Annual Reports

 
Quarterly Reports

  • 10-Q (Nov 15, 2010)
  • 10-Q (Aug 12, 2010)
  • 10-Q (May 12, 2010)
  • 10-Q (Nov 13, 2009)
  • 10-Q (Aug 12, 2009)
  • 10-Q (May 13, 2009)

 
8-K

 
Other

SI Financial Group 10-Q 2009

Documents found in this filing:

  1. 10-Q
  2. Ex-31.1
  3. Ex-31.2
  4. Ex-32.0
  5. Ex-32.0
Form 10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 10-Q

 

 

 

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended June 30, 2009

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: 0-50801

 

 

SI FINANCIAL GROUP, INC.

(Exact name of registrant as specified in its charter)

 

 

 

United States   84-1655232

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

803 Main Street, Willimantic, Connecticut   06226
(Address of principal executive offices)   (Zip Code)

(860) 423-4581

(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 (Section 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  ¨

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 definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large Accelerated Filer   ¨    Accelerated Filer   ¨
Non-Accelerated Filer   ¨    Smaller Reporting Company Filer   x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No   x

As of August 7, 2009, there were 11,789,202 shares of the registrant’s common stock outstanding.

 

 

 


Table of Contents

SI FINANCIAL GROUP, INC.

TABLE OF CONTENTS

 

          Page No.
PART I.    FINANCIAL INFORMATION   
Item 1.    Financial Statements:    1
   Consolidated Balance Sheets at June 30, 2009 and December 31, 2008    1
   Consolidated Statements of Operations for the three and six months ended June 30, 2009 and 2008    2
   Consolidated Statement of Changes in Stockholders’ Equity for the six months ended June 30, 2009    3
   Consolidated Statements of Cash Flows for the six months ended June 30, 2009 and 2008    4
   Notes to Consolidated Financial Statements    6
Item 2.    Management’s Discussion and Analysis of Financial Condition and Results of Operations    24
Item 3.    Quantitative and Qualitative Disclosures about Market Risk    35
Item 4(T).    Controls and Procedures    35
PART II.    OTHER INFORMATION   
Item 1.    Legal Proceedings    35
Item 1A.    Risk Factors    35
Item 2.    Unregistered Sales of Equity Securities and Use of Proceeds    36
Item 3.    Defaults Upon Senior Securities    36
Item 4.    Submission of Matters to a Vote of Security Holders    36
Item 5.    Other Information    36
Item 6.    Exhibits    37
SIGNATURES    38


Table of Contents

PART I. FINANCIAL INFORMATION

 

Item 1. Financial Statements.

SI FINANCIAL GROUP, INC.

CONSOLIDATED BALANCE SHEETS

(Dollars in Thousands, Except Share Amounts / Unaudited)

 

     June 30,
2009
    December 31,
2008
 

ASSETS:

    

Cash and due from banks:

    

Noninterest-bearing

   $ 14,586      $ 14,008   

Interest-bearing

     4,583        465   

Federal funds sold

     8,800        8,730   
                

Total cash and cash equivalents

     27,969        23,203   

Available for sale securities, at fair value

     165,814        162,699   

Loans held for sale

     2,009        —     

Loans receivable (net of allowance for loan losses of $5,001 at June 30, 2009 and $6,047 at December 31, 2008)

     627,315        617,263   

Federal Home Loan Bank stock, at cost

     8,388        8,388   

Bank-owned life insurance

     8,860        8,714   

Premises and equipment, net

     13,564        12,225   

Goodwill and other intangibles

     4,273        4,294   

Accrued interest receivable

     3,509        3,721   

Deferred tax asset, net

     6,630        7,938   

Other assets

     4,374        4,677   
                

Total assets

   $ 872,705      $ 853,122   
                

LIABILITIES AND STOCKHOLDERS’ EQUITY:

    

Liabilities:

    

Deposits:

    

Noninterest-bearing

   $ 61,220      $ 57,647   

Interest-bearing

     587,783        563,004   
                

Total deposits

     649,003        620,651   

Mortgagors’ and investors’ escrow accounts

     3,749        3,625   

Federal Home Loan Bank advances

     128,600        139,600   

Junior subordinated debt owed to unconsolidated trust

     8,248        8,248   

Accrued expenses and other liabilities

     7,632        8,071   
                

Total liabilities

     797,232        780,195   
                

Stockholders’ Equity:

    

Preferred stock ($.01 par value; 1,000,000 shares authorized; none issued)

     —          —     

Common stock ($.01 par value; 75,000,000 shares authorized; 12,563,750 shares issued; 11,789,202 and 11,800,445 shares outstanding at June 30, 2009 and December 31, 2008, respectively)

     126        126   

Additional paid-in capital

     52,160        52,103   

Unallocated common shares held by ESOP

     (3,391     (3,553

Unearned restricted shares

     (422     (714

Retained earnings

     37,905        35,848   

Accumulated other comprehensive loss

     (2,940     (2,986

Treasury stock, at cost (774,548 and 763,305 shares at June 30, 2009 and December 31, 2008, respectively)

     (7,965     (7,897
                

Total stockholders’ equity

     75,473        72,927   
                

Total liabilities and stockholders’ equity

   $     872,705      $ 853,122   
                

See accompanying notes to unaudited interim consolidated financial statements.

 

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Table of Contents

SI FINANCIAL GROUP, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(Dollars in Thousands, Except Per Share Amounts / Unaudited)

 

     Three Months Ended
June 30,
   Six Months Ended
June 30,
     2009     2008    2009     2008

Interest and dividend income:

         

Loans, including fees

   $ 9,369      $ 9,318    $ 18,591      $ 18,534

Securities:

         

Taxable interest

     2,023        2,176      4,048        4,158

Tax-exempt interest

     10        4      13        7

Dividends

     13        105      27        263

Other

     25        104      77        184
                             

Total interest and dividend income

     11,440        11,707      22,756        23,146
                             

Interest expense:

         

Deposits

     3,377        4,034      6,831        8,132

Federal Home Loan Bank advances

     1,440        1,596      2,921        3,188

Subordinated debt

     59        77      130        216
                             

Total interest expense

     4,876        5,707      9,882        11,536
                             

Net interest income

     6,564        6,000      12,874        11,610

Provision for loan losses

     1,440        150      1,930        285
                             

Net interest income after provision for loan losses

     5,124        5,850      10,944        11,325
                             

Noninterest income:

         

Service fees

     1,257        1,328      2,448        2,613

Wealth management fees

     969        1,020      1,927        1,991

Increase in cash surrender value of bank-owned life insurance

     73        77      146        152

Net gain on sale of securities

     117        34      254        144

Other-than-temporary impairment loss on securities (total losses of $1,862, net of $1,712 recognized in accumulated other comprehensive loss, pretax)

     —          —        (150     —  

Net gain on sale of equipment

     —          —        104        —  

Net gain on sale of loans

     191        22      382        81

Other

     36        142      (287     107
                             

Total noninterest income

     2,643        2,623      4,824        5,088
                             

Noninterest expenses:

         

Salaries and employee benefits

     4,484        4,305      8,763        8,305

Occupancy and equipment

     1,351        1,464      2,806        2,865

Computer and electronic banking services

     832        761      1,623        1,482

Outside professional services

     249        210      469        413

Marketing and advertising

     201        194      409        391

Supplies

     131        145      282        320

FDIC deposit insurance and regulatory assessment

     690        158      872        223

Other

     743        569      1,376        1,078
                             

Total noninterest expenses

     8,681        7,806      16,600        15,077
                             

(Loss) income before income tax (benefit) provision

     (914     667      (832     1,336

Income tax (benefit) provision

     (295     204      (269     418
                             

Net (loss) income

   $ (619   $ 463    $ (563   $ 918
                             

Net (loss) income per share:

         

Basic

   $ (0.05   $ 0.04    $ (0.05   $ 0.08

Diluted

   $ (0.05   $ 0.04    $ (0.05   $ 0.08

See accompanying notes to unaudited interim consolidated financial statements.

 

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SI FINANCIAL GROUP, INC.

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY

FOR THE SIX MONTHS ENDED JUNE 30, 2009

(Dollars in Thousands, Except Share Amounts / Unaudited)

 

     Common Stock    Additional
Paid-in
Capital
    Unallocated
Common
Shares Held
by ESOP
    Unearned
Restricted
Shares
    Retained
Earnings
    Accumulated
Other
Comprehensive
Loss
    Treasury
Stock
    Total
Stockholders’
Equity
 
     Shares    Dollars               

Balance at December 31, 2008

   12,563,750    $ 126    $ 52,103      $ (3,553   $ (714   $ 35,848      $ (2,986   $ (7,897   $ 72,927   
                          

Comprehensive income:

                    

Net loss

   —        —        —          —          —          (563     —          —          (563

Net unrealized gains on available for sale securities, net of reclassification adjustment and tax effects

   —        —        —          —          —          —          2,763        —          2,763   
                          

Total comprehensive income

                       2,200   

Treasury stock purchased

   —        —        —          —          —          —          —          (68     (68

Restricted shares activity

   —        —        31        —          66        (97     —          —          —     

Equity incentive plan shares earned

   —        —        150        —          226        —          —          —          376   

Committed to release 16,148 ESOP shares

   —        —        (81     162        —          —          —          —          81   

Vesting of restricted stock

   —        —        (43     —          —          —          —          —          (43

Cumulative effect adjustment of a change in accounting principle – adoption of FSP FAS 115-2 and FAS 124-2

   —        —        —          —          —          2,717        (2,717     —          —     
                                                                    

Balance at June 30, 2009

   12,563,750    $ 126    $ 52,160      $ (3,391   $ (422   $ 37,905      $ (2,940   $ (7,965   $ 75,473   
                                                                    

See accompanying notes to unaudited interim consolidated financial statements.

 

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SI FINANCIAL GROUP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in Thousands / Unaudited)

 

     Six Months Ended
June 30,
 
     2009     2008  

Cash flows from operating activities:

    

Net (loss) income

   $ (563   $ 918   

Adjustments to reconcile net (loss) income to net cash provided by operating activities:

    

Provision for loan losses

     1,930        285   

Employee stock ownership plan expense

     81        158   

Equity incentive plan expense

     376        398   

Accretion of investment premiums and discounts, net

     (112     (115

Amortization of loan premiums and discounts, net

     113        110   

Depreciation and amortization of premises and equipment

     960        1,045   

Amortization of core deposit intangible

     21        27   

Amortization of mortgage servicing rights

     69        56   

Net gain on sale of securities

     (254     (144

Deferred tax benefit

     6        59   

Loans originated for sale

     (28,830     (6,235

Proceeds from sale of loans held for sale

     27,203        6,726   

Net gain on sale of loans

     (382     (81

Net gain on sale of equipment

     (104     —     

Net gain on sale of other real estate owned

     —          (10

Increase in cash surrender value of bank-owned life insurance

     (146     (152

Other-than-temporary impairment loss on securities

     150        —     

Change in operating assets and liabilities:

    

Accrued interest receivable

     212        (26

Other assets

     556        271   

Accrued expenses and other liabilities

     (482     3,569   
                

Net cash provided by operating activities

     804        6,859   
                

Cash flows from investing activities:

    

Purchases of available for sale securities

     (37,573     (74,627

Proceeds from sales of available for sale securities

     9,558        9,953   

Proceeds from maturities of and principal repayments on available for sale securities

     29,184        24,323   

Net decrease (increase) in loans

     9,290        (14,966

Purchase of loans

     (21,806     —     

Purchases of Federal Home Loan Bank stock

     —          (497

Proceeds from sale of other real estate owned

     —          923   

Purchases of premises and equipment

     (3,145     (1,362

Branch (sale) acquisitions

     (619     15,857   
                

Net cash used in investing activities

     (15,111     (40,396
                

Cash flows from financing activities:

    

Net increase in deposits

     30,020        45,270   

Net increase (decrease) in mortgagors’ and investors’ escrow accounts

     124        (82

Proceeds from Federal Home Loan Bank advances

     4,032        30,436   

Repayments of Federal Home Loan Bank advances

     (15,032     (32,419

Cash dividends on common stock

     —          (333

Treasury stock purchased

     (68     (2,521

Other, net

     (3     —     
                

Net cash provided by financing activities

     19,073        40,351   
                

(continued on next page)

 

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Table of Contents

SI FINANCIAL GROUP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)

(Dollars in Thousands / Unaudited)

 

     Six Months Ended
June 30,
     2009    2008

Net change in cash and cash equivalents

     4,766      6,814

Cash and cash equivalents at beginning of period

     23,203      20,669
             

Cash and cash equivalents at end of period

   $ 27,969    $ 27,483
             

Supplemental cash flow information:

     

Interest paid

   $ 9,945    $ 11,541

Income taxes paid, net

     731      693

Transfer of loans to other real estate owned

     418      —  

Branch sale:

     

Cash paid for the disposition of net liabilities related to the sale of the branch office located in Gales Ferry, Connecticut in January 2009 were as follows:

Assets:

     

Loans receivable

   $ 3   

Fixed assets, net

     950   

Other assets

     96   
         

Total assets

     1,049   
         

Liabilities:

     

Deposits

     1,668   
         

Total liabilities

     1,668   
         

Net liabilities

   $ 619   
         

Branch acquisitions:

     

Cash received for the assumption of net liabilities related to the purchase of branch offices located in Colchester and New London, Connecticut in January 2008 and March 2008, respectively, were as follows:

Assets:

     

Loans receivable

      $ 7,441

Accrued interest - loans

        40

Core deposit intangible

        159

Fixed assets, net

        685

Goodwill

        3,493
         

Total assets

        11,818
         

Liabilities:

     

Deposits

        27,668

Accrued interest - deposits

        7
         

Total liabilities

        27,675
         

Net liabilities

      $ 15,857
         

See accompanying notes to unaudited interim consolidated financial statements.

 

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SI FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2009 AND 2008 AND DECEMBER 31, 2008

 

 

NOTE 1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Nature of Business

SI Financial Group, Inc. (the “Company”) is the holding company for Savings Institute Bank and Trust Company (the “Bank”). Established in 1842, the Bank is a community-oriented financial institution headquartered in Willimantic, Connecticut. The Bank provides a variety of financial services to individuals, businesses and municipalities through its twenty-one offices in eastern Connecticut. Its primary products include savings, checking and certificate of deposit accounts, residential and commercial mortgage loans, commercial business loans and consumer loans. In addition, wealth management services, which include trust, financial planning, life insurance and investment services, are offered to individuals and businesses. The Company does not conduct any business other than owning all of the stock of the Bank and paying interest on its subordinated debentures.

SI Trust Servicing, the third-party provider of trust outsourcing services for community banks, expands the wealth management products offered by the Bank, and offers trust services to other community banks.

Principles of Consolidation

The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary, the Bank, and the Bank’s wholly-owned subsidiaries, 803 Financial Corp., SI Mortgage Company and SI Realty Company, Inc. All significant intercompany accounts and transactions have been eliminated.

Basis of Financial Statement Presentation

The interim consolidated financial statements and related notes have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information, with the instructions to Form 10-Q and Rule 8-03 of Regulation S-X of the Securities and Exchange Commission (“SEC”) and general practices within the banking industry. Accordingly, certain information and footnote disclosures required by GAAP for complete financial statements have been omitted. Information in the accompanying interim consolidated financial statements and notes to the financial statements of the Company as of June 30, 2009 and for the three and six months ended June 30, 2009 and 2008 is unaudited. These unaudited interim consolidated financial statements and related notes should be read in conjunction with the audited financial statements of the Company and the accompanying notes for the year ended December 31, 2008 contained in the Company’s Form 10-K.

Interim financial statements are subject to possible adjustment in connection with the annual audit of the Company for the year ending December 31, 2009. In the opinion of management, the accompanying unaudited interim consolidated financial statements reflect all of the adjustments, consisting only of normal and recurring adjustments in nature, necessary for a fair presentation of the financial condition, results of operations and cash flows as of and for the period covered herein. The results of operations for the three and six months ended June 30, 2009 are not necessarily indicative of the operating results for the year ending December 31, 2009.

In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosures of contingent assets and liabilities, as of the date of the statement of financial condition and reported amounts of revenues and expenses for the periods presented. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses, other-than-temporary impairment of securities, deferred income taxes and the impairment of long-lived assets.

 

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SI FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2009 AND 2008 AND DECEMBER 31, 2008

 

 

 

Reclassifications

Certain amounts in the Company’s 2008 consolidated financial statements have been reclassified to conform to the 2009 presentation. Such reclassifications had no effect on net (loss) income.

Recent Accounting Pronouncements

Effective January 2009, the Company adopted Financial Accounting Standards Board (“FASB”) Staff Position (“FSP”) No. FAS 142-3, “Determination of the Useful Life of Intangible Assets” (“FSP FAS 142-3”), which amends the factors that should be considered in developing renewal extension assumptions used to determine the useful life of a recognized intangible asset under FASB Statement of Financial Accounting Standards (“SFAS”) No. 142, “Goodwill and Other Intangible Assets” (“SFAS 142”). The intent of this FSP is to improve the consistency between the useful life of a recognized intangible asset under SFAS 142 and the period of expected cash flows used to measure the fair value of the asset under SFAS 141(R), “Business Combinations” (“SFAS 141(R)”) and other U.S. generally accepted accounting principles. FSP FAS 142-3 was effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. The adoption of FSP FAS 142-3 did not have a material impact on the Company’s consolidated financial statements.

Effective January 2009, the Company adopted FASB FSP Emerging Issues Task Force (“EITF”) No. 03-6-1, “Determining Whether Instruments Granted in Share-Based Payment Transactions are Participating Securities” (“FSP EITF 03-6-1”), which addresses whether instruments granted in share-based payment transactions are participating securities prior to vesting and, therefore, need to be included in the earnings allocation in computing earnings per share under the two-class method described in paragraphs 60 and 61 of FASB SFAS No. 128, “Earnings Per Share.” All prior-period earnings per share data presented shall be adjusted retrospectively (including interim financial statements, summaries of earnings and selected financial data) to conform to the provisions of FSP EITF 03-6-1. The adoption of this pronouncement did not have a material impact on the Company’s consolidated financial statements. See Note 2 for more details.

In April 2009, FASB issued FSP No. FAS 141(R)-1, “Accounting for Assets Acquired and Liabilities Assumed in a Business Combination that Arise from Contingencies” (“FSP FAS 141(R)-1”). This FSP amends and clarifies SFAS 141(R) to address application issues raised by preparers, auditors and members of the legal profession on initial recognition and measurement, subsequent measurement, accounting and disclosure of assets and liabilities arising from contingencies in a business combination. Both SFAS 141(R) and FSP FAS 141(R)-1 are applicable to the Company’s accounting for business combinations closing on or after January 1, 2009. The adoption of this pronouncement would apply prospectively to any future business combinations and may have a material impact on the Company’s consolidated financial statements when a business combination occurs.

In April 2009, FASB issued FSP No. FAS 157-4, “Determining Fair Value when the Volume and Level of Activity for the Asset or Liability have Significantly Decreased and Identifying Transactions that are not Orderly” (“FSP FAS 157-4”), which provides additional guidance for estimating fair value in accordance with SFAS No. 157, “Fair Value Measurements” (“SFAS 157”) when the volume and level of activity for the asset or liability have significantly decreased. FSP FAS 157-4 also includes guidance on identifying circumstances that indicate a transaction is not orderly. The adoption of FSP FAS 157-4 during the first quarter of 2009 did not have a material impact on the Company’s consolidated financial statements. See Note 9 for more details.

In April 2009, the FASB issued FSP No. FAS 115-2 and FAS 124-2, “Recognition and Presentation of Other-Than-Temporary Impairments” (“FSP FAS 115-2 and FAS 124-2”), which amends the other-than-temporary impairment (“OTTI”) guidance for debt securities to make the guidance more operational and to improve

 

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SI FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2009 AND 2008 AND DECEMBER 31, 2008

 

 

 

the presentation and disclosure of other-than-temporary impairments on debt and equity securities in the financial statements. This FSP does not amend existing recognition and measurement guidance related to other-than-temporary impairments of equity securities. Under FSP FAS 115-2 and FAS 124-2, declines in the fair value of debt securities below their amortized cost basis that are deemed to be other-than-temporarily impaired are recognized in earnings to the extent the impairment is related to credit losses. The amount of the other-than-temporary impairment related to other factors is recognized in other comprehensive income, net of applicable taxes. The Company elected to adopt the provisions of FSP FAS 115-2 and FAS 124-2 during the quarter ended March 31, 2009. The adoption of FSP FAS 115-2 and FAS 124-2 resulted in a cumulative effect adjustment of $2.7 million (net of taxes) to retained earnings with a corresponding adjustment to accumulated other comprehensive loss. See Notes 3 and 6 for more details.

In April 2009, the FASB issued FSP No. FAS 107-1 and APB 28-1, “Interim Disclosures about Fair Value of Financial Instruments” (“FSP FAS 107-1 and APB 28-1”), which amends FASB SFAS No. 107, “Disclosures about Fair Value of Financial Instruments” to require disclosures about the fair value of financial instruments for interim reporting periods of publicly-traded companies as well as in annual financial statements. This FSP also amends APB Opinion No. 28, “Interim Financial Reporting” to require these disclosures in summarized financial information for interim reporting periods. This FSP was effective for interim reporting periods ended after June 15, 2009, with early adoption permitted for periods ended after March 15, 2009. The adoption of FSP FAS 107-1 and APB 28-1 during the quarter ended June 30, 2009 did not have a material impact on the Company’s consolidated financial statements.

In May 2009, the FASB issued SFAS No. 165, “Subsequent Events” (“SFAS 165”), which establishes principles and requirements for subsequent events. In particular, this Statement sets forth (1) the period after the balance sheet date during which management of a reporting entity shall evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements, (2) circumstances under which an entity shall recognize events or transactions occurring after the balance sheet date in its financial statements and (3) disclosures that an entity shall make about events or transactions that occurred after the balance sheet date. This Statement was effective for interim or annual financial periods ended after June 15, 2009, and shall be applied prospectively. The adoption of SFAS 165 during the quarter ended June 30, 2009 did not have a material impact on the Company’s consolidated financial statements.

In June 2009, the FASB issued SFAS No. 166, “Accounting for Transfers of Financial Assets” (“SFAS 166”), which improves the relevance, representational faithfulness, and comparability of the information that a reporting entity provides in its financial reports about a transfer of financial assets; the effects of a transfer on its financial position, financial performance, and cash flows; and a transferor’s continuing involvement in transferred financial assets. This Statement amends FASB Statement No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities” (“SFAS 140”). This Statement shall be effective as of the beginning of each reporting entity’s first annual reporting period that begins after November 15, 2009, for interim periods within the first annual reporting period, and for interim and annual reporting periods thereafter. Earlier application is prohibited. The recognition and measurement provisions of the Statement shall be applied to transfers that occur on or after the effective date. This Statement is not expected to have a material impact on the Company’s consolidated financial statements.

In June 2009, the FASB issued SFAS No. 168, “The FASB Accounting Standards Codification™ and the Hierarchy of Generally Accepted Accounting Principles” (“SFAS 168”), which replaces SFAS No. 162, “The Hierarchy of Generally Accepted Accounting Principles” (“SFAS 162”) and establishes the FASB Accounting Standards Codification™ as the source of authoritative accounting principles recognized by the FASB to be applied by nongovernmental entities in the preparation of financial statements in conformity with GAAP rules and interpretive releases of the SEC under authority of federal securities laws are also

 

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SI FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2009 AND 2008 AND DECEMBER 31, 2008

 

 

 

sources of authoritative GAAP for SEC registrants. This Statement shall be effective for financial statements issued for interim and annual periods ending after September 15, 2009. This Statement is not expected to have a material impact on the Company’s consolidated financial statements.

NOTE 2. EARNINGS PER SHARE

Basic net (loss) income per share is calculated by dividing the net (loss) income available to common stockholders by the weighted-average number of common shares outstanding during the period. Diluted net (loss) income per share is computed in a manner similar to basic net (loss) income per share except that the weighted-average number of shares outstanding is increased to include the incremental common shares (as computed using the treasury stock method) that would have been outstanding if all potentially dilutive common stock equivalents were issued during the period. The Company’s common stock equivalents relate solely to stock options. Treasury shares and unallocated common shares held by the Employee Stock Ownership Plan (“ESOP”) are not deemed outstanding for earnings per share calculations.

Anti-dilutive shares are common stock equivalents with weighted-average exercise prices in excess of the weighted-average market value for the periods presented. The Company had anti-dilutive shares outstanding of 472,750 and 475,525 for the three and six months ended June 30, 2009, respectively, and 501,250 and 502,235 for the three and six months ended June 30, 2008, respectively. For the three and six months ended June 30, 2009 and 2008, all common stock equivalents were anti-dilutive and were not included in the computation of diluted earnings per share. The computation of earnings per share is as follows:

 

     Three Months
Ended June 30,
   Six Months
Ended June 30,

(Dollars in Thousands, Except Per Share Amounts)

   2009     2008    2009     2008

Net (loss) income

   $ (619   $ 463    $ (563   $ 918
                             

Weighted-average common shares outstanding:

         

Basic

     11,448,292        11,457,358      11,446,797        11,518,281

Effect of dilutive stock options

     —          —        —          —  
                             

Diluted

     11,448,292        11,457,358      11,446,797        11,518,281
                             

Net (loss) income per share:

         

Basic

   $ (0.05   $ 0.04    $ (0.05   $ 0.08

Diluted

   $ (0.05   $ 0.04    $ (0.05   $ 0.08

In June 2008, the FASB issued FSP EITF 03-6-1, which was effective for the Company for the interim period beginning January 1, 2009. Upon adoption, all prior period earnings per share data was recalculated to include restricted shares that participate in dividends in accordance with FSP EITF 03-6-1. The calculations resulted in no change to previously presented earnings per share amounts.

 

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SI FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2009 AND 2008 AND DECEMBER 31, 2008

 

 

 

NOTE 3. SECURITIES

The amortized cost, gross unrealized gains and losses and approximate fair values of securities at June 30, 2009 and December 31, 2008 are as follows:

 

June 30, 2009

(Dollars in Thousands)

   Amortized
Cost (1)
   Gross
Unrealized
Gains
   Gross
Unrealized
Losses
    Fair
Value

Debt securities:

          

U.S. Government and agency obligations

   $ 15,024    $ 376    $ (29   $ 15,371

Government-sponsored enterprises

     15,740      243      (13     15,970

Mortgage-backed securities

     113,150      2,968      (6,580     109,538

Corporate debt securities

     16,444      480      (2,050     14,874

Obligations of state and political subdivisions

     5,003      154      (10     5,147

Tax-exempt securities

     3,280      8      —          3,288

Foreign government securities

     100      —        —          100
                            

Total debt securities

     168,741      4,229      (8,682     164,288

Equity securities:

          

Marketable equity securities

     1,527      50      (51     1,526
                            

Total available for sale securities

   $ 170,268    $ 4,279    $ (8,733   $ 165,814
                            
 
  (1)

Net of other-than-temporary impairment write-downs recognized in earnings, other than such noncredit-related amounts reclassified on January 1, 2009 in accordance with the adoption of FSP FAS 115-2 and FAS 124-2.

 

December 31, 2008

(Dollars in Thousands)

   Amortized
Cost (1)
   Gross
Unrealized
Gains
   Gross
Unrealized
Losses
    Fair
Value

Debt securities:

          

U.S. Government and agency obligations

   $ 2,453    $ —      $ (38   $ 2,415

Government-sponsored enterprises

     25,985      615      (13     26,587

Mortgage-backed securities

     120,819      2,389      (6,278     116,930

Corporate debt securities

     12,526      655      (1,831     11,350

Obligations of state and political subdivisions

     4,000      63      (26     4,037

Tax-exempt securities

     280      1      (1     280

Foreign government securities

     100      —        —          100
                            

Total debt securities

     166,163      3,723      (8,187     161,699

Equity securities:

          

Marketable equity securities

     1,060      —        (60     1,000
                            

Total available for sale securities

   $ 167,223    $ 3,723    $ (8,247   $ 162,699
                            
 
  (1)

Net of other-than-temporary impairment write-downs recognized in earnings.

Management evaluates securities for other-than-temporary impairment at least on a quarterly basis and more frequently when economic or market conditions warrant such evaluation. The investment securities portfolio is generally evaluated for other-than-temporary impairment under SFAS No. 115, “Accounting for Certain Investments in Debt and Equity Securities,” as amended for FSP FAS 115-2 and FAS 124-2.

The Company elected to early adopt the provisions of FSP FAS 115-2 and FAS 124-2 for the interim period ended March 31, 2009, which was applied to existing and new debt securities held by the Company as of January 1, 2009. For those debt securities for which the fair value of the security is less than its amortized cost and the Company does not intend to sell such security and it is not more likely than not that it will be required to sell such security prior to the recovery of its amortized cost basis less

 

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SI FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2009 AND 2008 AND DECEMBER 31, 2008

 

 

 

any credit losses, FSP FAS 115-2 and FAS 124-2 requires that the credit component of the other-than-temporary impairment losses be recognized in earnings while the noncredit component is recognized in other comprehensive loss, net of related taxes. As a result of the adoption of FSP FAS 115-2 and FAS 124-2, the Company reclassified the noncredit component of the other-than-temporary impairment loss previously recognized in earnings during the year ended December 31, 2008. The reclassification was reflected as a cumulative effect adjustment of $2.7 million ($4.0 million before taxes) that increased retained earnings and increased accumulated other comprehensive loss. The amortized cost basis of these debt securities for which other-than-temporary impairment losses were recognized during 2008 were adjusted by the amount of the cumulative effect adjustment before taxes.

The following table summarizes other-than-temporary impairment losses on available for sale securities for the three and six months ended June 30, 2009:

 

     Three Months Ended
June 30, 2009
   Six Months Ended
June 30, 2009
 

(Dollars in Thousands)

   Pooled
Trust
Preferred
Securities
   Non-agency
Mortgage-backed
Securities
      Total       Pooled
Trust
Preferred
Securities
    Non-agency
Mortgage-backed
Securities
    Total  

Total other-than-temporary impairment loss

   $ —      $ —      $ —      $ (903   $ (959   $ (1,862

Other-than-temporary impairment related to noncredit loss recognized in accumulated other comprehensive loss

     —        —        —        753        959        1,712   
                                             

Other-than-temporary impairment related to credit loss recognized in earnings

   $ —      $ —      $ —      $ (150   $ —        $ (150
                                             

The following table presents a roll-forward of the balance of credit-related impairment losses on debt securities held at June 30, 2009 for which a portion of the other-than-temporary impairment was recognized in other comprehensive loss:

 

(Dollars in Thousands)

   Three Months Ended
June 30, 2009
     Six Months Ended  
June 30, 2009

Balance at beginning of period

   $ 866    $ —  

Credit component of other-than-temporary impairment not reclassified to accumulated other comprehensive loss in conjunction with the cumulative effect adjustment

     —        866

Additions for credit component for which other-than-temporary impairment loss was not previously recognized

     —        —  
             

Balance at end of period

   $ 866    $ 866
             

As of June 30, 2009, debt securities with other-than-temporary impairment losses related to credit that were recognized in earnings consisted of pooled trust preferred securities (“PTPS”) and a non-agency mortgage-backed security. In accordance with FSP FAS 115-2 and FAS 124-2, the Company estimated the portion of loss attributable to credit using a discounted cash flow model. Significant inputs for the non-agency mortgage-backed security included the estimated cash flows of the underlying collateral based on key assumptions, such as default rate, loss severity and prepayment rate. Assumptions used can vary widely from loan to loan, and are influenced by such factors as loan interest rate, geographical location of the borrower, borrower characteristics and collateral type. Significant inputs for the PTPS included estimated cash flows and prospective deferrals, defaults and recoveries based on the underlying seniority status and subordination structure of the pooled trust preferred debt tranche at the time of measurement. Prospective deferral, default and recovery estimates affecting projected cash flows were based on analysis

 

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SI FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2009 AND 2008 AND DECEMBER 31, 2008

 

 

 

of the underlying financial condition of the individual issuers, with consideration of the account’s capital adequacy, credit quality, lending concentrations and other factors. All cash flow estimates were based on the securities’ tranche structure and contractual rate and maturity terms. The Company utilized the services of a third-party vendor to obtain information about the structure in order to determine how the underlying collateral cash flows will be distributed to each security issued from the structure. The present value of the expected cash flows were compared to the Company’s holdings to determine the credit-related impairment loss.

The following tables present information pertaining to securities with gross unrealized losses at June 30, 2009 and December 31, 2008, aggregated by investment category and length of time the individual securities have been in a continuous unrealized loss position.

 

June 30, 2009:

   Less Than 12 Months    12 Months Or More    Total

(Dollars in Thousands)

   Fair
Value
   Unrealized
Losses
   Fair
Value
   Unrealized
Losses
   Fair
Value
   Unrealized
Losses

U.S. Government and agency obligations

   $ 1,581    $ 19    $ 541    $ 10    $ 2,122    $ 29

Government-sponsored enterprises

     1,978      13      —        —        1,978      13

Mortgage-backed securities

     14,963      2,683      22,487      3,897      37,450      6,580

Corporate debt securities

     2,263      1,240      3,626      810      5,889      2,050

Obligations of state and political subdivisions

     —        —        491      10      491      10

Marketable equity securities

     222      25      724      26      946      51
                                         

Total

   $ 21,007    $ 3,980    $ 27,869    $ 4,753    $ 48,876    $ 8,733
                                         

 

December 31, 2008:

   Less Than 12 Months    12 Months Or More    Total

(Dollars in Thousands)

   Fair
Value
   Unrealized
Losses
   Fair
Value
   Unrealized
Losses
   Fair
Value
   Unrealized
Losses

U.S. Government and agency obligations

   $ 1,812    $ 14    $ 540    $ 24    $ 2,352    $ 38

Government-sponsored enterprises

     1,978      13      —        —        1,978      13

Mortgage-backed securities

     33,816      5,972      2,531      306      36,347      6,278

Corporate debt securities

     5,547      1,831      —        —        5,547      1,831

Obligations of state and political subdivisions

     475      26      —        —        475      26

Tax-exempt securities

     139      1      —        —        139      1

Marketable equity securities

     962      60      —        —        962      60
                                         

Total

   $ 44,729    $ 7,917    $ 3,071    $ 330    $ 47,800    $ 8,247
                                         

 

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SI FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2009 AND 2008 AND DECEMBER 31, 2008

 

 

 

At June 30, 2009, forty-three debt securities with gross unrealized losses have aggregate depreciation of 15.3% of the Company’s amortized cost basis. The following summarizes, by security type, the basis for management’s determination during the preparation of the financial statements for the quarter ended June 30, 2009 of whether the applicable investments within the Company’s available for sale portfolio were other-than-temporarily impaired at June 30, 2009, and if so, the amount of the other-than-temporary impairment that represents credit losses versus all other factors.

Debt Securities:

U.S. Government and Agency Obligations and Government-sponsored Enterprises. The unrealized losses were caused by a widening of the rate spread to comparable treasury securities. The contractual terms of these investments do not permit the issuer to settle the securities at a price less than the amortized cost bases of the investments. Because the decline in market value is attributable to changes in interest rates and not credit quality and because the Company does not intend to sell the investments and it is not more likely than not that the Company will be required to sell the investments before recovery of their amortized cost bases, which may be maturity, the Company does not consider these investments to be other-than-temporarily impaired at June 30, 2009.

Mortgage-backed Securities. The unrealized losses related primarily to non-agency mortgage-backed securities, which represents $25.6 million in fair value and $6.6 million in unrealized losses, that continue to trade well below historic levels, particularly those backed by jumbo or hybrid loan collateral. In particular, six non-agency mortgage-backed securities displayed market pricing significantly below book value, or received significant rating downgrades. At June 30, 2009, management evaluated credit rating details, potential future credit losses and loss analyses. The Bank previously recorded other-than-temporary impairment losses on two of these non-agency mortgage-backed securities totaling $489,000 related to credit and $3.2 million related to other factors. The unrealized losses on the Company’s remaining investments in non-agency mortgage-backed securities were caused by a lack of liquidity and an inactive market for these types of securities. Because the Company does not intend to sell the investments and it is not more likely than not that the Company will be required to sell the investments before recovery of their amortized cost bases, which may be maturity, the Company did not record any additional impairment losses at June 30, 2009.

The unrealized losses on the Company’s agency mortgage-backed securities were caused by increases in the rate spread to comparable treasury securities. The Company does not expect these securities to settle at a price less than the amortized cost basis of the investments. Because the Company does not intend to sell the investments and it is not more likely than not that the Company will be required to sell the investments before the recovery of their amortized cost basis, which may be maturity, the Company does not consider these investments to be other-than-temporarily impaired at June 30, 2009.

Corporate Debt Securities. The unrealized losses related primarily to investments in PTPS. Management evaluated current credit ratings, credit support and stress testing for future defaults. Management also reviewed analytics provided by the trustee, reports from third-party sources and internal documents. The Bank previously recorded other-than-temporary impairment losses on five PTPS investments totaling $1.2 million related to credit and $2.5 million related to other factors.

The unrealized losses on the Company’s remaining PTPS investments were caused by a lack of liquidity and uncertainties facing the banking and insurance industries. No loss of principal or break in yield is projected. Based on the existing credit profile, management does not believe that these investments will suffer from any credit related losses. Because the Company does not intend to sell

 

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SI FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2009 AND 2008 AND DECEMBER 31, 2008

 

 

 

the investments and it is not more likely than not that the Company will be required to sell the investments before recovery of their amortized cost bases, which may be maturity, the Company did not record additional impairment losses at June 30, 2009.

Marketable Equity Securities:

The Company’s investments in marketable equity securities consists primarily of common and preferred stock of companies in the financial services sector, which consists of common stock with a fair value of $274,000 and net unrealized gains of $2,000 and preferred stock with a fair value of $798,000 and net unrealized gains of $10,000. The remainder of the Company’s holdings in marketable equity securities are investments in the common stock of companies in a variety of industries including, but not limited to healthcare, utilities and consumer goods and services, which represents $455,000 in fair value and $13,000 of net unrealized losses. Management evaluated the near-term prospects of the issuers and the Company’s ability and intent to hold the investments for a reasonable period of time sufficient for an anticipated recovery of fair value. Although the issuers have shown declines in earnings as a result of the weakened economy, no credit issues have been identified that cause management to believe that the declines in market value are other-than-temporary at June 30, 2009.

To the extent that continued changes in interest rates, credit movements and other factors that influence the fair value of investments occur, the Company may be required to record additional impairment charges for other-than-temporary impairment in future periods.

The amortized cost and fair value of debt securities at June 30, 2009 by contractual maturities are presented below. Actual maturities of mortgage-backed securities may differ from contractual maturities because the mortgages underlying the securities may be called or repaid without any penalties. Because mortgage-backed securities are not due at a single maturity date, they are not included in the maturity categories in the following maturity summary.

 

(Dollars in Thousands)

   Amortized
Cost
   Fair
Value

Within 1 year

   $ 7,094    $ 7,128

After 1 but within 5 years

     20,983      21,626

After 5 but within 10 years

     6,229      6,288

After 10 years

     21,285      19,708
             
     55,591      54,750

Mortgage-backed securities

     113,150      109,538
             

Total debt securities

   $ 168,741    $ 164,288
             

The following is a summary of realized gains and losses on the sale of securities for the three and six months ended June 30, 2009 and 2008:

 

      Three Months Ended
June 30,
   Six Months Ended
June 30,

(Dollars in Thousands)

   2009         2008              2009               2008     

Gross gains on sales

   $ 117    $ 34    $ 481      $ 144

Gross losses on sales

     —        —        (227     —  
                            

Net gain on sale of securities

   $ 117    $ 34    $ 254      $ 144
                            

 

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SI FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2009 AND 2008 AND DECEMBER 31, 2008

 

 

 

Proceeds from the sales of available for sale securities were $1.1 million and $9.6 million for the three and six months ended June 30, 2009, respectively, and $10.0 million for both the three and six months ended June 30, 2008.

NOTE 4. LOANS RECEIVABLE

The composition of the Company’s loan portfolio at June 30, 2009 and December 31, 2008 is as follows:

 

(Dollars in Thousands)

   June 30,
2009
    December 31,
2008
 

Real estate loans:

    

Residential – 1 to 4 family

   $ 329,165      $ 332,399   

Multi-family and commercial

     158,900        158,693   

Construction

     22,806        27,892   
                

Total real estate loans

     510,871        518,984   

Consumer loans:

    

Home equity

     20,215        18,762   

Other

     3,444        3,345   
                

Total consumer loans

     23,659        22,107   

Commercial business loans

     96,216        80,649   
                

Total loans

     630,746        621,740   

Deferred loan origination costs, net of fees

     1,570        1,570   

Allowance for loan losses

     (5,001     (6,047
                

Loans receivable, net

   $     627,315      $ 617,263   
                

The following is a summary of information pertaining to impaired loans and nonaccrual loans.

 

(Dollars in Thousands)

        June 30,     
2009
   December 31,
2008

Impaired loans without valuation allowance

   $ 7,578    $ 6,934

Impaired loans with valuation allowance

     1,125      3,960
             

Total impaired loans

   $ 8,703    $ 10,894
             

Valuation allowance related to impaired loans

   $ 252    $ 1,235
             

Average recorded investment in impaired loans

   $ 9,451    $ 9,407
             

Nonaccrual loans

   $ 8,635    $ 9,328
             

Total loans past due 90 days or more and still accruing

   $ —      $ —  
             

 

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Table of Contents

SI FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2009 AND 2008 AND DECEMBER 31, 2008

 

 

 

NOTE 5. PREMISES AND EQUIPMENT

Premises and equipment at June 30, 2009 and December 31, 2008 are summarized as follows:

 

(Dollars in Thousands)

   June 30,
2009
    December 31,
2008
 

Land

   $ 2,090      $ 145   

Buildings

     6,024        5,282   

Leasehold improvements

     7,681        8,526   

Furniture and equipment

     10,715        10,608   

Construction in process

     2        51   
                
     26,512        24,612   

Accumulated depreciation and amortization

     (12,948     (12,387
                

Premises and equipment, net

   $ 13,564      $ 12,225   
                

On April 22, 2009, a subsidiary of the Bank, SI Realty Company, Inc., purchased property located in North Windham, Connecticut, which is currently the location of the Company’s training center, and two adjacent parcels of land for $1.5 million.

On May 14, 2009, a subsidiary of the Bank, SI Realty Company, Inc., purchased the land on which the Bank’s Norwich, Connecticut branch office is located for $1.2 million.

NOTE 6. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

The following tables present the changes in accumulated other comprehensive income (loss) for the six months ended June 30, 2009 and 2008.

 

Six Months Ended June 30, 2009

(Dollars in Thousands)

   Before Tax
Amount
    Tax
Effects
    Net of Tax
Amount
 

Unrealized holding gains on available for sale securities

   $ 4,169      $ (1,337   $ 2,832   

Credit portion of other-than-temporary impairment losses on available for sale securities

     150        (51     99   

Reclassification adjustment for gains recognized in net loss

     (254     86        (168
                        

Unrealized holding gains on available for sale securities, net of taxes

     4,065        (1,302     2,763   

Cumulative effect adjustment for change in accounting principle

     (3,995     1,278        (2,717
                        

Accumulated other comprehensive income

   $ 70      $ (24   $ 46   
                        

 

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SI FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2009 AND 2008 AND DECEMBER 31, 2008

 

 

 

 

Six Months Ended June 30, 2008

(Dollars in Thousands)

   Before Tax
Amount
    Tax
Effects
   Net of Tax
Amount
 

Unrealized holding losses on available for sale securities

   $ (3,502   $ 1,191    $ (2,311

Reclassification adjustment for gains recognized in net income

     (144     49      (95
                       

Unrealized holding losses on available for sale securities, net of taxes

   $ (3,646   $ 1,240    $ (2,406
                       

NOTE 7. REGULATORY CAPITAL

The Bank is subject to various regulatory capital requirements administered by the Office of Thrift Supervision (the “OTS”), including a risk-based capital measure. The risk-based capital guidelines include both a definition of capital and a framework for calculating risk-weighted assets by assigning balance sheet assets and off-balance sheet items to broad risk categories. As a savings and loan holding company regulated by the OTS, the Company is not subject to any separate regulatory capital requirements.

At June 30, 2009 and December 31, 2008, the Bank met all capital adequacy requirements to which it was subject and the Bank was considered “well capitalized” under regulatory guidelines at each of those dates.

The following is a summary of the Bank’s regulatory capital amounts and ratios as of June 30, 2009 and December 31, 2008.

 

June 30, 2009

   Actual     For Capital
Adequacy

Purposes
    To Be Well
Capitalized Under
Prompt Corrective
Action Provisions
 

(Dollars in Thousands)

   Amount    Ratio     Amount    Ratio     Amount    Ratio  

Total Risk-based Capital Ratio

   $ 74,242    14.34   $ 41,418    8.00   $ 51,773    10.00

Tier I Risk-based Capital Ratio

     69,195    13.37        20,702    4.00        31,052    6.00   

Tier I Capital Ratio

     69,195    8.01        34,554    4.00        43,193    5.00   

Tangible Equity Ratio

     69,195    8.01        12,958    1.50        N/A    N/A   

 

December 31, 2008

   Actual     For Capital
Adequacy

Purposes
    To Be Well
Capitalized Under
Prompt Corrective
Action Provisions
 

(Dollars in Thousands)

   Amount    Ratio     Amount    Ratio     Amount    Ratio  

Total Risk-based Capital Ratio

   $ 69,273    13.32   $ 41,605    8.00   $ 52,007    10.00

Tier I Risk-based Capital Ratio

     64,130    12.33        20,805    4.00        31,207    6.00   

Tier I Capital Ratio

     64,130    7.59        33,797    4.00        42,246    5.00   

Tangible Equity Ratio

     64,130    7.59        12,674    1.50        N/A    N/A   

 

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SI FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2009 AND 2008 AND DECEMBER 31, 2008

 

 

 

NOTE 8. INCOME TAXES

FASB’s Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (“FIN 48”) provides guidance on financial statement recognition, measurement and disclosure of tax positions taken, or expected to be taken in the future, in the Company’s tax returns. The initial adoption of FIN 48 had no impact on the Company’s financial statements. The Company has no material uncertain tax positions as of June 30, 2009.

In accordance with the provisions of FIN 48, in future periods, the Company may record a liability for unrecognized tax benefits related to the recognition, derecognition or change in measurement of a tax position as a result of new tax positions, changes in management’s judgment about the level of uncertainty of existing tax positions, expiration of open income tax returns due to the statutes of limitation, status of examinations and litigation and legislative activity.

The Company has elected to report future interest and penalties related to unrecognized tax benefits, if any, as income tax expense in the Company’s Consolidated Statement of Operations.

With limited exception, the Company is no longer subject to United States federal, state and local income tax examinations by the tax authorities for the years prior to 2005.

NOTE 9. FAIR VALUE OF ASSETS AND LIABILITIES

Determination of Fair Value

The Company uses fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. In accordance with SFAS 157, the fair value of a financial instrument is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value is best determined based upon quoted market prices. However, in many instances, there are no quoted market prices for the Company’s various financial instruments. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. Accordingly, the fair value estimates may not be realized in an immediate settlement of the instrument.

Fair Value Hierarchy

In accordance with SFAS 157, the fair value of financial instruments is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. SFAS 157 establishes a fair value hierarchy that prioritizes the use of inputs used in valuation methodologies into the following three levels:

 

Level 1:    Valuation is based on quoted prices in active markets for identical assets or liabilities. Level 1 assets and liabilities generally include debt and equity securities that are traded in an active exchange market. Valuations are obtained from readily available pricing sources for market transactions involving identical assets or liabilities.
Level 2:    Valuation is based on observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3:    Valuation is based on unobservable inputs that are supported by little or no market activity

 

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SI FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2009 AND 2008 AND DECEMBER 31, 2008

 

 

 

   and that are significant to the fair value of the assets or liabilities. Level 3 assets and liabilities include financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation.

The following methods and assumptions were used by the Company in estimating fair value disclosures of its financial instruments:

 

   

Cash and cash equivalents. The carrying amounts of these instruments approximate the fair values.

 

   

Securities available for sale. The securities measured at fair value in Level 1 are based on quoted market prices in an active exchange market. These securities include certain marketable equity securities. Securities measured at fair value in Level 2 are based on pricing models that consider standard input factors such as observable market data, benchmark yields, interest rate volatilities, broker/dealer quotes, credit spreads and new issue data. These securities include government-sponsored enterprise obligations, FHLMC and FNMA bonds, mortgage-backed securities, corporate bonds and other securities. Securities measured at fair value in Level 3 include certain collateralized debt obligations that are backed by trust preferred securities issued by banks, thrifts and insurance companies. Management determined that an orderly and active market for these securities and similar securities did not exist based on a significant reduction in trading volume and widening spreads relative to historical levels.

 

   

Federal Home Loan Bank stock. The carrying value of FHLB stock approximates fair value based on the redemption provisions of the Federal Home Loan Bank.

 

   

Loans held for sale. The fair value of loans held for sale is estimated using quoted market prices.

 

   

Loans receivable. For variable rate loans which reprice frequently and have no significant change in credit risk, fair values are based on carrying values. The fair value of fixed-rate loans are estimated by discounting the future cash flows using the year-end rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities.

 

   

Accrued interest receivable. The carrying amount of accrued interest approximates fair value.

 

   

Deposits. The fair value of demand deposits, negotiable orders of withdrawal, regular savings, certain money market deposits and mortgagors’ and investors’ escrow accounts is the amount payable on demand at the reporting date. The fair value of certificates of deposit and other time deposits is estimated using a discounted cash flow calculation that applies interest rates currently being offered for deposits of similar remaining maturities to a schedule of aggregated expected maturities on such deposits.

 

   

Federal Home Loan Bank advances. The fair value of the advances is estimated using a discounted cash flow calculation that applies current FHLB interest rates for advances of similar maturity to a schedule of maturities of such advances.

 

   

Junior subordinated debt owed to unconsolidated trust. Based on rates currently available to the Bank for debt with similar terms and remaining maturities.

 

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SI FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2009 AND 2008 AND DECEMBER 31, 2008

 

 

 

   

Off-balance sheet instruments. Fair values for off-balance sheet lending commitments are based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the counterparties’ credit standings.

Assets and Liabilities Measured at Fair Value on a Recurring Basis

At June 30, 2009 and December 31, 2008, assets and liabilities measured at fair value under SFAS 157 on a recurring basis are summarized below:

 

At June 30, 2009

(Dollars in Thousands)

   Quoted Prices
in Active
Markets for
Identical
Assets

(Level 1)
   Significant
Other
Observable
Inputs

(Level 2)
   Significant
Unobservable
Inputs

(Level 3)
   Total

Available for sale securities

   $ 348    $ 159,189    $ 6,277    $ 165,814
                           

Total assets at fair value

   $ 348    $ 159,189    $ 6,277    $ 165,814
                           

 

At December 31, 2008

(Dollars in Thousands)

   Quoted Prices
in Active
Markets for
Identical
Assets

(Level 1)
   Significant
Other
Observable
Inputs
(Level 2)
   Significant
Unobservable
Inputs

(Level 3)
   Total

Available for sale securities

   $ 300    $ 157,007    $ 5,392    $ 162,699
                           

Total assets at fair value

   $ 300    $ 157,007    $ 5,392    $ 162,699
                           

The following table shows a reconciliation of the beginning and ending balances for Level 3 assets:

 

(Dollars in Thousands)

   Six Months Ended
June 30, 2009
 

Balance at beginning of period

   $ 5,392   

Increase in fair value of securities included in accumulated other comprehensive loss

     1,035   

Impairment charges included in net loss

     (150

Transfers to/from level 3

     —     
        

Balance at end of period

   $ 6,277   
        

Assets Measured at Fair Value on a Nonrecurring Basis

The Company may also be required, from time to time, to measure certain other financial assets on a nonrecurring basis in accordance with generally accepted accounting principles. These adjustments to fair value usually result from the application of lower-of-cost-or-market accounting or write-downs of individual assets.

In accordance with the provisions of SFAS No. 114, “Accounting by Creditors for Impairment of a Loan,” the Company measures the impairment of loans that are collateral dependent based on the fair value of the collateral (Level 3). At June 30, 2009, the carrying value of impaired loans, net of specific reserves of $252,000 for which the fair value of collateral was used to measure impairment, totaled $872,000. The carrying value of impaired loans, net of specific reserves of $1.2 million, for which the fair value of collateral was used to measure impairment, totaled $3.3 million at June 30, 2008. The loss related to specific reserves on impaired loans increased $1.2 million and $1.6 million for the three and six months ended June 30, 2009, respectively, and was recognized in the provision for loan losses.

 

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SI FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2009 AND 2008 AND DECEMBER 31, 2008

 

 

 

The fair value of collateral used by the Company represents the amount expected to be received from the sale of the property, net of selling costs, as determined by an independent, licensed or certified appraiser using observable market data. This data includes information such as selling price of similar properties, expected future cash flows or earnings of the subject property based on current market expectations, relevant legal, physical and economic factors.

Summary of Fair Values of Financial Instruments

SFAS No. 107, “Disclosures About Fair Value of Financial Instruments” (“SFAS 107”) as amended by FSP FAS 107-1 and APB 28-1, requires the disclosure of fair value information for financial instruments, whether or not recognized on the balance sheets, for which it is practicable to estimate that value for both interim reporting periods as well as annual financial statements. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rates and estimates of future cash flows. In that regard, the derived fair value estimates cannot be substantiated by comparisons to independent markets and, in many cases, could not be realized in immediate settlement of the instrument. SFAS 107, as amended by FSP FAS 107-1 and APB 28-1, excludes certain financial instruments from its disclosure requirements. Accordingly, the aggregate fair value amounts presented do not represent the underlying value of the Company.

Management uses its best judgment in estimating the fair value of the Company’s financial instruments; however, there are inherent weaknesses in any estimation technique. Therefore, for substantially all financial instruments, the fair value estimates presented herein are not necessarily indicative of the amounts the Company could have realized in a sales transaction at June 30, 2009 and December 31, 2008. The estimated fair value amounts for June 30, 2009 and December 31, 2008 have been measured as of their respective period-ends, and have not been re-evaluated or updated for purposes of these consolidated financial statements subsequent to those respective dates. As such, the estimated fair values of these financial instruments subsequent to the respective reporting dates may be different than the amounts reported at each period-end. The information presented should not be interpreted as an estimate of the fair value of the entire Company since a fair value calculation is only required for a limited portion of the Company’s assets. Due to the wide range of valuation techniques and the degree of subjectivity used in making the estimate, comparisons between the Company’s disclosures and those of other banks may not be meaningful.

 

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SI FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2009 AND 2008 AND DECEMBER 31, 2008

 

 

 

As of June 30, 2009 and December 31, 2008, the recorded carrying amounts and estimated fair values of the Company’s financial instruments are as follows:

 

     June 30, 2009    December 31, 2008

(Dollars in Thousands)

   Carrying
Amount
   Fair Value    Carrying
Amount
   Fair Value

Financial Assets:

           

Noninterest-bearing deposits

   $ 14,586    $ 14,586    $ 14,008    $ 14,008

Interest-bearing deposits

     4,583      4,583      465      465

Federal funds sold

     8,800      8,800      8,730      8,730

Available for sale securities

     165,814      165,814      162,699      162,699

Loans held for sale

     2,009      2,009      —        —  

Loans receivable, net

     627,315      628,758      617,263      620,419

Federal Home Loan Bank stock

     8,388      8,388      8,388      8,388

Accrued interest receivable

     3,509      3,509      3,721      3,721

Financial Liabilities:

           

Savings deposits

     60,948      60,948      60,494      60,494

Demand deposits, negotiable orders of withdrawal and money market accounts

     267,298      267,298      245,346      245,346

Certificates of deposit

     320,757      325,388      314,811      318,812

Mortgagors’ and investors’ escrow accounts

     3,749      3,749      3,625      3,625

Federal Home Loan Bank advances

     128,600      133,448      139,600      144,520

Junior subordinated debt owed to unconsolidated trust

     8,248      6,174      8,248      8,248

Off-Balance Sheet Instruments

Loan commitments on which the committed interest rate is less than the current market rate are immaterial at June 30, 2009 and December 31, 2008.

The Company assumes interest rate risk, which represents the risk that general interest rate levels will change, as a result of its normal operations. As a result, the fair values of the Company’s financial instruments will change when interest rate levels change and that change may be either favorable or unfavorable to the Company. Management attempts to match maturities of assets and liabilities to the extent believed necessary to minimize interest rate risk. However, borrowers with fixed-rate obligations are less likely to prepay in a rising rate environment and more likely to prepay in a falling rate environment. Conversely, depositors who are receiving fixed rates are more likely to withdraw funds before maturity in a rising rate environment and less likely to do so in a falling rate environment. Management monitors rates and maturities of assets and liabilities and attempts to minimize interest rate risk by adjusting terms of new loans and deposits and by investing in securities with terms that mitigate the Company’s overall interest rate risk.

 

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SI FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2009 AND 2008 AND DECEMBER 31, 2008

 

 

 

NOTE 10. SALE OF BRANCH OFFICE

On January 30, 2009, the Company completed the sale of its Gales Ferry, Connecticut branch office to another local financial institution. According to the terms of the agreement, the Company provided $619,000 in cash in connection with the sale of deposit liabilities totaling $1.7 million and fixed assets and other assets aggregating $1.0 million, resulting in a gain on the sale of $104,000.

NOTE 11. SUBSEQUENT EVENT

Effective this quarter, the Company implemented SFAS 165. Management evaluated all events or transactions that occurred after June 30, 2009 up through August 12, 2009, the date the Company issued these financial statements. During this period, the Company did not have any material recognized or unrecognized subsequent events.

 

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

Management’s discussion and analysis of financial condition and results of operations is intended to assist in understanding changes in the Company’s financial condition as of June 30, 2009 and December 31, 2008 and its results of operations for the three and six months ended June 30, 2009 and 2008. The information contained in this section should be read in conjunction with the consolidated financial statements and notes thereto appearing in Part I, Item 1 of this document as well as with Management’s Discussion and Analysis of Financial Condition and Results of Operations included in the Company’s 2008 Annual Report on Form 10-K.

This report may contain certain “forward-looking statements” within the meaning of the federal securities laws, which are made in good faith pursuant to the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995. These statements are not historical facts; rather, they are statements based on management’s current expectations regarding its business strategies, intended results and future performance. Forward-looking statements are generally preceded by terms such as “expects,” “believes,” “anticipates,” “intends,” “estimates,” “projects” and similar expressions.

Management’s ability to predict results or the effect of future plans or strategies is inherently uncertain. Factors that could have a material adverse effect on the operations of the Company and its subsidiaries include, but are not limited to, changes in interest rates, national and regional economic conditions, legislative and regulatory changes, monetary and fiscal policies of the United States government, including policies of the United States Department of Treasury (the “Treasury”) and the Federal Reserve Board, the quality and composition of the loan or investment portfolios, demand for loan products, deposit flows, competition, demand for financial services in the Company’s market area, changes in real estate market values in the Company’s market area and changes in relevant accounting principles and guidelines. Additional factors that may affect the Company’s results are discussed in Item 1A. “Risk Factors” in the Company’s Annual Report on Form 10-K and in other reports filed with the Securities and Exchange Commission. These risks and uncertainties should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements. Except as required by applicable law or regulation, the Company does not undertake, and specifically disclaims any obligation, to release publicly the result of any revisions that may be made to any forward-looking statements to reflect events or circumstances after the date of the statements or to reflect the occurrence of anticipated or unanticipated events.

Critical Accounting Policies

The Company considers accounting policies involving significant judgments and assumptions by management that have, or could have, a material impact on the carrying value of certain assets or on income to be critical accounting policies. The Company considers the allowance for loan losses, other-than-temporary impairment of securities, deferred income taxes and the impairment of long-lived assets to be its critical accounting policies. Additional information about the Company’s accounting policies is included in the notes to the Company’s consolidated financial statements contained in Part I, Item 1 of this document and in the Company’s 2008 Annual Report on Form 10-K.

Impact of New Accounting Standards

Refer to Note 1 of the consolidated financial statements in this report for a discussion of recent accounting pronouncements.

Recent Developments

 

   

On May 13, 2009, the Company held its Annual Meeting of Stockholders. Shareholders voted to re-elect three directors to a three-year term and ratified the appointment of Wolf & Company,

 

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P.C. as the Company’s independent registered public accounting firm for the year ending December 31, 2009. See Part II, Item 4. Submission of Matters to a Vote of Security Holders for additional details.

 

   

The Bank’s Employees’ Caring and Giving Program awarded grants to eighteen local charitable organizations. The Caring and Giving Program has been making quarterly grants since its inception in 1998.

Comparison of Financial Condition at June 30, 2009 and December 31, 2008

Assets:

Summary. Total assets increased $19.6 million, or 2.3%, to $872.7 million at June 30, 2009, as compared to $853.1 million at December 31, 2008, primarily due to increases of $10.1 million in net loans receivable, $4.8 million in cash and cash equivalents, $3.1 million in available for sale securities and $2.0 million in loans held for sale. The increase in net loans receivable includes increases in commercial business loans and consumer loans, offset by decreases in construction and residential mortgage loans. Available for sale securities increased as a result of the purchase of predominantly mortgage-backed securities, tax-exempt municipal bonds and U.S. government and agency obligations.

Loans Receivable, Net. The net loan portfolio increased $10.1 million. Loan originations increased $10.8 million during the first half of 2009 from the comparable period in 2008. Residential mortgage loan and consumer loan originations increased due to favorable interest rates during the first half of 2009, while commercial mortgage and commercial business loan originations decreased as a result of the declining economic environment. Changes in the loan portfolio consisted of the following:

 

   

Residential Mortgage Loans. Residential mortgage loans decreased $3.2 million, or 1.0%. Contributing to the decrease was the sale of $26.8 million of longer-term fixed-rate residential mortgage loans. Loan originations for residential mortgage loans increased $40.9 million for the first half of 2009 compared to the same period in 2008.

 

   

Commercial Loans. Multi-family and commercial mortgage loans increased $207,000, or 0.1%. Loan originations for multi-family and commercial mortgage loans were $3.5 million, which represents a decrease of $21.3 million during the first six months of 2009 compared to the same period in 2008. Commercial business loans increased $15.6 million, or 19.3%, for 2009 primarily due to the purchase of $21.8 million in USDA and SBA guaranteed loans, offset by a decrease of $10.1 million of loan originations during the first half of 2009 compared to the prior year.

 

   

Consumer Loans. Consumer loans increased $1.6 million during the first half of 2009, consisting primarily of an increase in home equity loans of $1.5 million. Loan originations for consumer loans were up $1.2 million for the six months ended June 30, 2009 from the comparable period in 2008.

The allowance for loan losses totaled $5.0 million at June 30, 2009 compared to $6.0 million at December 31, 2008. The ratio of the allowance for loan losses to total loans decreased from 0.97% at December 31, 2008 to 0.79% at June 30, 2009. This decrease was due, in part, to the increase in purchased USDA and SBA guaranteed loans which are fully guaranteed by the full faith and credit of the U.S. government, thus requiring no allowance for loan losses. At June 30, 2009, nonperforming loans totaled $8.6 million compared to $9.3 million at December 31, 2008. Specific reserves relating to nonperforming loans decreased to $252,000 at June 30, 2009 from $1.2 million at December 31, 2008. This decrease was primarily due to charge-offs of $2.3 million on two commercial construction relationships with previously recorded specific reserves. At June 30, 2009, two commercial construction relationships accounted for $3.5 million of nonperforming loans.

 

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The following table summarizes the activity in the allowance for loan losses at and for the three and six months ended June 30, 2009 and 2008.

 

     Three Months
Ended June 30,
    Six Months
Ended June 30,
 

(Dollars in Thousands)

   2009     2008     2009     2008  

Balance at beginning of period

   $ 5,271      $ 5,298      $ 6,047      $ 5,245   

Provision for loan losses

     1,440        150        1,930        285   

Loans charged-off

     (1,714     (27     (2,998     (123

Recoveries of loans previously charged-off

     4        6        22        20   
                                

Balance at end of period

   $ 5,001      $ 5,427      $ 5,001      $ 5,427   
                                

The following table provides information with respect to nonperforming assets and troubled debt restructurings as of the dates indicated.

 

(Dollars in Thousands)

        June 30,     
2009
    December 31,
2008
 

Nonaccrual loans:

    

Real estate loans

   $ 4,003      $ 9,110   

Commercial business loans

     4,632        217   

Consumer loans

     —          1   
                

Total nonaccrual loans

     8,635        9,328   

Real estate owned, net

     418        —     
                

Total nonperforming assets

     9,053        9,328   

Troubled debt restructurings

     68        69   
                

Total nonperforming assets and troubled debt restructurings

   $ 9,121      $ 9,397   
                

Total nonperforming loans to total loans

     1.36     1.50

Total nonperforming loans to total assets

     0.99     1.09

Total nonperforming assets and troubled debt restructurings to total assets

     1.05     1.10

Liabilities:

Summary. Total liabilities increased $17.0 million, or 2.2%, from December 31, 2008 to June 30, 2009 primarily as a result of increases in deposits of $28.4 million, offset by a decrease in Federal Home Loan Bank advances of $11.0 million.

Deposits. Deposits increased $28.4 million, or 4.6%, to $649.0 million at June 30, 2009. Interest-bearing deposits increased $24.8 million, or 4.4%, which included increases in NOW and money market accounts of $18.4 million, certificates of deposit of $5.9 million and noninterest-bearing deposits of $3.6 million. The increase in deposits was due to branch expansion, marketing and promotional initiatives and competitively-priced deposit products.

Borrowings. Borrowings decreased $11.0 million to $136.8 million at June 30, 2009, resulting from net repayments of Federal Home Loan Bank advances.

Equity:

Summary. Total stockholders’ equity increased $2.5 million from $72.9 million at December 31, 2008 to $75.5 million at June 30, 2009. The increase in equity was primarily attributable to a decrease in net unrealized holding losses on available for sale securities aggregating $2.8 million (net of taxes), offset by net operating losses of $563,000.

 

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The early adoption of FSP FAS 115-2 and FAS 124-2 during the quarter ended March 31, 2009 required management to separately identify whether other-than-temporary impairment charges totaling $7.1 million that were previously recognized in earnings during the third and fourth quarters of 2008 were related to credit losses or other noncredit factors at the measurement date of impairment. Management determined, based on the present value of expected cash flows in accordance with applicable guidance, that $4.0 million of the $7.1 million in other-than-temporary impairment charges were related to noncredit factors and therefore, recorded a cumulative effect adjustment of $2.7 million (net of taxes) as an increase to retained earnings with a corresponding adjustment to accumulated other comprehensive losses, net of applicable taxes. The Company does not intend to sell these impaired securities and it is not more likely than not that the Company will be required to sell these securities before recovery of the amortized cost basis of each of these securities.

Accumulated Other Comprehensive Loss. Accumulated other comprehensive loss is comprised solely of the unrealized holding gains and losses on available for sale securities, net of taxes. Net unrealized holding losses on available for sale securities, net of taxes, totaled $2.9 million at June 30, 2009 compared to net unrealized holding losses on available for sale securities, net of taxes, of $3.0 million at December 31, 2008. Unrealized holding losses on available for sale securities resulted from a decline in the market value of primarily the debt securities portfolio, which was recognized in accumulated other comprehensive loss on the consolidated balance sheets and a component of comprehensive income (loss) on the consolidated statement of changes in stockholders’ equity. A majority of the unrealized losses relate to mortgage-backed securities issued by the U.S. Treasury, government-sponsored enterprises or private issuers that maintain investment grade ratings. The Company does not intend to sell such securities and it is more likely than not that it will not be required to sell such securities prior to the recovery of its amortized cost basis less any credit losses. In addition, management considers the issuers of the securities to be financially sound and believes the Company will receive all contractual principal and interest related to these investments.

There continues to be significant contraction of liquidity in the fixed income markets, resulting in a lack of an orderly market for trading and pricing of fixed income securities, with the exception of U.S. Treasuries. Mortgage-backed paper from private issuers and preferred securities of financial institutions have been negatively impacted. For the six months ended June 30, 2009, management determined that certain available for sale securities were impaired and recognized other-than-temporary impairment losses of $150,000. See Item 1. Note 3 for additional details.

Results of Operations for the Three and Six Months Ended June 30, 2009 and 2008

General. The Company’s results of operations are dependent primarily on net interest income, which is the difference between the interest income earned on the Company’s interest-earning assets, such as loans and investments, and the interest expense on its interest-bearing liabilities, such as deposits and borrowings. The Company also generates noninterest income such as service fees on deposits, gains on securities and loan sales, fees from deposit and trust and investment management services, insurance commissions, increases in cash surrender value of bank-owned life insurance and other fees. The Company’s noninterest expenses consist of employee compensation and benefits, occupancy and equipment, computer and electronic banking services, outside professional services, marketing, FDIC deposit insurance and regulatory assessments and other general and administrative expenses. The Company’s results of operations are also significantly affected by general economic and competitive conditions, particularly changes in market interest rates, governmental policies and actions of regulatory agencies.

Summary. The Company recorded a net loss of $619,000 for the three months ended June 30, 2009, a decrease of $1.1 million compared to net income of $463,000 for the three months ended June 30, 2008. This decrease was primarily attributable to increases in the provision for loan losses of $1.3 million and the FDIC deposit insurance and regulatory assessment of $532,000.

 

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The Company reported a net loss of $563,000 for the six months ended June 30, 2009, representing a decrease of $1.5 million, due to increases of $1.6 million in the provision for loan losses and $1.5 million in noninterest expenses, partially offset by an increase of $1.3 million in net interest income.

For the three and six months ended June 30, 2009, net interest income increased 9.4% to $6.6 million from $6.0 million and 10.9% to $12.9 million from $11.6 million, respectively, compared to the same periods in 2008. The increase in net interest income was due to a higher average balance of loans and a lower cost of funds, offset by a decrease in the average rate earned on interest-earning assets and an increase in average deposits.

Interest and Dividend Income. Total interest and dividend income decreased $267,000, or 2.3%, for the second quarter of 2009, despite an increase in average interest-earning assets of $10.1 million to $819.6 million. Average loans increased $19.4 million, offset by decreases in average securities and other interest-earnings assets. The yield on interest-earning assets decreased 22 basis points to 5.60% for the second quarter of 2009 from 5.82% for the same period in 2008.

For the six months ended June 30, 2009, interest and dividend income decreased $390,000 or 1.7% to $22.8 million due to a lower yield earned on interest-earning assets, offset by an increase in the average balance of interest-earning assets of $24.5 million, of which average loans increased $25.7 million.

Interest Expense. Interest expense decreased $831,000, or 14.6%, to $4.9 million for the second quarter of 2009 compared to $5.7 million for the second quarter of 2008, primarily as a result of decreases in the rate paid on average deposits and borrowings, offset by an increase in the average balance of deposits.

Interest expense decreased $1.7 million for the six months ended June 30, 2009 as compared to the same period in 2008, resulting from a decrease in the rate paid on deposits and borrowings of 61 basis points, offset by an increase in average deposits of $37.2 million. The rates paid on deposits and subordinated debt decreased 64 basis points and 209 basis points, respectively. Interest-bearing liabilities included increases in NOW and money market accounts and certificates of deposit of $24.9 million and $18.6 million, respectively, offset by decreases of $6.3 million and $4.5 million in savings deposits and FHLB advances, respectively.

The following tables set forth information regarding average balances of assets and liabilities as well as the total dollar amounts of interest income from average interest-earning assets and interest expense on average interest-bearing liabilities, resulting yields and rates paid, interest rate spread, net interest margin and the ratio of average interest-earning assets to average interest-bearing liabilities for the periods indicated.

 

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     At or For the Three Months Ended June 30,  
     2009     2008  

(Dollars in Thousands)

   Average
Balance
   Interest &
Dividends
    Average
Yield/
Rate
    Average
Balance
   Interest &
Dividends
    Average
Yield/
Rate
 

Interest-earning assets:

              

Loans (1)(2)

   $ 628,354    $ 9,369      5.98   $ 608,971    $ 9,318      6.15

Securities (3)

     176,213      2,048      4.66        183,592      2,287      5.01   

Other interest-earning assets

     14,983      25      0.67        16,890      104      2.48   
                                          

Total interest-earning assets

     819,550      11,442      5.60        809,453      11,709      5.82   
                                          

Noninterest-earning assets

     48,221          44,036     
                      

Total assets

   $ 867,771        $ 853,489     
                      

Interest-bearing liabilities:

              

Deposits:

              

NOW and money market

   $ 201,760      557      1.11      $ 180,803      836      1.86   

Savings (4)

     63,580      111      0.70        69,213      164      0.95   

Certificates of deposit (5)

     316,710      2,709      3.43        305,859      3,034      3.99   
                                          

Total interest-bearing deposits

     582,050      3,377      2.33        555,875      4,034      2.92   

FHLB advances

     136,545      1,440      4.23        146,130      1,596      4.39   

Subordinated debt

     8,248      59      2.87        8,248      77      3.75   
                                          

Total interest-bearing liabilities

     726,843      4,876      2.69        710,253      5,707      3.23   
                                          

Noninterest-bearing liabilities

     66,713          64,676     
                      

Total liabilities

     793,556          774,929     
                      

Total stockholders’ equity

     74,215          78,560     
                      

Total liabilities and stockholders’ equity

   $ 867,771        $ 853,489     
                      

Net interest-earning assets

   $ 92,707        $ 99,200     
                      

Tax equivalent net interest income (3)

        6,566             6,002     

Tax equivalent interest rate spread (6)

        2.91        2.59
                      

Tax equivalent net interest margin as a percentage of interest-earning assets (7)

        3.21        2.98
                      

Average of interest-earning assets to average interest-bearing liabilities

        112.75        113.97
                      

Less tax equivalent adjustment (3)

        (2          (2  
                          

Net interest income

      $ 6,564           $ 6,000     
                          

 

(1)

Amount is net of deferred loan origination fees and costs. Average balances include nonaccrual loans and loans held for sale.

(2)

Loan fees are included in interest income and are insignificant.

(3)

Securities income and net interest income are presented on a tax equivalent basis using a tax rate of 34%. The tax equivalent adjustment is deducted from tax equivalent net interest income to agree to the amounts reported in the statements of income.

(4)

Includes mortgagors’ and investors’ escrow accounts.

(5)

Includes brokered deposits.

(6)

Tax equivalent net interest rate spread represents the difference between the weighted-average yield on interest-earning assets and the weighted-average cost of interest-bearing liabilities.

(7)

Tax equivalent net interest margin represents tax equivalent net interest income divided by average interest-earning assets.

 

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     At or For the Six Months Ended June 30,  
     2009     2008  

(Dollars in Thousands)

   Average
Balance
   Interest &
Dividends
    Average
Yield/
Rate
    Average
Balance
   Interest &
Dividends
    Average
Yield/
Rate
 

Interest-earning assets:

              

Loans (1)(2)

   $ 627,156    $ 18,591      5.98   $ 601,438    $ 18,534      6.20

Securities (3)

     171,686      4,091      4.81        175,528      4,431      5.08   

Other interest-earning assets

     17,534      77      0.89        14,922      184      2.48   
                                          

Total interest-earning assets

     816,376      22,759      5.62        791,888      23,149      5.88   
                                          

Noninterest-earning assets

     46,495          42,860     
                      

Total assets

   $ 862,871        $ 834,748     
                      

Interest-bearing liabilities:

              

Deposits:

              

NOW and money market

   $ 198,718      1,186      1.20      $ 173,843      1,639      1.90   

Savings (4)

     62,408      225      0.73        68,721      362      1.06   

Certificates of deposit (5)

     315,666      5,420      3.46        297,078      6,131      4.15   
                                          

Total interest-bearing deposits

     576,792      6,831      2.39        539,642      8,132      3.03   

FHLB advances

     138,893      2,921      4.24        143,405      3,188      4.47   

Subordinated debt

     8,248      130      3.18        8,248      216      5.27   
                                          

Total interest-bearing liabilities

     723,933      9,882      2.75        691,295      11,536      3.36   
                                          

Noninterest-bearing liabilities

     65,063          63,279     
                      

Total liabilities

     788,996          754,574     
                      

Total stockholders’ equity

     73,875          80,174     
                      

Total liabilities and stockholders’ equity

   $ 862,871        $ 834,748     
                      

Net interest-earning assets

   $ 92,443        $ 100,593     
                      

Tax equivalent net interest income (3)

        12,877             11,613     

Tax equivalent interest rate spread (6)

        2.87        2.52
                      

Tax equivalent net interest margin as a percentage of interest-earning assets (7)

        3.18        2.95
                      

Average of interest-earning assets to average interest-bearing liabilities

        112.77        114.55
                      

Less tax equivalent adjustment (3)

        (3          (3  
                          

Net interest income

      $ 12,874           $ 11,610     
                          

 

(1)

Amount is net of deferred loan origination fees and costs. Average balances include nonaccrual loans and loans held for sale.

(2)

Loan fees are included in interest income and are insignificant.

(3)

Securities income and net interest income are presented on a tax equivalent basis using a tax rate of 34%. The tax equivalent adjustment is deducted from tax equivalent net interest income to agree to the amounts reported in the statements of income.

(4)

Includes mortgagors’ and investors’ escrow accounts.

(5)

Includes brokered deposits.

(6)

Tax equivalent net interest rate spread represents the difference between the weighted-average yield on interest-earning assets and the weighted-average cost of interest-bearing liabilities.

(7)

Tax equivalent net interest margin represents tax equivalent net interest income divided by average interest-earning assets.

 

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The following table sets forth the extent to which changes in interest rates and changes in volume of interest-earning assets and interest-bearing liabilities have on the Company’s interest income and interest expense for the periods presented. The rate column shows the effects attributable to changes in rate (changes in rate multiplied by prior volume). The volume column shows the effects attributable to changes in volume (changes in volume multiplied by prior rate). The net column represents the sum of the rate and volume columns. For purposes of this table, changes attributable to both changes in rate and volume that cannot be segregated have been allocated proportionately based on the changes due to rate and the changes due to volume.

 

     Three Months Ended
June 30, 2009 and 2008
    Six Months Ended June 30,
2009 and 2008
 
     Increase (Decrease) Due To     Increase (Decrease) Due To  

(Dollars in Thousands)

   Rate     Volume     Net     Rate     Volume     Net  

Interest-earning assets:

            

Interest and dividend income:

            

Loans (1)(2)

   $ (237   $ 288      $ 51      $ (692   $ 749      $ 57   

Securities (3)

     (151     (88     (239     (245     (95     (340

Other interest-earning assets

     (68     (11     (79     (135     28        (107
                                                

Total interest-earning assets

     (456     189        (267     (1,072     682        (390
                                                

Interest-bearing liabilities:

            

Interest expense:

            

Deposits (4)

     (840     183        (657     (1,842     541        (1,301

Federal Home Loan Bank advances

     (56     (100     (156     (168     (99     (267

Subordinated debt

     (18     —          (18     (86     —          (86
                                                

Total interest-bearing liabilities

     (914     83        (831     (2,096     442        (1,654
                                                

Change in net interest income (3)

   $ 458      $ 106      $ 564      $ 1,024      $ 240      $ 1,264   
                                                

 

(1)

Amount is net of deferred loan origination fees and costs. Average balances include nonaccrual loans and loans held for sale.

(2)

Loan fees are included in interest income and are insignificant.

(3)

Securities income and net interest income are presented on a tax equivalent basis using a tax rate of 34%. The tax equivalent adjustment is deducted from tax equivalent net interest income to agree to the amount reported in the statements of income.

(4)

Includes mortgagors’ and investors’ escrow accounts and brokered deposits.

Provision for Loan Losses. The Company’s provision for loan losses increased $1.3 million and $1.6 million for the three and six months ended June 30, 2009, respectively. The higher provision in 2009 related to increases in loan charge-offs and nonperforming loans, which continue to be impacted by adverse market conditions. While the Company has no direct exposure to sub-prime mortgages, declining economic conditions have negatively impacted the residential and commercial construction markets and contributed to the decrease in credit quality for commercial loans. At June 30, 2009, nonperforming loans totaled $8.6 million, compared to $7.9 million at June 30, 2008. Specific reserves relating to nonperforming loans decreased to $252,000 at June 30, 2009 compared to $1.2 million at June 30, 2008. Net loan charge-offs were $1.7 million and $3.0 million for the three and six months ended June 30, 2009, respectively, compared to net loan charge-offs of $21,000 and $103,000 for the three and six months ended June 30, 2008, respectively. Higher loan charge-offs for 2009 primarily related to two commercial construction relationships aggregating $2.3 million with previously recorded specific reserves. At June 30, 2009, the aforementioned commercial construction relationships accounted for $3.5 million of nonperforming loans.

 

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Noninterest Income. The following table shows the components of noninterest income and the dollar and percentage changes for the periods presented.

 

      Three Months Ended June 30,     Six Months Ended June 30,  

(Dollars in Thousands)

   2009    2008    Dollar
Change
    Percent
Change
    2009     2008    Dollar
Change
    Percent
Change
 

Service fees

   $ 1,257    $ 1,328    $ (71   (5.3 )%    $ 2,448      $ 2,613    $ (165   (6.3 )% 

Wealth management fees

     969      1,020      (51   (5.0     1,927        1,991      (64   (3.2

Increase in cash surrender value of bank-owned life insurance

     73      77      (4   (5.2     146        152      (6   (3.9

Net gain on sale of securities

     117      34      83      244.1        254        144      110      76.4   

Other-than-temporary impairment loss on securities

     —        —        —        N/A        (150     —        (150   N/A   

Net gain on sale of equipment

     —        —        —        N/A        104        —        104      N/A   

Net gain on sale of loans

     191      22      169      768.2        382        81      301      371.6   

Other

     36      142      (106   (74.6     (287     107      (394   (368.2
                                                         

Total noninterest income

   $ 2,643    $ 2,623    $ 20      0.8   $ 4,824      $ 5,088    $ (264   (5.2 )% 
                                                         

The decrease in other noninterest income for the six months ended June 30, 2009 was primarily due to impairment charges of $336,000 that were recorded during the first quarter of 2009 to reduce the carrying value of the Bank’s investment in two small business investment company limited partnerships. In addition, other noninterest income for 2008 included the recovery of $131,000 in administration fees and expenses related to the Bank’s acquisition of certain assets and operations of the former Circle Trust Company, which were previously deemed uncollectible. For 2009, the Company reported net gains on the sale of loans of $382,000 resulting from the sale of $26.8 million of fixed-rate longer-term residential mortgage loans, compared to net gains of $81,000 from the sale of $6.6 million of fixed-rate longer-term residential mortgage loans for the same period in 2008. Net gain on the sale of securities of $254,000 during 2009 resulted from the sale of primarily mortgage-backed securities and corporate debt securities, offset by other-than-temporary impairment charges on two pooled trust preferred securities totaling $150,000. Service fees decreased as a result of a decrease in overdraft charges on certain deposit products. Wealth management fees were lower principally due to a decrease in the market value of assets under management. During the first quarter of 2009, the Company reported a gain of $104,000 on the sale of equipment in connection with the sale of the Gales Ferry, Connecticut branch office in January 2009.

Noninterest Expenses. The following table shows the components of noninterest expenses and the dollar and percentage changes for the periods presented.

 

     Three Months Ended June 30,     Six Months Ended June 30,  

(Dollars in Thousands)

   2009    2008    Dollar
Change
    Percent
Change
    2009    2008    Dollar
Change
    Percent
Change
 

Salaries and employee benefits

   $ 4,484    $ 4,305    $ 179      4.2   $ 8,763    $ 8,305    $ 458      5.5

Occupancy and equipment

     1,351      1,464      (113   (7.7     2,806      2,865      (59   (2.1

Computer and electronic banking services

     832      761      71      9.3        1,623      1,482      141      9.5   

Outside professional services

     249      210      39      18.6        469      413      56      13.6   

Marketing and advertising

     201      194      7      3.6        409      391      18      4.6   

Supplies

     131      145      (14   (9.7     282      320      (38   (11.9

FDIC deposit insurance and regulatory assessment

     690      158      532      336.7        872      223      649      291.0   

Other

     743      569      174      30.6        1,376      1,078      298      27.6   
                                                        

Total noninterest expenses

   $ 8,681    $ 7,806    $ 875      11.2   $ 16,600    $ 15,077    $ 1,523      10.1
                                                        

Noninterest expenses increased $875,000 and $1.5 million for the three and six months ended June 30, 2009, respectively, compared to the same periods in 2008, primarily due to increases in the FDIC assessment, salaries and benefits and computer and electronic banking services. The increase in the 2009 FDIC assessment of $639,000 was attributable to the expiration of credits during 2008, an increase in the

 

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assessment rate for 2009 and an FDIC-imposed industry-wide five basis point special assessment totaling $393,000 that was accrued during the quarter ended June 30, 2009. Compensation costs increased as a result of additional salaries and benefits, loan origination commissions and related payroll taxes. Loan origination commissions increased due to higher residential mortgage volume resulting from a decrease in market interest rates. Computer and electronic banking services expense rose as a result of increased telecommunication costs and transaction activity.

Income Tax Provision. For the three and six months ended June 30, 2009, the Company’s income tax expense decreased $499,000 and $687,000, respectively, due to lower pre-tax income. The effective tax rate for the three months ended June 30, 2009 and 2008 was 32.3% and 30.6%, respectively. The effective tax rate for the six months ended June 30, 2009 and 2008 was 32.3% and 31.3%, respectively.

Liquidity and Capital Resources

Liquidity is the ability to meet current and future financial obligations of a short-term nature. The Company’s primary sources of funds consist of deposit inflows, loan repayments and sales, maturities and sales of investment securities and Federal Home Loan Bank borrowings. While maturities and scheduled amortization of loans and securities are predictable sources of funds, deposit flows, mortgage prepayments and loan and security sales are greatly influenced by general interest rates, economic conditions and competition.

The Company’s most liquid assets are cash and cash equivalents. The levels of these assets depend on the Company’s operating, financing, lending and investing activities during any given period. At June 30, 2009, cash and cash equivalents totaled $28.0 million. Interest-bearing deposits and federal funds sold totaled $13.4 million, which included a $1.5 million certificate of deposit pledged to support a letter of credit for MasterCard’s settlement guarantee program.

Securities classified as available for sale, which provide additional sources of liquidity, totaled $165.8 million at June 30, 2009. In addition, at June 30, 2009, the Company had a potential borrowing capacity of $210.4 million from the Federal Home Loan Bank, which included overnight lines of credit of $10.0 million. At June 30, 2009, the Company had advances outstanding of $128.6 million and no overnight advances outstanding. The Company believes that its liquid assets combined with the available line from the Federal Home Loan Bank provide adequate liquidity to meet its current financial obligations.

The Company’s primary investing activities are the origination of loans and the purchase and sale of securities and loans. For the six months ended June 30, 2009, the Company originated $91.2 million of loans and purchased $37.6 million of securities and $21.8 million of loans. For the twelve months ended December 31, 2008, the Company originated $141.6 million of loans and purchased $100.8 million of securities and $12.3 million of loans. The Company sold $26.8 million of residential mortgage loans during the six months ended June 30, 2009 compared to $14.2 million for the twelve months ended December 31, 2008.

Financing activities consist primarily of activity in deposit accounts and in Federal Home Loan Bank advances. The Company utilizes Federal Home Loan Bank advances and deposits to fund asset growth. The Company experienced a net increase in total deposits, including mortgagors’ and investors’ escrow accounts, of $28.5 million and $72.5 million for the six months ended June 30, 2009 and for the year ended December 31, 2008, respectively. Certificates of deposit due within one year of June 30, 2009 totaled $205.5 million, or 31.7%, of total deposits. Deposit flows are affected by the overall level of interest rates, the interest rates and products offered by the Company and its local competitors and other factors. The Company generally manages the pricing of its deposits to be competitive and to increase core deposits and commercial banking relationships. Occasionally, the Company offers promotional rates on certain deposit products to attract deposits.

 

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The Company experienced a net decrease of $11.0 million in Federal Home Loan Bank advances for the six months ended June 30, 2009 and $2.0 million for the year ended December 31, 2008. For the six months ended June 30, 2009, the Company repurchased 11,243 shares of the Company’s common stock at a cost of $68,000. Additional discussion about the Company’s liquidity and capital resources is contained in Item 7 in the Company’s 2008 Annual Report on Form 10-K.

SI Financial Group, Inc. is a separate legal entity from the Bank and must provide for its own liquidity. In addition to its operating expenses, SI Financial Group is responsible for paying any dividends declared to its shareholders and paying the obligations on its outstanding debentures. SI Financial Group also has repurchased shares of its common stock. SI Financial Group’s primary source of income is dividends received from the Bank. The amount of dividends that the Bank may declare and pay to SI Financial Group in any calendar year, without the receipt of prior approval from the OTS but with prior notice to the OTS, cannot exceed net income for that year to date plus retained net income (as defined) for the preceding two calendar years. At June 30, 2009, SI Financial Group had cash and cash equivalents of $2.8 million.

Payments Due Under Contractual Obligations

Information relating to payments due under contractual obligations is presented in the Company’s Form 10-K for the year ended December 31, 2008. There were no material changes in the Company’s payments due under contractual obligations between December 31, 2008 and June 30, 2009.

Off-Balance Sheet Arrangements

In the normal course of operations, the Company engages in a variety of financial transactions that, in accordance with accounting principles generally accepted in the United States of America, are not recorded on its financial statements. These transactions involve, to varying degrees, elements of credit, interest rate and liquidity risk. Such transactions are used primarily to manage customers’ requests for funding and take the form of loan commitments, lines of credit and letters of credit.

The contractual amount of commitments to extend credit represent the amounts of potential accounting loss should the contract be fully drawn upon, the customer defaults and the value of any existing collateral becomes worthless. The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments. Financial instruments whose contract amounts represent credit risk at June 30, 2009 and December 31, 2008 are as follows:

 

(Dollars in Thousands)

        June 30,     
2009
   December 31,
2008

Commitments to extend credit: (1)

     

Future loan commitments

   $ 8,944    $ 5,386

Undisbursed construction loans

     14,927      19,840

Undisbursed home equity lines of credit

     18,192      18,327

Undisbursed commercial lines of credit

     12,777      13,507

Overdraft protection lines

     1,473      1,434

Standby letters of credit (2)

     784      710
             

Total commitments

   $ 57,097    $ 59,204
             
 
  (1)

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments may require payment of a fee and generally have fixed expiration dates or other termination clauses.

  (2)

Standby letters of credit are conditional commitments issued to guarantee the performance of a customer to a third party.

The Bank is a limited partner in two Small Business Investment Corporations (“SBIC”). In 1998, the Bank became a limited partner in an SBIC and committed to contribute capital of $1.0 million in the limited

 

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partnership. In 2007, the Bank became a limited partner in a second SBIC and committed to contribute capital of $1.0 million in the limited partnership. The Bank recognized a write-down of $336,000 on its investment in the two SBICs during the six months ended June 30, 2009. At June 30, 2009, the Bank’s remaining off-balance sheet commitment for the capital investment in the SBICs was $817,000.

At June 30, 2009, the Bank had outstanding commitments to purchase $5.2 million in guaranteed USDA and SBA loans.

For the six months ended June 30, 2009, with the exception of the aforementioned commitments, the Company did not engage in any additional off-balance sheet transactions reasonably likely to have a material effect on the Company’s financial condition, results of operations or cash flows. See Notes 6 and 12 to the consolidated financial statements contained in the Company’s 2008 Annual Report on Form 10-K.

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

Not applicable as the Company is a smaller reporting company.

 

Item 4(T). Controls and Procedures.

The Company’s management, including the Company’s principal executive officer and principal financial officer, have evaluated the effectiveness of the Company’s “disclosure controls and procedures,” as such term is defined in Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended, (the “Exchange Act”). Based upon their evaluation, the principal executive officer and principal financial officer concluded that, as of the end of the period covered by this report, the Company’s disclosure controls and procedures were effective for ensuring that the information required to be disclosed in the reports that the Company files or submits under the Exchange Act with the Securities and Exchange Commission (1) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and (2) is accumulated and communicated to the Company’s management, including its principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure. No changes in the Company’s internal control over financial reporting occurred during the quarter ended June 30, 2009 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II. OTHER INFORMATION

 

Item 1. Legal Proceedings.

The Company is not involved in any pending legal proceedings believed by management to be material to the Company’s financial condition or results of operations. Periodically, there have been various claims and lawsuits against the Bank, such as claims to enforce liens, condemnation proceedings on properties in which the Bank holds a security interest, claims involving the making and servicing of real property loans and other issues incident to the Bank’s business. Management believes that these legal proceedings would not have a material adverse effect on the Company’s financial condition, results of operations or cash flows.

 

Item 1A. Risk Factors.

There are no material changes from the risk factors set forth under Part I, Item 1A. “Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2008, which could materially and adversely affect the Company’s business, financial condition or future results. The risks described in the Company’s Annual Report on Form 10-K are not the only risks that the Company faces. Additional risks and uncertainties not currently known to the Company or that the Company currently deems to be immaterial also may materially adversely affect the Company’s business, financial condition and/or operating results.

 

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

The Company’s repurchases of equity securities during the quarter ended June 30, 2009 were as follows:

 

Period

   Total
Number of
Shares
Purchased (1)
   Average
Price Paid
Per Share
   Total Number
of Shares
Purchased as
Part of Publicly
Announced Plans
or Programs
   Maximum
Number of Shares
that May Yet be
Purchased Under
the Plans or
Programs

April 1 - 30, 2009

   —      $ —      —      460,695

May 1 - 31, 2009

   11,243      6.00    11,243    449,452

June 1 - 30, 2009

   —        —      —      449,452
                   

Total

   11,243    $ 6.00    11,243   
                   

 

(1)

This table includes 11,243 shares withheld from employees to satisfy tax withholding requirements upon the vesting of restricted stock awards.

 

Item 3. Defaults Upon Senior Securities.

None.

 

Item 4. Submission of Matters to a Vote of Security Holders.

The Annual Meeting of Stockholders was held on May 13, 2009.

The items voted upon at the Annual Meeting and the votes for each proposal were as follows:

 

  1. Election of directors for a three-year term.

 

Nominees

  

For

  

Withheld

Donna M. Evan

   10,636,663    195,661

Henry P. Hinckley

   10,535,065    297,259

Steven H. Townsend

   10,567,100    265,224

 

  2. Ratification of the appointment of Wolf and Company, P.C. as the Company’s independent registered public accounting firm for the fiscal year ending December 31, 2009.

 

For

  

Against

  

Abstain

10,758,813

   72,828    683

 

Item 5. Other Information.

None.

 

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Item 6. Exhibits.

 

  3.1    Charter of SI Financial Group, Inc. (1)
  3.2    Bylaws of SI Financial Group, Inc. (2)
  4.0    Specimen Stock Certificate of SI Financial Group, Inc. (1)
31.1    Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer
31.2    Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer
32.0    18 U.S.C. Section 1350 Certifications

 

(1)

Incorporated by reference into this document from the Exhibits filed with the Securities and Exchange Commission on the Registration Statement on Form S-1, and any amendments thereto, Registration No. 333-116381.

(2)

Incorporated by reference into this document from the Exhibits filed with the Company’s Form 8-K, filed with the Securities and Exchange Commission on May 8, 2008.

 

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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.

 

    SI FINANCIAL GROUP, INC.
Date: August 12, 2009    

/s/ Rheo A. Brouillard

    Rheo A. Brouillard
    President and Chief Executive Officer
    (principal executive officer)
Date: August 12, 2009    

/s/ Brian J. Hull

    Brian J. Hull
    Executive Vice President, Treasurer and
    Chief Financial Officer
    (principal financial and accounting officer)

 

38

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