SBT Bancorp (SBTB) 10-Q 2012 Q2 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended June 30, 2012

or

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

For the transition period from _______ to __________

Commission File Number:  000-51832

SBT Bancorp, Inc.

 (Exact Name of Registrant as Specified in Its Charter)

Connecticut	20-4346972
(State or Other Jurisdiction of	(I.R.S. Employer
Incorporation or Organization)	Identification No.)

760 Hopmeadow Street, P.O. Box 248, Simsbury, CT	06070
(Address of Principal Executive Offices)	(Zip Code)

(860) 408-5493

(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 subject 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 [X]                 No [   ]

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Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “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]
(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in 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 July 31, 2012, the registrant had 876,926 shares of its Common Stock, no par value per share, outstanding.

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TABLE OF CONTENTS

SBT Bancorp, Inc.

		Page No.
	PART I - FINANCIAL INFORMATION
Item 1.	Financial Statements
	Condensed Consolidated Balance Sheets as of June 30, 2012 (unaudited)
	and December 31, 2011	4
	Condensed Consolidated Statements of Income for the Three and Six Months Ended
	June 30, 2012 and 2011 (unaudited)	5
	Condensed Consolidated Statements of Comprehensive Income
	for the Three and Six Months Ended June 30, 2012 and 2011(unaudited)	6 - 7
	Condensed Consolidated Statements of Changes in Stockholders' Equity for the Six
	Months Ended June 30, 2012 and 2011 (unaudited)	8
	Condensed Consolidated Statements of Cash Flows for the Six Months Ended
	June 30, 2012 and 2011 (unaudited)	9
	Notes to Condensed Consolidated Financial Statements – (unaudited)	10 - 25
Item 2.	Management’s Discussion and Analysis of  Financial Condition and Results of Operations	26 - 34
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	34
Item 4.	Controls and Procedures	34
	PART II - OTHER INFORMATION
Item 1.	Legal Proceedings	34
Item 1A.	Risk Factors	34
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	34
Item 3.	Defaults Upon Senior Securities	35
Item 4.	Mine Safety Disclosures	35
Item 5.	Other Information	35
Item 6.	Exhibits	36
SIGNATURES		37
EXHIBIT INDEX		38

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PART I – FINANCIAL INFORMATION Item 1. Financial Statements
SBT BANCORP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except for share amounts)
ASSETS	6/30/12		12/31/11
	(unaudited)
Cash and due from banks	$	8,101	$	19,217
Interest-bearing deposits with the Federal Reserve Bank of Boston		17,737		65,292
Interest-bearing deposits with the Federal Home Loan Bank		2		1
Federal funds sold		2,314		2,024
Money market mutual funds		348		5,346
Cash and cash equivalents		28,502		91,880
Interest-bearing time deposits with other banks		3,715		4,728
Investments in available-for-sale securities (at fair value)		75,709		56,859
Federal Home Loan Bank stock, at cost		589		660
Loans outstanding		222,632		216,552
Less allowance for loan losses		2,439		2,469
Loans, net		220,193		214,083
Premises and equipment		840		679
Accrued interest receivable		977		964
Bank owned life insurance		6,268		4,173
Other Real Estate Owned		372		-
Other assets		2,652		3,013
TOTAL ASSETS	$	339,817	$	377,039

LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Demand deposits	$	72,906	$	103,778
Savings and NOW deposits		159,887		164,318
Time deposits		74,757		76,681
Total deposits		307,550		344,777

Securities sold under agreements to repurchase	2,673		3,548
Other liabilities	1,186		1,271
Total liabilities	311,409		349,596
Stockholders' equity:
Preferred Stock – Series A	-		-
Preferred Stock – Series B	-		-
Preferred Stock – Series C	8,958		8,952
Common stock, no par value; authorized 2,000,000 shares;
issued and outstanding 876,926 shares at 6/30/12 and          876,394 at 12/31/11	9,631		9,620
Treasury stock, 414 shares	(7	)	(7	)
Unearned compensation restricted stock awards	(163	)	(199	)
Retained earnings	8,991		8,360
Accumulated other comprehensive income	998		717
Total stockholders' equity	28,408		27,443

                TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY $ 339,817 $ 377,039

See accompanying notes to the condensed consolidated financial statements

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SBT BANCORP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(Dollars in thousands, except for per share amounts)
	For the quarter ended				For the six months ended
	6/30/12		6/30/11		6/30/12		6/30/11
Interest and dividend income:
Interest and fees on loans	$	2,433	$	2,480	$	4,935	$	4,955
Investment securities		469		437		883		835
Federal funds sold and overnight deposits		20		22		58		39
Total interest and dividend income		2,922		2,939		5,876		5,829
Interest expense:
Deposits		253		379		521		797
Repurchase agreements		1		6		2		14
Total interest expense		254		385		523		811
Net interest and dividend income		2,668		2,554		5,353		5,018
Provision for loan losses		60		165		150		165
Net interest and divided income after provision for loan losses		2,608		2,389		5,203		4,853
Non-interest income:
Service charges on deposit accounts		118		134		240		247
Gain on sales of available-for-sale securities		24		162		47		269
Other service charges and fees		169		145		323		276
Increase in cash surrender value of life insurance policies		55		39		95		79
Gain on loans sold and commission fee income		533		54		882		101
Investment services fees and commissions		48		37		71		103
Other income		1		4		1		4
Total noninterest income		948		575		1,659		1,079
Non-interest expense:
Salaries and employee benefits		1,603		1,402		2,990		2,815

 Premises and equipment 324 330 663 692

Advertising and promotions 183 117 332 217

Forms and supplies 53 41 96 93

Professional fees		174		226		319		384
Directors’ fees		56		39		113		78
Correspondent charges		85		80		184		156
Postage		20		20		47		41
FDIC assessment		46		112		69		241
Data processing		124		112		238		221
Other expenses		278		262		541		455
Total noninterest expense		2,946		2,741		5,592		5,393
Income before income taxes		610		223		1,270		539
Income tax provision		157		25		336		254
Net income	$	453	$	198	$	934	$	285
Net income available to common stockholders	$	423	$	133	$	839	$	156
Average shares outstanding, basic		854,078		864,976		859,657		864,976
Earnings per common share, basic	$	0.49	$	0.15	$	0.98	$	0.18
Average shares outstanding, assuming dilution		865,284		865,264		871,113		865,282
Earnings per common share, assuming dilution	$	0.49	$	0.15	$	0.96	$	0.18
See accompanying notes to the condensed consolidated financial statements

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SBT BANCORP, INC. AND SUBSIDIARY

STATEMENT OF CONDENSED CONSOLIDATED COMPREHENSIVE INCOME

THREE MONTHS ENDED JUNE 30, 2012 and 2011

(Unaudited)
(Dollars in thousands)

June 30, 2012:

Net income				$	453
Other comprehensive income, net of tax:
Unrealized gains on securities:
Unrealized holding gains arising during period	$	271
Reclassification adjustment for gains
included in net income		(16	)		255
Comprehensive income attributable to SBT Bancorp, Inc.				$	708
June 30, 2011:
Net income				$	198
Other comprehensive income, net of tax:
Unrealized gains on securities:
Unrealized holding gains arising during period	$	490
Reclassification adjustment for gains
included in net income		(107	)		383
Comprehensive income attributable to SBT Bancorp, Inc.				$	581

See accompanying notes to the condensed consolidated financial statements

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SBT BANCORP, INC. AND SUBSIDIARY

STATEMENT OF CONDENSED CONSOLIDATED COMPREHENSIVE INCOME

SIX MONTHS ENDED JUNE 30, 2012 and 2011

(Unaudited)
(Dollars in thousands)

June 30, 2012:

Net income				$	934
Other comprehensive income, net of tax:
Unrealized gains on securities:
Unrealized holding gains arising during period	$	312
Reclassification adjustment for gains
included in net income		(31	)		281
Comprehensive income attributable to SBT Bancorp, Inc.				$	1,215
June 30, 2011:
Net income				$	285
Other comprehensive income, net of tax:
Unrealized gains on securities:
Unrealized holding gains arising during period	$	591
Reclassification adjustment for gains
included in net income		(177	)		414
Comprehensive income attributable to SBT Bancorp, Inc.				$	699

See accompanying notes to the condensed consolidated financial statements

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SBT BANCORP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (Unaudited)
(Dollars in thousands)
	Preferred Stock Series A		Preferred Stock Series B			Preferred Stock Series C		Common Stock		Unearned Restricted Stock Award			Treasury Stock			Retained Earnings			Accum. Other Comp.   Income			Total
Balance, December 31, 2010	$	3,851	$	219		$	-	$	9,381	$	-		$	-		$	8,255			$	261	$	21,967
Net income		-		-			-		-		-			-			285				-		285
Other Comprehensive income		-		-			-		-		-			-			-				414		414
Preferred stock dividends		-		-			-		-		-			-			(109	)			-		(109	)
Preferred stock amortization (accretion)		23		(3	)		-		-		-			-			(20	)			-		-
Dividends declared common stock ($0.24 per share)		-		-			-		-		-			-			(208	)			-		(208	)
Balance, June 30, 2011	$	3,874	$	216		$	-	$	9,381	$	-		$	-		$	8,203			$	675	$	22,349
Balance, December 31, 2011	$	-	$	-		$	8,952	$	9,620	$	(199	)	$	(7	)	$	8,360			$	717	$	27,443
Net income		-		-			-		-		-			-			934				-		934
Other Comprehensive income		-		-			-		-		-			-			-				281		281
Preferred stock amortization (accretion)		-		-			6		-		-			-			(6	)			-		-
Preferred stock dividend – Series C		-		-			-		-		-			-			(89	)			-		(89	)
Dividends declared common stock ($0.24 per share)		-		-			-		-		-			-			(208	)			-		(208	)
Stock-based compensation		-		-			-		-		36			-			-				-		36
Common stock issued		-		-			-		11		-			-			-				-		11
Balance, June 30, 2012	$	-	$	-		$	8,958	$	9,631	$	(163	)	$	(7	)	$	8,991			$	998	$	28,408

                                                                                                              See accompanying notes to the condensed consolidated financial statements

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SBT BANCORP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(Dollars in thousands)

		For the six months ended
		6/30/12		6/30/11
Cash flows from operating activities:
Net income	$	934	$	285

Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Amortization of securities, net	204		111
Interest capitalized on interest-bearing time deposits with other banks	(75	)	(43	)
Change in deferred loan costs, net	(166	)	(51	)
Provision for loan losses	150		165
Loss on sale of other real estate owned	-		28
Depreciation and amortization	115		108
Accretion on impairment of operating lease	(22	)	(11	)
Net gain on sales and writedowns of available-for-sale securities	(47	)	(269	)
Decrease in other assets	37		39
Increase in interest receivable	(13	)	(62	)
Decrease (increase) in taxes receivable	332		(151	)
Stock based compensation	36		-
Common stock issued	11		-
Decrease in other liabilities	(237	)	(188	)
Increase in cash surrender value of bank owned life insurance	(95	)	(79	)
Increase in interest payable	8		9
Net cash provided by (used in) operating activities	1,172		(109	)

Cash flows from investing activities:
Maturities and redemptions of interest-bearing time deposits with other banks	1,088		1,365
Purchases of available-for-sale securities	(33,198	)	(18,344	)
Proceeds from maturities of available-for-sale securities	13,716		8,304
Proceeds from sales of available-for-sale securities	900		3,226
Loan originations and principal collections, net	(5,261	)	(1,862	)
Loans purchased	(1,215	)	(2,758	)
Purchases of FHLB stock	(20	)	-
Proceeds from sale of FHLB stock	91		-
Capital expenditures	(262	)	(115	)
Recoveries of loans previously charged-off	10		5
Proceeds from sale of other real estate owned	-		322
Premiums paid on bank owned life insurance	(2,000	)	-
Net cash used in investing activities	(26,151	)	(9,857	)

Cash flows from financing activities:
Net (decrease) increase in demand, NOW, and savings accounts	(35,303	)	41,346
Net decrease in time deposits	(1,924	)	(1,476	)
Net decrease in securities sold under agreements to repurchase	(875	)	(654	)
Dividends paid – preferred stock	(89	)	(109	)
Dividends paid – common stock	(208	)	(208	)
Net cash (used in) provided by financing activities	(38,399	)	38,899

Net (decrease) increase in cash and cash equivalents		(63,378	)		28,933
Cash and cash equivalents at beginning of period		91,880			30,871
Cash and cash equivalents at end of period	$	28,502		$	59,804
Supplemental disclosures:
Interest paid	$	531		$	802
Income taxes paid		336			200
Loans transferred to other real estate owned		372			-

See accompanying notes to the condensed consolidated financial statements

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (UNAUDITED)

NOTE 1 – BASIS OF PRESENTATION

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial statements and the instructions to Form 10-Q and, accordingly, do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements.  In the opinion of management, the accompanying unaudited condensed consolidated financial statements reflect all necessary adjustments, consisting of only normal recurring accruals, to present fairly the financial position, results of operations, cash flows and changes in stockholders’ equity of SBT Bancorp, Inc. (the “Company”) for the periods presented.  The Company’s only business is its investment in The Simsbury Bank and Trust Company, Inc. (the “Bank”), which is a community-oriented financial institution providing a variety of banking and investment services. In preparing the interim financial statements, 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 revenues and expenses for the period.  Actual results could differ significantly from those estimates.  The interim results of operations are not necessarily indicative of the results to be expected for the full year ending December 31, 2012.

While management believes that the disclosures presented are adequate so as to not  make the information misleading, it is suggested that these condensed consolidated financial statements be read in conjunction with the financial statements and notes included in the Company’s Form 10-K for the year ended December 31, 2011.

NOTE 2 – STOCK-BASED COMPENSATION

At June 30, 2012, the Company maintained a stock-based employee compensation plan.  The Company recognizes the cost resulting from all share-based payment transactions in the consolidated financial statements and establishes fair value as the measurement objective in accounting for share-based payment arrangements.  During the six months ended June 30, 2012, the Company  recognized $36,000 in stock-based employee compensation expense.  During the six months ended June 30, 2011, the Company did not recognize any stock-based employee compensation expense.

NOTE 3 – RECENT ACCOUNTING PRONOUNCEMENTS

In April 2011, the Financial Accounting Standards Board (“FASB”) issued ASU 2011-03, “Reconsideration of Effective Control for Repurchase Agreements.”  The objective of this ASU is to improve the accounting for repurchase agreements and other agreements that both entitle and obligate a transferor to repurchase or redeem financial assets before their maturity.  This ASU prescribes when an entity may or may not recognize a sale upon the transfer of financial assets subject to repurchase agreements.  The guidance in this ASU is effective for the first interim or annual period beginning on or after December 15, 2011.  Early adoption is not permitted.  Adoption of this ASU did not have a material impact on the Company’s consolidated financial statements.

In May 2011, the FASB issued ASU 2011-04, “Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and International Financial Reporting Standards.”  The amendments in this ASU explain how to measure fair value.  They do not require additional fair value measurements and are not intended to establish valuation standards or affect valuation practices outside of financial reporting.  The amendments in this ASU are to be applied prospectively.  For public entities, the amendments are effective during interim and annual periods beginning after December 15, 2011.  Adoption of this ASU did not have a material impact on the Company’s consolidated financial statements.

In June 2011, the FASB issued ASU 2011-05, “Presentation of Comprehensive Income.”  The objective of this ASU is to improve the comparability, consistency, and transparency of financial reporting and to increase the prominence of items reported in other comprehensive income.  Under this ASU, an entity has the option to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements.  An entity is required to present each component of net income along with total net income, each component of other comprehensive income along with a total for other comprehensive income, and a total amount for comprehensive income.  An entity is required to present on the face of the financial statements reclassification adjustments for items that are reclassified from other comprehensive income to net income in the statement(s) where the components of net income and the components of other comprehensive income are presented.  The amendments in this ASU should be applied retrospectively.  For public entities, the amendments are effective for fiscal years, and interim periods within those years, beginning after December 15, 2011.  Adoption of this ASU did not have a material impact on the Company’s consolidated financial statements.

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In September 2011, the FASB issued ASU 2011-08, “Intangibles – Goodwill and Other”, an update to ASC 350, “Intangibles – Goodwill and Other.”  ASU 2011-08 simplifies how entities, both public and nonpublic, test goodwill for impairment.  The amendments in this update permit an entity to first assess qualitative factors to determine whether it is more likely than not the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test described in ASC 350.  The more-likely-than-not threshold is defined as having a likelihood of more than 50 percent.  For public and nonpublic entities, the amendments in this ASU are effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011.  Early adoption is permitted.  The adoption of this guidance did not have an impact on the Company’s results of operations or financial position.

In December 2011, the FASB issued ASU 2011-11, “Disclosures about Offsetting Assets and Liabilities.” This ASU is to enhance current disclosures. Entities are required to disclose both gross information and net information about both instruments and transactions eligible for offset in the statement of financial position and instruments and transactions subject to an agreement similar to a master netting arrangement. The amendments in this ASU are effective for annual periods beginning on or after January 1, 2013, and interim periods within those annual periods. An entity should provide the disclosures required by those amendments retrospectively for all comparative periods presented. The Company does not anticipate that the adoption of this guidance will have a material impact on its consolidated financial statements.

In December 2011, the FASB issued ASU 2011-12, “Comprehensive Income (Topic 220): Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05.”  The amendments in this update defer those changes in ASU 2011-05 that relate to the presentation of reclassifications out of accumulated other comprehensive income on the components of net income and other comprehensive income for all periods presented.  All other requirements in ASU 2011-05 are not affected by this update.  The amendments are effective during interim and annual periods beginning after December 15, 2011. The adoption of this guidance did not have a material impact on its consolidated financial statements.

NOTE 4 – FAIR VALUE MEASUREMENT DISCLOSURES

In accordance with ASC 820, the Company groups its financial 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 Inputs – Unadjusted quoted prices in active markets for identical assets or liabilities that are available at the measurement date.

Level 2 Inputs – Inputs other than quoted prices included within Level 1 that are observable for the assets or liabilities, either directly or indirectly.  These might include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the assets or liabilities (such as interest rates, volatilities, prepayment speeds, credit risks, etc.) or inputs that are derived principally from or corroborated by market data by correlation or other means.

Level 3 Inputs – Unobservable inputs for determining the fair value of the assets or liabilities that are based on the entity’s own assumption about the assumptions that market participants would use to price the assets or liabilities.

A description of the valuation methodologies used for instruments measured at fair value, as well as the general clarification 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 liabilities carried at fair value for June 30, 2012 and December 31, 2011.  The Company did not have any significant transfers of assets or liabilities to and from Levels 1 and 2 of the fair value hierarchy during the six months ended June 30, 2012.

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The Company’s cash instruments 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 obligations of states and municipalities, mortgage-backed securities and other debt securities available-for-sale are 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.

The Company’s fair values of interest-bearing time deposits with other banks, loans and deposits, as reported in this footnote, are classified within level 3 of the fair value hierarchy. Fair values for these assets and liabilities are based on management estimates derived from revaluing these securities at prevailing current interest rates.

The Company’s impaired loans 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 inputs, fair values are based on management estimates.

Other real estate owned values are estimated using Level 2 inputs based upon appraisals of similar properties obtained from a third party.  For Level 3 inputs, fair values are based on management estimates.

The following summarizes assets measured at fair value at June 30, 2012 and December 31, 2011.

Assets Measured at Fair Value on a Recurring Basis

	(Dollars in thousands)
	Fair Value Measurements at Reporting Date Using:
			Quoted Prices in		Significant		Significant
			Active Markets for		Other Observable		Unobservable
			Identical Assets		Inputs		Inputs
	Total		Level 1		Level 2		Level 3
June 30, 2012:
Debt securities issued by U.S. government corporations & agencies	$	19,333	$	-	$	19,333	$	-
Obligations of states and municipalities		14,515		-		14,515		-
Corporate debt securities		2,017				2,017
Mortgage-backed securities		38,591				38,591
SBA loan pool		1,253		-		1,253		-
Totals	$	75,709	$	-	$	75,709	$	-

December 31, 2011:
Debt securities issued by U.S. government corporations & agencies	$	12,543	$	-	$	12,543	$	-
Obligations of states and municipalities		13,612		-		13,612		-
Corporate debt securities		2,484				2,484
Mortgage-backed securities		26,866				26,866
SBA loan pool		1,354		-		1,354		-
Totals	$	56,859	$	-	$	56,859	$	-

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Assets Measured at Fair Value on a Nonrecurring Basis

	(Dollars in thousands)
	Fair Value Measurements at Reporting Date Using:
			Quoted Prices in		Significant		Significant
			Active Markets for		Other Observable		Unobservable
			Identical Assets		Inputs		Inputs
	Total		Level 1		Level 2		Level 3
June 30, 2012:
Impaired loans	$	189	$	-	$	-	$	189
Totals	$	189	$	-	$	-	$	189
December 31, 2011:
Impaired loans	$	175	$	-	$	-	$	175
Totals	$	175	$	-	$	-	$	175

The estimated fair values of the Company’s financial instruments, all of which are held or issued for purposes other than trading, were as follows as of June 30, 2012 and December 31, 2011:

	June 30, 2012
	(Dollars in thousands)
	Fair Value
	Carrying Value		Level 1		Level 2		Level 3		Total
Financial assets:
Cash and cash equivalents	$	28,502	$	28,502					$	28,502
Federal Home Loan Bank stock		589		589						589
Accrued interest receivable		977		977						977
Available-for-sale securities		75,709				75,709				75,709
Interest-bearing time deposits with other banks		3,715						3,869		3,869
Loans, net		220,193						225,535		225,535
Financial liabilities:
Deposits		307,550						308,140		308,140
Securities sold under agreements to repurchase		2,673		2,673						2,673
	December 31, 2011
	(Dollars in thousands)
	Fair Value
	Carrying Value		Level 1		Level 2		Level 3		Total
Financial assets:
Cash and cash equivalents	$	91,880	$	91,880					$	91,880
Federal Home Loan Bank stock		660		660						660
Accrued interest receivable		964		964						964
Available-for-sale securities		56,859				56,859				56,859
Interest-bearing time deposits with other banks		4,728						4,899		4,899
Loans, net		214,083						220,659		220,659
Financial liabilities:
Deposits		344,777						345,515		345,515
Securities sold under agreements to repurchase		3,548		3,548						3,548

- 13 -

NOTE 5 – EARNINGS PER  COMMON SHARE

Basic earnings per common share (”EPS”) excludes dilution and is computed by dividing net income available to common stockholders by the weighted-average number of common shares outstanding for the period.  Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then share in the earnings of the entity.

The following information was used in the computation of EPS on both a basic and diluted basis for the three and six months ended June 30, 2012 and June 30, 2011:

(Dollars in thousands, except per share amounts)
		For the three months ended
		6/30/12			6/30/11
Basic EPS computation:
Net income	$	453		$	198
Preferred stock net accretion		(3	)		(10	)
Preferred stock dividends		(27	)		(55	)
Net income available to common stockholders	$	423		$	133
Weighted average shares outstanding, basic		854,078			864,976
Basic EPS	$	0.49		$	0.15

Diluted EPS computation:
Net income	$	453		$	198
Preferred stock net accretion		(3	)		(10	)
Preferred stock dividends		(27	)		(55	)
Net income available to common stockholders	$	423		$	133

Weighted average shares outstanding, assuming dilution		854,078		864,976
Dilutive potential shares		11,206		288
		865,284		865,264
Diluted EPS	$	0.49	$	0.15

(Dollars in thousands, except per share amounts)
		For the six months ended
		6/30/12			6/30/11
Basic EPS computation:
Net income	$	934		$	285
Preferred stock net accretion		(6	)		(20	)
Preferred stock dividends		(89	)		(109	)
Net income available to common stockholders	$	839		$	156
Weighted average shares outstanding, basic		859,657			864,976
Basic EPS	$	0.98		$	0.18

Diluted EPS computation:
Net income	$	934		$	285
Preferred stock net accretion		(6	)		(20	)
Preferred stock dividends		(89	)		(109	)
Net income available to common stockholders	$	839		$	156

Weighted average shares outstanding, assuming dilution		859,657		864,976
Dilutive potential shares		11,456		306
		871,113		865,282
Diluted EPS	$	0.96	$	0.18

- 14 -

NOTE 6 – INVESTMENT SECURITIES

The aggregate fair value and unrealized losses of securities that have been in a continuous unrealized loss position for less than twelve months and for twelve months or more, and are not other than temporarily impaired, were as follows:

	As of June 30, 2012 (dollars in thousands)
	Less than 12 months					12 months or longer					Total
	Fair value		Unrealized losses			Fair  value		Unrealized losses			Fair value		Unrealized losses
Debt securities issued by the U.S. Treasury    and other U.S. govt. corporations and agencies	$	1,499	$	-		$	-	$	-		$	1,499	$	-
Obligations of states and municipalities		704		(21	)		-		-			704		(21	)
Corporate debt securities		495		(5	)		489		(10	)		984		(15	)
Mortgage-backed securities		2,965		(7	)		438		(99	)		3,403		(106	)
Total temporarily impaired securities	$	5,663	$	(33	)	$	927	$	(109	)	$	6,590	$	(142	)

The investments in the Company’s investment portfolio that were temporarily impaired as of June30, 2012 consisted of debt issued by states and municipalities, corporations and U.S. government agencies and sponsored enterprises.  The Company’s management anticipates that the fair value of securities that are currently impaired will recover to cost basis.  As the Company has the ability and intent to hold securities for the foreseeable future, no declines are deemed to be other than temporary.

The following table summarizes the amounts and distribution of the Bank’s investment securities held as of June 30, 2012 and December 31, 2011:

	Investment Portfolio
	(Dollars in thousands)
	June 30, 2012
	Amortized cost		Unrealized gains		Unrealized loss		Fair value		Yield
Available-for-sale securities
U.S. government and agency securities
Due within one year	$	-	$	-		-		-		-
Due after one to five years		13,747		58		-		13,805		1.11	%
Due after ten to fifteen years		5,014		14		-		5,028		1.47	%
Due beyond fifteen years		500		-		-		500		0.94	%
Total U.S. govt. and agency securities	$	19,261	$	72		-	$	19,333		1.20	%
State and municipal securities
Due within one year		326		9		-		335		3.80	%
Due after one to five years		500		2		-		502		5.10	%
Due after five to ten years		2,626		182		-		2,808		3.74	%
Due after ten to fifteen years		7,213		474		10		7,677		3.49	%
Due beyond fifteen years		2,978		226		11		3,193		3.41	%
Total state and municipal securities		13,643		893		21		14,515		3.59	%
Corporate debt securities
Due after one to five years		2,007		25		15		2,017		2.80	%
Total corporate debt securities		2,007		25		15		2,017		2.80	%
Mortgage-backed securities
Due within one year		90		4		-		94		3.54	%
Due after one to five years		218		4		-		222		3.81	%
Due after five to ten years		6,407		130		7		6,530		2.34	%
Due after ten to fifteen years		15,681		225		5		15,901		2.12	%
Due beyond fifteen years		15,765		173		94		15,844		2.33	%
Total mortgage-backed securities		38,161		536		106		38,591		2.25	%
SBA loan pool
Due after one to five years		119		1		-		120		4.62	%
Due after ten to fifteen years		1,005		128		-		1,133		5.06	%
Total SBA loan pool		1,124		129		-		1,253		5.02	%
Total available-for-sale securities	$	74,196	$	1,655	$	142	$	75,709		2.55	%

- 15 -

	Investment Portfolio
	(Dollars in thousands)
	December 31, 2011
	Amortized cost		Unrealized gains		Unrealized loss		Fair value		Yield
Available-for-sale securities
U.S. government and agency securities
Due within one year	$	500	$	2	$	-	$	502		1.49	%
Due after one to five years		12,000		44		3		12,041		1.37	%
Total U.S. govt. and agency securities		12,500		46		3		12,543		1.37	%
State and municipal securities
Due after one to five years		499		5		-		504		5.10	%
Due after five to ten years		1,518		55		-		1,573		3.72	%
Due after ten to fifteen years		7,261		387		1		7,647		3.61	%
Due beyond fifteen years		3,637		251		-		3,888		3.69	%
Total state and municipal securities		12,915		698		1		13,612		3.70	%
Corporate debt securities
Due within one year		500		3		-		503		5.00	%
Due after one to five years		2,009		1		29		1,981		2.83	%
Total corporate debt securities		2,509		4		29		2,484		3.26	%
Mortgage-backed securities
Due within one year		2		-		-		2		5.26	%
Due after one to five years		376		9		-		385		3.63	%
Due after five to ten years		6,518		107		12		6,613		2.39	%
Due after ten to fifteen years		11,785		162		47		11,900		2.25	%
Due beyond fifteen years		7,935		137		106		7,966		3.15	%
Total mortgage-backed securities		26,616		415		165		26,866		2.57	%
SBA loan pool
Due after one to five years		130		3		-		133		4.63	%
Due after ten to fifteen years		1,101		120		-		1,221		5.09	%
Total SBA loan pool		1,231		123		-		1,354		5.04	%
Total available-for-sale securities	$	55,771	$	1,286	$	198	$	56,859		2.61	%

During the six months ended June 30, 2012, there were proceeds of $900,010 from sales of available for sale securities.  Gross realized gains on these sales amounted to $49,481.  The tax expense applicable to these gross realized gains amounted to $16,824.

During the six months ended June 30, 2011, there were proceeds of $3,226,371 from sales of available for sale securities.  Gross realized gains on these sales amounted to $268,438.  The tax expense applicable to these gross realized gains amounted to $91,269.

- 16 -

NOTE 7 – LOAN INFORMATION

Loans consisted of the following as of June 30, 2012 and December 31, 2011:

	(Dollars in thousands)
	June 30, 2012			December 31, 2011
Commercial, financial and agricultural	$	15,024		$	15,145
Real estate - construction and land development		2,531			1,307
Real estate - residential		106,103			99,692
Real estate - commercial		38,202			39,723
Home equity		47,551			48,484
Municipal		1,893			1,807
Consumer		10,680			9,913
		221,984			216,071
Allowance for loan losses		(2,439	)		(2,469	)
Deferred costs, net		648			481
Net loans	$	220,193		$	214,083

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 uncollectability 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 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, the 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.

General component:

The general component of the allowance for loan 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; and national and local economic trends and conditions.  There were no changes in the Company’s policies or methodology pertaining to the general component of the allowance for loan losses during the six months ended June 30, 2012.

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:

Residential real estate:  The Company generally does not originate loans with a loan-to-value ratio greater than 80 %  without obtaining private mortgage insurance for any amounts over 80% and does not grant subprime loans.  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 real estate:  Loans in this segment are primarily owner-occupied properties throughout the Farmington Valley in Connecticut.  Management continually monitors the financial performance of these loans and the related operating entities.

Construction loans:  Loans in this segment primarily include real estate development loans for which payment is derived from the sale of the property.  Credit risk is affected by cost overruns, time to sell at adequate prices, and market conditions.

- 17 -

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

Consumer loans:  Loans in this segment are generally unsecured and repayment is dependent on the credit quality of the individual borrower.

Allocated component:

The allocated component relates to loans that are classified as impaired.  Impairment is measured on a loan-by-loan basis for commercial, commercial real estate and construction loans 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) 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 and residential real estate loans for impairment disclosures, unless such loans are subject to a troubled debt restructuring agreement.

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 may periodically 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.

Unallocated component:

An unallocated component is maintained to cover uncertainties that could affect management’s estimate of probable losses.  The unallocated component of the allowance reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating allocated and general reserves in the portfolio.

The following table presents the allowance for loan loss activity by portfolio segment for the six months ended  June 30, 2012 and June 30, 2011:

(Dollars in thousands)
	Real Estate
									Construction
									and Land							Commercial
	Residential				Commercial				Development				Home Equity			and Industrial				Consumer				Unallocated				Total
Allowance for loan losses:
Beginning balance		$	750			$	572			$	22			$	343		$	422			$	194			$	166			$	2,469
Charge-offs			(112	)			(25	)			(49	)			-			-				(4	)			-				(190	)
Recoveries			7				-				-				-			1				2				-				10
(Benefit)/Provision			270				(25	)			109				42			(169	)			(67	)			(10	)			150
Ending balance
June 30, 2012		$	915			$	522			$	82			$	385		$	254			$	125			$	156			$	2,439

- 18 -

(Dollars in thousands)
	Real Estate
								Construction
								and Land								Commercial
	Residential				Commercial			Development				Home Equity				and Industrial			Consumer				Unallocated				Total
Allowance for loan losses:
Beginning balance		$	838			$	465		$	68			$	360			$	410		$	94			$	91			$	2,326
Charge-offs			-				-			(160	)			-				-			(22	)			-				(182	)
Recoveries			-				-			-				-				-			5				-				5
(Benefit)/Provision			(105	)			36			151				(3	)			33			73				(20	)			165
Ending balance
June 30, 2011		$	733			$	501		$	59			$	357			$	443		$	150			$	71			$	2,314

The following table sets forth information regarding the allowance for loan losses by portfolio segment as of June 30, 2012 and December 31, 2011:

(Dollars in thousands)
	Real Estate:
						Construction and Land						Commercial
	Residential		Commercial			Development			Home Equity			& Industrial			Consumer			Unallocated			Total
June 30, 2012:
Allowance:
Ending balance:
Individually
evaluated for
impairment	$	47		$	-		$	-		$	-		$	-		$	-		$	-		$	47
Ending balance:
Collectively
evaluated for
impairment		868			522			82			385			254			125			156			2,392
Total allowance
for loan lease loss
ending balance	$	915		$	522		$	82		$	385		$	254		$	125		$	156		$	2,439
Loans:
Ending balance:
Individually
evaluated for
impairment	$	236		$	71		$	163		$	-		$	-		$	-		$	-		$	470
Ending balance:
Collectively
evaluated
for impairment		105,867			38,131			2,368			47,551			16,917			10,680	-			221,514

Total loans
ending balance	$	106,103	$	38,202	$	2,531	$	47,551	$	16,917	$	10,680	$	-	$	221,984
December 31, 2011:
Allowance:
Ending balance:
Individually
evaluated for
impairment	$	62	$	-	$	-	$	-	$	-	$	-	$	-	$	62
Ending balance:
Collectively
evaluated for
impairment		688		572		22		343		422		194		166		2,407
Total allowance
for loan lease loss
ending balance	$	750	$	572	$	22	$	343	$	422	$	194	$	166	$	2,469
Loans:
Ending balance:
Individually
evaluated for
impairment	$	808	$	250	$	399	$	-	$	215	$	-	$	-	$	1,672
Ending balance:
Collectively
evaluated
for impairment		98,884		39,473		909		48,484		16,736		9,913		-		214,399

Total loans
ending balance	$	99,692	$	39,723	$	1,308	$	48,484	$	16,951	$	9,913	$	-	$	216,071

- 19 -

The following table presents the Company’s loans by risk rating as of June 30, 2012 and December 31, 2011:

(Dollars in thousands)
Credit quality indicators
	Real Estate
						Construction
						and Land						Commercial
	Residential		Commercial			Development			Home Equity			and Industrial			Consumer			Total
June 30, 2012:
Grade:
Pass	$	-		$	36,375		$	2,368		$	-		$	12,345		$	-		$	51,088
Special Mention		-			1,372			-			-			3,288			-			4,660
Substandard		821			455			163			186			1,284			-			2,909
Loans not formally
rated		105,282			-			-			47,365			-			10,680			163,327
Total	$	106,103		$	38,202		$	2,531		$	47,551		$	16,917		$	10,680		$	221,984
December 31, 2011:
Grade:
Pass	$	-		$	35,746		$	909		$	-		$	13,343		$	-		$	49,998
Special mention		-			3,339			-			-			2,930			-			6,269
Substandard		1,349			638			399			238			678			-			3,302
Loans not formally
rated		98,343			-			-			48,246			-			9,913			156,502
Total	$	99,692		$	39,723		$	1,308		$	48,484		$	16,951		$	9,913		$	216,071

Credit Quality Indicators:  As part of the ongoing monitoring of the credit quality of the Company’s loan portfolio, management tracks certain credit quality indicators, including trends related to (i) weighted average risk rating of commercial loans; (ii) the level of classified and criticized commercial loans; (iii) non-performing loans; (iv) net charge-offs; and (v) the general economic conditions within the State of Connecticut.

The Company utilizes a risk rating grading matrix to assign a risk grade to each of its commercial loans.  Loans are graded on a scale of 1 to 7.  A “Pass” is defined as risk rating 1 through 3.5.  A description of each rating class is as follows:

Risk Rating 1 (Superior) – This risk rating is assigned to loans secured by cash.

Risk Rating 2 (Good) – This risk rating is assigned to borrowers of high credit quality who have primary and secondary sources of repayment which are well defined and fully confirmed.

Risk Rating 3 (Satisfactory) – This risk rating is assigned to borrowers who are fully responsible for the loan or credit commitment and have primary and secondary sources of repayment that are well defined and adequately confirmed.  Most credit factors are favorable, and the credit exposure is managed through normal monitoring.

Risk Rating 3.5 (Bankable with Care) – This risk rating is assigned to borrowers who are fully responsible for the loan or credit commitment and the secondary sources of repayment are weak.  These loans may require more than the average amount of attention from the relationship manager.

Risk Rating 4 (Special Mention) – This risk rating is assigned to borrowers with loan obligations which may be adequately protected by the present debt service capacity and tangible net worth of such borrowers, but which have potential problems that could, if not checked or corrected, eventually weaken these assets or otherwise jeopardize the repayment of principal and interest as originally intended.  Most credit factors are unfavorable, and the credit exposure requires immediate corrective action.

- 20 -

Risk Rating 5 (Substandard) – This risk rating is assigned to borrowers who have inadequate cash flow or collateral to satisfy their loan obligations as originally defined in the loan agreement.  Substandard loans may be placed on nonaccrual status if the conditions described above are generally met.

Risk Rating 6 (Doubtful) – This risk rating is assigned to borrowers or the portion of borrowers’ loans with which the Company is no longer certain of such loans’ collectability.  A specific reserve allocation is assigned to such portion of the loans.

Risk Rating 7 (Loss) – This risk rating is assigned to loans which have been charged off or the portion of the loans that have been charged off.  “Loss” does not imply that the loan, or any portion thereof, will never be repaid, nor does it imply that there has been a forgiveness of debt.

“Loans not formally rated” represent residential, home equity and consumer loans.  As of June 30, 2012, $163.3 million of the total residential, home equity and consumer loan portfolio of $164.3 million were not formally rated.  The performance of these loans is measured by delinquency status.  The Bank underwrites first mortgage loans in accordance with FHLMC and FNMA guidelines.  These guidelines provide for specific requirements with regard to documentation, loan to value and debt to income ratios.  Home equity loan and line guidelines place a maximum loan to value of 80% on these loans and the Bank requires full underwriting disclosure documentation for these loans.  These underwriting factors have produced a high performance loan portfolio.  Total delinquent loans decreased from 1.17% of loans outstanding on June 30, 2011 to 0.44% of total loans outstanding on June 30, 2012.

An age analysis of past-due loans, segregated by class of loans, as of June 30, 2012 and December 31, 2011 is as follows:

	(Dollars in thousands)
										Recorded
June 30, 2012:								Total		Investment
		30-59 Days		60-89 Days		90 Days or More		Past Due		90 Days and Accruing
Real estate:
Residential		$	113	$	-	$	-	$	113	$	-
Commercial			-		-		-		-		-
Construction and
land development			-		-		163		163		-
Home equity			-		-		-		-		-
Commercial and industrial			-		-		-		-		-
Consumer			34		1		-		35		40
Total		$	147	$	1	$	163	$	311	$	40
December 31, 2011:
Real estate:
Residential		$	-	$	515	$	430	$	945	$	-
Commercial			-		-		250		250		-
Construction and
land development			-		-		399		399		-
Home equity			38		-		-		38		-
Commercial and industrial			-		-		215		215		-
Consumer			52		1		18		71		-
Total		$	90	$	516	$	1,312	$	1,918	$	-

The following table sets forth information regarding nonaccrual loans as of June 30, 2012 and December 31, 2011:

(Dollars in thousands)
Real Estate:	June 30, 2012		December 31, 2011
Residential	$	685	$	1,186
Commercial		-		250
Construction and land development		163		399
Home equity		-		238
Commercial and industrial		-		215
Consumer -		-		18
Total nonaccrual loans	$	848	$	2,306

Information about loans that meet the definition of an impaired loan in ASC 310-10-35 is as follows as of and for the six months ended June 30, 2012 and the year ended December 31, 2011.

- 21 -

	(Dollars in thousands)
				Unpaid				Average		Interest
		Recorded		Principal		Related		Recorded		Income
		Investment		Balance		Allowance		Investment		Recognized
June 30, 2012:
With no related allowance recorded:
Real Estate:
Residential		$	-	$	-	$	-	$	245	$	-
Commercial			71		71		-		144		5
Commercial and Industrial			-		-		-		70		7
Construction and
land development			163		162		-		298		-
Home equity			-		-		-		-		-
Total impaired with no
related allowance			234		233		-		757		12
With an allowance recorded:
Real Estate:
Residential			236		236		47		236		2
Total impaired with an
allowance recorded			236		236		47		236		2
Total:
Real Estate:
Residential			236		236		47		481		2
Commercial			71		71		-		144		5
Commercial and industrial			-		-		-		70		7
Construction and
land development			163		162		-		298		-
Home equity			-		-		-		-		-
		$	470	$	469	$	47	$	993	$	14

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	(Dollars in thousands)
				Unpaid				Average		Interest
		Recorded		Principal		Related		Recorded		Income
		Investment		Balance		Allowance		Investment		Recognized
December 31, 2011:
With no related allowance recorded:
Real Estate:
Residential		$	571	$	571	$	-	$	564	$	8
Commercial			250		318		-		315		9
Construction and
land development			399		753		-		684		-
Commercial and industrial			215		215		-		46		1
Home equity			-		-		-		5		-
Total impaired with no
related allowance			1,435		1,857		-		1,614		18
With an allowance recorded:
Real Estate:
Residential			237		237		62		239		10
Commercial and industrial			-		-		-		-		-
Total impaired with an
allowance recorded			237		237		62		239		10
Total:
Real Estate:
Residential			808		808		62		803		18
Commercial			250		318		-		315		9
Construction and
land development			399		753		-		684		-
Commercial and industrial			215		215		-		46		1
Home equity			-		-		-		5		-
		$	1,672	$	2,094	$	62	$	1,853	$	28

The following table sets forth the Bank’s loan commitments, standby letters of credit, and unadvanced portions of loans at June 30, 2012 and December 31, 2011.

LOAN COMMITMENTS AND STANDBY LETTERS OF CREDIT
(Dollars in thousands)
	6/30/12		12/31/11
Commitments to originate loans	$	26,836	$	4,571
Standby letters of credit		175		293
Unadvanced portion of loans:
Construction		243		70
Commercial lines of credit		8,547		8,059
Consumer		692		674
Home  equity lines of credit		29,614		28,715
Total	$	66,107	$	42,382

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Troubled Debt Restructuring

June 30, 2012

(Dollars in thousands)

	3 months ended							6 months ended
	6/30/12							6/30/12
	Number of Contracts		Pre-Modification Outstanding Recorded Investment			Post- Modification  Outstanding  Recorded Investment		Number of Contracts		Pre-Modification Outstanding Recorded Investment			Post-Modification  Outstanding Recorded Investment
Troubled debt restructurings
Residential		-			-		-		-			-		-
Commercial		1		$	66	$	72		1		$	66	$	72
Construction and land development
Home equity		-			-		-		-			-		-
Commercial and industrial
Consumer
Troubled debt restructurings that subsequently defaulted
Residential		-			-		-		-			-		-
Commercial
Construction and land development
Home equity		-			-		-		-			-		-
Commercial and industrial
Consumer

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The Bank’s troubled debt restructurings are determined by management.  TDRs include all accrued interest, late charges, title and recording fees, and attorney’s fees being added back to the pre-modification balance.  Rates and terms of the loans have changed. The Bank does not expect to loan additional funds to these borrowers.

The Bank is currently selling loans in the secondary  market on a loan by loan basis. The Company had a balance of $49,200,000 in loans serviced for others as of June 30, 2012 and the amortized cost of the related servicing rights was $460,000. The Company had a balance of $25,800,000 in loans serviced for others as of December 31, 2011 and the amortized cost of the related servicing rights was $162,500.

The balance of capitalized servicing rights included in other assets at June 30, 2012 was approximately $460,000. Approximately $320,500 of mortgage servicing rights were capitalized during the six months ended June 30, 2012 and amortization of mortgage servicing rights recognized was approximately $23,000.

NOTE 8 – SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE

Securities sold under agreements to repurchase consist of funds borrowed from customers on a short-term basis secured by portions of the Company's investment portfolio.  The securities which were sold have been accounted for not as sales but as borrowings.  The securities consisted of debt securities issued by the U.S. Treasury and other U.S. government sponsored enterprises, corporations and agencies and states and municipalities.  The securities were held in safekeeping by Morgan Stanley, under the control of the Company.  The purchasers have agreed to sell to the Company substantially identical securities at the maturity of the agreements.  The agreements mature generally within three months from date of issue.

NOTE 9 – OTHER COMPREHENSIVE INCOME

The following table presents the reclassification disclosure for the six months ended June 30, 2012 and 2011:

	(Dollars in thousands)
	6/30/2012			6/30/2011
Net unrealized holding gains on available-for-sale securities	$	472		$	864
Reclassification adjustment for realized gains in net income		(47	)		(269	)
Other comprehensive income before income tax effect		425			595
Income tax expense		(144	)		(181	)
Other comprehensive income, net of tax	$	281		$	414

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Item 2.  Management's Discussion and Analysis of Financial Conditions and Results of Operations

Forward-Looking Statements

Certain statements contained in this report that are not historical facts may constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and are intended to be covered by the safe harbor provisions of the Private Securities Litigation Reform Act of 1995.  These statements, which are based on certain assumptions and describe the Company’s future plans, strategies and expectations, can generally be identified by the use of words such as “may,” “will,” “should,” “could,” “would,” “plan,” “believe,” “expect,” “anticipate,” “intend,” “estimate” or words of similar meaning.  These forward-looking statements include statements relating to the Company’s anticipated future financial performance, projected growth and management’s long-term performance goals, as well as statements relating to the anticipated effects on results of operations and financial condition from developments or events, the Company’s business and growth strategies.

These forward-looking statements are subject to significant risks, assumptions and uncertainties, and could be affected by many factors.  The following list, which is not intended to be an all-encompassing list of risks and uncertainties affecting the Company, summarizes several factors that could cause the Company’s actual results to differ materially from those anticipated or expected in these forward-looking statements:

●   economic conditions (both generally and in the Company’s markets) may be less favorable than expected, resulting in, among other things, a continued deterioration in credit quality, a further reduction in demand for credit and/or a further decline in real estate values;

●   the general decline in the real estate and lending market may continue to negatively affect the Company’s financial results;

●   inaccuracies in management’s assumptions used in calculating the appropriate amount to be placed into the Company’s allowance for loan and lease losses;

●   restrictions or conditions imposed by regulators on the Company’s operations may make it more difficult for the Company to achieve its goals;

●   legislative and regulatory changes (including the unexpected impact of the Dodd-Frank Wall Street Reform and Consumer Protection Act and related regulations) subject the Company to additional regulatory oversight which may result in increased compliance costs and/or require the Company to change its business model;

●   changes in accounting standards and compliance requirements may adversely affect the businesses in which the Company is engaged;

●   competitive pressures among depository and other financial institutions may increase significantly;

●   changes in the interest rate environment may reduce margins or the volumes or values of the loans the Company makes;

●   competitors may have greater financial resources and develop products that enable those competitors to compete more successfully than the Company can;

●   the Company’s ability to attract and retain key personnel can be affected by the increased competition for experienced employees in the banking industry;

●   adverse changes may occur in the equity markets;

●   war or terrorist activities may cause further deterioration in the economy or cause instability in credit markets; and

●   economic, governmental or other factors may prevent the projected population and residential and commercial growth in the markets in which the Company operates.

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Forward-looking statements speak only as of the date on which they are made.  The Company does not undertake any obligation to update any forward-looking statement to reflect circumstances or events that occur after the date the forward-looking statements are made.

General

Management’s Discussion and Analysis of Financial Conditions and Results of Operations is designed to provide a better understanding of the significant changes and trends related to the Company’s financial condition, results of operations, liquidity and capital resources.  The discussion should be read in conjunction with the consolidated financial statements of the Company for the six months ended June 30, 2012.  All adjustments which, in the opinion of management, are necessary in order to make the consolidated financial statements for the six months ended June 30, 2012 not misleading have been made.

The Company’s only business is its investment in The Simsbury Bank and Trust Company, Inc. (the “Bank”), which is a community-oriented financial institution providing a variety of banking and investment services.  The Bank offers a full range of banking services, including commercial loans, real estate term loans, construction loans, SBA loans and a variety of consumer loans; checking, savings, certificates of deposit and money market deposit accounts; and safe deposit and other customary non-deposit banking services to consumers and businesses in north central Connecticut.

The Bank offers investment products and services to customers through SBT Investment Services, Inc., a wholly-owned subsidiary of the Bank, and its affiliation with the securities broker/dealer, LPL Financial LLC.

Disclosure of the Company’s significant accounting policies is included in Note 2 to the consolidated financial statements of the Company’s Annual Report on Form 10-K for the year ended December 31, 2011.  Some of these policies are particularly sensitive, requiring significant judgments, estimates and assumptions to be made by management.  One of these significant policies relates to the provision for loan losses.  See the heading “Provision for Loan Losses” below for further details about the Bank’s current provision.

Overview

For the six months ended June 30, 2012, net income amounted to $934,000, or $0.96 per diluted share.  This compares to net income of $285,000 or $0.18 per diluted share for six months ended June 30, 2011.  Total assets on June 30, 2012 were $340 million.

Total loans outstanding on June 30, 2012 were $223 million, an increase of $13 million or 6% over a year ago. Average loan balances for the quarter ending June 30, 2012 increased by $14 million or 7% compared to average loan balances for the quarter ending June 30, 2011. Residential mortgage loan average balances increased $6.4 million or 7% over last year’s second quarter.  Commercial loan average balances increased $5.2 million or 10%.  Consumer loan average balances increased $2.5 million or 4%. The profile of the Company’s loan portfolio remains relatively low-risk.   Allowance for loan losses at June 30, 2012 was 1.10% of total loans.  The Company had non-accrual loans of $0.8 million equal to 0.38% of total loans on June 30, 2012 compared to non-accrual loans of $2.1 million or 1.00% of total loans a year ago.  Total delinquent loans decreased from 1.17% of loans outstanding on June 30, 2011 to 0.44% of loans outstanding on June 30, 2012.

Total deposits on June 30, 2012 were $308 million, a decrease of $1.6 million compared to total deposits a year ago.  Prior year quarter-end, June 30, 2011, total deposits included a business checking account short-term deposit of $22 million that was deposited in late June 2011 and was withdrawn in early July 2011.  Excluding this prior year quarter-end anomaly, total deposits for the quarter ending June 30, 2012 increased by $20 million or 7%. This growth was all in Core deposits (Demand, Savings and NOW accounts).  Compared to June 30, 2011, demand deposits, excluding the prior year quarter-end anomaly, increased $8 million or 12%, savings and NOW deposits increased $14 million or 10%, and time deposits decreased by $1.5 million or 2%. At quarter end, 24% of total deposits were in non-interest bearing demand accounts, 52% were in low-cost savings and NOW accounts, and 24% were in time deposits.

Total revenues, consisting of net interest and dividend income plus noninterest income, were $3,616,000 in the second quarter compared to $3,129,000 a year ago, an increase of $487,000 or 16%.  Net interest and dividend income increased by $114,000 or 5%, while noninterest income increased by $373,000 or 65% primarily due to an increase in the gain on loans sold.

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The Company’s taxable-equivalent net interest margin (taxable-equivalent net interest and dividend income divided by average earning assets) was 3.34% for the second quarter of 2012, compared to 3.45% for the second quarter of 2011.  The Company’s cost of funds declined 23 basis points while the yield on interest earning assets decreased 31 basis points during the second quarter of 2012, compared to the second quarter of 2011.

Total noninterest expenses increased by $205,000 or 7% to $2,946,000 for the second quarter 2012 compared to $2,741,000 in the second quarter 2011. This increase was mainly due to expenses related to growing the Bank’s revenues.  Salaries and employee benefit expenses increased by $201,000. Advertising and promotion expenses increased by $66,000.  Offsetting a portion of these expense increases were decreases in expenses for professional fees and FDIC assessment fees totaling $118,000.

Capital levels for the Bank on June 30, 2012 were above those required to meet the regulatory “well-capitalized” designation.

Capital Ratios 6/30/12
	The Simsbury Bank and Trust Company, Inc.	Regulatory Standard for Well-Capitalized
Tier 1 Leverage Capital Ratio	7.82%	5.00%
Tier 1 Risk-Based Capital Ratio	13.76%	6.00%
Total Risk-Based Capital Ratio	14.99%	10.00%

Results of Operation

Net Interest Income and Net Interest Margin

The Company’s earnings depend largely upon the difference between the income received from its loan portfolio and investment securities and the interest paid on its liabilities, including interest paid on deposits and borrowings.  This difference is “net interest income.”  The net interest income, when expressed as a percentage of average total interest-earning assets, is referred to as the net yield on interest-earning assets.  The Company’s net interest income is affected by the change in the level and the mix of interest-earning assets and interest-bearing liabilities, referred to as volume changes.  The Company’s net yield on interest-earning assets is also affected by changes in yields earned on assets and rates paid on liabilities, referred to as rate changes.  Interest rates charged on the Company’s loans are affected principally by the demand for such loans, the supply of money available for lending purposes and competitive factors.  These factors are in turn affected by general economic conditions and other factors beyond the Company’s control, such as federal economic policies, the general supply of money in the economy, legislative tax policies, governmental budgetary matters, and the actions of the Federal Reserve Bank.

Net interest and dividend income after provision for loan losses plus non-interest income was $3,556,000 for the second quarter of 2012 compared to $2,964,000 for the second quarter of 2011.  The Company’s net interest margin, defined as the ratio of taxable equivalent net interest and dividend income to interest-earning assets or net yield on earning assets, decreased to 3.34% for the quarter ended June 30, 2012 from 3.45% for the quarter ended June 30, 2011.  The Company’s net interest spread, defined as the difference between the yield on earning assets and the cost of deposits and borrowings, decreased to 3.24% for the quarter ended June 30, 2012 from 3.32% for the quarter ended June 30, 2011.  The Company’s yield on interest earning assets decreased during the second quarter of 2012 to 3.65% as compared to 3.96% for the second quarter of 2011 and the cost of deposits and borrowings decreased to 0.41% for the second quarter of 2012 from 0.64% for the second quarter of 2011.

Net interest and dividend income after provision for loan losses plus non-interest income was $6,862,000 for the first six months of 2012 compared to $5,932,000 for the same period in 2011.  The Company’s net interest margin, as defined in the immediately preceding paragraph , was relatively unchanged at 3.38% for the six months ended June 30, 2012 compared to 3.39% for the six months ended June 30, 2011. The Company’s net interest spread, as defined in the immediately preceding paragraph, increased to 3.32% for the six months ended June 30, 2012 from 3.24% for the six months ended June 30, 2011. The Company’s yield on interest earning assets decreased during the first six months of 2012 to 3.56% as compared to 3.92% for the same period in 2011, while the cost of deposits and borrowings decreased to 0.25% for the six months ended June 30, 2012 from 0.68% for the comparable period in 2011.

- 28 -

Provision for Loan Losses

The provision for loan losses is charged to earnings to bring the total allowance for loan losses to a level deemed appropriate by management based on such factors as historical experience, the volume and type of lending conducted by the Company, the amount of non-performing loans, regulatory policies, generally accepted accounting principles, general economic conditions, and other factors related to the collectability of loans in the Company’s portfolio.

Each month, the Company reviews the allowance for loan losses and makes additional provisions to the allowance, as determined by the Company’s guidelines.  The total allowance for loan losses at June 30, 2012 was $2,439,000 or 1.10% of outstanding loans as compared to $2,469,000 or 1.14% of outstanding loans as of December 31, 2011.   The Company charged off three loans totaling $51,500 in the second quarter of 2012 compared to five loans totaling $177,000 for the second quarter of 2011.  For the six months ended June 30, 2012, the Company charged off seven loans totaling $190,000 compared to six loans totaling $182,000 for the six months ended June 30, 2011.  During the second quarter of 2012, the Company had five recoveries totaling $8,400 compared to six  recoveries totaling $3,400 for the second quarter of 2011.  For the six months ended June 30, 2012, the Company had seven recoveries totaling $10,300 compared to seven recoveries totaling $5,100 for the same period in 2011.  The Company believes the allowance for loan losses is appropriate.

Non-interest Income and Non-interest Expense

Total non-interest income (which is derived mainly from service and overdraft charges) for the three months ended June 30, 2012 was $948,000 compared to $575,000 for the same period in the prior year.  Total non-interest income for the first six months of 2012 was $1,659,000, an increase of $580,000 from $1,079,000 for the first six months of 2011.  The increase in total non-interest income was primarily due to an increase in loans sold. At June 30, 2012 the Company had approximately 20,988 deposit accounts, compared to 21,006 deposit accounts at December 31, 2011.

Total non-interest expense for the three months ended June 30, 2012 was $2,946,000 compared to $2,741,000 for the same period in the prior year.  Total non-interest expense for the first six months of 2012 was $5,592,000, an increase of $199,000 over total non-interest expense of $5,393,000 for the first six months of 2011.  Salaries and employee benefit expenses accounted for approximately 88% of the increase in non-interest expenses, which were partially offset by lower FDIC assessment fees.  These expenses were primarily associated with strategic initiatives in increasing loan originations volume which resulted in strong revenue growth.  The ratio of annualized operating expenses to average assets was 3.32% for the second quarter of 2012 compared to 3.46% for the second quarter of 2011.

For the three months ended June 30, 2012, salaries and employee benefits comprised approximately 54% of total non-interest expense, an increase from 51% for the same period in the prior year.  Other major categories included premises and equipment, which comprised approximately 11% and 12%, respectively, of total non-interest expense for each of the three months ended June 30, 2012 and 2011; advertising and promotions, which comprised approximately 6% and 4%, respectively, of total non-interest expense for each of the three months ended June 30, 2012 and 2011; and professional fees, which comprised approximately 6% and 7%, respectively, of total non-interest expense for  each of the three months ended June 30, 2012 and 2011.

For the three months ended June 30, 2012, salaries and employee benefits comprised approximately 53% of total non-interest expense compared to 52% for the same period in the prior year.  Other major categories included premises and equipment, which comprised approximately 12% and 13%, respectively, of total non-interest expense for each of the six months ended June 30, 2012 and 2011; advertising and promotions, which comprised approximately 6% and 4%, respectively, of total non-interest expense each of the six months ended June 30, 2012 and 2011; and professional fees, which comprised approximately 6% and 7%, respectively, of total non-interest expense for each of the six months ended June 30, 2012 and 2011.

Income Taxes

The effective income tax rate for the three months ended June 30, 2012 and June 30, 2011 was 25.74% and 11.21%, respectively.  The effective income tax rate for the six months ended June 30, 2012 and June 30, 2011 was 26.46% and 47.12%, respectively.  On January 1, 2011, the company formed a Passive Investment Company (“PIC”) under Connecticut tax legislation for the purpose of holding certain mortgage loans.  The earnings, net of certain allocated expenses, will be exempt from Connecticut state income tax as long as the PIC meets certain ongoing qualifications.

- 29 -

Due to the creation of this special purpose entity under State of Connecticut statues, the Company will no longer incur state income tax liability except for the minimum tax.  Therefore, the Company incurred a one-time charge to expense for the reversal of state deferred tax assets, net of federal benefit, which will not be utilized.  Excluding this one-time charge, the effective income tax rate for the three and six months ended June 30, 2011 would have been 11.21% and 15.21%, respectively.

Financial Condition

Investment Portfolio

In order to maintain a reserve of readily sellable assets to meet the Company’s liquidity and loan requirements, the Company purchases United States Treasury securities and other investments.  Sales of “federal funds” (short-term loans to other banks) are regularly utilized.  Placement of funds in certificates of deposit with other financial institutions may be made as alternative investments pending utilization of funds for loans or other purposes.

Securities may be pledged to meet regulatory requirements imposed as a condition to receipt of deposits of public funds and repurchase agreements.  At June 30, 2012, the Company had 34 securities with a carrying value totaling $12,889,000 pledged for such purposes.  At December 31, 2011, the Company had 38 securities with a carrying value totaling $14,983,000 pledged for such purposes.

As of June 30, 2012 and December 31, 2011, the Company’s investment portfolio consisted of U.S. government and agency securities, state and municipal securities, corporate bonds, mortgage-backed securities, and money market securities. The Company’s policy is to stagger the maturities of its investment securities to meet overall liquidity requirements of the Company.

The fair market value of investments in available-for-sale securities as of June 30, 2012 was $75,709,000, which is 2.0% above amortized cost, compared to $56,859,000, which was 2.0% above amortized cost, as of December 31, 2011.  The Company has the ability to hold debt securities until maturity, or for the foreseeable future if classified as available-for-sale, and equity securities until recovery to cost basis occurs.

Management periodically reviews all investment securities with significant declines in fair value for potential other-than-temporary impairment pursuant to the guidance in ASC 320-10, “Investments – Debt and Equity Securities.”  ASC 320-10 addresses the determination as to when an investment is considered impaired, whether the impairment is other-than-temporary, and the measurement of an impairment loss.  Management evaluates the Company’s investment portfolio on an ongoing basis.  As of June 30, 2012, there were no investment securities in the investment portfolio that management determined to be other-than-temporarily impaired.

Loan Portfolio

The Company’s loan portfolio as of the end of the second quarter of 2012 was comprised of approximately 74% mortgage and consumer loans and 26% commercial loans.  The Company does not have any concentrations in its loan portfolio by industry or group of industries.  However, as of June 30, 2012, approximately 87% of the Company’s loans were secured by residential real property located in Connecticut compared with approximately 86% as of December 31, 2011.

The Company had approximately $153,600,000 of residential mortgage loans as of June 30, 2012, which represented a 3.7% increase from December 31, 2011. The Company sold ninety-six loans in the three months ended June 30, 2012 with an aggregate principal balance of $20,589,000, which resulted in a gain of $494,000.  For the six months ended June 30, 2012, the Company sold one hundred fifty-five loans with an aggregate principal balance of $32,430,000, which resulted in a gain of $805,000.  The Company sold thirteen loans in the three months ended June 30, 2011 with an aggregate principal balance of $2,300,000, which resulted in a gain of $44,000. For the six months ended June 30, 2011, the Company sold twenty five loans with an aggregate principal balance of $4,101,000, which resulted in a gain of $90,800.The Company is an approved originator of loans that can be sold to the Federal Home Loan Mortgage Corporation and the Federal Home Loan Bank.

At June 30, 2012, the Company had total consumer loan balances of approximately $10,700,000, representing a 7.7% increase from the total consumer loan balances at December 31, 2011.  As of June 30, 2012, the Company had approximately $9,774,000 in consumer auto loans purchased from BCI Financial Corp. (“BCI”) on its books compared to approximately $8,996,000 in consumer auto loans purchased from BCI on its books as of December 31, 2011. The Company has an agreement with BCI pursuant to which the Company purchases auto loans from BCI.  As part of the agreement, BCI services the loans for the Company.

- 30 -

The June 30, 2012 balance for commercial loans was $57,650,000, which was relatively unchanged from the commercial loan balance of $57,982,000 at December 31, 2011.  The Company’s commercial loans are made to borrowers for the purpose of providing working capital, financing the purchase of equipment, or financing other business purposes.  The majority of these loans are owner occupied.  Such loans include loans with maturities ranging from thirty days to one year and “term loans,” which are loans with maturities normally ranging from one year to twenty-five years.  Short-term business loans are generally intended to finance current transactions and typically provide for periodic principal payments, with interest payable monthly.  Term loans normally provide for fixed or floating interest rates, with monthly payments of both principal and interest.

The Company’s construction loans are primarily interim loans made by the Company to finance the construction of commercial and single-family residential property.  These loans are typically short-term.  The Company generally pre-qualifies construction loan borrowers for permanent “take-out” financing as a condition to making the construction loan.  The Company will also occasionally make loans for speculative housing construction or for acquisition and development of raw land.

The Company’s other real estate loans consist primarily of loans originated based on the borrower’s cash flow and which are secured by deeds of trust on commercial and residential property to provide another source of repayment in the event of default.  It is the Company’s policy to restrict real estate loans without credit enhancement to no more than 80% of the lower of the appraised value or the purchase price of the property, depending on the type of property and its utilization.

The Company offers both fixed and floating rate loans.  Maturities on such loans typically range from five to thirty years.  The Company has been designated an approved SBA lender.  The Company’s SBA loans are categorized as commercial or real estate depending on the underlying collateral.  Also, the Company has been approved as an originator of loans that can be sold to the Federal Home Loan Mortgage Corporation.

The Company is subject to certain lending limits.  With certain exceptions, the Company is permitted under applicable law to make related extensions of credit to any single borrowing entity of up to 15% of the Company’s capital and reserves.  Credit equaling an additional 10% of the Company’s capital and reserves may be extended if the credit is fully secured by limited types of qualified collateral.  As of June 30, 2012, the Company’s lending limits were $4,594,000 and $7,656,000, respectively.  As of December 31, 2011, these lending limits were $4,429,000 and $7,382,000, respectively.  The Company sells participations in its loans when necessary to stay within lending limits.

Interest on performing loans is accrued and taken into income daily.  Loans over 90 days past due are deemed non-performing and are placed on non-accrual status.  Interest received on non-accrual loans is credited to income only upon receipt and in certain circumstances may be applied to principal until the loan has been repaid in full, at which time the interest received is credited to income.  The Company had 8 non-accrual loans at June 30, 2012 with an aggregate balance of approximately $847,400 compared to 19 non-accrual loans at December 31, 2011 with an aggregate balance of approximately $2,306,000.

When appropriate or necessary to protect the Company’s interests, real estate pledged as collateral on a loan may be taken by the Company through foreclosure or a deed in lieu of foreclosure.  Real property acquired in this manner by the Company is known as “other real estate owned” (“OREO”) and is carried on the books of the Company as an asset at the lesser of the Company’s recorded investment or the fair value less estimated costs to sell.  At June 30, 2012, the Company had three OREO properties carried on the books at $372,000. The Company did not have any OREO property on the books at December 31, 2011.

A loan whose terms have been modified due to financial difficulties of a borrower is reported as a troubled debt restructure (“TDR”).  All TDRs are placed on non-accrual status until the loan qualifies for return to accrual status.  Loans qualify for return to accrual status once borrowers have demonstrated performance with the restructured terms of the loan agreement for a minimum of six months.  The Company had one TDR loan at June 30, 2012 with a balance of approximately $72,100 compared to two TDR loans at December 31, 2011 with a balance of approximately $571,000.

Non-payment of loans is an inherent risk in the banking business.  That risk varies with the type and purpose of the loan, the collateral which is utilized to secure payment and, ultimately, the creditworthiness of the borrower.  In order to minimize this credit risk, the Company requires that all loans be approved by at least two officers, one of whom must be an executive officer.  Commercial loans greater than $500,000, as well as other loans in certain circumstances, must be approved by the Loan Committee of the Company’s Board of Directors.

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The Company has an internal review process to verify credit quality and risk classifications.  In addition, the Company also maintains a program of annual review of certain new and renewed loans by an outside loan review consultant.  Loans are graded from “pass” to “loss” depending on credit quality, with “pass” representing loans that are fully satisfactory as additions to the Company’s portfolio.  These are loans which involve a degree of risk that is not unwarranted given the favorable aspects of the credit and which exhibit both primary and secondary sources of repayment.  Classified loans identified in the review process are added to the Company’s Internal Watchlist and an allowance for credit losses is established for such loans, if appropriate.  Additionally, the Bank is examined regularly by the Federal Deposit Insurance Corporation and the State of Connecticut Department of Banking, at which times a further review of loans is conducted.

As of June 30, 2012, the Company had criticized and classified loans with a combined outstanding balance of $7,569,000 compared to $9,571,000 as of December 31, 2011.  The Company had no exposure to sub-prime loans in its loan portfolio as of June 30, 2012 and December 31, 2011.  The Company’s overall asset quality and loan loss reserves of 1.10% of loans as of June 30, 2012 compare favorably to its peer banks.

The Company maintains an allowance for loan losses to provide for potential losses in the loan portfolio.  Additions to the allowance are made by charges to operating expenses in the form of a provision for loan losses.  All loans that are judged to be uncollectible are charged against the allowance, while any recoveries are credited to the allowance.  Management conducts a critical evaluation of the loan portfolio monthly.  This evaluation includes an assessment of the following factors:  the results of the Company’s internal loan review, any external loan review, any regulatory examination, loan loss experience, estimated potential loss exposure on each credit, concentrations of credit, value of collateral, any known impairment in the borrower’s ability to repay, qualitative risk factors, and present and prospective economic conditions.

Deposits

Deposits are the Bank’s primary source of funds.  At June 30, 2012, the Bank had a deposit mix of 39% checking, 36% savings and 25% certificates of deposit.  Twenty four percent of the total deposits of $307.6 million were noninterest bearing at June 30, 2012.  At December 31, 2011, the Bank had a deposit mix of 43% checking, 34% savings and 23% certificates of deposit.  Thirty percent of the total deposits of $344.8 million were noninterest bearing at December 31, 2011.  At June 30, 2012, $29.2 million of the Bank’s deposits were from public sources compared to deposits from public sources of $45.5 million at December 31,2011.  The Bank’s net interest income is enhanced by its percentage of noninterest bearing deposits.

The Company’s deposits are obtained from a cross-section of the communities it serves.  As of June 30, 2012, the Company had $26.3 million in municipal deposits which represent 8.6% of the total deposits.  The Company accepts deposits in excess of $100,000 from customers.  Those deposits are priced to remain competitive.  Through the Promontory Interfinancial Network LLC’s Certificate of Deposit Accounts Registry Service (“CDARS”) program, the Bank had brokered deposits of $7,579,000 as of June 30, 2012 and $9,017,000 as of December 31, 2011.

The Company is not dependent upon funds from sources outside the United States and has not made any loans to a foreign entity.

Liquidity and Asset-Liability Management

Liquidity management for banks requires that funds always be available to pay anticipated deposit withdrawals and maturing financial obligations promptly and fully in accordance with their terms.  The balance of the funds required is generally provided by payments on loans, sale of loans, liquidation of assets, borrowings, and the acquisition of additional deposit liabilities.  One method banks utilize for acquiring additional liabilities is through the acceptance of “brokered deposits” (defined to include not only deposits received through deposit brokers but also deposits bearing interest in excess of 75 basis points over market rates), typically attracting large certificates of deposit at high interest rates.  The Company is a member of Promontory Interfinancial Network LLC’s Certificate of Deposit Account Registry Service.  This allows the Company to offer its customers FDIC insurance on deposits in excess of $250,000, which reflects the deposit insurance limits currently in effect, by placing the deposits in the CDARS network.  Accounts placed in this manner are considered brokered deposits.  As of June 30, 2012, the Company had $7,579,000 of deposits in the CDARS network compared to $9,017,000 of deposits in the CDARS network as of December 31, 2011.

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Liquidity of a financial institution, such as a bank, is measured by its ability to have liquid assets sufficient to meet its short term obligations.  The net sum of liquid assets less anticipated current obligations represents the basic surplus of the Company.  The Company maintains a portion of its funds in cash deposits in other banks, federal funds sold, and available-for-sale securities to meet its obligations for anticipated depositors’ demands in the near future.  As of June 30, 2012, the Company held $22.7 million in cash and cash equivalents, net of required FRB reserves of $5.8 million, and $62.8 million in available-for-sale securities, net of pledged securities of $12.9 million, for total liquid assets of $85.5 million.  At June 30, 2012, the Company anticipated short term liability obligations of $37.7 million for a basic surplus of $47.8 million, which represented 14% of total assets.  As of December 31, 2011, the Company held $86.6 million in cash and cash equivalents, net of required FRB reserves of $5.3 million, and $41.9 million in available-for-sale securities, net of pledged securities of $15.0 million, for total liquid assets of $128.5 million.  At December 31, 2011, the Company anticipated short term liability obligations of $44.0 million for a basic surplus of $84.5 million, which represented 22% of total assets.

The careful planning of asset and liability maturities and the matching of interest rates to correspond with this  matching of maturities is an integral part of the active management of an institution’s net yield.  To the extent maturities of assets and liabilities do not match in a changing interest rate environment, net yields may be affected.  Even with perfectly matched repricing of assets and liabilities, risks remain in the form of prepayment of assets, timing lags in adjusting certain assets and liabilities that have varying sensitivities to market interest rates and basis risk.  In its overall attempt to match assets and liabilities, management takes into account rates and maturities offered in connection with its certificates of deposit and provides for the extension of variable rate loans to borrowers.  The Company has generally been able to control its exposure to changing interest rates by maintaining floating interest rate loans, shorter term investments, and a majority of its certificates of deposit with relatively short maturities.

The Executive Committee of the Company’s Board of Directors meets monthly to monitor the Company’s investments and liquidity needs and oversee its asset-liability management.  In between meetings of the Executive Committee, the Company’s management oversees the Bank’s liquidity.

Capital Requirements

The banking industry is subject to capital adequacy requirements based on risk-adjusted assets.  The risk-based guidelines are used to evaluate capital adequacy and are based on the institution’s asset risk profile, including investments and loans, and off-balance sheet exposures, such as unused loan commitments and standby letters of credit.  The guidelines require that a portion of total capital be core, or Tier 1.  Tier 1 capital is the aggregate of common stockholders’ equity and perpetual preferred stock, less goodwill and certain other deductions.  Total capital consists of Tier 1 capital plus the allowance for loan losses subject to certain limitations.  Leverage ratio is defined as Tier 1 capital divided by average assets.

At June 30, 2012 and December 31, 2011, the Company’s capital exceeded all minimum regulatory requirements and the Company was considered to be “well capitalized” as defined in the regulations issued by the FDIC.

Inflation and Deflation

The impact of changes in the general price level of goods or services on financial institutions, either through inflation or deflation, may differ significantly from the impact exerted on other companies.  Banks, as financial intermediaries, have numerous assets and liabilities whose values are affected by both inflation and deflation.  This is especially true for companies, such as a bank, with a high percentage of interest-rate-sensitive assets and liabilities.  Banks seek to reduce the impact of inflation or deflation, and the coincident increase or decrease in interest rates, by managing their interest-rate-sensitivity gap.  The Company attempts to manage its interest-rate-sensitivity gap and to structure its mix of financial instruments so as to minimize the potential adverse effects inflation or deflation may have on its net interest income and, therefore, its earnings and capital.

Based on the Company’s interest-rate-sensitivity position, the Company may be adversely affected by changes in interest rates in the short term.  As such, management of the money supply and interest rates by the Federal Reserve to control the general price level of goods or services has an indirect impact on the earnings of the Company.  Also, changes in interest rates may have a corresponding impact on the ability of borrowers to repay loans with the Company.

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Off Balance Sheet Arrangements

The Company does not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on the Company’s financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors.

Item 3.  Quantitative and Qualitative Disclosures about Market Risk

Not required.

Item 4.  Controls and Procedures

The Company has initiatives in place to ensure compliance with the Sarbanes-Oxley Act of 2002.  The Company has an Internal Compliance Committee that is responsible for the monitoring of, and compliance with, all federal regulations.  This committee makes reports on compliance matters to the Audit and Compliance Committee of the Company’s Board of Directors.

Evaluation of Disclosure Controls and Procedures

The Company’s management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Company’s disclosure controls and procedures as of  June 30, 2012.  Based upon this evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that, as of that date, the Company’s disclosure controls and procedures were effective at ensuring that required information will be disclosed on a timely basis.

As used herein, “disclosure controls and procedures” mean controls and other procedures of the Company that are designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms.  Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act is accumulated and communicated to the Company’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

Changes in Internal Controls over Financial Reporting

There was no change in the Company’s internal controls over financial reporting during the quarter ended June 30, 2012 that has materially affected, or is reasonably likely to materially affect, the Company’s internal controls over financial reporting.

PART II - OTHER INFORMATION

Item 1. Legal Proceedings

The Company is not a party to any pending legal proceeding, nor is its property the subject of any pending legal proceeding, other than routine litigation that is incidental to its business.  The Company is not aware of any pending or threatened litigation that could have a material adverse effect upon its business, operating results, or financial condition.  Moreover, the Company is not a party to any administrative or judicial proceeding, including, but not limited to, proceedings arising under Section 8 of the Federal Deposit Insurance Act.

To the best of the Company’s knowledge, none of its directors or officers, or their respective affiliates, or a beneficial owner of 5% or more of the Company’s securities is a party adverse to the Company or has a material interest adverse to the Company in any legal proceeding.

Item 1A.  Risk Factors

Not required.

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

None.

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Item 3.  Defaults upon Senior Securities

None.

Item 4.  Mine Safety Disclosures

Not applicable.

Item 5. Other Information

None.

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Item 6.  Exhibits

Exhibit No.	Description
3(i).1	Conformed Copy of the Certificate of Incorporation of SBT Bancorp, Inc. (incorporated by reference to Exhibit 3(i) of the Company's Form 10-K filed on March 31, 2009)
3(i).2	Certificate of Amendment to the Certificate of Incorporation of SBT Bancorp, Inc. establishing the designations, preferences, limitations and relative rights of the SBLF Preferred Stock (incorporated by reference to Exhibit 3.1 of the Company’s 8-K filed on August 12, 2011)
3(ii)	Amended and Restated Bylaws (incorporated by reference to Exhibit 3(ii) of the Company's Form 8-K filed on March 22, 2012)
4	Specimen Common Stock Certificate (incorporated by reference to Exhibit 4 of the Company’s Form 10-QSB file on May 15, 2006)
31.1	Rule 13a-14(a)/15d-14(a) Certification by Chief Executive Officer
31.2	Rule 13a-14(a)/15d-14(a) Certification by Chief Financial Officer
32.1	Section 1350 Certification by Chief Executive Officer
32.2	Section 1350 Certification by Chief Financial Officer
101.INS	XBRL Instance Document*
101.SCH	XBRL Taxonomy Extension Schema Document*
101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document*
101.LAB	XBRL Taxonomy Extension Label Linkbase Document*
101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document*
101.DEF	Taxonomy Extension Definitions Linkbase Document*

* As provided in Rule 406T of Regulation S-T, this information is deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 and 12 of the Securities Act of 1933, as amended, and is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise is not subject to liability under these sections.

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SIGNATURES

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

	SBT BANCORP, INC.
Date: August 14, 2012	By:	/s/ Martin J. Geitz
		Martin J. Geitz
		Chief Executive Officer
Date: August 14, 2012	By:	/s/ Anthony F. Bisceglio
		Anthony F. Bisceglio
		Chief Financial Officer

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EXHIBIT INDEX

Exhibit No.	Description
3(i).1	Conformed Copy of the Certificate of Incorporation of SBT Bancorp, Inc. (incorporated by reference to Exhibit 3(i) of the Company's Form 10-K filed on March 31, 2009)
3(i).2	Certificate of Amendment to the Certificate of Incorporation of SBT Bancorp, Inc. establishing the designations, preferences, limitations and relative rights of the SBLF Preferred Stock (incorporated by reference to Exhibit 3.1 of the Company’s 8-K filed on August 12, 2011)
3(ii)	Amended and Restated Bylaws (incorporated by reference to Exhibit 3(ii) of the Company's Form 8-K filed on March 22, 2012)
4	Specimen Common Stock Certificate (incorporated by reference to Exhibit 4 of the Company’s Form 10-QSB file on May 15, 2006)
31.1	Rule 13a-14(a)/15d-14(a) Certification by Chief Executive Officer
31.2	Rule 13a-14(a)/15d-14(a) Certification by Chief Financial Officer
32.1	Section 1350 Certification by Chief Executive Officer
32.2	Section 1350 Certification by Chief Financial Officer
101.INS	XBRL Instance Document*
101.SCH	XBRL Taxonomy Extension Schema Document*
101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document*
101.LAB	XBRL Taxonomy Extension Label Linkbase Document*
101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document*
101.DEF	Taxonomy Extension Definitions Linkbase Document*

* As provided in Rule 406T of Regulation S-T, this information is deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 and 12 of the Securities Act of 1933, as amended, and is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise is not subject to liability under these sections.

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