This Management's Discussion and Analysis of Results of Operations and Financial Condition presents a review of the results of operations for the three months ended September 30, 2008 and 2007 and the financial condition at September 30, 2008 and June 30, 2008. This discussion and analysis is intended to assist in understanding the results of operations and financial condition of Northeast Bancorp and its wholly-owned subsidiary, Northeast Bank. Accordingly, this section should be read in conjunction with the consolidated financial statements and the related notes and other statistical information contained herein. See our annual report on Form 10-K, for the fiscal year ended June 30, 2008, for discussion of the critical accounting policies of the Company. Certain amounts in the prior year have been reclassified to conform to the current-year presentation.

A Note about Forward Looking Statements

This report contains certain "forward-looking statements" within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, such as statements relating to our financial condition, prospective results of operations, future performance or expectations, plans, objectives, prospects, loan loss allowance adequacy, simulation of changes in interest rates, capital spending and finance sources, and revenue sources. These statements relate to expectations concerning matters that are not historical facts. Accordingly, statements that are based on management's projections, estimates, assumptions, and judgments constitute forward-looking statements. These forward-looking statements, which are based on various assumptions (some of which are beyond the Company's control), may be identified by reference to a future period or periods, or by the use of forward-looking terminology such as "believe", "expect", "estimate", "anticipate", "continue", "plan", "approximately", "intend", "objective", "goal", "project", or other similar terms or variations on those terms, or the future or conditional verbs such as "will", "may", "should", "could", and "would". In addition, the Company may from time to time make such oral or written "forward-looking statements" in future filings with the Securities and Exchange Commission (including exhibits thereto), in its reports to shareholders, and in other communications made by or with the approval of the Company.

Such forward-looking statements reflect our current views and expectations based largely on information currently available to our management, and on our current expectations, assumptions, plans, estimates, judgments, and projections about our business and our industry, and they involve inherent risks and uncertainties. Although we believe that these forward-looking statements are based on reasonable estimates and assumptions, they are not guarantees of future performance and are subject to known and unknown risks, uncertainties, contingencies, and other factors. Accordingly, we cannot give you any assurance that our expectations will, in fact, occur or that our estimates or assumptions will be correct. We caution you that actual results could differ materially from those expressed or implied by such forward-looking statements due to a variety of factors, including, but not limited to, those related to the current disruptions in the financial and credit markets, the economic environment, particularly in the market areas in which the Company operates, competitive products and pricing, fiscal and monetary policies of the U.S. Government, changes in government regulations affecting financial institutions, including regulatory fees and capital requirements, changes in prevailing interest rates, acquisitions and the integration of acquired businesses, credit risk management, asset/liability management, changes in technology, changes in the securities markets, and the availability of and the costs associated with sources of liquidity. Accordingly, investors and others are cautioned not to place undue reliance on such forward-looking statements. For a more complete discussion of certain risks and uncertainties affecting the Company, please see "Item 1. Business - Forward-Looking Statements and Risk Factors" set forth in our Form 10-K for the fiscal year ended June 30, 2008 and the additional risk factors in Part II of this 10-Q. These forward-looking statements speak only as of the date of this report and we do not undertake any obligation to update or revise any of these forward-looking statements to reflect events or circumstances occurring after the date of this report or to reflect the occurrence of unanticipated events.

Overview of Operations

This Overview is intended to provide a context for the following Management's Discussion and Analysis of the Results of Operations and Financial Condition, and should be read in conjunction with our unaudited consolidated financial statements, including the notes thereto, in this quarterly report on Form 10-Q, as well as our audited consolidated financial statements for the year ended June 30, 2008 as filed on Form 10-K with the SEC. We have attempted to identify the most important matters on which our management focuses in evaluating our financial condition and operating performance and the short-term and long-term opportunities, challenges, and risks (including material trends and uncertainties) which we face. We also discuss the action we are taking to address these opportunities, challenges, and risks. The Overview is not intended as a summary of, or a substitute for review of, Management's Discussion and Analysis of the Results of Operations and Financial Condition.

Northeast Bank is faced with the following challenges: growing our loan portfolio, improving net interest margins, executing our plan of increasing noninterest income and improving the efficiency ratio.

Loans have decreased compared to June 30, 2008, due principally to a decrease in commercial loans. Competition for commercial loans is intense and we are not competing for relationships where we believe transactions do not reflect pricing or structure for risk.

To improve net interest income, we leveraged our balance sheet using investment securities during the three months ended September 30, 2008. During the quarter ended September 30, 2008, we purchased $11 million of mortgage-backed securities funded with short-term advances from the Fed Discount Window. For the three months ended September 30, 2008, the Bank borrowed $10 million using $11 million of mortgage-backed securities as collateral. The proceeds were used to repay the Fed Discount Window short-term advances. This leveraging of our balance sheet increased overall earning assets at September 30, 2008 compared to prior periods.

Net interest margins are expected to continue to improve modestly over the near term. This increase will be due to the volume of certificates of deposits that is expected to reprice in the next quarter to interest rates lower than one year ago. Since our balance sheet was liability sensitive at June 30, 2008, the cost of interest-bearing liabilities reprice more quickly than the yield of interest-bearing assets and would generally be expected to result in an increase in net interest income during a period of falling interest rates (and a decrease in net interest income during a period of rising interest rates). We believe that the prospect of additional decreases in prime rate in the immediate future is likely based on the expectation that the Federal Reserve Bank will lower the federal funds rate. Any significant improvement in net interest income would also require an increased volume of new loan originations in addition to the changes in market rates.

Management believes that the allowance for loan losses as of September 30, 2008 was adequate, under present conditions, for the known credit risk in the loan portfolio. While non-accrual loans and loan delinquencies decreased compared to the levels at June 30, 2008 and as the loan portfolio decreased $435,339 during the three months ended September 30, 2008, we have maintained our allowance for loan losses at $5,656,000.

We expect to improve non-interest income primarily from increases in consumer and commercial property and casualty insurance policies sold by Northeast Bank Insurance Agency, Inc. through cross-sales to bank customers and sales to new customers, thereby increasing insurance commission revenue, and sales of investments by the wealth management division of our trust department and the investment brokerage division, thereby increasing commission revenue. Non-interest expense is expected to increase to support this expansion.

Our efficiency ratio, calculated by dividing noninterest expense by the sum of net interest income and noninterest income, was 92% and 87% for the three months ended September 30, 2008 and 2007, respectively. The ratio has increased due to the increase in noninterest expense as compared to the same period during the prior fiscal year, with this increase exceeding the increases in net interest income and non interest income. The Company recognized impairment expense of $267,976 on preferred stock securities of FNMA and FHLMC and the common and preferred stock of AIG Insurance which the US Treasury seized control of on September, 2008, contributing to the increase in noninterest expense for the three months ended September 30, 2008.

Description of Operations

Northeast Bancorp (the "Company") is a Maine corporation and a bank holding company registered with the Federal Reserve Bank of Boston ("FRB") under the Bank Holding Company Act of 1956. The FRB is the primary regulator of the Company, and it supervises and examines our activities. The Company also is a registered Maine financial institution holding company under Maine law and is subject to regulation and examination by the Superintendent of Maine Bureau of Financial Institutions. We conduct business from our headquarters in Lewiston, Maine and, as of September 30, 2008, we had eleven banking offices, one financial center and fourteen insurance offices located in western and south-central Maine and southeastern New Hampshire. At September 30, 2008, we had consolidated assets of $605.2 million and consolidated stockholders' equity of $41.3 million.

The Company's principal asset is all the capital stock of Northeast Bank (the "Bank"), a Maine state-chartered universal bank. The Company's results of operations are primarily dependent on the results of the operations of the Bank. The Bank's 11 offices are located in Auburn, Augusta, Bethel, Brunswick, Buckfield, Harrison, Lewiston (2), Mechanic Falls, Portland, and South Paris, Maine. The Bank's financial center is located in Falmouth, Maine and houses our investment brokerage division which offers investment, insurance and financial planning products and services.

The Bank's wholly owned subsidiary, Northeast Bank Insurance Group Inc, is our insurance agency. Its 14 offices are located in Anson, Auburn, Augusta, Berwick, Bethel, Jackman, Livermore Falls, Mexico, Rangeley (its headquarters), Thomaston, Turner, Scarborough, and South Paris, Maine and Rochester, New Hampshire. Seven agencies have been acquired in the past twenty four months :
Hyler Agency of Thomaston, Maine was acquired on December 11, 2007, Spence & Matthews, Inc of Berwick, Maine and Rochester, New Hampshire was acquired on November 30, 2007; Hartford Insurance Agency of Lewiston, Maine was acquired on August 30, 2007; Russell Agency of Madison, Maine was acquired on June 28, 2007; Southern Maine Insurance Agency of Scarborough, Maine was acquired on March 30, 2007; Sturtevant and Ham, Inc. of Livermore, Maine was acquired on December 1, 2006; and Palmer Insurance of Turner, Maine was acquired on November 28, 2006. Following the acquisitions, the Russell Agency was moved to our existing agency office in Anson, Maine and the Hartford Insurance Agency was moved to our existing agency office in Auburn, Maine. All of our insurance agencies offer personal and commercial property and casualty insurance products. See Note 6 in our June 30, 2008 audited consolidated financial statements and Note 10 of the September 30, 2008 unaudited consolidated financial statements for more information regarding our insurance agency acquisitions.

Bank Strategy

The principal business of the Bank consists of attracting deposits from the general public and applying those funds to originate or acquire residential mortgage loans, commercial loans, commercial real estate loans and a variety of consumer loans. The Bank sells, from time to time, fixed rate residential mortgage loans into the secondary market. The Bank also invests in mortgage-backed securities, securities issued by United States government sponsored enterprises, corporate and municipal securities. The Bank's profitability depends primarily on net interest income. It continues to be our largest source of revenue and is affected by the level of interest rates, changes in interest rates and by changes in the amount and composition of interest-earning assets(i.e. loans and investments) and interest-bearing liabilities (i.e. customer deposits and borrowed funds). The Bank also emphasizes the growth of non-interest sources of income from investment and insurance brokerage, trust management and financial planning to reduce its dependency on net interest income.

Our goal is to continue modest, but profitable, growth by increasing our loan and deposit market share in our existing markets in western and south-central Maine, closely managing the yields on interest-earning assets and rates on interest-bearing liabilities, introducing new financial products and services, increasing the number of bank services sold to each household, increasing non-interest income from expanded trust services, investment and insurance brokerage services, and controlling the growth of non-interest expenses. Additional acquisitions of insurance agencies are not planned for the near term.

Results of Operations

Comparison of the three months ended September 30, 2008 and 2007

General

The Company reported consolidated net income of $69,116, or $0.03 per diluted share, for the three months ended September 30, 2008 compared to $430,565, or $0.18 per diluted share, for the three months ended September 30, 2007, a decrease of $361,449, or 84%. Net interest and dividend income increased $448,360, or 12%, as a result of a higher net interest margin and increased earning assets. The provision for loan losses increased $330,441, or 173%, compared to the quarter ended September 30, 2007, from increased net credit losses. Noninterest income increased $571,273, or 29%, primarily from increased insurance commissions partially offset by net securities losses. Noninterest expense increased $1,247,238, or 26%, primarily due to increased salaries and employee benefits and other noninterest expenses related to insurance agency acquisitions and impairment expense from available for sale securities.

Annualized return on average equity ("ROE") and return on average assets ("ROA") were 0.68% and 0.05%, respectively, for the quarter ended September 30, 2008 as compared to 4.17% and 0.31%, respectively, for the quarter ended September 30, 2007. The decreases in the returns on average equity and average assets were primarily due to the decrease in net income for the most recent quarter.

Net Interest and Dividend Income

Net interest and dividend income for the three months ended September 30, 2008 increased to $4,041,207 as compared to $3,592,847 for the same period in 2007. The increase in net interest and dividend income of $448,360, or 12%, was primarily due to a 17 basis point increase in net interest margin, on a tax equivalent basis, and by an increase in average earning assets of $30,710,197, or 6%, for the quarter ended September 30, 2008 as compared to the quarter ended September 30, 2007. The increase in average earning assets was primarily due to an increase in average available-for-sale securities of $43,325,615, or 46%, from the purchase of mortgage-backed securities, and an increase in average interest-bearing deposits and regulatory stock of $2,199,171, or 28%, reduced by a decrease in average loans of $14,814,589, or 3%. Average loans as a percentage of average earning assets was 73% and 81% for quarters ended September 30, 2008 and 2007, respectively. Our net interest margin, on a tax equivalent basis, was 2.92% and 2.75% for the quarters ended September 30, 2008 and 2007, respectively. Our net interest spread, on a tax equivalent basis, for the three months ended September 30, 2008 was 2.69%, an increase of 27 basis points from 2.42% for the same period a year ago. Comparing the three months ended September 30, 2008 and 2007, the yields on earning assets decreased 64 basis points and the cost of interest-bearing liabilities decreased 91 basis points. The decrease in our yield on earning assets reflects the 275 basis point decrease in prime rate during the twelve months ended September 30, 2008. The decrease in the cost of interest-bearing liabilities reflects the lower interest rates paid on a significant volume of maturing certificates of deposits, and decreases in interest rates paid on interest-bearing non-maturing deposits.

The changes in net interest and dividend income, on a tax equivalent basis, are presented in the schedule below, which compares the three months ended September 30, 2008 and 2007.

                                                         Difference Due to
                                                       Volume          Rate            Total
Investments                                          $  562,033     $    27,425      $  589,458
                                                                                              (
Loans, net                                             (263,358 )      (658,572 )       921,930 )
FHLB & Other Deposits                                    14,681         (42,595 )       (27,914 )
 Total Interest-earnings Assets                         313,356        (673,742 )      (360,386 )

Deposits                                                (17,715 )      (859,325 )      (877,040 )
                                                                                              (
Securities sold under Repurchase Agreements              14,853       ( 169,820 )       154,967 )
Borrowings                                              405,572        (184,065 )       221,507
                                                                              (
 Total Interest-bearing Liabilities                     402,710       1,213,210 )      (810,500 )
  Net Interest and Dividend Income                   $ ( 89,354 )   $   539,468      $  450,114

Rate/volume amounts which are partly attributable to rate and volume are spread proportionately between volume and rate based on the direct change attributable to rate and volume. Borrowings in the table include junior subordinated notes, FHLB borrowings, structured repurchase agreements, capital lease obligation and other borrowings. The adjustment to interest income and yield on a fully tax equivalent basis was $51,331 and $49,577 for the three months ended September 30, 2008 and 2007, respectively.

The Company's business primarily consists of the commercial banking activities of the Bank. The success of the Company is largely dependent on its ability to manage interest rate risk and, as a result, changes in interest rates, as well as fluctuations in the level of assets and liabilities, affecting net interest and dividend income. This risk arises from our core banking activities: lending and deposit gathering. In addition to directly impacting net interest and dividend income, changes in interest rates can also affect the amount of loans originated and sold by the Bank, the ability of borrowers to repay adjustable or variable rate loans, the average maturity of loans, the rate of amortization of premiums and discounts paid on securities, the amount of unrealized gains and losses on securities available-for-sale and the fair value of our saleable assets and the resultant ability to realize gains. The interest sensitivity of the Bank's balance sheet is currently a liability sensitive position, where the costs of interest-bearing liabilities reprice more quickly than the yield of interest-bearing assets. As a result, the Bank is generally expected to experience a decrease in its net interest margins during a period of increasing interest rates, or an increase in its net interest margin during a period of decreasing interest rates.

As of September 30, 2008 and 2007, 42% and 43%, respectively, of the Bank's loan portfolio was composed of adjustable rate loans based on a prime rate index or short-term rate indices such as the one-year U.S. Treasury bill. Interest income on these existing loans would increase if short-term interest rates increase. An increase in short-term interest rates would also increase deposit and FHLB advance rates, increasing the Company's interest expense. The impact on future net interest and dividend income from changes in market interest rates will depend on, among other things, actual rates charged on the Bank's loan portfolio, deposit and advance rates paid by the Bank and loan volume.

Provision for Loan Losses

The provision for loan losses for the three months ended September 30, 2008 was $520,724, an increase of $330,441, or 174%, from $190,283 for the three months ended September 30, 2007. We maintained the allowance for loan losses flat to its June 30, 2008 balance by recognizing a provision equal to net charge-offs. For our internal analysis of adequacy of the allowance for loan losses, we considered: the decrease in net loans during the three months ended September 30, 2008; the increase in net charge-offs of $330,441 for the three months ended September 30, 2008 compared to the same period in 2007; the increase in net charge-offs of $341,801 for the quarter ended September 30, 2008 compared to the quarter ended June 30, 2008; a decrease in loan delinquency to 2.69% at September 30, 2008 compared to 3.03% at June 30, 2008 and 2.82% at September 30, 2007; a decrease of $1,142,000 in non-performing loans ( 90 days or more past due) at September 30, 2008 compared to June 30, 2008; and a decrease in internally classified and criticized loans at September 30, 2008 compared to June 30, 2008. Management deemed the allowance for loan losses adequate for the risk in the loan portfolio. See Financial Condition for a discussion of the Allowance for Loan Losses and the factors impacting the provision for loan losses. The allowance as a percentage of outstanding loans increased to 1.38% at September 30, 2008 and June 30, 2008, respectively, compared to 1.37% at September 30, 2007.

Noninterest Income

Total noninterest income was $2,560,647 for the quarter ended September 30, 2008, an increase of $571,273, or 29%, from $1,989,374 for the quarter ended September 30, 2007. This increase reflected the combined impact of a $651,405, or 75%, increase in insurance agency commissions due to full year impact of insurance agency acquisitions, an increase in fees for other services to customers of $37,658, or 14%, and an increase in investment brokerage commission revenue of $22,692, or 6%, partially offset by a increase in net securities losses of $102,190 from the sale of preferred and trust preferred stock of Wachovia Bank, and a decrease of $41,631 in gain on sales of residential real estate loans due to lower volume.

Noninterest Expense

Total noninterest expense for the three months ended September 30, 2008 was $6,088,842, an increase of $1,247,238, or 26%, from $4,841,604 for the three months ended September 30, 2007. This increase was primarily due to a $582,773, or 20%, increase in salaries and employee benefits from the full year impact of full-time staff from our insurance agency acquisitions, increase in medical plan benefits expenses, and accruals for a bank-wide incentive program. The increase in occupancy expense of $29,457, or 7%, was due to the increase in maintenance, utilities expense and real estate taxes partially offset by lower rent expense from the three insurance agency offices acquired in fiscal 2008. Equipment expense increased $31,553, or 8%, primarily due to increased computer hardware and software depreciation expense and software licensing expense. Intangible amortization increased $91,095, or 88%, from the customer list and non-compete intangibles added from the three insurance agencies acquired since September 30, 2007. Other noninterest expense increased $512,360, or 47%, primarily from $267,976 of impairment expense recognized on common and preferred stocks, including 1,000 shares of FNMA preferred stock and 4,000 shares of FHLMC preferred stock, increased professional fees for conversions and managing the disposal of repossessed loan collateral, increased collections expenses, increased FDIC insurance expense due to the expiration of credits, and an increase in computer services expense from core system conversions in our insurance division.

Income Taxes

For the three months ended September 30, 2008, the decrease in income tax expense was primarily due to the decrease in income before income taxes as compared to the same periods in 2007. For the three months ended September 30, 2008, the income benefit was due to the mix of tax-exempt interest from loans and municipal securities and BOLI income.

Efficiency Ratio

Our efficiency ratio, which is total non interest expense as a percentage of the sum of net interest and dividend income and non-interest income, was 92% and 87% for the three months ended September 30, 2008 and 2007, respectively. The increase in the efficiency ratio for the three months ended September 30, 2008 was due to an increase in noninterest expense compared to the three months ended September 30, 2007.

Financial Condition

Our consolidated assets were $605,169,601 and $598,273,650 as of September 30, 2008 and June 30, 2008, respectively, an increase of $6,895,951, or 1%. This increase was primarily due to increases of $8,961,658, or 7%, in available-for-sale securities, $1,026,516, or 30%, in interest-bearing deposits and $560,666, or 115%, in loans held for sale partially offset by a decrease of $435,339, or less than 1%, in net loans primarily from a decrease in commercial loans, a decrease in cash and due from banks of $2,782,156, or 31%, and a net decrease in the combination of premises and equipment, acquired assets accrued interest receivable, goodwill, intangible assets, bank owned life insurance and other assets of $435,394. For the three months ended September 30, 2008, average total assets were $598,928,259, an increase of $39,248,883, or 7%, from $559,679,376 for the same period in 2007. This average asset increase was primarily attributable to an increase in interest-bearing deposits, available-for-sale securities, fixed assets, goodwill and intangibles and BOLI.

Total stockholders' equity was $41,324,446 and $40,273,312 at September 30, 2008 and June 30, 2008, respectively, an increase of $1,051,134, or 3%, due to net income for the three months ended September 30, 2008 and a decrease in accumulated other comprehensive loss partially offset by dividends paid. Book value per outstanding share was $17.80 at September 30, 2008 and $17.40 at June 30, 2008. Tangible book value per outstanding share was $12.36 at September 30, 2008 and $11.85 at June 30, 2008. This increase in tangible book value was due to a decrease in total goodwill and other intangibles deducted from capital. This decrease in goodwill and other intangibles was due to the amortization of other intangibles during the quarter ended September 30, 2008.

Investment Activities

The available-for-sale investment portfolio was $143,444,635 as of September 30, . . .