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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 March 31, 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 May 7, 2009, there were 11,800,445 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.    Consolidated Financial Statements of SI Financial Group, Inc. and Subsidiaries (unaudited):   
   Consolidated Balance Sheets at March 31, 2009 and December 31, 2008    1
   Consolidated Statements of Operations for the three months ended March 31, 2009 and 2008    2
   Consolidated Statement of Changes in Stockholders’ Equity for the three months ended March 31, 2009    3
   Consolidated Statements of Cash Flows for the three months ended March 31, 2009 and 2008    4
   Notes to Consolidated Financial Statements    6
Item 2.    Management’s Discussion and Analysis of Financial Condition and Results of Operations    20
Item 3.    Quantitative and Qualitative Disclosures about Market Risk    30
Item 4(T).    Controls and Procedures    30
PART II.    OTHER INFORMATION   
Item 1.    Legal Proceedings    30
Item 1A.    Risk Factors    30
Item 2.    Unregistered Sales of Equity Securities and Use of Proceeds    30
Item 3.    Defaults Upon Senior Securities    30
Item 4.    Submission of Matters to a Vote of Security Holders    31
Item 5.    Other Information    31
Item 6.    Exhibits    31
SIGNATURES    32


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)

 

     March 31,
2009
    December 31,
2008
 

ASSETS:

    

Cash and due from banks:

    

Noninterest-bearing

   $ 12,905     $ 14,008  

Interest-bearing

     2,924       465  

Federal funds sold

     21,225       8,730  
                

Total cash and cash equivalents

     37,054       23,203  

Available for sale securities, at fair value

     154,452       162,699  

Loans held for sale

     1,192       —    

Loans receivable (net of allowance for loan losses of $5,271 at March 31, 2009 and $6,047 at December 31, 2008)

     623,518       617,263  

Federal Home Loan Bank stock, at cost

     8,388       8,388  

Bank-owned life insurance

     8,787       8,714  

Other real estate owned

     70       —    

Premises and equipment, net

     11,221       12,225  

Goodwill and other intangibles

     4,284       4,294  

Accrued interest receivable

     3,397       3,721  

Deferred tax asset, net

     8,499       7,938  

Other assets

     3,658       4,677  
                

Total assets

   $ 864,520     $ 853,122  
                

LIABILITIES AND STOCKHOLDERS’ EQUITY:

    

Liabilities:

    

Deposits:

    

Noninterest-bearing

   $ 58,636     $ 57,647  

Interest-bearing

     577,520       563,004  
                

Total deposits

     636,156       620,651  

Mortgagors’ and investors’ escrow accounts

     1,972       3,625  

Federal Home Loan Bank advances

     137,600       139,600  

Junior subordinated debt owed to unconsolidated trust

     8,248       8,248  

Accrued expenses and other liabilities

     7,996       8,071  
                

Total liabilities

     791,972       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; 11,800,445 shares outstanding at March 31, 2009 and December 31, 2008)

     126       126  

Additional paid-in capital

     52,171       52,103  

Unallocated common shares held by ESOP

     (3,472 )     (3,553 )

Unearned restricted shares

     (535 )     (714 )

Retained earnings

     38,524       35,848  

Accumulated other comprehensive loss

     (6,369 )     (2,986 )

Treasury stock, at cost (763,305 shares at March 31, 2009 and December 31, 2008)

     (7,897 )     (7,897 )
                

Total stockholders’ equity

     72,548       72,927  
                

Total liabilities and stockholders’ equity

   $ 864,520     $ 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
March 31,
 
     2009     2008  

Interest and dividend income:

    

Loans, including fees

   $ 9,222     $ 9,216  

Securities:

    

Taxable interest

     2,025       1,982  

Tax-exempt interest

     3       3  

Dividends

     14       158  

Other

     52       80  
                

Total interest and dividend income

     11,316       11,439  
                

Interest expense:

    

Deposits

     3,454       4,098  

Federal Home Loan Bank advances

     1,481       1,592  

Subordinated debt

     71       139  
                

Total interest expense

     5,006       5,829  
                

Net interest income

     6,310       5,610  

Provision for loan losses

     490       135  
                

Net interest income after provision for loan losses

     5,820       5,475  
                

Noninterest income:

    

Service fees

     1,191       1,285  

Wealth management fees

     958       971  

Increase in cash surrender value of bank-owned life insurance

     73       75  

Net gain on sale of securities

     137       110  

Impairment loss on securities (includes total losses of $1,862, net of $1,712 recognized in other comprehensive loss, pretax)

     (150 )     —    

Net gain on sale of equipment

     104       —    

Net gain on sale of loans

     191       59  

Other

     (323 )     (35 )
                

Total noninterest income

     2,181       2,465  
                

Noninterest expenses:

    

Salaries and employee benefits

     4,279       4,000  

Occupancy and equipment

     1,455       1,401  

Computer and electronic banking services

     791       721  

Outside professional services

     220       203  

Marketing and advertising

     208       197  

Supplies

     151       175  

FDIC deposit insurance and regulatory assessment

     182       65  

Other

     633       509  
                

Total noninterest expenses

     7,919       7,271  
                

Income before income tax provision

     82       669  

Income tax provision

     26       214  
                

Net income

   $ 56     $ 455  
                

Net income per share:

    

Basic

   $ 0.00     $ 0.04  

Diluted

   $ 0.00     $ 0.04  

See accompanying notes to unaudited interim consolidated financial statements.

 

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Table of Contents

SI FINANCIAL GROUP, INC.

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY

FOR THE THREE MONTHS ENDED MARCH 31, 2009

(Dollars in Thousands, Except Share Amounts / Unaudited)

 

            Additional
Paid-in
Capital
    Unallocated
Common

Shares Held
by ESOP
    Unearned
Restricted
Shares
    Retained
Earnings
    Accumulated
Other

Comprehensive
Loss
    Treasury
Stock
    Total
Stockholders’
Equity
 
    Common Stock              
    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 loss:

                 

Net income

  —       —       —         —         —         56       —         —         56  

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

  —       —       —         —         —         —         (666 )     —         (666 )
                       

Total comprehensive loss

                    (610 )

Restricted shares activity

  —       —       31       —         66       (97 )     —         —         —    

Equity incentive plan shares earned

  —       —       75       —         113       —         —         —         188  

Committed to release 8,074 ESOP shares

  —       —       (38 )     81       —         —         —         —         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 March 31, 2009

  12,563,750   $ 126   $ 52,171     $ (3,472 )   $ (535 )   $ 38,524     $ (6,369 )   $ (7,897 )   $ 72,548  
                                                                 

See accompanying notes to unaudited interim consolidated financial statements.

 

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Table of Contents

SI FINANCIAL GROUP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in Thousands / Unaudited)

 

     Three Months Ended March 31,  
     2009     2008  

Cash flows from operating activities:

    

Net income

   $ 56     $ 455  

Adjustments to reconcile net income to net cash provided by operating activities:

    

Provision for loan losses

     490       135  

Employee stock ownership plan expense

     43       79  

Equity incentive plan expense

     188       199  

Accretion of investment premiums and discounts, net

     (69 )     (55 )

Amortization of loan premiums and discounts, net

     70       46  

Depreciation and amortization of premises and equipment

     476       522  

Amortization of core deposit intangible

     10       13  

Amortization of mortgage servicing rights

     33       27  

Net gain on sale of securities

     (137 )     (110 )

Deferred tax benefit

     (97 )     (691 )

Loans originated for sale

     (16,228 )     (4,787 )

Proceeds from sale of loans held for sale

     15,227       5,076  

Net gain on sale of loans

     (191 )     (59 )

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

     (73 )     (75 )

Impairment loss on securities

     150       —    

Change in operating assets and liabilities:

    

Accrued interest receivable

     324       198  

Other assets

     890       372  

Accrued expenses and other liabilities

     (75 )     717  
                

Net cash provided by operating activities

     983       2,052  
                

Cash flows from investing activities:

    

Purchases of available for sale securities

     (18,830 )     (46,809 )

Proceeds from sales of available for sale securities

     8,492       —    

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

     17,510       16,063  

Net decrease (increase) in loans

     8,045       (3,737 )

Purchase of loans

     (14,933 )     (968 )

Purchases of Federal Home Loan Bank stock

     —         (323 )

Proceeds from sale of other real estate owned

     —         923  

Purchases of premises and equipment

     (317 )     (868 )

Branch (sale) acquisitions

     (619 )     15,932  
                

Net cash used in investing activities

     (652 )     (19,787 )
                

Cash flows from financing activities:

    

Net increase in deposits

     17,173       27,162  

Net decrease in mortgagors’ and investors’ escrow accounts

     (1,653 )     (1,578 )

Proceeds from Federal Home Loan Bank advances

     4,032       26,771  

Repayments of Federal Home Loan Bank advances

     (6,032 )     (23,712 )

Cash dividends on common stock

     —         (168 )

Treasury stock purchased

     —         (1,972 )
                

Net cash provided by financing activities

     13,520       26,503  
                

(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)

 

     Three Months Ended March 31,
     2009    2008

Net change in cash and cash equivalents

     13,851      8,768

Cash and cash equivalents at beginning of period

     23,203      20,669
             

Cash and cash equivalents at end of period

   $ 37,054    $ 29,437
             
Supplemental cash flow information:      

Interest paid

   $ 5,004    $ 5,758

Income taxes paid, net

     176      153

Transfer of loans to other real estate owned

     70      —  

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

     3,418  
        

Total assets

     11,743  
        

Liabilities:

  

Deposits

     27,668  

Accrued interest - deposits

     7  
        

Total liabilities

     27,675  
        

Net liabilities

   $ (15,932 )
        

See accompanying notes to unaudited interim consolidated financial statements.

 

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Table of Contents

SI FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2009 AND 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 through the Bank’s Connecticut offices. 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 subsidiaries, SI Capital Trust II and 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 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 March 31, 2009 and for the three months ended March 31, 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 months ended March 31, 2009 are not necessarily indicative of the operating results for the twelve months 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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Table of Contents

SI FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2009 AND 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 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 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.

In April 2009, FASB issued FSP 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 significant impact on the Company’s consolidated financial statements. See Note 8 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 guidance for debt securities to make the guidance more operational and to improve the

 

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SI FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2009 AND 2008

 

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 first quarter of 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 5 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 shall be effective for interim reporting periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. The Company does not expect the adoption of FSP FAS 107-1 and APB 28-1 to have a material impact on the Company’s consolidated financial statements.

NOTE 2. EARNINGS PER SHARE

Basic net income per share is calculated by dividing the net income available to common stockholders by the weighted-average number of common shares outstanding during the period. Diluted net income per share is computed in a manner similar to basic net 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.

 

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SI FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2009 AND 2008

 

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 478,330 and 503,219 for the three months ended March 31, 2009 and March 31, 2008, respectively. For the three months ended March 31, 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 March 31,

(Dollars in Thousands, Except Per Share Amounts)

   2009    2008

Net income

   $ 56    $ 455
             

Weighted-average common shares outstanding:

     

Basic

     11,445,285      11,579,204

Effect of dilutive stock options

     —        —  
             

Diluted

     11,445,285      11,579,204
             

Net income per share:

     

Basic

   $ 0.00    $ 0.04

Diluted

   $ 0.00    $ 0.04

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.

NOTE 3. SECURITIES

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

 

March 31, 2009

(Dollars in Thousands)

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

Debt securities:

          

U.S. Government and agency obligations

   $ 9,648    $ 451    $ (45 )   $ 10,054

Government-sponsored enterprises

     15,739      278      (26 )     15,991

Mortgage-backed securities

     113,919      3,005      (8,765 )     108,159

Corporate debt securities

     17,847      252      (4,716 )     13,383

Obligations of state and political subdivisions

     5,003      140      (41 )     5,102

Tax-exempt securities

     280      1      —         281

Foreign government securities

     100      —        —         100
                            

Total debt securities

     162,536      4,127      (13,593 )     153,070

Equity securities:

          

Marketable equity securities

     1,565      4      (187 )     1,382
                            

Total available for sale securities

   $ 164,101    $ 4,131    $ (13,780 )   $ 154,452
                            

 

(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.

 

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SI FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2009 AND 2008

 

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. However, certain purchased beneficial interests, including non-agency mortgage-backed securities and pooled trust preferred securities are evaluated using FSP EITF 99-20-1, “Recognition of Interest Income and Impairment on Purchased Beneficial Interests and Beneficial Interests that Continue to be Held by a Transferor in Securitized Financial Assets.”

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 more likely than not that it will not be required to sell such security prior to the recovery of its amortized cost basis less 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 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.

 

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SI FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2009 AND 2008

 

The following table summarizes other-than-temporary impairment losses on securities for the three months ended March 31, 2009:

 

(Dollars in Thousands)

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

Total other-than-temporary losses

   $ (903 )   $ (959 )   $ (1,862 )

Unrealized other-than-temporary losses recognized in other comprehensive loss (1)

     753       959       1,712  
                        

Net impairment losses recognized in earnings (2)

   $ (150 )   $ —       $ (150 )
                        

 

(1) Represents the noncredit component of the other-than-temporary impairment on available for sale securities.
(2) Represents the credit component of the other-than-temporary impairment on available for sale securities.

The following table presents a roll-forward of the balance of credit-related impairment losses on debt securities held at March 31, 2009 for which a portion of the other-than-temporary impairment was recognized in other comprehensive loss:

 

(Dollars in Thousands)

   Total

Balance at January 1, 2009

   $ —  

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

     866

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

     —  
      

Balance at March 31, 2009

   $ 866
      

As of March 31, 2009, debt securities with other-than-temporary impairment losses related to credit and 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 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.

 

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SI FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2009 AND 2008

 

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

 

      Less Than 12 Months    12 Months Or More    Total

March 31, 2009:

(Dollars in Thousands)

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

U.S. Government and agency obligations

   $ 1,633    $ 20    $ 545    $ 25    $ 2,178    $ 45

Government-sponsored enterprises

     3,964      26      —        —        3,964      26

Mortgage-backed securities

     7,323      3,312      23,904      5,453      31,227      8,765

Corporate debt securities

     4,127      2,674      2,407      2,042      6,534      4,716

Obligations of state and political subdivisions

     —        —        460      41      460      41

Marketable equity securities

     609      159      722      28      1,331      187
                                         

Total

   $ 17,656    $ 6,191    $ 28,038    $ 7,589    $ 45,694    $ 13,780
                                         

 

      Less Than 12 Months    12 Months Or More    Total

December 31, 2008:

(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
                                         

At March 31, 2009, fifty-five debt securities with gross unrealized losses have aggregate depreciation of 23.4% 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 first quarter of 2009 of whether the applicable investments within the Company’s available for sale portfolio were other-than-temporarily impaired at March 31, 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. The unrealized losses on the Company’s investments in U.S. Government and agency obligations were caused by an increase in the spread of agency obligations over comparable treasury rates. 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 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 March 31, 2009.

 

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SI FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2009 AND 2008

 

Government-sponsored Enterprises. The unrealized losses on the Company’s investments in government-sponsored enterprises 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 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 March 31, 2009.

Mortgage-backed Securities. The unrealized losses on the Company’s investments in mortgage-backed securities relates primarily to non-agency mortgage-backed securities that continue to trade well below historic levels, particularly those backed by jumbo or hybrid loan collateral. In particular, four non-agency mortgage-backed securities displayed market pricing significantly below book value, or received significant rating downgrades. At March 31, 2009, management evaluated credit rating details, potential future credit losses and loss analyses. The Bank had previously recorded other-than-temporary impairments on two of these non-agency mortgage-backed securities during 2008. Based on the guidance of FSP FAS 115-2 and FAS 124-2, these other-than-temporary impairments at December 31, 2008 consisted of $489,000 related to credit losses and $2.2 million related to other factors. Other-than-temporary impairments for the three months ended March 31, 2009 for these two securities were $960,000, none of which were credit-related losses.

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. 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 March 31, 2009.

Corporate Debt Securities. The unrealized losses on the Company’s investments in corporate debt securities 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. During 2008, the Bank had previously recorded other-than-temporary impairments on five PTPS investments. Based on the guidance of FSP FAS 115-2 and FAS 124-2, other-than-temporary impairments at December 31, 2008 consisted of $1.1 million related to credit losses and $1.8 million related to other factors. Other-than-temporary impairments for the three months ended March 31, 2009 for these five securities consisted of $150,000 related to credit losses and $753,000 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 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 March 31, 2009.

 

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Table of Contents

SI FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2009 AND 2008

 

Obligations of State and Political Subdivisions. The unrealized losses on the Company’s investments in obligations of state and political subdivisions were caused by increases in interest rate spreads. The contractual terms of these investments do not permit the issuer to settle the securities 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 recovery of their amortized cost basis, which may be maturity, the Company does not consider these investments to be other-than-temporarily impaired at March 31, 2009.

Tax-exempt Securities. There were no unrealized losses on the Company’s holdings in tax-exempt securities at March 31, 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 represents $894,000 in fair value and $128,000 of net unrealized losses. 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 $450,000 in fair value and $55,000 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. The Company does not consider these investments to be other-than-temporarily impaired at March 31, 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 March 31, 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

   $ 4,581    $ 4,659

After 1 but within 5 years

     20,055      20,577

After 5 but within 10 years

     8,277      8,162

After 10 years

     15,704      11,513
             
     48,617      44,911

Mortgage-backed securities

     113,919      108,159
             

Total debt securities

   $ 162,536    $ 153,070
             

 

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Table of Contents

SI FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2009 AND 2008

 

The following is a summary of realized gains and losses on the sale of securities for the three months ended March 31, 2009 and 2008:

 

(Dollars in Thousands)

   Three Months Ended
March 31,
     2009     2008

Gross gains on sales

   $ 364     $ 110

Gross losses on sales

     (227 )     —  
              

Net gain on sale of securities

   $ 137     $ 110
              

Proceeds from the sales of available for sale securities during the three months ended March 31, 2009 and 2008 amounted to $8.5 million and $0, respectively.

NOTE 4. LOANS RECEIVABLE

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

 

(Dollars in Thousands)

       March 31,    
2009
    December 31,
2008
 

Real estate loans:

    

Residential – 1 to 4 family

   $ 327,708     $ 332,399  

Multi-family and commercial

     158,217       158,693  

Construction

     27,588       27,892  
                

Total real estate loans

     513,513       518,984  

Consumer loans:

    

Home equity

     18,910       18,762  

Other

     3,223       3,345  
                

Total consumer loans

     22,133       22,107  

Commercial business loans

     91,570       80,649  
                

Total loans

     627,216       621,740  

Deferred loan origination costs, net of fees

     1,573       1,570  

Allowance for loan losses

     (5,271 )     (6,047 )
                

Loans receivable, net

   $ 623,518     $ 617,263  
                

NOTE 5. ACCUMULATED OTHER COMPREHENSIVE LOSS

The following tables present the changes in accumulated other comprehensive loss for the three months ended March 31, 2009 and 2008.

 

Three Months Ended March 31, 2009

(Dollars in Thousands)

   Before Tax
Amount
    Tax
Effects
    Net of Tax
Amount
 

Unrealized holding losses on available for sale securities

   $ (1,143 )   $ 468     $ (675 )

Impairment loss on securities

     150       (51 )     99  

Reclassification adjustment for gains recognized in net income

     (137 )     47       (90 )
                        

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

     (1,130 )     464       (666 )

Cumulative effect adjustment for change in accounting principle

     (3,995 )     1,278       (2,717 )
                        

Accumulated other comprehensive loss

   $ (5,125 )   $ 1,742     $ (3,383 )
                        

 

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Table of Contents

SI FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2009 AND 2008

 

Three Months Ended March 31, 2008

(Dollars in Thousands)

   Before Tax
Amount
    Tax
Effects
   Net of Tax
Amount
 

Unrealized holding losses on available for sale securities

   $ (1,775 )   $ 604    $ (1,171 )

Reclassification adjustment for gains recognized in net income

     (110 )     37      (73 )
                       

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

   $ (1,885 )   $ 641    $ (1,244 )
                       

NOTE 6. 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 March 31, 2009 and December 31, 2008, the Bank met all capital adequacy requirements to which it was subject and the Bank is considered “well capitalized” under regulatory guidelines.

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

 

 

March 31, 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

   $ 73,562    14.28 %   $ 41,211    8.00 %   $ 51,514    10.00 %

Tier I Risk-based Capital Ratio

     68,451    13.29       20,602    4.00       30,903    6.00  

Tier I Capital Ratio

     68,451    7.98       34,311    4.00       42,889    5.00  

Tangible Equity Ratio

     68,451    7.98       12,867    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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Table of Contents

SI FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2009 AND 2008

 

NOTE 7. 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 March 31, 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 8. FAIR VALUE OF ASSETS AND LIABILITIES

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 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.

 

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Table of Contents

SI FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2009 AND 2008

 

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

 

At March 31, 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

   $ 210    $ 150,584    $ 3,658    $ 154,452
                           

Total assets at fair value

   $ 210    $ 150,584    $ 3,658    $ 154,452
                           

 

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 securities measured at fair value utilizing Level 1 and 2 inputs are obligations of the U.S. government and agencies, government-sponsored enterprises, mortgage-backed securities, obligations of state and political subdivisions, common stocks, corporate debt securities, tax-exempt and foreign government securities. The fair values used by the Company are obtained from an independent pricing service, which represents either quoted market prices for identical securities (Level 1 inputs), quoted market prices for comparable securities or fair values determined by pricing models that consider observable market data, such as interest rate volatilities, credit spreads and prices from market makers and live trading systems and other market indicators, industry and economic events. 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.

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

 

(Dollars in Thousands)

   Three Months Ended
March 31, 2009
 

Balance at beginning of period

   $ 5,392  

Decrease in fair value of securities included in other comprehensive loss

     (1,584 )

Impairment charges included in net income

     (150 )

Transfers to/from level 3

     —    
        

Balance at end of period

   $ 3,658  
        

Certain assets were measured at fair value on a non-recurring basis at March 31, 2009 and 2008. In accordance with the provisions of FASB Statement No. 114, the Company measures the impairment of loans that are collateral dependent based on the fair value of the collateral (Level 2). At March 31, 2009, the carrying value of impaired loans (net of specific reserves of $497,000) for which the fair value of collateral was used to measure impairment totaled $4.2 million. The carrying value of impaired loans

 

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SI FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2009 AND 2008

 

(net of specific reserves of $1.3 million) for which the fair value of collateral was used to measure impairment totaled $4.0 million at March 31, 2008. Specific reserves on impaired loans decreased $739,000 for the three months ended March 31, 2009 compared to the same period in 2008. The resulting gain recorded for specific reserves on impaired loans is recognized in earnings through the provision for loan losses.

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.

NOTE 9. SALE OF BRANCH OFFICE

On January 30, 2009, the Company completed the sale of its Gales Ferry, Connecticut branch office to Putnam Bank. 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 10. SUBSEQUENT EVENT

On April 22, 2009, a subsidiary of the Bank, SI Realty Company, Inc., purchased property located at 579 North Windham Road, North Windham, Connecticut, which is currently the location of the Company’s training center, and two adjacent parcels of land for $1.5 million.

 

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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 March 31, 2009 and December 31, 2008 and the results of operations for the three months ended March 31, 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 new accounting pronouncements.

Recent Developments

 

   

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

 

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On January 30, 2009, the Bank completed the sale of its Gales Ferry, Connecticut branch office to Putnam Bank.

 

   

On March 18, 2009, the Company’s Board of Directors announced that it would not pay a cash dividend on the Company’s outstanding shares of common stock for the quarter ended March 31, 2009 in an effort to preserve capital.

 

   

On March 25, 2009, the Company announced the promotions of William E. Anderson, Jr. and Laurie L. Gervais to the position of Senior Vice President.

Comparison of Financial Condition at March 31, 2009 and December 31, 2008

Assets:

Summary. Assets increased $11.4 million, or 1.3%, to $864.5 million at March 31, 2009, as compared to $853.1 million at December 31, 2008, primarily due to increases of $13.9 million in cash and cash equivalents and $6.3 million in net loans receivable, offset by a decrease of $8.2 million in available for sale securities. The increase in net loans receivable includes an increase in commercial business loans, offset by a decrease in residential mortgage loans. Commercial business loans increased as a result of the purchase of $14.9 million in USDA and SBA loans that are fully guaranteed by the full faith and credit of the U.S. government. An increase in residential mortgage loan originations of $21.3 million were offset by residential mortgage loan sales of $15.0 million during the quarter ended March 31, 2009. Overall loan originations increased $4.1 million in the first quarter of 2009 compared to the same period in 2008. The decrease in available for sale securities reflects the sale of primarily mortgage-backed securities.

Loans Receivable, Net. The Company’s net loan portfolio increased $6.3 million. Loan originations increased $4.1 million during the first three months of 2009 from the comparable period in 2008. Despite an increase in residential mortgage loan originations due to favorable interest rates during the first quarter of 2009, the remaining loan portfolio experienced a decrease in loan originations as a result of the declining economic environment. For the three months ended March 31, 2009, the Company sold $15.0 million of longer-term fixed-rate residential mortgage loans. Changes in the loan portfolio consisted of the following:

 

   

Residential Mortgage Loans. Residential mortgage loans decreased $4.7 million, or 1.4%. Contributing to the decrease was the sale of $15.0 million of longer-term fixed-rate residential mortgage loans, offset by loan originations of $40.6 million. Loan originations for residential mortgage loans increased $21.3 million for the first three months of 2009 compared to the same period in 2008.

 

   

Commercial Loans. Multi-family and commercial mortgage loans decreased $476,000, or 0.3%. Originations for multi-family and commercial mortgage loans were $969,000, which represents a decrease of $9.9 million during the first three months of 2009 compared to the same quarter in 2008. Commercial business loans increased $10.9 million, or 13.5%, for 2009 primarily due to the purchase of $14.9 million in USDA and SBA guaranteed loans. Commercial business loan originations decreased $6.9 million to $1.5 million during the first three months of 2009 compared to the prior year.

 

   

Consumer Loans. Consumer loans increased $26,000 during the first three months of 2009, consisting of an increase in home equity loans of $148,000, offset by a decrease in other consumer loans of $122,000. Loan originations for consumer loans were down $356,000 for the quarter ended March 31, 2009 from the comparable period in 2008.

The allowance for loan losses totaled $5.3 million at March 31, 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 0.84% at March 31, 2009. At March 31, 2009, nonperforming loans totaled $9.5 million compared to $9.3 million at December 31, 2008. Specific reserves relating to nonperforming loans decreased to $498,000 at March 31, 2009 from $1.2 million at December 31, 2008. This decrease was primarily due to a $1.0 million charge-off of a commercial construction loan with a previously recorded specific reserve. At March 31, 2009, two commercial construction relationships accounted for $4.6 million of nonperforming loans and $364,000 of specific reserves.

 

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The following table summarizes the activity in the allowance for loan losses at and for the three months ended March 31, 2009 and 2008.

 

(Dollars in Thousands)

   Three Months
Ended March 31,
 
   2009     2008  

Balance at beginning of period

   $ 6,047     $ 5,245  

Provision for loan losses

     490       135  

Loans charged-off

     (1,284 )     (96 )

Recoveries of loans previously charged-off

     18       14  
                

Balance at end of period

   $ 5,271     $ 5,298  
                

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

 

(Dollars in Thousands)

   March 31,
2009
    December 31,
2008
 

Nonaccrual loans:

    

Real estate loans

   $ 9,264     $ 9,110  

Commercial business loans

     221       217  

Consumer loans

     1       1  
                

Total nonaccrual loans

     9,486       9,328  

Real estate owned, net

     70       —    
                

Total nonperforming assets

     9,556       9,328  

Troubled debt restructurings

     68       69  
                

Total nonperforming assets and troubled debt restructurings

   $ 9,624     $ 9,397  
                

Total nonperforming loans to total loans

     1.51 %     1.50 %

Total nonperforming loans to total assets

     1.10 %     1.09 %

Total nonperforming assets and troubled debt restructurings to total assets

     1.11 %     1.10 %

Liabilities:

Summary. Total liabilities increased $11.8 million, or 1.5%, from December 31, 2008 to March 31, 2009 primarily as a result of increases in deposits of $15.5 million, offset by decreases in Federal Home Loan Bank advances of $2.0 million and mortgagors’ and investors’ escrow accounts of $1.7 million.

Deposits. Deposits increased $15.5 million, or 2.5%, to $636.2 million at March 31, 2009. Interest-bearing deposits increased $14.5 million, or 2.6%, which included increases in NOW and money market accounts of $13.6 million and certificates of deposit of $956,000. Additionally, noninterest-bearing deposits increased $989,000. The increase in deposits was due to branch expansion, marketing and promotional initiatives and competitively-priced deposit products.

Borrowings. Borrowings decreased $2.0 million to $145.8 million at March 31, 2009, resulting from a decrease in Federal Home Loan Bank advances.

Equity:

Summary. Total stockholders’ equity decreased $379,000 from $72.9 million at December 31, 2008 to $72.5 million at March 31, 2009. The decrease in equity was primarily attributable to an increase in net unrealized holding losses on available for sale securities aggregating $3.4 million (net of taxes), offset by earnings of $56,000.

 

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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 $6.4 million at March 31, 2009 compared to 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 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, all of which 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. This has resulted 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 three months ended March 31, 2009, management determined that certain available for sale securities were impaired and recognized other-than-temporary impairment losses of $150,000. See Note 3 for additional details.

Results of Operations for the Three Months Ended March 31, 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 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 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 net income of $56,000 for the three months ended March 31, 2009, a decrease of $399,000 compared to $455,000 for the three months ended March 31, 2008.

 

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Net interest income increased 12.5% to $6.3 million for the quarter ended March 31, 2009 from $5.6 million for the quarter ended March 31, 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 yield earned on interest-earning assets and an increase in average deposits.

Interest and Dividend Income. Total interest and dividend income decreased $123,000, or 1.1%, for the first quarter of 2009. Average interest-earning assets increased $38.8 million to $813.2 million, due to a higher average balance of loans and, to a lesser extent, federal funds and other interest-earning assets. Average loans increased $32.0 million and the yield on loans decreased 26 basis points to 5.98% for the first quarter of 2009 from 6.24% for the same period in 2008. The average balance of federal funds and other interest-bearing assets increased $7.2 million, while the yield decreased 143 basis points from 2.48% to 1.05%.

Interest Expense. Interest expense decreased $823,000 for the three months ended March 31, 2009 as compared to the same period in 2008. Average deposits rose $48.1 million and the average rate decreased 70 basis points. The increase in average deposits included $28.8 million in NOW and money market accounts and $26.3 million in certificates of deposit accounts, offset by a decrease of $7.0 million in savings accounts. Average Federal Home Loan Bank advances increased $587,000 and the rate on Federal Home Loan Bank borrowings decreased 30 basis points to 4.25%. The average rate paid on subordinated debt decreased 329 basis points from 6.78% to 3.49%.

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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Table of Contents

(Dollars in Thousands)

   At or For the Three Months Ended March 31,  
   2009     2008  
   Average
Balance
   Interest &
Dividends
    Average
Yield/
Rate
    Average
Balance
   Interest &
Dividends
    Average
Yield/
Rate
 

Interest-earning assets:

              

Loans (1)(2)

   $ 625,944    $ 9,222     5.98 %   $ 593,907    $ 9,216     6.24 %

Securities (3)

     167,108      2,043     4.96       167,464      2,144     5.15  

Other interest-earning assets

     20,113      52     1.05       12,953      80     2.48  
                                          

Total interest-earning assets

     813,165      11,317     5.64       774,324      11,440     5.94  
                                          

Noninterest-earning assets

     44,752          41,684     
                      

Total assets

   $ 857,917        $ 816,008     
                      

Interest-bearing liabilities:

              

Deposits:

              

NOW and money market

   $ 195,643      629     1.30     $ 166,883      803     1.94  

Savings (4)

     61,222      114     0.76       68,228      198     1.17  

Certificates of deposit (5)

     314,610      2,711     3.49       288,297      3,097     4.32  
                                          

Total interest-bearing deposits

     571,475      3,454     2.45       523,408      4,098     3.15  

FHLB advances

     141,267      1,481     4.25       140,680      1,592     4.55  

Subordinated debt

     8,248      71     3.49       8,248      139     6.78  
                                          

Total interest-bearing liabilities

     720,990      5,006     2.82       672,336      5,829     3.49  
                                          

Noninterest-bearing liabilities

     63,396          61,883     
                      

Total liabilities

     784,386          734,219     
                      

Total stockholders’ equity

     73,531          81,789     
                      

Total liabilities and stockholders’ equity

   $ 857,917        $ 816,008     
                      

Net interest-earning assets

   $ 92,175        $ 101,988     
                      

Tax equivalent net interest income (3)

        6,311            5,611    

Tax equivalent interest rate spread (6)

        2.82 %        2.45 %
                      

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

        3.15 %        2.91 %
                      

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

        112.78 %        115.17 %
                      

Less tax equivalent adjustment (3)

        (1 )          (1 )  
                          

Net interest income

      $ 6,310          $ 5,610    
                          

 

(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
March 31, 2009 and 2008
 

(Dollars in Thousands)

   Increase (Decrease) Due To
Rate Volume Net
 

Interest-earning assets:

      

Interest and dividend income:

      

Loans (1)(2)

   $ (436 )   $ 442     $ 6  

Securities (3)

     (97 )     (4 )     (101 )

Other interest-earning assets

     (59 )     31       (28 )
                        

Total interest-earning assets

     (592 )     469       (123 )
                        

Interest-bearing liabilities

      

Interest expense:

      

Deposits (4)

     (1,004 )     360       (644 )

Federal Home Loan Bank advances

     (117 )     6       (111 )

Subordinated debt

     (68 )     —         (68 )
                        

Total interest-bearing liabilities

     (1,189 )     366       (823 )
                        

Change in net interest income (3)

   $ 597     $ 103     $ 700  
                        

 

(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 $355,000 for the three months ended March 31, 2009. The higher provision in 2009 related to increases in nonperforming loans and charge-offs, 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 March 31, 2009, two commercial construction relationships accounted for $4.6 million of nonperforming loans and $364,000 of specific reserves. Net loan charge-offs were $1.3 million for the three months ended March 31, 2009, compared to net loan charge-offs of $82,000 for the three months ended March 31, 2008, primarily due to a $1.0 million charge-off of a commercial construction loan with a previously recorded specific reserve.

 

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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 March 31,  

(Dollars in Thousands)

   2009     2008     Dollar
Change
    Percent
Change
 

Service fees

   $ 1,191     $ 1,285     $ (94 )   (7.3 )%

Wealth management fees

     958       971       (13 )   (1.3 )

Increase in cash surrender value of bank-owned life insurance

     73       75       (2 )   (2.7 )

Net gain on sale of securities

     137       110       27     24.5  

Impairment loss on securities

     (150 )     —         (150 )   N/A  

Net gain on sale of loans

     191       59       132     223.7  

Net gain on sale of equipment

     104       —         104     N/A  

Other

     (323 )     (35 )     (288 )   822.9  
                              

Total noninterest income

   $ 2,181     $ 2,465     $ (284 )   (11.5 )%
                              

Noninterest income was $2.5 million for the quarters ended March 31, 2009 and 2008. For the quarter ended March 31, 2009, the Company reported net gains on the sale of loans of $191,000 resulting from the sale of $15.0 million of residential mortgage loans, compared to net gains on the sale of loans of $59,000 resulting from the sale of $5.0 million of residential mortgage loans for the same period in 2008. Service fees decreased $94,000 as a result of a decrease in overdraft charges on certain deposit products. The increase of $27,000 on the sale of primarily mortgage-backed securities was offset by other-than-temporary impairment charges on two pooled trust preferred securities totaling $150,000. 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. Other noninterest income for 2009 includes impairment charges of $336,000 that were recorded to reduce the carrying value of the Bank’s investment in two small business investment company limited partnerships.

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

 

     Three Months Ended March 31,  

(Dollars in Thousands)

   2009    2008    Dollar
Change
    Percent
Change
 

Salaries and employee benefits

   $ 4,279    $ 4,000    $ 279     7.0 %

Occupancy and equipment

     1,455      1,401      54     3.9  

Computer and electronic banking services

     791      721      70     9.7  

Outside professional services

     220      203      17     8.4  

Marketing and advertising

     208      197      11     5.6  

Supplies and printing

     151      175      (24 )   (13.7 )

FDIC deposit insurance and regulatory assessment

     182      65      117     180.0  

Other

     633      509      124     24.4  
                            

Total noninterest expenses

   $ 7,919    $ 7,271    $ 648     8.9 %
                            

Noninterest expenses increased $921,000 for the quarter ended March 31, 2009 compared to the same period in 2008, primarily due to increases in salaries and benefits, impairment charges on other investments, FDIC assessment and computer and electronic banking services. 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 related to a decrease in market interest rates. The increase in the 2009 FDIC assessment was attributable to both the expiration of credits during 2008 and an increase in the assessment rate for 2009. The FDIC finalized a ruling in December 2008 that raised the assessment rates uniformly by 7 basis points for the first quarter of 2009 assessment. Computer and electronic banking services expense rose as a result of increased telecommunication costs and transaction activity.

 

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Income Tax Provision. For the three months ended March 31, 2009, the Company’s income tax expense decreased $188,000 due to lower pre-tax income. The effective tax rate for the three months ended March 31, 2009 and 2008 was 31.7% and 32.0%, 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 and subordinated debt 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 March 31, 2009, cash and cash equivalents totaled $37.1 million, which included interest-bearing deposits and federal funds sold of $24.1 million.

Securities classified as available for sale, which provide additional sources of liquidity, totaled $154.5 million at March 31, 2009. In addition, at March 31, 2009, the Company had a potential borrowing capacity of $207.6 million from the Federal Home Loan Bank, which included overnight lines of credit of $10.0 million. At March 31, 2009, the Company had advances outstanding of $137.6 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, the purchase of securities and loans and the sale of loan. For the three months ended March 31, 2009, the Company originated $44.3 million of loans and purchased $18.8 million of securities and $14.9 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 $15.0 million of residential mortgage loans during the three months ended March 31, 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 borrowings and capital and deposits received through the issuance of trust preferred securities and branch acquisitions to fund asset growth. The Company experienced a net increase in total deposits, including mortgagors’ and investors’ escrow accounts, of $13.9 million and $72.5 million for the three months ended March 31, 2009 and for the year ended December 31, 2008, respectively. Certificates of deposit due within one year of March 31, 2009 totaled $173.3 million, or 27.2%, 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. The Company experienced a net decrease of $2.0 million in Federal Home Loan Bank advances for the three months ended March 31, 2009 and for the year ended December 31, 2008. For the three months ended March 31, 2009, the Company did not repurchase shares of the Company’s common stock. 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.

 

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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 March 31, 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 March 31, 2009 and December 31, 2008 are as follows:

 

(Dollars in Thousands)

   March 31,
2009
   December 31,
2008

Commitments to extend credit: (1)

     

Future loan commitments

   $ 6,351    $ 5,386

Undisbursed construction loans

     15,640      19,840

Undisbursed home equity lines of credit

     18,105      18,327

Undisbursed commercial lines of credit

     12,310      13,507

Overdraft protection lines

     1,472      1,434

Standby letters of credit (2)

     781      710
             

Total commitments

   $ 54,659    $ 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.

In 1998, the Bank became a limited partner in a Small Business Investment Corporation (“SBIC”) and committed to contribute capital of $1.0 million in the limited partnership. At March 31, 2009, the Bank’s remaining off-balance sheet commitment for the capital investment was $194,000. 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. At March 31, 2009, the Bank’s remaining off-balance sheet commitment for the capital investment in the second SBIC was $622,000.

At March 31, 2009, the Bank had outstanding commitments to purchase $5.8 million in guaranteed USDA and SBA loans.

For the three months ended March 31, 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 5 and 11 to the consolidated financial statements contained in the Company’s 2008 Annual Report on Form 10-K.

 

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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 March 31, 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.

 

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

The Company did not repurchase equity securities during the three months ended March 31, 2009. On February 20, 2008, the Company announced that the Board of Directors had approved a stock repurchase program authorizing the Company to repurchase up to 596,000 shares of the Company’s common stock. The maximum number of shares that may yet be purchased under the Company’s stock repurchase program are 460,695. The repurchase program will continue until it is completed or terminated by the Company’s Board of Directors.

 

Item 3. Defaults Upon Senior Securities.

None.

 

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

None.

 

Item 5. Other Information.

None.

 

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: May 13, 2009    

/s/ Rheo A. Brouillard

    Rheo A. Brouillard
    President and Chief Executive Officer
    (principal executive officer)
Date: May 13, 2009    

/s/ Brian J. Hull

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

 

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