SBT Bancorp (SBTB) 10-Q 2014 Q1 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 March 31, 2014

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

or

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)

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

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

Yes [X]                 No [   ]

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

Yes [X]                 No [   ]

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

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes [   ]                 No [X]

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

As of April 30, 2014, the registrant had 900,342 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 March 31, 2014 (unaudited)
	and December 31, 2013	4
	Condensed Consolidated Statements of Income for the Three Months Ended
	March 31, 2014 and 2013 (unaudited)	5
	Condensed Consolidated Statements of Comprehensive Income
	for the Three Months Ended March 31, 2014 and 2013 (unaudited)	6
	Condensed Consolidated Statements of Changes in Stockholders' Equity for the Three
	Months Ended March 31, 2014 and 2013 (unaudited)	7
	Condensed Consolidated Statements of Cash Flows for the Three Months Ended
	March 31, 2014 and 2013 (unaudited)	8
	Notes to Condensed Consolidated Financial Statements - (unaudited)	9 - 23
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	24 - 31
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	31
Item 4.	Controls and Procedures	32
	PART II - OTHER INFORMATION
Item 1.	Legal Proceedings	32
Item 1A.	Risk Factors	32
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	32
Item 3.	Defaults Upon Senior Securities	32
Item 4.	Mine Safety Disclosures	32
Item 5.	Other Information	33
Item 6.	Exhibits	33
SIGNATURES		34
EXHIBIT INDEX		35

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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 and per share amounts)

ASSETS	3/31/14			12/31/13
	(Unaudited)
Cash and due from banks	$	9,284		$	13,355
Interest-bearing deposits with the Federal Reserve Bank
and Federal Home Loan Bank		12,678			24,165
Money market mutual funds		345			346
Federal funds sold		774			724
Cash and cash equivalents		23,081			38,590
Investments in available-for-sale securities (at fair value)		86,694			87,449
Federal Home Loan Bank stock, at cost		2,196			2,196
Loans held-for-sale		2,989			2,861
Loans		278,315			279,667
Less allowance for loan losses		2,779			2,792
Loans, net		275,536			276,875
Premises and equipment, net		1,610			1,618
Accrued interest receivable		989			1,074
Other real estate owned		155			-
Bank owned life insurance		6,778			6,729
Other assets		4,692			4,456
Total assets	$	404,720		$	421,848
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Demand deposits	$	108,941		$	116,015
Savings and NOW deposits		194,136			173,500
Time deposits		68,517			68,989
Total deposits		371,594			358,504
Securities sold under agreements to repurchase		3,335			4,390
Federal Home Loan Bank advances		-			30,000
Other liabilities		1,720			1,558
Total liabilities		376,649			394,452
Stockholders' equity:
Preferred stock, senior non-cumulative perpetual, Series C, no par; 9,000
shares issued and outstanding at March 31, 2014 and December 31, 2013;
liquidation value of $1,000 per share		8,979			8,976
Common stock, no par value; authorized 2,000,000 shares; issued
and outstanding 900,756 shares and 900,342 shares, respectively, as of
March 31, 2014 and 900,264 shares and 899,850 shares as of December 31, 2013		10,146			10,136
Retained earnings		10,277			10,347
Treasury stock, 414 shares at March 31, 2014 and December 31, 2013		(7	)		(7	)
Unearned compensation-restricted stock awards		(362	)		(401	)
Accumulated other comprehensive loss		(962	)		(1,655	)
Total stockholders' equity		28,071			27,396
Total liabilities and stockholders' equity	$	404,720		$	421,848

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
	3/31/2014			3/31/2013
Interest and dividend income:
Interest and fees on loans	$	2,611		$	2,334
Investment securities		480			534
Federal funds sold and overnight deposits		11			12
Total interest and dividend income		3,102			2,880
Interest expense:
Deposits		212			220
Federal Home Loan Bank advances		2			-
Repurchase agreements		1			1
Total interest expense		215			221
Net interest and dividend income		2,887			2,659
Provision for loan losses		30			30
Net interest and dividend income after provision for loan losses		2,857			2,629
Noninterest income:
Service charges on deposit accounts		118			128
Gain on sales and writedowns of available-for-sale securities, net		-			77
Other service charges and fees		207			159
Increase in cash surrender value of life insurance policies		49			56
Gain on loans sold and commission fee income		39			571
Investment services fees and commissions		61			49
Other income (expense)		38			(3	)
Total noninterest income		512			1,037
Noninterest expense:
Salaries and employee benefits		1,973			1,743
Occupancy expense		347			277
Equipment expense		101			60
Advertising and promotions		103			166
Forms and supplies		35			30
Professional fees		77			129
Directors’ fees		67			51
Correspondent charges		80			76
Postage		22			22
FDIC assessment		103			45
Data processing		145			131
Other expenses		307			260
Total noninterest expense		3,360			2,990
Income before income taxes		9			676
Income tax (benefit) provision		(69	)		159
Net income	$	78		$	517
Net income available to common stockholders	$	52		$	491
Average shares outstanding, basic		880,075			870,332
Earnings per common share, basic	$	0.06		$	0.56
Average shares outstanding, assuming dilution		887,004			874,508
Earnings per common share, assuming dilution	$	0.06		$	0.56

See accompanying notes to the unaudited condensed consolidated financial statements.

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SBT BANCORP, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF  COMPREHENSIVE INCOME

 (Unaudited)

(Dollars in thousands)

	Three Months Ended
	March 31,
	2014			2013
	(unaudited)
Net income	$	78		$	517
Other comprehensive income (loss), net of tax:
Change in fair value of securities available for sale		1,050			(476	)
Reclassification adjustment for net realized gains in net income		-			(77	)
Other comprehensive income (loss), before tax		1,050			(553	)
Income tax (expense) benefit related to items of other comprehensive income (loss)		(357	)		188
Other comprehensive income (loss), net of tax		693			(365	)
Comprehensive income	$	771		$	152

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, 2012	$	8,964	$	9,901	$	(368	)	$	(7	)	$	9,819		$	1,128		$	29,437
Net income		-		-		-			-			517			-			517
Other comprehensive loss, net of tax		-		-		-			-			-			(365	)		(365	)
Preferred stock dividend-SBLF		-		-		-			-			(23	)		-			(23	)
Preferred stock amortization (accretion)		3		-		-			-			(3	)		-			-
Stock based compensation		-		-		21			-			-			-			21
Dividends declared common stock		-		-		-			-			(124	)		-			(124	)
Common stock issued		-		9		-			-			-			-			9
Balance, March 31, 2013	$	8,967	$	9,910	$	(347	)	$	(7	)	$	10,186		$	763		$	29,472
Balance, December 31, 2013	$	8,976	$	10,136	$	(401	)	$	(7	)	$	10,347		$	(1,655	)	$	27,396
Net income		-		-		-			-			78			-			78
Other comprehensive income, net of tax		-		-		-			-			-			693			693
Preferred stock dividend-SBLF		-		-		-			-			(23	)		-			(23	)
Preferred stock amortization (accretion)		3		-		-			-			(3	)		-			-
Stock based compensation		-		-		39			-			-			-			39
Dividends declared common stock		-		-		-			-			(122	)		-			(122	)
Common stock issued		-		10		-			-			-			-			10
Balance, March 31, 2014	$	8,979	$	10,146	$	(362	)	$	(7	)	$	10,277		$	(962	)	$	28,071

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 three months ended
	3/31/2014			3/31/2013
Cash flows from operating activities:
Net income	$	78		$	517
Adjustments to reconcile net income to net cash provided by operating activities:
Interest capitalized on interest-bearing time deposits with other banks		-			(34	)
Amortization of securities, net		98			166
Writedown of available-for-sale securities		-			4
Gain on sales of available-for-sale securities		-			(81	)
Change in deferred origination costs, net		(12	)		(40	)
Provision for loan losses		30			30
Loans originated for sale		(5,148	)		-
Proceeds from sales of loans		5,050			-
Gains on sales of loans		(30	)		-
Writedown on other real estate owned		-			15
Depreciation and amortization		96			51
Accretion on impairment of operating lease		(11	)		(11	)
Increase in other assets		(492	)		(547	)
Decrease in interest receivable		85			16
(Increase) decrease in taxes receivable		(69	)		159
Increase in cash surrender value of bank owned life insurance		(49	)		(56	)
Stock-based compensation		39			21
Increase in other liabilities		165			54
Increase in interest payable		8			7
Net cash (used in) provided by operating activities		(162	)		271
Cash flows from investing activities:
Maturities and redemptions of interest-bearing time deposits with other banks		-			1,075
Purchases of available-for-sale securities		-			(35,320	)
Proceeds from maturities of available-for-sale securities		1,707			9,134
Proceeds from sales of available-for-sale securities		-			3,137
Loan originations and principal collections, net		1,156			(3,058	)
Loans purchased		-			(921	)
Recoveries of loans previously charged off		10			3
Capital expenditures		(120	)		(19	)
Net cash provided by (used in) investing activities		2,753			(25,969	)
Cash flows from financing activities:
Net increase in demand deposits, NOW and savings accounts		13,562			20,002
(Decrease) increase in time deposits		(472	)		928
Net decrease in securities sold under agreements to repurchase		(1,055	)		(528	)
Paydown of FHLB advances		(30,000	)		-
Proceeds from issuance of common stock		10			9
Dividends paid - preferred stock		(23	)		(23	)
Dividends paid - common stock		(122	)		(124	)
Net cash (used in) provided by financing activities		(18,100	)		20,264
Net decrease in cash and cash equivalents		(15,509	)		(5,434	)
Cash and cash equivalents at beginning of period		38,590			34,100
Cash and cash equivalents at end of period	$	23,081		$	28,666
Supplemental disclosures:
Interest paid	$	207		$	214
Income taxes paid		-			-
Loan transferred to other real estate owned		155			-

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, 2014.

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, 2013.

NOTE 2 – STOCK-BASED COMPENSATION

At March 31, 2014, 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 three months ended March 31, 2014, the Company recognized $39 thousand in stock-based employee compensation expense.  During the three months ended March 31, 2013, the Company recognized $21 thousand in stock-based employee compensation expense.

NOTE 3 – RECENT ACCOUNTING PRONOUNCEMENTS

In February 2013, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“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  adoption of this guidance did not have an impact on the Company’s 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 adoption of this guidance did not have an impact on the Company’s 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 did not have an impact on the Company’s results of operations or financial position.

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In July 2013, the FASB issued ASU 2013-11, “Income Taxes (Topic 740): 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 did not  have an impact on the Company’s results of operations or financial position.

In January 2014, the FASB issued ASU 2014-01, “Investments - Equity Method and Joint Ventures (Topic 323): Accounting for Investments in Qualified Affordable Housing Projects.” The amendments in this ASU apply to all reporting entities that invest in qualified affordable housing projects through limited liability entities that are flow-through entities for tax purposes as follows:

1.   For reporting entities that meet the conditions for and that elect to use the proportional amortization method to account for investments in qualified affordable housing projects, all amendments in this ASU apply.

2.   For reporting entities that do not meet the conditions for or that do not elect the proportional amortization method, only the amendments in this ASU that are related to disclosures apply.

The amendments in this ASU permit reporting entities to make an accounting policy election to account for their investments in qualified affordable housing projects using the proportional amortization method if certain conditions are met. Under the proportional amortization method, an entity amortizes the initial cost of the investment in proportion to the tax credits and other tax benefits received and recognizes the net investment performance in the income statement as a component of income tax expense (benefit). For those investments in qualified affordable housing projects not accounted for using the proportional amortization method, the investment should be accounted for as an equity method investment or a cost method investment in accordance with Subtopic 970-323. The amendments in this ASU should be applied retrospectively to all periods presented. A reporting entity that uses the effective yield method to account for its investments in qualified affordable housing projects before the date of adoption may continue to apply the effective yield method for those preexisting investments. The amendments in this ASU are effective for public business entities for annual periods and interim reporting periods within those annual periods, beginning after December 15, 2014. 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 January 2014, the FASB issued ASU 2014-04, “Receivables-Troubled Debt Restructurings by Creditors (Subtopic 310-40): Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure.” The objective of the amendments in this ASU is to reduce diversity by clarifying when an in substance repossession or foreclosure occurs, that is, when a creditor should be considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan such that the loan receivable should be derecognized and the real estate property recognized. The amendments in this ASU clarify that an in substance repossession or foreclosure occurs, and a creditor is considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan, upon either (i) the creditor obtaining legal title to the residential real estate property upon completion of a foreclosure or (ii) the borrower conveying all interest in the residential real estate property to the creditor to satisfy that loan through completion of a deed in lieu of foreclosure or through a similar legal agreement. Additionally, the amendments require interim and annual disclosure of both (i) the amount of foreclosed residential real estate property held by the creditor and (ii) the recorded investment in consumer mortgage loans collateralized by residential real estate property that are in the process of foreclosure according to local requirements of the applicable jurisdiction. The amendments in this ASU are effective for public business entities for annual periods, and interim periods within those annual periods, beginning after December 15, 2014. For entities other than public business entities, the amendments in this ASU are effective for annual periods beginning after December 15, 2014, and interim periods within annual periods beginning after December 15, 2015. An entity can elect to adopt the amendments in this ASU using either a modified retrospective transition method or a prospective transition method. The Company anticipates that the adoption of this guidance will not have a material impact on its consolidated financial statements.

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In April 2014, the FASB issued ASU 2014-08, “Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity.” This ASU changes the criteria for reporting discontinued operations and modifies related disclosure requirements. The new guidance is effective on a prospective basis for fiscal years beginning on or after December 15, 2014, and interim periods within those years. The Company anticipates that the adoption of this guidance will not have a material impact on its consolidated financial statements.

NOTE 4 – FAIR VALUE MEASUREMENTS

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 March 31, 2014 and December 31, 2013.  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 three months ended March 31, 2014.

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.

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The following summarizes assets measured at fair value at March 31, 2014 and December 31, 2013.

Assets Measured at Fair Value on a Recurring Basis

			Fair Value Measurements at Reporting Date Using:
			Quoted prices in		Significant		Significant
			Active Markets for		Other Observable		Unobservable
			Identical Assets		Inputs		Inputs
	Total		Level 1		Level 2		Level 3
	(Dollars In Thousands)
March 31, 2014:
Debt securities issued by U.S. government corporations
and agencies	$	18,401	$	-	$	18,401	$	-
Obligations of states and municipalities		14,244		-		14,244		-
Mortgage-backed securities		53,434		-		53,434		-
SBA loan pools		615		-		615		-
	$	86,694	$	-	$	86,694	$	-
December 31, 2013:
Debt securities issued by U.S. government corporations
and agencies	$	18,247	$	-	$	18,247	$	-
Obligations of states and municipalities		13,973		-		13,973		-
Mortgage-backed securities		54,568		-		54,568		-
SBA loan pools		661		-		661		-
	$	87,449	$	-	$	87,449	$	-

Assets Measured at Fair Value on a Nonrecurring Basis

	Fair Value Measurements at Reporting Date Using:
			Quoted prices in		Significant		Significant
			Active Markets for		Other Observable		Unobservable
			Identical Assets		Inputs		Inputs
	Total		Level 1		Level 2		Level 3
	(Dollars In Thousands)
March 31, 2014:
Other real estate owned	$	155	$	-	$	-	$	155
	$	155	$	-	$	-	$	155

- 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 March 31, 2014 and December 31, 2013:

	March 31, 2014
	Carrying		Fair Value
	Amount		Level 1		Level 2		Level 3		Total
	(Dollars in thousands)
Financial assets:
Cash and cash equivalents	$	23,081	$	23,081	$	-	$	-	$	23,081
Available-for-sale securities		86,694		-		86,694		-		86,694
Federal Home Loan Bank stock		2,196		2,196		-		-		2,196
Loans held-for-sale		2,989						2,999		2,999
Loans, net		275,536		-		-		278,100		278,100
Accrued interest receivable		989		989		-		-		989
Financial liabilities:
Deposits		371,594		-		372,007		-		372,007
Securities sold under agreements to repurchase		3,335		-		3,335		-		3,335
	December 31, 2013
	Carrying		Fair Value
	Amount		Level 1		Level 2		Level 3		Total
	(Dollars in thousands)
Financial assets:
Cash and cash equivalents	$	38,590	$	38,590	$	-	$	-	$	38,590
Available-for-sale securities		87,449		-		87,449		-		87,449
Federal Home Loan Bank stock		2,196		2,196		-		-		2,196
Loans held-for-sale		2,861						2,909		2,909
Loans, net		276,875		-		-		277,539		277,539
Accrued interest receivable		1,074		1,074		-		-		1,074
Financial liabilities:
Deposits		358,504		-		358,961		-		358,961
Securities sold under agreements to repurchase		4,390		-		4,390		-		4,390
Federal Home Loan Bank advances		30,000		-		30,000		-		30,000

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 months ended March 31, 2014 and  2013:

	For the three months ended
	3/31/14			3/31/13
	(In Thousands, Except Per Share Data)
Basic earnings per share computation:
Net income	$	78		$	517
Preferred stock net accretion		(3	)		(3	)
Cumulative preferred stock dividends		(23	)		(23	)
Net income available to common stockholders	$	52		$	491
Weighted average shares outstanding, basic		880,075			870,332
Basic earnings per share	$	0.06		$	0.56
Diluted earnings per share computation:
Net income	$	78		$	517
Preferred stock net accretion		(3	)		(3	)
Cumulative preferred stock dividends		(23	)		(23	)
Net income available to common stockholders	$	52		$	491
Weighted average shares outstanding, before dilution		880,075			870,332
Dilutive potential shares		6,929			4,176
Weighted average shares outstanding, assuming dilution		887,004			874,508
Diluted earnings per share	$	0.06		$	0.56

NOTE 6 – INVESTMENT SECURITIES

The following tables summarize the amounts and distribution of the Company’s investment securities held as of March 31, 2014 and December 31, 2013:

	Investment Portfolio
	(Dollars in thousands)
	March 31, 2014
	Amortized		Gross Unrealized		Gross Unrealized		Fair
	Cost		Gains		Losses		Value		Yield
Available for sale securities:
U.S government and agency securities-
Due after one year through five years	$	13,561	$	-	$	195	$	13,366		1.11	%
Due after five years through ten years		5,205		-		170		5,035		1.57	%
Total U.S government and agency securities		18,766		-		365		18,401		1.24	%
State and municipal securities-
Due within one year		300		-		-		300		3.87	%
Due after five years through ten years		3,411		102		72		3,441		3.08	%
Due after ten years through fifteen years		10,046		496		39		10,503		3.47	%
Total state and municipal securities		13,757		598		111		14,244		3.38	%
Mortgage-backed securities-
Due within one year		5		-		-		5		4.06	%
Due after one year through five years		815		21		-		836		2.96	%
Due after five years through ten years		2,322		35		6		2,351		2.28	%
Due after ten years through fifteen years		31,957		32		968		31,021		1.86	%
Due beyond fifteen years		19,959		30		768		19,221		2.44	%
Total mortgage-backed securities		55,058		118		1,742		53,434		2.10	%
SBA loan pools
Due after ten years through fifteen years		571		44		-		615		4.99	%
Total SBA loan pool		571		44		-		615		4.99	%
Total available-for-sale securities	$	88,152	$	760	$	2,218	$	86,694		2.13	%

- 14 -

	Investment Portfolio
	(Dollars in thousands)
	December 31, 2013
	Amortized		Gross Unrealized		Gross Unrealized		Fair
	Cost		Gains		Losses		Value		Yield
Available for sale securities:
U.S government and agency securities-
Due after one year through five years	$	13,061	$	-	$	245	$	12,816		1.08	%
Due after five to ten years		5,706		-		275		5,431		1.46	%
Total U.S government and agency securities		18,767		-		520		18,247		1.20	%
State and municipal securities-
Due after one year through five years		301		2		-		303		3.00	%
Due after five years through ten years		3,412		86		98		3,400		3.08	%
Due after ten years through fifteen years		10,067		303		100		10,270		3.47	%
Total state and municipal securities		13,780		391		198		13,973		3.36	%
Mortgage-backed securities-
Due within one year		9		-		-		9		3.98	%
Due after one year through five years		761		14		-		775		2.60	%
Due after five years through ten years		2,660		49		11		2,698		2.39	%
Due after ten years through fifteen years		32,886		31		1,281		31,636		1.85	%
Due beyond fifteen years		20,483		32		1,065		19,450		2.44	%
Total mortgage-backed securities		56,799		126		2,357		54,568		2.10	%
SBA loan pools
Due after one year through five years		611		50		-		661		4.60	%
Total SBA loan pool		611		50		-		661		4.99	%
Total available-for-sale securities	$	89,957	$	567	$	3,075	$	87,449		2.25	%

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)
March 31, 2014:
Debt securities issued by U.S. government
corporations and agencies	$	15,481	$	286	$	2,920	$	79	$	18,401	$	365
Obligations of states and municipalities		1,328		82		377		29		1,705		111
Mortgage-backed securities		34,467		1,021		13,274		687		47,741		1,708
Total temporarily impaired securities	$	51,276	$	1,389	$	16,571	$	795	$	67,847	$	2,184
Other-than-temporarily impaired securities
Mortgage-backed securities		-		-		340		34		340		34
Total temporarily impaired and other-
than-temporarily impaired securities	$	51,276	$	1,389	$	16,911	$	829	$	68,187	$	2,218
December 31, 2013:
Debt securities issued by U.S. government
corporations and agencies	$	18,247	$	520	$	-	$	-	$	18,247	$	520
Obligations of states and municipalities		3,340		198		-		-		3,340		198
Mortgage-backed securities		42,185		1,958		6,240		359		48,425		2,317
Total temporarily impaired securities	$	63,772	$	2,676	$	6,240	$	359	$	70,012	$	3,035
Other-than-temporarily impaired securities
Mortgage-backed securities		-		-		331		40		331		40
Total temporarily impaired and other-
than-temporarily impaired securities	$	63,772	$	2,676	$	6,571	$	399	$	70,343	$	3,075

- 15 -

The investments in the Company’s investment portfolio that were temporarily impaired as of March 31, 2014, consisted of debt issued by states and municipalities, U.S. government corporations and 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.

During the three months ended March 31, 2014, the Company did not sell any available-for-sale securities.

During the three months ended March 31, 2013, there were proceeds of $3.137 million from sales of available for sale securities.  Gross realized gains on these sales amounted to $81.0 thousand.  The tax expense applicable to these gross realized gains amounted to $28.0 thousand.

NOTE 7 – LOAN INFORMATION

Loans consisted of the following as of March 31, 2014 and December 31, 2013:

	March 31, 2014			December 31, 2013
	(In Thousands)
Commercial and industrial	$	18,778		$	18,432
Real estate - construction and land development		8,591			7,773
Real estate - residential		137,603			137,539
Real estate - commercial		47,338			48,814
Municipal		8,485			8,488
Home equity		46,269			46,742
Consumer		10,024			10,664
		277,088			278,452
Allowance for loan losses		(2,779	)		(2,792	)
Deferred loan origination costs, net		1,227			1,215
Net loans	$	275,536		$	276,875

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 three months ended March 31, 2014.

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.

- 16 -

Commercial real estate:  Loans in this segment are primarily owner occupied properties throughout the Farmington Valley in Connecticut. Management continually monitors the financial performance of these loans and the related operating entities.

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

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

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.

- 17 -

The following tables set forth information regarding the allowance for loan losses by portfolio segment as of March 31, 2014 and December 31, 2013:

	Real Estate:
							Construction and					Commercial
	Residential			Commercial			Land Development		Home Equity			& Industrial		Consumer			Unallocated		Total
	(Dollars in thousands)
March 31, 2014:
Allowance for loan
losses:
Beginning balance	$	1,189		$	748		$	211	$	303		$	239	$	102		$	-	$	2,792
Charge-offs		(53	)		-			-		-			-		-			-		(53	)
Recoveries		9			-			-		-			1		-			-		10
Provision (benefit)		29			(20	)		13		(2	)		3		(12	)		19		30
Ending balance	$	1,174		$	728		$	224	$	301		$	243	$	90		$	19	$	2,779
Ending balance:
Individually evaluated
for impairment	$	-		$	-		$	-	$	-		$	-	$	-		$	-	$	-
Ending balance:  Collectively
evaluated for
impairment		1,174			728			224		301			243		90			19		2,779
Total allowance for loan
losses ending
balance	$	1,174		$	728		$	224	$	301		$	243	$	90		$	19	$	2,779
Loans:
Ending balance:  Individually
evaluated for
impairment	$	-		$	924		$	221	$	-		$	-	$	-		$	-	$	1,145
Ending balance:
Collectively evaluated
for impairment		137,603			52,727			8,370		46,269			20,950		10,024			-		275,943
Total loans ending balance	$	137,603		$	53,651		$	8,591	$	46,269		$	20,950	$	10,024		$	-	$	277,088

	Real Estate:
						Construction and					Commercial
	Residential			Commercial		Land Development		Home Equity			& Industrial		Consumer			Unallocated			Total
	(Dollars in thousands)
March 31, 2013:
Allowance for loan
losses:
Beginning balance	$	1,051		$	586	$	142	$	362		$	219	$	99		$	135		$	2,594
Charge-offs		(15	)		-		-		-			-		(9	)		-			(24	)
Recoveries		1			-		-		-			2		-			-			3
Provision (benefit)		(23	)		97		18		(1	)		22		6			(89	)		30
Ending balance	$	1,014			683	$	160	$	361		$	243	$	96		$	46		$	2,603

- 18 -

	Real Estate:
								Construction
								and Land					Commercial
	Residential				Commercial			Development		Home Equity			and Industrial			Consumer			Unallocated			Total
	(In Thousands)
December 31, 2013:
Allowance for loan
losses:
Beginning balance		$	1,051		$	586		$	142	$	362		$	219		$	99		$	135		$	2,594
Charge-offs			(40	)		(54	)		-		-			(2	)		(58	)		-			(154	)
Recoveries			-			-			-		-			4			3			-			7
Provision (benefit)			178			216			69		(59	)		18			58			(135	)		345
Ending balance		$	1,189		$	748		$	211	$	303		$	239		$	102		$	-		$	2,792

	Real Estate:
					Construction  and				Commercial
	Residential		Commercial		Land Development		Home Equity		& Industrial		Consumer		Unallocated		Total
	(Dollars in thousands)
December 31, 2013
Ending balance:
Individually evaluated
for impairment	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	-
Ending balance:  Collectively
evaluated for
impairment		1,189		748		211		303		239		102		-		2,792
Total allowance for loan
losses ending
balance	$	1,189	$	748	$	211	$	303	$	239	$	102	$	-	$	2,792
Loans:
Ending balance:  Individually
evaluated for
impairment	$	175	$	924	$	222	$	4	$	-	$	-	$	-	$	1,325
Ending balance:
Collectively evaluated
for impairment		137,364		54,234		7,551		46,738		20,576		10,664		-		277,127
Total loans ending balance	$	137,539	$	55,158	$	7,773	$	46,742	$	20,576	$	10,664	$	-	$	278,452

The following tables present the Company’s loans by risk rating as of March 31, 2014 and December 31, 2013:

	Real Estate
					Construction
					and Land				Commercial
	Residential		Commercial		Development		Home Equity		and Industrial		Consumer		Total
	(Dollars in thousands)
March 31, 2014:
Grade:
Pass	$	-	$	47,908	$	7,889	$	-	$	17,737	$	-	$	73,534
Special mention		-		4,819		702		80		3,213		-		8,814
Substandard		503		924		-		-		-		-		1,427
Loans not formally rated		137,100		-		-		46,189		-		10,024		193,313
Total	$	137,603	$	53,651	$	8,591	$	46,269	$	20,950	$	10,024	$	277,088
December 31, 2013:
Grade:
Pass	$	-	$	50,520	$	6,042	$	-	$	18,425	$	-	$	74,987
Special mention		-		2,661		1,163		-		1,175		-		4,999
Substandard		1,601		1,977		568		116		976		-		5,238
Loans not formally rated		135,938		-		-		46,626		-		10,664		193,228
Total	$	137,539	$	55,158	$	7,773	$	46,742	$	20,576	$	10,664	$	278,452

- 19 -

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.

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 include residential, home equity and consumer loans. As of March 31, 2014, $193.3 million of the total residential, home equity and consumer loan portfolio of $193.9 million were not formally rated. As of December 31, 2013, $193.2 million of the total residential, home equity and consumer loan portfolio of $194.9 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 delinquent loans, consisting of loans past due 60 days or more, decreased from 1.19% of total loans outstanding as of December 31, 2013 to 1.13% of total loans outstanding as of March 31, 2014. The Company’s allowance for loan losses at March 31, 2014 was 1.00% of total loans compared to 0.99% as of December 31, 2013.

An age analysis of past-due loans, segregated by class of loans, as of March 31, 2014 and December 31, 2013 is as follows:

- 20 -

					90 Days		Total		Total		Total
	30–59 Days		60–89 Days		or More		Past Due		Current		Loans
	(Dollars in thousands)
March 31, 2014:
Real estate:
Residential	$	-	$	856	$	582	$	1,438	$	136,165	$	137,603
Commercial		-		481		924		1,405		45,933		47,338
Construction and
land development		-		-		221		221		8,370		8,591
Home equity		173		46		-		219		46,050		46,269
Municipal		-		-		-		-		6,313		6,313
Commercial and industrial		-		-		-		-		18,778		18,778
Municipal		-		-		-		-		2,172		2,172
Consumer		84		9		11		104		9,920		10,024
Total	$	257	$	1,392	$	1,738	$	3,387	$	273,701	$	277,088
December 31, 2013:
Real estate:
Residential	$	-	$	720	$	1,253	$	1,973	$	135,566	$	137,539
Commercial		-		-		924		924		47,890		48,814
Construction and
land development		-		-		204		204		7,569		7,773
Home equity		-		94		83		177		46,565		46,742
Municipal		-		-		-		-		6,344		6,344
Commercial and industrial		-		-		-		-		18,432		18,432
Municipal		-		-		-		-		2,144		2,144
Consumer		128		-		26		154		10,510		10,664
Total	$	128	$	814	$	2,490	$	3,432	$	275,020	$	278,452

The following tables set forth information regarding nonaccrual loans as of March 31, 2014 and December 31, 2013

Real estate:	March 31, 2014		December 31, 2013
	(Dollars in thousands)		(Dollars in thousands)
Residential	$	1,094	$	1,597
Commercial		924		924
Construction and
land development		221		222
Home equity		80		83
Commercial and industrial		-		-
Consumer		11		23
Total	$	2,330	$	2,849

Information about loans that meet the definition of an impaired loan in ASC 310-10-35 is as follows as of and for the three months ended March 31, 2014 and the year ended December 31, 2013:

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				Unpaid						Average			Interest
	Recorded			Principal			Related			Recorded			Income
	Investment			Balance			Allowance			Investment			Recognized
	(Dollars in thousands)
March 31,  2014:
With no related allowance recorded:
Real Estate:
Commercial		$	924		$	924		$	-		$	923		$	-
Home equity			-			-			-			2			-
Construction and land development			221			221			-			222			-
Total impaired with no related allowance		$	1,145		$	1,145		$	-		$	1,147		$	-
Total
Real Estate:
Commercial		$	924		$	924		$	-		$	923		$	-
Home equity			-			-			-			2			-
Construction and land development			221			221			-			222			-
Total impaired loans		$	1,145		$	1,145		$	-		$	1,147		$	-
				Unpaid						Average			Interest
	Recorded			Principal			Related			Recorded			Income
	Investment			Balance			Allowance			Investment			Recognized
	(Dollars in thousands)
December 31, 2013:
With no related allowance recorded:
Real Estate:
Residential		$	175		$	175		$	-		$	178		$	6
Commercial			924			924			-			929			3
Home equity			4			4			-			5			-
Construction and land development			222			222			-			212			-
Total impaired with no related allowance		$	1,325		$	1,325		$	-		$	1,324		$	9
Total
Real Estate:
Residential		$	175		$	175		$	-		$	178		$	6
Commercial			924			924			-			929			3
Home equity			4			4			-			5			-
Construction and land development			222			222			-			212			-
Total impaired loans		$	1,325		$	1,325		$	-		$	1,324		$	9

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 three months ended March 31, 2014.

There were no TDRs entered into in the last twelve months that subsequently defaulted.

The balance of mortgage servicing rights included in other assets at March 31, 2014 and December 31, 2013 was $1.41 million and $1.41 million, respectively.  Mortgage servicing rights of $5 thousand and $925 thousand were capitalized through March 31, 2014 and December 31, 2013, respectively.  Amortization of mortgage servicing rights was $90 thousand and $300 thousand through the three months ended March 31, 2014 and for the year ended December 31, 2013, respectively.  The fair value of these rights was $1.43 million and $1.67 million as of March 31, 2014 and December 31, 2013, respectively.

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 $150.4 million and $147.9 million as of March 31, 2014 and December 31, 2013, 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 INCOME (LOSS)

The following tables present the reclassification disclosure for the three months  ended March 31, 2014 and 2013:

	3/31/2014				3/31/2013
Three months ended:	(Dollars in thousands)
Net change in unrealized holding gains on available-for-sale securities		$	1,050		$	(476	)
Reclassification adjustment for realized gains and writedowns, net, in net income (1)			-			(77	)
Other comprehensive income (loss) before income tax effect			1,050			(553	)
Income tax (expense) benefit			(357	)		188
Other comprehensive income (loss), net of tax		$	693		$	(365	)

(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 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 (benefit) 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 Quarterly Report on Form 10-Q 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;

● a general decline in the real estate and lending markets may 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 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 deterioration in the economy or cause instability in credit markets; and economic, governmental or other factors may prevent the projected population and residential and commercial growth in the markets in which the Company operates.

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

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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 three months ended March 31, 2014.  All adjustments which, in the opinion of management, are necessary in order to make the consolidated financial statements for the three months ended March 31, 2014 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, 2013.  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 three months ended March 31, 2014, net income amounted to $78 thousand, or $0.06 per diluted share.  This compares to net income of $517 thousand, or $0.56 per diluted share for the three months ended March 31, 2013.  Total assets as of March 31, 2014 were $405 million compared to $396 million as of March 31, 2013.

Key financial highlights for the three months ended March 31, 2014 compared to the three months ended March 31, 2013 include total asset growth of $9.2 million or 2.3%, deposit growth of $10.3 million or 2.8% and loan growth of $38.4 million or 16.0%. Non-interest income decreased by $525 thousand or 51% for the three months ended March 31, 2014 compared to he three months ended March 31, 2013.

For the first quarter of 2014, the Company’s earnings per share was $0.06, a decrease of $0.50 in basic and diluted earnings per share of $0.56 for the first quarter of 2013. Total non-accrual loans and loans 30 or more days past due increased to 1.33% of total loans outstanding as of March 31, 2014 from 1.09% of total loans outstanding as of March 31, 2013, primarily due to one commercial real estate loan totaling $1.0 million that was placed on non-accrual status during the second quarter of 2013. This loan is fully collateralized and the Bank does not expect to incur any loss on this loan.

Total deposits as of March 31, 2014 were $372 million, an increase of $10.3 million or 2.8% over a year ago.  This growth was mainly in core demand deposits and municipal deposits.  At quarter-end, 29% of total deposits were in non-interest bearing demand accounts, 52% were in low-cost savings and NOW accounts, and 19% were in time deposits.  At March 31, 2014, the Company had approximately  21,724 deposit accounts compared to 21,248 deposit accounts at March 31, 2013.

At March 31, 2014, loans outstanding were $278 million, an increase of $38.4 million or 16.0%, over a year ago.   Commercial loans grew by $12.6 million or 21.2%, residential mortgage loans grew by $24.8 million or 20.9%, and consumer loans grew by $1.0 million or 1.3%. The profile of the Company’s loan portfolio remains strong.   The Company’s allowance for loan losses at March 31, 2014 was 1.00% of total loans.  The Company had non-accrual loans totaling $2.3 million equal to 0.84% of total loans as of March 31, 2014 compared to non-accrual loans totaling $1.2 million or 0.51% of total loans as of March 31, 2013. The increase was primarily due to one commercial  real estate loan totaling $1.0 million that was placed on non-accrual status during the second quarter of 2013. This loan is fully collateralized and the Bank does not expect to incur any loss on this loan.

Total revenues, consisting of net interest and dividend income plus noninterest income, were $3.4 million in the first  quarter of 2014 compared to $3.7 million for the first  quarter of 2013, a decrease  of 8%.  Net interest and dividend income increased by $228 thousand or 9%, primarily due to an increase in yields on earning assets and increases in average outstanding balances of earning assets. Noninterest income decreased by $525 thousand primarily due to a $532 thousand decrease in gain on loan sales.

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The Company’s taxable-equivalent net interest margin (taxable-equivalent net interest and dividend income divided by average earning assets) was 3.04% for the first quarter of 2014 as compared to 3.03% for the first quarter of 2013.  The Company’s cost of funds declined 1 basis point while the yield on interest earning assets decreased 1 basis point during the first quarter of 2014 as compared to the first quarter of 2013.

Total noninterest expenses, excluding a one-time cost in the amount of $252 thousand related to the retirement of the Company’s former Chief Financial Officer, were $3.1 million for the first quarter of 2014, an increase of $118 thousand or 4% compared to the first quarter of 2013.  The $118 thousand increase was due primarily to increases in occupancy and equipment costs in the amount of $111 thousand , FDIC assessment in the amount of $58 thousand  and other expenses in the amount of $47 thousand, which were partially offset by decreases in advertising and promotions expense of $63 thousand and professional fees of $52 thousand.  Total noninterest expenses, including the one-time cost in the amount of $252 thousand related to the retirement of the Company’s former Chief Financial Officer for the first quarter of 2014 were $3.36 million, an increase of $370 thousand or 12% compared to the first quarter of 2013.

Capital levels for the Bank on March 31, 2014 were above those required to meet the regulatory “well-capitalized” designation.

	Capital Ratios
	3/31/2014
	The Simsbury Bank
	and Trust Company, Inc.	Regulatory Standard for Well-Capitalized
Tier 1 Leverage Capital Ratio	7.03%	5.00%
Tier 1 Risk-Based Capital Ratio	12.03%	6.00%
Total Risk-Based Capital Ratio	13.20%	10.00%

Results of Operations

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 $3.37 million for the first quarter of 2014 compared to $3.67 million for the first  quarter of 2013.  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 3.04% for the quarter ended March 31, 2014 from 3.03% for the quarter ended March 31, 2013.  The Company’s net interest spread, defined as the difference between the yield on earning assets and the cost of deposits and borrowings, remained the same at 2.94% for both the quarters ended March 31, 2014 and 2013. The Company’s cost of deposits and borrowings decreased to 0.32% for the first quarter ended March 31, 2014 from 0.33% for the first quarter ended March 31, 2013.

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.

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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 March 31, 2014 was $2.779 million or 1.00% of outstanding loans compared to $2.603 million or 1.09% of outstanding loans as of March 31, 2013.  The Company charged off three loans in the first quarter of 2014 totaling $53 thousand compared to two loans totaling $24 thousand in the first quarter of 2013.  During the first quarter of 2014, the Company had  six recoveries totaling $10 thousand compared to eight recoveries totaling $3 thousand for the first quarter of 2013. The Company believes the allowance for loan losses is appropriate.

Non-interest Income and Noninterest Expense

Total non-interest income (which is derived mainly from  service and overdraft charges) for the three months ended March 31, 2014 was $512 thousand compared to $1.04 million for the same period in the prior year. The decrease was mainly due to a decrease in gain on loans sold in the amount of $532 thousand.

Total non-interest expense for the three months ended March 31, 2014 was $3.36 million compared to $2.99 million for the same period in the prior year.  The ratio of annualized operating expenses to average assets was 3.30% for the first quarter of 2014 compared to 3.09% for the first quarter of 2013.

Salaries and employee benefits comprised approximately 59% of total non-interest expense for the three months ended March 31, 2014 and 58% of total non-interest expense for the same period in the prior year.  Other major categories included occupancy expenses, which comprised approximately 10% of non-interest expense for the three months ended March 31, 2014 compared to 9% for the three months ended March 31, 2013; advertising and promotions expenses, which comprised approximately 3% of total non-interest expense for the three months ended March 31, 2014 compared to 6% for the same period ending March 31, 2013; and professional fees, which comprised approximately  2% of total non-interest expense for the three months ended March 31, 2014 and 4% for the three months ended March 31, 2013.

Income Taxes

The effective income tax rate for the three months ended March 31, 2014 and 2013 was (766.7%) and 23.5%, respectively.  The Company realized a tax benefit in the first quarter of 2014 as the core earnings were lower in relation to tax exempt income thereby creating a tax benefit in 2014. 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 value of investments in available-for-sale securities as of March 31, 2014 was $86.69 million, which is 1.65% below amortized cost, compared to $87.45 million, which was 2.79% below amortized cost as of December 31, 2013.  The Company has the ability to hold debt securities until maturity, or for the foreseeable future if classified as available-for-sale.

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 March 31, 2014, 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 debt 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.

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Securities may be pledged to meet regulatory requirements imposed as a condition to receipt of deposits of public funds and repurchase agreements. At March 31, 2014, the Company had 40 securities with a carrying value totaling $16.82 million pledged for such purposes.  At December 31, 2013, the Company had 37 securities with a carrying value totaling $15.42 million pledged for such purposes.

As of March 31, 2014 and December 31, 2013, the Company’s investment portfolio consisted of  U.S. government and agency securities, municipal securities, corporate bonds and mortgage-backed 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 first quarter of 2014 was comprised of approximately 72% mortgage and consumer loans and 28% commercial loans.  The Company does not have any concentrations in its loan portfolio by industry or group of industries.  However, as of March 31, 2014 and December 31, 2013, approximately 84% and 74%, of the Company’s loans were secured by residential real property located in Connecticut.

There were approximately $137.6 million of residential mortgage loans as of March 31, 2014, which represented a 0.07% increase from December 31, 2013. The Company sold twenty seven (27) loans during the three months ended March 31, 2014 with an aggregate principal balance of $5.05 million, which resulted in an aggregate gain on sales of these loans of $30 thousand.  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  March 31, 2014, the Company had total consumer loan balances of approximately $10.02 million, representing a 6% decrease from the consumer loan balances at December 31, 2013.  As of March 31, 2014, the Company had approximately $9.10 million in consumer auto loans purchased from BCI Financial Corp. (“BCI”) on its books compared to approximately $10.22 million in auto loans purchased from BCI on its books as of December 31, 2013.  The Company has an agreement with BCI pursuant to which the Company purchases auto loans from BCI.  As part of the agreement, BCI services the loans for the Company.

The March 31, 2014 balance for municipal and commercial real estate loans, including construction loans, was $83.19 million, a 0.4% decrease from the commercial loan balance at December 31, 2013.  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 March 31, 2014, the Company’s lending limits were $4.58 million and $7.63 million, respectively.  As of December 31, 2013, these lending limits were $4.49 million and $7.48 million, respectively.  The Company sells participations in its loans when necessary to stay within lending limits.

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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  14 non-accrual loans at March 31, 2014 with an aggregate balance of $2.33 million compared to 15 non-accrual loans at December 31, 2013 with an aggregate balance of $2.85 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 March 31, 2014 carried on the books at $155 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. There were no TDRs entered into in the last twelve months that subsequently defaulted.

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.

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 criticized and classified loans with an aggregate outstanding balance of $10.24 million as of March 31, 2014 and December 31, 2013.  The Company had no exposure to sub-prime loans in its loan portfolio as of March 31, 2014 and December 31, 2013.  The Company’s overall asset quality and allowance for loan losses of 1.00% of loans as of March 31, 2014 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 March 31, 2014, the Company had a deposit mix of 40% checking, 41% savings and 19% certificates of deposit.  The Company’s net interest income is enhanced by its percentage of non-interest-bearing deposits.  As of December 31, 2013, the deposit mix was 43% checking, 37.5%savings, and 19.5% certificates of deposit.  At March 31, 2014, 25.1% of the total deposits of $372 million were non-interest-bearing compared to 32% of the Company’s total deposits of $359 million that were non-interest-bearing at December 31, 2013.  As of March 31, 2014 and December 31, 2013, the Company had $63.3 million and $54.6 million, respectively, in deposits from public sources.

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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 $771 thousand as of March 31, 2014 compared to $2.01 million as of December 31, 2013.

Borrowings

As of March 31, 2014, the Company had no advances from the Federal Home Loan Bank of Boston (FHLBB) on its balance sheet compared to $30 million in borrowings outstanding as of December 31, 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 March 31, 2014, the Company had $771 thousand of deposits in the CDARS network compared to $2.01 million of deposits in the CDARS network as of December 31, 2013.

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 March 31, 2014, the Company held $16.95 million in cash and cash equivalents, net of required FRB reserves of $6.133 million, and $69.87 million in available-for-sale securities, net of pledged securities of $16.82 million, for total liquid assets of $86.82 million.  At March 31, 2014, the Company anticipated short-term liability obligations of $48.57 million for a basic surplus of $38.25 million, representing 9.5%  of total assets.  As of December 31, 2013, the Company held $32.2 million in cash and cash equivalents, net of required FRB reserves of $6.4 million, and $72.0 million in available-for-sale securities, net of pledged securities of $15.4 million, for total liquid assets of $104.2 million.  At December 31, 2013, the Company’s anticipated short term liability obligations were $75.8 million for a basic surplus of $28.4 million, which represented 6.73% 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.

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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.

As of March 31, 2014 and December 31, 2013, 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% in addition to the amount necessary to meet the minimum revised 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.

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 March 31, 2014, the Company had in place mandatory commitments to sell approximately $4.11 million of loans secured by 1-to-4 family residential properties to the Federal Home Loan Mortgage Corporation (Freddie Mac). As of December 31, 2013 the Company had in place mandatory commitments to sell approximately $4.4 million of loans secured by 1-to-4 family residential properties to Freddie Mac.

Item 3.  Quantitative and Qualitative Disclosures about Market Risk

Not required.

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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 March 31, 2014.  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

March 31, 2014 that has materially affected, or is reasonably likely to materially affect, the Company’s internal controls over financial reporting.

PART II - OTHER INFORMATION

Item 1.  Legal Proceedings

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

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

Item 1A.  Risk Factors

Not required.

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

None.

Item 3.  Defaults upon Senior Securities

None.

Item 4.  Mine Safety Disclosures

Not applicable.

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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 (sec File No. 000-51832) 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 Current Report on Form 8-K filed on   August 12, 2011)
3(ii)	Amended and Restated Bylaws (incorporated by reference to Exhibit 3.1 of the Company's Form 8-K filed on March 22, 2012)
4.1	Specimen Common Stock Certificate (incorporated by reference to Exhibit 4 of the Company’s Form 10-QSB (SEC File No. 000-51832) filed on May 15, 2006)
10.1	Change in Control Severance Agreement, dated as of March 11, 2014, by and between The Simsbury Bank & Trust Company, Inc. and Richard J. Sudol (incorporated by reference to Exhibit 10.1 of the Company’s Form 8-K filed on March 12, 2014)
10.2	Supplemental Executive Retirement Agreement, adopted as of March 11, 2014, by and between The Simsbury Bank & Trust Company, Inc. and Richard J. Sudol (incorporated by reference to Exhibit 10.2 of the Company’s Form 8-K filed on March 12, 2014)
10.3	Change in Control Severance Agreement, dated as of March 12, 2014, by and between The Simsbury Bank & Trust Company, Inc. and David H. MacKenzie
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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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: May 14, 2014	By:	/s/ Martin J. Geitz
		Martin J. Geitz
		Chief Executive Officer
Date: May 14, 2014	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 (sec File No. 000-51832) 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 Current Report on Form 8-K filed on   August 12, 2011)
3(ii)	Amended and Restated Bylaws (incorporated by reference to Exhibit 3.1 of the Company's Form 8-K filed on March 22, 2012)
4.1	Specimen Common Stock Certificate (incorporated by reference to Exhibit 4 of the Company’s Form 10-QSB (SEC File No. 000-51832) filed on May 15, 2006)
10.1	Change in Control Severance Agreement, dated as of March 11, 2014, by and between The Simsbury Bank & Trust Company, Inc. and Richard J. Sudol (incorporated by reference to Exhibit 10.1 of the Company’s Form 8-K filed on March 12, 2014)
10.2	Supplemental Executive Retirement Agreement, adopted as of March 11, 2014, by and between The Simsbury Bank & Trust Company, Inc. and Richard J. Sudol (incorporated by reference to Exhibit 10.2 of the Company’s Form 8-K filed on March 12, 2014)
10.3	Change in Control Severance Agreement, dated as of March 12, 2014, by and between The Simsbury Bank & Trust Company, Inc. and David H. MacKenzie
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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