SBT Bancorp (SBTB) 10-Q 2012 Q3 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 September 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 [   ]

-1-

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 October 31, 2012, the registrant had 877,746 shares of its Common Stock, no par value per share, outstanding.

-2-

TABLE OF CONTENTS

SBT Bancorp, Inc.

	Page No.
PART I - FINANCIAL INFORMATION
Item 1.  Financial Statements
Condensed Consolidated Balance Sheets as of September 30, 2012 (unaudited)
and December 31, 2011		4
Condensed Consolidated Statements of Income for the Three and Nine Months Ended
September 30, 2012 and 2011 (unaudited)		5
Condensed Consolidated Statements of Comprehensive Income
for the Three and Nine Months Ended September 30, 2012 and 2011(unaudited)		6 - 7
Condensed Consolidated Statements of Changes in Stockholders' Equity for the Nine
Months Ended September 30, 2012 and 2011 (unaudited)		8
Condensed Consolidated Statements of Cash Flows for the Nine Months Ended
September 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		25 - 32
Item 3.  Quantitative and Qualitative Disclosures About Market Risk		33
Item 4.  Controls and Procedures		33 - 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		34
Item 4.  Mine Safety Disclosures		34
Item 5.  Other Information		34
Item 6.  Exhibits		35
SIGNATURES		36
EXHIBIT INDEX		37

-3-

PART I – FINANCIAL INFORMATION Item 1. Financial Statements
SBT BANCORP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except for share amounts)
ASSETS	9/30/12			12/31/11
	(unaudited)
Cash and due from banks	$	6,807		$	19,217
Interest-bearing deposits with the Federal Reserve Bank of Boston		32,338			65,292
Interest-bearing deposits with the Federal Home Loan Bank		2			1
Federal funds sold		2,476			2,024
Money market mutual funds		365			5,346
Cash and cash equivalents		41,988			91,880
Interest-bearing time deposits with other banks		3,752			4,728
Investments in available-for-sale securities (at fair value)		86,274			56,859
Federal Home Loan Bank stock, at cost		589			660
Loans outstanding		227,224			216,552
Less allowance for loan losses		2,482			2,469
Loans, net		224,742			214,083
Premises and equipment		841			679
Accrued interest receivable		961			964
Bank owned life insurance		6,325			4,173
Other Real Estate Owned		323			-
Other assets		2,903			3,013
TOTAL ASSETS	$	368,698		$	377,039
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Demand deposits	$	70,100		$	103,778
Savings and NOW deposits		188,259			164,318
Time deposits		74,969			76,681
Total deposits		333,328			344,777
Securities sold under agreements to repurchase		4,615			3,548
Other liabilities		1,528			1,271
Total liabilities		339,471			349,596
Stockholders' equity:
Preferred Stock – Series C		8,961			8,952
Common stock, no par value; authorized 2,000,000 shares;
issued and outstanding 877,746 shares at 9/30/12 and 876,808 at 12/31/11		9,639			9,620
Treasury stock, 414 shares		(7	)		(7	)
Unearned compensation restricted stock awards		(141	)		(199	)
Retained earnings		9,364			8,360
Accumulated other comprehensive income		1,411			717
Total stockholders' equity		29,227			27,443
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	368,698		$	377,039
See accompanying notes to the condensed consolidated financial statements

-4-

SBT BANCORP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(Dollars in thousands, except for per share amounts)
	For the quarter ended				For the nine months ended
	9/30/12		9/30/11		9/30/12		9/30/11
Interest and dividend income:
Interest and fees on loans	$	2,352	$	2,520	$	7,288	$	7,436
Investment securities		464		416		1,346		1,250
Federal funds sold and overnight deposits		23		30		81		69
Total interest and dividend income		2,839		2,966		8,715		8,755
Interest expense:
Deposits		263		383		784		1,180
Repurchase agreements		1		7		3		21
Total interest expense		264		390		787		1,201
Net interest and dividend income		2,575		2,576		7,928		7,554
Provision for loan losses		60		165		210		330
Net interest and divided income after provision for loan losses		2,515		2,411		7,718		7,224
Non-interest income:
Service charges on deposit accounts		121		129		361		377
Gain on sales and writedowns of available-for-sale             securities		30		116		78		384
Other service charges and fees		235		162		558		424
Increase in cash surrender value of life insurance policies		57		40		152		120
Gain on loans sold and commission fee income		609		103		1,491		215
Investment services fees and commissions		49		36		120		139
Other income		1		2		2		49
Total noninterest income		1,102		588		2,762		1,708
Non-interest expense:
Salaries and employee benefits		1,658		1,397		4,648		4,212

 Premises and equipment 339 330 1,002 1,023

Advertising and promotions 174 139 506 357

Forms and supplies 42 43 138 135

Professional fees		119		233		438		617
Directors’ fees		57		53		170		131
Correspondent charges		83		73		267		229
Postage		20		24		68		65
FDIC assessment		46		56		114		298
Data processing		131		107		369		328
Other expenses		295		232		837		686
Total noninterest expense		2,964		2,687		8,557		8,081
Income before income taxes		653		312		1,923		851
Income tax provision		147		54		483		308
Net income	$	506	$	258	$	1,440	$	543
Net income available to common stockholders	$	481	$	83	$	1,320	$	239
Average shares outstanding, basic		867,640		864,976		866,135		864,976
Earnings per common share, basic	$	0.55	$	0.10	$	1.52	$	0.28
Average shares outstanding, assuming dilution		877,018		870,803		876,977		867,149
Earnings per common share, assuming dilution	$	0.55	$	0.10	$	1.51	$	0.28

See accompanying notes to the condensed consolidated financial statements

-5-

SBT BANCORP, INC. AND SUBSIDIARY

STATEMENT OF CONDENSED CONSOLIDATED COMPREHENSIVE INCOME

THREE MONTHS ENDED SEPTEMBER 30, 2012 and 2011

(Unaudited)

(Dollars in thousands)

September 30, 2012:
Net income				$	506
Unrealized gains on securities:
Unrealized holding gains arising during period, net of taxes	$	433
Reclassification adjustment for gains
included in net income, net of taxes		(20	)		413
Comprehensive income				$	919
September 30, 2011:
Net income				$	258
Unrealized gains on securities:
Unrealized holding gains arising during period, net of taxes	$	161
Reclassification adjustment for gains
included in net income, net of taxes		(77	)		84
Comprehensive income				$	342

See accompanying notes to the condensed consolidated financial statements

-6-

SBT BANCORP, INC. AND SUBSIDIARY

STATEMENT OF CONDENSED CONSOLIDATED COMPREHENSIVE INCOME

NINE MONTHS ENDED SEPTEMBER 30, 2012 and 2011

(Unaudited)

(Dollars in thousands)

September 30, 2012:
Net income				$	1,440
Unrealized gains on securities:
Unrealized holding gains arising during period, net of taxes	$	1,051
Reclassification adjustment for gains
included in net income, net of taxes		(357	)		694
Comprehensive income				$	2,134
September 30, 2011:
Net income				$	543
Unrealized gains on securities:
Unrealized holding gains arising during period, net of taxes	$	751
Reclassification adjustment for gains
included in net income, net of taxes		(253	)		498
Comprehensive income				$	1,041

See accompanying notes to the condensed consolidated financial statements

-7-

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 SBLF		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		-			-			-		-		-			-			543			-		543
Other comprehensive income		-			-			-		-		-			-			-			498		498
Preferred stock dividends – Series A and B		-			-			-		-		-			-			(161	)		-		(161	)
Preferred stock amortization (accretion)		149			(19	)		-		-		-			-			(130	)		-		-
Preferred stock dividend – Series C		-			-			-		-		-						(38	)		-		(38	)
Amortization of SBLF preferred stock issuance costs		-			-			2		-		-			-			(2	)		-		-
Dividends declared common stock ($0.36 per share)		-			-			-		-		-			-			(311	)		-		(311	)
Restricted stock award		-			-			-		235		(235	)		-			-			-		-
Stock-based compensation		-			-			-		-		10			-			-			-		10
SBLF preferred stock, net of issuance costs of $55		-			-			8,945		-		-			-			-			-		8,945
Redemption of preferred stock – Series A and B		(4,000	)		(200	)		-		-		-			-			-			-		(4,200	)
Balance, September 30, 2011	$	-		$	-		$	8,947	$	9,616	$	(225	)	$	-		$	8,156		$	759	$	27,253
Balance, December 31, 2011	$	-		$	-		$	8,952	$	9,620	$	(199	)	$	(7	)	$	8,360		$	717	$	27,443
Net income		-			-			-		-		-			-			1,440			-		1,440
Other comprehensive income		-			-			-		-		-			-			-			694		694
Preferred stock amortization (accretion)		-			-			9		-		-			-			(9	)		-		-
Preferred stock dividend – Series C		-			-			-		-		-			-			(115	)		-		(115	)
Dividends declared common stock ($0.36 per share)		-			-			-		-		-			-			(312	)		-		(312	)
Stock-based compensation		-			-			-		-		58			-			-			-		58
Common stock issued		-			-			-		19		-			-			-			-		19
Balance, September 30, 2012	$	-		$	-		$	8,961	$	9,639	$	(141	)	$	(7	)	$	9,364		$	1,411	$	29,227

See accompanying notes to the condensed consolidated financial statements

-8-

SBT BANCORP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(Dollars in thousands)

		For the nine months ended
		9/30/12			9/30/11
Cash flows from operating activities:
Net income	$	1,440		$	543
Adjustments to reconcile net income to net cash provided by (used in)                operating activities:
Amortization of securities, net		341			161
Amortization of mortgage servicing rights		47			3
Interest capitalized on interest-bearing time deposits with other banks		(112	)		(130	)
Change in deferred loan costs, net		(263	)		(95	)
Provision for loan losses		210			330
Loss on sale of other real estate owned		-			28
Depreciation and amortization		169			160
Accretion on impairment of operating lease		(33	)		(1	)
Net gain on sales and writedowns of available-for-sale securities		(78	)		(384	)
(Increase) decrease in other assets		(892	)		32
Decrease (increase) in interest receivable		3			(17	)
Decrease in taxes receivable		589			6
Stock based compensation		58			10
Decrease in other liabilities		273			(12	)
Increase in cash surrender value of bank owned life insurance		(152	)		(120	)
Increase in interest payable		13			5
Net cash provided by operating activities		1,613			519

Cash flows from investing activities:
Maturities and redemptions of interest-bearing time deposits with other banks	1,088		1,409
Purchases of available-for-sale securities	(49,890	)	(24,297	)
Proceeds from maturities of available-for-sale securities	19,197		14,701
Proceeds from sales of available-for-sale securities	2,066		7,389
Loan originations and principal collections, net	(10,079	)	(4	)
Loans purchased	(862	)	(5,607	)
Purchases of FHLB stock	(20	)	-
Proceeds from sale of FHLB stock	91		-
Capital expenditures	(322	)	(154	)
Recoveries of loans previously charged-off	12		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	(40,719	)	(6,236	)

Cash flows from financing activities:
Net (decrease) increase in demand, NOW, and savings accounts	(9,737	)	51,610
Net decrease in time deposits	(1,712	)	(1,971	)
Net increase in securities sold under agreements to repurchase	1,067		673
Dividends paid – preferred stock	(115	)	(161	)
Dividends paid – common stock	(308	)	(311	)
Issuance of SBLF preferred stock			8,945
Redemption of preferred stock – Series A and B			(4,200	)

Common stock issued	19		-
Net cash (used in) provided by financing activities	(10,786	)	54,585

Net (decrease) increase in cash and cash equivalents		(49,892	)		48,868
Cash and cash equivalents at beginning of period		91,880			30,871
Cash and cash equivalents at end of period	$	41,988		$	79,739

Supplemental disclosures:
Interest paid	$	774		$	1,196
Income taxes (received) paid		(106	)		175
Loans transferred to other real estate owned		323			-

See accompanying notes to the condensed consolidated financial statements

-9-

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 September 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 nine months ended September 30, 2012, the Company  recognized $58,000 in stock-based employee compensation expense.  During the nine months ended September 30, 2011, the Company recognized $10,000 in 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 September 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.

-10-

  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 the Company’s 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 September 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 nine months ended September 30, 2012.

-11-

  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 September 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
September 30, 2012:
Debt securities issued by U.S.
government corporations &
agencies	$	28,870	$	-	$	28,870	$	-
Obligations of states and
municipalities		14,736		-		14,736		-
Corporate debt securities		2,054		-		2,054		-
Mortgage-backed securities		39,392		-		39,392		-
SBA loan pool		1,222		-		1,222		-
Totals	$	86,274	$	-	$	86,274	$	-
December 31, 2011:
Debt securities issued by U.S.
government corporations &
agencies	$	12,543	$	-	$	12,543	$	-
Obligations of statesand
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	$	-

-12-

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
September 30, 2012:
Impaired loans	$	192	$	-	$	-	$	192
Other real estate owed		323		-		-		323
Totals	$	515	$	-	$	-	$	515
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 September 30, 2012 and December 31, 2011:

	September 30, 2012
	(Dollars in thousands)
	Fair Value
	Carrying Value		Level 1		Level 2		Level 3		Total
Financial assets:
Cash and cash equivalents	$	41,988	$	41,988					$	41,988
Federal Home Loan Bank stock		589		589						589
Accrued interest receivable		961		961						961
Available-for-sale securities		86,274				86,274				86,274
Interest-bearing time deposits with other banks		3,752						3,853		3,853
Loans, net		224,742						231,191		231,191
Financial liabilities:
Deposits		333,328						333,850		333,850
Securities sold under agreements to repurchase		4,615		4,615						4,615
	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 nine months ended September 30, 2012 and September 30, 2011:

(Dollars in thousands, except per share amounts)
		For the three months ended
		9/30/12			9/30/11
Basic EPS computation:
Net income	$	506		$	258
Preferred stock net accretion		(3	)		(112	)
Preferred stock dividends		(22	)		(63	)
Net income available to common stockholders	$	481		$	83
Weighted average shares outstanding, basic		867,640			864,976
Basic EPS	$	0.55		$	0.10

Diluted EPS computation:
Net income	$	506		$	258
Preferred stock net accretion		(3	)		(112	)
Preferred stock dividends		(22	)		(63	)
Net income available to common stockholders	$	481		$	83

Weighted average shares outstanding, assuming dilution		867,640		864,976
Dilutive potential shares		9,378		5,827
		877,018		870,803
Diluted EPS	$	0.55	$	0.10

(Dollars in thousands, except per share amounts)
		For the nine months ended
		9/30/12			9/30/11
Basic EPS computation:
Net income	$	1,440		$	543
Preferred stock net accretion		(9	)		(132	)
Preferred stock dividends		(111	)		(172	)
Net income available to common stockholders	$	1,320		$	239
Weighted average shares outstanding, basic		866,135			864,976
Basic EPS	$	1.52		$	0.28

Diluted EPS computation:
Net income	$	1,440		$	543
Preferred stock net accretion		(9	)		(132	)
Preferred stock dividends		(111	)		(172	)
Net income available to common stockholders	$	1,320		$	239

Weighted average shares outstanding, before dilution		866,135		864,976
Dilutive potential shares		10,842		2,173
		876,977		867,149
Diluted EPS	$	1.51	$	0.28

-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 September 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	$	500	$	-		$	-	$	-		$	500	$	-
Obligations of states    and municipalities		719		(5	)		-		-			719		(5	)
Corporate debt    securities							497					497
Mortgage-backed    securities		4,549		(11	)		447		(67	)		4,996		(78	)
Total temporarily impaired securities	$	5,768	$	(16	)	$	944	$	(67	)	$	6,712	$	(83	)

  The investments in the Company’s investment portfolio that were temporarily impaired as of September30, 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 September 30, 2012 and December 31, 2011:

	Investment Portfolio
	(Dollars in thousands)
	September 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		18,756		72		-		18,828		1.07	%
Due after ten to fifteen years		10,008		34		-		10,042		1.46	%
Due beyond fifteen years		-		-		-		-		-	%
Total U.S. govt. and agency securities	$	28,764	$	106		-	$	28,870		1.20	%
State and municipal securities
Due within one year		825		9		-		834		4.59	%
Due after one to five years		-		-		-		-		-	%
Due after five to ten years		2,624		200		-		2,824		3.75	%
Due after ten to fifteen years		8,584		662		5		9,241		3.36	%
Due beyond fifteen years		1,587		250		-		1,837		4.02	%
Total state and municipal securities		13,620		1,121		5		14,736		3.59	%
Corporate debt securities
Due after one to five years		2,007		47		-		2,054		2.80	%
Total corporate debt securities		2,007		47		-		2,054		2.80	%
Mortgage-backed securities
Due within one year		80		3		-		83		3.13	%
Due after one to five years		132		3		-		135		4.12	%
Due after five to ten years		5,834		142		4		5,972		2.25	%
Due after ten to fifteen years		17,281		388		5		17,664		1.98	%
Due beyond fifteen years		15,324		283		69		15,538		2.27	%
Total mortgage-backed securities		38,651		819		78		39,392		2.14	%
SBA loan pool
Due after one to five years		115		2		-		117		4.62	%
Due after ten to fifteen years		978		127		-		1,105		5.06	%
Total SBA loan pool		1,093		129		-		1,222		5.01	%
Total available-for-sale securities	$	84,135	$	2,222	$	83	$	86,274		2.08	%

-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 nine months ended September 30, 2012, there were proceeds of $2,066,432 from sales of available for sale securities.  Gross realized gains on these sales amounted to $85,384.  The tax expense applicable to these gross realized gains amounted to $29,030.

During the nine months ended September 30, 2011, there were proceeds of $7,378,225 from sales of available for sale securities.  Gross realized gains on these sales amounted to $384,262.  The tax expense applicable to these gross realized gains amounted to $130,649.

-16-

NOTE 7 – LOAN INFORMATION

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

	(Dollars in thousands)
	September 30, 2012			December 31, 2011
Commercial, financial and agricultural	$	12,673		$	15,145
Real estate - construction and land development		3,124			1,307
Real estate - residential		113,137			99,692
Real estate - commercial		39,351			39,723
Home equity		46,031			48,484
Municipal		1,587			1,807
Consumer		10,577			9,913
		226,480			216,071
Allowance for loan losses		(2,482	)		(2,469	)
Deferred costs, net		744			481
Net loans	$	224,742		$	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 nine months ended September 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.

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.

-17-

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 nine months ended  September 30, 2012 and September 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		(114	)		(25	)		(48	)		-		-			(22	)		-			(209	)
Recoveries		8			-			-			-		3			1			-			12
(Benefit)/Provision		332			(8	)		145			29		(211	)		(44	)		(33	)		210
Ending balance
September 30, 2012	$	976		$	539		$	119		$	372	$	214		$	129		$	133		$	2,482

	(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		-			-			(203	)		-			-		(29	)		-		(232	)
Recoveries		-			-			-			-			-		5			-		5
(Benefit)/Provision		(92	)		(25	)		196			(3	)		75		99			80		330
Ending balance
September 30, 2011	$	746		$	440		$	61		$	357		$	485	$	169		$	171	$	2,429

-18-

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

	(Dollars in thousands)
	Real Estate:
					Construction and				Commercial
	Residential		Commercial		Land Development		Home Equity		& Industrial		Consumer		Unallocated		Total
September 30, 2012:
Allowance:
Ending balance:
Individually
evaluated for
impairment	$	45	$	-	$	-	$	-	$	-	$	-	$	-	$	45
Ending balance:
Collectively
evaluated for
impairment		931		539		119		372		214		129		133		2,437
Total allowance
for loan lease loss
ending balance	$	976	$	539	$	119	$	372	$	214	$	129	$	133	$	2,482
Loans:
Ending balance:
Individually
evaluated for
impairment	$	237	$	70	$	163	$	-	$	-	$	-	$	-	$	470
Ending balance:
Collectively
evaluated
for impairment		112,900		39,281		2,961		46,031		14,260		10,577		-		226,010
Total loans
ending balance	$	113,137	$	39,351	$	3,124	$	46,031	$	14,260	$	10,577	$	-	$	226,480
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		908		48,484		16,737		9,913		-		214,399
Total loans
ending balance	$	99,692	$	39,723	$	1,307	$	48,484	$	16,952	$	9,913	$	-	$	216,071

-19-

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

(Dollars in thousands)
Credit quality indicators
	Real Estate:
					Construction
					and				Commercial
	Residential		Commercial		Land Development		Home Equity		& Industrial		Consumer		Total
September 30, 2012:
Grade:
Pass	$	-	$	37,544	$	2,961	$	-	$	10,638	$	-	$	51,143
Special Mention		-		1,355				-		2,400		-		3,775
Substandard		156		452		163		812		1,222		-		2,805
Loans not formally
rated		112,981		-		-		45,219		-		10,577		168,777
Total	$	113,137	$	39,351	$	3,124	$	46,031	$	14,260	$	10,577	$	226,480
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” loan  is defined as a loan with a risk rating of 1through 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.

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.

-20-

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 September 30 2012, $168.8 million of the total residential, home equity and consumer loan portfolio of $169.7 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 and loan to value and debt to income ratios.  Home equity loan and line guidelines place a maximum loan to value ratio 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 1.34% of total loans outstanding as of September 30, 2011 to 0.69% of total loans outstanding as of September 30, 2012.

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

(Dollars in thousands)
									Recorded
September 30, 2012:					90 Days		Total		Investment
	30-59 Days		60-89 Days		or More		Past Due		90 Days and Accruing
Real estate:
Residential	$	529	$	360	$	204	$	1,093	$	-
Commercial		-		-		-		-		-
Construction and
land development		-		-		163		163		-
Home equity		-		-		-		-		-
Commercial and industrial		-		-		-		-		-
Consumer		37		87		-		124		-
Total	$	566	$	447	$	367	$	1,380	$	-
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 September 30, 2012 and December 31, 2011:

(Dollars in thousands)
Real Estate:	September 30, 2012		December 31, 2011
Residential	$	646	$	1,186
Commercial		-		250
Construction and land development		163		399
Home equity		-		238
Commercial and industrial		-		215
Consumer		-		18
Total nonaccrual loans	$	809	$	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 nine months ended September 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
September 30, 2012:
With no related allowance recorded:
Real Estate:
Residential	$	-	$	-	$	-	$	171	$	-
Commercial		70		70		-		122		1
Commercial and Industrial		-		-		-		83		-
Construction and
land development		163		163		-		258		-
Home equity		-		-		-		-		-
Total impaired with no
related allowance		233		233		-		634		1
With an allowance recorded:
Real Estate:
Residential		237		236		45		236		2
Total impaired with an
allowance recorded		237		236		45		236		2
Total:
Real Estate:		237		236		45		407		2
Commercial		70		70		-		122		1
Commercial and industrial		-		-		-		83		-
Construction and
land development		163		163		-		258		-
Home equity		-		-		-		-		-
	$	470	$	469	$	45	$	870	$	3

-22-

(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 September 30, 2012 and December 31, 2011.

LOAN COMMITMENTS AND STANDBY LETTERS OF CREDIT

(Dollars in thousands)

	9/30/12		12/31/11
Commitments to originate loans	$	27,648	$	4,571
Standby letters of credit		175		293
Unadvanced portion of loans:

Construction		62		70
Commercial lines of credit		10,331		8,059
Consumer		683		674
Home equity lines of credit		30,754		28,715
Total	$	69,653	$	42,382

-23-

Troubled Debt Restructurings

September 30, 2012

(Dollars in thousands)

	3 months ended						9 months ended
	9/30/12						9/30/12
	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
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

-24-

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 these loans have been modified.  The Bank does not expect to lend 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 $64,400,000 in loans serviced for others as of September 30, 2012 and the amortized cost of the related servicing rights was $594,000.  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 September 30, 2012 was approximately $547,000.  Approximately $431,500 of mortgage servicing rights were capitalized during the nine months ended September 30, 2012 and amortization of mortgage servicing rights recognized was approximately $47,000.

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 Merrill Lynch, 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 nine months ended September 30, 2012 and 2011:

	(Dollars in thousands)
	9/30/2012			9/30/2011
Net unrealized holding gains on available-for-sale securities	$	1,129		$	1,107
Reclassification adjustment for realized gains in net income		(78	)		(384	)
Other comprehensive income before income tax effect		1,051			723
Income tax expense		(357	)		(225	)
Other comprehensive income, net of tax	$	694		$	498

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:

-25-

● 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.

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 nine months ended September 30, 2012.  All adjustments which, in the opinion of management, are necessary in order to make the consolidated financial statements for the nine months ended September 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.

-26-

  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 nine months ended September 30, 2012, net income amounted to $1,440,000, or $1.50 per diluted share, compared to $543,000, or $0.28 per diluted share, for the nine months ended September 30, 2011.  Total assets as of September 30, 2012 were $369 million.

  At September 30, 2012, total outstanding loans were $227 million, an increase of $16 million, or 8%, over a year ago.  With a loan loss provision of $60 thousand during the quarter, the Company’s allowance for loan losses at September 30, 2012 was 1.09% of total loans.  The profile of the Company’s loan portfolio remains relatively low-risk.   The Company had non-accrual loans totaling $0.6 million, which was equal to 0.33% of total loans at September 30, 2012, compared to non-accrual loans totaling $2.0 million or 0.83% of total loans a year ago.  Total non-accrual loans and loans 30 or more days delinquent decreased to 0.69% of total outstanding loans at September 30, 2012 from 1.34% of total outstanding loans at September 30, 2011.

  Total deposits at September 30, 2012 were $333 million, an increase of $14 million or 4% over a year ago.  This growth was mainly in core deposits (Demand, Savings and NOW accounts).  At quarter-end, 21% of total deposits were in non-interest bearing demand accounts, 56% were in low-cost savings and NOW accounts and 23% were in time deposits.

  Total revenues, consisting of net interest and dividend income plus noninterest income, were $3,677,000 in the third quarter of 2012 compared to $3,164,000 a year ago, an increase of $513 thousand or 16%.  Net interest and dividend income was relatively unchanged, while noninterest income increased by $514 thousand or 87% primarily due to an increase in gains on loans sold.

  The Company’s taxable-equivalent net interest margin (taxable-equivalent net interest and dividend income divided by average earning assets) decreased by 8 basis points to 3.03% for the third quarter of 2012 from 3.11% for the third quarter of 2011.   The Company’s cost of funds declined by 21 basis points during the third quarter of 2012 compared to the third quarter of 2011.  Yield on assets declined by 25 basis points over this same period.

  Total noninterest expenses for the third quarter were $2,964,000, an increase of $277 thousand or 10% over the third quarter of 2011.  Salaries and employee benefit expenses increased by $261 thousand or 19%.  Advertising and promotions expenses increased by $35 thousand or 25%. Professional fees decreased by $114 thousand or 49%. The increase in expenses was primarily attributable to strategic initiatives targeted to grow revenues.  For the nine months ended September 30, 2012, total noninterest expenses were $8,557,000 compared to $8,081,000 for the nine months ended September 30, 2011, an increase of $476 thousand or 6%.

  Capital levels for the Simsbury Bank & Trust Company as of September 30, 2012 were above those required to meet the regulatory “well-capitalized” designation.

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.

-27-

      Net interest and dividend income after provision for loan losses plus noninterest income was $3,617,000 for the third quarter of 2012 compared to $2,999,000 for the third 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 3.03% for the quarter ended September 30, 2012 from 3.11% for the quarter ended September 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 2.94% for the quarter ended September 30, 2012 from 2.98% for the quarter ended September 30, 2011.  The Company’s yield on interest earning assets decreased to 3.33% for the third quarter of 2012 from 3.58% for the third quarter of 2011 and the cost of deposits and borrowings decreased to 0.39% for the third quarter of 2012 from 0.60% for the third quarter of 2011.

      Net interest and dividend income after provision for loan losses plus noninterest income was $10,480,000 for the first nine months of 2012 compared to $8,932,000 for the same period in 2011.  The Company’s net interest margin, as defined in the immediately preceding paragraph, decreased to 3.17% for the nine months ended September 30, 2012 from 3.23% for the nine months ended September 30, 2011.  The Company’s net interest spread, as defined in the immediately preceding paragraph, remained relatively flat at 3.08% for the nine months ended September 30, 2012 as compared to the nine months ended September 30, 2011.  The Company’s yield on interest earning assets decreased to 3.48% for the first nine months of 2012 from 3.74% for the same period in 2011, while the cost of deposits and borrowings decreased to 0.41% for the nine months ended September 30, 2012 from 0.66% for the comparable period in 2011.

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 September 30, 2012 was $2,482,000 or 1.09% of outstanding loans compared to $2,469,000 or 1.14% of outstanding loans as of December 31, 2011.   The Company charged off four loans totaling $18,600 in the third quarter of 2012 compared to three loans totaling $50,100 for the third quarter of 2011.  For the nine months ended September 30, 2012, the Company charged off ten loans totaling $209,000 compared to nine loans totaling $232,000 for the nine months ended September 30, 2011.  During the third quarter of 2012, the Company had five recoveries totaling $2,000 compared to two recoveries totaling $425 for the third quarter of 2011.  For the nine months ended September 30, 2012, the Company had ten recoveries totaling $12,400 compared to seven recoveries totaling $5,600 for the same period in 2011.  The Company believes that the allowance for loan losses is appropriate.

Non-interest Income and Non-interest Expense

Total noninterest income (which is derived mainly from service and overdraft charges) for the three months ended September 30, 2012 was $1,102,000 compared to $588,000 for the same period in the prior year.  Total noninterest income for the first nine months of 2012 was $2,762,000, an increase of $1,054,000 from $1,708,000 for the first nine months of 2011.  The increase in total noninterest income was primarily due to an increase in gains on loans sold and commission fee income.  At September 30, 2012, the Company had approximately 21,639 deposit accounts compared to 21,006 deposit accounts at December 31, 2011.

      Total noninterest expense for the three months ended September 30, 2012 was $2,964,000 compared to $2,687,000 for the same period in the prior year.  Total noninterest expense for the first nine months of 2012 was $8,557,000, an increase of $476,000 over total noninterest expense of $8,081,000 for the first nine months of 2011.  Salaries and employee benefit expenses accounted for approximately 92% of the increase in noninterest expenses.  The increase in salaries and employee benefit expenses, which was partially offset by lower professional fees, was primarily associated with strategic initiatives targeted to grow revenues.  The ratio of annualized operating expenses to average assets was 3.42% for the third quarter of 2012 compared to 3.28% for the third quarter of 2011.

-28-

      For the three months ended September 30, 2012, salaries and employee benefit expenses comprised approximately 56% of total noninterest expense, an increase from 52% of total noninterest expense for the same period in the prior year.  Other major categories included premises and equipment, which comprised approximately 11% and 12%, respectively, of total noninterest expense for each of the three months ended September 30, 2012 and 2011; advertising and promotions, which comprised approximately 6% and 5%, respectively, of total noninterest expense for each of the three months ended September 30, 2012 and 2011; and professional fees, which comprised approximately 4% and 9%, respectively, of total noninterest expense for each of the three months ended September 30, 2012 and 2011.

      For the nine months ended September 30, 2012, salaries and employee benefits comprised approximately 54% of total noninterest expense compared to 52% of total noninterest expense for the same period in the prior year.  Other major categories included premises and equipment, which comprised approximately 12% and 13%, respectively, of total noninterest expense for each of the nine months ended September 30, 2012 and 2011; advertising and promotions, which comprised approximately 6% and 4%, respectively, of total noninterest expense for each of the nine months ended September 30, 2012 and 2011; and professional fees, which comprised approximately 5% and 8%, respectively, of total noninterest expense for each of the nine months ended September 30, 2012 and 2011.

Income Taxes

The effective income tax rate for the three months ended September 30, 2012 and September 30, 2011 was 22.51% and 17.31%, respectively.  The effective income tax rate for the nine months ended September 30, 2012 and September 30, 2011 was 25.12% and 36.19% 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, are exempt from Connecticut state income tax as long as the PIC meets certain ongoing qualifications.

      Due to the creation of this special purpose entity under State of Connecticut statues, the Company no longer incurs 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 nine months ended September 30, 2011 would have been 17.49% and 15.77%, 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 September 30, 2012, the Company had 37 securities with a carrying value totaling $14,741,000 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 September 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 the overall liquidity requirements of the Company.

      The fair market value of investments in available-for-sale securities as of September 30, 2012 was $86,274,000, which was 2.5% 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 September 30, 2012, there were no investment securities in the investment portfolio that management determined to be other-than-temporarily impaired.

-29-

Loan Portfolio

The Company’s loan portfolio as of the end of the third quarter of 2012 was comprised of approximately 75% mortgage and consumer loans and 25% commercial loans.  The Company does not have any concentrations in its loan portfolio by industry or group of industries.  However, as of September 30, 2012, approximately 88% 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 $159,200,000 of residential mortgage loans as of September 30, 2012, which represented a 7.4% increase from December 31, 2011.  The Company sold 74 loans in the three months ended September 30, 2012 with an aggregate principal balance of $16,200,000, which resulted in a gain of $570,000.  For the nine months ended September 30, 2012, the Company sold 229 loans with an aggregate principal balance of $48,600,000, which resulted in a gain of $1,375,000.  The Company sold 19 loans in the three months ended September 30, 2011 with an aggregate principal balance of $3,660,000, which resulted in a gain of $104,000.  For the nine months ended September 30, 2011, the Company sold 44 loans with an aggregate principal balance of $7,761,000, which resulted in a gain of $193,600.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 September 30, 2012, the Company had total consumer loan balances of approximately $10,600,000, representing a 6.7% increase from the total consumer loan balances at December 31, 2011.  As of September 30, 2012, the Company had approximately $9,657,000 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.

      The September 30, 2012 balance for commercial loans was $56,700,000, representing a 2.2% decrease 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 secured by owner occupied real estate. 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 property 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 September 30, 2012, the Company’s lending limits were $4,726,000 and $7,877,000, 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 its lending limits.

-30-

  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 7 non-accrual loans at September 30, 2012 with an aggregate balance of approximately $808,900 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 September 30, 2012, the Company had three OREO properties carried on its books at $323,000.  The Company did not have any OREO property on its 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 September 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.

  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 September 30, 2012, the Company had criticized and classified loans with a combined outstanding balance of $9,414,000 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 September 30, 2012 or December 31, 2011.  The Company’s overall asset quality and loan loss reserves of 1.09% of loans as of September 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 September 30, 2012, the Bank had a deposit mix of 34% checking, 43% savings, and 23% certificates of deposit.  Twenty-one percent of the total deposits of $333.3 million were noninterest bearing at September 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 September 30, 2012, $62.6 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.

-31-

      The Company’s deposits are obtained from a cross-section of the communities it serves.  As of September 30, 2012, the Company had $57.9 million in municipal deposits which represent 17.4% 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 $5,599,000 as of September 30, 2012 compared to $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 September 30, 2012, the Company had $5,599,000 of deposits in the CDARS network compared to $9,017,000 of deposits in the CDARS network as of December 31, 2011.

      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 September 30, 2012, the Company held $37.8 million in cash and cash equivalents, net of required FRB reserves of $4.2 million, and $71.5 million in available-for-sale securities, net of pledged securities of $14.7 million, for total liquid assets of $109.3 million.  At September 30, 2012, the Company anticipated short-term liability obligations of $45.5 million for a basic surplus of $63.8 million, which represented 17% 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.

-32-

      At September 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 made by the Company.

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  September 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.

-33-

Changes in Internal Controls over Financial Reporting

There was no change in the Company’s internal controls over financial reporting during the quarter ended September 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.

Item 3.  Defaults upon Senior Securities

None.

Item 4.  Mine Safety Disclosures

Not applicable.

Item 5.  Other Information

None.

-34-

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.

-35-

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:  November 14, 2012	By:	/s/ Martin J. Geitz
		Martin J. Geitz
		Chief Executive Officer

Date:  November 14, 2012	By:	/s/ Anthony F. Bisceglio
		Anthony F. Bisceglio
		Chief Financial Officer

-36-

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.

-37-