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EX-31.1 - EXHIBIT 31.1 - SBT Bancorp, Inc.a6721980_ex311.htm
EX-32.2 - EXHIBIT 32.2 - SBT Bancorp, Inc.a6721980_ex322.htm
EX-31.2 - EXHIBIT 31.2 - SBT Bancorp, Inc.a6721980_ex312.htm
EX-32.1 - EXHIBIT 32.1 - SBT Bancorp, Inc.a6721980_ex321.htm
EX-10.2 - EXHIBIT 10.2 - SBT Bancorp, Inc.a6721980_ex102.htm
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

(Mark One)
 
[X]
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
  EXCHANGE ACT OF 1934 
 
For the quarterly period ended March 31, 2011
 
or
 
[  ]
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
  EXCHANGE ACT OF 1934 
 
For the transition period from _______ to __________

Commission File Number:  000-51832
 
SBT Bancorp, Inc.

(Exact name of registrant as specified in its charter)
 
Connecticut
 
20-4346972
(State or other jurisdiction of
 
(I.R.S. Employer
incorporation or organization)
 
Identification No.)
     
760 Hopmeadow Street, P.O. Box 248, Simsbury, CT
 
06070
(Address of principal executive offices)
 
(Zip Code)
 
(860) 408-5493

(Registrant's telephone number, including area code)

Not Applicable

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes [X]        No [   ]
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
 
Yes [   ]        No [   ]
 
 
-1-

 
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.  (check one):
 
Large accelerated filer [   ]
Accelerated filer [   ]
   
Non-accelerated filer [   ]
Smaller reporting company [X]
(do not check if a smaller reporting company)
 
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
 
Yes [   ]     No [X]
 
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

As of April 30, 2011, the registrant had 864,976 shares of its Common Stock, no par value per share, outstanding.
 
 
-2-

 
 
TABLE OF CONTENTS

SBT Bancorp, Inc.
 
   
Page No.
     
     
 
     
 
 
 
4
     
   
 
5
     
   
 
6
     
   
 
7
     
 
8 - 18
     
19 – 25
     
26
     
26
     
     
26
     
26
     
26
     
27
     
27
     
27
     
27
     
28
     
29
 
 
-3-

 
 
PART I – FINANCIAL INFORMATION
 
             
SBT BANCORP, INC.
 
CONDENSED CONSOLIDATED BALANCE SHEETS
 
(Dollars in thousands, except for share amounts)
 
ASSETS
 
3/31/11
   
12/31/10
 
   
(unaudited)
       
Cash and due from banks
  $ 6,456     $ 7,164  
Interest-bearing deposits with the Federal Reserve Bank of Boston
    37,682       12,574  
Interest-bearing deposits with the Federal Home Loan Bank
    -       3  
Federal funds sold
    1,794       2,787  
Money market mutual funds
    8,344       8,343  
Cash and cash equivalents
    54,276       30,871  
 
               
Interest-bearing time deposits with other banks
    4,885       5,963  
Investments in available-for-sale securities (at fair value)
    53,812       46,289  
Federal Home Loan Bank stock, at cost
    660       660  
 
               
Loans outstanding
    204,750       205,118  
Less allowance for loan losses
    2,322       2,326  
Loans, net
    202,428       202,792  
 
               
Premises and equipment
    535       562  
Accrued interest receivable
    929       905  
Bank owned life insurance
    4,053       4,013  
Other real estate owned
    350       350  
Other assets
    3,195       3,162  
Total other assets
    9,062       8,992  
 
               
TOTAL ASSETS
  $ 325,123     $ 295,567  
                 
LIABILITIES AND STOCKHOLDERS' EQUITY
               
Deposits:
               
Demand deposits
  $ 58,277     $ 55,339  
Savings and NOW deposits
    164,223       136,208  
Time deposits
    76,749       77,732  
Total deposits
    299,249       269,279  
 
               
Securities sold under agreements to repurchase
    2,935       3,235  
Other liabilities
    1,012       1,086  
Total liabilities
    303,196       273,600  
 
               
Stockholders' equity:
               
Preferred Stock – Series A
    3,862       3,851  
Preferred Stock – Series B
    218       219  
Common stock, no par value; authorized 2,000,000 shares;
               
issued and outstanding 864,976 shares on 3/31/11 and 12/31/10
               
 
   
9,381
     
9,381
 
Retained earnings
    8,174       8,255  
Accumulated other comprehensive income
    292       261  
Total stockholders' equity
    21,927       21,967  
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
  $ 325,123     $ 295,567  
   
See accompanying notes to the condensed consolidated financial statements
 
 
 
-4-

 
 
SBT BANCORP, INC.
 
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
 
(Unaudited)
 
(Dollars in thousands, except for per share amounts)
 
 
 
For the quarter ended
 
   
3/31/11
   
3/31/10
 
Interest and dividend income:
           
Interest and fees on loans
  $ 2,475     $ 2,501  
Investment securities
    398       470  
Federal funds sold and overnight deposits
    17       5  
Total interest and dividend income
    2,890       2,976  
Interest expense:
               
Deposits
    418       473  
Repurchase agreements
    8       10  
Total interest expense
    426       483  
 
               
Net interest and dividend income
    2,464       2,493  
 
               
Provision for loan losses
    -       225  
 
               
Net interest and divided income after provision for loan losses
    2,464       2,268  
Noninterest income:
               
Service charges on deposit accounts
    113       131  
Gain on sales of available-for-sale securities
    107       -  
Other service charges and fees
    131       154  
Increase in cash surrender value of life insurance policies
    40       42  
Gain on loans sold
    47       -  
Investment Services fees and commissions
    66       24  
Other income
    -       12  
Total noninterest income
    504       363  
 
               
Noninterest expense:
               
Salaries and employee benefits
    1,413       1,085  
Premises and equipment
    362       369  
Advertising and promotions
    100       95  
Forms and supplies
    52       34  
Professional fees
    158       203  
Directors’ fees
    39       48  
Correspondent charges
    76       64  
Postage
    21       24  
FDIC assessment
    129       97  
Data processing
    109       118  
Other expenses
    193       184  
Total noninterest expense
    2,652       2,321  
 
               
Income before income taxes
    316       310  
Income tax provision
    229       67  
Net income
  $ 87     $ 243  
Net income available to common stockholders
  $ 23     $ 178  
Average shares outstanding, basic
    864,976       864,976  
Earnings per common share, basic
  $ 0.03     $ 0.21  
Average shares outstanding, assuming dilution
    865,256       865,181  
Earnings per common share, assuming dilution
  $ 0.03     $ 0.21  
 
 
-5-

 
 
SBT BANCORP, INC.
 
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(Unaudited)
 
   
   
Preferred Stock
Series A
   
Preferred Stock
Series B
   
Common
Stock
   
Retained
Earnings
   
Accumulated
Other
Comprehensive
Income
   
Total
 
Balance, December 31, 2009
  $ 3,805     $ 225     $ 9,372     $ 7,782     $ 228     $ 21,412  
Comprehensive income:
                                               
Net income
    -       -       -       243       -       -  
Net change in unrealized holding gain on                                                 
available-for-sale securities, net of tax effect
    -       -       -       -       141       -  
Comprehensive income
    -       -       -       -       -       384  
                                                 
Preferred stock dividends
    -       -       -       (55 )     -       (55 )
Preferred stock amortization (accretion)
    11       (1 )     -       (10 )     -       -  
Stock-based compensation
    -       -       7       -       -       7  
Dividends declared common stock ($0.12 per share)
    -       -       -       (104 )     -       (104 )
Balance, March 31, 2010
  $ 3,816     $ 224     $ 9,379     $ 7,856     $ 369     $ 21,644  
                                                 
Balance, December 31, 2010
  $ 3,851     $ 219     $ 9,381     $ 8,255     $ 261     $ 21,967  
Comprehensive income:
                                               
Net income
    -       -       -       87       -       -  
Net change in unrealized holding gain on
                                               
available-for-sale securities, net of tax effect
    -       -       -       -       31       -  
Comprehensive income
    -       -       -       -       -       118  
Preferred stock dividends
    -       -       -       (54 )     -       (54 )
Preferred stock amortization (accretion)
    11       (1 )     -       (10 )     -       -  
Dividends declared common stock ($0.12 per share)
    -       -       -       (104 )     -       (104 )
                                                 
Balance, March 31, 2011
  $ 3,862     $ 218     $ 9,381     $ 8,174     $ 292     $ 21,927  
 
See accompanying notes to the condensed consolidated financial statements
 
 
-6-

 
 
SBT BANCORP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in thousands)
   
For the three months ended
 
   
3/31/11
   
3/31/10
 
Cash flows from operating activities:
           
Net income
  $ 87     $ 243  
Adjustments to reconcile net income to net cash (used in)
provided by operating activities:
               
Amortization of securities, net
    60       51  
Interest capitalized on interest-bearing time deposits with other banks
    (44 )     (45 )
Change in deferred loan costs, net
    (18 )     5  
Provision for loan losses
    -       225  
Depreciation and amortization
    48       58  
Accretion on impairment of operating lease
    (11 )     (11 )
Net gain on sales of available-for-sale securities
    (107 )     -  
Increase in other assets
    (117 )     (79 )
(Increase) decrease in interest receivable
    (24 )     19  
Decrease in taxes receivable
    97       44  
Stock based compensation
    -       7  
(Decrease) increase in other liabilities
    (66 )     78  
Increase in cash surrender value of bank owned life insurance
    (40 )     (42 )
Increase in interest payable
    4       3  
Net cash (used in) provided by operating activities
    (131 )     556  
                 
Cash flows from investing activities:
               
Proceeds from maturities of interest-bearing time deposits with other banks
    1,122       -  
Purchases of available-for-sale securities
    (9,980 )     (4,521 )
Proceeds from maturities of available-for-sale securities
    2,519       5,418  
Loan originations and principal collections, net
    1,364       (1,214 )
Loans purchased
    (984 )     (1,062 )
Capital expenditures
    (19 )     (12 )
Recoveries of loans previously charged-off
    2       4  
Net cash used in investing activities
    (5,976 )     (1,387 )
                 
Cash flows from financing activities:
               
Net increase in demand, NOW, and savings accounts
    30,953       10,213  
Net decrease in time deposits
    (983 )     (6,251 )
Net (decrease) increase in securities sold under agreements to repurchase
    (300 )     3,581  
Dividends paid – preferred stock
    (54 )     (55 )
Dividends paid – common stock
    (104 )     (104 )
Net cash provided by financing activities
    29,512       7,384  
                 
Net increase in cash and cash equivalents
    23,405       6,553  
Cash and cash equivalents at beginning of period
    30,871       17,089  
Cash and cash equivalents at end of period
  $ 54,276     $ 23,642  
Supplemental disclosures:
               
Interest paid
    422       480  
Income taxes paid
    127       23  
Increase in due to broker
    -       1,013  
 
See accompanying notes to the condensed consolidated financial statements
 
 
-7-

 
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (UNAUDITED)

NOTE 1 – BASIS OF PRESENTATION
 
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial statements and the instructions to Form 10-Q, and accordingly do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements.  In the opinion of management, the accompanying unaudited condensed consolidated financial statements reflect all necessary adjustments, consisting of only normal recurring accruals, to present fairly the financial position, results of operations, cash flows and changes in stockholders’ equity of SBT Bancorp, Inc. (the “Company”) for the periods presented.  In preparing the interim financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheet and revenues and expenses for the period.  Actual results could differ significantly from those estimates.  The interim results of operations are not necessarily indicative of the results to be expected for the full year ending December 31, 2011.
 
While management believes that the disclosures presented are adequate so as not to 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, 2010.


NOTE 2 – STOCK-BASED COMPENSATION
 
At March 31, 2011, the Company maintained a stock-based employee compensation plan.  The Company recognizes the cost resulting from all share-based payment transactions in the consolidated financial statements and establishes fair value as the measurement objective in accounting for share-based payment arrangements.  During the three months ended March 31, 2011, the Company did not recognize any stock-based employee compensation expense.  During the three months ended March 31, 2010, the Company recognized $7,000 in stock-based employee compensation expense.


NOTE 3 – RECENT ACCOUNTING PRONOUNCEMENTS

In March 2010, the FASB issued ASU 2010-11, “Scope Exception Related to Embedded Credit Derivatives.”  The ASU clarifies that certain embedded derivatives, such as those contained in certain securitizations, CDOs and structured notes, should be considered embedded credit derivatives subject to potential bifurcation and separate fair value accounting.  The ASU allows any beneficial interest issued by a securitization vehicle to be accounted for under the fair value option at transition.  At transition, the Company may elect to reclassify various debt securities (on an instrument-by-instrument basis) from held-to-maturity (HTM) or available-for-sale (AFS) to trading.  The new rules are effective July 1, 2010.  This ASU did not have a significant impact on the Company’s financial condition or results of operation.

In January 2010, the FASB issued ASU 2010-06, “Improving Disclosures about Fair Value Measurements.”  The ASU requires disclosing the amounts of significant transfers in and out of Level 1 and 2 of the fair value hierarchy and describing the reasons for the transfers.  The disclosures are effective for reporting periods beginning after December 15, 2009.  The Company adopted ASU 2010-06 as of January 1, 2010.  The required disclosures are included in Note 4.  Additionally, disclosures of the gross purchases, sales, issuances and settlements activity in Level 3 of the fair value measurement hierarchy are required for fiscal years beginning after December 15, 2010.

In April 2010, the FASB issued ASU 2010-18, “Effect of a Loan Modification When the Loan is Part of a Pool That is Accounted for as a Single Asset.”  As a result of this ASU, modifications of loans that are accounted for within a pool under Subtopic 310-30 do not result in the removal of such loans from the pool even if the modification of such loans would otherwise be considered a troubled debt restructuring.  An entity will continue to be required to consider whether the pool of assets in which the loan is included is impaired if expected cash flows for the pool change.  The amendments in this ASU are effective for modifications of loans accounted for within pools under Subtopic 310-30 occurring in the first interim or annual period ending on or after July 15, 2010.  The amendments are to be applied prospectively.  Early application is permitted.
 
 
-8-

 
 
In July 2010, the FASB issued ASU 2010-20, “Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses.”  This ASU was created to provide financial statement users with greater transparency about an entity’s allowance for credit losses and the credit quality of its financing receivables.  This ASU is intended to provide additional information to assist financial statement users in assessing the entity’s credit risk exposures and evaluating the adequacy of its allowance for credit losses.  The amendments in this ASU are effective for public entities as of the end of a reporting period for interim and annual reporting periods ending on or after December 15, 2010.  The disclosures about activity that occurs during a reporting period are effective for interim and annual reporting periods beginning on or after December 15, 2010.  For nonpublic entities, the disclosures are effective for annual reporting periods ending on or after December 15, 2011.  The required disclosures are included in Note 7.
 
In December 2010, the FASB issued ASU 2010-28, “Intangibles - Goodwill and Other.”  This ASU addresses when to perform step 2 of the goodwill impairment test for reporting units with zero or negative carrying amounts.  For public entities, the amendments in this ASU are effective for fiscal years and interim periods beginning after December 15, 2010.  For nonpublic entities, the amendments are effective for fiscal years and interim periods beginning after December 15, 2011.
 
In December 2010, the FASB issued ASU 2010-29, “Disclosure of Supplementary Pro Forma Information for Business Combinations.”  This ASU addresses diversity in practice about the interpretation of the pro forma revenue and earnings disclosure requirements for business combinations.  This ASU is effective prospectively for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2010.

In April 2011, the FASB issued ASU 2011-02, “A Creditor’s Determination of Whether a Restructuring Is a Troubled Debt Restructuring.”  This ASU provides additional guidance or clarification to help creditors determine whether a restructuring constitutes a troubled debt restructuring.  For public entities, the amendments in this ASU are effective for the first interim or annual period beginning on or after June 15, 2011, and should be applied retrospectively to the beginning of the annual period of adoption.  As a result of applying these amendments, an entity may identify receivables that are newly considered impaired, and should measure impairment on those receivables prospectively for the first interim or annual period beginning on or after June 15, 2011.  Additional disclosures are also required under this ASU.  The Company is currently evaluating the impact of this ASU.  The ASU is expected to cause more loan modifications to be classified as TDRs and the Company is evaluating its modification programs and practices in light of the new ASU.

In April 2011, the FASB issued ASU 2011-03, “Reconsideration of Effective Control for Repurchase Agreements.”  The objective of this ASU is to improve the accounting for repurchase agreements and other agreements that both entitle and obligate a transferor to repurchase or redeem financial assets before their maturity.  This ASU prescribes when an entity may or may not recognize a sale upon the transfer of financial assets subject to repurchase agreements.  The guidance in this ASU is effective for the first interim or annual period beginnng on or after December 15, 2011.  Early adoption is not permitted.


NOTE 4 – FAIR VALUE MEASUREMENT DISCLOSURES

In accordance with ASC 820, the Company groups its financial assets and liabilities measured at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value.

Level 1 Inputs – Unadjusted quoted prices in active markets for identical assets or liabilities that are available at the measurement date.

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

Level 3 Inputs – Unobservable inputs for determining the fair value of the assets or liabilities that are based on the entity’s own assumption about the assumptions that market participants would use to price the assets or liabilities.
 
 
-9-

 

A description of the valuation methodologies used for instruments measured at fair value, as well as the general clarification of such instruments pursuant to the valuation hierarchy, is set forth below.  These valuation methodologies were applied to all of the Company’s financial assets and liabilities carried at fair value for March 31, 2011 and December 31, 2010.  The Company did not have any significant transfers of assets or liabilities to and from Levels 1 and 2 of the fair value hierarchy during the three months ended March 31, 2011.

The Company’s cash instruments are generally classified within Level 1 or Level 2 of the fair value hierarchy because they are valued using quoted market prices, broker or dealer quotations, or alternative pricing sources with reasonable levels of price transparency.

The Company’s investment in obligations of states and municipalities, mortgage-backed securities and other debt securities available-for-sale are generally classified within Level 2 of the fair value hierarchy.  For these securities, we obtain fair value measurements from independent pricing services.  The fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, the U.S. treasury yield curve, trading levels, market consensus prepayment speeds, credit information, and the instrument’s terms and conditions.
 
The Company’s impaired loans are reported at the fair value of the underlying collateral if repayment is expected solely from the collateral.  Collateral values are estimated using Level 2 inputs based upon appraisals of similar properties obtained from a third party.  For Level 3 inputs, fair values are based on management estimates.

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

The following summarizes assets measured at fair value for the period ending March 31, 2011 and December 31, 2010.


Assets Measured at Fair Value on a Recurring Basis
 
   
(Dollars in thousands)
 
   
Fair Value Measurements at Reporting Date Using:
 
         
Quoted Prices in
   
Significant
   
Significant
 
         
Active Markets for
   
Other Observable
   
Unobservable
 
         
Identical Assets
   
Inputs
   
Inputs
 
   
Total
   
Level 1
   
Level 2
   
Level 3
 
March 31, 2011:
                       
Securities available-for-sale
  $ 53,812     $ 118     $ 53,694     $ -  
Totals
  $ 53,812     $ 118     $ 53,694     $ -  
   
December 31, 2010:
                               
Securities available-for-sale
  $ 46,289     $ 34     $ 46,255     $ -  
Totals
  $ 46,289     $ 34     $ 46,255     $ -  

 
Assets Measured at Fair Value on a Nonrecurring Basis
 
   
(Dollars in thousands)
 
   
Fair Value Measurements at Reporting Date Using:
 
         
Quoted Prices in
   
Significant
   
Significant
 
         
Active Markets for
   
Other Observable
   
Unobservable
 
         
Identical Assets
   
Inputs
   
Inputs
 
   
Total
   
Level 1
   
Level 2
   
Level 3
 
March 31, 2011:
                       
Impaired loans
  $ 311     $ -     $ -     $ 311  
Totals
  $ 311     $ -     $ -     $ 311  
   
December 31, 2010:
                               
Impaired loans
  $ 312     $ -     $ -     $ 312  
Totals
  $ 312     $ -     $ -     $ 312  

 
-10-

 
 
   
Fair Value Measurements
   
Using Significant Unobservable Inputs
   
Level 3
   
Impaired Loans
Beginning balance, December 31, 2010
  $ 312  
Transfers in and/or out of Level 3
    -  
Principal payments
    (1 )
Ending balance, March 31, 2011
  $ 311  

 
The estimated fair values of the Company’s financial instruments, all of which are held or issued for purposes other than trading, were as follows as of March 31, 2011 and December 31, 2010:


   
(Dollars in thousands)
 
   
March 31, 2011
   
December 31, 2010
 
   
Carrying
amount
   
Fair value
   
Carrying
amount
   
Fair value
 
Financial assets:
                       
Cash and cash equivalents
  $ 54,276     $ 54,276     $ 30,871     $ 30,871  
Interest-bearing time deposits with other banks
    4,885       5,102       5,963       6,257  
Available-for-sale securities
    53,812       53,812       46,289       46,289  
Federal Home Loan Bank stock
    660       660       660       660  
Loans, net
    202,428       205,204       202,792       204,841  
Accrued interest receivable
    929       929       905       905  
                                 
Financial liabilities:
                               
Deposits
    299,249       300,044       269,279       270,082  
Securities sold under agreements to repurchase
    2,935       2,935       3,235       3,235  
 
 
NOTE 5 – EARNINGS PER  COMMON SHARE
 
Basic earnings per common share (EPS) excludes dilution and is computed by dividing 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.
 
The following information was used in the computation of EPS on both a basic and diluted basis for the three months ended March 31, 2011 and  March 31, 2010:
 
 
-11-

 

(Dollars in thousands, except per share amounts)
 
   
For the three months ended
 
   
3/31/11
   
3/31/10
 
Basic EPS computation:
           
Net income
  $ 87     $ 243  
Preferred stock net accretion
    (10 )     (10 )
Preferred stock dividend paid
    (54 )     (55 )
Net income available to common stockholders
  $ 23     $ 178  
                 
Weighted average shares outstanding, basic
    864,976       864,976  
Basic EPS
  $ 0.03     $ 0.21  

Diluted EPS computation:
 
Net income
  $ 87     $ 243  
Preferred stock net accretion
    (10 )     (10 )
Preferred stock dividend paid
    (54 )     (55 )
Net income available to common stockholders
  $ 23     $ 178  
                 
Weighted average shares outstanding, before dilution
    864,976       864,976  
Dilutive potential shares
    280       205  
Weighted average shares outstanding, assuming dilution
    865,256       865,181  
Diluted EPS
  $ 0.03     $ 0.21  

 
NOTE 6 – IMPAIRED INVESTMENT SECURITIES

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

   
As of March 31, 2011 (dollars in thousands)
 
   
Less than 12 months
   
12 months or longer
   
Total
 
   
Fair
value
   
Unrealized
losses
   
Fair
value
   
Unrealized
losses
   
Fair
value
   
Unrealized
losses
 
                                     
Mortgage-backed securities
  $ -     $ -     $ 985     $ 125     $ 985     $ 125  
Total temporarily impaired securities
  $ -     $ -     $ 985     $ 125     $ 985     $ 125  

 
The investments in the Company’s investment portfolio that were temporarily impaired as of March 31, 2011 consisted of debt issued by U.S. government-sponsored corporations and agencies.  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.
 
 
-12-

 
 
NOTE 7 – LOAN INFORMATION

Loans consisted of the following as of March 31, 2011 and December 31, 2010:
 

   
(Dollars in thousands)
 
   
March 2011
   
December 2010
 
Commercial, financial and agricultural
  $ 13,682     $ 13,568  
Real estate - construction and land development
    3,151       4,986  
Real estate - residential
    147,065       148,396  
Real estate - commercial
    33,234       31,294  
Municipal
    2,289       2,035  
Consumer
    4,985       4,512  
      204,406       204,791  
Allowance for loan losses
    (2,322 )     (2,326 )
Deferred costs, net
    344       327  
Net loans
  $ 202,428     $ 202,792  

 
The following table presents the allowance for loan loss activity by portfolio segment as of March 31, 2011:
 
   
(Dollars in thousands)
 
   
Real Estate
                         
               
Construction
                               
               
and Land
         
Commercial
                   
   
Residential
   
Commercial
   
Development
   
Home Equity
   
and Industrial
   
Consumer
   
Unallocated
   
Total
 
Allowance for loan losses:
                                               
Beginning balance
  $ 838     $ 465     $ 68     $ 360     $ 410     $ 94     $ 91     $ 2,326  
Charge-offs
    -       -       -       -       -       (5 )     -       (5 )
Recoveries
    -       -       -       -       -       1       -       1  
Provision
    (31 )     29       (9 )     7       10       12       (18 )     -  
Ending balance
  $ 807     $ 494     $ 59     $ 367     $ 420     $ 102     $ 73     $ 2,322  

 
Changes in the allowance for loan losses were as follows for the periods ended March 31, 2011 and December 31,2010:
 
 
   
(Dollars in thousands)
 
   
March 31, 2011
   
December 31, 2010
 
Balance at beginning of year
  $ 2,326     $ 2,211  
Provision for loan losses
    -       755  
Charge-offs
    (5 )     (646 )
Recoveries of loans previously charged off
    1       6  
Balance at end of period
  $ 2,322     $ 2,326  
 
 
-13-

 
 
The following table sets forth information regarding the allowance for loan losses by portfolio segment as of March 31, 2011 and December 31, 2010:
 
 
   
(Dollars in thousands)
 
   
Real Estate:
                         
               
Construction and
         
Commercial
                   
   
Residential
   
Commercial
   
Land Development
   
Home Equity
   
& Industrial
   
Consumer
   
Unallocated
   
Total
 
   
March 31, 2011:
                                               
Allowance:
                                               
Ending balance:
                                               
Individually
                                               
evaluated for
                                               
impairment
  $ 79     $ -     $ -     $ 1     $ -     $ -     $ -     $ 80  
   
Ending balance:
                                                               
Collectively
                                                               
evaluated for
                                                               
impairment
    728       494       59       366       420       102       73       2,242  
   
Total allowance
                                                               
for loan lease loss
                                                               
ending balance
  $ 807     $ 494     $ 59     $ 367     $ 420     $ 102     $ 73     $ 2,322  
   
Loans:
                                                               
Ending balance:
                                                               
Individually
                                                               
evaluated for
                                                               
impairment
  $ 755     $ 324     $ 1,001     $ 8     $ -     $ -     $ -     $ 2,088  
   
Ending balance:
                                                               
Collectively
                                                               
evaluated
                                                               
for impairment
    97,732       32,939       2,154       48,816       16,030       4,991       -       202,662  
   
Total loans
                                                               
ending balance
  $ 98,487     $ 33,263     $ 3,155     $ 48,824     $ 16,030     $ 4,991     $ -     $ 204,750  
   
   
December 31, 2010:
                                                               
Allowance:
                                                               
Ending balance:
                                                               
Individually
                                                               
evaluated for
                                                               
impairment
  $ 79     $ -     $ -     $ 1     $ -     $ -     $ -     $ 80  
   
Ending balance:
                                                               
Collectively
                                                               
evaluated for
                                                               
impairment
    759       465       68       359       410       94       91       2,246  
   
Total allowance
                                                               
for loan lease loss
                                                               
ending balance
  $ 838     $ 465     $ 68     $ 360     $ 410     $ 94     $ 91     $ 2,326  
   
Loans:
                                                               
Ending balance:
                                                               
Individually
                                                               
evaluated for
                                                               
impairment
  $ 384     $ 326     $ 1,001     $ 8     $ -     $ -     $ -     $ 1,719  
   
Ending balance:
                                                               
Collectively
                                                               
evaluated
                                                               
for impairment
    100,303       30,998       3,990       47,927       15,662       4,519       -       203,399  

Total loans
                                               
ending balance
  $ 100,687     $ 31,324     $ 4,991     $ 47,935     $ 15,662     $ 4,519     $ -     $ 205,118  
 
 
-14-

 
 
The following table presents the Company’s loans by risk rating as of March 31, 2011 and December 31, 2010:
 
 
   
(Dollars in thousands)
 
Credit quality indicators
                                         
   
Real Estate
                   
               
Construction
                         
               
and Land
         
Commercial
             
   
Residential
   
Commercial
   
Development
   
Home Equity
   
and Industrial
   
Consumer
   
Total
 
March 31, 2011:
                                         
Grade:
                                         
Pass
  $ 97,247     $ 30,764     $ 2,154     $ 48,414     $ 14,257     $ 4,982     $ 197,818  
Special Mention
    259       1,780       -       -       1,092       -       3,131  
Substandard
    981       719       1,001       410       681       9       3,801  
Total
  $ 98,487     $ 33,263     $ 3,155     $ 48,824     $ 16,030     $ 4,991     $ 204,750  
   
December 31, 2010:
                                                       
Grade:
                                                       
Pass
  $ 99,658     $ 28,802     $ 3,650     $ 47,515     $ 14,394     $ 4,510     $ 198,529  
Special Mention
    260       1,798       340       -       162       -       2,560  
Substandard
    769       724       1,001       420       1,106       9       4,029  
Total
  $ 100,687     $ 31,324     $ 4,991     $ 47,935     $ 15,662     $ 4,519     $ 205,118  

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

The Company utilizes a risk rating grading matrix to assign a risk grade to each of its commercial loans.  Loans are graded on a scale of 1 to 7.  A 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, which has 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 the borrower, 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 a borrower or portion of a borrower’s loan with which the Company is no longer certain of the loan’s collectability.  A specific reserve allocation is assigned to this portion of the loan.

Risk Rating 7 (Loss) – This risk rating is assigned to loans which have been charged off or the portion of the loan that has been charged off.  “Loss” does not imply that the loan, or portion of, will never be repaid, nor does it imply that there has been a forgiveness of debt.
 
 
-15-

 

An age analysis of past-due loans, segregated by class of loans, as of March  31, 2011 and December 31, 2010 was as follows:
 
 
   
(Dollars in thousands)
 
                           
Recorded
 
March 31, 2011:
             
Greater
   
Total
   
Investment
 
   
30-59 Days
   
60-89 Days
   
than 90 Days
   
Past Due
   
90 Days and Accruing
 
Real estate:
                             
Residential
  $ 82     $ 152     $ 171     $ 405     $ -  
Commercial
    -       70       254       324       -  
Construction and
                                       
land development
    -       -       1,001       1,001       -  
Commercial and industrial
    -       -       203       203       -  
Consumer
    36       3       28