SBT Bancorp (SBTB) 10-Q 2013 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, 2013

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.)
86 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)

760 Hopmeadow Street, P.O. Box 248, Simsbury, CT 06070

(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes [X]                 No [   ]

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes [X]                 No [   ]

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Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.  (Check one):

Large accelerated filer [   ]	Accelerated filer [   ]
Non-accelerated filer [   ] (Do not check if a smaller reporting company)	Smaller reporting company [X]

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, 2013, the registrant had 889,396 shares of its Common Stock, no par value per share, outstanding.

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TABLE OF CONTENTS

SBT Bancorp, Inc. and Subsidiary

		Page No.
PART I - FINANCIAL INFORMATION
Item 1.	Financial Statements
	Condensed Consolidated Balance Sheets as of September 30, 2013 (unaudited)
	and December 31, 2012	4
	Condensed Consolidated Statements of Income for the Three and Nine Months Ended
	September 30, 2013 and 2012 (unaudited)	5
	Condensed Consolidated Statements of Comprehensive Income
	for the Three and Nine Months Ended September 30, 2013 and 2012 (unaudited)	6
	Condensed Consolidated Statements of Changes in Stockholders' Equity for the Nine
	Months Ended September 30, 2013 and 2012 (unaudited)	7
	Condensed Consolidated Statements of Cash Flows for the Nine Months Ended
	September 30, 2013 and 2012 (unaudited)	8
	Notes to Condensed Consolidated Financial Statements – (unaudited)	9 - 24
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	25 - 33
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	33
Item 4.	Controls and Procedures	33
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	34-35
SIGNATURES		36
EXHIBIT INDEX		37

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PART I – FINANCIAL INFORMATION

Item 1.  Financial Statements

SBT BANCORP, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED BALANCE SHEETS

(Dollars in thousands, except for share amounts)

ASSETS	9/30/13			12/31/12
	(Unaudited)
Cash and due from banks	$	10,238		$	12,372
Interest-bearing deposits with the Federal Reserve Bank
and Federal Home Loan Bank		7,247			19,276
Money market mutual funds		355			358
Federal funds sold		36			2,094
Cash and cash equivalents		17,876			34,100
Interest-bearing time deposits with other banks		2,814			3,789
Investments in available-for-sale securities (at fair value)		96,259			91,820
Federal Home Loan Bank stock, at cost		1,807			589
Loans		277,800			235,884
Less allowance for loan losses		2,764			2,594
Loans, net		275,036			233,290
Premises and equipment, net		1,590			824
Accrued interest receivable		1,001			1,019
Other real estate owned		117			213
Bank owned life insurance		6,680			6,520
Other assets		3,827			2,855
Total assets	$	407,007		$	375,019
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Demand deposits	$	94,915		$	92,670
Savings and NOW deposits		197,086			175,268
Time deposits		71,814			72,471
Total deposits		363,815			340,409
Securities sold under agreements to repurchase		3,931			3,569
Federal Home Loan Bank advances		10,000			-
Other liabilities		1,326			1,604
Total liabilities		379,072			345,582
Stockholders' equity:
Preferred stock, senior non-cumulative perpetual, Series C, no par; 9,000
shares issued and outstanding at September 30, 2013 and December 31, 2012
liquidation value of $1,000 per share		8,973			8,964
Common stock, no par value; authorized 2,000,000 shares; issued
and outstanding 889,810 shares and 889,396 shares, respectively, as of
September 30, 2013 and 888,724 shares and 888,310 shares as of December 31, 2012		9,929			9,901
Treasury stock, 414 shares at September 30, 2013 and December 31, 2012		(7	)		(7	)
Unearned compensation restricted stock awards		(251	)		(368	)
Retained earnings		10,366			9,819
Accumulated other comprehensive (loss) income		(1,075	)		1,128
Total stockholders' equity		27,935			29,437
Total liabilities and stockholders' equity	$	407,007		$	375,019

See accompanying notes to the unaudited condensed consolidated financial statements.

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SBT BANCORP, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

(Dollars in thousands, except for share and per share amounts)

	For the three months ended					For the nine months ended
	9/30/2013			9/30/2012		9/30/2013		9/30/2012
Interest and dividend income:
Interest and fees on loans	$	2,541		$	2,352	$	7,195	$	7,288
Investment securities		522			464		1,612		1,346
Federal Funds sold and overnight income		8			23		29		81
Total interest and dividend income		3,071			2,839		8,836		8,715
Interest expense:
Deposits		219			263		655		784
Interest on Federal Home Loan Bank advances		7			-		8		-
Repurchase Agreements		-			1		3		3
Total interest expense		226			264		666		787
Net interest and dividend income		2,845			2,575		8,170		7,928
Provision for loan losses		120			60		230		210
Net interest and dividend income after provision for loan losses		2,725			2,515		7,940		7,718
Noninterest income:
Service charges on deposit accounts		118			121		368		361
Gain on sales and writedowns of available-for-sale securities, net		(6	)		30		98		78
Other service charges and fees		116			235		479		558
Increase in cash surrender value of life insurance policies		51			57		159		152
Gain on loans sold and commission fee income		111			609		1,203		1,491
Investment services fees and commissions		87			49		172		120
Other income		9			1		8		2
Total noninterest income		486			1,102		2,487		2,762
Noninterest expense:
Salaries and employee benefits		1,631			1,658		5,088		4,648
Premises and equipment		359			339		1,037		1,002
Advertising and promotions		235			174		593		506
Forms and supplies		42			42		109		138
Professional fees		134			119		386		438
Directors’ fees		62			57		187		170
Correspondent charges		77			83		242		267
Postage		23			20		66		68
FDIC assessment		64			46		119		114
Data processing		156			131		434		369
Other expenses		377			295		939		837
Total noninterest expense		3,160			2,964		9,200		8,557
Income before income taxes		51			653		1,227		1,923
Income tax provision		(34	)		147		224		483
Net income	$	85		$	506	$	1,003	$	1,440
Net income available to common stockholders	$	56		$	481	$	923	$	1,316
Average shares outstanding, basic		871,055			867,640		870,695		866,135
Earnings per common share, basic	$	0.06		$	0.55	$	1.06	$	1.52
Average shares outstanding, assuming dilution		877,916			877,018		876,185		876,977
Earnings per common share, assuming dilution	$	0.06		$	0.55	$	1.05	$	1.51

See accompanying notes to the unaudited condensed consolidated financial statements.

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SBT BANCORP, INC. AND SUBSIDIARY

STATEMENT OF CONDENSED CONSOLIDATED COMPREHENSIVE INCOME

THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2013 and 2012

(Unaudited)

(Dollars in thousands)

		Three Months Ended							Nine Months Ended
		September 30,							September 30,
		2013			2012				2013			2012
	(unaudited)							(unaudited)
Net income		$	85		$	506			$	1,003		$	1,440
Other comprehensive income (loss),before tax:
Change in fair value of securities available for sale			(6	)		657				(3,241	)		1,129
Reclassification adjustment for realized losses (gains) in net income			6			(30	)			(98	)		(78	)
Other comprehensive income (loss), before tax			-			627				(3,339	)		1,051
Income tax (expense) benefit related to items of other comprehensive income (loss)			-			(213	)			1,136			(357	)
Other comprehensive income (loss), net of tax			-			414				(2,203	)		694
Comprehensive income (loss)		$	85		$	920			$	(1,200	)	$	2,134

See accompanying notes to the unaudited condensed consolidated financial statements.

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SBT BANCORP, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(Unaudited)

(Dollars in thousands)

					Unearned									Accumulated
	Perferred				Compensation-									Other
	Stock		Common		Restricted			Treasury			Retained			Comprehensive
	Series C		Stock		Stock Awards			Stock			Earnings			Income (Loss)			Total
Balance, December 31, 2011	$	8,952	$	9,620	$	(199	)	$	(7	)	$	8,360		$	717		$	27,443
Net income		-		-		-			-			1,440			-			1,440
Other comprehensive income,
net of tax effect		-		-		-			-			-			694			694
Preferred stock amortization (accretion)		9		-		-			-			(9	)		-			-
Preferred stock dividend-Series C		-		-		-			-			(115	)		-			(115	)
Stock based compensation		-		-		58			-			-			-			58
Dividends declared common stock		-		-		-			-			(312	)		-			(312	)
Common stock issued		-		19		-			-			-			-			19
Balance, September, 2012	$	8,961	$	9,639	$	(141	)	$	(7	)	$	9,364		$	1,411		$	29,227
Balance, December 31, 2012	$	8,964	$	9,901	$	(368	)	$	(7	)	$	9,819		$	1,128		$	29,437
Net income		-		-		-			-			1,003			-			1,003
Other comprehensive loss,
net of tax effect		-		-		-			-			-			(2,203	)		(2,203	)
Preferred stock dividend-SBLF		-		-		-			-			(71	)		-			(71	)
Preferred stock amortization (accretion)		9		-		-			-			(9	)		-			-
Stock based compensation		-		-		117			-			-			-			117
Dividends declared common stock		-		-		-			-			(376	)		-			(376	)
Common stock issued		-		28		-			-			-			-			28
Balance, September 30, 2013	$	8,973	$	9,929	$	(251	)	$	(7	)	$	10,366		$	(1,075	)	$	27,935

See accompanying notes to the unaudited condensed consolidated financial statements.

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SBT BANCORP, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(Dollars in thousands)

	For the nine months ended
	9/30/2013			9/30/2012
Cash flows from operating activities:
Net income	$	1,003		$	1,440
Adjustments to reconcile net income to net cash provided by operating activities:
Interest capitalized on interest-bearing time deposits with other banks		(100	)		(112	)
Amortization of securities, net		482			341
Amortization of mortgage servicing rights		185			47
Writedown of available-for-sale securities		14			-
Gain on sales of available-for-sale securities		(112	)		(78	)
Change in deferred origination fees, net		(295	)		(263	)
Provision for loan losses		230			210
Writedown on other real estate owned		96			-
Depreciation and amortization		163			169
Accretion on impairment of operating lease		(22	)		(33	)
Increase in other assets		(195	)		(892	)
Decrease in interest receivable		18			3
Decrease in taxes receivable		154			589
Increase in cash surrender value of bank owned life insurance		(160	)		(152	)
Stock-based compensation		117			58
(Decrease) increase in other liabilities		(288	)		273
Increase in interest payable		19			13
Net cash provided by operating activities		1,309			1,613
Cash flows from investing activities:
Maturities and redemptions of interest-bearing time deposits with other banks		1,075			1,088
Purchases of FHLB Stock		(1,218	)		(20	)
Purchases of available-for-sale securities		(35,184	)		(49,890	)
Proceeds from maturities of available-for-sale securities		21,373			19,197
Proceeds from sales of available-for-sale securities		5,649			2,066
Loan originations and principal collections, net		(36,762	)		(10,079	)
Loans purchased		(4,925	)		(862	)
Recoveries of loans previously charged off		6			12
Proceeds from sale of Federal Home Loan Bank stock		-			91
Premium paid on bank owned life insurance		-			(2,000	)
Capital expenditures		(909	)		(322	)
Net cash used in investing activities		(50,895	)		(40,719	)
Cash flows from financing activities:
Net Increase (decrease) in demand deposits, NOW and savings accounts		24,063			(9,737	)
Decrease in time deposits		(657	)		(1,712	)
Net increase in securities sold under agreements to repurchase		362			1,067
Proceeds from other borrowings		10,000			-
Proceeds from issuance of common stock		28			19
Dividends paid - preferred stock		(71	)		(115	)
Dividends paid - common stock		(363	)		(308	)
Net cash provided by (used in) financing activities		33,362			(10,786	)
Net decrease in cash and cash equivalents		(16,224	)		(49,892	)
Cash and cash equivalents at beginning of period		34,100			91,880
Cash and cash equivalents at end of period	$	17,876		$	41,988
Supplemental disclosures:
Interest paid	$	647		$	774
Income taxes paid		70			(106	)
Loan transferred to other real estate owned		-			323

See accompanying notes to the unaudited condensed consolidated financial statements.

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SBT BANCORP, INC. AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (UNAUDITED)

(Dollars in thousands)

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, 2013.

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, 2012.

NOTE 2 – STOCK-BASED COMPENSATION

At September 30, 2013, 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, 2013, the Company recognized $117 thousand in stock-based employee compensation expense.  During the nine months ended September 30, 2012, the Company recognized $58 thousand in stock-based employee compensation expense.

NOTE 3 – RECENT ACCOUNTING PRONOUNCEMENTS

In December 2011, the Financial Accounting Standards Board (“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 adoption of this guidance did not have a material impact on its consolidated financial statements.

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

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In October 2012, the FASB issued ASU 2012-06, “Business Combinations (Topic 805): Subsequent Accounting for an Indemnification Asset Recognized at the Acquisition Date as a Result of a Government-Assisted Acquisition of a Financial Institution.”  The amendments in this update clarify the applicable guidance for subsequently measuring an indemnification asset recognized as a result of a government-assisted acquisition of a financial institution.  For public and nonpublic entities, the amendments in this update are effective for fiscal years, and interim periods within those years beginning on or after December 15, 2012.  The adoption of this guidance did not have a material impact on the Company’s consolidated financial statements.

In February 2013, the FASB issued ASU 2013-02, “Comprehensive Income (Topic 220): Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income.”  The amendments in this update do not change the current requirements for reporting net income or other comprehensive income in financial statements.  However, the amendments require an entity to provide information about the amounts reclassified out of accumulated other comprehensive income by component.  In addition, an entity is required to present, either on the face of the statement where net income is presented or in the notes, significant amounts reclassified out of accumulated other comprehensive income by the respective line items of net income but only if the amount reclassified is required under U.S. GAAP to be reclassified to net income in its entirety in the same reporting period.  For other amounts that are not required under U.S. GAAP to be reclassified in their entirety to net income, an entity is required to cross-reference to other disclosures required under U.S. GAAP that provide additional detail about those amounts.  The amendments are effective prospectively for reporting periods beginning after December 15, 2012.  Early adoption is permitted.  The adoption of ASU 2013-02 did not have a material impact on the Company’s consolidated financial statements.

In February 2013, the FASB issued ASU 2013-04, “Liabilities (Topic 405): Obligations Resulting from Joint and Several Liability Arrangements for Which the Total Amount of the Obligation Is Fixed at the Reporting Date.”  The objective of the amendments in this ASU is to provide guidance for the recognition, measurement, and disclosure of obligations resulting from joint and several liability arrangements for which the total amount of the obligation within the scope of this guidance is fixed at the reporting date, except for obligations addressed within existing guidance in U.S. generally accepted accounting principles (GAAP).  Examples of obligations within the scope of this ASU include debt arrangements, other contractual obligations, and settled litigation and judicial rulings.  The amendments in this ASU are effective for fiscal years, and interim periods within those years, beginning after December 15, 2013; and should be applied retrospectively to all prior periods presented for those obligations resulting from joint and several liability arrangements within the ASU scope that exist at the beginning of an entity’s fiscal year of adoption.  The Company anticipates that the adoption of this guidance will not have a material impact on its consolidated financial statements.

In April 2013, the FASB issued ASU 2013-07, “Presentation of Financial Statements (Topic 205): Liquidation Basis of Accounting.”  The amendments in this ASU are being issued to clarify when an entity should apply the liquidation basis of accounting.  The guidance provides principles for the recognition and measurement of assets and liabilities and requirements for financial statements prepared using the liquidation basis of accounting.  Additionally, the amendments require disclosures about an entity’s plan for liquidation, the methods and significant assumptions used to measure assets and liabilities, the type and amount of costs and income accrued, and the expected duration of the liquidation process.  The amendments are effective for entities that determine liquidation is imminent during annual reporting periods beginning after December 15, 2013, and interim reporting periods therein.  Entities should apply the requirements prospectively from the day that liquidation becomes imminent.  Early adoption is permitted.  The Company anticipates that the adoption of this guidance will not have a material impact on its consolidated financial statements.

In July 2013, the FASB issued ASU 2013-10, “Derivatives and Hedging (Topic 815) – Inclusion of the Fed Funds Effective Swap Rate (or Overnight Index Swap Rate) as a Benchmark Interest Rate for Hedge Accounting Purposes.”  The amendments in this ASU permit the Fed Funds Effective Swap Rate (OIS) to be used as a U.S. benchmark interest rate for hedge accounting purposes under Topic 815, in addition to Treasury Obligations of the U.S. government (UST) and the London Interbank Offered Rate (LIBOR).  The amendments also remove the restriction on using different benchmark rates for similar hedges.  The amendments apply to all entities that elect to apply hedge accounting of the benchmark interest rate under Topic 815.  The amendments are effective prospectively for qualifying new or redesignated hedging relationships entered into on or after July 17, 2013.  The adoption of this ASU is not expected to have an impact on the Company’s results of operations or financial position.

In July 2013, the FASB issued ASU 2013-11, “Income Taxes – Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carry forward, a Similar Tax Loss, or a Tax Credit Carry forward Exists.”  The amendments in this ASU provide guidance for the financial statement presentation of an unrecognized tax benefit when a net operating loss carry forward, a similar tax loss, or a tax credit carry forward exists.  The amendments in this ASU are expected to reduce diversity in practice by providing guidance on the presentation of unrecognized tax benefits and will better reflect the manner in which an entity would settle at the reporting date any additional income taxes that would result from the disallowance of a tax position when net operating loss carry forwards, similar tax losses, or tax credit carry forwards exist.  The amendments apply to all entities that have unrecognized tax benefits when a net operating loss carry forward, a similar tax loss, or a tax credit carry forward exists at the reporting date and are effective for fiscal years, and interim periods within those years, beginning after December 15, 2013.  The adoption of this guidance is not expected to have an impact on the Company’s results of operations or financial position.

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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, 2013 and December 31, 2012.  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, 2013.

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.

-11-

The following summarizes assets measured at fair value at September 30, 2013 and December 31, 2012.

Assets Measured at Fair Value on a Recurring Basis

	Fair Value Measurments 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
	(Dollars In Thousands)
September 30, 2013:
Debt securities issued by U.S. government corporations
and agencies	$	20,914	$	-	$	20,914	$	-
Obligations of states and municipalities		14,073		-		14,073		-
Corporate debt securities		998		-		998		-
Mortgage-backed securities		59,497		-		59,497		-
SBA loan pools		777		-		777		-
	$	96,259	$	-	$	96,259	$	-
December 31, 2012:
Debt securities issued by U.S. government corporations
and agencies	$	30,835	$	-	$	30,835	$	-
Obligations of states and municipalities		14,551		-		14,551		-
Corporate debt securities		2,053		-		2,053		-
Mortgage-backed securities		43,257		-		43,257		-
SBA loan pools		1,124		-		1,124		-
	$	91,820	$	-	$	91,820	$	-

Assets Measured at Fair Value on a Nonrecurring Basis

	Fair Value Measurments 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
	(Dollars In Thousands)
September 30, 2013:
Other Real Estate owned	$	117	$	-	$	-	$	117
	$	117	$	-	$	-	$	117
December 31, 2012:
Other Real Estate owned	$	213	$	-	$	-	$	213
	$	213	$	-	$	-	$	213

-12-

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, 2013 and December 31, 2012:

	September 30, 2013
	Carrying		Fair Value
	Amount		Level 1		Level 2		Level 3		Total
	(Dollars in thousands)
Financial assets:
Cash and cash equivalents	$	17,876	$	17,876	$	-	$	-	$	17,876
Interest-bearing time deposits with other banks		2,814		-		2,917		-		2,917
Available-for-sale securities		96,259		-		96,259		-		96,259
Federal Home Loan Bank stock		1,807		1,807		-		-		1,807
Loans, net		275,036		-		-		275,643		275,643
Accrued interest receivable		1,001		1,001		-		-		1,001
Financial liabilities:
Deposits		363,815		-		364,315		0		364,315
Securities sold under agreements to repurchase		3,931		-		3,931		-		3,931
FHLB Boston Advances		10,000		-		9,996		-		9,996

	December 31, 2012
	Carrying		Fair Value
	Amount		Level 1		Level 2		Level 3		Total
	(Dollars in thousands)
Financial assets:
Cash and cash equivalents	$	34,100	$	34,100	$	-	$	-	$	34,100
Interest-bearing time deposits with other banks		3,789		-		3,892		-		3,892
Available-for-sale securities		91,820		-		91,820		-		91,820
Federal Home Loan Bank stock		589		589		-		-		589
Loans, net		233,290		-		-		239,465		239,465
Accrued interest receivable		1,019		1,019		-		-		1,019
Financial liabilities:
Deposits		340,409		-		340,857		-		340,857
Securities sold under agreements to repurchase		3,569		-		3,569		-		3,569

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.

-13-

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, 2013 and September 30, 2012:

	For the three months ended
	9/30/13			9/30/12
	(In Thousands, Except Per Share Data)
Basic earnings per share computation:
Net income	$	85		$	506
Preferred stock net accretion		(3	)		(3	)
Cumulative preferred stock dividends		(26	)		(22	)
Net income available to common shareholders	$	56		$	481
Weighted average shares outstanding, basic		871,055			867,640
Basic earnings per share	$	0.06		$	0.55
Diluted earnings per share computation:
Net income	$	85		$	506
Preferred stock net accretion		(3	)		(3	)
Cumulative preferred stock dividends		(26	)		(22	)
Net income available to common shareholders	$	56		$	481
Weighted average shares outstanding, before dilution		871,055			867,640
Dilutive potential shares		6,861			9,378
Weighted average shares outstanding, assuming dilution		877,916			877,018
Diluted earnings per share	$	0.06		$	0.55
	For the nine months ended
	9/30/13			9/30/12
	(In Thousands, Except Per Share Data)
Basic earnings per share computation:
Net income	$	1,003		$	1,440
Preferred stock net accretion		(9	)		(9	)
Cumulative preferred stock dividends		(71	)		(115	)
Net income available to common shareholders	$	923		$	1,316
Weighted average shares outstanding, basic		870,695			866,135
Basic earnings per share	$	1.06		$	1.52
Diluted earnings per share computation:
Net income	$	1,003		$	1,440
Preferred stock net accretion		(9	)		(9	)
Cumulative preferred stock dividends		(71	)		(115	)
Net income available to common shareholders	$	923		$	1,316
Weighted average shares outstanding, before dilution		870,695			866,135
Dilutive potential shares		5,490			10,842
Weighted average shares outstanding, assuming dilution		876,185			876,977
Diluted earnings per share	$	1.05		$	1.51

-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:

	Less than 12 Months				12 Months or Longer				Total
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
	Value		Losses		Value		Losses		Value		Losses
	(Dollars in thousands)
September 30, 2013:
Debt securities issued by U.S. Government
corporations and agencies	$	18,407	$	363	$	-	$	-	$	18,407	$	363
Obligations of states and municipalities		3,376		172		-		-		3,376		172
Corporate debt securities		-		-		496		4		496		4
Mortgage-backed securities		50,633		1,697		347		41		50,980		1,738
Total temporarily impaired securities	$	72,416	$	2,232	$	843	$	45	$	73,259	$	2,277
Other-than-temporarily impaired securities
Mortgage-backed securities		-		-		-		-		-		-
Total temporarily impaired and other-
than-temporarily impaired securities	$	72,416	$	2,232	$	843	$	45	$	73,259	$	2,277
December 31, 2012:
Debt securities issued by U.S. Government
corporations and agencies	$	2,989	$	11	$	-	$	-	$	2,989	$	11
Obligations of states and municipalities		720		3		-		-		720		3
Corporate debt securities		-		-		495		5		495		5
Mortgage-backed securities		8,642		20		118		3		8,760		23
Total temporarily impaired securities	$	12,351	$	34		613	$	8	$	12,964	$	42
Other-than-temporarily impaired securities
Mortgage-backed securities		-		-		280		58		280		58
Total temporarily impaired and other-
than-temporarily impaired securities	$	12,351	$	34	$	893	$	66	$	13,244	$	100

The investments in the Company’s investment portfolio that were temporarily impaired as of September30, 2013 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.

-15-

The following table summarizes the amounts and distribution of the Bank’s investment securities held as of September 30, 2013 and December 31, 2012:

	Investment Portfolio (Dollars in thousands)
	September 30, 2013
	Amortized		Unrealized		Unrealized		Fair
	Cost		Gains		Loss		Value		Yield
Available for sale securities:
U.S government and agency securities-
Due within one year	$	500	$	3	$	-	$	503	1.30	%
Due after one year through five years		14,062		3		157		13,908	1.06	%
Due after five to ten years		6,709		-		206		6,503	1.41	%
Total U.S government and agency securities		21,271		6		363		20,914	1.18	%
State and municipal securities-
Due within one year		-		-		-		-	0.00	%
Due after five to ten years		3,715		105		82		3,738	4.05	%
Due after ten to fifteen years		9,556		303		90		9,769	4.53	%
Due beyond fifteen years		532		34		-		566	5.00	%
Total state and municipal securities		13,803		442		172		14,073	4.42	%
Corporate debt securities-
Due after one year through five years		999		3		4		998	1.61	%
Total corporate debt securities		999		3		4		998	1.61	%
Mortgage-backed securities-
Due within one year		5		-		-		5	3.32	%
Due after one year through five years		781		5		1		785	2.43	%
Due after five to ten years		2,950		54		4		3,000	2.30	%
Due after ten to fifteen years		34,908		32		907		34,033	1.78	%
Due beyond fifteen years		22,458		42		826		21,674	2.19	%
Total mortgage-backed securities		61,102		133		1,738		59,497	1.96	%
SBA loan pool
Due after five to ten years		466		42		-		508	4.98	%
Due after ten to fifteen years		248		21		-		269	5.07	%
Total SBA loan pool		714		63		-		777	5.01	%
Total available-for-sale securities	$	97,889	$	647	$	2,277	$	96,259	2.13	%
	Investment Portfolio (Dollars in thousands)
	December 31, 2012
	Amortized		Unrealized		Unrealized		Fair
	Cost		Gains		Loss		Value		Yield
Available for sale securities:
U.S government and agency securities-
Due after one year through five years	$	18,758	$	67	$	-	$	18,825	1.06	%
Due after five to ten years		12,002		19		11		12,010	1.39	%
Total U.S government and agency securities		30,760		86		11		30,835	1.19	%
State and municipal securities-
Due within one year		825		5		-		830	6.95	%
Due after five to ten years		2,622		192		-		2,814	5.70	%
Due after ten to fifteen years		8,566		564		3		9,127	5.09	%
Due beyond fifteen years		1,585		195		-		1,780	6.09	%
Total state and municipal securities		13,598		956		3		14,551	5.44	%
Corporate debt securities-
Due after one year through five years		2,006		52		5		2,053	2.34	%
Total corporate debt securities		2,006		52		5		2,053	2.34	%
Mortgage-backed securities-
Due within one year		52		2		-		54	3.25	%
Due after one year through five years		78		1		-		79	4.06	%
Due after five to ten years		5,294		118		3		5,409	2.25	%
Due after ten to fifteen years		18,305		308		6		18,607	1.90	%
Due beyond fifteen years		19,008		172		72		19,108	2.10	%
Total mortgage-backed securities		42,737		601		81		43,257	2.04	%
SBA loan pool
Due after one to five years		115		1		-		116	4.60	%
Due after ten to fifteen years		895		113		-		1,008	5.04	%
Total SBA loan pool		1,010		114		-		1,124	4.99	%
Total available-for-sale securities	$	90,111	$	1,809	$	100	$	91,820	2.27	%

-16-

During the nine months ended September 30, 2013, there were proceeds of $5.7 million from sales of available for sale securities.  Gross realized gains on these sales amounted to $112.4 thousand.  The tax expense applicable to these gross realized gains amounted to $38.2 thousand.

During the nine months ended September 30, 2012, there were proceeds of $2.1 million from sales of available for sale securities.  Gross realized gains on these sales amounted to $85.4 thousand.  The tax expense applicable to these gross realized gains amounted to 29.0 thousand.

NOTE 7 – LOAN INFORMATION

Loans consisted of the following as of September 30, 2013 and December 31, 2012:

	September 30, 2013			December 31, 2012
	(In Thousands)
Commercial and industrial	$	15,696		$	13,991
Real estate - construction and land development		6,684			2,982
Real estate - residential		137,997			118,316
Real estate - commercial		55,052			41,978
Home equity		46,395			45,245
Municipal		2,334			1,478
Consumer		12,506			11,053
		276,664			235,043
Allowance for loan losses		(2,764	)		(2,594	)
Deferred loan origination costs, net		1,136			841
Net loans	$	275,036		$	233,290

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, 2013.

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.

-17-

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.

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, 2013 and September 30, 2012:

	Real Estate:
						Construction and					Commercial
	Residential			Commercial		Land Development		Home Equity			& Industrial			Consumer			Unallocated			Total
	(Dollars in thousands)
September 30, 2013:
Allowance for loan
losses:
Beginning balance	$	1,051		$	586	$	142	$	362		$	219		$	99		$	135		$	2,594
Charge-offs		(44	)		-		-		-			-			(22	)		-			(66	)
Recoveries		2			-		-		-			4			-			-			6
Provision (benefit)		165			173		26		(37	)		(14	)		40			(123	)		230
Ending balance	$	1,174		$	759	$	168	$	325		$	209		$	117		$	12		$	2,764

-18-

	Real Estate:
							Construction and					Commercial
	Residential			Commercial			Land Development			Home Equity		& Industrial			Consumer			Unallocated			Total
	(Dollars in thousands)
September 30, 2012:
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
Provision (benefit)		332			(8	)		145			29		(211	)		(44	)		(33	)		210
Ending balance	$	976		$	539		$	119		$	372	$	214		$	129		$	133		$	2,482

The following table sets forth information regarding the allowance for loan losses by portfolio segment as of September 30, 2013 and December 31, 2012:

September 30, 2013:
Ending balance:
Individually evaluated
for impairment	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	-
Ending balance:  Collectively
evaluated for
impairment		1,174		759		168		325		209		117		12		2,764
Total allowance for loan
losses ending
balance	$	1,174	$	759	$	168	$	325	$	209	$	117	$	12	$	2,764
Loans:
Ending balance:  Individually
evaluated for
impairment	$	177	$	1,122	$	155	$	4	$	-	$	-	$	-	$	1,458
Ending balance:
Collectively evaluated
for impairment		137,820		53,930		6,529		46,391		18,030		12,506		-		275,206
Total loans ending balance	$	137,997	$	55,052	$	6,684	$	46,395	$	18,030	$	12,506	$	-	$	276,664

December 31, 2012
Ending balance:
Individually evaluated
for impairment	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	-
Ending balance:  Collectively
evaluated for
impairment		1,051		586		142		362		219		99		135		2,594
Total allowance for loan
losses ending
balance	$	1,051	$	586	$	142	$	362	$	219	$	99	$	135	$	2,594
Loans:
Ending balance:  Individually
evaluated for
impairment	$	180	$	119	$	163	$	5	$	-	$	-	$	-	$	467
Ending balance:
Collectively evaluated
for impairment		118,136		41,859		2,819		45,240		15,469		11,053		-		234,576
Total loans ending balance	$	118,316	$	41,978	$	2,982	$	45,245	$	15,469	$	11,053	$	-	$	235,043

-19-

The following tables present the Company’s loans by risk rating as of September 30, 2013 and December 31, 2012:

	Real Estate
					Construction
					and Land				Commercial
	Residential		Commercial		Development		Home Equity		and Industrial		Consumer		Total
	(Dollars in thousands)
September 30, 2013:
Grade:
Pass	$	-	$	52,046	$	6,529	$	-	$	16,868	$	-	$	75,443
Special mention		-		2,859		-		-		1,149		-		4,008
Substandard		1,615		147		155		33		13		-		1,963
Loans not
formally rated		136,382		-		-		46,362		-		12,506		195,250
Total	$	137,997	$	55,052	$	6,684	$	46,395	$	18,030	$	12,506	$	276,664
December 31, 2012:
Grade:
Pass	$	-	$	36,748	$	2,381	$	-	$	13,048	$	-	$	52,177
Special mention		-		3,778		438		-		2,268		-		6,484
Substandard		572		1,452		163		155		153		-		2,495
Loans not
formally rated		117,744				-		45,090		-		11,053		173,887
Total	$	118,316	$	41,978	$	2,982	$	45,245	$	15,469	$	11,053	$	235,043

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

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

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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, 2013, $195.2 million of the total residential, home equity and consumer portfolio totaling $196.9 million were not formally rated. The performance of these loans is measured by delinquency status. The Bank underwrites first mortgage loans in accordance with FHLMC and FNMA guidelines. These guidelines provide for specific requirements with regard to documentation, loan to value and debt to income ratios. Guidelines for home equity loans and lines place a maximum loan to value of 80% on these loans and lines and the Bank requires full underwriting disclosure documentation for these loans. These underwriting factors have produced a loan portfolio with low delinquencies. Total non-accrual and delinquent loans on September 30, 2013 were 1.23% of total loans outstanding compared to 0.69% on September 30, 2012. The Company’s allowance for loan losses at September 30, 2013 was 1.00% of total loans compared to 1.10% as of December 31, 2012.

An age analysis of past-due loans, segregated by class of loans, as of September 30, 2013 and December 31, 2012 is as follows:

					90 Days		Total		Total		Total		90 Days
	30–59 Days		60–89 Days		or More		Past Due		Current		Loans		and Accruing
	(Dollars in thousands)
September 30, 2013:
Real estate:
Residential	$	-	$	373	$	1,202	$	1,575	$	136,422	$	137,997	$	-
Commercial		-		-		-		-		55,052		55,052		-
Construction and
land development		-		-		205		205		6,479		6,684		-
Home equity		84		-		-		84		46,311		46,395		-
Commercial and industrial		-		-		-		-		18,030		18,030		-
Consumer		45		8		8		61		12,445		12,506		-
Total	$	129	$	381	$	1,415	$	1,925	$	274,739	$	276,664	$	-
December 31, 2012:
Real estate:
Residential	$	-	$	490	$	563	$	1,053	$	117,263	$	118,316	$	-
Commercial		-		-				-		41,978		41,978		-
Construction and
land development		-		-		163		163		2,819		2,982		-
Home equity		25		36		-		61		45,184		45,245		-
Commercial and industrial		-		-		-		-		15,469		15,469		-
Consumer		110		-		17		127		10,926		11,053		-
Total	$	135	$	526	$	743	$	1,404	$	233,639	$	235,043	$	-

The following tables set forth information regarding nonaccrual loans as of September 30, 2013 and December 31, 2012:

Real estate:	September 30, 2013		December 31, 2012
	(Dollars in thousands)		(Dollars in thousands)
Residential	$	1,604	$	821
Commercial		1,072		119
Construction and
land development		205		163
Home equity		-		120
Commercial and industrial		13		-
Consumer		8		17
Total	$	2,902	$	1,240

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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, 2013 and the year ended December 31, 2012:

			Unpaid				Average		Interest
	Recorded		Principal		Related		Recorded		Income
	Investment		Balance		Allowance		Investment		Recognized
	(Dollars in thousands)
September 30, 2013:
With no related allowance recorded:
Real Estate:
Residential	$	177	$	177	$	-	$	178	$	4
Commercial		1,122		1,122		-		368		5
Home equity		4		4		-		5		-
Construction and land development		155		155		-		159		-
Total impaired with no related allowance	$	1,458	$	1,458	$	-	$	710	$	9
Total
Real Estate:
Residential	$	177	$	177	$	-	$	178	$	4
Commercial		1,122		1,122		-		368		5
Home equity		4		4		-		5		-
Construction and land development		155		155		-		159		-
Total impaired loans	$	1,458	$	1,458	$	-	$	710	$	9

			Unpaid				Average		Interest
	Recorded		Principal		Related		Recorded		Income
	Investment		Balance		Allowance		Investment		Recognized
	(Dollars in thousands)
December 31, 2012:
With no related allowance recorded:
Real Estate:
Residential	$	180	$	180	$	-	$	449	$	15
Commercial		119		119		-		115		7
Home equity		5		5		-		6		-
Construction and land development		163		163		-		257		62
Commercial and industrial		-		-		-		70		5
Total impaired with no related allowance	$	467	$	467	$	-	$	897	$	89
Real Estate:
Residential	$	180	$	180	$	-	$	449	$	15
Commercial		119		119		-		115		7
Home equity		5		5		-		6		-
Construction and land development		163		163		-		257		62
Commercial and industrial		-		-		-		70		5
Total impaired loans	$	467	$	467	$	-	$	897	$	89

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The Bank’s troubled debt restructurings (“TDRs”) 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.  In addition, rates and terms of the loans have changed. There were no new troubled debt restructurings during the nine months ended September 30, 2013.

Troubled Debt Restructuring

September 30, 2013

(Dollars in thousands)

	Number of
	Contracts		Recorded Investment
Troubled Debt Restructurings
That Subsequently Defaulted:
Residential		1	$	67
		1	$	67

The following tables set forth information regarding troubled debt restructured loans that were restructured during the year ended December 31, 2012:

			Pre-Modification		Post- Modification
	Number of		Outstanding Recorded		Outstanding Recorded
	Contracts		Investment		Investment
	(Dollars In Thousands)
December 31, 2012:
Troubled Debt Restructurings:
Residential real estate		1	$	66	$	72
		1	$	66	$	72
	Number of
	Contracts		Recorded Investment
Troubled Debt Restructurings
That Subsequently Defaulted:
Residential real estate		1	$	68
		1	$	68

There was one loan classified as a troubled debt restructuring during 2012. Past-due principal, interest, and legal fees were capitalized to the loan to bring all payments current.  The loan was individually evaluated for impairment and it was determined that no related allowance allocation was necessary.  The loan was reported as impaired and was on nonaccrual status as of September 30, 2013 and December 31, 2012.

The balance of mortgage servicing rights included in other assets at September 30, 2013 and December 31, 2012 was $1.29 million and $822 thousand, respectively.  Mortgage servicing rights of $744 thousand and $774 thousand were capitalized through September 30, 2013 and December 31, 2012, respectively.  Amortization of mortgage servicing rights was $185 thousand and $106 thousand through September 30, 2013 and December 31, 2012, respectively.  The fair value of these rights was $1.48 million and $1.04 million as of September 30, 2013 and December 31, 2012, respectively.  As of September 30, 2013, there was a valuation allowance of $91 thousand on the mortgage servicing rights.

Mortgage loans serviced for others were not included in the accompanying consolidated balance sheets.  The unpaid principal balances of mortgage loans serviced for others were $137.81 million and $88.73 million as of September 30, 2013 and December 31, 2012, respectively.

NOTE 8 – SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE

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

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NOTE 9 – OTHER COMPREHENSIVE (LOSS) INCOME

The following tables present the reclassification disclosure for the three months and nine months ended September 30, 2013 and 2012:

	9/30/2013			9/30/2012
Three months ended:	(Dollars in thousands)
Net unrealized holding (losses) gains on available-for-sale securities	$	(6	)	$	657
Reclassification adjustment for realized gains and writedowns in net income (1)		6			(30	)
Other comprehensive income before income tax effect		-			627
Income tax benefit (expense)		-			(213	)
Other comprehensive income, net of tax	$	-		$	414
	9/30/2013			9/30/2012
Nine months ended :	(Dollars in thousands)
Net unrealized holding (losses) gains on available-for-sale securities	$	(3,241	)	$	1,129
Reclassification adjustment for realized gains and writedowns in net income (1)		(98	)		(78	)
Other comprehensive (loss) income before income tax effect		(3,339	)		1,051
Income tax benefit (expense)		1,136			(357	)
Other comprehensive (loss) income, net of tax	$	(2,203	)	$	694

(1) Reclassification adjustments are comprised of realized security gains and losses and writedowns. The gains and losses and writedowns have been reclassified out of accumulated other comprehensive (loss) income and have affected certain lines in the consolidated statements of income as follows: the pre-tax amount is included in gain on sales and writedowns of available-for-sale securities, net, the tax expense amount is included in income tax provision and the after tax amount is included in net income.

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

Forward-Looking Statements

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

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

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

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

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

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

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

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

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

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

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

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

● adverse changes may occur in the equity markets;

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

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

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

General

Management’s Discussion and Analysis of Financial Conditions and Results of Operations is designed to provide a better understanding of the significant changes and trends related to the Company’s financial condition, results of operations, liquidity and capital resources.  The discussion should be read in conjunction with the consolidated financial statements of the Company for the nine months ended September 30, 2013.  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, 2013 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. Now, through a network of loan originators the Bank offers residential 1-4 family mortgages throughout southern New England.

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, 2012.  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, 2013, net income amounted to $1.00 million , or $1.05 per diluted share.  This compares to net income of $1.44 million or $1.51 per diluted share for nine months ended September 30, 2012.  Total assets as of September 30, 2013 were $407 million compared to $369 million as of September 30, 2012.

Key financial highlights for the period ending September 30, 2013 compared to the period ending September 30, 2012 include total asset growth of $38 million or 10%, deposit growth of $30 million or 9%, loan growth of $51 million or 22%. Non-interest income decreased by $275 thousand or 10% for the nine months ended September 30, 2013 over the same period ending September 30, 2012.

Other highlights for the third quarter of 2013 compared to the third quarter of 2012 include a decrease in non-interest income of $616 thousand or 56%, a decrease of $0.49 in earnings per share to $0.06 as of September 30, 2013 compared to $ 0.55 as of September 30, 2012. There was also a decrease of $0.49 per diluted share for the same three month period. Total non-accrual loans and loans 30 or more days past due increased to 1.24% of total loans outstanding as of September 30, 2013 from 0.69% of total loans outstanding as of September 30, 2012, primarily due to two related business loans totaling $1.1 million that were placed on non-accrual status during the second quarter of 2013. Both loans are fully collateralized and the Bank does not expect to incur any loss on these two loans.

Total deposits on September 30, 2013 were $364 million, an increase of $30 million or 9% over a year ago.  This growth was mainly in core demand deposits and municipal deposits.  At quarter-end, 26% of total deposits were in non-interest bearing demand accounts, 54% were in low-cost savings and NOW accounts, and 20% were in time deposits.

On September 30, 2013, loans outstanding were $278 million, an increase of $51 million, or 22%, over a year ago.   Commercial loans grew by $22 million or 40%, Residential mortgage loans grew by $26 million or 22%, and Consumer loans grew by $2 million or 13%. The profile of the Company’s loan portfolio remains relatively low-risk.   The Company’s allowance for loan losses at September 30, 2013 was 1.00% of total loans.  The Company had non-accrual loans totaling $2.9 million equal to 1.06% of total loans as of September 30, 2013 compared to non-accrual loans totaling $0.81 million  or 0.36% of total loans as of September 30, 2012. Total non-accrual and delinquent loans on September 30, 2013 were 1.24% of loans outstanding compared to 0.69% as of September 30, 2012.

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Total revenues, consisting of net interest and dividend income plus noninterest income, were $3.33 million in the third quarter of 2013 compared to $3.68 million for the third quarter of 2012, a decrease  of 9%.  Net interest and dividend income increased by $270 thousand or 10%, primarily due to an increase in yields on earning assets and increases in average outstanding balances. Noninterest income decreased by $616 thousand primarily due to a decrease in gain on loan sales in the amount of $498 thousand.

The Company’s taxable-equivalent net interest margin (taxable-equivalent net interest and dividend income divided by average earning assets) was 3.15% for the third quarter of 2013 as compared to 3.03% for the third quarter of 2012.  The Company’s cost of funds declined 5 basis points while the yield on interest earning assets increased 7 basis points during the third quarter of 2013 as compared to the third quarter of 2012.

Total noninterest expenses for the third quarter of 2013 were $3.16 million, an increase of $196 thousand or 6.6% above the third quarter of 2012.  The increase was primarily due to increases in marketing related expenses in the amount of $61 thousand, other operating expenses in the amount of $82 thousand and occupancy expenses in the amount of $20 thousand.  Third quarter 2013 occupancy costs included costs related to relocating the Company’s administrative offices to a larger facility.  The move was completed during the month of July.  For the nine months ended September 30, 2013, total noninterest expenses were $9.2 million compared to $8.56 million for the nine months ended September 30, 2012, an increase of $0.64 million or 8%.  Over this period, the increase in expenses was primarily in salary and employee benefits.

Capital levels for the Bank on September 30, 2013 were above those required to meet the regulatory “well-capitalized” designation.

	Capital Ratios
	9/30/2013
	The Simsbury Bank
	and Trust Company, Inc.	Regulatory Standard for Well-Capitalized
Tier 1 Leverage Capital Ratio	7.12%	5.00%
Tier 1 Risk-Based Capital Ratio	12.08%	6.00%
Total Risk-Based Capital Ratio	13.24%	10.00%

Results of Operation

Net Interest Income and Net Interest Margin

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

Net interest and dividend income after provision for loan losses plus non-interest income was $3.22 million for the third quarter of 2013 compared to $ 3.62 million for the third quarter of 2012.  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, increased to 3.15% for the quarter ended September 30, 2013 from 3.03% for the quarter ended September 30, 2012.  The Company’s net interest spread, defined as the difference between the yield on earning assets and the cost of deposits and borrowings, increased to 3.07% for the quarter ended September 30, 2013 from 2.94%  for the quarter ended September 30, 2012.  The Company’s cost of deposits and borrowings decreased to 0.33% for the third quarter ended September 30, 2013 from 0.39% for the third quarter ended September 30, 2012.

Net interest and dividend income after provision for loan losses plus non-interest income was $10.43 million for the first nine months of 2013 compared to $10.48 million for the first nine months of 2012.  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 3.09% for the nine months ended September 30, 2013 from 3.17% for the nine months ended September 30, 2012.  The Company’s net interest spread, defined as the difference between the yield on earning assets and the cost of deposits and borrowings, decreased to 3.01% for the nine months ended September 30, 2013 from 3.08% for the nine months ended September 30, 2012.  The Company’s cost of deposits and borrowings decreased to 0.33% for the nine months ended September 30, 2013 from 0.40% for the nine months ended September 30, 2012.

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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, 2013 was $2.76 million or 1.00% of outstanding loans compared to $2.48 million or 1.09% of outstanding loans as of September 30, 2012.   The Company charged off no loans in the third quarter of 2013 compared to four loans totaling $18.6 thousand in the third  quarter of 2012.  During the third quarter of 2013, the Company had  five recoveries totaling $1.14 thousand compared to nine recoveries totaling $2.1 thousand for the third  quarter of 2012.  The Company believes the allowance for loan losses is appropriate. For the nine months ended September 30, 2013, the Company charged off a total of 5 loans totaling $66 thousand compared to 12 loans totaling $209 thousand for the first nine months ended September 30, 2012. The Company had  20 recoveries totaling $6 thousand in the first nine months ended September 30, 2013 compared to 23 recoveries totaling $12.6 thousand for the nine months ended September 30, 2012.

Non-interest Income and Noninterest Expense

Total non-interest income (which is derived mainly gain on sales of loans along with service and overdraft charges) for the three months ended September 30, 2013 was $0.49 million compared to $1.10 million for the same period in the prior year.  Total non-interest income for the nine months ended September 30, 2013 was $2.49 million compared to $2.76 million for the nine months ended September 30, 2012. At September 30, 2013, the Company had approximately  21,077 deposit accounts compared to 21,639 deposit accounts at September 30, 2012.

Total non-interest expense for the three months ended September 30, 2013 was $ 3.16 million compared to $2.96 million for the same period in the prior year. These expenses were due mainly to strategic initiatives to position the Company for future growth.  The ratio of annualized operating expenses to average assets was 3.23% for the third quarter of 2013 compared to 3.29% for the third quarter of 2012. Total non-interest expenses for the nine months ended September 30, 2013 was $ 9.20 million compared to $8.56 million for the nine months ended September 30, 2012.

Salaries and employee benefits comprised approximately 52% of total non-interest expense for the three months ended September 30, 2013 and 56% of total non-interest expense for the same period in the prior year.  For the nine months ended September 30, 2013, Salaries and employee benefits comprised approximately 55% of total non-interest expense compared to 54% for the same nine months period ended September 30, 2012. Other major categories included premises and equipment, which comprised approximately 11% of non-interest expense for the three months ended September 30, 2013 and 2012; advertising and promotions expenses, which comprised approximately 7% of total non-interest expense for the three months ended September 30, 2013 compared to 6% for the same period ending September 30, 2012; and professional fees, which comprised approximately  4% of total non-interest expense for the three months ended September 30, 2013 and 2012.

Salaries and employee benefits comprised approximately 55% of total non-interest expense for the nine months ended September 30, 2013 compared to 54% for the same nine months period ended September 30, 2012. Other major categories included premises and equipment, which comprised approximately 11% of non-interest expense for the nine months ended September 30, 2013 and 12% for the nine months ended September 30, 2012; advertising and promotions expenses, which comprised approximately 6% of total non-interest expense for the nine months ended September 30, 2013 and 2012 and professional fees, which comprised approximately 4% of the total non-interest expense for the nine months ended September 30, 2013 compared to 5% for the nine months ended September 30, 2012.

-28-

Income Taxes

The effective income tax rate for the three months ended September 30, 2013 and 2012 was (66.67%) and 22.51%, respectively.  Due to the creation on January 1, 2011 of a Passive Investment Company (“PIC”) under Connecticut tax legislation for the purpose of holding certain mortgage loans, the Company will no longer incur state income tax liability except for the minimum tax since the PIC’s earnings, net of certain allocated expenses, is exempt from Connecticut state income tax as long as the PIC meets certain ongoing qualifications.

Financial Condition

Investment Portfolio

The fair market value of investments in available-for-sale securities as of September 30, 2013 was $96.26 million, which is 1.66% below amortized cost, compared to $91.82 million, which was 1.89% above amortized cost as of December 31, 2012.  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, 2013, there were no investment securities in the investment portfolio that management determined to be other-than-temporarily impaired.

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, 2013, the Company had 41 securities with a carrying value totaling $15.75 million pledged for such purposes.  At December 31, 2012, the Company had 37 securities with a carrying value totaling $14.82 million pledged for such purposes.

As of September 30, 2013 and December 31, 2012, the Company’s investment portfolio consisted of  U.S. government and agency securities, municipal securities, corporate bonds, mortgage-backed securities and money market securities.  The Company’s policy is to stagger the maturities of its investment securities to meet overall liquidity requirements of the Company.

Loan Portfolio

The Company’s loan portfolio as of the end of the third quarter of 2013 was comprised of approximately 71% mortgage and consumer loans and 29% commercial loans.  The Company does not have any concentrations in its loan portfolio by industry or group of industries.  However, as of September 30, 2013 and December 31, 2012, respectively, approximately 92% and 86%, respectively, of the Company’s loans were secured by residential real property located in Connecticut.

There were approximately $138.0 million of residential mortgage loans as of September 30, 2013, which represented a 16.6% increase from December 31, 2012. The Company sold forty three (43) loans in the three months ended September 30, 2013 with an aggregate principal balance of $10.16 million, which resulted in a gain on sales of these loans for  $101 thousand.  For the nine months ended September 30, 2012, the Company sold two hundred and twenty nine (229) loans with an aggregate principal balance of $48.6 million, which resulted in a gain of $1.38 million.  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, 2013, the Company had total consumer loan balances of approximately $12.51 million, representing a 13.1% increase from the consumer loan balances at December 31, 2012.  As of September 30, 2013, the Company had approximately $11.36 million in consumer auto loans purchased from BCI Financial Corp. (“BCI”) on its books compared to approximately $9.75 million in auto loans purchased from BCI on its books as of December 31, 2012.  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.

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The September 30, 2013 balance for commercial and commercial real estate loans, including construction loans, was $79.77 million, a 32.0% increase from the commercial loan balance at December 31, 2012.  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.  Such loans include loans with maturities ranging from thirty days to one year and “term loans,” which are loans with maturities normally ranging from one year to twenty-five years.  Short-term business loans are generally intended to finance current transactions and typically provide for periodic principal payments, with interest payable monthly.  Term loans normally provide for fixed or floating interest rates, with monthly payments of both principal and interest.

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

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

The Company offers both fixed and floating rate loans.  Maturities on such loans typically range from five to thirty years.  The Company has been designated as 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, 2013, the Company’s lending limits were $4.56 million and $7.59 million, respectively.  As of December 31, 2012, these lending limits were $4.78 million and $7.96 million, respectively.  The Company sells participations in its loans when necessary to stay within lending limits.

Interest on performing loans is accrued and taken into income daily.  Loans over 90 days past due are deemed non-performing and are placed on non-accrual status.  Interest received on non-accrual loans is credited to income only upon receipt and, in certain circumstances, may be applied to principal until the loan has been repaid in full, at which time the interest received is credited to income.  The Company had  16 non-accrual loans at September 30, 2013 with an aggregate balance of approximately $2.90 million compared to 11 non-accrual loans at December 31, 2012 with an aggregate balance of approximately $1.24 million.

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 estate 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.  The Company had one OREO property at September 30, 2013 carried on the books at $117 thousand.

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, 2013 with a balance of approximately $67 thousand, compared to one TDR loan at December 31, 2012 with a balance of approximately $68 thousand.

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 thousand, as well as other loans in certain circumstances, must be approved by the Loan Committee of the Company’s Board of Directors.

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The Company has an internal review process to verify credit quality and risk classifications.  In addition, the Company also maintains a program of annual review of certain new and renewed loans by an outside loan review consultant.  Loans are graded from “pass” to “loss” depending on credit quality, with “pass” representing loans that are fully satisfactory as additions to the Company’s portfolio.  These are loans which involve a degree of risk that is not unwarranted given the favorable aspects of the credit and which exhibit both primary and secondary sources of repayment.  Classified loans identified in the review process are added to the Company’s Internal Watch list 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.

The Company had classified loans with an aggregate outstanding balance of $5.97 million as of September 30, 2013 compared to $8.98 million as of December 31, 2012.  The Company had no exposure to sub-prime loans in its loan portfolio as of September 30, 2013 and December 31, 2012.  The Company’s overall asset quality and loan loss reserves of 1.00% of loans as of September 30, 2013 compared 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 all 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 Company’s primary source of funds.  At September 30, 2013, the Company had a deposit mix of 35% checking, 45% savings and 20% certificates of deposit.  The Company’s net interest income is enhanced by its percentage of non-interest-bearing deposits.  As of December 31, 2012, the deposit mix was 42% checking, 37%savings, and 21% certificates of deposit.  At September 30, 2013, 26.1% of the total deposits of $ 363.8 million were non-interest-bearing compared to 27% of the Company’s total deposits of $340.4 million being non-interest-bearing at December 31, 2012.  As of September 30, 2013 and December 31, 2012, the Company had $77.7 million and $45.7 million, respectively, in deposits from public sources.

The Company’s deposits are obtained from a cross-section of the communities it serves.  No material portion of the Company’s deposits has been obtained from or is dependent upon any one person or industry.  The Company’s business is not seasonal in nature.  The Company accepts deposits in excess of $100 thousand 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 $3.98 million as of September 30, 2013 and $4.54 million as of December 31, 2012.

Borrowings

As of September 30, 2013, the Company had $10 million in Federal Home Loan Bank of Boston (FHLBB) borrowings on its balance sheet compared to $0 as of December 31, 2012. This is a three month bullet advance maturing on December 20, 2013.

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 any 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 the bank utilizes 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 (“CDARS”).  This allows the Company to offer its customers FDIC insurance on deposits in excess of $250 thousand, which reflects the deposit insurance limits in effect on the report date, by placing the deposits in the CDARS network.  Accounts placed in this manner are considered brokered deposits.  As of September 30, 2013, the Company had $ 3.978 million of deposits in the CDARS network compared to $4.54 million of deposits in the CDARS network as of December 31, 2012.

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Liquidity of a financial institution, such as the Bank, is measured by its ability to have sufficient liquid assets 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, 2013, the Company held $12.43 million in cash and cash equivalents, net of required FRB reserves of $ 5.45 million, and $ 80.51 million in available-for-sale securities, net of pledged securities of $ 15.75 million, for total liquid assets of $92.94 million.  At September 30, 2013, the Company anticipated short-term liability obligations of $60.3 million for a basic surplus of $32.63 million, representing 8.03%  of total assets.  As of December 31, 2012, the Company held $29.4 million in cash and cash equivalents, net of required FRB reserves of $4.7 million, and $77.0 million in available-for-sale securities, net of pledged securities of $14.8 million, for total liquid assets of $106.4 million.  At December 31, 2012, the Company’s anticipated short term liability obligations were $43.2 million for a basic surplus of $63.2 million, which represented 17% 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 at least quarterly to monitor the Company’s investments and liquidity needs and oversee its asset-liability management.  In between meetings of the Executive Committee, the Company’s management oversees the Bank’s liquidity.

Capital Requirements

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

At September 30, 2013 and December 31, 2012, 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.

In July 2013, the Federal Reserve Board and the FDIC approved revisions to their capital adequacy guidelines and prompt corrective action rules that implement the revised standards of the Basel Committee on Banking Supervision, commonly called Basel III, and address relevant provisions of the Dodd-Frank Act Wall Street Reform and Consumer Protection Act of 2010 (the “Dodd-Frank Act”).  The Federal Reserve Board’s final rules and the FDIC’s interim final rules apply to all depository institutions, top-tier bank holding companies with total consolidated assets of $500 million or more, and top-tier savings and loan holding companies (“banking organizations”).  Among other things, the rules establish a new common equity Tier 1 minimum capital requirement (4.5% of risk-weighted assets) and increases the minimum Tier 1 capital to risk-based assets requirement (from 4% to 6% of risk-weighted assets).  Banking organizations will also be required to have a total capital  ratio of 8% (unchanged from current rules) and a Tier 1 leverage ratio of 4% (unchanged from current rules).  The rules also limit a banking organization’s ability to pay dividends, engage in share repurchases or pay discretionary bonuses if the banking organization does not hold a “capital conservation buffer” consisting of 2.5% of common equity Tier 1 capital to risk-weighted assets in addition to the amount necessary to meet its minimum risk-based capital requirements.  The rules become effective for the Company and the Bank on January 1, 2015.  The capital conservation buffer requirement will be phased in beginning in January 1, 2016 at 0.625% of common equity Tier 1 capital to risk-weighted assets and would increase by that amount each year until fully implemented in January 2019 at 2.5% of common equity Tier 1 capital to risk-weighted assets.  Management is currently evaluating the provisions of these rules and their expected impact on the Company and the Bank.

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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

As of September 30, 2013, The Company had in place mandatory commitments to sell approximately $11.2 million of loans secured by 1-to-4 family residential properties to the Federal Home Loan Mortgage Corporation (Freddie Mac). As of December 31, 2012, there were no such commitments in place.

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, 2013.  Based upon this evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that, as of that date, the Company’s disclosure controls and procedures were effective at ensuring that required information will be disclosed on a timely basis.

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

Changes in Internal Controls over Financial Reporting

There was no change in the Company’s internal controls over financial reporting during the quarter ended September 30, 2013 that has materially affected, or is reasonably likely to materially affect, the Company’s internal controls over financial reporting.

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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.

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)
10.1	Letter Agreement, dated August 6, 2013, between The Simsbury Bank & Trust Company and Richard J. Sudol (incorporated by reference to Exhibit 10.1 of the Company’s Form 8-K filed on August 26, 2013)
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

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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

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SIGNATURES

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

	SBT BANCORP, INC.
Date:  November 12, 2013	By:	/s/ Martin J. Geitz
		Martin J. Geitz
		Chief Executive Officer

Date:  November 12, 2013	By:	/s/ Richard J. Sudol
		Richard J. Sudol
		Chief Financial Officer

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EXHIBIT INDEX

Exhibit No.	Description
3(i).1	Conformed Copy of the Certificate of Incorporation of SBT Bancorp, Inc. (incorporated by reference to Exhibit 3(i) of the Company's Form 10-K filed on March 31, 2009)
3(i).2	Certificate of Amendment to the Certificate of Incorporation of SBT Bancorp, Inc. establishing the designations, preferences, limitations and relative rights of the SBLF Preferred Stock (incorporated by reference to Exhibit 3.1 of the Company’s 8-K filed on August 12, 2011)
3(ii)	Amended and Restated Bylaws (incorporated by reference to Exhibit 3(ii) of the Company's Form 8-K filed on March 22, 2012)
4	Specimen Common Stock Certificate (incorporated by reference to Exhibit 4 of the Company’s Form 10-QSB file on May 15, 2006)
10.1	Letter Agreement, dated August 6, 2013, between The Simsbury Bank & Trust Company and Richard J. Sudol (incorporated by reference to Exhibit 10.1 of the Company’s Form 8-K filed on August 26, 2013)
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

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