SBT Bancorp, Inc. - FORM 10-Q - November 13, 2015

Attached files

file	filename
EX-32.2 - EXHIBIT 32.2 - SBT Bancorp, Inc.	ex32-2.htm
EX-31.1 - EXHIBIT 31.1 - SBT Bancorp, Inc.	ex31-1.htm
EX-32.1 - EXHIBIT 32.1 - SBT Bancorp, Inc.	ex32-1.htm
EX-31.2 - EXHIBIT 31.2 - SBT Bancorp, Inc.	ex31-2.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

(Mark One)

[X]	QUARTERLY Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended September 30, 2015

[ ]	Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act OF 1934

For the transition period from _______ to __________

Commission File Number: 000-51832

SBT Bancorp, Inc.

(Exact Name of Registrant as Specified in Its Charter)

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

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

(860) 408-5493

(Registrant's Telephone Number, Including Area Code)

(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 October 31, 2015, the registrant had 908,246 shares of its Common Stock, no par value per share, outstanding.

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table of contents

SBT Bancorp, Inc. and Subsidiary

		Page No.

	PART I - FINANCIAL INFORMATION

Item 1.	Financial Statements

	Condensed Consolidated Balance Sheets as of September 30, 2015 (unaudited) and December 31, 2014	4

	Condensed Consolidated Statements of Income for the Three and Nine Months Ended September 30, 2015 and 2014 (unaudited)	5

	Condensed Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended September 30, 2015 and 2014 (unaudited)	6

	Condensed Consolidated Statements of Changes in Stockholders' Equity for the Nine Months Ended September 30, 2015 and 2014 (unaudited)	7

	Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2015 and 2014 (unaudited)	8

	Notes to Condensed Consolidated Financial Statements – (unaudited)	9-27

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	28-39

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	40

Item 4.	Controls and Procedures	40

	PART II - OTHER INFORMATION

Item 1.	Legal Proceedings	41

Item 1A.	Risk Factors	41

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	41

Item 3.	Defaults Upon Senior Securities	41

Item 4.	Mine Safety Disclosures	41

Item 5.	Other Information	41

Item 6.	Exhibits	42

SIGNATURES		43

EXHIBIT INDEX		44

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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)

	9/30/15			12/31/14
	(Unaudited)
ASSETS

Cash and due from banks	$	7,313		$	10,118
Interest-bearing deposits with the Federal Reserve Bank and Federal Home Loan Bank		5,919			9,696
Money market mutual funds		580			1
Federal funds sold		346			5
Cash and cash equivalents		14,158			19,820
		-
Investments in available-for-sale securities (at fair value)		71,816			83,805
Federal Home Loan Bank stock, at cost		3,074			1,801

Loans held-for-sale		6,892			5,374

Loans		307,323			286,142
Less allowance for loan losses		2,897			2,761
Loans, net		304,426			283,381

Premises and equipment, net		1,390			1,460
Accrued interest receivable		1,045			1,095
Other real estate owned		-			105
Bank owned life insurance		7,338			7,184
Other assets		5,021			4,815
Total assets	$	415,160		$	408,840

LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Demand deposits	$	115,105		$	117,261
Savings and NOW deposits		201,170			177,158
Time deposits		58,531			61,646
Total deposits		374,806			356,065
Securities sold under agreements to repurchase		2,722			3,921
Federal Home Loan Bank advances		5,500			17,500
Other liabilities		1,717			1,882
Total liabilities		384,745			379,368

Stockholders' equity:
Preferred stock, senior non-cumulative perpetual, Series C, no par; 9,000 shares issued and outstanding at September 30, 2015 and December 31, 2014; liquidation value of $1,000 per share		8,997			8,988
Common stock, no par value; authorized 2,000,000 shares; issued and outstanding 908,660 shares and 908,246 shares, respectively, at September 30, 2015, and 898,105 shares and 897,691 shares, respectively, at December 31, 2014		10,333			10,127
Retained earnings		11,134			10,549
Treasury stock, 414 shares		(7	)		(7	)
Unearned compensation-restricted stock awards		(254	)		(207	)
Accumulated other comprehensive income		212			22
Total stockholders' equity		30,415			29,472
Total liabilities and stockholders' equity	$	415,160		$	408,840

See accompanying notes to the unaudited condensed consolidated financial statements.

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SBT BANCORP, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

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

	For the Three Months Ended					For the Nine Months Ended
	9/30/2015		9/30/2014			9/30/2015		9/30/2014
Interest and dividend income:
Interest and fees on loans	$	2,748	$	2,590		$	8,057	$	7,733
Investment securities		393		438			1,235		1,373
Federal funds sold and overnight deposits		14		21			26		38
Total interest and dividend income		3,155		3,049			9,318		9,144
Interest expense:
Deposits		192		213			566		647
Federal Home Loan Bank advances		8		2			35		9
Repurchase agreements		1		1			3		3
Total interest expense		201		216			604		659

Net interest and dividend income		2,954		2,833			8,714		8,485

Provision for loan losses		65		25			145		55

Net interest and dividend income after provision for loan losses		2,889		2,808			8,569		8,430
Noninterest income:
Service charges on deposit accounts		98		119			303		353
Gain (loss) on sales of available-for-sale securities, net of writedowns		26		(1	)		93		96
Other service charges and fees		208		173			561		560
Increase in cash surrender value of life insurance policies		51		55			154		151
Mortgage banking activities		422		254			866		408
Investment services fees and commissions		48		43			159		172
Other income		68		33			141		64
Total noninterest income		921		676			2,277		1,804
Noninterest expense:
Salaries and employee benefits		1,779		1,564			5,062		5,140
Occupancy expense		340		363			1,046		1,030
Equipment expense		104		112			306		340
Advertising and promotions		109		177			365		461
Forms and supplies		48		45			125		139
Professional fees		196		167			448		377
Directors’ fees		66		65			180		196
Correspondent charges		67		42			187		173
FDIC assessment		78		80			234		285
Data processing		198		170			531		490
Other expenses		397		388			1,132		1,218
Total noninterest expense		3,382		3,173			9,616		9,849
Income before income taxes		428		311			1,230		385
Income tax provision (benefit)		75		53			185		(66	)
Net income	$	353	$	258		$	1,045	$	451
Net income available to common stockholders	$	327	$	233		$	959	$	375
Weighted average shares outstanding, basic		890,190		883,998			889,473		882,158
Earnings per common share, basic	$	0.37	$	0.26		$	1.08	$	0.42
Weighted average shares outstanding, assuming dilution		894,380		888,335			892,004		886,694
Earnings per common share, assuming dilution	$	0.37	$	0.26		$	1.08	$	0.42

Dividends per common share	$	0.14	$	0.14		$	0.42	$	0.42

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						Nine Months Ended
	September 30,						September 30,
	2015			2014			2015			2014

Net income	$	353		$	258		$	1,045		$	451
Other comprehensive income (loss), net of tax:
Net change in unrealized holding gains/ losses on securities available for sale		672			(250	)		381			1,977
Reclassification adjustment for realized gains in net income		(26	)		-			(93	)		(96	)
Other comprehensive income (loss), before tax		646			(250	)		288			1,881
Income tax (expense) benefit		(220	)		85			(98	)		(640	)
Other comprehensive income (loss), net of tax		426			(165	)		190			1,241
Comprehensive income	$	779		$	93		$	1,235		$	1,692

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

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2015 AND 2014

(Unaudited)

(Dollars in thousands)

												Unearned			Accumulated
	Preferred											Compensation-			Other
	Stock		Common			Retained			Treasury			Restricted			Comprehensive
	Series C		Stock			Earnings			Stock			Stock Awards			(Loss) Income			Total
Balance, December 31, 2013	$	8,976	$	10,136		$	10,347		$	(7	)	$	(401	)	$	(1,655	)	$	27,396
Net income		-		-			451			-			-			-			451
Other comprehensive income, net of tax		-		-			-			-			-			1,241			1,241
Preferred stock dividend-SBLF		-		-			(67	)		-			-			-			(67	)
Preferred stock amortization (accretion)		9		-			(9	)		-			-			-			-
Stock based compensation		-		-			-			-			117			-			117
Dividends declared common stock		-		-			(377	)		-			-			-			(377	)
Forfeited restricted stock awards		-		(90	)		-			-			90			-			-
Restricted stock awards		-		41			-			-			(41	)		-			-
Common stock issued		-		29			-			-			-			-			29
Balance, September 30, 2014	$	8,985	$	10,116		$	10,345		$	(7	)	$	(235	)	$	(414	)	$	28,790

Balance, December 31, 2014	$	8,988	$	10,127		$	10,549		$	(7	)	$	(207	)	$	22		$	29,472
Net income		-		-			1,045			-			-			-			1,045
Other comprehensive income, net of tax		-		-			-			-			-			190			190
Preferred stock dividend-SBLF		-		-			(77	)		-			-			-			(77	)
Preferred stock amortization (accretion)		9		-			(9	)		-			-			-			-
Stock based compensation		-		-			-			-			130			-			130
Dividends declared common stock		-		-			(374	)		-			-			-			(374	)
Restricted stock awards		-		177			-			-			(177	)		-			-
Common stock issued		-		29			-			-			-			-			29
Balance, September 30, 2015	$	8,997	$	10,333		$	11,134		$	(7	)	$	(254	)	$	212		$	30,415

See accompanying notes to the unaudited condensed consolidated financial statements.

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SBT BANCORP, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(Dollars in thousands)

	For the Nine Months Ended
	9/30/2015			9/30/2014
Cash flows from operating activities:
Net income	$	1,045		$	451
Adjustments to reconcile net income to net cash used in operating activities:
Amortization of securities, net		307			301
Writedown of available-for-sale securities		6			7
Gain on sales of available-for-sale securities		(99	)		(103	)
Change in deferred origination costs, net		(73	)		(79	)
Provision for loan losses		145			55
Loans originated for sale		(63,269	)		(28,920	)
Proceeds from sales of loans		62,625			24,979
Gains on sales of loans		(874	)		(338	)
Writedown on other real estate owned		-			25
(Gain) loss on sale of other real estate owned		(9	)		1
Depreciation and amortization		218			294
Accretion on impairment of operating lease		(26	)		(33	)
Increase in other assets		(352	)		(668	)
Decrease in interest receivable		50			54
Decrease (increase) in taxes receivable		48			(67	)
Increase in cash surrender value of bank owned life insurance		(154	)		(151	)
Stock-based compensation		130			117
(Decrease) increase in other liabilities		(208	)		14
Increase in interest payable		69			49
Net cash used in operating activities		(421	)		(4,012	)

Cash flows from investing activities:
(Purchases) redemptions of Federal Home Loan Bank stock		(1,273	)		936
Purchases of available-for-sale securities		(319	)		(3,011	)
Proceeds from maturities of available-for-sale securities		10,767			5,946
Proceeds from sales of available-for-sale securities		1,614			1,139
Loan originations and principal collections, net		(12,765	)		8,283
Loans purchased		(8,361	)		(11,925	)
Recoveries of loans previously charged off		9			14
Proceeds from sale of other real estate owned		114			539
Premium paid on bank owned life insurance		-			(250	)
Capital expenditures		(148	)		(255	)
Net cash (used in) provided by investing activities		(10,362	)		1,416

Cash flows from financing activities:
Net increase in demand deposits, NOW and savings accounts		21,856			23,013
Decrease in time deposits		(3,115	)		(5,377	)
Net decrease in securities sold under agreements to repurchase		(1,199	)		(545	)
Paydown of Federal Home Loan Bank advances		(12,000	)		(30,000	)
Proceeds from issuance of common stock		29			29
Dividends paid - preferred stock		(77	)		(67	)
Dividends paid - common stock		(373	)		(374	)
Net cash provided by (used in) financing activities		5,121			(13,321	)

Net decrease in cash and cash equivalents		(5,662	)		(15,917	)
Cash and cash equivalents at beginning of period		19,820			38,590
Cash and cash equivalents at end of period	$	14,158		$	22,673

Supplemental disclosures:
Interest paid	$	535		$	610
Income taxes paid		137			1
Loan transferred to other real estate owned		-			695

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)

NOTE 1 – BASIS OF PRESENTATION

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial statements and the instructions to Form 10-Q and, accordingly, do not include all of the information and footnotes required by GAAP 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 & 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 dates of the balance sheets and revenues and expenses for the periods presented. 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, 2015.

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, 2014.

NOTE 2 – STOCK-BASED COMPENSATION

At September 30, 2015, the Company maintained a stock-based employee compensation plan. The Company recognizes the cost resulting from all share-based payment transactions in the condensed consolidated financial statements and establishes fair value as the measurement objective in accounting for share-based payment arrangements. During the nine months ended September 30, 2015, the Company recognized $130 thousand in stock-based employee compensation expense. During the nine months ended September 30, 2014, the Company recognized $117 thousand in stock-based employee compensation expense.

NOTE 3 – RECENT ACCOUNTING PRONOUNCEMENTS

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (ASU) 2014-09, “Revenue from Contracts with Customers (Topic 606).” The objective of this ASU is to clarify principles for recognizing revenue and to develop a common revenue standard for GAAP and International Financial Reporting Standards. The guidance in this ASU affects any entity that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of nonfinancial assets unless those contracts are within the scope of other standards. The core principal of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The amendments in this update are effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. However, in July 2015, the FASB voted to approve deferring the effective date by one year (i.e., interim and annual reporting periods beginning after December 15, 2017). Early adoption is permitted, but not before the original effective date (i.e., interim and annual reporting periods beginning after December 15, 2016). The Company is currently reviewing this ASU to determine if it will have an impact on its consolidated financial statements.

In June 2014, the FASB issued ASU 2014-12, “Compensation - Stock Compensation (Topic 718): Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could be Achieved after the Requisite Service Period.” The amendments in this ASU require that a performance target that affects vesting and that could be achieved after the requisite service period be treated as a performance condition. A reporting entity should apply existing guidance in Topic 718 as it relates to awards with performance conditions that affect vesting to account for such awards. This ASU is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2015. Earlier adoption is permitted. ASU 2014-12 may be adopted either (a) prospectively to all awards granted or modified after the effective date or (b) retrospectively to all awards with performance targets that are outstanding as of the beginning of the earliest annual period presented in the financial statements, and to all new or modified awards thereafter. If retrospective transition is adopted, the cumulative effect of applying this update as of the beginning of the earliest annual period presented in the financial statements should be recognized as an adjustment to the opening retained earnings balance at that date. 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 August 2014, the FASB issued ASU 2014-14, “Receivables - Troubled Debt Restructurings by Creditors (Subtopic 310-40): Classification of Certain Government - Guaranteed Mortgage Loans upon Foreclosure.” The amendments in this ASU require that a mortgage loan be derecognized and that a separate other receivable be recognized upon foreclosure if the following conditions are met:

the loan has a government guarantee that is not separable from the loan before foreclosure;

at the time of foreclosure, the creditor has the intent to convey the real estate property to the guarantor and make a claim on the guarantee, and the creditor has the ability to recover under that claim; and

at the time of foreclosure, any amount of the claim that is determined on the basis of the fair value of the real estate is fixed.

Upon foreclosure, the separate other receivable should be measured based on the amount of the loan balance (principal and interest) expected to be recovered from the guarantor. The amendments in this ASU are effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2014. The adoption of this ASU did not have an impact on the Company’s consolidated financial statements.

In February 2015, the FASB issued ASU 2015-02, “Consolidation (Topic 810): Amendments to the Consolidation Analysis.” The amendments in this ASU affect reporting entities that are required to evaluate whether they should consolidate certain legal entities. Specifically, the amendments: (1) modify the evaluation of whether limited partnerships and similar legal entities are variable interest entities (“VIEs”) or voting interest entities; (2) eliminate the presumption that a general partner should consolidate a limited partnership; (3) affect the consolidation analysis of reporting entities that are involved with VIEs, particularly those that have fee arrangements and related party relationships; and (4) provide a scope exception from consolidation guidance for reporting entities with interests in legal entities that are required to comply with or operate in accordance with requirements that are similar to those in Rule 2a-7 of the Investment Company Act of 1940 for registered money market funds. ASU 2015-02 is effective for interim and annual reporting periods beginning after December 15, 2015. The Company anticipates that the adoption of this ASU will not have a material impact on its consolidated financial statements.

In April 2015, the FASB issued ASU 2015-03, “Interest - Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs.” The amendments in this ASU require that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The recognition and measurement guidance for debt issuance costs are not affected by the amendments in this ASU. The standard is effective for interim and annual reporting periods beginning after December 15, 2015, with early adoption permitted. The guidance should be applied on a retrospective basis. The Company anticipates that the adoption of this ASU will not have a material impact on its consolidated financial statements.

In April 2015, the FASB issued ASU 2015-05, “Intangibles – Goodwill and Other - Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement.” This ASU provides guidance to customers about whether a cloud computing arrangement includes a software license. If a cloud computing arrangement includes a software license, the customer should account for the software license element of the arrangement consistent with the acquisition of other software licenses. If a cloud computing arrangement does not include a software license, the customer should account for the arrangement as a service contract. The new guidance does not change the accounting for a customer’s accounting for service contracts. ASU 2015-05 is effective for interim and annual reporting periods beginning after December 15, 2015. The Company anticipates that the adoption of this ASU will not have a material impact on its consolidated financial statements.

In July 2015, the FASB issued ASU 2015-07, "Disclosures for Investments in Certain Entities That Calculate Net Asset Value per Share (or its Equivalent) (a consensus of the FASB Emerging Issues Task Force)." This update removes the requirement to categorize within the fair value hierarchy all investments for which fair value is measured using the net asset value per share practical expedient. The Update also removes the requirement to make certain disclosures for all investments that are eligible to be measured at fair value using the net asset value per share practical expedient. Rather, those disclosures are limited to investments for which the entity has elected to measure the fair value using that practical expedient An entity should apply the Update on a retrospective basis. The Company intends to adopt the Update during the first quarter of 2016. Adoption is not anticipated to have a material impact on the Company's financial statements.

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NOTE 4 – FAIR VALUE MEASUREMENTS

In accordance with Accounting Standards Codification (“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 financial instrument’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. The Company did not have any significant transfers of assets or liabilities to or from Levels 1 and 2 of the fair value hierarchy during the nine months ended September 30, 2015.

A description of the valuation methodologies used for instruments measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy, is set forth below. These valuation methodologies were applied consistently to all of the Company’s financial assets and financial liabilities carried at fair value for September 30, 2015 and December 31, 2014.

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.

Level 3 is for positions that are not traded in active markets or are subject to transfer restrictions. Valuations are adjusted to reflect illiquidity and/or non-transferability, and such adjustments are generally based on available market evidence. In the absence of such evidence, management’s best estimate is used. Subsequent to inception, management only changes Level 3 inputs and assumptions when corroborated by evidence such as (1) transactions in similar instruments; (2) completed or pending third-party transactions in the underlying investment or comparable entities; (3) subsequent rounds of financing, recapitalization and other transactions across the capital structure; (4) offerings in the equity or debt markets, and (5) changes in financial ratios or cash flows.

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.

- 11 -

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

The following summarizes assets measured at fair value at September 30, 2015 and December 31, 2014.

Assets Measured at Fair Value on a Recurring Basis

			Fair Value Measurements at Reporting Date Using:
			Quoted Prices		Significant
			in Active		Other		Significant
			Markets for		Observable		Unobservable
			Identical Assets		Inputs		Inputs
	Total		Level 1		Level 2		Level 3
	(In Thousands)
September 30, 2015:
Debt securities issued by U.S. government corporations and agencies	$	13,751	$	-	$	13,751	$	-
Obligations of states and municipalities		14,858		-		14,858		-
Mortgage-backed securities		42,816		-		42,816		-
SBA loan pool		391		-		391		-
	$	71,816	$	-	$	71,816	$	-

December 31, 2014:
Debt securities issued by U.S. government corporations and agencies	$	18,064	$	-	$	18,064	$	-
Obligations of states and municipalities		16,599		-		16,599		-
Mortgage-backed securities		48,668		-		48,668		-
SBA loan pool		474		-		474		-
	$	83,805	$	-	$	83,805	$	-

- 12 -

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
	(In Thousands)
September 30, 2015:
Impaired loans	$	382	$	-	$	-	$	382
	$	382	$	-	$	-	$	382

			Fair Value Measurements at Reporting Date Using:
			Quoted Prices		Significant
			in Active		Other		Significant
			Markets for		Observable		Unobservable
			Identical Assets		Inputs		Inputs
	Total		Level 1		Level 2		Level 3
	(In Thousands)
December 31, 2014:
Impaired loans	$	433	$	-	$	-	$	433
Other real estate owned		105		-		-		105
	$	538	$	-	$	-	$	538

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The estimated fair values of the Company’s financial instruments, all of which are held or issued for purposes other than trading, were as follows as of September 30, 2015 and December 31, 2014:

	September 30, 2015
	Carrying		Fair Value
	Amount		Level 1		Level 2		Level 3		Total
	(In Thousands)
Financial assets:
Cash and cash equivalents	$	14,158	$	14,158	$	-	$	-	$	14,158
Available-for-sale securities		71,816		-		71,816		-		71,816
Federal Home Loan Bank stock		3,074		3,074		-		-		3,074
Loans held-for-sale		6,892		-		-		7,006		7,006
Loans, net		304,426		-		-		305,781		305,781
Bank-owned life insurance		7,338		-		7,338		-		7,338
Accrued interest receivable		1,045		1,045		-		-		1,045

Financial liabilities:
Deposits		374,806		-		367,421		-		367,421
Securities sold under agreements to repurchase		2,722		-		2,722		-		2,722
Federal Home Loan Bank advances		5,500		-		5,500		-		5,500

	December 31, 2014
	Carrying		Fair Value
	Amount		Level 1		Level 2		Level 3		Total
	(In Thousands)
Financial assets:
Cash and cash equivalents	$	19,820	$	19,820	$	-	$	-	$	19,820
Available-for-sale securities		83,805		-		83,805		-		83,805
Federal Home Loan Bank stock		1,801		1,801		-		-		1,801
Loans held-for-sale		5,374		-		-		5,499		5,499
Loans, net		283,381		-		-		285,439		285,439
Bank-owned life insurance		7,184		-		7,184		-		7,184
Accrued interest receivable		1,095		1,095		-		-		1,095

Financial liabilities:
Deposits		356,065		-		356,353		-		356,353
Securities sold under agreements to repurchase		3,921		-		3,921		-		3,921
Federal Home Loan Bank advances		17,500		-		17,500		-		17,500

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 shared in the earnings of the entity.

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The following information was used in the computation of EPS on both a basic and diluted basis for the three and nine months ended September 30, 2015 and 2014:

	For the three months ended
	9/30/15			9/30/14
	(In Thousands, Except Per Share Data)
Basic earnings per share computation:
Net income	$	353		$	258
Preferred stock net accretion		(3	)		(3	)
Cumulative preferred stock dividends		(23	)		(22	)
Net income available to common stockholders	$	327		$	233

Weighted average shares outstanding, basic		890,190			883,998

Basic earnings per share	$	0.37		$	0.26

Diluted earnings per share computation:
Net income	$	353		$	258
Preferred stock net accretion		(3	)		(3	)
Cumulative preferred stock dividends		(23	)		(22	)
Net income available to common stockholders	$	327		$	233

Weighted average shares outstanding, before dilution		890,190			883,998
Dilutive potential shares		4,190			4,337
Weighted average shares outstanding, assuming dilution		894,380			888,335

Diluted earnings per share	$	0.37		$	0.26

	For the nine months ended
	9/30/15			9/30/14
	(In Thousands, Except Per Share Data)
Basic earnings per share computation:
Net income	$	1,045		$	451
Preferred stock net accretion		(9	)		(9	)
Cumulative preferred stock dividends		(77	)		(67	)
Net income available to common shareholders	$	959		$	375

Weighted average shares outstanding, basic		889,473			882,158

Basic earnings per share	$	1.08		$	0.42

Diluted earnings per share computation:
Net income	$	1,045		$	451
Preferred stock net accretion		(9	)		(9	)
Cumulative preferred stock dividends		(77	)		(67	)
Net income available to common shareholders	$	959		$	375

Weighted average shares outstanding, before dilution		889,473			882,158
Dilutive potential shares		2,531			4,536
Weighted average shares outstanding, assuming dilution		892,004			886,694

Diluted earnings per share	$	1.08		$	0.42

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NOTE 6 – INVESTMENT SECURITIES

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

	Less than 12 Months				12 Months or Longer				Total
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
	Value		Losses		Value		Losses		Value		Losses
	(In Thousands)
September 30, 2015:
Debt securities issued by U.S. government corporations and agencies	$	-	$	-	$	2,497	$	2	$	2,497	$	2
Obligations of states and municipalities		697		13		1,988		41		2,685		54
Mortgage-backed securities		6,358		20		24,803		270		31,161		290
Total temporarily impaired securities		7,055		33		29,288		313		36,343		346

Other-than-temporarily impaired securities
Mortgage-backed securities		17		-		228		26		245		26
Total temporarily impaired and other-than-temporarily impaired securities	$	7,072	$	33	$	29,516	$	339	$	36,588	$	372


December 31, 2014:
Debt securities issued by U.S. Government corporations and agencies	$	4,486	$	12	$	13,077	$	127	$	17,563	$	139
Obligations of states and municipalities		526		12		1,772		40		2,298		52
Mortgage-backed securities		1,422		6		36,550		593		37,972		599
Total temporarily impaired securities		6,434		30		51,399		760		57,833		790

Other-than-temporarily impaired securities:
Mortgage-backed securities		-		-		274		30		274		30
Total temporarily impaired and other-than-temporarily impaired securities	$	6,434	$	30	$	51,673	$	790	$	58,107	$	820

The investments in the Company’s investment portfolio that were temporarily impaired as of September 30, 2015 consisted of debt issued by states and municipalities and U.S. government agencies and sponsored enterprises. The Company’s management anticipates that the fair value of securities that are currently impaired will recover to cost basis. As the Company has the ability and intent to hold securities for the foreseeable future, no declines are deemed to be other than temporary, unless otherwise noted above.

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The following tables summarize the amounts and distribution of the Company’s investment securities held as of September 30, 2015 and December 31, 2014:

	INVESTMENT PORTFOLIO
	(In Thousands)

	September 30, 2015
			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
	Cost		Gains		Losses		Value		Yield

AVAILABLE-FOR-SALE SECURITIES
U.S. government and agency securities
Due after one to five years	$	13,203	$	42	$	2		13,243		1.28	%
Due after five to ten years		500		8		-		508		2.00	%
Total U.S. government and agency securities		13,703		50		2		13,751		1.31	%
State and municipal securities
Due after one to five years		376		5		-		381		4.25	%
Due after five to ten years		5,261		180		23		5,418		3.72	%
Due after ten to fifteen years		6,297		256		25		6,528		4.13	%
Due beyond fifteen years		2,511		26		6		2,531		3.20	%
Total state and municipal securities		14,445		467		54		14,858		3.82	%
Mortgage-backed securities
Due after one to five years		518		10		-		528		3.19	%
Due after five to ten years		1,418		31		1		1,448		3.31	%
Due after ten to fifteen years		25,359		64		144		25,279		2.44	%
Due beyond fifteen years		15,690		42		171		15,561		3.06	%
Total mortgage-backed securities		42,985		147		316		42,816		2.70	%
SBA loan pool
Due after five to ten years		361		30		-		391		4.70	%
Total SBA loan pool		361		30		-		391		4.70	%

Total available-for-sale securities	$	71,494	$	694	$	372	$	71,816		2.67	%

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	INVESTMENT PORTFOLIO
	(In Thousands)

	December 31,2014
			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
	Cost		Gains		Losses		Value		Yield

AVAILABLE-FOR-SALE SECURITIES
U.S. government and agency securities
Due after one to five years	$	16,702	$	1	$	135	$	16,568		1.21	%
Due after five to ten years		1,500		-		4		1,496		1.83	%
Total U.S. government and agency securities		18,202		1		139		18,064		1.27	%
State and municipal securities
Due after one to five years		559		24		-		583		2.26	%
Due after five to ten years		4,835		184		31		4,988		3.22	%
Due after ten to fifteen years		8,065		445		21		8,489		3.23	%
Due beyond fifteen years		2,513		26		-		2,539		3.09	%
Total state and municipal securities		15,972		679		52		16,599		3.18	%
Mortgage-backed securities
Due within one year		-		-		-		-		-
Due after one to five years		588		14		-		602		2.97	%
Due after five to ten years		1,846		36		1		1,881		2.25	%
Due after ten to fifteen years		28,811		42		360		28,493		1.78	%
Due beyond fifteen years		17,912		48		268		17,692		2.38	%
Total mortgage-backed securities		49,157		140		629		48,668		2.03	%
SBA loan pool
Due after ten to fifteen years		440		34		-		474		4.96	%
Total SBA loan pool		440		34		-		474		4.96	%

Total available-for-sale securities	$	83,771	$	854	$	820	$	83,805		2.36	%

During the nine months ended September 30, 2015, there were proceeds of $1.6 million from sales of available-for-sale securities. Gross realized gains on these sales amounted to $99 thousand. The tax expense applicable to these gross realized gains amounted to $34 thousand.

During the nine months ended September 30, 2014, there were proceeds of $1.1 million from sales of available-for-sale securities. Gross realized gains on these sales amounted to $103 thousand. The tax expense applicable to these gross realized gains amounted to $35 thousand.

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NOTE 7 – LOAN INFORMATION

Loans consisted of the following as of September 30, 2015 and December 31, 2014:

	September 30, 2015			December 31, 2014
	(In Thousands)
Real estate - residential	$	137,518		$	132,553
Real estate - commercial		47,454			46,982
Real estate - construction and land development		17,919			13,234
Municipal		12,502			10,061
Home equity		47,017			46,403
Commercial and industrial		26,813			19,038
Consumer		16,732			16,576
		305,955			284,847
Allowance for loan losses		(2,897	)		(2,761	)
Deferred loan origination costs, net		1,368			1,295
Net loans	$	304,426		$	283,381

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 and land development, municipal, home equity, commercial and consumer. Management uses a rolling average of historical losses based on a time frame appropriate to capture relevant loss data for each loan segment. This historical loss factor is adjusted for the following qualitative factors: levels/trends in delinquencies; trends in volume and terms of loans; effects of changes in risk selection and underwriting standards and other changes in lending policies, procedures and practices; experience/ability/depth of lending management and staff; and national and local economic trends and conditions. There were no changes in the Company’s policies or methodology pertaining to the general component of the allowance for loan losses during the nine months ended September 30, 2015.

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 and home equity: The Company generally does not originate loans with a loan-to-value ratio greater than 80% without obtaining private mortgage insurance for any amounts over 80% and does not grant subprime loans. All loans in this segment are collateralized by owner-occupied residential real estate and repayment is dependent on the credit quality of the individual borrower. The overall health of the economy, including unemployment rates and housing prices, will have an effect on the credit quality in this segment.

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

- 19 -

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 made for the purpose of financing automobiles, various types of consumer goods and other personal purposes. Most of the Company’s consumer loans are secured by personal property purchased with the proceeds of such consumer loans.

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 are lower than the carrying value of that loan. Large groups of smaller balance homogeneous loans are collectively evaluated for impairment. Accordingly, the Company does not separately identify individual consumer and residential real estate loans for impairment disclosures, unless such loans are subject to a troubled debt restructuring agreement.

A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed.

The Company may periodically agree to modify the contractual terms of loans. When a loan is modified and a concession is made to a borrower experiencing financial difficulty, the modification is considered a troubled debt restructuring ("TDR"). All TDRs are initially classified as impaired.

Unallocated component:

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

The following tables present the allowance for loan losses by portfolio segment for the nine months ended September 30, 2015 and September 30, 2014:

	Real Estate:
							Construction and				Commercial
	Residential			Commercial			Land Development		Home Equity		& Industrial		Consumer			Unallocated		Total
	(In thousands)
September 30, 2015:
Allowance for loan losses:
Beginning balance	$	1,085		$	738		$	249	$	324	$	227	$	134		$	4	$	2,761
Charge-offs		-			-			-		-		-		(18	)		-		(18	)
Recoveries		-			-			-		-		-		9			-		9
(Benefit) provision		(15	)		(66	)		119		5		98		3			1		145
Ending balance	$	1,070		$	672		$	368	$	329	$	325	$	128		$	5	$	2,897

- 20 -

	Real Estate:
							Construction
							and Land					Commercial
	Residential			Commercial			Development		Home Equity			& Industrial		Consumer			Unallocated		Total
	(In thousands)
September 30, 2014:
Allowance for loan losses:
Beginning balance	$	1,189		$	748		$	211	$	303		$	239	$	102		$	-	$	2,792
Charge-offs		(98	)		-			-		-			-		(2	)		-		(100	)
Recoveries		11			-			-		-			3		-			-		14
(Benefit) provision		(114	)		(16	)		145		(26	)		3		45			18		55
Ending balance	$	988		$	732		$	356	$	277		$	245	$	145		$	18	$	2,761

The following tables set forth information regarding loans and the allowance for loan losses by portfolio segment as of September 30, 2015 and December 31, 2014:

	Real Estate:
					Construction
					and Land				Commercial
	Residential		Commercial		Development		Home Equity		& Industrial		Consumer		Unallocated		Total
	(In Thousands)
September 30, 2015:
Allowance for loan losses
Ending balance:
Individually evaluated for impairment	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	-
Ending balance:
Collectively evaluated for impairment		1,070		672		368		329		325		128		5		2,897
Total allowance for loan losses ending balance	$	1,070	$	672	$	368	$	329	$	325	$	128	$	5	$	2,897

Loans:
Ending balance:
Individually evaluated for impairment	$	-	$	2,315	$	-	$	-	$	382	$	-	$	-	$	2,697
Ending balance:
Collectively evaluated for impairment		137,518		53,711		17,919		47,017		30,361		16,732		-		303,258
Total loans ending balance	$	137,518	$	56,026	$	17,919	$	47,017	$	30,743	$	16,732	$	-	$	305,955

- 21 -

	Real Estate:
							Construction
							and Land				Commercial
	Residential			Commercial			Development		Home Equity		& Industrial			Consumer			Unallocated		Total
	(In thousands)
December 31, 2014
Allowance for loan losses:
Beginning balance	$	1,189		$	748		$	211	$	303	$	239		$	102		$	-	$	2,792
Charge-offs		(93	)		-			-		-		-			(8	)		-		(101	)
Recoveries		8			-			-		-		3			4			-		15
(Benefit) provision		(19	)		(10	)		38		21		(15	)		36			4		55
Ending balance	$	1,085		$	738		$	249	$	324	$	227		$	134		$	4	$	2,761

December 31, 2014:
Allowance for loan losses
Ending balance:
Individually evaluated for impairment	$	-		$	-		$	-	$	-	$	6		$	-		$	-	$	6
Ending balance:
Collectively evaluated for impairment		1,085			738			249		324		221			134			4		2,755
Total allowance for loan losses ending balance	$	1,085		$	738		$	249	$	324	$	227		$	134		$	4	$	2,761

Loans:
Ending balance:
Individually evaluated for impairment	$	170		$	860		$	-	$	3	$	439		$	-		$	-	$	1,472
Ending balance:
Collectively evaluated for impairment		132,383			54,724			13,234		46,400		20,058			16,576			-		283,375
Total loans ending balance	$	132,553		$	55,584		$	13,234	$	46,403	$	20,497		$	16,576		$	-	$	284,847

The following tables present the Company’s loans by risk rating as of September 30, 2015 and December 31, 2014:

	Real Estate
					Construction
					and Land				Commercial
	Residential		Commercial		Development		Home Equity		& Industrial		Consumer		Total
	(In Thousands)
September 30, 2015:
Grade:
Pass	$	-	$	50,159	$	17,919	$	-	$	27,041	$	-	$	95,119
Special mention		-		3,197		-		-		220		-		3,417
Substandard		729		2,670		-		234		3,482		-		7,115
Loans not formally rated		136,789		-		-		46,783		-		16,732		200,304
Total	$	137,518	$	56,026	$	17,919	$	47,017	$	30,743	$	16,732	$	305,955

December 31, 2014:
Grade:
Pass	$	-	$	50,208	$	11,529	$	-	$	18,380	$	-	$	80,117
Special mention		-		3,866		1,705		-		642		-		6,213
Substandard		474		1,510		-		166		1,475		-		3,625
Loans not formally rated		132,079		-		-		46,237		-		16,576		194,892
Total	$	132,553	$	55,584	$	13,234	$	46,403	$	20,497	$	16,576	$	284,847

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.

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

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

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

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

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

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

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 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 September 30, 2015, $200.3 million of the total residential, home equity and consumer loan portfolio of $201.3 million were not formally rated. As of December 31, 2014, $194.9 million of the total residential, home equity and consumer loan portfolio of $195.5 million were not formally rated. The performance of these loans is measured by delinquency status. The Bank underwrites first mortgage loans in accordance with FHLMC and FNMA guidelines. These guidelines provide for specific requirements with regard to documentation, loan to value and debt to income ratios. Guidelines for home equity loans and lines place a maximum loan to value of 80% on these loans and lines and the Bank requires full underwriting disclosure documentation for these loans. These underwriting factors have produced a loan portfolio with low delinquencies. Total non-accrual and delinquent loans as of September 30, 2015 were 1.50% of total loans outstanding compared to 1.08% of total loans outstanding on December 31, 2014. There were no loans past due 90 days or more and still accruing at September 30, 2015 and December 31, 2014, respectively. The Company’s allowance for loan losses at September 30, 2015 was 0.94% of total loans compared to 0.97% of total loans as of December 31, 2014.

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An age analysis of past-due loans, segregated by class of loans, as of September 30, 2015 and December 31, 2014 is as follows:

					90 Days		Total		Total		Total
	30–59 Days		60–89 Days		or More		Past Due		Current		Loans
	(In Thousands)
September 30, 2015:
Real estate:
Residential	$	-	$	971	$	789	$	1,760	$	135,791	$	137,551
Commercial		623		540		1,152		2,315		45,139		47,454
Construction and land development		-		-		-		-		17,919		17,919
Home equity		-		-		-		-		47,017		47,017
Municipal		-		-		-		-		8,572		8,572
Commercial and industrial		-		-		382		382		26,431		26,813
Municipal		-		-		-		-		3,930		3,930
Consumer		85		23		2		110		16,622		16,732
Total	$	708	$	1,534	$	2,325	$	4,567	$	301,421	$	305,988

December 31, 2014:
Real estate:
Residential	$	147	$	-	$	516	$	663	$	131,890	$	132,553
Commercial		-		-		860		860		46,122		46,982
Construction and land development		-		-		-		-		13,234		13,234
Home equity		328		-		77		405		45,998		46,403
Municipal		-		-		-		-		8,602		8,602
Commercial and industrial		-		-		439		439		18,599		19,038
Municipal		-		-		-		-		1,459		1,459
Consumer		124		19		-		143		16,433		16,576
Total	$	599	$	19	$	1,892	$	2,510	$	282,337	$	284,847

The following table sets forth information regarding nonaccrual loans as of September 30, 2015 and December 31, 2014:

	Nonaccrual		Nonaccrual
	September 30, 2015		December 31, 2014
	(In Thousands)
Real estate:
Residential	$	1,054	$	1,064
Commercial		2,315		860
Construction and land development		-		-
Home equity		263		165
Commercial and industrial		382		439
Consumer		-		-
Total	$	4,014	$	2,528

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Information about loans that meet the definition of an impaired loan in ASC 310-10-35 is as follows as of and for the nine months ended September 30, 2015 and the year ended December 31, 2014:

			Unpaid				Average		Interest
	Recorded		Principal		Related		Recorded		Income
	Investment		Balance		Allowance		Investment		Recognized
	(In Thousands)
September 30, 2015:
With no related allowance recorded:
Real Estate:
Residential	$	-	$	-	$	-	$	10	$	-
Commercial		2,315		2,315		-		2,221		58
Home equity		-		-		-		-		-
Construction and land development		-		-		-		-		-
Commercial and industrial		382		382		-		410
Total impaired with no related allowance	$	2,697	$	2,697	$	-	$	2,641	$	58

With an allowance recorded:
Total impaired with an allowance recorded	$	-	$	-	$	-	$	-	$	-
Total
Real Estate:
Residential	$	-	$	-	$	-	$	10	$	-
Commercial		2,315		2,315		-		2,221		58
Home equity		-		-		-		-		-
Construction and land development		-		-		-		-		-
Commercial and industrial		382		382		-		410		-
Total impaired loans	$	2,697	$	2,697	$	-	$	2,641	$	58

			Unpaid				Average		Interest
	Recorded		Principal		Related		Recorded		Income
	Investment		Balance		Allowance		Investment		Recognized
	(In Thousands)
December 31, 2014:
With no related allowance recorded:
Real Estate:
Residential	$	170	$	170	$	-	$	172	$	5
Commercial		860		860		-		896		-
Construction and land development		-		-		-		133		56
Home equity		3		3		-		4		-
Total impaired with no related allowance	$	1,033	$	1,033	$	-	$	1,205	$	61

With an allowance recorded:
Residential	$	-	$	-	$	-	$	-	$	-
Commercial		-		-		-		-		-
Construction and land development		-		-		-		-		-
Home equity		-		-		-		-		-
Commercial and industrial		439		439		6		372		-
Total impaired with an allowance recorded	$	439	$	439	$	6	$	372	$	-

Total
Real Estate:
Residential	$	170	$	170	$	-	$	172	$	5
Commercial		860		860		-		896		-
Construction and land development		-		-		-		133		56
Home equity		3		3		-		4		-
Commercial and industrial		439		439		6		372		-
Total impaired loans	$	1,472	$	1,472	$	6	$	1,577	$	61

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The Bank’s troubled debt restructurings (“TDRs”) are determined by management. TDRs may 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 loans modified as a troubled debt restructuring during the nine months ended September 30, 2015.

There was one commercial loan that was modified as a troubled debt restructuring during the year ended December 31, 2014. The loan, with a recorded investment of $439 thousand, had its payments temporarily reduced as part of the modification. The loan was individually evaluated for impairment as of December 31, 2014 and it was determined that a $6 thousand specific allowance was required. On September 30, 2015, the loan had a recorded investment of $382 thousand and cash flows from the borrower showed no necessity of maintaining the specific allowance. The loan was kept in nonaccrual status at September 30, 2015 and December 31, 2014.

As of September 30, 2015, there were no foreclosed residential real estate properties held by the Company. The recorded investment in consumer mortgage loans collateralized by residential real estate property that were in the process of foreclosure according to local requirements of the applicable jurisdiction amounted to $315 thousand at September 30, 2015.

The balance of mortgage servicing rights included in other assets at September 30, 2015 and December 31, 2014 was $1.92 million and $1.58 million, respectively. Mortgage servicing rights of $781 thousand and $531 thousand were capitalized for the nine months ended September 30, 2015 and the year ended December 31, 2014, respectively. Amortization of mortgage servicing rights was $431 thousand and $401 thousand for the nine months ended September 30, 2015 and the year ended December 31, 2014, respectively. The fair value of these rights was $2.52 million and $2.05 million as of September 30, 2015 and December 31, 2014, 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 $216.8 million and $176.8 million as of September 30, 2015 and December 31, 2014, 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.

NOTE 9 – OTHER COMPREHENSIVE INCOME (LOSS)

The following tables present the reclassification disclosure for the three and nine months ended September 30, 2015 and 2014:

	9/30/2015			9/30/2014
	(In thousands)
Three months ended:

Net change in unrealized holding gains/losses on available-for-sale securities	$	672		$	(250	)
Reclassification adjustment for realized gains in net income (1)		(26	)		-
Other comprehensive income (loss) before income tax effect		646			(250	)
Income tax (expense) benefit		(220	)		85
Other comprehensive income (loss), net of tax	$	426		$	(165	)

	9/30/2015			9/30/2014
	(In thousands)
Nine months ended :

Net unrealized holding gains/losses on available-for-sale securities	$	381		$	1,977
Reclassification adjustment for realized gains in net income (1)		(93	)		(96	)
Other comprehensive income before income tax effect		288			1,881
Income tax expense		(98	)		(640	)
Other comprehensive income, net of tax	$	190		$	1,241

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

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NOTE 10 – RECENT DEVELOPMENTS

On September 30, 2015 the Company entered into a Subordinated Loan Agreement (the “Loan Agreement”) with Community Funding CLO, Ltd. (“Community Funding”) pursuant to which the Company issued an unsecured subordinated term note in the aggregate principal amount of $7,500,000 due July 31, 2025 (the “Subordinated Note”) to Community Funding. The closing date of the issuance of the Subordinated Note occurred on October 15th, 2015 (the “Closing Date”). The Company received net proceeds of approximately $7.2 million from the issuance of the Subordinated Note.

The Loan Agreement provides that the Subordinated Note will bear interest at a fixed rate of 6.75% per annum, provided, however, that for the period beginning immediately after the Closing Date through, but not including, February 11, 2016, Community Funding will rebate an amount equal to 3.40% per annum to the Company, resulting in a rate of 3.35% per annum to the Company, net of any payments of interest made by the Company, so long as no event of default has occurred or is occurring during such period. Interest on the Subordinated Note will be payable by the Company quarterly in arrears on January 1, April 1, July 1 and October 1 of each year, commencing on the first such date following the Closing Date and on the maturity date. The principal amount of the Subordinated Note is due on the tenth anniversary of the Closing Date, provided, however, that the Company may prepay all or a portion of the principal amount of the Subordinated Note on or after the sixth anniversary of the Closing Date. Prior to the sixth anniversary of the Closing Date, the Company can prepay all or a portion of the principal amount of the Subordinated Note only under limited specified circumstances set forth in the Loan Agreement. The Loan Agreement contains customary events of default such as the institution of bankruptcy proceedings by or against the Company and the non-payment by the Company of principal or interest when due. Community Funding may accelerate the repayment of the Subordinated Note only in the event that bankruptcy proceedings are instituted by or against the Company and not for any other event of default.

The Loan Agreement includes customary representations, warranties and covenants by the Company. The Company also agreed to indemnify Community Funding and its affiliates against liabilities arising from any breach of representations, warranties and covenants made by the Company under the Loan Agreement or any action instituted against Community Funding and its affiliates by any shareholder of the Company or other third party with respect to the transactions contemplated by the Loan Agreement.

On November 5, 2015, the Company entered into an underwriting agreement (the “Underwriting Agreement”) with Keefe, Bruyette & Woods, Inc. (the “Underwriter”), pursuant to which the Company agreed to sell to the Underwriter, and the Underwriter agreed to purchase from the Company, 400,000 shares (the “Shares”) of common stock, no par value per share, of the Company (the “Common Stock”) at a public offering price of $21.00 per share. Pursuant to the Underwriting Agreement, the Company also granted the Underwriter an option (the “Option”), exercisable not later than 30 calendar days after the date of the Underwriting Agreement, to purchase up to 60,000 additional shares of Common Stock. The Shares were registered under the Securities Act of 1933, as amended (the “Securities Act”), pursuant to the Company’s Registration Statement on Form S-1, as amended (File No. 333-206533), which the Securities and Exchange Commission (the “Commission”) declared effective on November 5, 2015 and Registration Statement on Form S-1MEF (File No. 333-207856) as filed by the Company with the Commission on November 6, 2015, which became effective upon filing in accordance with Rule 462(b) under the Securities Act.

The Underwriting Agreement contains customary representations, warranties and agreements by the Company, and customary conditions to closing, indemnification obligations of the Company and the Underwriter, including for liabilities under the Securities Act, other obligations of the parties, and termination provisions.

Pursuant to the Underwriting Agreement, the Company and each of its officers and directors have agreed, subject to certain exceptions, not to offer, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase, lend or otherwise transfer or dispose of, directly or indirectly, any Common Stock or other securities convertible into or exercisable or exchangeable for shares of our Common Stock for a period of 90 days from the date of the Underwriting Agreement without the prior written consent of the Underwriter.

The Underwriting Agreement is not intended to provide any other factual information about the Company. The representations, warranties and covenants contained in the Underwriting Agreement were made only for purposes of the Underwriting Agreement and as of specific dates, were solely for the benefit of the parties to the Underwriting Agreement, and may be subject to limitations agreed upon by the contracting parties, including being qualified by confidential disclosures exchanged between the parties in connection with the execution of the Underwriting Agreement.

The closing occurred on November 10, 2015, following satisfaction of the closing conditions set forth in the Underwriting Agreement. At the closing, the Company issued 400,000 shares of Common Stock. The Company received net proceeds of approximately $7.9 million after deducting underwriting discounts and commissions payable by the Company in connection with the offering.

On November 12, 2015, the Underwriter notified the Company that it had exercised a portion of the Option and purchased an additional 51,473 shares of common stock in the Company. The Company expects the transaction to settle on November 17th, 2015 and expects to receive approximately $1.0 million of net proceeds after deducting underwriting discounts and commissions payable by the Company in connection with the offering.

The Company intends to use the net proceeds of approximately $7.2 million from the issuance of the Subordinated Note and approximately $8.9 million from the public offering of the Shares to support the growth of the Bank, including the expansion into the West Hartford, Connecticut market through the opening of a new branch office and the growth of the Bank’s loan portfolio, and for other general corporate purposes. The Company also intends to use a portion of the net proceeds from the issuance of the Subordinated Note and from the public offering of the Shares to redeem, prior to December 31, 2015, the 9,000 shares of Senior Non-Cumulative Perpetual Preferred Stock that were issued to the U.S. Treasury as part of the Company’s participation in the SBLF program.

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Item 2. Management's Discussion and Analysis of Financial Condition 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 deterioration in credit quality, a reduction in demand for credit and/or a decline in real estate values;
	●	the Company’s ability to manage its operations under the current economic conditions nationally and in its market area;
	●	a general decline in the real estate and lending market may negatively affect the Company’s financial results;
	●	risks related to a high concentration of loans secured by real estate located in the Company’s market area;
	●	loan delinquencies and changes in the underlying cash flows of the Company’s borrowers;
	●	significant increases in the Company’s loan losses, including as a result of its inability to resolve classified and non-performing assets or reduce risks associated with its loans;
	●	inaccuracies in management’s assumptions used in calculating the appropriate amount to be placed in the Company’s allowance for loan losses;
	●	credit risks of lending activities, including changes in the level and trend of loan delinquencies and write-offs and in the Company’s allowance for loan losses and provision for loan losses;
	●	the impairment of our investment securities;
	●	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;
	●	the Company’s ability to enter new markets successfully and capitalize on growth opportunities;
	●	competitive pressures among depository and other financial institutions may increase significantly;
	●	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 maintain deposits and its success in developing new financial products;
	●	fluctuations in the demand for loans;
	●	changes in consumer spending, borrowing and savings habits;
	●	changes in the interest rate environment may reduce margins or the volumes or values of the loans the Company makes;
	●	declines in the yield on the Company’s assets resulting from the current low interest rate environment;
	●	the Company’s ability to attract and retain key personnel can be affected by the increased competition for experienced employees in the banking industry;
	●	changes in the Company’s compensation and benefit plans, and the Company’s ability to retain key personnel and to address staffing needs in response to product demand or to implement its strategic plans;

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	●	adverse changes in the financial industry, securities, credit and national local real estate markets (including real estate values);
	●	technological changes that may be more difficult or expensive than expected;
	●	the failure or security breaches of computer systems on which the Company depends;
	●	war or terrorist activities may cause deterioration in the economy or cause instability in credit markets;
	●	the Company’s ability to control costs and expenses, particularly those associated with operating as a publicly traded company;
	●	the ability of key third-party service providers to perform their obligations to the Company; and
	●	economic, governmental, or other factors may prevent the projected population and residential and commercial growth in the markets in which the Company operates.

Because of these and a wide variety of other uncertainties, many of which are beyond the Company’s control, the Company’s actual future results may be materially different from the results indicated by these forward-looking statements.

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

General

Management’s Discussion and Analysis of Financial Condition and Results of Operations is designed to provide a better understanding of the significant changes and trends related to the Company’s financial condition, results of operations, liquidity and capital resources. The discussion should be read in conjunction with the consolidated financial statements of the Company for the nine months ended September 30, 2015. All adjustments which, in the opinion of management, are necessary in order to make the consolidated financial statements for the nine months ended September 30, 2015 not misleading have been made.

The Company’s only business is its investment in The Simsbury Bank & 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. Through a network of loan originators, the Bank also offers 1-4 family residential mortgages throughout southern New England.

The Bank’s main office and its corporate offices are located in the town of Simsbury, Connecticut. The Bank has branch offices in the towns of Granby, Avon, and Bloomfield, Connecticut. The Bank also maintains a mortgage center in Canton, Connecticut. Services to the Bank’s customers are also provided through SBT Online Internet banking. The Bank’s customer base consists primarily of individual customers and small businesses in north central Connecticut. On July 10, 2015, the Bank filed applications with the Connecticut Department of Banking and the Federal Deposit Insurance Corporation to open a full service branch at 1232 Farmington Avenue in West Hartford, Connecticut. The Bank has received regulatory approval from the Connecticut Department of Banking and the FDIC to open this new branch office in West Hartford, Connecticut and has negotiated a lease for the new branch office, which is scheduled to open in the first quarter of 2016.

On October 15, 2015, the Company raised net proceeds of approximately $7.2 million through the issuance of $7.5 million in unsecured subordinated debt in a private placement to Community Funding CLO, Ltd., an institutional investor (“Community Funding”). The loan agreement provides that the subordinated note will bear interest at a fixed rate of 6.75% per annum, provided, however, that for the period beginning immediately after the closing date through, but not including, February 11, 2016, Community Funding will rebate an amount equal to 3.40% per annum to the Company, resulting in a rate of 3.35% per annum to the Company, net of any payments of interest made by the Company, so long as no event of default has occurred or is occurring during such period. The principal amount of the subordinated note is due on the tenth anniversary of the closing date, provided, however, that the Company may prepay all or a portion of the principal amount of the subordinated note on or after the sixth anniversary of the Closing Date. Prior to the sixth anniversary of the closing date, the Company can prepay all or a portion of the principal amount of the subordinated note only under limited specified circumstances set forth in the loan agreement. Community Funding may accelerate the repayment of the subordinated note only in the event that bankruptcy proceedings are instituted by or against the Company and not for any other event of default.

On November 10, 2015 the Company closed on its public offering of its common stock. The Company sold a total of 400,000 shares of its common stock at a public offering price of $21.00 per share pursuant to an underwriting agreement with Keefe, Bruyette & Woods, Inc. dated as of November 5, 2015. The underwriter, Keefe, Bruyette & Woods, Inc., has an option to purchase up to an additional 60,000 shares of common stock at the public offering price, less the underwriting discount, within 30 days from the date of the underwriting agreement.

The 400,000 shares of common stock were registered under the Securities Act of 1933, as amended, pursuant to the Company’s Registration Statement on Form S-1, as amended (File No. 333-206533), which the Securities and Exchange Commission (the “SEC”) declared effective on November 5, 2015, and Registration Statement on Form S-1MEF (File No. 333-207856) as filed by the Company with the SEC on November 6, 2015, which became effective upon filing. These registration statements filed with the SEC may be obtained by visiting the SEC’s website at www.sec.gov. On November 12, 2015, the Underwriter notified the Company that it had exercised a portion of the Option and purchased an additional 51,473 shares of common stock in the Company. The Company expects the transaction to settle on November 17th, 2015 and expects to receive approximately $1.0 million of net proceeds after deducting underwriting discounts and commissions payable by the Company in connection with the offering.

The Company intends to use the net proceeds of approximately $7.2 million from the issuance of the subordinated note and approximately $8.9 million from the public offering of 400,000 shares of its common stock to support the growth of the Bank, including the expansion into the West Hartford, Connecticut market through the opening of a new branch office and the growth of the Bank’s loan portfolio, and for other general corporate purposes. The Company also intends to use a portion of the net proceeds from the issuance of the subordinated note and from the public offering of 400,000 shares of its common stock to redeem, prior to December 31, 2015, the 9,000 shares of Senior Non-Cumulative Perpetual Preferred Stock that was issued to the U.S. Treasury as part of the Company’s participation in the SBLF program.

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, 2014. 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” under “Results of Operations” below for further details about the Bank’s current provision.

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Overview

For the nine months ended September 30, 2015, net income amounted to $1.05 million, or $1.08 per diluted share. This compares to net income of $451 thousand, or $0.42 per diluted share for the nine months ended September 30, 2014. Total assets as of September 30, 2015 were $415 million compared to $409 million as of December 31, 2014.

Key financial highlights at September 30, 2015 compared to September 30, 2014 include total asset growth since September 30, 2014 of $4.8 million, or 1.17%, and net loan growth of $24.7 million, or 8.75% over the last twelve months. Deposits declined in the same twelve month period by $1.3 million primarily due to a $5.1 million decrease in certificates of deposit, and a $10.7 million decrease in combined savings and money market accounts. These decreases were partially offset by an increase in demand deposits of $14.4 million. Net loan growth for the nine months ended September 30, 2015 was $21.2 million or 7.4%. Net deposits for the nine months ended September 30, 2015 increased $18.7 million or 5.3%. Noninterest income increased by $245 thousand or 36.2% for the third quarter of 2015 compared to the third quarter of 2014 while net interest and dividend income increased by $121 thousand or 4.3% for the third quarter of 2015 compared to the corresponding period a year ago. Operating expenses increased by $209 thousand or 6.5% for the third quarter of 2015 compared to the third quarter of 2014.

For the third quarter of 2015, the Company’s earnings per share was $0.37, an increase of $0.11 in basic and diluted earnings per share compared to $0.26 for the third quarter of 2014. Non-accrual loans increased to $4.0 million as of September 30, 2015, which was 1.3% of total loans as of such date, from $1.9 million or 0.69% of total loans a year ago. Total non-accrual and delinquent loans increased to 1.50% of total loans outstanding as of September 30, 2015 from 0.91% of total loans outstanding as of September 30, 2014. The Company’s allowance for loan losses was 0.94% of total loans at September 30, 2015.

Total deposits as of September 30, 2015 were $375 million, a decrease of $1 million or 0.27% from total deposits of $376 million a year ago. At September 30, 2015, 31% of total deposits were in non-interest bearing demand accounts, 54% were in low-cost savings and NOW accounts, and 15% were in time deposits. At September 30, 2015, the Company had approximately 21,503 deposit accounts compared to 21,741 deposit accounts at September 30, 2014.

At September 30, 2015, total gross loans were $307 million compared to $283 million a year ago. Commercial loans grew by $18.0 million or 21.3%, residential mortgage loans decreased by $2.2 million or 1.6%, and consumer loans grew by $1.5 million or 2.5%, primarily due to an increase in outstanding balances under home equity lines. The profile of the Company’s loan portfolio remains strong.

Total revenues, consisting of net interest and dividend income plus noninterest income, were $3.9 million for the third quarter of 2015 compared to $3.5 million for the third quarter of 2014. The increase in total revenues was due to an increase in mortgage banking activities of $168 thousand and an increase in net interest and dividend income of $121 thousand that was driven primarily by interest and fees on loans.

The Company’s 2015 year-to-date taxable-equivalent net interest margin (taxable-equivalent net interest and dividend income divided by average earning assets) was 3.01% compared to 2.97% for the comparable 2014 period. The Company’s yield on earning assets increased 2 basis points to 3.22% while its cost of funds decreased 4 basis points to 0.29% for the nine months ended September 30, 2015 compared to the same period of 2014.

Total noninterest expenses for the third quarter of 2015 were $3.38 million, an increase of $209 thousand from the corresponding 2014 period primarily due to an increase in salaries and employee benefits of $215 thousand, and an increase in professional fees of $29 thousand. These increases were partially offset by decreases in advertising and promotion of $68 thousand and a decrease in occupancy expenses of $23 thousand.

Capital levels for the Bank as of September 30, 2015 were above those required to meet the regulatory “well-capitalized” designation.

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	Capital Ratios
	9/30/2015
	The Simsbury Bank
	& Trust Company	Regulatory Standard for Well-Capitalized
Tier 1 Leverage Capital Ratio	6.95%	5.00%
Tier 1 Risk-Based Capital Ratio	11.17%	8.00%
Common Equity Tier 1 Risk-Based Capital Ratio	11.17%	6.50%
Total Risk-Based Capital Ratio	12.25%	10.00%

At September 30, 2015, the capital ratios of the Bank exceeded the new minimum Basel III capital requirements. It is management’s goal to monitor and maintain adequate capital levels to continue to support asset growth and the expansion of the Bank and to continue its status as a well- capitalized institution. The Bank’s new capital requirements, which became effective on January 1, 2015, are fully described in the “Capital Requirements” section of Financial Condition of this Form 10-Q.

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 was $2.9 million and $2.8 million, respectively, for the quarters ended September 30, 2015 and 2014. 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 2.97% for the quarter ended September 30, 2015 from 2.88% for the quarter ended September 30, 2014. The Company’s net interest spread, defined as the difference between the yield on earning assets and the cost of deposits and borrowings, increased to 2.88% for the quarter ended September 30, 2015 from 2.79% for the quarter ended September 30, 2014. The Company’s cost of deposits and borrowings decreased to 0.28% for the third quarter ended September 30, 2015 from 0.31% for the third quarter ended September 30, 2014.

Net interest and dividend income after provision for loan losses was $8.6 million and $8.4 million, respectively, for the first nine months ended September 30, 2015 and 2014. 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 3.01% for the nine months ended September 30, 2015 from 2.97% for the nine months ended September 30, 2014. The Company’s net interest spread, defined as the difference between the yield on earning assets and the cost of deposits and borrowings, increased to 2.93% for the nine months ended September 30, 2015 from 2.87% for the nine months ended September 30, 2014. The Company’s cost of deposits and borrowings decreased to 0.29% for the nine months ended September 30, 2015 from 0.33% for the nine months ended September 30, 2014.

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The following tables summarize the Company’s daily average balances, interest, average yields and net interest margin on a fully tax-equivalent basis:

	Three months ended September 30,
	2015								2014
	Average					Average			Average					Average
	Balance		Interest			Yields			Balance		Interest			Yields
(In thousands)

Interest-earning assets:
Federal Funds Sold & overnight deposits	$	21,292	$	14			0.26	%	$	31,781	$	21			0.26	%

Investments		77,846		432			2.22	%		86,414		474			2.19	%

Mortgage loans		144,664		1,271			3.51	%		142,485		1,284			3.60	%
Commercial loans		100,914		1,048			4.15	%		82,325		866			4.21	%
Consumer loans		62,550		456			2.92	%		58,082		461			3.17	%

Total loans		308,128		2,775			3.60	%		282,892		2,611			3.69	%

Total interest-earning assets	$	407,266		3,221			3.16	%	$	401,087		3,106			3.10	%

Interest-bearing liabilities:
NOW deposits	$	38,108	$	8			0.08	%	$	39,212	$	8			0.08	%
Savings deposits		170,034		82			0.19	%		170,348		70			0.16	%
Certificates of deposit		57,787		102			0.71	%		64,487		135			0.84	%
Total Deposits		265,929		192			0.29	%		274,047		213			0.31	%

Repurchase agreements		3,202		1			0.12	%		3,208		1			0.14	%
FHLB Borrowings		14,099		8			0.23	%		4,152		2			0.19	%

Total interest-bearing liabilities	$	283,230	$	201			0.28	%	$	281,407	$	216			0.31	%

Tax-equivalent Net Interest Income			$	3,020							$	2,890
Less: tax equivalent adjustments				(66	)							(57	)
Net Interest Income			$	2,954							$	2,833
Net Interest Spread							2.88	%							2.79	%
Net Interest Margin							2.97	%							2.88	%

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	Nine months ended September 30,
	2015								2014
	Average					Average			Average					Average
	Balance		Interest			Yields			Balance		Interest			Yields
(In thousands)

Interest-earning assets:
Federal Funds Sold & overnight deposits	$	12,548	$	26			0.28	%	$	19,661	$	38			0.26	%

Investments		81,196		1,358			2.23	%		89,044		1,484			2.22	%

Mortgage loans		142,990		3,785			3.53	%		141,682		3,838			3.61	%
Commercial loans		95,090		2,955			4.14	%		81,102		2,561			4.21	%
Consumer loans		62,693		1,396			2.97	%		56,852		1,392			3.26	%

Total loans		300,773		8,136			3.61	%		279,636		7,791			3.71	%

Total interest-earning assets	$	394,517		9,520			3.22	%	$	388,341		9,313			3.20	%

Interest-bearing liabilities:
NOW deposits	$	39,313	$	24			0.08	%	$	38,525	$	22			0.08	%
Savings deposits		152,845		223			0.19	%		155,198		207			0.18	%
Certificates of deposit		58,974		319			0.72	%		66,778		418			0.83	%
Total Deposits		251,132		566			0.30	%		260,501		647			0.33	%

Repurchase agreements		3,223		3			0.12	%		3,398		3			0.12	%
FHLB Borrowings		19,062		35			0.24	%		6,125		9			0.20	%

Total interest-bearing liabilities	$	273,417	$	604			0.29	%	$	270,024	$	659			0.33	%

Tax-equivalent Net Interest Income			$	8,916							$	8,654
Less: tax equivalent adjustments				(202	)							(169	)
Net Interest Income			$	8,714							$	8,485
Net Interest Spread							2.93	%							2.87	%
Net Interest Margin							3.01	%							2.97	%

The table below describes the extent to which changes in interest rates and changes in the volume of interest-earning assets and interest-bearing liabilities have impacted interest income and interest expense during the periods indicated. Information is provided in each category with respect to the impact attributable to changes in volume (change in volume multiplied by prior rate), changes attributable to rates (change in rates multiplied by prior volume), and the total net change. The change attributable to the combined impact of volume and rate has been allocated proportionately to the change due to volume and the change due to rate.

	Three months ended Septemnber 30,										Nine months ended September 30,
	2015 vs. 2014										2015 vs. 2014
	Increase (decrease) due to:										Increase (decrease) due to:
	Rate			Volume			Total				Rate			Volume			Total
(In thousands)										(In thousands)

Interest on interest-earning assets:										Interest on interest-earning assets:
Federal funds sold & overnight deposits	$	-		$	(7	)	$	(7	)	Federal funds sold & overnight deposits	$	5		$	(17	)	$	(12	)
Investments		6			(48	)		(42	)	Investments		9			(135	)		(126	)
Mortgage loans		(32	)		19			(13	)	Mortgage loans		(156	)		103			(53	)
Commercial loans		(11	)		193			182		Commercial loans		(72	)		466			394
Consumer loans		(38	)		33			(5	)	Consumer loans		(224	)		228			4
Total Interest Income	$	(75	)	$	190		$	115		Total Interest Income	$	(438	)	$	645		$	207

Interest on interest-bearing liabilities:										Interest on interest-bearing liabilities:
Total deposits	$	(15	)	$	(6	)	$	(21	)	Total Deposits	$	(106	)	$	25		$	(81	)
Repurchase agreements		-			-			-		Repurchase agreements		-			-			-
FHLB Borrowings		-			6			6		FHLB Borrowings		4			22			26
Total Interest Expense	$	(15	)	$	-		$	(15	)	Total Interest Expense	$	(102	)	$	47		$	(55	)
Net change in net interest income	$	(61	)	$	191		$	130		Net change in interest income	$	(336	)	$	598		$	262

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Provision for Loan Losses

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

Each month, the Company reviews the allowance for loan losses and makes additional provisions to the allowance, as determined by the Company’s guidelines. The total allowance for loan losses at September 30, 2015 was $2.9 million or 0.94% of outstanding loans compared to $2.8 million or 0.97% of outstanding loans as of December 31, 2014. The Company charged off one loan in the third quarter of 2015 for $2 thousand compared to two loans totaling $45 thousand in the third quarter of 2014. During the third quarter of 2015, the Company had three recoveries totaling $1 thousand compared to five recoveries totaling $1 thousand for the third quarter of 2014. For the nine months ended September 30, 2015, the Company charged off five loans totaling $18 thousand compared to six loans totaling $100 thousand for the nine months ended September 30, 2014. The Company had twelve recoveries totaling $9 thousand in the nine months ended September 30, 2015 compared to nineteen recoveries totaling $14 thousand for the nine months ended September 30, 2014. The Company believes the allowance for loan losses is adequate.

Noninterest Income and Noninterest Expense

Total noninterest income (which is derived mainly from service and overdraft charges and mortgage banking activities) for the quarter ended September 30, 2015 was $921 thousand compared to $676 thousand for the same period in the prior year. Total noninterest income for the nine months ended September 30, 2015 was $2.3 million compared to $1.8 million for the nine months ended September 30, 2014. The increase in noninterest income for the three and nine months ended September 30, 2015 was mainly due to an increase in mortgage banking activities and fees. At September 30, 2015, the Company had 21,503 deposit accounts compared to 21,741 at September 30, 2014.

Total noninterest expense for the quarter ended September 30, 2015 was $3.4 million compared to $3.2 million for the same period in the prior year. The increase in noninterest expenses for the three months ended September 30, 2015 was primarily due to increases in salaries and benefits. The ratio of annualized operating expenses to average assets was 3.3% for the third quarter of 2015 compared to 3.1% for the third quarter of 2014. Total noninterest expense for the nine months ended September 30, 2015 was $9.6 million compared to $9.8 million for the nine months ended September 30, 2014. The decrease in noninterest expenses for the nine months ended September 30, 2015 was primarily due to decreases in the FDIC assessment, salaries and benefits and other expenses.

Salaries and employee benefits comprised approximately 53% of total noninterest expense for the three months ended September 30, 2015 and 49% of total noninterest expense for the same period in the prior year. Other major categories included occupancy expenses, which comprised approximately 10% of noninterest expense for the three months ended September 30, 2015 compared to 11% for the three months ended September 30, 2014, and data processing fees, which comprised 5.8% of noninterest expense for the three months ended September 30, 2015 compared to 5.4% of noninterest expenses for the same period in 2014. Advertising and promotions, equipment expenses, and professional fees each remained relatively constant in the 3.1% to 6.0% range for the three months ended September 30, 2015 and 2014. Other expenses comprised approximately 11.7% of the total noninterest expenses for the quarter ended September 30, 2015 compared to 12.2% for the same period in the prior year.

Salaries and employee benefits comprised approximately 53% of total noninterest expense for the nine months ended September 30, 2015 and 52% of total noninterest expense for the same period in the prior year. Other major categories included occupancy expenses, which comprised approximately 11% of noninterest expense for the nine months ended September 30, 2015 compared to 10% for the nine months ended September 30, 2014, and data processing fees, which comprised 5.5% of noninterest expense for the nine months ended September 30, 2015 compared to 5.0% of noninterest expenses for the same period in 2014. Advertising and promotions, equipment expenses, and professional fees each remained relatively constant in the 3.1% to 4.7% range for the nine months ended September 30, 2015 and 2014. Other expenses comprised approximately 11.8% of the total noninterest expenses for the nine months ended September 30, 2015 compared to 12.3% for the nine months ended September 30, 2014.

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Income Taxes

The effective income tax rate for the three months ended September 30, 2015 and 2014 was 17.5% and 17.0%, respectively. For the nine months ended September 30, 2015 and 2014, the effective tax rate was 15.0% and (17.2%), respectively. The Company realized a tax benefit in the second 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 no longer incurs state income tax liability except for the minimum tax since the PIC’s earnings, net of certain allocated expenses, are 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 September 30, 2015 was $71.8 million, which was 0.45% above amortized cost, compared to $83.8 million, which was 0.04% above amortized cost, as of December 31, 2014. The Company has the intent and 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 September 30, 2015, 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.

Securities may be pledged to meet regulatory requirements imposed as a condition to receipt of deposits of public funds and repurchase agreements. At September 30, 2015, the Company had 33 securities with a carrying value totaling $15.0 million pledged for such purposes. At December 31, 2014, the Company had 38 securities with a carrying value totaling $17.2 million pledged for such purposes.

As of September 30, 2015 and December 31, 2014, the Company’s investment portfolio consisted of U.S. government and agency securities, state and municipal securities, mortgage-backed securities and one SBA loan pool. The Company’s policy is to stagger the maturities of its investment securities to meet overall liquidity requirements of the Company.

Loan Portfolio

The Company’s loan portfolio as of the end of the third quarter of 2015 was comprised of approximately 66% mortgage and consumer loans and 34% commercial loans. The Company does not have any concentrations in its loan portfolio by industry or group of industries. However, as of September 30, 2015, approximately 86% of the Company’s loans were secured by residential real property located in Connecticut. At December 31, 2014, approximately 80% of the Company’s loans were secured by residential real property located in Connecticut.

There were approximately $139 million of gross residential mortgage loans as of September 30, 2015, which represented a 2.9% increase from December 31, 2014. During the three months ended September 30, 2015, the Company sold one hundred-eight (108) loans with an aggregate principal balance of $25.6 million, which resulted in a gain on sales of these loans of $422 thousand. For the nine months ended September 30, 2015, the Company sold two hundred sixty-nine (269) loans with an aggregate principal balance of $62.6 million, which resulted in a gain on sale of $874 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 September 30, 2015, the Company had consumer loan balances of approximately $16.7 million, representing a 0.94% increase from the consumer loan balances at December 31, 2014. As of September 30, 2015, the Company had approximately $15.4 million in consumer auto loans purchased from BCI Financial Corp. (“BCI”) on its books compared to approximately $15.2 million in auto loans purchased from BCI on its books as of December 31, 2014. The Company has an agreement with BCI pursuant to which the Company purchases auto loans from BCI. As part of the agreement, BCI services the loans for the Company.

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The September 30, 2015 gross loan balance for municipal and commercial real estate loans, including construction loans, was $102.6 million, a 4.4.% increase from the gross loan balance for municipal and commercial real estate loans at December 31, 2014. 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. In addition, the Company has been approved as an originator of loans that can be sold to the Federal Home Loan Mortgage Corporation.

The Bank is subject to certain lending limits. With certain exceptions, the Bank is permitted under applicable law to make related extensions of credit to any single borrowing entity of up to 15% of the Bank’s capital and reserves. Credit equaling an additional 10% of the Bank’s capital and reserves may be extended if the credit is fully secured by limited types of qualified collateral. As of September 30, 2015, the Bank’s lending limits were $5.0 million and $8.3 million, respectively. As of December 31, 2014, these lending limits were $4.8 million and $7.9 million, respectively. The Bank sells participations in its loans when necessary to stay within lending limits.

Interest on performing loans is accrued and taken into income daily. Loans over 90 days past due are deemed non-performing and are placed on non-accrual status. Interest received on non-accrual loans is credited to income only upon receipt and, in certain circumstances, may be applied to principal until the loan has been repaid in full, at which time the interest received is credited to income. The Company had 16 nonaccrual loans at September 30, 2015 with an aggregate balance of $4.0 million compared to 9 nonaccrual loans at December 31, 2014 with an aggregate balance of $2.5 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 fair value less estimated costs to sell. The Company had no OREO properties at September 30, 2015.

A loan whose terms have been modified due to financial difficulties of a borrower is reported as a troubled debt restructuring (“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 loans modified as a troubled debt restructuring during the nine months ended September 30, 2015.

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

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

The Company had criticized and classified loans with an aggregate outstanding balance of $6.7 million as of September 30, 2015 compared to $9.8 million as of December 31, 2014. The Company had no exposure to sub-prime loans in its loan portfolio as of September 30, 2015 and December 31, 2014. The Company’s allowance for loan losses was 0.94% of outstanding loans as of September 30, 2015.

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

Deposits

Deposits are the Company’s primary source of funds. At September 30, 2015, the Company had a deposit mix of 41% checking, 43% savings and 16% certificates of deposit. The Company’s net interest income is enhanced by its percentage of non-interest-bearing deposits. As of December 31, 2014, the deposit mix was 45% checking, 38% savings, and 17% certificates of deposit. Of the total deposits of $375 million and $356 million, respectively, at September 30, 2015 and December 31, 2014, 31% and 33% of such deposits were non-interest bearing. As of September 30, 2015 and December 31, 2014, the Company had $75.0 million and $46.0 million, respectively, in deposits from public sources.

The Company’s deposits are obtained from a cross-section of the communities it serves. No material portion of the Company’s deposits has been obtained from or is dependent upon any one person or industry. The Company’s business is not seasonal in nature. The Company accepts deposits in excess of $250 thousand from customers. Those deposits are priced to remain competitive. Through the Promontory Interfinancial Network LLC’s Certificate of Deposit Account Registry Service (“CDARS”) program, the Bank had brokered deposits of $1.3 million as of September 30, 2015 compared to $1.0 million as of December 31, 2014.

Borrowings

As of September 30, 2015, the Company had $5.5 million in borrowings from the Federal Home Loan Bank of Boston (FHLBB) on its balance sheet compared to $17.5 million in borrowings outstanding as of December 31, 2014.

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 date this Form 10-Q is filed with the SEC, by placing the deposits in the CDARS network. Accounts placed in this manner are considered brokered deposits. As of September 30, 2015, the Company had $1.3 million of deposits in the CDARS network compared to $1.0 million of deposits in the CDARS network as of December 31, 2014.

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Liquidity of a financial institution, such as the Bank, is measured by its ability to have sufficient liquid assets to meet its short term obligations. The net sum of liquid assets less anticipated current obligations represents the basic surplus of the Company. The Company maintains a portion of its funds in cash deposits in other banks, federal funds sold and available-for-sale securities to meet its obligations for anticipated depositors’ demands in the near future. As of September 30, 2015, the Company held $8.4 million in cash and cash equivalents, net of required Federal Reserve Board (“FRB”) reserves of $5.8 million, and $56.8 million in available-for-sale securities, net of pledged securities of $15.0 million, for total liquid assets of $65.2 million. At September 30, 2015, the Company anticipated short-term liability obligations of $54.9 million for a basic surplus of $10.3 million, representing 2.5% of total assets. As of December 31, 2014, the Company held $13.5 million in cash and cash equivalents, net of required FRB reserves of $6.3 million, and $66.5 million in available-for-sale securities, net of pledged securities of $17.2 million, for total liquid assets of $80.0 million. At December 31, 2014, the Company’s anticipated short term liability obligations were $61.0 million for a basic surplus of $19.0 million, which represented 4.6% of total assets.

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

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

Capital Requirements

The Bank is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Bank’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank’s assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The Banks’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors.

Effective January 1, 2015 (with a phase-in period of two to four years for certain components), the Bank became subject to new capital regulations adopted by the FRB and the FDIC, which implement the Basel III regulatory capital reforms and the changes required by the Dodd-Frank Act. The new regulations require a new common equity Tier 1 (“CETI”) capital ratio of 4.5%, increase the minimum Tier 1 capital to risk-weighted assets ratio to 6.0% from 4.0%, require a minimum total capital to risk-weighted assets ratio of 8.0% and require a minimum Tier 1 leverage ratio of 4.0%. CETI generally consists of common stock and retained earnings, subject to applicable adjustments and deductions. Under new prompt corrective action regulations, in order to be considered “well capitalized,” the Bank must maintain a CETI capital ratio of 6.5% (new) and a Tier 1 ratio of 8.0% (increased from 6.0%), a total risk based capital ratio of 10% (unchanged) and a Tier 1 leverage ratio of 5.0% (unchanged). In addition, the regulations establish a capital conservation buffer above the required capital ratios that phases in beginning January 1, 2016 at 0.625% of risk-weighted assets and increases each year by 0.625% until it is fully phased in at 2.5% effective January 1, 2019. Beginning January 1, 2016, failure to maintain the capital conservation buffer will limit the ability of the Bank and the Company to pay dividends, repurchase shares or pay discretionary bonuses.

The new regulations implemented changes to what constitutes regulatory capital. Certain instruments will no longer constitute qualifying capital, subject to phase-out periods. In addition, Tier 2 capital is no longer limited to the amount of Tier 1 capital included in total capital. Mortgage servicing rights, certain deferred tax assets and investments in unconsolidated subsidiaries over designated percentages of CETI will be deducted from capital. The Bank has elected to permanently opt-out of the inclusion of accumulated other comprehensive income in capital calculations, as permitted by the regulations. This opt-out will reduce the impact of market volatility on the Bank’s regulatory capital ratios.

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The new regulations also changed the risk weights of certain assets, including an increase in the risk weight of certain high volatility commercial real estate acquisition, development and construction loans and non-residential mortgage loans that are 90 days past due or on non-accrual status to 150% from 100%, a credit conversion factor for the unused portion of commitments with maturities of less than one year that are not cancellable to 20% from 0%, an increase in the risk weight for mortgage servicing rights and deferred tax assets that are not deducted from capital to 250% from 100%, and an increase in the risk weight for equity exposures to 600% from 0%.

As of September 30, 2015 (unaudited) and December 31, 2014, the most recent notification from the FDIC categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. There are no conditions or events since that notification that management believes have changed the institution’s category.

Inflation and Deflation

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

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

Off Balance Sheet Arrangements

As of September 30, 2015, the Company had in place mandatory commitments to sell approximately $5.4 million of loans secured by 1-to-4 family residential properties to the Federal Home Loan Mortgage Corporation (Freddie Mac). As of December 31, 2014, 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.

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Item 3. Quantitative and Qualitative Disclosures about Market Risk

Not required.

Item 4. Controls and Procedures

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

Evaluation of Disclosure Controls and Procedures

The Company’s management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Company’s disclosure controls and procedures as of September 30, 2015. 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 disclosures.

Changes in Internal Controls over Financial Reporting

There was no change in the Company’s internal controls over financial reporting during the quarter ended September 30, 2015 that has materially affected, or is reasonably likely to materially affect, the Company’s internal controls over financial reporting.

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PART II - OTHER INFORMATION

Item 1. Legal Proceedings

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

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

Item 1A. Risk Factors

Not required.

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

None.

Item 3. Defaults upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

None

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Item 6. Exhibits

Exhibit No.	Description
3(i).1	Conformed Copy of the Certificate of Incorporation of SBT Bancorp, Inc. (incorporated by reference to Exhibit 3(i) of the Company’s Form 10-K (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(ii) 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)

4.2	Subordinated Loan Agreement dated as of September 30, 2015 by and between the Company and Community Funding CLO, Ltd. (incorporated by reference to Exhibit 4.1 of the Company’s Form 8-K filed on October 16, 2015)

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: November 13, 2015	By:	/s/ Martin J. Geitz
		Martin J. Geitz
		Chief Executive Officer


Date: November 13, 2015	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(ii) 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)

4.2	Subordinated Loan Agreement dated as of September 30, 2015 by and between the Company and Community Funding CLO, Ltd. (incorporated by reference to Exhibit 4.1 of the Company’s Form 8-K filed on October 16, 2015)



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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Attached files

SBT Bancorp, Inc. Reports

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