Northeast Bancorp
NORTHEAST BANCORP /ME/ (Form: 10-Q, Received: 11/10/2010 15:50:17)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

X Quarterly report pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934

For the quarterly period ended
September 30, 2010
Or
___ Transition report pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934

For the transition period for _______________ to _______________

Commission File Number
1-14588

Northeast Bancorp
 (Exact name of registrant as specified in its charter)

Maine
 
01-0425066
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
 
500 Canal Street, Lewiston, Maine
 
04240
(Address of Principal executive offices)
 
(Zip Code)

(207) 786-3245
Registrant's telephone number, including area code

Not Applicable
Former name, former address and former fiscal year, if changed since last report.

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

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definition of "accelerated filer”, “large accelerated filer" and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (check one): Large accelerated filer __ Accelerated filer __ Non-accelerated filer ___ Smaller Reporting Company X

Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act). Yes_ No X
 
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. As of November 10, 2010, the registrant had outstanding 2,331,332 shares of common stock, $1.00 stated value per share.
 
 
Part I.
Financial Information
 
Item 1.
Consolidated Financial Statements
     
   
Consolidated Balance Sheets
September 30, 2010 (Unaudited) and June 30, 2010
     
   
Consolidated Statements of Income (Unaudited)
Three Months Ended September 30, 2010 and 2009
     
   
Consolidated Statements of Changes in Stockholders' Equity (Unaudited)
Three Months Ended September 30, 2010 and 2009
     
   
Consolidated Statements of Cash Flows (Unaudited)
Three Months Ended September 30, 2010 and 2009
     
   
Notes to Consolidated Financial Statements (Unaudited)
     
 
Item 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations
     
 
Item 3.
Quantitative and Qualitative Disclosure about Market Risk
     
 
Item 4.
Controls and Procedures
   
Part II.
Other Information
     
 
Item 1.
Legal Proceedings
     
 
Item 1.a.
Risk Factors
     
 
Item 2.c.
Unregistered Sales of Equity Securities and Use of Proceeds
     
 
Item 3.
Defaults Upon Senior Securities
     
 
Item 4.
Removed and Reserved
     
 
Item 5.
Other Information
     
 
Item 6.
Exhibits


PART 1 - FINANCIAL INFORMATION
 
             
Item 1.  Financial Statements
           
             
NORTHEAST BANCORP AND SUBSIDIARY
 
Consolidated Balance Sheets
 
             
    September 30,  
June 30,
 
   
2010
   
2010
 
   
(Unaudited)
   
(Audited)
 
Assets
           
Cash and due from banks
  $ 3,078,651     $ 7,019,498  
Interest-bearing deposits
    44,446,601       13,416,060  
Total cash and cash equivalents
    47,525,252       20,435,558  
                 
Available-for-sale securities, at fair value
    157,022,417       164,187,702  
Loans held-for-sale
    5,736,120       14,254,093  
                 
Loans receivable
    378,431,432       382,308,517  
Less allowance for loan losses
    5,862,000       5,806,000  
Net loans
    372,569,432       376,502,517  
                 
Premises and equipment, net
    7,968,480       7,997,054  
Acquired assets, net
    974,341       1,292,161  
Accrued interest receivable
    1,991,640       2,080,520  
Federal Home Loan Bank stock, at cost
    4,889,400       4,889,400  
Federal Reserve Bank stock, at cost
    596,750       596,750  
Goodwill
    4,082,604       4,082,604  
Intangible assets, net of accumulated amortization of $2,497,806 at 09/30/10 and $2,322,847 at 6/30/10
    7,113,085       7,288,044  
Bank owned life insurance
    13,412,890       13,285,908  
Other assets
    4,930,195       5,714,477  
Total assets
  $ 628,812,606     $ 622,606,788  
 
               
                 
Liabilities and Stockholders' Equity
               
Liabilities:
               
Deposits
               
Demand
  $ 36,510,155     $ 35,266,386  
NOW
    54,217,485       50,833,904  
Money market
    57,300,831       55,556,017  
Regular savings
    39,105,046       38,189,867  
Brokered time deposits
    4,886,375       4,883,250  
Certificates of deposit
    190,994,743       199,467,799  
Total deposits
    383,014,635       384,197,223  
                 
Federal Home Loan Bank advances
    50,500,000       50,500,000  
Structured repurchase agreements
    65,000,000       65,000,000  
Short-term borrowings
    53,777,536       46,167,858  
Junior subordinated debentures issued to affiliated trusts
    16,496,000       16,496,000  
Capital lease obligation
    2,192,632       2,230,630  
Other borrowings
    2,508,378       2,629,660  
Other liabilities
    4,064,245       4,479,358  
Total liabilities
    577,553,426       571,700,729  
                 
Commitments and contingent liabilities
               
                 
Stockholders' equity
               
Preferred stock, $1.00 par value, 1,000,000 shares authorized; 4,227 shares issued and outstanding
               
at September 30, 2010 and June 30, 2010; liquidation preference of $1,000 per share
    4,227       4,227  
Common stock, at stated value, 15,000,000 shares authorized; 2,331,332 and 2,323,832 shares
               
issued and outstanding at September 30, 2010 and June 30, 2010, respectively
    2,331,332       2,323,832  
Warrants
    133,468       133,468  
Additional paid-in capital
    6,822,913       6,760,549  
Retained earnings
    38,027,722       37,337,542  
Accumulated other comprehensive income
    3,939,518       4,346,441  
Total stockholders' equity
    51,259,180       50,906,059  
                 
Total liabilities and stockholders' equity
  $ 628,812,606     $ 622,606,788  
 

NORTHEAST BANCORP AND SUBSIDIARY
 
Consolidated Statements of Income
 
(Unaudited)
 
             
   
Three Months Ended
 
   
September 30,
 
   
2010     
   
2009     
 
Interest and dividend income:
           
Interest on loans
  $ 5,741,901     $ 6,041,312  
Taxable interest on available-for-sale securities
    1,543,665       1,713,080  
Tax-exempt interest on available-for-sale securities
    118,362       115,465  
Dividends on available-for-sale securities
    9,349       7,386  
Dividends on Federal Home Loan Bank and Federal Reserve Bank stock
    8,700       8,954  
Other interest and dividend income
    11,839       5,609  
Total interest and dividend income
    7,433,816       7,891,806  
                 
Interest expense:
               
Deposits
    1,522,597       2,054,296  
Federal Home Loan Bank advances
    466,504       404,060  
Structured repurchase agreements
    707,633       771,755  
Short-term borrowings
    171,429       142,235  
Junior subordinated debentures issued to affiliated trusts
    172,954       205,162  
Obligation under capital lease agreements
    28,068       29,951  
Other borrowings
    38,991       56,778  
Total interest expense
    3,108,176       3,664,237  
                 
Net interest and dividend income before provision for loan losses
    4,325,640       4,227,569  
                 
Provision for loan losses
    459,005       423,461  
Net interest and dividend income after provision for loan losses
    3,866,635       3,804,108  
                 
Noninterest income:
               
Fees for other services to customers
    366,498       365,083  
Net securities losses
    12,333       27,707  
Gain on sales of loans
    948,263       210,021  
Investment commissions
    548,350       452,795  
Insurance commissions
    1,439,310       1,584,492  
BOLI income
    126,982       125,000  
Other  income
    72,711       3,310  
Total noninterest income
    3,514,447       2,768,408  
                 
Noninterest expense:
               
Salaries and employee benefits
    3,351,372       3,401,108  
Occupancy expense
    403,401       434,465  
Equipment expense
    378,135       355,460  
Intangible assets amortization
    174,959       186,117  
Other
    1,683,909       1,547,444  
  Total noninterest expense
    5,991,776       5,924,594  
                 
Income before income tax expense
    1,389,306       647,922  
Income tax expense
    428,615       152,253  
                 
Net income
  $ 960,691     $ 495,669  
 
               
Net income available to common stockholders
  $ 899,864     $ 434,885  
                 
Earnings per common share:
               
 Basic
  $ 0.39     $ 0.19  
 Diluted
  $ 0.38     $ 0.19  
                 
Net interest margin (tax equivalent basis)
    2.96 %     3.01 %
Net interest spread (tax equivalent basis)
    2.78 %     2.83 %
Return on average assets (annualized)
    0.61 %     0.33 %
Return on average equity (annualized)
    7.40 %     4.10 %
Efficiency ratio
    76 %     85 %


NORTHEAST BANCORP AND SUBSIDIARY
 
Consolidated Statements of Changes in Stockholders' Equity
 
Three Months Ended September 30, 2010 and 2009
 
(Unaudited)
 
                                         
 
Preferred
Stock
   
Common
Stock
   
Warrants
   
Additional
Paid-in
Capital
   
Retained
Earnings
 
Accumulated
Other
Comprehensive(Loss) Income
 
Total
 
Balance at June 30, 2009
$ 4,227     $ 2,321,332     $ 133,468     $ 6,708,997     $ 36,697,712     $ 1,451,144     $ 47,316,880  
Net income for three months ended 09/30/09
  -       -       -       -       495,669       -       495,669  
Other comprehensive income net of tax:
                                                     
Net unrealized loss on purchased interest rate
                                                     
  caps and swap
                                          (32,611 )     (32,611 )
Net unrealized gain on investments available
                                                     
  for sale, net of reclassification adjustment
  -       -       -       -       -       1,654,017       1,654,017  
Total comprehensive income
                                                  2,117,075  
                                                       
Dividends on preferred stock
  -       -       -       -       (52,838 )     -       (52,838 )
Dividends on common stock at $0.09 per share
  -       -       -       -       (208,920 )     -       (208,920 )
Stock options exercised
  -       -       -               -       -       -  
Accretion of preferred stock
  -       -       -       6,646       (6,646 )     -       -  
Amortization of issuance cost of preferred stock
  -       -       -       1,300       (1,300 )     -       -  
                                                       
Balance at September 30, 2009
$ 4,227     $ 2,321,332     $ 133,468     $ 6,716,943     $ 36,923,677     $ 3,072,550     $ 49,172,197  
                                                       
Balance at June 30, 2010
$ 4,227     $ 2,323,832     $ 133,468     $ 6,760,549     $ 37,337,542     $ 4,346,441     $ 50,906,059  
Net income for three months ended 09/30/10
  -       -       -       -       960,691       -       960,691  
Other comprehensive income net of tax:
                                                     
Net unrealized loss on purchased interest rate
                                                     
  caps and swap
  -       -       -       -       -       (199,210 )     (199,210 )
Net unrealized loss on investments available
                                                     
  for sale, net of reclassification adjustment
  -       -       -       -       -       (207,713 )     (207,713 )
Total comprehensive income
                                                  553,768  
                                                       
Dividends on preferred stock
  -       -       -       -       (52,838 )     -       (52,838 )
Dividends on common stock at $0.09 per share
  -       -       -       -       (209,684 )     -       (209,684 )
Stock options exercised
  -       7,500       -       54,375       -       -       61,875  
Accretion of preferred stock
  -       -       -       6,689       (6,689 )     -       -  
Amortization of issuance cost of preferred stock
  -       -       -       1,300       (1,300 )     -       -  
                                                       
Balance at September 30, 2010
$ 4,227     $ 2,331,332     $ 133,468     $ 6,822,913     $ 38,027,722     $ 3,939,518     $ 51,259,180  

 
NORTHEAST BANCORP AND SUBSIDIARY
 
Consolidated Statements of Cash Flows
 
(Unaudited)
 
 
Three Months Ended
 
 
September 30,
 
 
2010
   
2009
 
Cash flows from operating activities:
         
Net income
$ 960,691     $ 495,669  
Adjustments to reconcile net income to net cash  provided by operating activities:
             
Provision for loan losses
  459,005       423,461  
Provision made for deferred compensation
  52,485       43,143  
Write-down of available-for-sale securities
  -       26,165  
Write-down of non-marketable securities
  -       3,350  
Write-down of acquired assets
  45,250       -  
Amortization of intangible assets
  174,959       186,117  
Deferred income tax benefit
  -       (49,409 )
BOLI income, net
  (126,982 )     (125,000 )
Depreciation of premises and equipment
  260,272       245,323  
Net gain on sale of available-for-sale securities
  (12,333 )     (27,707 )
Net loss on sale of acquired assets
  49,111       131,434  
Net change in loans held-for-sale
  8,517,973       (1,127,403 )
Net amortization (accretion) of securities
  30,755       (28,465 )
Change in other assets and liabilities:
             
Interest receivable
  88,880       66,762  
Decrease in prepayment FDIC assessment
  124,780       -  
Other assets and liabilities
  99,697       (237,312 )
               
Net cash provided by operating activities
  10,724,543       26,128  
               
Cash flows from investing activities:
             
Proceeds from the sales of available-for-sale securities
  40,959       1,121,883  
Purchases of available-for-sale securities
  (5,000,624 )     (21,065,130 )
Proceeds from maturities and principal payments  on available-for-sale securities
  11,791,812       10,658,162  
Loan originations and principal collections, net
  3,350,316       2,795,525  
Purchases of premises and equipment
  (260,993 )     (304,489 )
Proceeds from sales of premises and equipment
  29,295       -  
Proceeds from sales of acquired assets
  347,223       215,928  
               
Net cash provided by (used in) investing activities
  10,297,988       (6,578,121 )
               
Cash flows from financing activities:
             
Net decrease in deposits
  (1,182,588 )     (4,479,105 )
Advances from the Federal Home Loan Bank
  -       5,000,000  
Net repayments on Federal Home Loan Bank overnight advances
  -       (815,000 )
Net increase in short-term borrowings
  7,609,678       4,802,305  
Dividends paid
  (262,522 )     (261,758 )
Issuance of common stock
  61,875       -  
Repayment on debt from insurance agencies acquisitions
  (121,282 )     (113,880 )
Repayment on capital lease obligation
  (37,998 )     (36,114 )
               
Net cash provided by financing activities
  6,067,163       4,096,448  
               
Net decrease in cash and cash equivalents
  27,089,694       (2,455,545 )
               
Cash and cash equivalents, beginning of period
  20,435,558       13,022,642  
               
Cash and cash equivalents, end of period
$ 47,525,252     $ 10,567,097  
               
Supplemental schedule of cash flow information:
             
Interest paid
$ 3,095,500     $ 3,687,424  
Income taxes paid
$ -     $ 30,000  
               
Supplemental schedule of noncash investing and  financing activities:
             
               
Transfer from loans to acquired assets
$ 179,434     $ 253,576   
Transfer from acquired assets to loans
  55,670       44,570  
Change in valuation allowance for unrealized losses  (gains) on available-for-sale securities, net of tax
   (406,923       1,621,406  
Net change in deferred taxes for unrealized losses  (gains) on available-for-sale securities
   209,627        (835,270 )
 
           
The accompanying notes are an integral part of these consolidated financial statements.
 

 
NORTHEAST BANCORP AND SUBSIDIARY
Notes to Consolidated Financial Statements
September 30, 2010
(Unaudited)

1.   Basis of Presentation

The accompanying unaudited condensed and consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and notes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, the accompanying consolidated financial statements contain all adjustments (consisting principally of normal recurring accruals) considered necessary for a fair presentation of the Company's financial position at September 30, 2010, the results of operations for the three  month periods ended September 30, 2010 and 2009, the changes in stockholders' equity for the three month periods ended September 30, 2010 and 2009, and the cash flows for the three month periods ended September 30, 2010 and 2009. Operating results for the three month period ended September 30, 2010 are not necessarily indicative of the results that may be expected for the fiscal year ending June 30, 2011. For further information, refer to the audited consolidated financial statements and notes thereto for the fiscal year ended June 30, 2010 included in the Company's Annual Report on Form 10-K.

2.   Junior Subordinated Debentures Issued to Affiliated Trust

NBN Capital Trust II and NBN Capital Trust III were created in December 2003. NBN Capital Trust IV was created in December 2004. Each such trust is a Delaware statutory trust (together, the "Private Trusts"). The exclusive purpose of the Private Trusts was (i) issuing and selling common securities and preferred securities in a private placement offering (the “Private Trust Securities”), (ii) using the proceeds of the sale of the Private Trust Securities to acquire Junior Subordinated Deferrable Interest Notes ("Junior Subordinated Debentures"); and (iii) engaging only in those other activities necessary, convenient or incidental thereto. Accordingly, the Junior Subordinated Debentures are the sole assets of each of the Private Trusts.

The following table summarizes the Junior Subordinated Debentures issued by the Company to each affiliated trust and the Private Trust Securities issued by each affiliated trust at September 30, 2010. Amounts include the Junior Subordinated Debentures acquired by the affiliated trusts from the Company with the capital contributed by the Company in exchange for the common securities of such trust. The trust preferred securities (the “Preferred Securities”) were sold in two separate private placement offerings. The Company has the right to redeem the Junior Subordinated Debentures, in whole or in part, on or after March 30, 2009, for NBN Capital Trust II and III, and on or after February 23, 2010, for NBN Capital Trust IV, at the redemption price specified in the associated Indenture plus accrued but unpaid interest to the redemption date.

Affiliated Trusts   
 
Trust
Preferred
Securities
   
Common
Securities
   
Junior
Subordinated
Debentures
   
Interest
Rate
 
Maturity Date
NBN  Capital Trust II
  $
3,000,000
     
93,000
     
3,093,000
     
3.09
%
March 30, 2034 
NBN  Capital Trust III
   
3,000,000
     
93,000
     
3,093,000
     
3.09
%
March 30, 2034 
NBN  Capital Trust IV
   
10,000,000
     
310,000
     
10,310,000
     
2.23
%
February 23, 2035 
     Total
  $
16,000,000
     
496,000
     
16,496,000
     
2.55
%
 

NBN Capital Trust II and III pay a variable rate based on three month LIBOR plus 2.80%, and NBN Capital Trust IV pays a variable rate based on three month LIBOR plus 1.89%. Accordingly, the Preferred Securities of the Private Trusts currently pay quarterly distributions at an annual rate of 3.09% for the stated liquidation amount of $1,000 per Preferred Security for NBN Capital Trust II and III and an annual rate of 2.23% for the stated liquidation amount of $1,000 per Preferred Security for NBN Capital Trust IV. The Company has fully and unconditionally guaranteed all of the obligations of each trust. The guaranty covers the quarterly distributions and payments on liquidation or redemption of the Private Trust Securities, but only to the extent of funds held by the trusts. Based on the current rates and the impact of the interest rate swap referred to below, the annual interest expense on the Preferred Securities is approximately $675,000.

The Junior Subordinated Debentures each have variable rates indexed to three-month LIBOR.  During the twelve months ended June 30, 2010, the Company purchased two interest rate caps and an interest rate swap to hedge the interest rate risk on notional amounts of $6 million and $10 million, respectively, of the Company’s Junior Subordinated Debentures. Each was a cash flow hedge to manage the risk to net interest income in a period of rising rates.

The interest rate caps hedge the junior subordinated debt resulting from the issuance of trust preferred securities by our affiliates NBN Capital Trust II and NBN Capital Trust III. The notional amount of $3 million for each interest rate cap represents the outstanding junior subordinated debt from each trust. The strike rate is 2.505%. The Company will recognize higher interest expense on the junior subordinated debt for the first 200 basis points increase in three-month LIBOR. Once three-month LIBOR rate exceeds 2.505% on a quarterly reset date, there will be a payment by the counterparty to the Company at the following quarter end. The effective date of the purchased interest rate caps was September 30, 2009 and matures in five years.

The interest rate swap hedges the junior subordinated debt resulting from the issuance of trust preferred stock by our affiliate NBN Capital Trust IV.  The notional amount of $10 million represents the outstanding junior subordinated debt from this trust. Under the terms of the interest rate swap, Northeast pays a fixed rate of 4.69% quarterly for a period of five years from the effective date of February 23, 2010. We receive quarterly interest payments of three month LIBOR plus 1.89% over the same term.

See Note 13 for additional information on derivatives.

3.   Loans

The following is a summary of the composition of loans at:

 
September 30, 2010  
 
June 30, 2010    
 
Residential real estate
$
154,898,388
 
$
155,499,237
 
Commercial real estate
 
122,154,160
   
121,384,741
 
Construction
 
7,752,785
   
5,524,465
 
Commercial
 
29,171,974
   
30,138,901
 
Consumer & Other
 
63,348,593
   
68,488,798
 
     Total
 
377,325,900
   
381,036,142
 
Net Deferred Costs
 
1,105,532
   
1,272,375
 
     Total Loans
$
378,431,432
 
$
382,308,517
 

4.   Allowance for Loan Losses

The following is an analysis of transactions in the allowance for loan losses:

   
Three months Ended
September 30,
 
   
2010
   
2009
 
Balance at beginning of period
 
$
5,806,000
   
$
5,764,000
 
Add provision charged to operations
   
459,005
     
423,461
 
Recoveries on loans previously charged off
   
15,913
     
33,236
 
     
6,280,918
     
6,220,697
 
Less loans charged off
   
418,918
     
435,697
 
Balance at end of period
 
$
5,862,000
   
$
5,785,000
 

5.   Securities

Securities available-for-sale at amortized cost and approximate fair values and maturities at September 30, 2010 and June 30, 2010 are summarized below:

   
September 30, 2010
   
June 30, 2010
 
   
Amortized Cost
   
Fair
Value
   
Amortized
Cost
   
Fair
Value
 
Debt securities issued by U. S. Government-sponsored enterprises
 
$
 12,590,000
   
$
12,680,696
   
$
8,583,080
   
$
8,649,135
 
Mortgage-backed securities
   
116,050,903
     
122,412,771
     
126,536,947
     
133,861,542
 
Municipal bonds
   
11,904,020
     
12,371,060
     
11,905,390
     
12,007,322
 
Collateralized Mortgage Obligation
   
7,068,177
     
7,331,362
     
7,330,766
     
7,422,971
 
Corporate bonds
   
996,460
     
1,020,679
     
994,082
     
1,029,536
 
Equity securities
   
934,217
     
736,758
     
1,044,081
     
775,744
 
Trust preferred securities
   
584,311
     
469,091
     
584,311
     
441,452
 
   
$
150,128,088
   
$
157,022,417
   
$
156,978,657
   
$
164,187,702
 
 
The gross unrealized gains and unrealized losses on available-for-sale securities are as follows:

   
September 30, 2010
   
June 30, 2010
 
   
Gross
Unrealized
 Gains
   
Gross
Unrealized
 Losses
   
Gross
Unrealized
 Gains
   
Gross
Unrealized
 Losses
 
Debt securities issued by U. S.  Government-sponsored enterprises
  $ 90,696       -        66,055        -  
Mortgage-backed securities
    6,361,868       -       7,327,014       2,419  
Municipal bonds
    481,571       14,531       166,090       64,158  
Collateralized Mortgage Obligation
    263,185       -       92,205       -  
Corporate bonds
    24,219       -       35,454       -  
Equity securities
    14,851       212,310       5,134       273,471  
Trust preferred securities
    1,622       116,842       60       142,919  
    $ 7,238,012       343,683       7,692,012       482,967  

The following summarizes the Company’s gross unrealized losses and fair values aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at September 30, 2010 and June 30, 2010:
 
   
Less than 12 Months
   
More than 12 Months
   
Total
 
   
Fair
 Value
   
Unrealized
 Losses
   
Fair
 Value
   
Unrealized
 Losses
   
Fair
 Value
   
Unrealized
 Losses
 
September 30, 2010:
                                   
Municipal bonds
  $ -       -       588,648       14,531       588,648       14,531  
Equity securities
    28,895       4,759       493,698       207,551       522,593       212,310  
Trust preferred securities
    21,646       50       339,078       116,792       360,724       116,842  
    $ 50,541       4,809       1,421,424       338,874       1,471,965       343,683  
 

   
Less than 12 Months
   
More than 12 Months
   
Total
 
   
Fair
 Value
   
Unrealized
 Losses
   
Fair
 Value
   
Unrealized
 Losses
   
Fair
 Value
   
Unrealized
 Losses
 
June 30, 2010:
                                   
Mortgage-backed  securities
    161,095       2,419       -       -       161,095       2,419  
Municipal bonds
    2,607,582       19,918       830,592       44,240       3,438,174       64,158  
Equity securities
    189,775       10,326       472,678       263,145       662,453       273,471  
Trust preferred securities
    95,055       726       338,747       142,193       433,802       142,919  
    $ 3,053,507       33,389       1,642,017       449,578       4,695,524       482,967  
 
Management of the Company, in addition to considering current trends and economic conditions that may affect the quality of individual securities within the Company's investment portfolio, also considers the Company's ability and intent to hold such securities to maturity or recovery of cost. Management does not believe any of the Company's available-for-sale securities are other-than-temporarily impaired at September 30, 2010, except as discussed below.

Based on management's assessment of available-for-sale securities, there has not been an other-than-temporary decline in market value of certain trust preferred and equity securities for the three months ended September 30, 2010. During the three months ended September 30, 2009, impairment of available-for-sale securities was $26,165, and are included in other noninterest expense in the consolidated statements of income.

Management evaluates securities for other-than-temporary impairment at least on a quarterly basis and more frequently when economic or market conditions warrant such evaluation. The investment securities portfolio is generally evaluated for other-than-temporary impairment under ASC 320-10, “ Investments – Debt and Equity Securities .”

The Company adopted the provisions of ASC 320-10 for the year ended June 30, 2009, which was applied to existing and new debt securities held by the Company as of April 1, 2009. For those debt securities for which the fair value of the security is less than its amortized cost, the Company does not intend to sell such security, and it is more likely than not that it will not be required to sell such security prior to the recovery of its amortized cost basis less any credit losses, ASC 320-10 requires that the credit component of the other-than-temporary impairment losses be recognized in earnings while the noncredit component is recognized in other comprehensive income, net of related taxes.

The following table summarizes other-than-temporary impairment losses on securities for the three months ended September 30, 2010:
   
Equity
Securities
   
Trust Preferred
Securities
   
Total
 
                   
Total other-than-temporary impairment losses
  $ -       -       -  
Less: unrealized other-than-temporary losses
   recognized in other comprehensive loss (1)
     -        -        -  
                         
Net impairment losses recognized in earnings (2)
  $ -       -       -  
 
(1)   Represents the noncredit component of the other-than-temporary impairment on the securities.
( 2)   Represents the credit component of the other-than-temporary impairment on securities.

The amortized cost and fair values of available-for-sale debt securities at September 30, 2010 and June 30, 2010, by contractual maturity, are shown below. Actual maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

 
September 30, 2010
   
June 30, 2010
 
 
Amortized
Cost
 
Fair
Value
   
Amortized
Cost
   
Fair
Value
 
Due in one year or less
$
996,460
 
$
1,020,678
   
$
994,082
   
$
1,029,536
 
Due after one year through five years
 
12,590,000
   
12,680,696
     
5,000,000
     
5,011,858
 
Due after five years through ten years
 
2,638,390
   
2,723,815
     
4,749,824
     
4,804.085
 
Due after ten years
 
16,918,118
   
17,447,699
     
11,322,957
     
11,281,966
 
Mortgage-backed securities and collateralized mortgage
  obligations (including 
securities with interest rates ranging 
  from 4.0% to 6.4% maturing February 2013 to September 2038)
 
116,050,903
   
122,412,771
     
133,867,713
     
141,284,513
 
 
$
149,193,871
 
$
156,285,659
   
$
155,934,576
   
$
163,411,958
 
 
6.   Advances from the Federal Home Loan Bank

A summary of borrowings from the Federal Home Loan Bank is as follows:

September 30, 2010
 
 
Principal Amounts
   
 
Interest Rates
   
Maturity Dates For Periods Ending
September 30,
 
$ 8,000,000       3.99% - 4.99%       2011  
  15,000,000       2.55 - 3.99       2013  
  5,000,000       3.08       2014  
  7,500,000       2.91 - 3.05       2015  
  10,000,000       4.26       2017  
  5,000,000       4.29       2018  
$ 50,500,000                  

June 30, 2010
 
Principal
Amounts
   
Interest Rates
   
Maturity Dates For Periods Ending
June 30,
 
$ 3,000,000       4.99%       2011  
  5,000,000       3.99       2012  
  15,000,000       2.55 - 3.99       2013  
  12,500,000       2.91 - 3.08       2015  
  10,000,000       4.26       2017  
  5,000,000       4.29       2018  
$ 50,500,000                  

The Federal Home Loan Bank has the option to call $28,000,000 of the outstanding advances at September 30, 2010. The options are continuously callable quarterly until maturity.

7.   Structured Repurchase Agreements

The total outstanding structured repurchase agreements balance at September 30, 2010 was $65,000,000.

September 30, 2010
       
Imbedded
           
Amount
 
Interest Rate
 
Cap/ Floor
 
Amount of Cap/Floor
 
Strike Rate
 
Maturity
$20,000,000
 
4.68%
 
Purchased Caps
 
$40,000,000
 
Expired
 
August 28, 2012
$10,000,000
 
3.98%
 
Sold Floors
 
$20,000,000
 
Expired
 
August 28, 2012
$10,000,000
 
4.18%
 
Purchased Caps
 
$10,000,000
 
4.88%
 
December 13, 2012
$10,000,000
 
4.30%
 
Purchased Caps
 
$10,000,000
 
3.79%
 
July 3, 2013
$10,000,000
 
4.44%
 
Purchased Caps
 
$10,000,000
 
3.81%
 
September 23, 2015
$  5,000,000
 
2.86%
 
None
         
March 25, 2014
$65,000,000
                   


June 30, 2010
       
Imbedded
           
Amount
 
Interest Rate
 
Cap/ Floor
 
Amount of Cap/Floor
 
Strike Rate
 
Maturity
$20,000,000
 
4.68%
 
Purchased Caps
 
$40,000,000
 
Expired
 
August 28, 2012
$10,000,000
 
3.98%
 
Sold Floors
 
$20,000,000
 
Expired
 
August 28, 2012
$10,000,000
 
4.18%
 
Purchased Caps
 
$10,000,000
 
4.88%
 
December 13, 2012
$10,000,000
 
4.30%
 
Purchased Caps
 
$10,000,000
 
3.79%
 
July 3, 2013
$10,000,000
 
4.44%
 
Purchased Caps
 
$10,000,000
 
3.81%
 
September 23, 2015
$  5,000,000
 
2.86%
 
None
         
March 25, 2014
$65,000,000
                   
 
No leveraging strategies were implemented in fiscal 2010.  For the leveraging strategies implemented in fiscal 2009, the Company pledged mortgage-backed securities of $28,217,084, at inception, as collateral for $25,000,000 borrowed in three transactions. The transactions maturing July 2013 and September 2015 of $10,000,000 each had imbedded interest rate caps as summarized in the table above. The interest rate caps reduced our balance sheet risk to rising interest rates. They cannot be called by the issuer for three years ending July 3, 2011 and for four years ending September 23, 2012, respectively. Each agreement can be called quarterly thereafter. The transaction in March 2009, which did not have imbedded interest rate caps or floors, allowed the Company to extend its funding at a favorable interest rate. The issuer has no call option unless the Company no longer maintains regulatory “well-capitalized status” or is subject to a regulatory cease and desist order. Interest is paid quarterly. The interest rates are fixed for the term of the three agreements.

The Company is subject to margin calls on each transaction to maintain the necessary collateral in the form of cash or other mortgage-backed securities during the borrowing term.

Payments would be received on the interest rate caps when three-month LIBOR exceeds the strike rate on the quarterly reset date. The amount of the payment would be equal to the difference between the strike rate and three-month LIBOR multiplied by the notional amount of the cap to be made 90 days after the reset date. The purchased interest rate caps expire at the end of the non-call periods noted above.

The collateral pledged was FNMA, FHLMC and GNMA issued mortgage-backed securities with a fair value of $68,544,617 and cash of $7,455,061 as of September 30, 2010.

8.   Stock-Based Compensation
 
The Company has stock-based employee compensation plans, which are described more fully in Note 1 of the June 30, 2010 audited consolidated financial statements. In accordance with ASC 718-10-25, “Compensation – Stock Compensation –Overall-Recognition,” the Company recognizes expense for new options awarded and to awards modified, repurchased or canceled. Since there were no new options granted (or modifications of existing options) during the three months ended September 30, 2010, no expense was recognized.

9.   Capital Lease

In fiscal 2006, the Company recognized a capital lease obligation for its new headquarters known as the Southern Gateway building located at 500 Canal Street in Lewiston, Maine.  The present value of the lease payments over fifteen years ($264,262 per year for each of the initial ten years of the lease term and $305,987 per year for each of the last five years) exceeded 90% of the fair value of the Southern Gateway building.  Northeast Bank's commercial lending and underwriting, consumer loan underwriting, loan servicing, deposit operations, accounting, human resources, risk management, and executive administration departments occupy the approximately 27,000 square feet of space.

The future minimum lease payments over the remaining term of the lease and the outstanding capital lease obligations at September 30, 2010 are as follows:

2011
  $
     264,262
2012
   
264,262
2013
   
264,262
2014
   
264,262
2015
   
271,216
2016 and thereafter
 
1,480,250
 
Total minimum lease payments
 
2,808,514
 
Less imputed interest
 
615,882
 
Capital lease obligation
 
$  2,192,632
 
10.   Other Expenses

Other expenses include the following for the three months ended September 30, 2010 and 2009:

   
Three Months Ended
 
   
September 30,
 
   
2010     
   
2009     
 
Professional fees
  $ 350,090     $ 348,355  
FDIC insurance
    176,233       150,000  
Advertising expense
    116,887       124,451  
Computer services and processing costs
    222,872       224,637  
Loan expense
    246,535       98,608  
Telephone expense
    72,879       95,951  
Write-down of available-for-sale securities
    -       26,165  
Write-down of non-marketable securities
    -       3,350  
Other
    498,413       475,927  
    $ 1,683,909     $ 1,547,444  

11.   Insurance Agency Acquisitions

Northeast Bank Insurance Group, Inc. acquired one insurance agency in fiscal 2009, three insurance agencies in fiscal 2008 and four insurance agencies in fiscal 2007. Each acquisition was made as a purchase of assets for cash and a note, with the exception of the Palmer Insurance Agency, which was the purchase of stock for cash and a note, and the Goodrich Insurance Associates, which was a purchase of assets for cash. Each agency operates at the location being used at the time of the acquisition except: Goodrich, which was relocated to our agency office in Berwick, Maine; Hartford, which was relocated to our agency office in Auburn, Maine; and Russell, which was relocated to the agency office in Anson, Maine.

All acquisitions were accounted for using the purchase method and resulted in increases in goodwill and customer list and non-compete intangibles on the consolidated balance sheet. All purchase and sale agreements, except the agreements relating to the Russell Insurance Agency and Hartford Insurance Agency, call for a reduction in the purchase price should the stipulated minimum commission revenue levels not be attained over periods of one to three years from the purchase date. During the year ended June 30, 2008, other borrowings and goodwill related to the Southern Maine acquisition were reduced by $98,332 in accordance with this stipulation. The customer list intangibles and estimated useful lives are based on estimates from a third-party appraiser. The useful lives of these intangibles range from eleven to twenty-four years. Non-compete intangible useful lives are amortized over a range of ten to fifteen years.

The debt incurred is payable to the seller of each agency. Each note bears an interest rate of 6.50% over terms as follows: the Palmer debt is payable over a term of seven years; the Sturtevant debt is payable over a term of three years; the Southern Maine debt is payable over a term of four years; and the Russell debt is payable over a term of two years. Hartford, Spence & Matthews, and Hyler are payable over a term of seven years. Hartford, Spence & Matthews, and Hyler have debt of $100,000, $800,000, and $200,000, respectively, which bears no interest and has been recorded at its present value assuming a discount rate of 6.50%. Northeast Bank guaranteed the debt repayment to each seller.

Northeast Bank Insurance Group, Inc. leases the office locations for Sturtevant, Southern Maine and Hyler, which are operating leases. Northeast Bank acquired Palmer’s agency building and land in January 2007.

The results of operations of all agencies have been included in the consolidated financial statements since their acquisition date. There is no pro-forma disclosure included because the agencies individually, and in aggregate, were not considered significant acquisitions.

   
Acquisitions
 
Purchase price
 
2009     
   
2008     
 
Cash paid
  $ 715,000       3,701,250  
Debt incurred
    -       2,823,936  
Acquisition costs
    2,710       36,354  
Total
  $ 717,710       6,561,540  
                 
Allocation of purchase price:
               
Goodwill
  $ 100,160       1,545,110  
Customer list intangible
    480,000       3,905,000  
Non-compete intangible
    135,000       1,100,000  
Fixed and other assets
    2,550       11,430  
Deferred income taxes
     -       -  
Total
  $ 717,710       6,561,540  
                 

$2,902,501 of the total goodwill acquired is deductible for tax purposes.

Northeast Bank Insurance Group, Inc. acquired Solon-Anson Insurance Agency, Inc. on September 29, 2004. This acquisition was accounted for using the purchase method and resulted in a customer list intangible asset of $2,081,500, which is being amortized over twelve years.

The customer list of our Mexico, Maine insurance agency office (“Mexico”) was sold to UIG, Inc. on December 31, 2009.  The customer list and certain fixed assets of our Rangeley, Maine insurance agency office (“Rangeley”) were sold to Morton & Furbish Insurance Agency on January 31, 2010.  Since these offices were part of the Solon-Anson Insurance Agency, Inc. acquired on September 29, 2004, the customer list intangibles were allocated based upon the gross commission revenues for the Mexico and Rangeley offices as a percentage of the total commission revenue of the Solon-Anson Insurance Agency, Inc. The land and buildings in Mexico and Rangeley have been listed for sale by Northeast Bank Insurance Group, Inc. Impairment expense of $45,611 and $91,080 was recognized for the Mexico and Rangeley buildings, respectively, in order to adjust the carrying values to the expected sales price.  The Rochester, NH office was closed in May, 2010, and servicing of customer accounts from that office was transferred to the Berwick, ME office.

The following summarizes entries made to record the sales for the year ended June 30, 2010:

   
Mexico
   
Rangeley
 
Sale price
  $ 269,575       279,791  
Allocated customer list, net of amortization
    153,803       145,656  
Fixed assets, net of accumulated depreciation
    -       5,046  
Gain recognized
  $ 115,772       129,089  

12.   Fair Value Measurements

In accordance with ASC 820, the Company groups its assets and liabilities measured at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value.

Level 1 - Valuations for assets and liabilities traded in active exchange markets, such as the New York Stock Exchange. Level 1 also includes U.S. Treasury and other U.S. Government sponsored enterprise securities that are traded by dealers or brokers in active markets. Valuations are obtained from readily available pricing sources for market transactions involving identical assets or liabilities.

Level 2 - Valuations for assets and liabilities traded in less active dealer or broker markets. Valuations are obtained from third party pricing services for identical or comparable assets or liabilities.

Level 3 - Valuations for assets and liabilities that are derived from other methodologies, including option pricing models, discounted cash flow models and similar techniques, are not based on market exchange, dealer, or broker traded transactions. Level 3 valuations incorporate certain assumptions and projections in determining the fair value assigned to such assets and liabilities.

A financial instrument’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement.

A description of the valuation methodologies used for instruments measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy, is set forth below. These valuation methodologies were applied to all of the Company’s financial assets and financial liabilities carried at fair value at September 30, 2010 and June 30, 2010.

The Company’s exchange traded equity securities are generally classified within level 1 or level 2 of the fair value hierarchy because they are valued using quoted market prices, broker or dealer quotations, or alternative pricing sources with reasonable levels of price transparency.

The Company’s investment in municipal, corporate and agency bonds and mortgage-backed securities available-for-sale is generally classified within level 2 of the fair value hierarchy. For these securities, we obtain fair value measurements from independent pricing services. The fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, the U.S. treasury yield curve, trading levels, market consensus prepayment speeds, credit information and the instrument’s terms and conditions.

Level 3 is for positions that are not traded in active markets or are subject to transfer restrictions: valuations are adjusted to reflect illiquidity and/or non-transferability, and such adjustments are generally based on available market evidence. In the absence of such evidence, management’s best estimate is used. Subsequent to initial valuation, management only changes level 3 inputs and assumptions when evidence such as transactions in similar instruments, completed or pending third-party transactions in the underlying investment or comparable entities, subsequent rounds of financing, recapitalization and other transactions across the capital structure, offerings in the equity or debt markets, and changes in financial ratios or cash flows indicates that initial valuation needs to be updated.
 
The Company did not have any significant transfers of assets or liabilities between Levels 1 and 2 of the fair value hierarchy during the three months ended September 30, 2010.

The following summarizes assets measured at fair value for the period ending September 30, 2010 and June 30, 2010.
 
Assets Measured At Fair Value On A Recurring Basis

   
Fair Value Measurements at Reporting Date Using:
 
 
 
 
September 30, 2010:
 
 
 
Total
   
Quoted Prices in
Active Markets for
Identical Assets
Level 1
   
Significant
Other Observable
Inputs
Level 2
   
Significant
Unobservable
Inputs
Level 3
 
Securities available-for-sale
  $ 157,022,417       3,705,849       153,316,568       -  
Other assets – purchased interest rate caps
     52,305        -        52,305        -  

   
Fair Value Measurements at Reporting Date Using:
 
 
 
 
June  30, 2010:
 
 
 
Total
   
Quoted Prices in
Active Markets for
Identical Assets
Level 1
   
Significant
Other Observable
Inputs
Level 2
   
Significant
Unobservable
Inputs
Level 3
 
Securities available-for-sale
  $ 164,187,702       3,717,196       160,470,506       -  
Other assets – purchased interest rate caps
     113,586        -        113,586        -  
 
The Company’s impaired loans and acquired assets are reported at the fair value of the underlying collateral if repayment is expected solely from the collateral. Collateral values are estimated using level 2 inputs based upon appraisals of similar properties obtained from a third party. For Level 3 input, collateral values are based on management’s estimates pending appraisals from third party valuation services or imminent sale of collateral.
 
Assets Measured At Fair Value On A Nonrecurring Basis

   
Fair Value Measurements at Reporting Date Using:
 
 
 
 
September 30, 2010:
 
 
 
Total
   
Quoted Prices in
Active Markets for
Identical Assets
Level 1
   
Significant
Other Observable
Inputs
Level 2
   
Significant
Unobservable
Inputs
Level 3
 
Impaired Loans
  $ 1,097,937       -       -       1,097,937  
Acquired assets
    814,897                       814,897  
Premises
    371,472                       371,472  

   
Fair Value Measurements at Reporting Date Using:
 
 
 
 
June 30, 2010:
 
 
 
Total
   
Quoted Prices in
Active Markets for
Identical Assets
Level 1
   
Significant
Other Observable
Inputs
Level 2
   
Significant
Unobservable
Inputs
Level 3
 
Impaired Loans
  $ 1,019,562       -       -       1,019,562  
Acquired assets
    500,956       -       -       500,956  
Premises
    402,103                       402,103  

The following tables show the changes in the fair values of impaired loans measured on a nonrecurring basis using significant unobservable inputs (Level 3) for the three months ended September 30, 2010 and 2009.

   
2010     
   
2009     
 
Beginning balance at July 1
  $ 1,019,562       1,195,685  
Loans transferred in and/or out of Level 3
    78,375       (164,246 )
Ending balance at September 30
  $ 1,097,937       1,031,439  

The following table shows the changes in the fair value of acquired assets measured on a nonrecurring basis using significant unobservable inputs (Level 3) for the three months ended September 30, 2010.

   
2010     
 
Beginning balance at July 1
  $ 500,956  
Loans transferred in and/or out of Level 3
    313,941  
Ending balance at September 30
  $ 814,897  

The following table shows the changes in fair value of premises measured on a nonrecurring basis using significant unobservable inputs (Level 3) for the three months ended September 30, 2010.

   
2010     
 
Beginning balance at July 1
  $ 402,103  
Premises transferred out
    30,631  
Ending balance at September 30
  $ 371 ,472  

Liabilities Measured At Fair Value On A Recurring Basis

   
Fair Value Measurements at Reporting Date Using:
 
 
 
 
September 30, 2010:
 
 
 
Total
   
Quoted Prices in
Active Markets for
Identical Assets
Level 1
   
Significant
Other Observable
Inputs
Level 2
   
Significant
Unobservable
Inputs
Level 3
 
Derivative financial instruments
  $ 654,696       -       -       654,696  
                                 
                                 
   
Fair Value Measurements at Reporting Date Using:
 
 
 
 
June 30, 2010:
 
 
 
Total
   
Quoted Prices in
Active Markets for
Identical Assets
Level 1
   
Significant
Other Observable
Inputs
Level 2
   
Significant
Unobservable
Inputs
Level 3
 
Derivative financial instruments
  $ 412,588       -       -       412,588  
 
The following table shows the change in the fair value of derivative financial instruments measured on a recurring basis using significant unobservable inputs (Level 3) for the three months ended September 30, 2010.
   
2010     
 
Beginning balance at July 1
  $ 412,588  
Transferred in
    242,108  
Ending balance at September 30
  $ 654,696  
 
The Company’s derivative financial instruments are generally classified within level 3 of the fair value hierarchy.  For these financial instruments, the Company obtains fair value measurements from independent pricing services.  The fair value measurements utilize a discounted cash flow model that incorporates and considers observable data that may include publicly available third party market quotes, in developing the curve utilized for discounting future cash flows.

Fair value estimates, methods and assumptions are set forth below for the Company's significant financial instruments .

Cash and Cash Equivalents - The fair value of cash, due from banks, interest bearing deposits and FHLB overnight deposits approximates their relative book values, as these financial instruments have short maturities.

Available-for-sale Securities - The fair value of available-for-sale securities is estimated based on bid prices published in financial newspapers or bid quotations received from securities dealers.

Federal Home Loan Bank and Federal Reserve Bank Stock - The carrying value of Federal Home Loan Bank (FHLB) stock and Federal Reserve Bank (FRB) stock approximates fair value based on redemption provisions of the FHLB and the FRB.

Loans and Loans held-for-sale - Fair values are estimated for portfolios of loans with similar financial characteristics. The fair value of performing loans is calculated by discounting scheduled cash flows through the estimated maturity using estimated market discount rates that reflect the credit and interest rate risk inherent in the loan. The estimates of maturity are based on the Company's historical experience with repayments for each loan classification, modified, as required, by an estimate of the effect of current economic conditions, lending conditions and the effects of estimated prepayments.

Fair value for significant nonperforming loans is based on estimated cash flows and is discounted using a rate commensurate with the risk associated with the estimated cash flows. Assumptions regarding credit risk, cash flows and discount rates are developed using available market information and historical information.

Management has made estimates of fair value using discount rates that it believes to be reasonable. However, because there is no market for many of these financial instruments, management has no basis to determine whether the fair value presented would be indicative of the value negotiated in an actual sale.

The fair value of loans held-for-sale is estimated based on bid quotations received from loan dealers.

Interest Receivable - The fair value of this financial instrument approximates the book value as this financial instrument has a short maturity. It is the Company's policy to stop accruing interest on loans past due by more than ninety days. Therefore, this financial instrument has been adjusted for estimated credit loss.

Derivative financial instruments :  Fair value for interest rate caps and interest rate swap agreements are based upon the amounts required to settle the contracts.

Deposits - The fair value of deposits with no stated maturity, such as noninterest-bearing demand deposits, savings, NOW accounts and money market accounts, is equal to the amount payable on demand. The fair values of time deposits are based on the discounted value of contractual cash flows.

The discount rate is estimated using the rates currently offered for deposits of similar remaining maturities.

The fair value estimates do not include the benefit that results from the low-cost funding provided by the deposit liabilities compared to the cost of borrowing funds in the market. If that value was considered, the fair value of the Company's net assets could increase.

Borrowings - The fair value of the Company's borrowings with the Federal Home Loan Bank is estimated by discounting the cash flows through maturity or the next repricing date based on current rates available to the Company for borrowings with similar maturities. The fair value of the Company’s short-term borrowings, capital lease obligations, structured repurchase agreements and other borrowings is estimated by discounting the cash flows through maturity based on current rates available to the Company for borrowings with similar maturities.

Junior Subordinated Debentures - The fair value of the Company's Junior Subordinated Debentures is estimated based on current interest rates.

Due-to-Broker - The fair value of due-to-broker approximates carrying value due to their short term nature.

Commitments to Originate Loans - The Company has not estimated the fair value of commitments to originate loans due to their short term nature and their relative immateriality.

Limitations - Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument. These values do not reflect any premium or discount that could result from offering for sale at one time the Company's entire holdings of a particular financial instrument. Because no market exists for a significant portion of the Company's financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments and other factors. These estimates are subjective in nature, involve uncertainties and matters of significant judgment, and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates.

Fair value estimates are based on existing on and off-balance sheet financial instruments without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments. Other significant assets and liabilities that are not considered financial instruments include the deferred tax asset, premises and equipment and intangible assets, including the customer base. In addition, the tax ramifications related to the realization of the unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in any of the estimates.

The following table presents the estimated fair value of the Company's significant financial instruments at September 30, 2010 and June 30, 2010:

   
September 30, 2010
   
June 30, 2010
 
   
Carrying
 Value
   
Estimated
Fair Value
   
Carrying
 Value
   
Estimated
Fair Value
 
   
(Dollars in Thousands)
 
Financial assets:
                       
Cash and cash equivalents
  $ 47,525       47,525       20,436       20,436  
Available-for-sale securities
    157,022       157,022       164,188       164,188  
Regulatory stock (FHLB and FRB)
    5,486       5,486       5,486       5,486  
Loans held-for-sale
    5,736       5,750       14,254       14,289  
Loans, net
    372,569       382,964       376,503       387,008  
Accrued interest receivable
    1,992       1,992       2,081       2,081  
Other assets – purchased interest rate caps
    52       52       114       114  
                                 
Financial liabilities:
                               
Deposits (with no stated maturity)
    187,134       187,134       179,846       179,846  
Time deposits
    195,881       201,052       204,351       209,756  
Federal Home Loan Bank advances
    50,500       53,907