federal’s primary source of pre-tax income is net interest income. Net interest income is the difference between interest income, which is the income that we earn on our loans and investments, and interest expense, which is the interest that the Bank pays on deposits and borrowings. Other significant sources of pre-tax income are customer service fees (mostly from service charges on deposit accounts), loan servicing fees and income from bank-owned life insurance.

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

Expenses. The non-interest expenses Newport Federal incurs in operating its business consist of salaries and employee benefits, occupancy and equipment, data processing and other expenses.

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

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

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

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

Index

Critical Accounting Policies

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

Allowance for Loan Losses. The allowance for loan losses is the amount estimated by management as necessary to cover losses inherent in the loan portfolio at the balance sheet date. The allowance is established through the provision for loan losses, which is charged to earnings. Loan losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance.

Determining the amount of the allowance for loan losses necessarily involves a high degree of judgment. Management evaluates the level of the allowance at least quarterly and establishes the provision for loan losses based upon a review of the collectability of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral, prevailing economic conditions and other factors related to the collectability of the loan portfolio. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available. Although management uses the best information available to establish the allowance for loan losses, future adjustments to the allowance may be necessary if economic conditions differ substantially from the assumptions used in making the evaluation. In addition, the OCC, as an integral part of its examination process, periodically reviews Newport Federal’s allowance for loan losses. Such agency may require the Bank to recognize adjustments to the allowance based on its judgments about information available to it at the time of its examination. A large loss could deplete the allowance and require increased provisions to replenish the allowance, which would adversely affect earnings.

The allowance consists of general and allocated loss components. For loans that are classified as impaired, an allocated loss allowance is established when the discounted cash flows or the collateral value of the impaired loan is lower than the carrying value of that loan. The general component covers non-impaired loans and is based on historical loss experience adjusted for qualitative factors.

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

Income Taxes. Management considers accounting for income taxes as a critical accounting policy due to the subjective nature of certain estimates that are involved in the calculation. The Company uses the asset and liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. A valuation allowance related to deferred tax assets is established when, in the judgment of management, it is more likely than not that all or a portion of such deferred tax assets will not be realized. The 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 that are expected to reverse. Adjustments to increase or decrease the valuation allowance are generally charged or credited, respectively, to income tax expense.

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~~income~~Merger inAgreement ~~allowable~~With ~~federal~~SI ~~carry-back~~Financial ~~periods~~Group, 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 they are expected to reverseInc. ~~Adjustments~~ ~~to increase or decrease the valuation allowance are generally charged or credited, respectively, to income tax expense.~~

On March 5, 2013, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with SI Financial Group, Inc. (“SI Financial”), the holding company of Savings Institute Bank and Trust Company, pursuant to which the Company will merge with and into SI Financial, with SI Financial as the surviving entity (the “Merger”). In addition, the Bank will merge with and into Savings Institute Bank and Trust Company, with Savings Institute Bank and Trust Company as the surviving entity.

Under the terms of the Merger Agreement, at the effective time of the Merger, each share of Company common stock will be converted into the right to receive either $17.55 in cash or 1.5129 shares of SI Financial common stock in exchange for each share of Company common stock held by them, subject to proration procedures to ensure that 50 percent of the outstanding shares of Company common stock is converted into SI Financial common stock and the balance is converted into the cash consideration.

The directors of the Company have agreed to vote their shares in favor of the approval of the Merger Agreement at the Company stockholders’ meeting to be held to vote on the proposed transaction. Following the Merger, three members of the Company’s board of directors, including Kevin M. McCarthy, the current President and Chief Executive Officer of the Company, will join SI Financial’s board of directors. The Merger is currently expected to be completed in the third quarter of 2013.

The completion of the Merger is subject to customary closing conditions, including regulatory approval and approval by stockholders of the Company and SI Financial. The Company has also agreed not to (i) solicit proposals relating to alternative business combination transactions or (ii) subject to certain exceptions, enter into discussions concerning confidential information in connection with alternative business combination transactions. If the Merger Agreement is terminated under certain circumstances, the Company has agreed to pay SI Financial a termination fee of $2.45 million.

The Merger Agreement also contains usual and customary representations and warranties that the Company and SI Financial made to each other as of specific dates. The assertions embodied in those representations and warranties were made solely for purposes of the contract between the Company and SI Financial, and may be subject to important qualifications and limitations agreed to by the parties in connection with negotiating its terms. Moreover, the representations and warranties are subject to a contractual standard of materiality that may be different from what may be viewed as material to stockholders, and the representations and warranties may have been used to allocate risk between the Company and SI Financial rather than establishing matters as facts.

Balance Sheet Analysis

Overview. During the year ended December 31, ~~2011~~2012, the Company’s assets ~~increased~~decreased by $4.25 million, or 01.90%, to $~~453~~449.94 million. The ~~increase~~decrease in assets was ~~concentrated~~primarily indue ~~cash~~to ~~and~~a ~~cash~~$13.9 ~~equivalents~~million, ~~which~~or ~~increased~~38.4%, bydecrease in securities and a $211.72 million, or ~~231~~8.53%, decrease in premises and equipment, offset in part by a $105.80 million, or 2316.0%, ~~decrease~~increase in ~~securities~~cash and cash equivalents and a $7.6.5 million, or 2.1.9%, ~~decrease~~increase in net loans. The ~~increase~~decrease in ~~cash~~securities ~~and~~was ~~cash~~attributable ~~equivalents is due~~ to principal payments received on the mortgage-backed securities, ~~and~~which ancontributed to the increase in ~~deposits~~cash and cash equivalents. The decrease in net premises and equipment is attributable to the sale of the former Westerly, Rhode Island branch and normal depreciation and amortization.

~~Loans.~~During ~~Newport Federal’s primary lending activity is~~ the ~~origination~~year ofended ~~loans~~December ~~secured by real estate. The Bank originates one-to-four family residential real estate loans~~31, ~~commercial real estate and multi-family real estate loans and home equity loans and lines of credit. To a lesser extent~~2012, liabilities ~~Newport Federal originates construction loans, commercial and consumer loans. Net loans~~ decreased ~~from~~by $~~356~~6.0 million, ~~at December~~or 311.5%, ~~2010~~due to a $~~348~~30.59 million ~~at December 31~~, ~~2011,~~ or 223.1%., ~~Net~~decrease ~~loans~~in ~~represented~~borrowings, ~~76.78%~~offset ofby ~~total~~a ~~assets~~$24.9 ~~at December 31~~million, ~~2011~~or 9.4%, increase in deposits.

~~The~~Loans. ~~largest~~Newport ~~segment of the Bank~~Federal’s ~~loan~~primary ~~portfolio~~lending activity is ~~one-to-four~~the ~~family~~origination ~~residential~~of ~~real estate~~ loans, ~~which~~secured ~~increased~~ by $3real estate.9 ~~million~~The inBank ~~2011.~~originates ~~One~~one-to-four family residential ~~loans~~real ~~totaled~~estate ~~$207.8 million~~loans, ~~which~~equity ~~represented~~loans ~~58.8%~~and lines of ~~total~~credit ~~loans~~and atcommercial ~~December~~and ~~31,~~multi-family ~~2011,~~mortgage ~~compared~~loans. toTo ~~$203.9~~a ~~million~~lesser extent, ~~which represented~~Newport ~~56.5%~~Federal oforiginates ~~total~~construction loans, atcommercial ~~December~~and ~~31,~~consumer ~~2010~~loans. ~~The~~Net ~~Bank~~loans ~~offers~~increased ~~fixed~~1.9% ~~and~~from ~~adjustable rate one-to-four family residential loans~~$348.5 Atmillion at December 31, 2011, ~~the~~to ~~Bank had~~ $~~197~~355.30 million inat ~~fixed~~December ~~rate~~31, ~~and~~2012. ~~$10~~Net loans represented 79.50% ~~million~~of intotal ~~adjustable~~assets ~~rate~~at ~~one-to-four~~December ~~family~~31, ~~loans~~2012.

Commercial real estate loans totaled $101.2 million and represented 28.6% of total loans at December 31, 2011, compared to $104.5 million, representing 29.0% of total loans at December 31, 2010. Multi-family real estate loans totaled $18.3 million, or 5.2% of total loans at December 31, 2011, compared to $22.5 million, or 6.2% of total loans at December 31, 2010. Construction loans totaled $5.0 million, representing 1.4% of total loans at December 31, 2011, compared to $4.9 million, representing 1.4% of total loans at December 31, 2010.

Home equity loans and lines of credit totaled $19.6 million, representing 5.6% of total loans at December 31, 2011, a decrease of $3.5 million from $23.1 million at December 31, 2010.

Commercial business loans, which consist of commercial loans not secured by real estate, totaled $1.1 million, representing 0.3% of total loans at December 31, 2011, compared to $1.6 million at December 31, 2010. The Bank also originates consumer loans secured by automobiles or passbook or certificate accounts. Consumer loans totaled $399,000 at December 31, 2011, compared to $288,000 at December 31, 2010.

~~Table of Contents~~Index

The ~~following~~largest ~~table~~segment ~~sets forth the composition~~ of the Bank’s loan portfolio is one-to-four family residential mortgage loans, which increased by $20.7 million in 2012. One-to-four family loans totaled $228.4 million, which represented 63.4% of total loans at December 31, 2012, compared to $207.8 million, which represented 58.8% of total loans at December 31, 2011. The Bank offers fixed and adjustable-rate one-to-four family residential loans. At December 31, 2012, the ~~dates~~Bank ~~indicated~~had $218.3 million in fixed-rate and $10.1 million in adjustable-rate one-to-four family residential loans.

	At December 31,
	2011						2010						2009						2008						2007
	Amount			Percent			Amount			Percent			Amount			Percent			Amount			Percent			Amount			Percent
	(Dollars in thousands)
Real estate mortgage loans:
Residential
One-to-four family	$	207,773			58.79	%	$	203,893			56.49	%	$	191,154			53.67	%	$	183,767			54.53	%	$	169,179			57.08	%
Multi-family		18,271			5.17			22,540			6.25			22,535			6.33			17,379			5.16			9,494			3.20
Equity loans and lines		19,597			5.55			23,112			6.40			25,891			7.27			30,425			9.03			30,934			10.44
Commercial		101,215			28.64			104,531			28.96			104,720			29.42			91,487			27.14			75,623			25.51
Construction		5,016			1.42			4,948			1.37			9,736			2.73			11,204			3.32			9,427			3.18
Total real estate loans		351,872			99.57			359,024			99.47			354,036			99.42			334,262			99.18			294,657			99.41
Commercial		1,116			0.32			1,638			0.45			1,885			0.52			2,145			0.64			1,296			0.44
Consumer		399			0.11			288			0.08			223			0.06			601			0.18			442			0.15
Total loans		353,387			100.00	%		360,950			100.00	%		356,144			100.00	%		337,008			100.00	%		296,395			100.00	%
Allowance for loan losses		(3,709	)					(3,672	)					(3,467	)					(2,924	)					(2,399	)
Net deferred loan fees		(1.186	)					(1.229	)					(1,178	)					(1,055	)					(912	)
Loans, net	$	348,492					$	356,049					$	351,499					$	333,029					$	293,084

Equity loans and lines of credit totaled $17.0 million, representing 4.7% of total loans at December 31, 2012, a decrease of $2.6 million from $19.6 million at December 31, 2011.

Commercial and multi-family residential mortgage loans totaled $109.4 million and represented 30.4% of total loans at December 31, 2012, compared to $119.5 million, representing 33.8% of total loans at December 31, 2011. Construction loans totaled $4.1 million, representing 1.1% of total loans at December 31, 2012, compared to $5.0 million, representing 1.4% of total loans at December 31, 2011.

Commercial business loans, which consist of commercial loans not secured by real estate, totaled $998,000, representing 0.3% of total loans at December 31, 2012, compared to $1.1 million at December 31, 2011. The Bank also originates consumer loans secured by automobiles or passbook or certificate accounts. Consumer loans totaled $311,000 at December 31, 2012, compared to $399,000 at December 31, 2011.

~~Table of Contents~~Index

The following table sets forth ~~certain~~the composition ~~information~~of ~~at December 31, 2011 regarding~~ the ~~dollar~~Bank’s ~~amount of~~ loan ~~principal~~portfolio ~~repayments~~at ~~coming due during~~ the ~~periods~~dates indicated. The table does not include any estimate of prepayments, which significantly shorten the average life of all loans and may cause our actual repayment experience to differ from that shown below. Demand loans having no stated schedule of repayments and no stated maturity are reported as due in one year or less.

	One-to-Four Family Residential Mortgage Loans			Multi-Family Mortgage Loans			Equity Loans & Lines			Commercial Mortgage Loans
	At December 31,
	(Dollars in thousands)
	2012						2011						2010						2009						2008
Amounts due in:
	Percent			Amount			Percent			Amount			Percent			Amount			Percent			Amount			Percent
One year or less	$	67		$	-		$	386		$	3,933
	(Dollars in thousands)
More than one year to five years		1,956			4,057			4,089			31,554
Mortgage loans:
More than five years to ten years		21,715			13,305			8,590			61,572
One-to-four family residential	$	228,428			63.41	%	$	207,773			58.79	%	$	203,893			56.49	%	$	191,154			53.67	%	$	183,767		54.53	%
More than ten years to twenty years		72,334			909			6,532			4,060
Equity loans and lines of credit		16,995			4.72			19,597			5.55			23,112			6.40			25,891			7.27			30,425		9.03
More than twenty years		111,701			-			-			96
Commercial and multi-family residential		109,372			30.36			119,486			33.81			127,071			35.21			127,255			35.74			108,866		32.30
Total	$	207,773		$	18,271		$	19,597		$	101,215
Construction		4,117			1.14			5,016			1.42			4,948			1.37			9,736			2.73			11,204		3.32
Total mortgage loans		358,912			99.63			351,872			99.57			359,024			99.47			354,036			99.41			334,262		99.18
Other Loans:
Commercial loans		998			0.28			1,116			0.32			1,638			0.45			1,885			0.53			2,145		0.64
Consumer loans		311			0.09			399			0.11			288			0.08			223			0.06			601		0.18
Total loans		360,221			100.00	%		353,387			100.00	%		360,950			100.00	%		356,144			100.00	%		337,008		100.00	%
Less:
Allowance for loan losses		(4,031	)					(3,709	)					(3,672	)					(3,467	)					(2,924	)
Net deferred loan fees		(1,152	)					(1,186	)					(1,229	)					(1,178	)					(1,055	)
Loans, net	$	355,038					$	348,492					$	356,049					$	351,499					$	333,029

	Construction Mortgage Loans		Commercial Loans		Consumer Loans		Total Loans
	(Dollars in thousands)
Amounts due in:
One year or less	$	3,608	$	95	$	177	$	8,266
More than one year to five years		1,408		591		222		43,877
More than five years to ten years		-		430		-		105,612
More than ten years to twenty years		-		-		-		83,835
More than twenty years		-		-		-		111,797
Total	$	5,016	$	1,116	$	399	$	353,387

The following table sets forth the dollar amount of all loans at December 31, 2011 that are due after December 31, 2012 and have either fixed interest rates or floating or adjustable interest rates. The amounts shown below exclude the allowance for loan losses and net deferred loan fees.

	Fixed Rates		Floating or Adjustable Rates		Total
	(Dollars in thousands)
Real estate mortgages:
Residential
One-to-four family	$	197,263	$	10,443	$	207,706
Multi-family		2,741		15,530		18,271
Equity loans and lines		7,405		11,806		19,211
Commercial		39,153		58,129		97,282
Construction		-		1,408		1,408
Commercial loans		565		456		1,021
Consumer loans		-		222		222
Total	$	247,127	$	97,994	$	345,121

~~Table of Contents~~Index

~~Securities.~~ The ~~securities~~following table sets forth certain ~~portfolio~~information ~~consists~~at December 31, 2012 regarding the dollar amount of loan principal repayments coming due during the ~~following:~~periods indicated. The table does not include any estimate of prepayments, which significantly shorten the average life of all loans and may cause our actual repayment experience to differ from that shown below. Demand loans having no stated schedule of repayments and no stated maturity are reported as due in one year or less.

	At December 31,
	One-to-Four Family Residential Mortgage Loans		Equity Loans & Lines of Credit		Commercial and Multi-family Mortgage Loans		Construction Mortgage Loans
	2011				2010				2009
	(In thousands)
	Amortized Cost		Fair Value		Amortized Cost		Fair Value		Amortized Cost		Fair Value
Amounts due in:
	(In thousands)
One year or less	$	122	$	607	$	6,215	$	1,343
Securities available for sale:
More than one year to five years		1,980		4,338		35,909		2,774
Mutual funds	$	-	$	-	$	-	$	-	$	6,388	$	6,249
More than five years to ten years		25,297		7,068		64,287		—
Securities held to maturity:
More than ten years to twenty years		87,624		4,926		2,753		—
Mortgage-back securities	$	36,220	$	39,248	$	47,021	$	49,314	$	44,898	$	46,940
More than twenty years		113,405		56		208		—
Total	$	228,428	$	16,995	$	109,372	$	4,117

All mortgage-backed securities are backed by residential mortgage loans and are issued by U.S. government-sponsored enterprises. Other than mortgage-backed securities issued by U.S. government-sponsored enterprises, the Company had no investments in one issuer that had an aggregate book value in excess of 10% of our equity at December 31, 2011.

	Commercial Loans		Consumer Loans		Total Loans
	(In thousands)
Amounts due in:
One year or less	$	231	$	273	$	8,791
More than one year to five years		337		38		45,376
More than five years to ten years		430		—		97,082
More than ten years to twenty years		—		—		95,303
More than twenty years		—		—		113,669
Total	$	998	$	311	$	360,221

~~There~~The ~~were~~following notable ~~sales~~sets offorth ~~securities~~the ~~during~~dollar ~~the~~amount ~~year~~of ~~ended~~all loans at December 31, ~~2011.~~2012 ~~For~~that ~~the~~are ~~year~~due ~~ended~~after December 31, ~~2010,~~2013 ~~proceeds~~and ~~from~~have ~~the~~either ~~sale~~fixed ofinterest ~~securities~~rates ~~available~~or ~~for sale~~floating ~~amounted~~or toadjustable ~~$6,275,000,~~interest ~~which~~rates. ~~realized~~The aamounts ~~gross~~shown ~~loss~~below ofexclude ~~$267,000 and gross gains of $146,000. All of~~ the ~~Company’s~~allowance ~~investments in~~for ~~mutual~~loan ~~funds~~losses ~~were~~and ~~sold~~net indeferred ~~2010~~loan fees.

The following table sets forth the stated maturities and weighted average yields of debt securities at December 31, 2011. At December 31, 2011, we had no debt securities with maturities of ten years or less.

	Fixed Rates		Floating or Adjustable Rates		Total
	(In thousands)
Mortgage loans:
One-to-four family residential	$	218,182	$	10,124	$	228,306
Equity loans and lines of credit		5,140		11,248		16,388
Commercial and multi-family residential		44,343		58,814		103,157
Construction		—		2,774		2,774
Other loans:
Commercial loans		428		339		767
Consumer loans		—		38		38
Total	$	268,093	$	83,337	$	351,430

	More than Ten Years					Total
	Carrying Value		Weighted Average Yield			Carrying Value		Weighted Average Yield
	(Dollars in thousands)
Securities held to maturity:
Mortgage-backed securities	$	36,220		4.42	%	$	36,220		4.42	%

~~Table of Contents~~Index

~~Deposits~~Securities. ~~Newport Federal’s deposit base is comprised of demand deposits, money market and savings accounts and time deposits.~~ The ~~Bank considers demand deposits,~~securities ~~money~~portfolio ~~market~~consists and savings accounts to be core deposits. Deposits increased $3.7 million, or 1.4%, for the year ended December 31, 2011. The increase in deposits in 2011 resulted from a $3.2 million, or 1.4%, increase in NOW/Demand accounts, a $2.4 million, or 8.1%, increase in savings accounts and a $863,000, or 1.2%, increase in time deposits, offset by a $2.8 million, or 5.4%, decrease in money market accounts. Time deposits represented 26.6% of the Company’s total deposit balances at December 31, 2011, compared to 26.7% at December 31, 2010. NOW/Demand accounts represented 42.7% and 42.1% of the Company’s total deposit balances at December 31, 2011 and 2010, respectively.following:

	At December 31,
	2012				2011				2010
	Amortized Cost		Fair Value		Amortized Cost		Fair Value		Amortized Cost		Fair Value
	(In thousands)

Securities held to maturity:
Mortgage-back securities	$	22,307	$	24,506	$	36,220	$	39,248	$	47,021	$	49,314

There were no sales of securities during the years ended December 31, 2012 and 2011.

The following table sets forth the stated maturities and weighted average yields of debt securities at December 31, 2012. At December 31, 2012, we had no debt securities with maturities of ten years or less.

	More than Ten Years					Total
	Carrying Value		Weighted Average Yield			Carrying Value		Weighted Average Yield
	(Dollars in thousands)
Securities held to maturity:
Mortgage-backed securities	$	22,307		4.42	%	$	22,307		4.42	%

Deposits. Newport Federal’s deposit base is comprised of demand deposits, money market and savings accounts and time deposits. The Bank considers demand deposits, money market and savings accounts to be core deposits. Deposits increased $24.9 million, or 9.4%, for the year ended December 31, 2012. The increase in deposits in 2012 resulted from an $18.1 million, or 16.0%, increase in NOW/Demand accounts, a $6.3 million, or 19.5%, increase in savings accounts and a $5.1 million, or 7.2%, increase in time deposits, offset by a $4.6 million, or 9.4%, decrease in money market accounts. Time deposits represented 26.1% of the Company’s total deposit balances at December 31, 2012, compared to 26.6% at December 31, 2011. NOW/Demand accounts represented 45.3% and 42.7% of the Company’s total deposit balances at December 31, 2012 and 2011, respectively.

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

At December 31,

2011

2010

2009

2012

2011

2010

(In thousands)

Noninterest-bearing demand deposits

3949,~~868~~173

3739,~~026~~868

3437,~~520~~026

Interest-bearing demand deposits

7382,~~233~~059

7273,~~842~~233

7472,~~589~~842

Money market deposit accounts

4844,~~986~~404

5148,~~778~~986

4651,~~991~~778

Regular savings

3238,~~143~~418

2932,~~728~~143

2629,~~793~~728

Certificates of deposit

7075,~~539~~620

6970,~~676~~539

7969,~~053~~676

Total

~~264~~289,~~769~~674

~~261~~264,~~050~~769

261,~~946~~050

~~The~~At ~~following~~December ~~table~~31, ~~indicates~~2012, ~~the amount of jumbo~~ certificates of deposit byinclude ~~time~~$9.9 ~~remaining~~million ~~until~~of ~~maturity~~brokered ascertificates of ~~December 31, 2011~~deposit. ~~Jumbo~~Beginning ~~certificates~~in ofNovember ~~deposit~~2013, ~~require minimum~~and ~~deposits~~monthly ofthereafter, $~~100,000~~5.0 ~~The~~million of ~~Bank~~these ~~does~~accounts ~~not~~become ~~offer~~callable ~~special~~by ~~rates~~the ~~for jumbo certificates~~Bank.

Maturity Period	Certificates of Deposit
	In thousands)
Three months or less	$	4,532
Over three through six months		4,462
Over six through twelve months		7,942
Over twelve months		8,095
Total	$	25,031

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

The Company’s borrowings decreased by $1.5 million to $133.7 million at December 31, 2011, due to excess liquidity available as borrowings matured. Federal Home Loan Bank advances decreased by $6.2 million to $135.2 million during 2010. For additional information regarding our borrowings, see Note 7 to the Notes to Consolidated Financial Statements included in this Annual Report.

~~Table of Contents~~Index

~~Results~~The offollowing ~~Operations~~table ~~for~~indicates the ~~Years~~amount of ~~Ended~~jumbo certificates of deposit by time remaining until maturity as of December 31, 2012. Jumbo certificates of deposit require ~~2011~~minimum ~~and~~deposits ~~2010~~of $100,000. The Bank does not offer special rates for jumbo certificates.

Overview. The following table provides selected performance, capital and asset quality reatios for the years ended December 31, 2011 and 2010, expressed as percentages.

Maturity Period		Amount
	(In thousands)
Three months or less		$	3,083
Over three through six months			4,186
Over six through twelve months			5,705
Over twelve months			10,079
Total		$	23,053

	At or For the Years Ended December 31,
	2011			2010
Performance Ratios:
Return on average assets		0.32	%		0.40	%
Return on average equity		2.83			3.57
Interest rate spread (1)		3.49			3.50
Net interest margin (2)		3.69			3.72
Non-interest expense to average assets		3.07			3.02
Efficiency ratio (3)		80.64			78.96
Average interest-earning assets to average interest-bearing liabilities		112.26			112.22
Average equity to average assets		11.25			11.15
Capital Ratios (Bank Only):
Tangible capital		9.50			9.30
Leverage capital		9.50			9.30
Total risk-based capital		16.00			15.20
Asset Quality Ratios:
Allowance for loan losses as a percent of total loans (4)		1.05			1.02
Allowance for loan losses as a percent of nonperforming loans		194.19			3,400.00
Net charge-offs to average outstanding loans during the period		0.31			0.21
Non-performing loans as a percent of total loans (4)		0.54			0.03

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

The Company’s borrowings decreased by $30.9 million to $102.8 million at December 31, 2012, due to excess liquidity available as borrowings matured. For additional information regarding our borrowings, see Note 7 to the Notes to Consolidated Financial Statements included in this Annual Report.

Index

Results of Operations for the Years Ended December 31, 2012 and 2010

Overview. The following table provides selected performance, capital and asset quality ratios for the years ended December 31, 2012 and 2011, expressed as percentages.

	At or For the Years Ended December 31,
	2012			2011
Performance Ratios:
Return on average assets		0.34	%		0.32	%
Return on average equity		2.96			2.83
Interest rate spread (1)		3.21			3.49
Net interest margin (2)		3.38			3.69
Non-interest expense to average assets		2.80			3.07
Efficiency ratio (3)		79.98			80.64
Average interest-earning assets to average interest-bearing liabilities		112.81			112.26
Average equity to average assets		11.36			11.25

Capital Ratios (Bank Only):
Tangible capital		10.00			9.50
Leverage capital		10.00			9.50
Total risk-based capital		17.10			16.00

Asset Quality Ratios:
Allowance for loan losses as a percent of total loans (4)		1.12			1.05
Allowance for loan losses as a percent of nonperforming loans		186.62			194.19
Net charge-offs to average outstanding loans during the period		0.19			0.31
Non-performing loans as a percent of total loans (4)		0.60			0.54

(1)

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

(2)

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

(3) Represents non-interest expense divided by the sum of net interest income and non-interest income~~, excluding gains (losses) on sales of securities and impairment charges incurred~~.

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

Net income in ~~2011~~2012 was $1.56 million compared to $1.85 million in ~~2010~~2011. The ~~decrease~~increase was due to the $~~218~~102,000 decrease in the ~~Bank’s~~provision ~~net~~for ~~interest~~loan ~~income~~losses, the $~~165~~71,000 increase in ~~the~~non-interest ~~provision~~income, ~~for loan losses and~~ the $~~280~~961,000 ~~increase~~decrease in non-interest expenses, ~~partially~~and ~~offset by~~ the $~~203~~106,000 ~~increase~~ decrease in ~~non-interest~~the ~~income~~tax ~~and~~provision, partially offset by the $~~110,000~~1.1 million decrease in the ~~tax~~Company’s ~~provision~~net interest income.

Table of Contents

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

	Years Ended December 31,
	2011							2010							2009
	Average Balance		Interest and Dividends		Yield/ Cost			Average Balance		Interest and Dividends		Yield/ Cost			Average Balance		Interest and Dividends		Yield/ Cost
	(Dollars in thousands)
Assets:
Interest-earning assets:
Loans	$	353,495	$	19,176		5.42	%	$	350,613	$	20,100		5.73	%	$	346,022	$	20,287		5.86	%
Securities		41,892		2,041		4.87			47,260		2,383		5.04			55,054		2,709		4.92
Other interest-earning assets		9,299		48		0.52			8,992		23		0.26			10,043		12		0.12
Total interest-earning assets		404,686		21,265		5.25			406,865		22,506		5.53			411,119		23,008		5.60
Bank-owned life insurance		10,886							10,504							10,105
Noninterest-earning assets		39,138							35,340							28,329
Total assets	$	454,710						$	452,709						$	449,553
Liabilities and equity:
Interest-bearing liabilities:
Interest-bearing demand deposits	$	71,732		442		0.62		$	72,972		850		1.16		$	67,691		1,347		1.99
Savings accounts		31,003		43		0.14			28,244		62		0.22			25,783		69		0.27
Money market accounts		51,107		296		0.58			49,958		494		0.99			44,517		694		1.56
Certificates of deposit		70,355		969		1.38			75,000		1,114		1.49			82,807		2,199		2.66
Total interest-bearing deposits		224,197		1,750		0.78			226,174		2,520		1.11			220,798		4,309		1.95
Borrowings		136,305		4,581		3.36			136,378		4,834		3.54			139,601		5,238		3.75
Total interest-bearing liabilities		360,502		6,331		1.76			362,552		7,354		2.03			360,399		9,547		2.65
Demand deposits		38,874							35,387							31,954
Noninterest-bearing liabilities		4,187							4,299							4,309
Total liabilities		403,563							402,238							396,662
Equity		51,147							50,471							52,891
Total liabilities and equity	$	454,710						$	452,709						$	449,553
Net interest income			$	14,934						$	15,152						$	13,461
Interest rate spread						3.49	%						3.50	%						2.95	%
Net interest margin						3.69	%						3.72	%						3.27	%
Average interest-earning assets to average interest-bearing liabilities						112.26	%						112.22	%						114.07	%

~~Table of Contents~~Index

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

	Years Ended December 31,
	2012							2011
	Average Balance		Interest and Dividends		Yield/ Cost			Average Balance		Interest and Dividends		Yield/ Cost
	(Dollars in thousands)
Assets:
Interest-earning assets:
Loans	$	358,929	$	17,800		4.96	%	$	353,495	$	19,176		5.42	%
Securities		34,792		1,510		4.34			41,892		2,041		4.87
Other interest-earning assets		14,626		75		0.51			9,299		48		0.52
Total interest-earning assets		408,347		19,385		4.75			404,686		21,265		5.25

Bank-owned life insurance		11,262							10,886
Other noninterest-earning assets		44,525							39,138
Total assets	$	464,134						$	454,710

Liabilities and equity:
Interest-bearing liabilities:
Interest-bearing demand deposits	$	76,726		223		0.29		$	71,732		442		0.62
Savings accounts		35,186		28		0.08			31,003		43		0.14
Money market accounts		47,074		120		0.25			51,107		296		0.58
Certificates of deposit		69,529		819		1.18			70,355		969		1.38
Total interest-bearing deposits		228,515		1,190		0.52			224,197		1,750		0.78

Borrowings		133,467		4,390		3.29			136,305		4,581		3.36
Total interest-bearing liabilities		361,982		5,580		1.54			360,502		6,331		1.76

Noninterest-bearing demand deposits		44,078							38,874
Other noninterest-bearing liabilities		5,332							4,187
Total liabilities		411,392							403,563

Equity		52,742							51,147
Total liabilities and equity	$	464,134						$	454,710

Net interest income			$	13,805						$	14,934
Interest rate spread						3.21	%						3.49	%
Net interest margin						3.38	%						3.69	%
Average interest-earning assets to average interest-bearing liabilities						112.81	%						112.26	%

Index

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

	2011 Compared to 2010
	2012 Compared to 2011
	Increase (Decrease) Due to
	Volume			Rate			Net
	(Dollars in thousands)
	(In thousands)
Interest income:
Loans	$	~~164~~291		$	(1,~~088~~667	)	$	(~~924~~1,376	)
Securities		(~~264~~323	)		(78208	)		(~~342~~531	)
Other interest-earning assets		127			24—			2527
Total interest-earning assets		(995	)		(1,~~142~~875	)		(1,~~241~~880	)
Interest expense:
Deposits		~~(22~~33	)		(~~748~~593	)		(~~770~~560	)
Borrowings		(394	)		(~~250~~97	)		(~~253~~191	)
Total interest-bearing liabilities		(2561	)		(~~998~~690	)		(~~1,023~~751	)
Change in net interest income	$	~~(74~~56	)	$	(~~144~~1,185	)	$	(~~218~~1,129	)

Net Interest Income. Net interest income for the year ended December 31, ~~2011~~2012 was $1413.98 million, compared to $1514.29 million for the year ended December 31, ~~2010,~~ 2011, a decrease of 17.46%, primarily due to a 129 basis point decrease in the Company’s net interest rate spread. The decrease in in net interest income ~~during 2011~~ was primarily due to a decrease in the interest earned on loans and securities, partially offset by a decrease in the interest expense from deposits and borrowings. The yield on interest-earning assets decreased to 54.2575% in ~~2011~~2012 from 5.5325% in ~~2010~~2011, a decrease of 2850 basis points. This decline in the yield was partially offset by an increase in the average balance of interest-earning assets, resulting in a decrease of $1.9 million of income earned on such assets. The cost of interest-bearing liabilities decreased to 1.7654% in ~~2011~~2012 from 21.0376% in ~~2010~~ 2011, a decrease of 2722 basis points. The average ~~cost~~balance of interest-bearing deposits ~~decreased~~increased by$4.3 33million, ~~basis~~or ~~points~~1.9%, for the year ended December 31, 2012, as athe ~~result~~average cost of interest-bearing deposits decreased by 26 basis points in the ~~continued~~year ~~low~~ended ~~interest~~December ~~rate~~31, ~~environment~~2012, resulting in ~~2011~~a $560,000 decrease in interest expense on such deposits. With the short-term market interest rates at their current all-time low levels, customers continue to show a preference for higher-yielding core accounts and short-term time deposits, rather than the longer-term time deposit accounts. The average balance of borrowings decreased $~~73,000~~2.8 million in ~~2011~~2012 and the low interest rate environment contributed ~~towards~~ to the $~~253~~191,000, or 187 basis points, decrease in total cost of borrowings from ~~2010~~2011 to ~~2011~~2012. When older and higher-cost borrowings matured, newer and lower-cost borrowings were purchased, which contributed ~~towards~~to the decrease in the cost of borrowings during ~~2011~~2012.

Provision for Loan Losses. The loan loss provision for the years ended December 31, ~~2011~~2012 and December 31, ~~2010~~2011 was $1.10 million and $~~956~~1.1 million,~~000,~~ respectively. ~~The~~ The provision ~~increased~~decreased primarily due to changes in the loan portfolio mix, an increase in ~~loan~~recoveries and a decrease in charge-offs, offset by loan growth and ~~problem~~an ~~loans,~~increase ~~partially~~in ~~offset~~allocated byreserves afor ~~decrease~~impaired inloans ~~the~~that ~~loan portfolio~~have been restructured.

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

	Years Ended December 31,
	2011		2010			%Change
	2012		2011			%Change
	(Dollars in thousands)
	(In thousands)
Customer service fees	$	1,~~929~~880	$	1,~~868~~929			3(2.35	)%
Net loss on sale of securities available for sale		-		(121	)		100.0
Bank-owned life insurance		532		383			38.9
Bank-owned life insurance		383		387			(1.0	)
Miscellaneous		45		74			(39.2	)
Miscellaneous		74		49			51.0
Total	$	2,457	$	2,386			3.0	%
Total	$	2,386	$	2,183			9.3	%

Non-interest income for 2011 totaled $2.4 million, an increase of $203,000, or 9.3%, compared to 2010. The increase in non-interest income is primarily due to the $61,000 increase in fees earned on checking accounts and no loss on sales of securities available for sale recorded in 2011, as compared to the $121,000 net realized loss on sales

Table of Contents

of securities available for sale recorded in 2010. The loss on sales of securities available for sale in 2010 was due to the sale of the Bank’s entire holdings in one mutual fund, which resulted in a $267,000 realized loss, partially offset by gains on sales of other securities available for sale.

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

	Years Ended December 31,
	2011			2010			% Change
	(Dollars in thousands)
Salaries and employee benefits	$	7,699		$	7,651			0.6	%
Occupancy and equipment		2,185			1,873			16.7
Data processing		1,564			1,503			4.1
Professional fees		535			458			16.8
Marketing		711			959			(25.9	)
Foreclosed real estate		182			64			184.4
FDIC insurance		343			459			(25.3	)
All other		748			720			3.9
Total	$	13,967		$	13,687			2.0
Efficiency ratio		80.64	%		78.96	%		2.1	%

Total non-interest expenses for 2011 increased to $14.0 million from $13.7 million for 2010, an increase of 2.0%. The increase between the two years is attributable to an increase in salaries and employee benefits, occupancy and equipment expense, data processing fees, professional fees, foreclosed real estate and other general and administrative costs, offset by decreases in marketing fees and FDIC insurance costs. The increase in salaries and benefits is primarily due to an increase in retirement and health benefit costs, partially offset by 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 2010 compared to 2011. The increase in occupancy and equipment expense and data processing fees is due to the overall increase in operating costs and an increase in depreciation expense in 2011 as a result of a relocation of an existing branch in the beginning of 2011. The increase in the foreclosed real estate expense is a result of an overall increase in foreclosed real estate assets. The decrease in marketing costs is a result of management’s decision to reduce marketing expenditures in 2011. The decrease in FDIC insurance was a result of the FDIC regulation that changed its assessment system for deposit insurance coverage from one based on domestic deposits to one based on consolidated total average assets less tangible equity and revised the assessment rate schedule. This regulation, effective for the quarter ended June 30, 2011, resulted in a lower expense in deposit insurance coverage in 2011 compared to 2010.

Income Tax Expense. The income tax expense for 2011 was $782,000 compared to the income tax expense of $892,000 for 2010. The effective tax rates were 35.0% and 33.1% in 2011 and 2010, respectively. The effective tax rate increase is due primarily to the decrease in the charitable contribution deduction from what was estimated in 2010. The effective tax rates in 2011 and 2010 also include the non-deductible compensation expense recorded for a portion of the incentive stock options, partially offset by non-taxable BOLI income.

The deferred tax assets applicable to loss carry forwards relating to the deduction for the donation to the charitable foundation in 2006 are recoverable, only to the extent that 10% pre-tax of income exceeds the deduction during the five-year carryforward period. At December 31, 2011, this loss carryforward expired and the Company reversed the valuation allowance of $868,000 against the deferred tax asset related to this loss carryforward. In addition, securities available for sale that were previously impaired were sold in 2010, creating a capital loss carryover and a related valuation allowance of $304,000 at December 31, 2011 and 2010, respectively. For additional information regarding deferred tax assets, see Note 8 to the Notes to Consolidated Financial Statements included in this Annual Report.

~~Table of Contents~~Index

Non-interest income for 2012 totaled $2.5 million, an increase of $71,000, or 3.0%, compared to 2011. The increase in non-interest income is primarily due to the $149,000 increase in bank-owned life insurance income, due to $164,000 in income relating to death benefits in 2012, partially offset by a decrease in customer service fees earned on checking accounts.

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

	Years Ended December 31,
	2012			2011			%Change
	(In thousands)

Salaries and employee benefits	$	6,885		$	7,699			(10.6	)%
Occupancy and equipment		2,192			2,185			0.3
Data processing		1,682			1,564			7.5
Professional fees		670			535			25.2
Marketing		577			711			(18.8	)
FDIC insurance		339			343			(1.2	)
All other		661			930			(28.9	)
Total	$	13,006		$	13,967			(6.9	)

Efficiency ratio		79.98	%		80.64	%		(0.8	)%

Total non-interest expenses for 2012 decreased to $13.0 million from $14.0 million for 2011, a decrease of 6.9%. The decrease in total non-interest expense between the two years is attributable to decreases in salaries and employee benefits, marketing costs and other general and administrative expenses, partially offset by increases in data processing costs and professional fees. The decrease in salaries and benefits 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 2011 compared to 2012. The decrease in marketing costs is a result of a continued effort by management to reduce advertising and marketing expenses. The decrease in other general and administrative expenses is primarily due to decreases in foreclosed real estate and stationery and office supply expenses.

Income Tax Expense. The income tax expense for 2012 was $676,000 compared to the income tax expense of $782,000 for 2011. The effective tax rates were 30.2% and 35.0% in 2012 and 2011, respectively. The effective tax rates in 2012 and 2011 include the non-deductible compensation expense recorded for a portion of the incentive stock options, partially offset by non-taxable BOLI income. The effective tax rate decrease is primarily due to higher non-taxable BOLI income and lower state income taxes in 2012 compared to 2011.

Risk Management

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

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

Index

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

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

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

	At December 31,
	2011			2010			2009			2008			2007
	2012			2011			2010			2009			2008
	(Dollars in thousands)
Nonaccrual loans:
One-to-four family real estate	$	1,052		$	108		$	-		$	-		$	-
One-to-four family residential	$	518		$	1,052		$	108		$	—		$	—
Multi-family real estate		858			-			-			-			-
Equity loans and lines of credit		56			—			—			—			—
Commercial real estate		-			-			860			-			908
Commercial and multi-family residential		1,586			858			—			860			—
Total		12,~~910~~160			~~108~~1,910			~~860~~108			-860			~~908~~—
Accruing loans past due 90 days or more		-—			-—			-—			-—			-—
Total nonperforming loans		~~1,910~~			~~108~~1,910			~~860~~108			-860			~~908~~—
Foreclosed real estate		~~839~~—			~~100~~839			-100			-—			-—
Other nonperforming assets		-—			-—			-—			-—			-—
Total nonperforming assets	$	2,~~749~~160		$	~~208~~2,749		$	~~860~~208		$	-860		$	~~908~~—
Total nonperforming loans to total loans		0.55	%		0.03	%		0.24	%		0.00	%		0.31	%
Performing troubled debt restructurings		3,116			—			—			—			—
Total nonperforming loans to total assets		0.42	%		0.02	%		0.19	%		0.00	%		0.25	%
Total non-performing assets
Total nonperforming assets to total assets		0.61	%		0.05	%		0.19	%		0.00	%		0.25	%
and performing troubled
debt restructurings	$	5,276		$	2,749		$	208		$	860		$	—
Total nonperforming loans to total loans		0.60	%		0.55	%		0.03	%		0.24	%		0.00	%
Total nonperforming loans to total assets		0.48	%		0.42	%		0.02	%		0.19	%		0.00	%
Total nonperforming assets to total assets		0.48	%		0.61	%		0.05	%		0.19	%		0.00	%

34Gross interest income that would have been recorded for 2012 had nonaccrual loans been current according to their original terms, amounted to $105,000. The amount of interest income on such loans on a cash basis that was included in net income in 2012 was $94,000.

~~Table~~Nonaccrual loans at December 31, 2012, consist of ~~Contents~~two one-to-four family residential mortgage loans, one equity loan and four commercial and multi-family residential mortgage loans. There are no losses expected on these loans.

Gross interest income that would have been recorded for 2011 had nonaccruing loans been current according to their original terms, amounted to $91,000. The amount of interest income on such loans that was included in net income in 2011 was $58,000.35

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

Nonaccrual loans at December 31, 2011, consist of two one-to-four family residential mortgages and one multi-family residential real estate mortgage. There are no losses expected on these loans.

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

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

	At December 31,
	2011		2010		2009
	2012		2011		2010
	(Dollars in thousands)
Special mention loans	$	10,~~294~~417	$	10,~~030~~294	$	610,~~242~~030
Substandard loans		610,~~782~~908		36,~~204~~782		43,~~570~~204
Substandard securities		-—		-—		~~3,582~~—
Doubtful assets		-—		-—		-—
Loss assets		-—		-—		-—
Total classified assets	$	1721,~~076~~325	$	1317,~~234~~076	$	1413,~~394~~234

At December 31, ~~2011~~2012, loans classified as substandard, ~~which~~consist ~~the~~of ~~Company~~twelve ~~considers~~commercial toand bemulti-family ~~potential~~residential ~~problem~~mortgage loans, ~~consist~~two ofone-to-four ~~six~~family ~~commercial~~residential ~~real~~mortgage loans ~~estate~~and ~~mortgages~~one equity loan. Other than disclosed in the above tables, ~~two~~there are no other loans at December 31, 2012 that management ~~multi-family~~has ~~residential~~doubts ~~real~~about ~~estate~~the ~~mortgages~~ability ~~and~~of ~~two~~the ~~one-~~borrowers to~~-four~~ ~~family~~comply ~~residential~~with ~~real~~the ~~estate~~present ~~mortgages~~loan repayment terms.

35Troubled Debt Restructurings. A modified loan is considered to be a troubled debt restructuring (TDR) when two conditions are met: 1) the borrower is experiencing financial difficulties and 2) the modification constitutes a concession. These concessions include modifications of the terms of the debt such as reduction of the stated interest rate other than normal market rate adjustments, extension of maturity dates, or reduction of principal balance or accrued interest. The decision to restructure a loan, versus aggressively enforcing the collection of the loan, may benefit the Company by increasing the ultimate probability of collection.

~~Table~~The Company’s policy is to place all TDR loans on non-accrual status for a minimum period of ~~Contents~~three months, if they were performing to the terms of their original loan. If the loan was non-accrual status prior to the restructuring, the TDR loan is placed on non-accrual status for a minimum period of six months. If the loan was in accruing status prior to the restructuring, the TDR loan is placed on non-accrual status for a minimum period of three months. Loans qualify for return to accrual status once they have demonstrated performance with the restructured terms of the loan agreement for a minimum of three to six months. Commercial TDRs are evaluated on a case-by-case basis. Initially, all TDRs are reported as impaired. Generally, a TDR is classified as an impaired loan and a TDR for the remaining life of the loan. Impaired classification may be removed if the borrower demonstrates compliance with the modified terms and the restructuring agreement specifies an interest rate equal to that which would be provided to a borrower with similar credit at the time of restructuring.

As a result of weakened economic conditions, the Company experienced troubled debt restructuring events involving commercial and residential borrowers during 2012.

Index

The following table presents loans that have been restructured as TDRs at December 31, 2012:

	(In thousands)
Mortgage loans:
One-to-four family residential	$	518
Equity loans and lines of credit		56
Commercial and multi-family residential		3,493
Total	$	4,067

There were no troubled debt restructurings at December 31, 2011 and 2010.

Gross interest income that would have been recorded in 2012 had our troubled debt restructurings been current in accordance with their original terms was $225,000. Interest income recognized on such loans for 2012 was $203,000.

For additional information and discussion regarding our TDRs, see Note 4 to the Notes to Consolidated Financial Statements included in this Annual Report.

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

	At December 31,
	2011						2010						2009
	2012						2011						2010
	30-59 Days Past Due			60-89 Days Past Due			30-59 Days Past Due			60-89 Days Past Due			30-59 Days Past Due			60-89 Days Past Due
	(Dollars in thousands)
Real estate mortgage loans:
Mortgage loans:
Residential
One-to-four family residential	$	1,075		$	—		$	149		$	690		$	220		$	—
One-to-four family	$	149		$	690		$	220		$	-		$	229		$	-
Equity loans and lines of credit		—			—			57			150			—			—
Equity loans and lines		57			150			-			-			146			-
Commercial and multi-family residential		—			—			199			—			618			—
Commercial		199			-			618			-			-			-
Total	$	1,075		$	—		$	405		$	840		$	838		$	—
Total	$	405		$	840		$	838		$	-		$	375		$	-
Delinquent loans to total loans		0.30	%		0.00	%		0.11	%		0.24	%		0.23	%		0.00	%
Delinquent loans to total loans		0.11	%		0.24	%		0.23	%		0.00	%		0.11	%		0.00	%

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

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

Allocated Allowance on Identified Impaired Loans. Newport Federal identifies impaired loans by reviewing all delinquent loans, classified loans and other loans that management may have concerns about collectability. A loan is considered impaired when, based on current information and events, it is probable that the ~~Company~~Bank will be unable to collect the scheduled payments of principal or interest when due ~~according~~ according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Impairment is measured on a loan by loan basis by either the present value of expected future cash flows discounted at the loan’s effective interest rate or the fair value of the collateral if the loan is collateral dependent.

Index

General Allowance on the Remainder of the Loan Portfolio. Newport Federal establishes a general allowance for loans that are not impaired loans, to recognize the inherent losses associated with lending activities. This general allowance is determined by segregating the loans by loan type and risk classification and assigning allowance percentages to each category. The percentages are adjusted for significant changes in factors that, in management’s judgment, affect the collectability of the portfolio as of the evaluation date. These significant factors may include changes in lending policies and procedures, changes in existing general economic and business conditions affecting our primary lending areas, credit quality trends, collateral value, loan volumes and concentrations, seasoning of the loan portfolio, recent loss experience in particular segments of the portfolio, duration of the current business cycle and bank regulatory examination results. The applied loss factors are reevaluated quarterly to ensure their relevance in the current economic environment.

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

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

36At December 31, 2012 and 2011, the allowance for loan losses represented 1.12% and 1.05% of total loans, respectively. At December 31, 2012, $282,000 of the allowance was allocated to impaired loans that have been restructured. No portion of the allowance was allocated to impaired loans at December 31, 2011. The allowance for loan losses was $4.0 million and $3.7 million at December 31, 2012 and December 31, 2011, respectively. The increase in the allowance for loan losses as a percentage of the loan portfolio was primarily due to the allowance allocated to impaired loans and additional general reserves provided due to an increase in non-impaired classified loans which, although currently performing, represent increased risk. The Bank currently does not originate sub-prime residential mortgage loans. There are $21.3 million of classified and criticized loans that are under watch by management. Total classified and criticized loans consist of $10.9 million in the substandard category and $10.4 million in the special mention category. The special mention category consists of $10.4 million of commercial real estate loans and one $22,000 commercial loan. The substandard category consists of $10.3 million of commercial real estate loans, $518,000 of one-to-four family residential real estate loans and $56,000 of a home equity loan. Total classified and criticized loans represent 5.9% of the Company’s total gross loans.

Table of Contents

At December 31, 2011 and 2010, the allowance for loan losses represented 1.05% and 1.02% of total loans, respectively. No portion of the allowance was allocated to impaired loans at December 31, 2011 or 2010. The allowance for loan losses was $3.7 million at December 31, 2011 and December 31, 2010. The increase in the allowance for loan losses as a percentage of the loan portfolio was primarily due to additional general reserves provided due to an increase in classified loans that, although currently performing, represent increased risk. The Bank currently does not originate sub-prime residential mortgage loans. There are $17.1 million of classified and criticized loans that are under watch by management. Total classified and criticized loans consist of $6.8 million in the substandard category and $10.3 million in the special mention category. The special mention category consists of $8.3 million of commercial real estate loans, $1.9 million of multi-family real estate loans and $44,000 of commercial loans. The substandard category consists of $4.6 million of commercial real estate loans, $1.1 million of multi-family real estate loans and $1.1 million of one-to-four family residential real estate loans. Total classified and criticized loans represent 4.8% of the Company’s total gross loans.

Table of Contents

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

	At December 31,
	2011								2010
	Amount		% of Allowance to Total Allowance			% of Loans in Category To Total Loans			Amount		% of Allowance to Total Allowance			% of Loans in Category To Total Loans
	(Dollars in thousands)
Real estate mortgage:
Residential
One-to-four family	$	1,070		28.85	%		58.79	%	$	1,028		28.00	%		56.49	%
Multi-family		339		9.50			5.17			377		10.27			6.25
Equity loans and lines		147		3.96			5.55			173		4.71			6.40
Commercial		2,034		54.49			28.64			1,976		53.81			28.96
Construction		94		2.53			1.42			89		2.42			1.37
Commercial		19		0.51			0.32			25		0.68			0.45
Consumer		6		0.16			0.11			4		0.11			0.08
Total allowance for loan losses	$	3,709		100.00	%		100.00	%	$	3,672		100.00	%		100.00	%

	At December 31,
	2009								2008
	Amount		% of Allowance to Total Allowance			% of Loans in Category To Total Loans			Amount		% of Allowance to Total Allowance			% of Loans in Category To Total Loans
	(Dollars in thousands)
Real estate mortgage:
Residential
One-to-four family	$	956		27.57	%		53.67	%	$	916		31.33	%		54.53	%
Multi-family		338		9.75			6.33			260		8.89			5.16
Equity loans and lines		142		4.10			7.27			167		5.71			9.03
Commercial		1,833		52.87			29.42			1,372		46.92			27.14
Construction		167		4.82			2.73			168		5.75			3.32
Commercial		28		0.81			0.52			32		1.09			0.64
Consumer		3		0.08			0.06			9		0.31			0.18
Total allowance for loan losses	$	3,467		100.00	%		100.00	%	$	2,924		100.00	%		100.00	%

	At December 31,
	2007
	Amount		% of Allowance to Total Allowance			% of Loans in Category To Total Loans
	(Dollars in thousands)
Real estate mortgage:
Residential
One-to-four family	$	835		34.80	%		57.08	%
Multi-family		137		5.71			3.20
Equity loans and lines		170		7.09			10.44
Commercial		1,096		45.69			25.51
Construction		136		5.67			3.18
Commercial		19		0.79			0.44
Consumer		6		0.25			0.15
Total allowance for loan losses	$	2,399		100.00	%		100.00	%

~~Table of Contents~~Index

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

	At December 31,
	2012								2011
	Amount		% of Allowance to Total Allowance			% of Loans in Category To Total Loans			Amount		% of Allowance to Total Allowance			% of Loans in Category To Total Loans
	(Dollars in thousands)
Mortgage loans:
One-to-four family residential	$	1,212		30.07	%		63.41	%	$	1,070		28.85	%		58.79	%
Equity loans and lines of credit		134		3.32			4.72			147		3.96			5.55
Commercial and multi-family residential		2,589		64.23			30.36			2,373		63.99			33.81
Construction		76		1.89			1.14			94		2.53			1.42
Commercial		15		0.37			0.28			19		0.51			0.32
Consumer		5		0.12			0.09			6		0.16			0.11
Total allowance for loan losses	$	4,031		100.00	%		100.00	%	$	3,709		100.00	%		100.00	%

	At December 31,
	2010								2009
	Amount		% of Allowance to Total Allowance			% of Loans in Category To Total Loans			Amount		% of Allowance to Total Allowance			% of Loans in Category To Total Loans
	(Dollars in thousands)
Mortgage loans:
One-to-four family residential	$	1,028		28.00	%		56.49	%	$	956		27.57	%		53.67	%
Equity loans and lines of credit		173		4.71			6.40			142		4.10			7.27
Commercial and multi-family residential		2,353		64.08			35.21			2,171		62.62			35.74
Construction		89		2.42			1.37			167		4.82			2.73
Commercial		25		0.68			0.45			28		0.81			0.53
Consumer		4		0.11			0.08			3		0.08			0.06
Total allowance for loan losses	$	3,672		100.00	%		100.00	%	$	3,467		100.00	%		100.00	%

	At December 31,
	2008
	Amount		% of Allowance to Total Allowance			% of Loans in Category To Total Loans
	(Dollars in thousands)
Mortgage loans:
One-to-four family residential	$	916		31.33	%		54.53	%
Equity loans and lines of credit		167		5.71			9.03
Commercial and multi-family residential		1,632		55.81			32.30
Construction		168		5.75			3.32
Commercial		32		1.09			0.64
Consumer		9		0.31			0.18
Total allowance for loan losses	$	2,924		100.00	%		100.00	%

Index

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

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

	Years Ended December 31,
	2011			2010			2009			2008			2007
	2012			2011			2010			2009			2008
	(Dollars in thousands)
Balance at beginning of year	$	3,~~672~~709		$	3,~~467~~672		$	23,~~924~~467		$	2,~~399~~924		$	12,~~973~~399
Provision for loan losses		1,~~121~~019			~~956~~1,121			~~593~~956			~~568~~593			~~426~~568
Charge offs:
Real estate mortgage:
Mortgage loans:
Residential
One-to-four family residential		—			120			—			—			—
One-to-four family		120			-			-			-			-
Equity loans and lines of credit		25			71			124			50			40
Multi-family		608			170			-			-			-
Commercial and multi-family residential		752			867			639			—			—
Equity loans and lines		71			124			50			40			-
Commercial loans		—			37			6			—			—
Commercial		259			469			-			-			-
Consumer loans		—			—			3			—			7
Commercial loans		37			6			-			-			-
Total charge-offs		777			1,095			772			50			47
Consumer loans		-			3			-			7			-
Total charge-offs		1,095			772			50			47			-
Recoveries:
Real estate mortgage:
Mortgage loans:
Residential
One-to-four family residential		—			—			—			—			—
One-to-four family		-			-			-			-			-
Equity loans and lines of credit		—			—			21			—			—
Multi-family		-			-			-			-			-
Commercial and multi-family residential		80			9			—			—			—
Equity loans and lines		-			21			-			-			-
Commercial loans		—			2			—			—			—
Commercial		9			-			-			-			-
Consumer loans		—			—			—			—			4
Commercial loans		2			-			-			-			-
Total recoveries		80			11			21			—			4
Consumer loans		-			-			-			4			-
Net charge-offs		697			1,084			751			50			43
Total recoveries		11			21			-			4			-
Balance at end of year	$	4,031		$	3,709		$	3,672		$	3,467		$	2,924
Net charge-offs		1,084			751			50			43			-
Net charge-offs to average loans outstanding during the year		0.19	%		0.31	%		0.22	%		0.01	%		0.01	%
Balance at end of year	$	3,709		$	3,672		$	3,467		$	2,924		$	2,399
Net charge-offs to average loans outstanding during the year		0.31	%		0.22	%		0.01	%		0.01	%		0.00	%

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

Table of Contents

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

Quantitative Aspects of Market Risk. The Company uses an interest rate sensitivity analysis prepared by the OCC to review our level of interest rate risk. This analysis measures interest rate risk by computing changes in net portfolio value of our cash flows from assets, liabilities and off-balance sheet items in the event of a range of assumed changes in market interest rates. Net portfolio value represents the market value of portfolio equity and is equal to the market value of assets minus the market value of liabilities, with adjustments made for off-balance sheet items. This analysis assesses the risk of loss in market risk sensitive instruments in the event of a sudden and sustained 50 to 300 basis point increase or 50 to 100 basis point decrease in market interest rates with no effect given to any steps that we might take to counter the effect of that interest rate movement. Newport Bancorp measures interest rate risk by modeling the changes in net portfolio value over a variety of interest rate scenarios.40

The following table presents the change in the net portfolio value at December 31, 2011, that would occur in the event of an immediate change in interest rates based on OCC assumptions, with no effect given to any steps that we might take to counteract that change.Index

Basis Point (“bp”)	Net Portfolio Value						Net Portfolio Value as % of Portfolio Value of Assets
Change in Rates	Amount		Change		% Change		NPV Ratio			Change (bp)
	(Dollars in thousands)
300	$	45,926	$	-12,577		-21		9.97	%		-210
200		53,313		-5,189		-9		11.30			-76
100		58,006		-496		-1		12.08			1
50		58,583		80		0		12.13			6
0		58,502		0		0		12.07			0
(50)		57,337		-1,165		-2		11.81			-26
(100)		56,276		-2,227		-4		11.58			-49

Quantitative Aspects of Market Risk. The Company uses an interest rate sensitivity analysis prepared by the OCC 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. Newport Bancorp measures interest rate risk by modeling the changes in EVE over a variety of interest rate scenarios.

The following table presents the change in our net EVE at November 30, 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 Company expects that its net EVE at December 31, 2012 is consistent with the table below.

Basis Point (“bp”)	Net EVE								Net EVE as % of Economic Value of Assets
Change in Rates	Amount		Change			% Change			EVE Ratio			Change (bp)
	(Dollars in thousands)

400	$	45,209	$	(13,191	)		(22.6	)		10.88	%		(175	)
300		48,632		(9,768	)		(16.7	)		11.38			(125	)
200		53,276		(5,124	)		(8.8	)		12.11			(52	)
100		56,951		(1,449	)		(2.5	)		12.60			(3	)
0		58,400		0			0			12.63			0
(100)		50,319		(8,081	)		(13.8	)		10.85			(178	)

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

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

Table of Contents

The table below sets forth, as of November 30, 2011, the estimated changes in Newport Bancorp’s net interest income that would result from the designated instantaneous changes in the U.S. Treasury yield curve. Computations of prospective effects of hypothetical interest rate changes are based on numerous assumptions including relative levels of market interest rates, loan prepayments and deposit decay, and should not be relied upon as indicative of actual results.

	% Change in Estimated Net Interest Income Over the Next 12 Months	% Change in Estimated Net Interest Income Over Months 13-24
200 basis point increase in rates	0.1%	(3.8)%
Flat interest rates	0.0%	1.4%
100 basis point decrease in rates	0.2%	(0.6)%

As indicated in the table above, the result of an immediate 200 basis point parallel increase in interest rates is estimated to increase net interest income by 0.1% over a 12-month horizon, and decrease net interest income by 3.8% for months 13-24, when compared to the flat rate scenario, which assumes no increase in interest-bearing checking rates except for high balance interest bearing checking which increase 75 basis points (BP), an increase in savings rates of 50-75 BP and an increase in money market rates of 150 basis points. These assumptions are based on the Bank’s past experience with the changes in rates paid on these non-maturity deposits coincident with changes in market interest rates. The estimated change in net interest income from the flat rate scenario for a 100 basis point parallel decline in the level of interest rates is an increase of 0.2% over the 12 month horizon and a decrease of 0.6% for months 13-24, which assumes no decrease in interest-bearing checking rates, except for high balance accounts which decrease 5 BP, savings rates decreasing 3-5 BP and a decrease in money market rates of 25-38 basis points. These assumptions are based on the Bank’s past experience with the changes in rates paid on these non-maturity deposits coincident with changes in market interest rates.

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

~~Table of Contents~~Index

The table below ~~shows~~sets ~~Newport~~forth, ~~Bancorp’s interest~~as ~~rate~~of ~~sensitivity gap position at December 31~~November 30, ~~2011~~2012, ~~indicating~~ the ~~amount~~estimated ofchanges ~~interest-earning assets~~in ~~and~~Newport Bancorp’s net interest~~-bearing~~ ~~liabilities~~income that ~~are~~would ~~anticipated~~result tofrom ~~mature~~the ordesignated ~~reprice~~instantaneous changes in ~~each of~~ the ~~future~~U.S. Treasury ~~time~~yield ~~periods shown~~curve. ~~Generally, these~~Computations ~~assets~~of ~~and~~prospective ~~liabilities~~effects ~~are~~of ~~shown~~hypothetical ininterest ~~the~~rate ~~table~~changes ~~based~~are based on ~~the~~numerous ~~earlier~~assumptions ofincluding ~~the~~relative ~~time~~levels ~~remaining~~of tomarket ~~repricing~~interest ~~or contractual maturity. However~~rates, ~~savings,~~loan ~~money~~prepayments ~~market deposit~~ and ~~interest bearing~~ deposit ~~accounts~~decay, ~~are~~and ~~assumed~~should tonot be ~~have~~relied anupon ~~annual~~as ~~rate~~indicative of ~~withdrawal~~actual ~~(decay rate) of 10%~~results.

	At December 31, 2011
	% Change in Estimated Net Interest Income Over the Next 12 Months		% Change in Estimated Net Interest Income Over Months 13-24
	Up to One Year			More than One Year to Two Years			More than Two Years to Three Years			More than Three Years to Five Years			More than Five Years			Total
200 basis point increase in rates	(0.7)%		(5.3)%
	(Dollars in thousands)
Flat interest rates	0%		(4.0)%
Interest-earning assets:
100 basis point decrease in rates	(0.1)%		(9.4)%
Loans	$	8,266		$	8,949		$	7,524		$	27,404		$	301,244		$	353,387
Securities		-			22			-			-			36,198			36,220
Short-term investments		11,335			-			-			-			-			11,335
Total interest-earning assets		19,601			8,971			7,524			27,404			337,442			400,942
Interest-bearing liabilities:
Savings deposits		3,214			2,893			2,604			2,343			21,089			32,143
Money market deposits		4,898			4,409			3,968			3,571			32,140			48,986
Interest-bearing demand deposits		7,323			6,591			5,932			5,339			48,048			73,233
Certificates of deposits		50,654			4,984			1,670			9,582			3,649			70,539
Borrowings		36,009			32,000			10,500			29,687			25,500			133,696
Total interest-bearing liabilities		102,098			50,877			24,673			50,522			130,426			358,596
Interest rate sensitivity gap	$	(82,497	)	$	(41,906	)	$	(17,149	)	$	(23,118	)	$	207,016		$	42,346
Interest rate sensitivity gap as a % of total assets		(18.18	)%		(9.23	)%		(3.78	)%		(5.09	)%		45.61	%
Cum. interest rate sensitivity gap	$	(82,497	)	$	(124,403	)	$	(141,552	)	$	(164,670	)	$	42,346
Cum. interest rate sensitivity gap as a % of total assets		(18.18	)%		(27.41	)%		(31.19	)%		(36.28	)%		9.33	%

As indicated in the table above, the result of an immediate 200 basis point parallel increase in interest rates is estimated to decrease net interest income by 0.7% over a 12-month horizon, and decrease net interest income by 5.3% for months 13-24, when compared to the flat rate scenario, which assumes no increase in interest-bearing checking rates except for high balance interest bearing checking which increase 75 basis points (BP), an increase in savings rates of 50-75 BP and an increase in money market rates of 150 basis points. These assumptions are based on the Bank’s past experience with the changes in rates paid on these non-maturity deposits coincident with changes in market interest rates. The estimated change in net interest income from the flat rate scenario for a 100 basis point parallel decline in the level of interest rates is a decrease of 0.1% over the 12 month horizon and a decrease of 9.4% for months 13-24, which assumes no decrease in interest-bearing checking rates, except for high balance accounts which decrease 5 BP, savings rates decreasing 3-5 BP and a decrease in money market rates of 25-38 basis points. These assumptions are based on the Bank’s past experience with the changes in rates paid on these non-maturity deposits coincident with changes in market interest rates.

Index

The table below shows Newport Bancorp’s interest rate sensitivity gap position at December 31, 2012, indicating the amount of interest-earning assets and interest-bearing liabilities that are anticipated to mature or reprice in each of the future time periods shown. Generally, these assets and liabilities are shown in the table based on the earlier of the time remaining to repricing or contractual maturity. However, savings, money market deposit and interest bearing deposit accounts are assumed to have an annual rate of withdrawal (decay rate) of 10%.

	At December 31, 2012
	Up to One Year			More than One Year to Two Years			More than Two Years to Three Years			More than Three Years to Five Years			More than Five Years			Total
	(Dollars in thousands)
Interest-earning assets:
Loans	$	8,792		$	7,920		$	6,604		$	30,852		$	306,053		$	360,221
Securities		—			—			—			—			22,307			22,307
Short-term investments		15,732			—			—			—			—			15,732
Total interest-earning assets		24,524			7,920			6,604			30,852			328,360			398,260

Interest-bearing liabilities:
Savings deposits		3,842			3,458			3,111			2,801			25,206			38,418
Money market deposits		4,440			3,996			3,597			3,237			29,134			44,404
Interest-bearing demand deposits		8,206			7,385			6,647			5,982			53,839			82,059
Certificates of deposits		39,850			8,094			11,001			3,729			12,946			75,620
Borrowings		32,000			10,500			29,797			12,000			18,500			102,797
Total interest-bearing liabilities		88,338			33,433			54,153			27,749			139,625			343,298
Interest rate sensitivity gap	$	(63,814	)	$	(25,513	)	$	(47,549	)	$	3,103		$	188,735		$	54,962

Interest rate sensitivity gap as a % of total assets		(14.20	)%		(5.68	)%		(10.58	)%		0.69	%		42.00	%

Cum. interest rate sensitivity gap	$	(63,814	)	$	(89,237	)	$	(136,876	)	$	(133,773	)	$	54,962

Cum. interest rate sensitivity gap as a % of total assets		(14.20	)%		(19.88	)%		(30.46	)%		(29.77	)%		12.23	%

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

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

The most liquid assets are cash and cash equivalents ~~and interest-bearing deposits~~. The levels of these assets depend on the operating, financing, lending and investing activities during any given period. At December 31, ~~2011~~2012, cash and cash equivalents totaled $3136.10 million. At December 31, ~~2011~~2012, we had the ability to borrow a total of approximately $5068.82 million of additional advances from the Federal Home Loan Bank of Boston. On December 31, ~~2011~~2012, we had $9387.7 8 million of advances outstanding.

At December 31, ~~2011~~2012, the Bank had $2421.98 million in loan commitments outstanding, which consisted of $42.71 million of real estate loan commitments, $1413.6 million in unused home equity lines of credit, $23.4 million in construction loan commitments and $3.2.7 million in commercial lines of credit commitments. Certificates of deposit due within one year of December 31, ~~2011~~2012 totaled $5039.79 million, or 7152.87% of certificates of deposit. The large percentage of certificates of deposit that mature within one year reflects customer’s hesitancy to invest their funds for long periods in the recent low interest rate environment. If these maturing deposits do not remain with us, we will be required to seek other sources of funds, including other certificates of deposit and borrowings. Depending on market conditions, Newport Federal may be required to pay higher rates on such deposits or other borrowings than we currently pay on the certificates of deposit due on or before December 31, 2012. The Bank believes, based on past experience, that a significant portion of our certificates of deposit will remain with the Bank. Newport Federal has the ability to attract and retain deposits by adjusting the interest rates offered.

4243

~~Table of Contents~~Index

however, based on past experience, that a significant portion of our certificates of deposit will remain with the Bank. Newport Federal has the ability to attract and retain deposits by adjusting the interest rates offered.

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

Capital Resources. The Bank is subject to various regulatory capital requirements administered by the 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 December 31, ~~2011~~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, Newport Federal engages in a variety of financial transactions that, in accordance with generally accepted accounting principles, are not recorded in our financial statements. These transactions involve, to varying degrees, elements of credit, interest rate and liquidity risk. Such transactions are used primarily to manage customers’ requests for funding and take the form of loan commitments and lines of credit. For information about the Company’s loan commitments and unused lines of credit, see Note 11 to the Consolidated Financial Statements included in this Annual Report.

For the year ended December 31, ~~2011~~2012, the Company did not engage in any off-balance sheet transactions reasonably likely to have a material effect on our financial condition, results of operations or cash flows.

Impact of Recent Accounting Pronouncements

For a discussion of the impact of recent accounting pronouncements, see ~~note~~Note 1 of the Notes to the Consolidated Financial Statements included in this Form 10-K.

Effect of Inflation and Changing Prices

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

ITEM 7A.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

ITEM 8.

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

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

4344

~~Table of Contents~~Index

ITEM 9.

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

ITEM 9A.

CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures.

The Company’s President and Chief Executive Officer, its Chief Financial Officer, and other members of its senior management team have evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) or 15d-15(e)), as of December 31, ~~2011~~2012. Based on such evaluation, the President and Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures, as of the end of the period covered by this report, were adequate and effective to provide reasonable assurance that information required to be disclosed by the Company, including Newport Federal, in reports that are filed or submitted under the Exchange Act, is recorded, processed, summarized and reported, within the time periods specified in the Commission’s rules and forms.

Changes in Internal Controls Over Financial Reporting.

There have been no changes in the Company’s internal control over financial reporting during the quarter ended December 31, ~~2011~~2012 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

Management’s Report on Internal Control Over Financial Reporting.

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

Management conducted an assessment of the effectiveness of the Company’s internal control over financial reporting as of December 31, ~~2011~~2012, utilizing the framework established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on this assessment, management has determined that the Company’s internal control over financial reporting as of December 31, ~~2011~~2012 is effective.

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

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

4445

~~Table of Contents~~Index

Management’s report on internal control was not subject to attestation by the Company’s registered public accounting firm in accordance with rules of the Securities and Exchange Commission for smaller reporting companies.

ITEM 9B.

OTHER INFORMATION

Not applicable.

PART III

ITEM 10.

DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

The information relating to the directors and officers of the Company, information regarding compliance with Section 16(a) of the Exchange Act and information regarding the audit committee and audit committee financial expert is incorporated herein by reference to the Company’s Proxy Statement for the Registrant’s Annual Meeting of Stockholders, to be held on May 17, 2012 (the “Proxy Statement”).Directors

The Company has ~~adopted~~eleven adirectors. ~~code~~Our Bylaws ofprovide ~~ethics~~ that ~~applies~~directors toare ~~its~~divided ~~principal~~into ~~executive~~three ~~officer~~classes, ~~the~~with ~~principal~~one ~~financial~~class ~~officer~~of directors elected annually. Our directors are generally elected to serve for a three-year period and ~~principal~~until ~~accounting~~their ~~officer~~respective successors have been elected and qualified. ~~The~~Below ~~Code~~is ofcertain ~~Ethics~~information isregarding ~~posted~~our ondirectors. Unless otherwise stated, each individual has held his or her current occupation for the ~~Company’s~~last five ~~Internet~~years. ~~Web~~The ~~site~~age atindicated ~~www~~for each individual is as of December 31, 2012.~~newportfederal.com.~~

Directors with terms expiring in 2013:

William R. Harvey is an attorney and partner in the law firm Harvey, Carr & Hadfield. Mr. Harvey’s extensive legal career, make his contributions to the Board in the areas of leadership, consensus building, corporate governance and litigation oversight very important. Mr. Harvey has been a director of Newport Federal since 1987 and director of Newport Bancorp since its formation. Mr. Harvey also provides legal services to the Company and the Bank. Age 66.

Kevin M. McCarthy is President and Chief Executive Officer of Newport Federal and Newport Bancorp. Mr. McCarthy joined Newport Federal in 1989. Prior to joining Newport Federal, Mr. McCarthy served as Vice President, Director of Policy and Supervision at the Federal Home Loan Bank of Boston from 1977 to 1989 and was a savings and loan examiner with the Federal Home Loan Bank Board from 1973 to 1977. Currently, Mr. McCarthy serves on the Board of the Federal Home Loan Bank of Boston and the Community Bank Council of the American Bankers Association. Mr. McCarthy is a retired Captain in the U.S. Navy Reserve. Mr. McCarthy has been a director of Newport Federal since 1993 and director of Newport Bancorp since its formation. Age 65.

Alicia S. Quirk is the former co-owner of Aquidneck Employment Services, Inc. Ms. Quirk’s expertise in compensation, benefits and other personnel matters is being utilized by the Board. Ms. Quirk has been a director of Newport Federal since 1992 and director of Newport Bancorp since its formation. Age 71.

Directors with terms expiring in 2014:

Peter T. Crowley is the owner of La Forge Casino Restaurant. Mr. Crowley’s experience successfully managing and working in one of the premier restaurants in Newport for the last 42 years has resulted in management, financial and marketing expertise that has benefited the Bank. Mr. Crowley has been a director of Newport Federal since 1992 and a director of Newport Bancorp since its formation. Age 64.

Michael J. Hayes is the President of Michael Hayes Co. Mr. Hayes’ experience as the Chief Executive of a local clothing retailer gives him unique insights in the Company’s challenges, opportunities and operations. In addition, his retail marketing skills have proven to be most helpful to Newport Federal. Mr. Hayes has been a director of Newport Federal since 1988 and a director of Newport Bancorp since its formation. Age 63.

Arthur H. Lathrop is a Certified Public Accountant. Mr. Lathrop was licensed as a Certified Public Accountant in Massachusetts in 1982 and in Rhode Island from 1987 to the present. He brings substantial financial, auditing and tax expertise to the Board. Mr. Lathrop has been a director of Newport Federal since 2005 and a director of Newport Bancorp since its formation. Before serving as a director with Newport Federal, Mr. Lathrop was a director of Westerly Savings Bank from 1993 until it merged with Newport Federal in 2005. Mr. Lathrop was also a director of Ocean State Tax-Exempt Fund until 2008. Age 58.

Index

Kathleen A. Nealon is a Certified Public Accountant, the Chief Financial Officer and a manager in the Professional Planning Group, a Westerly, Rhode Island based company that provides an array of financial planning services. Ms. Nealon brings financial, accounting and management expertise to the Board. Ms. Nealon has been a director of Newport Federal since 2005 and a director of Newport Bancorp since its formation. Before serving as a director with Newport Federal, Ms. Nealon was a director of Westerly Savings Bank from 2004 until it merged with Newport Federal in 2005. Age 60.

Directors with terms expiring in 2015:

Donald N. Kaull is a retired independent property/casualty insurance agent. As the former Chief Executive of an insurance agency, Mr. Kaull brings extensive experience in management, corporate governance, finance and risk management to the Board. Mr. Kaull has been a director of Newport Federal since 1989 and a director of Newport Bancorp since its formation. Age 67.

Arthur P. Macauley is President of CM Publications, Inc. Prior to starting his own company, CM Publications, Mr. Macauley was the Director of Planning for a graphics company. His background in planning and management provides a unique perspective to the Board. Mr. Macauley has been a director of Newport Federal since 2005 and a director of Newport Bancorp since its formation. Before serving as a director with Newport Federal, Mr. Macauley was a director of Westerly Savings Bank from 1981 until it merged with Newport Federal in 2005. Age 70.

Nino Moscardi has been Executive Vice President, Chief Operating Officer and director of Newport Federal since October 2005 and Executive Vice President, Chief Operating Officer and director of Newport Bancorp since its formation. Before serving with Newport Federal, Mr. Moscardi was Chairman and Chief Executive Officer of Westerly Savings Bank from 1989 until it merged with Newport Federal in 2005. Mr. Moscardi currently serves on the Board and is a former chairman of the Rhode Island Bankers Association. He also is a Board member of the Ocean State Business Development Authority. Age 61.

Barbara Saccucci-Radebach is the General Manager of Saccucci Lincoln Mercury Honda, Inc. and has been since 1974. In addition to Ms. Saccucci-Radebach’s expertise in management and administration, she brings risk assessment skills and marketing expertise to the Board. Ms. Saccucci-Radebach has been a director of Newport Federal since 1991 and a director of Newport Bancorp since its formation. Age 60.

Executive Officers

The Boards of Directors of the Company and the Bank annually elect the officers of the Company and the Bank, respectively. The officers serve at the discretion of the Boards. The Company’s executive officers are:

Name	Position
Kevin M. McCarthy	President and Chief Executive Officer of Newport Bancorp and Newport Federal Savings Bank

Nino Moscardi	Executive Vice President and Chief Operating Officer of Newport Bancorp and Newport Federal Savings Bank

Bruce A. Walsh	Executive Vice President and Chief Financial Officer of Newport Bancorp and Newport Federal Savings Bank

Ray D. Gilmore, II	Executive Vice President and Chief Lending Officer of Newport Federal Savings Bank

Index

Below is information regarding the Bank’s executive officers who are not also directors. Ages presented are as of December 31, 2012.

Bruce A. Walsh has been Executive Vice President and Chief Financial Officer of Newport Federal since March 1999. Mr. Walsh joined Newport Federal in 1986 after two years at KPMG Peat Marwick. Mr. Walsh is a certified public accountant. Age 55.

Ray D. Gilmore, II has been Executive Vice President and Chief Lending Officer of Newport Federal since July 1999. Mr. Gilmore joined Newport Federal in January 1992. He began his banking career as a bank examiner with the OCC, U.S. Treasury Department. Prior to working at Newport Federal, Mr. Gilmore was Vice President, Corporate Banking Group of Shawmut Bank, Providence, Rhode Island. Age 65.

Section 16(a) Beneficial Ownership Reporting Compliance

Section 16(a) of the Securities Exchange Act of 1934 requires the Company’s executive officers and directors, and persons who own more than 10% of any registered class of the Company’s equity securities, to file reports of ownership and changes in ownership with the Securities and Exchange Commission. Executive officers, directors and greater than 10% stockholders are required by regulation to furnish the Company with copies of all Section 16(a) reports they file.

Based solely on the Company’s review of copies of the reports it has received and written representations provided to it from the individuals required to file the reports, the Company believes that each of its executive officers and directors has complied with applicable reporting requirements for transactions in Newport Bancorp common stock during the year ended December 31, 2012.

Code of Ethics and Business Conduct

The Company has adopted a Code of Ethics and Business Conduct that is designed to promote the highest standards of ethical conduct by the Company’s directors, executive officers and employees. The Code of Ethics and Business Conduct requires that the Company’s directors, executive officers and employees avoid conflicts of interest, comply with all laws and other legal requirements, conduct business in an honest and ethical manner and otherwise act with integrity and in the Company’s best interest. Under the terms of the Code of Ethics and Business Conduct, directors, executive officers and employees are required to report any conduct that they believe in good faith to be an actual or apparent violation of the Code of Ethics and Business Conduct. A copy of the Code of Ethics and Business Conduct can be found in the “About Us—Corporate Governance” section of the Company’s website, www.newportfederal.com.

As a mechanism to encourage compliance with the Code of Ethics and Business Conduct, the Company has established procedures for receiving, retaining and addressing complaints regarding accounting, internal accounting controls and auditing matters. These procedures ensure that individuals may submit concerns regarding questionable accounting or auditing matters in a confidential and anonymous manner. The Code of Ethics and Business Conduct also prohibits the Company from retaliating against any director, executive officer or employee who reports actual or apparent violations of the Code of Ethics and Business Conduct.

Audit Committee and Audit Committee Financial Expert

The Company has a separately-designated standing audit committee established in accordance with section 3(a)(58)(A) of the Securities Exchange Act of 1934, as amended, and the rules of The Nasdaq Stock Market, Inc. The members of the audit committee are Peter T. Crowley, Michael J. Hayes, Arthur H. Lathrop and Kathleen A. Nealon. The Board of Directors has determined that director Lathrop is as an audit committee financial expert under the rules of the Securities and Exchange Commission. Each member of the audit committee is independent, as independence for audit committee members is defined under the rules of The Nasdaq Stock Market, Inc. and the Securities and Exchange Commission.

Index

ITEM 11.

EXECUTIVE COMPENSATION

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

Summary Compensation Table

The following information is provided for our Chief Executive Officer and two other most highly compensated executive officers who received compensation totaling $100,000 or more for the year ended December 31, 2012, referred to herein as the “named executive officers.”

Name and Principal Position	Year		Salary		Option Awards		All Other Compensation (1)		Total
Kevin M. McCarthy		2012	$	274,186	$	—	$	36,674	$	310,860
President and Chief Executive Officer		2011		255,000		—		35,791		290,791

Nino Moscardi		2012		190,500		—		26,695		217,195
Executive Vice President and Chief Operating Officer		2011		173,750		—		26,748		200,498

Ray D. Gilmore II		2012		175,400		—		24,387		199,787
Executive Vice President and Chief Lending Officer		2011		163,200		—		24,465		187,665

(1)

Details of the amounts reported in the “All Other Compensation” column for 2012 are provided in the table below. Amounts do not include perquisites, which did not total in the aggregate more than $10,000 for any of the named executive officers.

Compensation Item	Mr. McCarthy		Mr. Moscardi		Mr. Gilmore
Employer contributions to 401(k) Plan	$	10,000	$	8,436	$	7,798
ESOP allocation market value		18,862		15,301		14,373
Imputed income under split dollar arrangements		7,812		2,958		2,216

Employment Agreements

Newport Federal maintains three-year employment agreements with Messrs. McCarthy, Moscardi and Gilmore and Newport Bancorp, Inc. maintains three-year employment agreements with Messrs. McCarthy and Moscardi. The continued success of Newport Federal and Newport Bancorp, Inc. depends to a significant degree on the skills and competence of these executives.

The terms of the Newport Federal employment agreements extend annually unless written notice of non-renewal is given by the Board of Directors of Newport Federal or the executive. The terms of the Newport Bancorp, Inc. employment agreements extend daily, unless written notice of non-renewal is given to the Board of Directors of Newport Bancorp, Inc. or the executive. The employment agreements provide that the executive’s base salary will be reviewed annually. The current base salaries for Messrs. McCarthy, Moscardi and Gilmore are $266,200, $181,400 and $168,200, respectively. In addition to base salary, the employment agreements provide for, among other things, participation in benefit plans and other fringe benefits applicable to executive personnel. Under the terms of the agreements each executive is entitled to severance payments and benefits in the event his employment is terminated: (i) without Cause (as defined in the agreements); (ii) with Good Reason (as defined in the agreements); (iii) as a result of the executive becoming disabled; or (iv) following a change in control. If the executive’s termination of employment is for reasons other than a change in control, he must adhere to a one-year non-competition agreement.

Index

The employment agreements provide for termination for cause, as defined in the employment agreements, at any time. If an executive is terminated for cause he is entitled only to his wages earned as of his termination date, along with any accrued benefits under the Newport Federal tax-qualified plans. If Newport Federal or Newport Bancorp choose to terminate an executive’s employment for reasons other than for cause, or if an executive resigns under circumstances that would constitute Good Reason under his employment agreement, the executive would be entitled to receive a lump sum cash payment equal to the remaining base salary payments due to him for the remaining term of the employment agreement and under the Newport Bancorp, Inc. employment agreements, the contributions that would have been made on an executive’s behalf to any employee benefit plans of Newport Federal during the remaining term of the employment agreement. Newport Federal or Newport Bancorp (as applicable) would continue and/or pay for the executive’s life, health, and dental coverage for the remaining term of the employment agreement.

If Messrs. McCarthy, Moscardi or Gilmore are involuntarily terminated in connection with a change in control, or if they voluntarily terminate employment following a change in control under certain circumstances specified in the employment agreements, the executives or their beneficiaries would be entitled to receive a lump sum cash severance payment equal to three times the executive’s average annual compensation over the five preceding tax years (or if the executive is employed less than five years, the years of employment) for Messrs. McCarthy and Moscardi and 2.99 times the executive’s average annual compensation over the five preceding tax years for Mr. Gilmore. Under the Newport Bancorp, Inc. employment agreements, Messrs. McCarthy and Moscardi would receive a lump sum cash payment in an amount equal to the benefits the executives would have received under the Newport Federal retirement programs in which the executives participated before a change in control. The Newport Federal and the Newport Bancorp, Inc. employment agreements would also continue the executives’ medical, dental and life insurance coverage for 36 months following termination of employment. Under Mr. Gilmore’s employment agreement, all payments made in connection with a change in control (under the employment agreement and otherwise) are limited to one dollar less than three times the executive’s average annual compensation in order to avoid excess parachute payments and a resulting federal excise tax. Under the Newport Bancorp, Inc. employment agreements for Messrs. McCarthy and Moscardi, the executives would be entitled to receive a tax indemnification payment if the change in control payments under their employment agreements or other payments outside of their employment agreements trigger liability under the Internal Revenue Code as an excise tax on payments constituting excess parachute payments.

The employment agreements also provide for a disability benefit equal to 75% of an executive’s bi-weekly rate of base salary in effect as of the executive’s termination date. Disability payments are reduced by any disability benefits provided by a policy or program sponsored by Newport Federal and/or Newport Bancorp. Disability payments end upon the earlier of the executive’s full-time employment with Newport Federal or Newport Bancorp, Inc., death, attainment of age 65 or the termination of the executive’s agreement.

To the extent that salary payments, other cash payments and benefits under the Newport Bancorp agreements are paid to or received by the executives under the Newport Federal employment agreements, such compensation payments and benefits paid by Newport Federal will be subtracted from any amount due simultaneously to the executives under similar provisions of the Newport Bancorp agreements. Payments pursuant to the Newport Bancorp employment agreement and the Newport Federal employment agreement will be allocated in proportion to the level of activity and the time expended on such activities by the executives as determined by Newport Bancorp and Newport Federal.

Executive Split Dollar Arrangements

Newport Federal maintains split dollar life insurance agreements with Messrs. McCarthy, Moscardi and Gilmore. Under the terms of the agreements, Newport Federal is the owner of the life insurance policies under which each individual is insured. Newport Federal and the executives each pay a portion of the annual premiums due on the life insurance policies. Under the split-dollar arrangements, upon an executive’s death while he is actively employed, his designated beneficiary is entitled to, in the case of Messrs. McCarthy and Gilmore, an amount equal to $100,000 plus the cash asset value of the life insurance policies and, in the case of Mr. Moscardi, the cash asset value of the life insurance policy. If an executive dies after retiring or being terminated for reasons other than cause and the executive had at least ten years of employment with Newport Federal, his beneficiary will receive a benefit equal to the lesser of $300,000, $150,000 and $100,000 for the beneficiaries of Messrs. McCarthy, Moscardi and Gilmore, respectively, or the total insurance proceeds less the cash value of the policy for each executive. The remainder of the death benefit under the split dollar arrangements is payable to Newport Federal.

Index

Stock Based Compensation. Set forth below is certain information regarding outstanding equity awards granted to the named executive officers at December 31, 2012:

Outstanding Equity Awards at Fiscal Year-End

	Option awards							Stock awards
Name	Number of securities underlying unexercised options (#) exercisable		Number of securities underlying unexercised options (#) unexercisable		Option exercise price		Option expiration date	Number of shares or units of stock that have not vested (#)		Market value of shares or units of stock that have not vested
Kevin M. McCarthy		100,000		—	$	12.53	10/1/2017		—	$	—
		5,000		—		12.25	1/4/2020

Nino Moscardi		60,000		—		12.53	10/1/2017		—		—
		5,000		—		12.25	1/4/2020

Ray D. Gilmore, II		50,000		—		12.53	10/1/2017		—		—
		5,000		—		12.25	1/4/2020

Pension Benefits

Pentegra Defined Benefit Plan. Newport Federal is a participating member of the Pentegra Defined Benefit Plan for Financial Institutions (“Pension Plan”), which is a multiple employer tax-qualified defined benefit plan, for the purpose of providing eligible employees with retirement benefits. The plan provides benefits based primarily on a formula that takes into account the employee’s years of service and salary history. Effective July 1, 2006, Newport Federal amended the plan formula prospectively, to be based upon 1% of an employee’s career average earnings. The employee’s annual earnings taken into account under this formula include base salary in effect for each month of the plan year (January 1 to December 31) and may not exceed the Internal Revenue Code limitations ($250,000 for 2012). Prior to July 1, 2006, plan benefits were determined based on a formula that integrated 1.5%/2.0% of the average of a participant’s highest three years of compensation with the fixed compensation level in effect as of a participant’s retirement date. Benefits provided under this plan are payable as of a participant’s retirement at age 65. However, an employee can elect to retire as early as age 55, in which case, benefits will be actuarially reduced by 6% per year for retirement between ages 60 to 65, 4% for retirement between age 55 to 60 and 3% if retirement occurs at age 55. The normal form of benefit payment is a monthly annuity for life with a 10 year certain death benefit feature. An employee becomes vested in a pension benefit after 5 years of service.

Supplemental Executive Retirement Arrangements. Newport Federal maintains supplemental executive retirement arrangements (“SERAs”) with Messrs. McCarthy, Moscardi and Gilmore. The SERAs are unfunded and are not qualified for tax purposes. The SERAs provide for a fixed annual benefit payable monthly over a fifteen-year period following the executive’s retirement at or after age 65. The annual supplemental retirement benefits are $25,000 for Messrs. Moscardi and Gilmore, and $50,000 for Mr. McCarthy. If an executive retires after attaining age 60, but prior to age 65 and has completed 10 years of service, his annual supplemental retirement benefit will be reduced by a specific percentage (as specified in the agreement) based on the executive’s age. All benefits are forfeited under the agreements if an executive is terminated for cause. The agreements also provide for retirement benefits upon an executive’s death, disability or termination of employment following a change in control. If, within two years of a change in control, Newport Federal or its successor elects to terminate the employment of an executive, the executive would be entitled to receive the monthly benefit he would have received had the executive continued to be employed by Newport Federal (or its successor) until age 65. Years of credited service have no bearing on an executive’s benefit under his SERA.

Index

Nonqualified Deferred Compensation

Newport Federal maintains a supplemental executive retirement plan for Messrs. McCarthy and Moscardi. The plan provides benefits that cannot be provided under the 401(k) Plan as a result of limitations imposed by the Internal Revenue Code, but that would have been provided under the plan but for these Internal Revenue Code limitations. The Plan also provides supplemental benefits upon a change in control prior to the scheduled repayment of the employee stock ownership plan loan. Upon a change in control, the supplemental executive retirement plan provides Messrs. McCarthy and Moscardi with a cash payment equal to the benefit the executive would have received under the employee stock ownership plan, had the executive remained employed throughout the term of the loan, less the benefits actually provided under the employee stock ownership plan on the participant’s behalf. Benefits will be paid in a lump sum within 90 days following the first to occur of: a change in control of Newport Bancorp, death, or a separation from service, provided that a payment upon separation from service will be delayed until the executive attains age 65.

Director Compensation

The following table provides the compensation received by individuals who served as directors of the Company during the 2012 fiscal year and who are not also executive officers of the Company.

Name	Fees Earned or Cash		Stock Awards (1)		Option Awards (1)		All Other Compensation (2)		Total
Peter T. Crowley	$	25,200		—		—	$	625	$	25,825
William R. Harvey		32,700		—		—		—		32,700
Michael J. Hayes		29,100		—		—		545		29,645
Donald N. Kaull		26,700		—		—		912		27,612
Arthur H. Lathrop		29,100		—		—		340		29,440
Robert S. Lazar (3)		31,000		—		—		1,122		32,122
Arthur P. Macauley		24,300		—		—		1,237		25,537
Kathleen A. Nealon		25,900		—		—		391		26,291
Alicia S. Quirk		25,900		—		—		1,363		27,263
Barbara Saccucci-Radebach		24,300		—		—		391		24,691

(1)

No stock awards or option awards were granted in 2012. At December 31, 2012, the aggregate number of stock options held by each non-employee director was 9,200.

(2)

Includes imputed income recognized by each director under his or her split dollar arrangement.

(3)

Mr. Lazar passed away in November 2012.

Cash Retainer and Meeting Fees for Non-Employee Directors

The following information sets forth the applicable retainers and fees that will be paid to our non-employee directors for their service on the Boards of Directors of Newport Bancorp and Newport Federal during 2013.

Newport Bancorp

Annual retainer	$	5,000
Fee per meeting attended	$	700
Fee per meeting attended (Chair)	$	900

Committee fees (generally):
Per meeting attended	$	400
Per meeting attended (Chair)	$	800

Executive committee retainer	$	2,000
Fee per meeting attended	$	500
Fee per meeting attended (Chair)	$	700

Index


Newport Federal

Annual retainer	$	6,500
Annual retainer (Chair)	$	7,500

Director Split Dollar Life Insurance Agreements

Newport Federal maintains split dollar life insurance agreements with directors. The agreements provide participating directors with a cash payment in the event the director dies while in service with Newport Federal. Under the terms of the agreements, Newport Federal is the owner of the life insurance policies under which the individuals are insured. Newport Federal and the participating directors each pay a portion of the annual premiums due on the life insurance policies. Under the directors’ split-dollar arrangements, upon the director’s death his designated beneficiary is entitled to receive from a life insurance policy an amount equal to the lesser of $30,000 ($35,000 for the Chairman of the Board), or the total insurance proceeds less the cash value of the policy. The remainder of the death benefit under the agreements is payable to Newport Federal.

Supplemental Director Retirement Agreements

Newport Federal maintains supplemental director retirement agreements, which were amended and restated in March 2007 and further amended in 2008 and 2011. The agreements are unfunded and are not qualified for tax purposes. The annual supplemental retirement benefits are payable over a ten-year period commencing on the first of the month following the participating director’s retirement at or after the attainment of age 72. If a participating director retires after attaining age 67, but prior to age 72, and has completed 10 years of service, his or her annual supplemental retirement benefit will be reduced by a specific percentage (as specified in the agreement) based on the participating director’s age. If a participating director is terminated for cause, all supplemental retirement benefits will be forfeited. The agreements also provide for benefits upon a participating director’s death, disability, and upon a change in control of Newport Bancorp followed by the participating director’s involuntary termination of service. If a participating director’s service with the Bank is involuntarily terminated within two years after a change in control of Newport Bancorp, the participating director will be entitled to receive his or her benefits in monthly installments equal to the benefits he or she would have received had the director continued in service until age 72. Messrs. Kaull and Harvey are entitled to receive a $7,000 and $7,500 annual supplemental retirement benefit, respectively, and all other participating directors are entitled to receive a $4,800 annual supplemental retirement benefit.

ITEM 12.

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDERS MATTERS

~~(a)~~Stock ~~Security~~ Ownership of Certain Beneficial Owners

~~Information~~The ~~required~~following bytable ~~this~~provides ~~item~~information isas ~~incorporated~~of ~~herein~~March 4, 2013, with respect to persons known by ~~reference~~the Company to be the ~~section~~beneficial ~~captioned~~owners ~~“Stock~~of ~~Ownership”~~more inthan 5% of the ~~Proxy~~Company’s outstanding ~~Statement~~common stock. A person may be considered to own any shares of common stock over which he or she has, directly or indirectly, sole or shared voting or investing power. Percentages are based on 3,499,722 shares of Company common stock issued and outstanding as of March 4, 2013.

(b) Security Ownership of Management

Name and Address	Number of Shares Owned	Percent of Common Stock Owned

Wellington Management Company, LLP (1) 75 State Street Boston, MA 02109	339,160	9.69%
Newport Federal Savings Bank (2) Employee Stock Ownership Plan Trust 100 Bellevue Avenue Newport, RI 02840	374,335	10.70%

~~Information required by this item is incorporated herein by reference to the section captioned “Stock Ownership” in the Proxy Statement.~~53

~~(c) Changes in Control~~Index

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

Sandler O’Neill Asset Management, LLC (3) Terry Maltese 150 East 52^nd St, 30th Floor New York, New York 10022	344,200	9.84%
Thomson Horstmann & Bryant, Inc. (4) 501 Merritt #7 Norwalk, CT 06851	337,371	9.64%
NewportFed Charitable Foundation (5) 100 Bellevue Avenue Newport, RI 02840	266,359	7.61%
M3 Partners, LP (6) M3 Funds, LLC M3F, Inc. Jason A. Stock William C. Waller 215 South State Street, Suite 1170 Salt Lake City, UT 84111	213,020	6.09%
Bay Pond Partners, L.P. (7) Wellington Hedge Management, LLC c/o Wellington Management Company, LLP 280 Congress Street Boston, MA 02210	241,389	6.90%

(d1) ~~Equity~~Wellington ~~Compensation~~Management ~~Plan~~Company, ~~Information~~LLP (“Wellington Management”) reported shared dispositive power and shared voting power with respect to 339,160 shares and 327,846 shares, respectively, of the Company’s common stock on a Schedule 13G/A filed on February 14, 2013. Wellington reported that it filed the Schedule 13G/A in its capacity as financial advisor and that the shares were owned of record by its clients, including Bay Pond Partners which owns over 5% of the Company’s common stock. See footnote 7 below.

45(2) Under the terms of the ESOP, the ESOP trustee will vote shares allocated to participants’ accounts in the manner directed by the participants. The ESOP trustee, subject to its fiduciary duties, will vote unallocated shares and allocated shares for which no timely voting instructions are received in the same proportion as shares for which the trustee has received proper voting instructions from participants.

~~Table~~(3) On a Schedule 13F filed on February 14, 2013, Sandler O’Neill Asset Management, LLC and Terry Maltese each reported shared voting and dispositive power with respect to 344,200 shares of ~~Contents~~the Company’s common stock.

~~The~~(4) ~~following~~Thompson ~~table~~Horstmann ~~sets~~& ~~forth~~Bryant ~~information as~~reported ofsole ~~December~~voting ~~31,~~and ~~2011~~dispositive ~~about~~power ~~Company~~with ~~common~~respect ~~stock~~to ~~that~~337,371 ~~may~~shares ~~be issued upon the exercise~~ of ~~options under~~ the ~~Newport~~Company’s ~~Bancorp,~~common ~~Inc. 2007~~stock ~~Equity~~on ~~Incentive~~a ~~Plan.~~Schedule ~~The~~13G/A ~~plan~~dated ~~was~~February ~~approved~~12, ~~by the Company’s stockholders~~2013.

Plan Category	Number of securities to be issued upon the exercise of outstanding options, warrants and rights		Weighted-average exercise price of outstanding options, warrants and rights		Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in the first column)
Equity compensation plans approved by security holders		481,754	$	12.50		-
Equity compensation plans not approved by security holders		N/A		N/A		N/A
Total		481,754	$	12.50		-

(5)

The foundation’s gift instrument requires that all shares of common stock held by the foundation must be voted in the same ratio as all other shares of Company common stock are voted on all proposals considered by stockholders of the Company.

(6)

Each person or entity listed reported shared voting and dispositive power with respect to 213,020 shares of the Company’s common stock on a Schedule 13G/A filed on February 8, 2013.

(7)

Wellington Hedge Management, LLC and Bay Pond Partners, L.P. each reported shared dispositive and voting power with respect to 241,389 shares of the Company’s common stock on a Schedule 13G/A dated February 14, 2013.

Index

Stock Ownership of Management

The following table provides information as of March 4, 2013 about the shares of Company common stock that may be considered to be beneficially owned by each director, named executive officer listed in the Summary Compensation Table and all directors and executive officers of the Company as a group. A person may be considered to beneficially own any shares of common stock over which he or she has, directly or indirectly, sole or shared voting or investment power. Unless otherwise indicated, none of the shares listed are pledged as security, and each of the named individuals has sole voting power and sole investment power with respect to the number of shares shown. Percentages are based on 3,499,722 shares of Company common stock issued and outstanding as of March 4, 2013.

Name	Number of Shares Owned			Percent of Common Stock Outstanding
*Directors*
Peter T. Crowley		28,200	⁽¹⁾	*
William R. Harvey		23,200	⁽¹⁾	*
Michael J. Hayes		27,200	⁽¹⁾	*
Donald N. Kaull		28,200	⁽¹⁾	*
Arthur H. Lathrop		13,800	⁽²⁾	*
Arthur P. Macauley		23,388	⁽¹⁾⁽³⁾	*
Kevin M. McCarthy		191,234	⁽⁴⁾	5.31%
Nino Moscardi		111,898	⁽⁵⁾	3.14%
Kathleen A. Nealon		11,700	⁽¹⁾	*
Alicia S. Quirk		18,200	⁽¹⁾	*
Barbara Saccucci-Radebach		27,200	⁽¹⁾⁽⁶⁾	*

*Named Executive Officer Who Is Not Also A Director*
Ray D. Gilmore, II		92,725	⁽⁷⁾	2.61%

All directors and executive officers as a group (13 persons)		679,651		17.64%

Less than 1%.

(1)

Includes 9,200 options exercisable within 60 days.

(2)

Includes 9,200 options exercisable within 60 days, and 100 shares held by Mr. Lathrop’s son.

(3)

Includes 200 shares held by Mr. Macauley’s son and 3,500 shares held by his spouse’s IRA.

(4)

Includes 105,000 options exercisable within 60 days, 37,731 shares held in the Newport Bancorp, Inc. Stock Fund through the Bank’s 401(k) plan, 12,403 ESOP shares, and 100 shares held by Mr. McCarthy’s daughter.

(5)

Includes 65,000 options exercisable within 60 days, 18,794 shares held in the Newport Bancorp, Inc. Stock Fund through the Bank’s 401(k) plan, and 10,454 ESOP shares.

(6)

Includes 7,000 shares held by Ms. Saccucci-Radebach’s spouse in his IRA account.

(7)

Includes 55,000 options exercisable within 60 days, 12,745 shares held in the Newport Bancorp, Inc. Stock Fund through the Bank’s 401(k) plan, and 9,502 ESOP shares.

Changes in Control

On March 5, 2013, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with SI Financial Group, Inc. (“SI Financial”), the holding company of Savings Institute Bank and Trust Company (“Savings Institute”), pursuant to which the Company will merge with and into SI Financial, with SI Financial as the surviving entity. In addition, Newport Federal Savings Bank will merge with and into Savings Institute, with Savings Institute as the surviving entity. The directors of the Company have agreed to vote their shares in favor of the approval of the Merger Agreement at the Company stockholders’ meeting to be held to vote on the proposed transaction.

Index

The following table sets forth information as of December 31, 2012 about Company common stock that may be issued upon the exercise of options under the Newport Bancorp, Inc. 2007 Equity Incentive Plan. The plan was approved by the Company’s stockholders.

Plan Category	Number of securities to be issued upon the exercise of outstanding options, warrants and rights		Weighted-average exercise price of outstanding options, warrants and rights		Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in the first column)

Equity compensation plans approved by security holders		469,767	$	12.50		—

Equity compensation plans not approved by security holders		N/A		N/A		N/A

Total		469,767	$	12.50		—

ITEM 13.

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

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

Federal regulations require that all loans or extensions of credit to executive officers and directors of insured institutions must be made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with other persons, and must not involve more than the normal risk of repayment or present other unfavorable features. Notwithstanding this rule, federal regulations permit the Bank to make loans to executive officers and directors at reduced interest rates if the loan is made under a benefit program generally available to all Bank employees and does not give preference to any executive officer or director over any other employee. Newport Federal maintains loan programs whereby employees, including executive officers and directors, may obtain loans with a one percent interest rate discount and reduced closing costs. The following information is furnished for loans to executive officers and directors under these loan programs during 2012 and 2011.

Executive Officer/Director	Largest Aggregate Principal Outstanding for 2012		Principal Outstanding at December 31, 2012		Principal Paid During 2012		Interest Paid During 2012		Interest Rate Payable

Michael J. Hayes	$	1,529,323	$	786,455	$	742,869	$	18,969		2.000	%
Nino Moscardi		383,399		371,404		11,995		13,705		3.625	%
Ray D. Gilmore, II		176,832		166,699		10,133		4,090		2.375	%
William R. Harvey		289,909		205,073		87,387		5,805		2.750	%
Donald N. Kaull		305,777		299,184		6,593		11,118		2.750	%
Alicia S. Quirk		63,312		57,477		5,853		2,426		4.000	%
Kevin M. McCarthy		92,185		81,923		10,261		3,939		4.500	%
Bruce Walsh		199,183		185,376		16,707		4,493		2.000	%
Barbara Saccucci-Radebach		538,923		262,920		116,642		3,085		1.750	%

Index

Executive Officer/Director	Largest Aggregate Principal Outstanding for 2011		Principal Outstanding at December 31, 2011		Principal Paid During 2011		Interest Paid During 2011		Interest Rate Payable

Michael J. Hayes		810,952		729,323		81,629		26,186		3.125	%
Nino Moscardi		394,481		383,399		11,082		14,117		3.625	%
Ray D. Gilmore, II		184,514		176,832		7,682		5,331		2.375	%
William R. Harvey		221,792		211,065		12,127		5,591		2.750	%
Robert S. Lazar		202,383		190,271		13,258		6,122		4.000	%
Donald N. Kaull		311,163		305,777		5,386		11,674		4.125	%
Alicia S. Quirk		127,241		63,312		63,929		2,862		4.000	%
Kevin M. McCarthy		161,892		92,185		69,707		3,603		4.500	%
Bruce Walsh		208,788		195,056		13,732		8,317		3.875	%
Barbara Saccucci-Radebach		411,598		269,423		142,175		10,739		2.250	%

From time to time, Newport Federal also makes loans and extensions of credit, directly and indirectly, to its executive officers and directors that are not part of the loan programs discussed above. These loans are made in the ordinary course of business, are made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable loans with persons not related to Newport Federal, and do not involve more than the normal risk of collectability or present other unfavorable features.

In accordance with banking regulations, the Board of Directors reviews all loans made to a director or executive officer in an amount that, when aggregated with the amount of all other loans to such person and his or her related interests, exceed the greater of $25,000 or 5% of Newport Bancorp’s capital and surplus (up to a maximum of $500,000) and such loan must be approved in advance by a majority of the disinterested members of the Board of Directors. Additionally, pursuant to the Company’s Code of Ethics and Business Conduct, all executive officers and directors of Newport Bancorp must disclose any existing or emerging conflicts of interest to the President and Chief Executive Officer of Newport Bancorp. Such potential conflicts of interest include, but are not limited to, the following: (i) Newport Bancorp conducting business with or competing against an organization in which a family member of an executive officer or director has an ownership or employment interest and (ii) the ownership of more than 1% of the outstanding securities or 5% of total assets of any business entity that does business with or is in competition with Newport Bancorp.

Director Independence

All of the directors are independent as defined by Nasdaq rules except for Kevin M. McCarthy and Nino Moscardi, who are executive officers of the Company. In determining director independence, the Board of Directors considered transactions, relationships and arrangements between the Company and its directors, including relationships that are not required to be disclosed above under the heading “Transactions with Related Persons” including legal services provided to the Company and the Bank by Mr. Harvey’s law firm. The Board of Directors determined that the amounts paid by the Company and the Bank for such services were not material.

Index

ITEM 14.

PRINCIPAL ACCOUNTING FEES AND SERVICES

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

46The following table sets forth the fees billed to the Company for the fiscal years ending December 31, 2012 and December 31, 2011 by Wolf & Company, P.C.

Table of Contents

	2012		2011
Audit fees (1)	$	159,000	$	153,500
Tax fees (2)	$	18,000	$	17,000
All other fees (3)	$	7,500	$	7,500

(1)

Includes quarterly reviews.

(2)

Includes tax return preparation and related tax compliance services.

(3)

Includes WolfPac IT risk assessment annual license fee.

Pre-Approval of Services by the Independent Registered Public Accounting Firm

The Audit Committee is responsible for appointing, setting compensation and overseeing the work of the independent registered public accounting firm. In accordance with its charter, the Audit Committee approves, in advance, all audit and permissible non-audit services to be performed by the independent registered public accounting firm. Such approval process ensures that the external auditor does not provide any non-audit services to the Company that are prohibited by law or regulation.

In addition, the Audit Committee has established a policy regarding pre-approval of all audit and permissible non-audit services provided by the independent registered public accounting firm. Requests for services by the independent registered public accounting firm for compliance with the auditor services policy must be specific as to the particular services to be provided. The request may be made with respect to either specific services or a type of service for predictable or recurring services. During the year ended December 31, 2012, all services were approved, in advance, by the Audit Committee in compliance with these procedures.

Index

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. (Incorporated by reference to Exhibit 3.1 to the Company’s Registration Statement on Form S-1, as amended, initially filed with the SEC on March 20, 2006).

3.2 Bylaws of Newport Bancorp, Inc. (Incorporated by reference to Exhibit 3.2 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2008).

4.1 Specimen Stock Certificate of Newport Bancorp, Inc. (Incorporated by reference to Exhibit 4.1 to the Company’s Registration Statement on Form S-1, as amended, initially filed with the SEC on March 20, 2006).

10.1 Form of Amended and Restated ~~Supplemental~~Employment ~~Executive~~Agreement ~~Retirement~~between ~~Plan~~Newport Federal Savings Bank and Kevin M. McCarthy, Nino Moscardi and Ray D. Gilmore, II (Incorporated by reference to Exhibit 10.3 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2009).

10.2 ~~First~~Form ~~Amendment~~of toAmended ~~Form~~and ofRestated Employment Agreement between Newport ~~Federal~~Bancorp, ~~Savings~~Inc. ~~Bank~~and ~~Supplemental~~Kevin ~~Director~~M. ~~Retirement~~McCarthy ~~Agreement~~and Nino Moscardi (Incorporated by reference to Exhibit 10.4 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2009).

10.3 Form of ~~Amended~~Supplemental ~~and~~Executive ~~Restated~~Retirement ~~Employment~~ Agreement between Newport Federal Savings Bank and ~~Executives~~Kevin M. McCarthy, Nino Moscardi and Ray D. Gilmore, II (Incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2007).

10.4 Form of ~~Amended~~First ~~and~~Amendment ~~Restated~~to ~~Employment~~Supplemental Executive Retirement Agreement between Newport ~~Bancorp,~~Federal ~~Inc~~Savings Bank and Kevin M. McCarthy, Nino Moscardi and ~~Executives~~Ray D. Gilmore, II (Incorporated by reference to Exhibit 10.3 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2009).

10.5 ~~Form~~Executive ofSplit ~~First~~Dollar ~~Amendment~~Life toInsurance ~~Supplemental~~Agreements ~~Executive Retirement Agreement~~ between Newport Federal Savings Bank and ~~Carol R. Silven,~~ Kevin M. McCarthy, and Nino Moscardi, ~~Bruce~~(Incorporated A.by ~~Walsh~~reference ~~and~~to ~~Ray~~Exhibit D10.2 ~~Gilmore,~~to IIthe (3Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2007).

10.6 First Amendment to the Executive Split Dollar Life Insurance ~~Agreements~~Agreement between Newport Federal Savings Bank and ~~Kevin~~Nino M.Moscardi ~~McCarthy,~~(Incorporated ~~Nino~~by ~~Moscardi~~reference ~~and~~to ~~Bruce~~Exhibit A10.1 ~~Walsh~~to (3the Company’s Current Report on Form 8-K filed on August 17, 2012).

10.7 ~~Director~~Executive Split Dollar Life Insurance Agreements between Newport Federal Savings Bank and ~~Peter~~Ray WD. ~~Rector,~~Gilmore ~~Donald~~(Incorporated N.by ~~Kaull,~~reference ~~Robert~~to SExhibit 10.15 ~~Lazar,~~to ~~Michael~~the J.Company’s ~~Hayes,~~Registration ~~Barbara~~Statement ~~Saccucci~~on ~~Radebach,~~Form ~~Alicia~~ S~~. Quirk~~-1, ~~Peter~~as ~~T. Crowley~~amended, ~~Arthur~~initially H.filed ~~Lathrop,~~on ~~Arthur~~March H.20, ~~Macauley and Kathleen A. Nealon (3~~2006).

10.8 ~~Form~~Amended ofand Restated Supplemental ~~Director~~Executive Retirement ~~Agreements between Newport Federal Savings Bank and Peter W~~Plan. Rector, William R. Harvey, Donald N. Kaull, Robert S. Lazar, Michael J. Hayes, Barbara Saccucci Radebach, Alicia S. Quirk, Peter T. Crowley, Arthur H. Lathrop, Arthur H. Macauley and Kathleen A. Nealon (3)

10.9 Form of Supplemental Director Retirement Agreements between Newport ~~Bancorp~~Federal Savings Bank and William R. Harvey, ~~Inc~~Donald N. ~~2007~~Kaull, ~~Equity~~Michael ~~Incentive~~J. ~~Plan~~Hayes, Barbara Saccucci Radebach, Alicia S. Quirk, Peter T. Crowley, Arthur H. Lathrop, Arthur H. Macauley and Kathleen A. Nealon (Incorporated by reference to Exhibit 10.3 to the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2007).

2110.010 ~~List~~First Amendment to Form of ~~Subsidiaries~~Newport Federal Savings Bank Supplemental Director Retirement Agreement (5Incorporated by reference to Exhibit 10.2 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2009).

Index

10.11

Second Amendment to Form of Newport Federal Savings Bank Supplemental Director Retirement Agreement.

10.12

Director Split Dollar Life Insurance Agreements between Newport Federal Savings Bank and Donald N. Kaull, Michael J. Hayes, Barbara Saccucci Radebach, Alicia S. Quirk, Peter T. Crowley, Arthur H. Lathrop, Arthur H. Macauley and Kathleen A. Nealon (Incorporated by reference to Exhibit 10.4 to the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2007).

10.13

Newport Bancorp, Inc. 2007 Equity Incentive Plan (Incorporated herein by reference to Appendix A to the Company’s definitive proxy statement filed with the Securities and Exchange Commission on July 10, 2007).

21.0

List of Subsidiaries (Incorporated by reference to Exhibit 21.0 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2011).

23.0

Consent of Wolf & Company, P.C.

31.1

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

31.2

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

32.0

Section 1350 Certification of Chief Executive Officer and Chief Financial Officer

~~___________________________________~~60

~~(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.~~Index

(2) Incorporated by reference to the Company’s Annual Report on Form 10-K for the year ended December 31, 2008.

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

(4) Incorporated herein by reference to Appendix A to the Company’s definitive proxy statement filed with the Securities and Exchange Commission on July 10, 2007 (File No. 000-51856).

(5) Incorporated by reference to the Company’s Annual Report on Form 10-K for the year ended December 31, 2010.

Table of Contents

SIGNATURES

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

	NEWPORT BANCORP, INC.
Date: March 16, 2012	By:	/s/ Kevin M. McCarthy
Date: March 22, 2013	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~~Title	Date
/s/ Kevin M. McCarthy	~~President, Chief Executive Officer~~	~~March 16~~President, ~~2012~~Chief Executive Officer	March 22, 2013
Kevin M. McCarthy	~~and Director~~	and Director
	~~(principal executive officer)~~	(principal executive officer)
/s/ Bruce A. Walsh	~~Senior Vice President and~~	~~March~~Executive ~~16,~~Vice ~~2012~~President and	March 22, 2013
Bruce A. Walsh	~~Chief Financial Officer~~	Chief Financial Officer
	~~(principal accounting and~~	(principal accounting and
	~~financial officer)~~	financial officer)
/s/ Peter T. Crowley	~~Director~~	~~March 16, 2012~~Director	March 22, 2013
Peter T. Crowley
/s/ William R. Harvey	~~Director~~	~~March 16, 2012~~Director	March 22, 2013
William R. Harvey
/s/ Michael J. Hayes	~~Director~~	~~March 16, 2012~~Director	March 22, 2013
Michael J. Hayes
/s/ Donald N. Kaull	~~Director~~	~~March 16, 2012~~Director	March 22, 2013
Donald N. Kaull
/s/ Arthur H. Lathrop	~~Director~~	~~March 16, 2012~~Director	March 22, 2013
Arthur H. Lathrop
/s/ Robert S. Lazar	Director	March 16, 2012
/s/ Arthur P. Macauley		Director	March 22, 2013
Robert S. Lazar
Arthur P. Macauley

4861

~~Table of Contents~~Index

Name	~~Title~~	~~Date~~Title	Date
/s/ Arthur P. Macauley	Director	March 16, 2012
/s/ Nino Moscardi		Director	March 22, 2013
Arthur P. Macauley
Nino Moscardi
/s/ Nino Moscardi	Director	March 16, 2012
/s/ Kathleen A. Nealon		Director	March 22, 2013
Nino Moscardi
Kathleen A. Nealon
/s/ Kathleen A. Nealon	Director	March 16, 2012
/s/ Alicia S. Quirk		Director	March 22, 2013
Kathleen A. Nealon
Alicia S. Quirk
/s/ Alicia S. Quirk	Director	March 16, 2012
/s/ Barbara Saccucci-Radebach		Director	March 22, 2013
Alicia S. Quirk
Barbara Saccucci Radebach
/s/ Barbara Saccucci Radebach	Director	March 16, 2012
Barbara Saccucci Radebach

4962

~~Table of Contents~~Index

Newport Bancorp, Inc.

Consolidated Financial Statements

Years Ended December 31, ~~2011~~2012 and ~~2010~~2011

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

Report of Independent Registered Public Accounting Firm	F-2
Consolidated Balance Sheets	F-3
Consolidated Statements of Income	F-4
Consolidated Statements of Net Income and Comprehensive Income	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-4850

F-1

~~Table of Contents~~Index

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Stockholders of Newport Bancorp, Inc.:

We have audited the accompanying consolidated balance sheets of Newport Bancorp, Inc. and subsidiary as of December 31, ~~2011~~2012 and ~~2010~~2011, and the related consolidated statements of net income and comprehensive income, changes in stockholders’ equity and cash flows for the years then ended. These financial statements are the responsibility of the Company’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, ~~2011~~2012 and ~~2010~~2011, and the results of ~~its~~their operations and ~~its~~their 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 1521, ~~2012~~2013

F-2

~~Table of Contents~~Index

Newport Bancorp, Inc. and Subsidiary

Consolidated Balance Sheets

December 31, ~~2011~~2012 and ~~2010~~2011

Assets
	2011			2010
	2012			2011
	(In thousands, except per share data)
	(In thousands)
Cash and due from banks	$	1920,~~739~~311		$	819,~~194~~739
Short-term investments		1115,~~335~~732			111,~~181~~335
Cash and cash equivalents		3136,~~074~~043			931,~~375~~074
Securities held to maturity, at amortized cost		3622,~~220~~307			4736,~~021~~220
Federal Home Loan Bank stock, at cost		5,~~730~~588			5,730
Loans		~~352~~359,~~201~~069			~~359~~352,~~721~~201
Allowance for loan losses		(34,~~709~~031	)		(3,~~672~~709	)
Loans, net		~~348~~355,~~492~~038			~~356~~348,~~049~~492
Premises and equipment, net		1413,~~706~~489			14,~~477~~706
Accrued interest receivable		1,~~268~~118			1,~~413~~268
Net deferred tax asset		2,~~809~~848			2,~~600~~809
Bank-owned life insurance		11,~~088~~456			1011,~~705~~088
Foreclosed real estate		~~839~~—			~~100~~839
Prepaid FDIC insurance		~~734~~423			~~1,052~~734
Other assets		~~949~~1,103			~~1,163~~949
Total assets	$	~~453~~449,~~909~~413		$	~~449~~453,~~685~~909
Liabilities and Stockholders' Equity
Deposits	$	~~264~~289,~~769~~674		$	~~261~~264,~~050~~769
Short-term borrowings		-			3,000
Long-term borrowings		102,797			133,696
Long-term borrowings		133,696			132,236
Accrued expenses and other liabilities		3,787			3,790
Accrued expenses and other liabilities		3,790			3,696
Total liabilities		396,258			402,255
Total liabilities		402,255			399,982
Commitments and contingencies (Notes 10, 11 and 16)
Commitments and contingencies (Notes 10 and 11)
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,~~282~~085			50,~~435~~282
Retained earnings		2021,~~282~~843			1820,~~832~~282
Unearned compensation (272,786 and 338,030 shares
Unearned compensation (208,143 and 272,786 shares
at December 31, 2011 and 2010, respectively)		(2,413	)		(2,864	)
at December 31, 2012 and 2011, respectively)		(2,081	)		(2,413	)
Treasury stock (1,371,943 and 1,389,572 shares at
Treasury stock (1,378,627 and 1,371,943 shares at
at December 31, 2011 and 2010, respectively)		(16,546	)		(16,749	)
at December 31, 2012 and 2011, respectively)		(16,741	)		(16,546	)
Total stockholders' equity		5153,~~654~~155			4951,~~703~~654
Total liabilities and stockholders' equity	$	~~453~~449,~~909~~413		$	~~449~~453,~~685~~909

See accompanying notes to consolidated financial statements.F-3

~~F-3~~Index

Table of Contents

Newport Bancorp, Inc. and Subsidiary

Consolidated Statements of ~~Income~~Net Income and Comprehensive Income

Years Ended December 31, ~~2011~~2012 and ~~2010~~2011

	2011		2010
	2012		2011
	(Dollars in thousands, except per share data)
Interest and dividend income:
Loans	$	1917,~~176~~800	$	2019,~~100~~176
Securities		21,~~041~~510		2,~~383~~041
Other interest-earning assets		4875		2348
Total interest and dividend income		2119,~~265~~385		2221,~~506~~265
Interest expense:
Deposits		1,~~750~~190		21,~~520~~750
Short-term borrowings		3—		23
Long-term borrowings		4,~~578~~390		4,~~832~~578
Total interest expense		65,~~331~~580		76,~~354~~331
Net interest income		1413,~~934~~805		1514,~~152~~934
Provision for loan losses		1,~~121~~019		~~956~~1,121
Net interest income, after provision
for loan losses		1312,~~813~~786		1413,~~196~~813
Non-interest income:
Customer service fees		1,~~929~~880		1,~~868~~929
Net loss on sale of securities available for sale		-		(121	)
Bank-owned life insurance		532		383
Bank-owned life insurance		383		387
Miscellaneous		45		74
Miscellaneous		74		49
Total non-interest income		2,457		2,386
Total non-interest income		2,386		2,183
Non-interest expenses:
Salaries and employee benefits		76,~~699~~885		7,~~651~~699
Occupancy and equipment		2,~~185~~192		12,~~873~~185
Data processing		1,~~564~~682		1,~~503~~564
Professional fees		~~535~~670		~~458~~535
Marketing		~~711~~577		~~959~~711
Foreclosed real estate		182		64
FDIC insurance		339		343
FDIC insurance		343		459
Other general and administrative		661		930
Other general and administrative		748		720
Total non-interest expenses		13,006		13,967
Total non-interest expenses		13,967		13,687
Income before income taxes		2,237		2,232
Income before income taxes		2,232		2,692
Provision for income taxes		676		782
Provision for income taxes		782		892
Net income and comprehensive income	$	1,561	$	1,450
Net income	$	1,450	$	1,800
Weighted average shares outstanding:
Basic		3,~~315~~306,~~369~~817		3,~~458~~315,~~212~~369
Diluted		3,~~329~~358,~~082~~195		3,~~458~~329,~~212~~082
Earnings per share:
Basic	$	0.4447	$	0.5244
Diluted	$	0.4446	$	0.5244

See accompanying notes to consolidated financial statements.F-4

~~F-4~~Index

Table of Contents

Newport Bancorp, Inc. and Subsidiary Consolidated Statements of Changes in Stockholders' Equity Years Ended December 31, 2011 and 2010

																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, 2009		4,878,349	$	49	$	50,504		$	17,032	$	(3,465	)	$	(12,590	)	$	(139	)	$	51,391
Comprehensive income:
Net income		-		-		-			1,800		-			-			-			1,800
Net unrealized gain on securities available for sale,
net of reclassification adjustment of $121,000		-		-		-			-		-			-			139			139
Total comprehensive income																				1,939
Share-based compensation - restricted stock		-		-		-			-		341			-			-			341
Share-based compensation - options		-		-		350			-		-			-			-			350
Release of ESOP shares (26,018 shares)		-		-		50			-		260			-			-			310
Issuance of treasury stock in connection with
restricted stock plan (38,927 shares)		-		-		(469	)		-		-			469			-			-
Purchase of treasury shares (380,327 shares)		-		-		-			-		-			(4,628	)		-			(4,628	)
Balance at December 31, 2010		4,878,349		49		50,435			18,832		(2,864	)		(16,749	)		-			49,703
Comprehensive income:
Net income		-		-		-			1,450		-			-			-			1,450
Share-based compensation - restricted stock		-		-		-			-		191			-			-			191
Share-based compensation - options		-		-		227			-		-			-			-			227
Release of ESOP shares (26,018 shares)		-		-		86			-		260			-			-			346
Issuance of treasury stock in connection with
restricted stock plan (38,627 shares)		-		-		(466	)		-		-			466			-			-
Purchase of treasury shares (20,998 shares)		-		-		-			-		-			(263	)		-			(263	)
Balance at December 31, 2011		4,878,349	$	49	$	50,282		$	20,282	$	(2,413	)	$	(16,546	)	$	-		$	51,654
See accompanying notes to consolidated financial statements

F-5

Table of Contents

Newport Bancorp, Inc. and Subsidiary

Consolidated Statements of Changes in Stockholders' Equity

Years Ended December 31, 2012 and 2011

					Additional											Total
	Common Stock				Paid-in			Retained		Unearned			Treasury			Stockholders'
	Shares		Amount		Capital			Earnings		Compensation			Stock			Equity
	(Dollars in thousands)
Balance at December 31, 2010		4,878,349	$	49	$	50,435		$	18,832	$	(2,864	)	$	(16,749	)	$	49,703
Net income		—		—		—			1,450		—			—			1,450
Share-based compensation - restricted stock		—		—		—			—		191			—			191
Share-based compensation - options		—		—		227			—		—			—			227
Release of ESOP shares (26,018 shares)		—		—		86			—		260			—			346
Reissuance of treasury stock under
restricted stock plan (38,627 shares)		—		—		(466	)		—		—			466			—
Purchase of treasury stock (20,998 shares)		—		—		—			—		—			(263	)		(263	)

Balance at December 31, 2011		4,878,349		49		50,282			20,282		(2,413	)		(16,546	)		51,654
Net income		—		—		—			1,561		—			—			1,561
Share-based compensation - restricted stock		—		—		(5	)		—		72			—			67
Share-based compensation - options		—		—		119			—		—			—			119
Stock options exercised (4,308 shares)		—		—		—			—		—			53			53
Excess tax benefits from share-based compensation		—		—		29			—		—			—			29
Release of ESOP shares (26,018 shares)		—		—		113			—		260			—			373
Reissuance of treasury stock under
restricted stock plan (37,367 shares)		—		—		(453	)		—		—			453			—
Treasury stock acquired for tax withholdings
under restricted stock plan (6,459 shares)		—		—		—			—		—			(99	)		(99	)
Purchase of treasury stock (41,900 shares)		—		—		—			—		—			(602	)		(602	)

Balance at December 31, 2012		4,878,349	$	49	$	50,085		$	21,843	$	(2,081	)	$	(16,741	)	$	53,155

See accompanying notes to consolidated financial statements.

F-5

Index

Newport Bancorp, Inc. and Subsidiary

Consolidated Statements of Cash Flows

Years Ended December 31, ~~2011~~2012 and ~~2010~~2011

	2011			2010
	2012			2011
	(In thousands)
Cash flows from operating activities:
Net income	$	1,~~450~~561		$	1,~~800~~450
Adjustments to reconcile net income to
net cash provided by operating activities:
Provision for loan losses		1,~~121~~019			~~956~~1,121
Accretion of securities held to maturity		(~~165~~215	)		(~~199~~165	)
Net loss on sale of securities available for sale		-			121
Write-down on foreclosed real estate		—			45
Loss on sale and write-down of foreclosed real estate		78			17
(Gain) loss on sale of foreclosed real estate		(20	)		33
Amortization of net deferred loan fees		(~~402~~604	)		(~~416~~402	)
Depreciation and amortization of premises
and equipment		~~958~~934			~~849~~958
Share-based compensation and ESOP allocation		764			1,001
Gain on sale of premises and equipment		(16	)		—
Deferred income tax benefit		(209	)		(62	)
Share-based compensation and ESOP allocation		559			764
Income from bank-owned life insurance		(383	)		(387	)
Deferred income tax benefit		(39	)		(209	)
Income from bank-owned life insurance		(532	)		(383	)
Net change in:
Accrued interest receivable		~~145~~150			65145
Prepaid FDIC insurance		~~318~~311			~~420~~318
Other assets		~~214~~10			~~773~~214
Accrued expenses and other liabilities		9426			~~(378~~94	)
Net cash provided by operating activities		3,~~983~~144			43,~~560~~983
Cash flows from investing activities:
Proceeds from sales of securities available for sale		-			6,275
Purchase of securities held to maturity		(7,998	)		—
Purchase of securities held to maturity		-			(15,767	)
Maturities of securities held to maturity		7,998			—
Reinvested dividends on mutual funds		-			(8	)
Principal payments received on securities held to maturity		14,128			10,966
Principal payments received on securities held to maturity		10,966			13,843
Redemption of Federal Home Loan stock		142			—
Net (loan originations) principal payments		5,713			(5,315	)
Net loan (originations) principal payments		(7,185	)		5,713
Proceeds from sale of foreclosed real estate		~~308~~1,083			~~108~~308
Additions to premises and equipment		(~~1,187~~132	)		(1,~~933~~187	)
Net cash provided (used) by investing activities		15,800			(2,797	)
Proceeds from sale of premises and equipment		431			—
Net cash provided by investing activities		8,467			15,800

(continued)

See accompanying notes to consolidated financial statements.F-6

~~F-6~~Index

Table of Contents

Newport Bancorp, Inc. and Subsidiary

Consolidated Statements of Cash Flows (Concluded)

Years Ended December 31, ~~2011~~ 2012 and ~~2010~~ 2011

	2011			2010
	2012			2011
	(In thousands)
Cash flows from financing activities:
Net (decrease) increase in deposits		3,719			(896	)
Net increase in deposits		24,905			3,719
Net increase (decrease) in borrowings with
Net decrease in borrowings with
maturities of three months or less		~~(3,000~~—	)		(3,000	)
Proceeds from borrowings with maturities in
excess of three months		105,~~500~~000			810,~~000~~500
Repayment of borrowings with maturities in
excess of three months		(935,~~040~~899	)		(179,~~232~~040	)
Purchase of treasury stock		(~~263~~602	)		(~~4,628~~263	)
Net cash provided (used) by financing activities		1,916			(11,756	)
Treasury stock acquired for tax withholding		(99	)		—
Net change in cash and cash equivalents		21,699			(9,993	)
Stock options exercised		53			—
Cash and cash equivalents at beginning of year		9,375			19,368
Net cash provided (used) by financing activities		(6,642	)		1,916
Cash and cash equivalents at end of year	$	31,074		$	9,375
Net change in cash and cash equivalents		4,969			21,699
Cash and cash equivalents at beginning of year		31,074			9,375
Cash and cash equivalents at end of year	$	36,043		$	31,074
Supplemental cash flow information:
Interest paid on deposit accounts	$	1,~~856~~194		$	21,~~606~~856
Interest paid on borrowings		4,~~597~~503			4,~~874~~597
Income taxes paid, net of refunds		~~623~~569			~~1,166~~623
Transfers from loans to foreclosed real estate		~~1,125~~224			~~225~~1,125

See accompanying notes to consolidated financial statements.F-7

~~F-7~~Index

Table of Contents

Newport Bancorp, Inc. and Subsidiary

Notes to Consolidated Financial Statements

Years Ended December 31, ~~2011 and~~2012 ~~2010~~and 2011

1.	SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation

The consolidated financial statements include the accounts of Newport Bancorp, Inc. (the “Company”) and its wholly-owned subsidiary, Newport Federal Savings Bank (the “Bank”). The Bank has one wholly-owned subsidiary, NewportFed Investments, Inc., which was established to hold certain investments, consisting primarily of commercial mortgages and loans. All significant intercompany balances and transactions have been eliminated in consolidation.

Nature of Operations

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

Segment Reporting

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

Use of Estimates

In preparing financial statements in conformity with accounting principles generally accepted in the United States of America, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheet and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change 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 ~~2010~~2011 consolidated financial statements have been reclassified to conform to the ~~2011~~2012 presentation.

F-8

~~Table~~IndexNewport ofBancorp, ~~Contents~~Inc. and SubsidiaryNotes to Consolidated Financial Statements (Continued) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Newport Bancorp, Inc. and Subsidiary

Notes to Consolidated Financial Statements (Continued)

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Fair Value Hierarchy

The Company groups its assets and liabilities 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.

Transfers between levels are recognized at the end of the reporting period, if applicable.

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. The Company maintains amounts in due from banks that, at times, may exceed federally insured limits.

Securities Held to Maturity

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

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

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

F-9

~~Table~~IndexNewport ofBancorp, ~~Contents~~Inc. and SubsidiaryNotes to Consolidated Financial Statements (Continued) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Securities Held to Maturity (concluded)

~~Newport~~Each ~~Bancorp~~reporting period, ~~Inc.~~the ~~and~~Company ~~Subsidiary~~evaluates all securities with a decline in fair value below the amortized cost of the investment to determine whether or not the impairment is deemed to be other-than-temporary (“OTTI”).

Notes to Consolidated Financial Statements (Continued)

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Securities (concluded)

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

Federal Home Loan Bank Stock

The Bank, as a member of the Federal Home Loan Bank (“FHLB”) system, is required to maintain an investment in capital stock of the FHLB. Based on redemption provisions of the FHLB, the stock has no quoted market value and is carried at cost. At its discretion, the FHLB may declare dividends on the stock. The Bank reviews for impairment based on the ultimate recoverability of the cost basis in the FHLB stock. As of December 31, ~~2011~~2012, no impairment has been recognized.

Loans

The Company’s loan portfolio includes ~~residential mortgage, commercial mortgage, construction, commercial and consumer segments. Residential real estate loans include classes for~~ one-to-four family, ~~multi-family~~residential ~~and~~mortgages, ~~home~~ equity loans and ~~equity~~ lines of credit., ~~The~~commercial ~~Company~~and ~~grants~~multi-family ~~mortgage~~mortgages, ~~commercial~~construction and ~~consumer~~ ~~loans~~other ~~to customers~~loan segments. 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 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.

F-10

~~Table~~IndexNewport ofBancorp, ~~Contents~~Inc. and SubsidiaryNotes to Consolidated Financial Statements (Continued) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Loans (concluded)

Newport Bancorp, Inc. and Subsidiary

Notes to Consolidated Financial Statements (Continued)

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Loans (concluded)

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.

The allowance consists of general and allocated loss components, as further described below.

General component

The general component of the allowance for loan ~~losses~~ losses is based on historical loss experience adjusted for qualitative factors stratified by ~~the following~~ loan segments~~: residential real estate, commercial real estate, construction, commercial and consumer~~. Management uses a rolling average of historical losses based on a time frame appropriate to capture relevant loss data for each loan segment. This historical loss factor is adjusted for the following qualitative factors: levels/trends in delinquencies; trends in volume and terms of loans; effects of changes in risk selection and underwriting standards and other changes in lending policies, procedures and practices; experience/ability/depth of lending management and staff; national and local economic trends and conditions; and risk ratings assigned to loans. There were no changes in the Company’s policies or methodology pertaining to the general component of the allowance for loan losses during ~~2011~~2012 or ~~2010~~2011.

The qualitative factors are determined based on the various risk characteristics of each loan segment. Risk characteristics relevant to each portfolio segment are as follows:

One-to-four family residential mortgage loans – The Company generally does not originate loans with a loan-to-value ratio greater than 95 percent and does not grant subprime loans. Loans with loan-to-value ratios in excess of 80 percent generally require private mortgage insurance. Loans in this segment are collateralized primarily by owner-occupied residential real estate and repayment is dependent on the credit quality of the individual borrower. The overall health of the economy, including unemployment rates and housing prices, will have an effect on the credit quality in this segment.

F-11

~~Newport~~Equity ~~Bancorp,~~loans ~~Inc~~and lines of credit - Loans in this segment are collateralized primarily by owner-occupied residential real estate and repayment is dependent on the credit quality of the individual borrower. The Company estimates that approximately 68% of the combined equity loans and ~~Subsidiary~~lines of credit balances are secured by first lien positions or subordinate to other Bank mortgages.

~~Notes~~Commercial and multi-family residential mortgage loans – Loans in this segment are primarily income-producing properties throughout Newport and Washington County, Rhode Island, and to ~~Consolidated~~a ~~Financial~~lesser extent, other cities and towns in Rhode Island, Connecticut and Massachusetts. The underlying cash flows generated ~~Statements~~by ~~(Continued)~~the properties are adversely impacted by a downturn in the economy as evidenced by increased vacancy rates, which in turn, will have an effect on the credit quality in this segment. Management obtains rent rolls annually and continually monitors the cash flows of these loans. In addition, for owner-occupied commercial real estate loans, repayment is expected from the cash flows of the owner’s business. A weakened economy will have an effect on the credit quality of this segment.

~~SUMMARY~~Construction OFloans ~~SIGNIFICANT~~– ~~ACCOUNTING~~The Company originates construction ~~POLICIES~~loans ~~(continued)~~for one-to-four family homes and commercial, multi-family and other nonresidential purposes. One-to-four family residential construction loans are typically made to the prospective owner occupant of the dwelling. The construction to permanent product has one closing and provides for a construction phase of six to twelve months followed by a standard amortizing mortgage term of ten to thirty years. The Company also offers construction loans to local real estate contractors in our market area, generally for the construction of residential properties. These loans are made on either a pre-sold or speculative basis. Occasionally, the Company originates construction loans on other nonresidential properties. These loans are generally secured by personal guarantees to provide an additional source of repayment. Credit risk is affected by cost overruns, time to sell at an adequate price, and market conditions.

~~Allowance~~Other ~~for~~loans ~~Loan~~– ~~Losses~~Loans ~~(continued)~~in this segment are made to businesses that are generally secured by assets of the business or a variety of consumer loans, including auto loans and loans secured by passbook savings or certificate accounts. Repayment of commercial loans is expected from the cash flows of the business. A weakened economy, and resultant decreased consumer spending, will have an effect on the credit quality in this segment. Repayment of consumer loans is dependent on the credit quality of the individual borrower.

General component (concluded)

Residential mortgage loans – The Company generally does not originate loans with a loan-to-value ratio greater than 95 percent and does not grant subprime loans. Loans with loan-to-value ratios in excess of 80 percent generally require private mortgage insurance. All loans in this segment are collateralized by owner-occupied residential real estate and repayment is dependent on the credit quality of the individual borrower. The overall health of the economy, including unemployment rates and housing prices, will have an effect on the credit quality in this segment.

Commercial mortgage loans – Loans in this segment are primarily income-producing properties throughout Newport and Washington County, Rhode Island, and to a lesser extent, other cities and towns in Rhode Island, Connecticut and Massachusetts. The underlying cash flows generated by the properties are adversely impacted by a downturn in the economy as evidenced by increased vacancy rates, which in turn, will have an effect on the credit quality in this segment. Management obtains rent rolls annually and continually monitors the cash flows of these loans. In addition, for owner-occupied commercial real estate loans, repayment is expected from the cash flows of the owner’s business. A weakened economy will have an effect on the credit quality of this segment.

Construction loans – The Company originates construction loans for one-to-four family homes and commercial, multi-family and other nonresidential purposes. Credit risk is affected by cost overruns, time to sell at an adequate price, and market conditions.

Commercial loans – Loans in this segment are made to businesses and are generally secured by assets of the business. Repayment is expected from the cash flows of the business. A weakened economy, and resultant decreased consumer spending, will have an effect on the credit quality in this segment.

Consumer loans – The Company offers a variety of consumer and other loans, including auto loans and loans secured by passbook savings or certificate accounts. Repayment is dependent on the credit quality of the individual borrower.

F-12

Table of Contents

Newport Bancorp, Inc. and Subsidiary

Notes to Consolidated Financial Statements (Continued)

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Allowance for Loan Losses (concluded)

Allocated component

The allocated component relates to loans that are classified as impaired. Impairment is measured on a loan by loan basis by either the present value of expected future cash flows discounted at the loan’s effective interest rate or the fair value of the collateral if the loan is collateral dependent. An allowance is established when the discounted cash flows (or collateral value, if the loan is collateral dependent) of the impaired loan is lower than the carrying value of that loan. Large groups of smaller balance homogeneous loans are collectively evaluated for impairment. Accordingly, the Company does not separately identify individual consumer loans for impairment disclosures, unless such loans are subject to a troubled debt restructuring agreement.

F-12

Index

Newport Bancorp, Inc. and Subsidiary

Notes to Consolidated Financial Statements (Continued)

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Allowance for Loan Losses (concluded)

Allocated component (concluded)

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. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed.

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

Transfers of Financial Assets

Transfers of an entire asset, a group of entire financial assets, or a participating interest in an entire financial asset 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.

During the normal course of business, the Company may transfer a portion of a financial asset, for example, a participation loan or the government guaranteed portion of a loan. In order to be eligible for sales treatment, the transfer of the portion of the loan must meet the criteria of a participating interest. If it does not meet the criteria of a participating interest, the transfer must be accounted for as a secured borrowing. In order to meet the criteria for a participating interest, all cash flows from the loan must be divided proportionately, the rights of each loan holder must have the same priority, the loan holders must have no recourse to the transferor other than standard representations and warranties and no loan holder has the right to pledge or exchange the entire loan.

F-13

~~Table~~IndexNewport ofBancorp, ~~Contents~~Inc. and SubsidiaryNotes to Consolidated Financial Statements (Continued) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Newport Bancorp, Inc. and Subsidiary

Notes to Consolidated Financial Statements (Continued)

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

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 and are not subject to income taxes.

Premises and Equipment

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

Marketing Costs

Marketing costs are expensed as incurred.

Pension Plan

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

Share-based Compensation Plans

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

Employee Stock Ownership Plan

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

F-14

Index

Newport Bancorp, Inc. and Subsidiary

Notes to Consolidated Financial Statements (Continued)

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Treasury Stock

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

F-14

Table of Contents

Newport Bancorp, Inc. and Subsidiary

Notes to Consolidated Financial Statements (Continued)

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Income Taxes

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

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

Earnings ~~Per~~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 with forfeitable dividend rights) 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:

	2011			2010
	(In thousands)
Net income applicable to common stock	$	1,450		$	1,800
Weighted average number of common shares issued		4,878			4,878
Less: Weighted average treasury shares		(1,382	)		(1,254	)
Less: Weighted average unallocated ESOP shares		(247	)		(273	)
Add: Weighted average unvested restricted stock
plan shares with non-forfeitable dividend rights		66			107
Weighted average number of common shares outstanding
used to calculate basic earnings per common share		3,315			3,458
Effect of dilutive stock options		14			-
Weighted average number of common shares outstanding
used to calculate diluted earnings per common share		3,329			3,458

F-15

~~Newport~~Earnings ~~Bancorp,~~per ~~Inc.~~common ~~and~~share ~~Subsidiary~~have been computed based on the following:

Notes to Consolidated Financial Statements (Continued)

	Years Ended December 31,
	2012			2011
	(In thousands)

Net income applicable to common stock	$	1,561		$	1,450

Weighted average number of common shares issued		4,878			4,878
Less: Weighted average treasury shares		(1,379	)		(1,382	)
Less: Weighted average unallocated ESOP shares		(221	)		(247	)
Add: Weighted average unvested restricted stock
plan shares with non-forfeitable dividend rights		29			66
Weighted average number of common shares outstanding
used to calculate basic earnings per common share		3,307			3,315

Effect of dilutive stock options		51			14
Weighted average number of common shares outstanding
used to calculate diluted earnings per common share		3,358			3,329

~~SUMMARY~~There OFwere ~~SIGNIFICANT~~no ~~ACCOUNTING~~anti-dilutive shares for the year ended ~~POLICIES~~December ~~(continued)~~31, 2012. Options for 471,081 shares of common stock were not included in the computation of diluted EPS because they were anti-dilutive for the year ended December 31, 2011.

Earnings Per Share (concluded)

Options for 471,081 and 487,834 shares of common stock were not included in the computation of diluted EPS because they were anti-dilutive for the years ended December 31, 2011 and 2010, respectively.

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 equity section of the balance sheet, such items, along with net income, are components of comprehensive income/loss. The Company had no components of accumulated other comprehensive income at December 31, 2011 and 2010.

Recent Accounting Pronouncements

In ~~September 2011~~January 2012, the Company adopted Financial Accounting ~~Standards~~ Standards Board (FASB) ~~issued~~ Accounting Standards Update (ASU) 2011-0905, ~~Compensation~~Comprehensive –Income ~~Retirement Benefits – Multiemployer Plans~~ (~~Subtopic~~Topic ~~715-80~~220), ~~Disclosures~~Presentation ~~about~~of ~~an Employer’s Participation in a Multiemployer Plan~~Comprehensive Income. This ASU amends the disclosure requirements for ~~multiemployer~~the ~~pension~~presentation ~~plans~~of ~~and~~comprehensive ~~multiemployer other postretirement benefit plans~~income. ~~This~~The ~~Update~~amended ~~requires~~guidance ~~an employer~~eliminates the option to ~~provide~~present ~~additional~~components ~~quantitative~~of ~~and~~other ~~qualitative~~comprehensive ~~disclosures~~income to(OCI) ~~provide~~as ~~users~~part ~~with~~of ~~more~~the ~~detailed~~statement ~~information~~of ~~about~~changes anin ~~employer~~stockholder’s ~~involvement~~equity. inUnder ~~multiemployer~~the ~~pension~~amended ~~plans.~~guidance, ~~The~~all ~~amendments~~changes in ~~this~~OCI ~~Update~~ are ~~effective~~to ~~for~~be ~~annual~~presented ~~periods~~either ~~for~~in ~~fiscal~~a ~~years~~single ~~ending~~continuous statement of comprehensive ~~after~~income ~~December~~or ~~15,~~in ~~2011~~two separate but consecutive financial statements. There iswas no impact to the consolidated financial results as the amendments relate only to ~~additional~~changes ~~disclosures, which are provided~~ in ~~Note~~financial 10statement presentation.

In June 2011, the FASB issued 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. The changes are effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. Early application is permitted. There will be no impact to the consolidated financial results as the amendments relate only to changes in financial statement presentation.

In April 2011, the FASB issued ASU No. 2011-02, Receivables (Topic 310), A Creditor’s Determination of Whether a Restructuring Is a Troubled Debt Restructuring. This Update provides additional guidance and clarification to help creditors in determining whether a creditor has granted a concession and whether a debtor is experiencing financial difficulties for purposes of determining whether a restructuring constitutes a troubled debt restructuring (“TDR”). The measurement of impairment will be done prospectively in the period of adoption for loans that are newly identified as TDRs upon adoption of this Update. In addition, the TDR disclosures required by ASU 2010-20, Receivables (Topic 310), Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses will be provided beginning in the period of adoption of this Update.

The Company adopted this Update on July 1, 2011 and it did not have a material impact on its consolidated financial statements.

F-16

~~Newport~~In ~~Bancorp~~January 2012, ~~Inc~~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 ~~Subsidiary~~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.

~~Notes~~In toJanuary ~~Consolidated~~2012, ~~Financial~~the Company adopted the FASB ASU 2011-04, ~~Statements~~Fair Value Measurement (~~Continued~~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 13 to the accompanying consolidated financial statements.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (concluded)

Recent Accounting Pronouncements (concluded)

In April 2011, the FASB issued ASU No. 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. The amendment is effective for the first interim or annual period beginning on or after December 15, 2011 and should be applied prospectively to transactions or modifications of existing transactions that occur on or after the effective date. The Update is not expected to have a significant 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, ~~2011~~2012 and ~~2010~~2011, these reserve balances amounted to $56,~~749~~240,000 and $65,~~410~~749,000, respectively. Certain amounts due from banks were pledged to secure repurchase agreements at December 31, ~~2011~~2012 (see Note 7).

F-17

~~Table~~IndexNewport ofBancorp, ~~Contents~~Inc. and SubsidiaryNotes to Consolidated Financial Statements (Continued)

Newport Bancorp, Inc. and Subsidiary

Notes to Consolidated Financial Statements (Continued)

3.	SECURITIES

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

~~Fair~~

Cost

Gains

~~Losses~~Value

~~Value~~

(In thousands)

December 31, 2011

December 31, 2012

Government-sponsored

enterprise residential

mortgage-backed securities

3622,~~220~~307

32,~~028~~199

-24,506

~~39,248~~

December 31, 2010

December 31, 2011

Government-sponsored

enterprise residential

mortgage-backed securities

4736,~~021~~220

23,~~300~~028

(739,248

)

~~49,314~~

AtThere ~~December~~were ~~31,~~no ~~2011~~securities ~~and~~with ~~2010,~~gross ~~certain~~unrealized ~~mortgage-backed~~losses ~~securities~~at ~~were~~December ~~pledged~~31, to2012 ~~secure~~and ~~repurchase agreements (see Note 7)~~2011.

~~There~~At ~~were no sales of securities during the year ended~~ December 31, ~~2011.~~2012 ~~For~~and ~~the year ended December 31~~2011, ~~2010,~~certain ~~proceeds from the sale of~~ mortgage-backed securities ~~available~~were ~~for~~pledged ~~sale amounted~~ to ~~$6,275,000, which~~secure ~~realized~~repurchase ~~gross~~agreements ~~losses~~(see ofNote ~~$267,000 and gross gains of $146,000~~7).

There were no sales of securities during the years ended December 31, 2012 and 2011.

F-18

~~Table~~IndexNewport ofBancorp, ~~Contents~~Inc. and SubsidiaryNotes to Consolidated Financial Statements (Continued)

Newport Bancorp, Inc. and Subsidiary

Notes to Consolidated Financial Statements (Continued)

SECURITIES (concluded)

Information pertaining to securities held to maturity at December 31, 2010 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

Unrealized

Fair

Unrealized

Fair

Losses

Value

Losses

Value

(In thousands)

December 31, 2010

Government-sponsored

enterprise residential

mortgage-backed securities

9,785

F-19

Table of Contents

Newport Bancorp, Inc. and Subsidiary

Notes to Consolidated Financial Statements (Continued)

LOANS

A summary of the balances of loans follows:

	December 31,
	2011			2010
	2012			2011
	(In thousands)
Mortgage loans:
Residential:
One-to-four family residential	$	228,428		$	207,773
One-to-four family	$	207,773		$	203,893
Equity loans and lines of credit		16,995			19,597
Multi-family		18,271			22,540
Commercial and multi-family residential		109,372			119,486
Equity loans and lines of credit		19,597			23,112
Construction		4,117			5,016
Commercial		101,215			104,531
		358,912			351,872
Construction		5,016			4,948
Other loans:
		351,872			359,024
Commercial loans		998			1,116
Commercial loans		1,116			1,638
Consumer loans		311			399
Consumer loans		399			288
Total loans		360,221			353,387
Total loans		353,387			360,950
Less: Allowance for loan losses		(4,031	)		(3,709	)
Less: Allowance for loan losses		(3,709	)		(3,672	)
Net deferred loan fees		(1,152	)		(1,186	)
Net deferred loan fees		(1,186	)		(1,229	)
Loans, net	$	355,038		$	348,492
Loans, net	$	348,492		$	356,049

Loans sold and serviced for others amounted to $53,~~386~~284,000 and $65,~~509~~386,000 at December 31, ~~2011~~2012 and ~~2010~~2011, respectively, and have been sold without recourse.

F-2019

~~Table~~IndexNewport ofBancorp, ~~Contents~~Inc. and SubsidiaryNotes to Consolidated Financial Statements (Continued) LOANS (continued)

Newport Bancorp, Inc. and Subsidiary

Notes to Consolidated Financial Statements (Continued)

LOANS (continued)

Further information pertaining to the allowance for loan losses and impaired loans follows:

	Residential			Commercial
	One-to-Four			Equity Loans			Commerical
	Mortgages			Mortgages			Construction			Commercial			Consumer			Total
	Family			and Lines			and						Other
	Residential			of Credit			Multi-Family			Construction			Loans			Total
	(In thousands)
Year ended December 31, 2011
Year Ended December 31, 2012
Allowance for loan losses:
Balance at beginning of year	$	1,~~578~~070		$	~~1,976~~147		$	892,373		$	2594		$	425		$	3,~~672~~709
Provision for loans losses		767			317			5			30			2			1,121
Provision (credit) for loan losses		142			12			888			(18	)		(5	)		1,019
Loans charged-off		~~(799~~—	)		(~~259~~25	)		-(752	)		~~(37~~—	)		-—			(~~1,095~~777	)
Recoveries of loans
previously charged-off		10—			-—			-80			1—			-—			1180
Balance at end of year	$	1,~~556~~212		$	~~2,034~~134		$	942,589		$	1976		$	620		$	34,~~709~~031
December 31, 2011
Year Ended December 31, 2011
Amount of allowance for loan losses
Allowance for loan losses:
for loans deemed to be impaired	$	-		$	-		$	-		$	-		$	-		$	-
Balance at beginning of year	$	1,028		$	173		$	2,353		$	89		$	29		$	3,672
Amount of allowance for loan losses
Provision for loan losses		162			45			877			5			32			1,121
for loans not deemed to be impaired		1,556			2,034			94			19			6			3,709
Loans charged-off		(120	)		(71	)		(867	)		—			(37	)		(1,095	)
Total allowance for loan losses	$	1,556		$	2,034		$	94		$	19		$	6		$	3,709
Recoveries of loans
Recorded investment in:
previously charged-off		—			—			10			—			1			11
Loans deemed to be impaired		1,910			1,545			-			-			-			3,455
Balance at end of year	$	1,070		$	147		$	2,373		$	94		$	25		$	3,709
Loans deemed not to be impaired		243,731			99,670			5,016			1,116			399			349,932
Total	$	245,641		$	101,215		$	5,016		$	1,116		$	399		$	353,387
December 31, 2010
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		1,578			1,976			89			25			4			3,672
Total allowance for loan losses	$	1,578		$	1,976		$	89		$	25		$	4		$	3,672
Recorded investment in:
Loans deemed to be impaired		108			-			-			-			-			108
Loans deemed not to be impaired		249,437			104,531			4,948			1,638			288			360,842
Total	$	249,545		$	104,531		$	4,948		$	1,638		$	288		$	360,950

F-20

Index

Newport Bancorp, Inc. and Subsidiary

Notes to Consolidated Financial Statements (Continued)

LOANS (continued)

	One-to-Four		Equity Loans		Commerical
	Family		and Lines		and				Other
	Residential		of Credit		Multi-Family		Construction		Loans		Total
	(In thousands)

December 31, 2012

Amount of allowance for loan losses
for loans deemed to be impaired	$	72	$	7	$	203	$	—	$	—	$	282

Amount of allowance for loan losses
for loans not deemed to be impaired		1,140		127		2,386		76		20		3,749

Total allowance for loan losses	$	1,212	$	134	$	2,589	$	76	$	20	$	4,031

Recorded investment in:
Loans deemed to be impaired	$	518	$	56	$	5,176	$	—	$	—	$	5,750
Loans deemed not to be impaired		227,910		16,939		104,196		4,117		1,309		354,471
Total	$	228,428	$	16,995	$	109,372	$	4,117	$	1,309	$	360,221

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

F-21

~~Table~~IndexNewport ofBancorp, ~~Contents~~Inc. and SubsidiaryNotes to Consolidated Financial Statements (Continued) LOANS (continued)

Newport Bancorp, Inc. and Subsidiary

Notes to Consolidated Financial Statements (Continued)

LOANS (continued)

An analysis of the allowance for loan losses for the year ended December 31, 2010 follows:

	(In thousands)
Balance at beginning of year	$	3,467
Provision for loan losses		956
Loans charged-off		(772	)
Recoveries of loans previously charged-off		21
Balance at end of year	$	3,672

The following is a summary of past due and non-accrual loans:

	30-59 Days Past Due		60-89 Days Past Due		Greater than 90 Days Past Due		Total Past Due		Loans on Non- accrual
	(In thousands)
December 31, 2012
One-to-four family residential	$	1,075	$	—	$	—	$	1,075	$	518
Equity loans and lines of credit		—		—		—		—		56
Commercial and multi-family residential		—		—		1,209		1,209		1,586
Total	$	1,075	$	—	$	1,209	$	2,284	$	2,160
December 31, 2011
Residential mortgages:
One-to-four family residential	$	149	$	690	$	446	$	1,285	$	1,052
One-to-four family	$	149	$	690	$	446	$	1,285	$	1,052
Equity loans and lines of credit		57		150		—		207		—
Multi-family		-		-		858		858		858
Commercial and multi-family residential		199		—		858		1,057		858
Equity loans and lines of credit		57		150		-		207		-
Commercial mortgages		199		-		-		199		-
Total	$	405	$	840	$	1,304	$	2,549	$	1,910
December 31, 2010
Residential mortgages:
One-to-four family	$	220	$	-	$	108	$	328	$	108
Multi-family		-		-		-		-		-
Equity loans and lines of credit		-		-		-		-		-
Commercial mortgages		618		-		-		618		-
Total	$	838	$	-	$	108	$	946	$	108

At December 31, ~~2011~~2012 and ~~2010~~2011, there were no loans greater than ninety days past due and still accruing interest.

F-22

~~Table~~IndexNewport ofBancorp, ~~Contents~~Inc. and SubsidiaryNotes to Consolidated Financial Statements (Continued) LOANS (continued)

Newport Bancorp, Inc. and Subsidiary

Notes to Consolidated Financial Statements (Continued)

LOANS (continued)

Further information pertaining to impaired loans follows:

	December 31, 2011				December 31, 2010
	December 31, 2012
	Average Recorded Investment		Unpaid Principal Balance		Average Recorded Investment		Unpaid Principal Balance
	Recorded Investment		Unpaid Principal Balance		Related Allowance
	(In thousands)
Impaired loans without a valuation allowance:
Residential real estate:
Commercial and multi-family residential	$	2,781	$	2,970	$	—
One-to-four family	$	1,052	$	1,053	$	108	$	108
Impaired loans with a valuation allowance:
Multi-family		858		938		-		-
One-to-four family residential		518		518		72
Commercial mortgages		1,545		1,545		-		-
Equity loans and lines of credit		56		56		7
Total	$	3,455	$	3,536	$	108	$	108
Commercial and multi-family residential		2,395		2,395		203
Total		2,969		2,969		282
Total impaired loans	$	5,750	$	5,939	$	282

	Year Ended December 31, 2011
	Year Ended December 31, 2012
	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)~~		(In thousands)
Residential real estate:
One-to-four family residential	$	938	$	49	$	49
One-to-four family	$	295	$	58	$	58
Equity loans and lines of credit		94		4		4
Multi-family		671		47		47
Commercial and multi-family residential		4,170		120		120
Equity loans and lines of credit		151		1		1
Total	$	5,202	$	173	$	173
Commercial mortgages		2		102		102
Total	$	1,119	$	208	$	208

For the year ended December 31, 2010, the average recorded investment in impaired loans amounted to $980,000. There was $32,000 of interest income recognized on impaired loans on the cash basis during 2010. There were no additional funds committed to be advanced in connection with impaired loans at December 31, 2011 and 2010.

F-23

~~Table~~IndexNewport ofBancorp, ~~Contents~~Inc. and SubsidiaryNotes to Consolidated Financial Statements (Continued) LOANS (continued)

Newport Bancorp, Inc. and Subsidiary

	December 31, 2011
	Recorded Investment		Unpaid Principal Balance
	(In thousands)
Impaired loans without a valuation allowance:
One-to-four family residential	$	1,052	$	1,053
Commercial and multi-family residential		2,403		2,480
Total impaired loans	$	3,455	$	3,533

Notes to Consolidated Financial Statements (Continued)

	Year Ended December 31, 2011
	Average Recorded Investment		Interest Income Recognized		Interest Income Recognized on Cash Basis
	(In thousands)

One-to-four family residential	$	295	$	58	$	58
Equity loans and lines of credit		151		1		1
Commercial and multi-family residential		673		149		149
Total	$	1,119	$	208	$	208

~~LOANS~~There were ~~(continued)~~no additional funds committed to be advanced in connection with impaired loans at December 31, 2012 and 2011.

The following is a summary of troubled debt restructurings for the year ended December 31, 2012. There were no troubled debt restructurings for the year ended December 31, 2011.

				Pre-Modification				Post-Modification
				Outstanding

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