SIFI 09.30.2012 10-Q


 
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 September 30, 2012
OR
o
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:  0-54241
 
SI FINANCIAL GROUP, INC.
(Exact name of registrant as specified in its charter)
__________________________________________________
Maryland
 
80-0643149
(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  o

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  x No  o
 
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 o
Accelerated Filer x
 
 
Non-Accelerated Filer  ¨     
Smaller Reporting Company o
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).   Yes o    No  x
 
As of November 2, 2012, there were 10,141,110 shares of the registrant’s common stock outstanding.
 



SI FINANCIAL GROUP, INC.
TABLE OF CONTENTS
 
 
 
 
Page No.
 
 
 
 
PART I. FINANCIAL INFORMATION
 
 
 
 
 
Item 1.
 
Financial Statements (Unaudited):
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
 
 
 
 
Item 3.
 
 
 
 
 
Item 4.
 
 
 
 
 
PART II. OTHER INFORMATION
 
 
 
 
 
Item 1.
 
 
 
 
 
Item 1A.
 
 
 
 
 
Item 2.
 
 
 
 
 
Item 3.
 
 
 
 
 
Item 4.
 
 
 
 
 
Item 5.
 
 
 
 
 
Item 6.
 
 
 
 
 
 
 




PART I.  FINANCIAL INFORMATION
Item 1.  Financial Statements.
SI FINANCIAL GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Share Amounts / Unaudited)
 
September 30,
2012
 
December 31,
2011
ASSETS:
 
 
 
Cash and due from banks:
 
 
 
Noninterest-bearing
$
15,291

 
$
13,980

Interest-bearing
18,974

 
34,432

Total cash and cash equivalents
34,265

 
48,412

 
 
 
 
Available for sale securities, at fair value
193,925

 
230,814

Loans held for sale
5,333

 
5,558

Loans receivable (net of allowance for loan losses of $5,826 at September 30, 2012 and $4,970 at December 31, 2011)
668,151

 
618,626

Federal Home Loan Bank stock, at cost
8,078

 
8,388

Bank-owned life insurance
8,989

 
9,012

Premises and equipment, net
11,196

 
12,651

Goodwill and other intangibles
3,454

 
4,105

Accrued interest receivable
3,407

 
3,539

Deferred tax asset, net
3,389

 
4,614

Other real estate owned, net
660

 
976

Prepaid FDIC deposit insurance assessment
1,461

 
1,974

Other assets
8,052

 
6,378

Total assets
$
950,360

 
$
955,047

 
 
 
 
LIABILITIES AND SHAREHOLDERS' EQUITY:
 

 
 

Liabilities:
 

 
 

Deposits:
 

 
 

Noninterest-bearing
$
85,267

 
$
85,958

Interest-bearing
622,260

 
615,968

Total deposits
707,527

 
701,926

 
 
 
 
Mortgagors' and investors' escrow accounts
1,502

 
3,291

Federal Home Loan Bank advances
93,069

 
100,069

Junior subordinated debt owed to unconsolidated trust
8,248

 
8,248

Accrued expenses and other liabilities
12,344

 
10,996

Total liabilities
822,690

 
824,530

 
 
 
 
Shareholders' Equity:
 

 
 

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

 
—

Common stock ($.01 par value; 35,000,000 shares authorized; 10,141,110 shares issued and outstanding at September 30, 2012; 10,576,849 shares issued and 10,576,302 shares outstanding at December 31, 2011)
101

 
106

Additional paid-in-capital
94,735

 
94,612

Unallocated common shares held by ESOP
(5,208
)
 
(5,568
)
Unearned restricted shares
(29
)
 
(38
)
Retained earnings
36,610

 
42,085

Accumulated other comprehensive income (loss)
1,461

 
(675
)
Treasury stock, at cost (547 shares at December 31, 2011)
—

 
(5
)
Total shareholders' equity
127,670

 
130,517

Total liabilities and shareholders' equity
$
950,360

 
$
955,047

 

See accompanying notes to unaudited interim consolidated financial statements.

1


SI FINANCIAL GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands, Except Per Share Amounts / Unaudited)
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2012
 
2011
 
2012
 
2011
Interest and dividend income:
 
 
 
 
 
 
 
Loans, including fees
$
7,690

 
$
7,688

 
$
22,747

 
$
23,402

Securities:
 

 
 

 
 
 
 
Taxable interest
1,150

 
1,734

 
4,141

 
5,033

Tax-exempt interest
1

 
2

 
2

 
4

Dividends
10

 
17

 
36

 
60

Other
11

 
10

 
35

 
56

Total interest and dividend income
8,862

 
9,451

 
26,961

 
28,555

 
 
 
 
 
 
 
 
Interest expense:
 

 
 

 
 
 
 
Deposits
1,479

 
1,790

 
4,589

 
5,579

Federal Home Loan Bank advances
804

 
941

 
2,469

 
2,909

Subordinated debt
85

 
84

 
253

 
251

Total interest expense
2,368

 
2,815

 
7,311

 
8,739

 
 
 
 
 
 
 
 
Net interest income
6,494

 
6,636

 
19,650

 
19,816

 
 
 
 
 
 
 
 
Provision for loan losses
1,334

 
210

 
2,250

 
610

 
 
 
 
 
 
 
 
Net interest income after provision for loan losses
5,160

 
6,426

 
17,400

 
19,206

 
 
 
 
 
 
 
 
Noninterest income:
 

 
 

 
 
 
 
Total other-than-temporary impairment losses on securities
(311
)
 
—

 
(272
)
 
—

Portion of losses recognized in other comprehensive income (loss)
224

 
—

 
149

 
—

Net impairment losses recognized in earnings
(87
)
 
—

 
(123
)
 
—

Service fees
1,253

 
1,233

 
3,684

 
3,624

Wealth management fees
288

 
989

 
1,698

 
3,106

Increase in cash surrender value of bank-owned life insurance
71

 
72

 
213

 
215

Net (loss) gain on sale of securities
(344
)
 
122

 
230

 
340

Mortgage banking
502

 
189

 
1,179

 
491

Net (loss) gain in fair value on trading securities and derivatives
(79
)
 
71

 
(280
)
 
279

Net loss on disposal of equipment
(5
)
 
(33
)
 
(5
)
 
(41
)
Net loss on disposal of SI Trust Servicing operations
—

 
—

 
(698
)
 
—

Impairment loss on long-lived assets
(410
)
 
—

 
(410
)
 
—

Other
43

 
54

 
831

 
228

Total noninterest income
1,232

 
2,697

 
6,319

 
8,242

 
 
 
 
 
 
 
 
Noninterest expenses:
 

 
 

 
 
 
 
Salaries and employee benefits
3,838

 
4,057

 
12,092

 
12,433

Occupancy and equipment
1,340

 
1,450

 
4,158

 
4,373

Computer and electronic banking services
930

 
986

 
2,819

 
2,929

Outside professional services
296

 
273

 
973

 
854

Marketing and advertising
162

 
205

 
534

 
606

Supplies
96

 
104

 
324

 
371

FDIC deposit insurance and regulatory assessments
223

 
110

 
715

 
718

Contribution to SI Financial Group Foundation
—

 
—

 
—

 
500

Other real estate operations
104

 
257

 
320

 
566

Other
419

 
605

 
1,380

 
1,720

Total noninterest expenses
7,408

 
8,047

 
23,315

 
25,070

 
 
 
 
 
 
 
 
(Loss) income before income tax provision
(1,016
)
 
1,076

 
404

 
2,378

Income tax (benefit) provision
(316
)
 
336

 
31

 
722

Net (loss) income
$
(700
)
 
$
740

 
$
373

 
$
1,656

 
 
 
 
 
 
 
 
(Loss) earnings per share:
 

 
 

 
 
 
 
Basic
$
(0.07
)
 
$
0.07

 
$
0.04

 
$
0.17

Diluted
$
(0.07
)
 
$
0.07

 
$
0.04

 
$
0.17

 See accompanying notes to unaudited interim consolidated financial statements.

2


SI FINANCIAL GROUP, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In Thousands / Unaudited)

 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
 
2012
 
2011
 
2012
 
2011
 
 
 
 
 
 
 
 
 
Net (loss) income
 
$
(700
)
 
$
740

 
$
373

 
$
1,656

Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
 
Net unrealized gain (loss) on available for sale securities:
 
 
 
 
 
 
 
 
Net unrealized holding gain (loss) on available for sale securities
 
340

 
(232
)
 
1,319

 
1,040

Reclassification adjustment for losses (gains) realized in net (loss) income
 
227

 
(80
)
 
(152
)
 
(224
)
Plus: credit portion of OTTI losses recognized in net (loss) income
 
57

 
—

 
81

 
—

Plus: noncredit portion of OTTI losses (gains) on available for sale securities
 
254

 
(42
)
 
921

 
(14
)
Net unrealized holding gains (losses) on available for sale securities
 
878

 
(354
)
 
2,169

 
802

Net unrealized loss on interest-rate swap derivative
 
(15
)
 
(155
)
 
(33
)
 
(232
)
Other comprehensive income (loss)
 
863

 
(509
)
 
2,136

 
570

Comprehensive income
 
$
163

 
$
231

 
$
2,509

 
$
2,226

 
 
 
 
 
 
 
 
 
See accompanying notes to unaudited interim consolidated financial statements.

 



3


SI FINANCIAL GROUP, INC.
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2012
(In Thousands, Except Share Data / Unaudited)

 
Common Stock
 
Additional
Paid-in
Capital
 
Unallocated
Common
Shares Held
by ESOP
 
Unearned
Restricted
Shares
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Treasury
Stock
 
Total
Shareholders'
Equity
 
Shares
 
Dollars
 
 
 
 
 
 
 
Balance at December 31, 2011
10,576,849

 
$
106

 
$
94,612

 
$
(5,568
)
 
$
(38
)
 
$
42,085

 
$
(675
)
 
$
(5
)
 
$
130,517

Net income
—

 
—

 
—

 
—

 
—

 
373

 
—

 
—

 
373

Other comprehensive income
—

 
—

 
—

 
—

 
—

 
—

 
2,136

 
—

 
2,136

Cash dividends declared ($0.09 per share)
—

 
—

 
—

 
—

 
—

 
(885
)
 
—

 
—

 
(885
)
Equity incentive plan compensation
—

 
—

 
77

 
—

 
9

 
—

 
—

 
—

 
86

Allocation of 36,477 ESOP shares
—

 
—

 
47

 
360

 
—

 
—

 
—

 
—

 
407

Tax benefit from share-based compensation
—

 
—

 
3

 
—

 
—

 
—

 
—

 
—

 
3

Stock options exercised (1,796 shares)
—

 
—

 
(4
)
 
—

 
—

 
(5
)
 
—

 
19

 
10

Common shares repurchased (436,988 shares)
(435,739
)
 
(5
)
 
—

 
—

 
—

 
(4,958
)
 
—

 
(14
)
 
(4,977
)
Balance at September 30, 2012
10,141,110

 
$
101

 
$
94,735

 
$
(5,208
)
 
$
(29
)
 
$
36,610

 
$
1,461

 
$
—

 
$
127,670

 
See accompanying notes to unaudited interim consolidated financial statements.


4


SI FINANCIAL GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands / Unaudited)
 
Nine Months Ended
September 30,
 
2012
 
2011
Cash flows from operating activities:
 
 
 
Net income
$
373

 
$
1,656

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

Provision for loan losses
2,250

 
610

Employee stock ownership plan expense
407

 
354

Equity incentive plan expense
86

 
72

Excess tax benefit from share-based compensation
(3
)
 
(2
)
Amortization of investment premiums and discounts, net
932

 
372

Amortization of loan premiums and discounts, net
1,045

 
1,077

Depreciation and amortization of premises and equipment
1,406

 
1,443

Amortization of core deposit intangible
8

 
16

Net gain on sale of securities
(230
)
 
(340
)
Net loss (gain) on trading securities and derivatives
280

 
(279
)
Deferred income tax benefit
124

 
140

Loans originated for sale
(36,303
)
 
(26,665
)
Proceeds from sale of loans held for sale
37,232

 
32,485

Net loss on disposal of SI Trust Servicing operations
698

 
—

Net gain on sale of loans held for sale
(998
)
 
(346
)
Net loss on disposal of equipment
5

 
41

Net loss on sales or write-downs of other real estate owned
14

 
212

Increase in cash surrender value of bank-owned life insurance
(213
)
 
(215
)
Gain on bank-owned life insurance proceeds
(349
)
 
(122
)
Impairment charge on long-lived assets
410

 
—

Other-than-temporary impairment losses on securities
123

 
—

Change in operating assets and liabilities:
 

 
 

Accrued interest receivable
132

 
(540
)
Other assets
290

 
1,830

Accrued expenses and other liabilities
652

 
58

Net cash provided by operating activities
8,371

 
11,857

 
 
 
 
Cash flows from investing activities:
 

 
 

Purchases of available for sale securities
(41,721
)
 
(133,780
)
Proceeds from sales of available for sale securities
39,115

 
36,400

Proceeds from maturities of and principal repayments on available for sale securities
42,197

 
34,803

Net (increase) decrease in loans
(12,908
)
 
29,526

Purchases of loans
(40,788
)
 
(41,197
)
Proceeds from sale of other real estate owned
1,101

 
473

Purchases of premises and equipment
(1,062
)
 
(1,786
)
Proceeds from bank-owned life insurance
585

 
602

Net cash used in investing activities
(13,481
)
 
(74,959
)
 
 
 
 

5


SI FINANCIAL GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Concluded)
(In Thousands / Unaudited)
 
Nine Months Ended
September 30,
 
2012
 
2011
Cash flows from financing activities:
 

 
 

Net increase in deposits
5,601

 
33,647

Net decrease in mortgagors' and investors' escrow accounts
(1,789
)
 
(1,841
)
Proceeds from Federal Home Loan Bank advances
—

 
19,000

Repayments of Federal Home Loan Bank advances
(7,000
)
 
(33,100
)
Net proceeds from common stock offering
—

 
2,774

Excess tax benefit from share-based compensation
3

 
2

Purchase of shares by ESOP pursuant to reorganization
—

 
(3,141
)
Cash dividends on common stock
(885
)
 
(893
)
Stock options exercised
10

 
—

Common shares repurchased
(4,977
)
 
(5
)
Net cash (used in) provided by financing activities
(9,037
)
 
16,443

 
 
 
 
 
 
Net change in cash and cash equivalents
(14,147
)
 
(46,659
)
Cash and cash equivalents at beginning of period
48,412

 
78,321

Cash and cash equivalents at end of period
$
34,265

 
$
31,662

 
 
 
 
Supplemental cash flow information:
 

 
 

Interest paid
$
7,315

 
$
8,766

Income taxes paid, net
113

 
510

Transfer of stock offering escrow for issuance of common shares
—

 
47,556

Transfer of loans to other real estate owned
876

 
469


 See accompanying notes to unaudited interim consolidated financial statements.

6
Table of Contents
SI FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2012 AND 2011 AND DECEMBER 31, 2011
 
 
 
 
 
 


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 offices.  The Company does not conduct any material business other than owning all of the stock of the Bank and making payments on the subordinated debentures held by the Company.

In January 2011, the Company completed a public stock offering and concurrent conversion of the Bank from the mutual holding company form of organization to the stock form of organization. A total of 6,544,493 shares of common stock were sold at $8.00 per share.  Additional shares totaling 4,032,356 were issued in exchange for shares of the former SI Financial Group, Inc. at an exchange ratio of 0.8981.  Shares outstanding after the stock offering and the exchange totaled 10,576,849.  

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

Basis of Financial Statement Presentation
The interim consolidated financial statements and related notes have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information, with the instructions to Form 10-Q and Rule 8-03 of Regulation S-X of the Securities and Exchange Commission (“SEC”) and general practices within the banking industry.  Accordingly, certain information and footnote disclosures required by GAAP for complete financial statements have been omitted.  Information in the accompanying interim consolidated financial statements and notes to the financial statements of the Company as of September 30, 2012 and for the three and nine months ended September 30, 2012 and 2011 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, 2011 contained in the Company’s Form 10-K.

In the opinion of management, the accompanying unaudited interim consolidated financial statements reflect all of the adjustments, consisting only of normal and recurring adjustments, necessary for a fair presentation of the financial condition, results of operations and cash flows as of and for the period covered herein.  The results of operations for the three and nine months ended September 30, 2012 are not necessarily indicative of the operating results for the year ending December 31, 2012.

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 balance sheets 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 (“OTTI”) of securities, deferred income taxes and the impairment of long-lived assets.
     

7
Table of Contents
SI FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2012 AND 2011 AND DECEMBER 31, 2011
 
 
 
 
 
 

Reclassifications
Certain amounts in the Company’s 2011 consolidated financial statements have been reclassified to conform to the 2012 presentation.  Such reclassifications had no effect on net income.

Loans Receivable
Loans receivable are stated at current unpaid principal balances, net of the allowance for loan losses and deferred loan origination fees and costs.  Management has the ability and intent to hold its loans receivable for the foreseeable future or until maturity or pay-off.

A loan is impaired when, based on current information and events, it is probable the Company will be unable to collect all contractual principal and interest payments due in accordance with the terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value and the probability of collecting scheduled principal and interest payments when due. Impairment is measured on a loan by loan basis for residential and commercial mortgage loans and commercial business loans by either the present value of expected future cash flows discounted at the loan's effective interest rate or, as a practical expedient, at the loan's observable market price or the fair value of the collateral if the loan is collateral dependent.  Large groups of smaller balance homogeneous loans are collectively evaluated for impairment.  Accordingly, the Company does not typically identify individual consumer loans for impairment disclosures, unless such loans are subject to a troubled debt restructuring ("TDR") agreement.

The Company periodically may agree to modify the contractual terms of loans.  When a loan is modified and concessions have been made to the original contractual terms, such as reductions of interest rates or deferral of interest or principal payments due to the borrower’s financial condition, the modification is considered a TDR.  

Management considers all nonaccrual loans, with the exception of certain consumer loans, and TDRs to be impaired.  In most cases, loan payments less than 90 days past due are considered minor collection delays and the related loans are generally not considered impaired.

Allowance for Loan Losses
The allowance for loan losses, a material estimate which could change significantly in the near-term, is established through a provision for loan losses charged to earnings to account for losses that are inherent in the loan portfolio and estimated to occur, and is maintained at a level that management considers adequate to absorb losses in the loan portfolio.  Loan losses are charged against the allowance for loan losses when management believes that the uncollectibility of the principal loan balance is confirmed.  Subsequent recoveries, if any, are credited to the allowance for loan losses when received.  In the determination of the allowance for loan losses, management may obtain independent appraisals for significant properties, if necessary.

Management's judgment in determining the adequacy of the allowance is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.  The allowance for loan losses is evaluated on a monthly basis by management and is based on the evaluation of the known and inherent risk characteristics and size and composition of the loan portfolio, the assessment of current economic and real estate market conditions, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral, historical loan loss experience, the level of nonperforming loans, delinquencies, classified assets and loan charge-offs and evaluations of loans and other relevant factors.

8
Table of Contents
SI FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2012 AND 2011 AND DECEMBER 31, 2011
 
 
 
 
 
 

The allowance for loan losses consists of the following key elements:

•
Specific allowance for identified impaired loans.  For loans that are identified as impaired, an allowance is established when the present value of expected cash flows (or observable market price of the loan or fair value of the collateral if the loan is collateral dependent) of the impaired loan is lower than the carrying value of that loan.

•
General valuation allowance.  The general component represents a valuation allowance on the remainder of the loan portfolio, after excluding impaired loans.  For this portion of the allowance, loans are segregated by category and assigned an allowance percentage based on historical loan loss experience adjusted for qualitative factors stratified by the following loan segments:  residential one- to four-family, multi-family and commercial real estate, construction, commercial business and consumer. Management uses a rolling average of historical losses based on the time frame appropriate to capture relevant loss data for each loan segment.  This historical loss factor is adjusted for the following qualitative factors: levels/trends in delinquencies, classified loans and nonaccrual loans; level of loan charge-offs; trends in volume, nature and terms of loans; existence and effect of/or changes in the level of credit concentrations; effects of changes in risk selection, underwriting standards and other changes in lending policies, procedures and practices; experience/ability and depth of lending management and staff, national and local economic trends and conditions and impact on value of underlying collateral for collateral dependent loans.

The qualitative factors are determined based on the following various risk characteristics for each loan segment. Risk characteristics relevant to each portfolio segment are as follows:

Residential – One- to Four-Family – The Bank primarily originates conventional loans with loan-to-value ratios less than 95% and generally originates loans with loan-to-value ratios in excess of 80% only when secured by first liens on owner-occupied one- to four-family residences.  Loans with loan-to-value ratios in excess of 80% generally require private mortgage insurance or additional collateral. All loans in this segment are collateralized by owner-occupied residential real estate and repayment is dependent on the credit quality of the individual borrower.  The overall health of the economy, including unemployment rates and housing prices, will have an effect on the credit quality of this segment.

Multi-family and Commercial – Loans in this segment are originated for the purpose of acquiring, developing, improving or refinancing multi-family and commercial real estate where the property is the primary collateral securing the loan, and the income generated from the property is the primary repayment source.  The underlying cash flows generated by the properties are adversely impacted by a downturn in the economy as evidenced by increased vacancy rates, which in turn, will have an effect on the credit quality in this segment.  Payments on loans secured by income-producing properties often depend on the successful operation and management of the properties.  Management continually monitors the underlying cash flows related to these loans.

Construction – This segment includes loans to individuals, and to a lesser extent builders, to finance the construction of residential dwellings.  The Bank also originates construction loans for commercial development projects.  Upon the completion of construction, the loan generally converts to a permanent mortgage loan.  Credit risk is affected by cost overruns, time to sell at an adequate price and market conditions.

Commercial Business – Loans in this segment are made to businesses and are generally secured by assets of the business.  Repayment is expected from the cash flows of the business.  A weakened economy and reduced viability of the industry in which the customer operates will have a negative impact on the credit quality in this segment. To a lesser extent, the Bank finances capital improvements for condominium

9
Table of Contents
SI FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2012 AND 2011 AND DECEMBER 31, 2011
 
 
 
 
 
 

associations which are secured by the assigned rights to levy special assessments to condominium owners.

Consumer – Loans in this segment primarily include home equity lines of credit (representing both first and second liens) and indirect automobile loans and, to a lesser extent, loans secured by marketable securities, passbook or certificate accounts, motorcycles, automobiles and recreational vehicles, as well as unsecured loans.  Consumer loan collections depend on the borrower’s continuing financial stability, and therefore, are more likely to be adversely affected by job loss, divorce, illness or personal bankruptcy.
 
In computing the allowance for loan losses, we do not assign a general valuation allowance to the Small Business Administration (“SBA”) and United States Department of Agriculture (“USDA”) loans that we purchase as such loans are fully guaranteed.  These loans are included in commercial business loans.
 
The majority of the Company's loans are collateralized by real estate located in eastern Connecticut. To a lesser extent, certain commercial real estate loans are secured by collateral located outside of our primary market area. Accordingly, the collateral value of a substantial portion of the Company's loan portfolio and real estate acquired through foreclosure is susceptible to changes in market conditions.
 
Although management believes that it uses the best information available to establish the allowance for loan losses, future adjustments to the allowance for loan losses may be necessary and the Company’s results of operations could be adversely affected if circumstances differ substantially from the assumptions used in making the determinations.  Furthermore, while management believes it has established the allowance for loan losses in conformity with GAAP, our regulators, in reviewing the loan portfolio, may request us to increase our allowance for loan losses based on judgments different from ours.  In addition, because future events affecting borrowers and collateral cannot be predicted with certainty, the existing allowance for loan losses may not be adequate or increases may be necessary should the quality of any loans deteriorate as a result of the factors discussed above.  Any material increase in the allowance for loan losses would adversely affect the Company’s financial condition and results of operations.

Interest and Fees on Loans
Interest on loans is accrued and included in net interest income based on contractual rates applied to principal amounts outstanding.  Accrual of interest is discontinued when loan payments are 90 days or more past due, based on contractual terms, or when, in the judgment of management, collectibility of the loan or loan interest becomes uncertain.  Subsequent recognition of income occurs only to the extent payment is received subject to management's assessment of the collectibility of the remaining interest and principal.  A nonaccrual loan is restored to accrual status when it is no longer delinquent and collectibility of interest and principal is no longer in doubt and the borrower has made regular payments in accordance with the terms of the loan over a period of at least six months.  Interest collected on nonaccrual loans is recognized only to the extent cash payments are received, and may be recorded as a reduction to principal if the collectibility of the principal balance of the loan is unlikely.

Loan origination fees and direct loan origination costs are deferred, and the net amount is recognized as an adjustment of the related loan's yield utilizing the interest method over the contractual life of the loan.

Shareholders' Equity
The Company is chartered in the state of Maryland. Maryland law does not provide for treasury shares, rather shares repurchased by the Company constitute authorized but unissued shares. Accounting principles generally accepted in the United States of America state that accounting for treasury stock shall conform to state law. Therefore, the cost of shares repurchased by the Company has been allocated to common stock and retained earnings balances.


10
Table of Contents
SI FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2012 AND 2011 AND DECEMBER 31, 2011
 
 
 
 
 
 

Recent Accounting Pronouncements
Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements – In May 2011, the Financial Accounting Standards Board ("FASB") amended its standard related to fair value measurement and disclosure requirements in accordance with GAAP and International Financial Reporting Standards.  The amendments (1) change the wording used to describe many of the requirements in GAAP for measuring fair value and for disclosing information about fair value measurement, (2) clarify the intent of the application of existing fair value measurement requirements and (3) change the requirements for measuring fair value and for disclosing information about fair value.  The amendments are not intended to change the application of existing requirements for fair value measurement.  The amendments should be applied prospectively effective during the first interim and annual periods beginning after December 15, 2011.  The adoption of these amendments did not have a material impact on the Company’s consolidated financial statements.

Presentation of Comprehensive Income – In June 2011, the FASB amended its standard related to the presentation of comprehensive income.  Under this amendment, an entity has the option to present the total of comprehensive income, the components of net income and the components of other comprehensive income in a single continuous statement or in two separate but consecutive statements.  The Company adopted this amendment as of December 31, 2011 with the presentation of separate consolidated statements of comprehensive income.

Testing of Goodwill for Impairment – In September 2011, the FASB amended its standard related to how entities test goodwill for impairment.  Under this amendment, an entity is now permitted to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test.  If after assessing the totality of events and circumstances, an entity determines it is not more likely than not that the fair value of the reporting unit is less than its carrying amount, then performing the two-step impairment test is unnecessary.  Under this amendment, an entity is no longer permitted to carry forward its detailed calculation of a reporting unit’s fair value from a prior year.  The amendments in this update were effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011.  The Company adopted this amendment as of January 1, 2012 and it did not have a material impact on the Company’s consolidated financial statements.

Disclosures about Offsetting Assets and Liabilities – In December 2011, the FASB amended its standard related to disclosure requirements for offsetting assets and liabilities. Under this amendment, an entity will be required to disclose both gross and net information about both instruments and transactions eligible for offset in the statement of financial position and instruments and transactions subject to an agreement similar to a master netting arrangement. This scope would include derivatives, sale and repurchase agreements and reverse sale and repurchase agreements, and securities borrowing and securities lending arrangements. The amendments in this update are effective for annual reporting periods beginning on or after January 1, 2013, and interim periods within those annual periods. An entity should provide the disclosures required by these amendments retrospectively for all comparative periods presented. The adoption of this amendment is not expected to have a material impact on the Company's consolidated financial statements.

NOTE 2.  EARNINGS (LOSS) PER SHARE

Basic earnings (loss) per share is calculated by dividing the net income (loss) available to common shareholders by the weighted average number of common shares outstanding during the period.  Unvested restricted shares are considered outstanding in the computation of basic earnings (loss) per share since the shares participate in dividends and the rights to the dividends are non-forfeitable.  Diluted earnings (loss) per share is computed in a manner similar to basic earnings (loss) per share except that the weighted average number of common 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.  Repurchased common

11
Table of Contents
SI FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2012 AND 2011 AND DECEMBER 31, 2011
 
 
 
 
 
 

shares and unallocated common shares held by the Bank’s ESOP are not deemed outstanding for earnings (loss) per share calculations.
 
Anti-dilutive shares are common stock equivalents with weighted average exercise prices in excess of the weighted average market value for the periods presented, and are not considered in diluted earnings per share calculations.
The Company had anti-dilutive common shares outstanding of 173,138 and 215,987 for the three and nine months
ended September 30, 2012, respectively, and 436,434 and 395,512 for the three and nine months ended September 30, 2011, respectively. For the quarter ended September 30, 2012, all common stock equivalents were anti-dilutive and were not included in the computation of earnings (loss) per share.

The computation of earnings (loss) per share is as follows:
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2012
 
2011
 
2012
 
2011
 
(In Thousands, Except Share Data)
Net (loss) income
$
(700
)
 
$
740

 
$
373

 
$
1,656

 
 
 
 
 
 
 
 
Weighted average common shares outstanding:
 

 
 

 
 
 
 
Basic
9,569,069

 
9,947,040

 
9,785,924

 
9,998,136

Effect of dilutive stock options
—

 
20,656

 
21,774

 
20,940

Diluted
9,569,069

 
9,967,696

 
9,807,698

 
10,019,076

 
 
 
 
 
 
 
 
Earnings (loss) per share:
 

 
 

 
 
 
 
Basic
$
(0.07
)
 
$
0.07

 
$
0.04

 
$
0.17

Diluted
$
(0.07
)
 
$
0.07

 
$
0.04

 
$
0.17



12
Table of Contents
SI FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2012 AND 2011 AND DECEMBER 31, 2011
 
 
 
 
 
 

NOTE 3.  SECURITIES

Available for sale securities:
The amortized cost, gross unrealized gains and losses and approximate fair values of available for sale securities at September 30, 2012 and December 31, 2011 are as follows:
 
 
September 30, 2012
 
 
Amortized
Cost (1)
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
 
 
(In Thousands)
 
 
 
 
 
 
 
 
U.S. Government and agency obligations
$
56,161

 
$
1,188

 
$
(21
)
 
$
57,328

Government-sponsored enterprises
23,695

 
613

 
—

 
24,308

Mortgage-backed securities:(2)
 
 
 

 
 

 
 

Agency - residential
77,544

 
2,572

 
(57
)
 
80,059

Non-agency - residential
5,179

 
53

 
(159
)
 
5,073

Non-agency - HELOC
2,705

 
—

 
(395
)
 
2,310

Asset-backed securities
1,942

 
25

 
—

 
1,967

Corporate debt securities
11,533

 
234

 
(53
)
 
11,714

Collateralized debt obligations
6,003

 
—

 
(1,558
)
 
4,445

Obligations of state and political subdivisions
6,317

 
284

 
—

 
6,601

Tax-exempt securities
70

 
—

 
—

 
70

Foreign government securities
50

 
—

 
—

 
50

Total available for sale securities
$
191,199

 
$
4,969

 
$
(2,243
)
 
$
193,925

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(1) Net of OTTI write-downs recognized in earnings.
(2) Agency securities refer to debt obligations issued or guaranteed by government corporations or government-sponsored enterprises (“GSEs”).  Non-agency securities, or private-label securities, are the sole obligation of their issuer and are not guaranteed by one of the GSEs or the U.S. Government.

13
Table of Contents
SI FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2012 AND 2011 AND DECEMBER 31, 2011
 
 
 
 
 
 

 
 
December 31, 2011
 
 
Amortized
Cost (1)
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
 
 
(In Thousands)
Debt securities:
 
 
 
 
 
 
 
U.S. Government and agency obligations
$
88,917

 
$
770

 
$
(100
)
 
$
89,587

Government-sponsored enterprises
17,204

 
462

 
—

 
17,666

Mortgage-backed securities:(2)


 


 


 
 

Agency - residential
85,552

 
3,070

 
(178
)
 
88,444

Non-agency - residential
7,766

 
21

 
(899
)
 
6,888

Non-agency - HELOC
3,097

 
—

 
(559
)
 
2,538

Corporate debt securities
14,094

 
240

 
(287
)
 
14,047

Collateralized debt obligations
6,275

 
—

 
(3,358
)
 
2,917

Obligations of state and political subdivisions
6,488

 
278

 
—

 
6,766

Tax-exempt securities
70

 
1

 
—

 
71

Foreign government securities
75

 
—

 
—

 
75

Total debt securities
229,538

 
4,842

 
(5,381
)
 
228,999

Equity securities:


 


 


 
 

Equity securities - financial services
228

 
1

 
(24
)
 
205

Equity securities - other
1,609

 
96

 
(95
)
 
1,610

Total equity securities
1,837

 
97

 
(119
)
 
1,815

Total available for sale securities
$
231,375

 
$
4,939

 
$
(5,500
)
 
$
230,814

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(1) Net of OTTI write-downs recognized in earnings.
(2) Agency securities refer to debt obligations issued or guaranteed by government corporations or government-sponsored enterprises (“GSEs”).  Non-agency securities, or private-label securities, are the sole obligation of their issuer and are not guaranteed by one of the GSEs or the U.S. Government.

The amortized cost and fair value of debt securities by contractual maturities at September 30, 2012 are presented below.  Actual maturities of mortgage-backed securities ("MBS") may differ from contractual maturities because the mortgages underlying the securities may be called or repaid without any penalties.  Because mortgage-backed and asset-backed securities are not due at a single maturity date, they are not included in the maturity categories in the following maturity summary.
 
 
Amortized
Cost
 
Fair
Value
 
(In Thousands)
Within 1 year
$
3,806

 
$
3,829

After 1 but within 5 years
35,134

 
35,999

After 5 but within 10 years
9,230

 
9,346

After 10 years
55,659

 
55,342

 
103,829

 
104,516

Mortgage-backed and asset-backed securities
87,370

 
89,409

Total debt securities
$
191,199

 
$
193,925



14
Table of Contents
SI FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2012 AND 2011 AND DECEMBER 31, 2011
 
 
 
 
 
 

The following is a summary of realized gains and losses on the sale of securities for the three and nine months ended September 30, 2012 and 2011:
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2012
 
2011
 
2012
 
2011
 
(In Thousands)
Gross gains on sales
$
113

 
$
147

 
$
740

 
$
413

Gross losses on sales
(457
)
 
(25
)
 
(510
)
 
(73
)
Net (loss) gain on sale of securities
$
(344
)
 
$
122

 
$
230

 
$
340

 
Proceeds from the sale of available for sale securities were $6.7 million and $39.1 million for the three and nine months ended September 30, 2012, respectively and $3.8 million and $36.4 million for the three and nine months ended September 30, 2011, respectively.

The following tables present information pertaining to securities with gross unrealized losses at September 30, 2012 and December 31, 2011, 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
September 30, 2012:
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
 
(In Thousands)
U.S. Government and agency obligations
$
—

 
$
—

 
$
1,509

 
$
21

 
$
1,509

 
$
21

Mortgage-backed securities:
 

 
 

 
 

 
 

 
 

 
 

Agency - residential
3,428

 
17

 
2,129

 
40

 
5,557

 
57

Non-agency - residential
2,066

 
10

 
1,579

 
149

 
3,645

 
159

Non-agency - HELOC
—

 
—

 
2,310

 
395

 
2,310

 
395

Corporate debt securities
—

 
—

 
2,886

 
53

 
2,886

 
53

Collateralized debt obligations
—

 
—

 
4,445

 
1,558

 
4,445

 
1,558

Total
$
5,494

 
$
27

 
$
14,858

 
$
2,216

 
$
20,352

 
$
2,243


 
Less Than 12 Months
 
12 Months Or More
 
Total
December 31, 2011:
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
 
(In Thousands)
U.S. Government and agency obligations
$
32,390

 
$
94

 
$
415

 
$
6

 
$
32,805

 
$
100

Mortgage-backed securities:
 

 
 

 
 

 
 

 
 

 
 

Agency - residential
8,241

 
111

 
1,969

 
67

 
10,210

 
178

Non-agency - residential
—

 
—

 
5,305

 
899

 
5,305

 
899

Non-agency - HELOC
—

 
—

 
2,538

 
559

 
2,538

 
559

Corporate debt securities
3,482

 
234

 
946

 
53

 
4,428

 
287

Collateralized debt obligations
—

 
—

 
2,917

 
3,358

 
2,917

 
3,358

Equity securities - financial services
169

 
24

 
—

 
—

 
169

 
24

Equity services - other
708

 
95

 
—

 
—

 
708

 
95

Total
$
44,990

 
$
558

 
$
14,090

 
$
4,942

 
$
59,080

 
$
5,500



15
Table of Contents
SI FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2012 AND 2011 AND DECEMBER 31, 2011
 
 
 
 
 
 

For debt securities with OTTI losses, the Company estimated the portion of loss attributable to credit using a discounted cash flow model in accordance with applicable guidance.  Significant inputs for the non-agency mortgage-backed securities 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 collateralized debt obligations 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 an 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 an independent third-party valuation firm 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 was compared to the Company’s holdings to determine the credit-related impairment loss, if any.

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

At September 30, 2012, sixteen debt securities with gross unrealized losses had aggregate depreciation of 9.93% of the Company’s amortized cost basis.  The majority of the unrealized losses related to the Company’s collateralized debt obligations and non-agency mortgage-backed securities. The Company recognized net impairment losses on securities of $87,000 and $123,000 for the three and nine months ended September 30, 2012, respectively, and did not recognize net impairment losses on securities for the three and nine months ended September 30, 2011.  The following summarizes, by security type, the basis for management’s determination during the preparation of the financial statements of whether the applicable investments within the Company’s securities portfolio were other-than-temporarily impaired at September 30, 2012.

Debt Securities:
U.S. Government and Agency Obligations.  The unrealized losses on the Company’s U.S. Government and agency obligations related primarily to 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 basis of the investments.  Because the decline in market value is attributable to changes in interest rates and not credit quality, and because the Company does not intend to sell these securities and it is not more likely than not that the Company will be required to sell the securities before their anticipated recovery, which may be maturity, the Company did not consider these securities to be other-than-temporarily impaired at September 30, 2012.

Mortgage-backed Securities - Agency - Residential. The unrealized losses on the Company’s agency–residential 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 at maturity, the Company did not consider these investments to be other-than-temporarily impaired at September 30, 2012.
 
Mortgage-backed Securities - Non-agency - Residential.  Despite significant improvement in the market, these securities continue to trade well below historic levels, particularly those backed by jumbo or hybrid loan collateral.  At September 30, 2012, management evaluated credit rating details for the tranche, as well as credit information on subordinate tranches, potential future credit losses and loss analyses.  Additionally, management

16
Table of Contents
SI FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2012 AND 2011 AND DECEMBER 31, 2011
 
 
 
 
 
 

reviewed reports prepared by an independent third party for certain non-agency mortgage-backed securities.

The following table details the Company's non-agency residential mortgage-backed security holdings that are rated below investment grade as of September 30, 2012:
Security
 
Class (1)
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
 
Lowest
Credit
Rating (2)
 
Total
Credit-
Related
OTTI (3)
 
Credit
Support
Coverage
Ratios (4)
(Dollars in Thousands)
MBS 1
 
SSNR, AS
 
$
1,728

 
$
—

 
$
(149
)
 
$
1,579

 
D
 
$
197

 
0.00
MBS 2
 
PT, AS
 
220

 
4

 
—

 
224

 
C
 
—

 
0.36
 
 
 
 
$
1,948

 
$
4

 
$
(149
)
 
$
1,803

 
 
 
$
197

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(1) Class definitions:  PT – Pass Through, AS – Accelerated, and SSNR – Super Senior.
(2) The Company utilized credit ratings provided by Moody’s, S&P and Fitch in its evaluation of issuers.
(3) The OTTI amounts provided in the table represent cumulative credit loss amounts through September 30, 2012.
(4) The credit support coverage ratio, which is the ratio that determines the multiple of credit support, is based on assumptions for the performance of loans within the delinquency pipeline.  The assumptions used are:  current collateral support/((60 day delinquencies x .60) + (90 day delinquencies x .70) + (foreclosures x 1.00) + (other real estate x 1.00)) x .40 for loss severity.

Mortgage-backed Securities - Non-agency - HELOC.  The unrealized loss on the Company’s non-agency - HELOC mortgage-backed security is related to one security whose market has been illiquid.  This security is collateralized by home equity lines of credit secured by first and second liens and insured by Financial Security Assurance.  At September 30, 2012, management evaluated credit rating details, collateral support and loss analyses.  All of the unrealized losses on this security relate to factors other than credit.  Because the Company does not intend to sell this security and it is not more likely than not that the Company will be required to sell this security before the recovery of its amortized cost basis, which may be at maturity, the Company did not record an impairment loss at September 30, 2012.

Corporate Debt Securities. Substantially all of the corporate debt securities are rated investment-grade, including those in an unrealized loss position. Various factors were considered in assessing whether the Company expects to recover the amortized cost of corporate debt securities including, but not limited to, the strength of issuer credit ratings, the financial condition of guarantors and the length of time and the extent to which a security's fair value has been less than its amortized cost. Based on management's assessment, the Company expects to recover the entire amortized cost basis of all corporate debt securities that were in an unrealized loss position as of September 30, 2012.

Collateralized Debt Obligations.  The unrealized losses on the Company’s collateralized debt obligations related to investments in pooled trust preferred securities (“PTPS”).  The PTPS market has stabilized at depressed market values as a result of market saturation. Transactions for PTPS have been limited and have occurred primarily as a result of distressed or forced liquidation sales.  The securities were widely held by hedge funds and European banks and used to offset interest rate exposure tied to LIBOR.  As the positions have unwound, an excess supply of these securities have saturated the market.

Management evaluated current credit ratings, credit support and stress testing for future defaults related to the Company’s PTPS.  Management also reviewed analytics provided by the trustee and independent OTTI reviews and associated cash flow analyses performed by an independent third party.  The unrealized losses on the Company’s PTPS investments were caused by a lack of liquidity, credit downgrades and decreasing credit support.  The increased number of bank and insurance company failures has decreased the level of credit support for these investments.  A number of lower tranche income issues have foregone payments or have received payment in kind through increased principal allocations.  However, the number of deferring securities has been decreasing and a

17
Table of Contents
SI FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2012 AND 2011 AND DECEMBER 31, 2011
 
 
 
 
 
 

number of reinstatements have occurred recently.  Based on the existing credit profile of the remainder of the Company's PTPS investments, management does not believe that these investments will suffer from any further 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 basis, which may be at maturity, the Company did not record additional impairment losses at September 30, 2012.  

The following table details the Company's collateralized debt obligations that are rated below investment grade as of September 30, 2012:
Security
 
Class
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
 
Lowest
Credit
Rating (1)
 
Total
Credit-
Related
OTTI (2)
 
% of Current
Performing
Collateral
Coverage
(Dollars in Thousands)
CDO 1
 
B1
 
$
1,000

 
$
—

 
$
(620
)
 
$
380

 
CCC-
 
$
—

 
104.4
CDO 2
 
B3
 
1,000

 
—

 
(605
)
 
395

 
CCC-
 
—

 
104.4
CDO 3
 
A2
 
2,578

 
—

 
(139
)
 
2,439

 
B-
 
62

 
117.5
CDO 4
 
A1
 
1,425

 
—

 
(194
)
 
1,231

 
BB-
 
—

 
157.2
 
 
 
 
$
6,003

 
$
—

 
$
(1,558
)
 
$
4,445

 
 
 
$
62

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(1) The Company utilized credit ratings provided by Moody’s, S&P and Fitch in its evaluation of issuers.
(2) The OTTI amounts provided in the table represent cumulative credit loss amounts through September 30, 2012.

The following table presents a roll-forward of the balance of credit losses on the Company’s debt securities for which a portion of OTTI was recognized in other comprehensive income for the three and nine months ended September 30, 2012 and 2011.
 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2012
 
2011
 
2012
 
2011
 
(In Thousands)
Balance at beginning of period
$
172

 
$
1,059

 
$
1,207

 
$
1,093

Additional credit losses for which OTTI losses were previously recognized
87

 
—

 
123

 
—

Reduction for permanent loss in value of securities during the period
—

 
—

 
(1,071
)
 
—

Reduction for securities sold during the period (realized)
—

 
—

 
—

 
(34
)
Balance at end of period
$
259

 
$
1,059

 
$
259

 
$
1,059

 

18
Table of Contents
SI FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2012 AND 2011 AND DECEMBER 31, 2011
 
 
 
 
 
 

NOTE 4.  LOANS RECEIVABLE AND ALLOWANCE FOR LOAN LOSSES

The composition of the Company’s loan portfolio at September 30, 2012 and December 31, 2011 is as follows:
 
 
September 30, 2012
 
December 31, 2011
 
(In Thousands)
Real estate loans:
 
 
 
Residential - 1 to 4 family
$
234,173

 
$
247,426

Multi-family and commercial
197,545

 
158,384

Construction
3,333

 
12,290

Total real estate loans
435,051

 
418,100

 
 
 
 
Commercial business loans:
 

 
 

SBA and USDA guaranteed
140,440

 
127,359

Other
55,569

 
40,442

Total commercial business loans
196,009

 
167,801

 
 
 
 
Consumer loans:
 

 
 

Home equity
28,273

 
27,425

Indirect automobile
10,574

 
5,733

Other
2,346

 
2,824

Total consumer loans
41,193

 
35,982

 
 
 
 
Total loans
672,253

 
621,883

 
 
 
 
Deferred loan origination costs, net of fees
1,724

 
1,713

Allowance for loan losses
(5,826
)
 
(4,970
)
Loans receivable, net
$
668,151

 
$
618,626


The Company purchased $33.9 million in commercial business loans and $6.9 million in consumer loans for the nine months ended September 30, 2012. For the twelve months ended December 31, 2011, the Company purchased $41.2 million in commercial business loans and $5.8 million in consumer loans.
 
Allowance for Loan Losses
The following table summarizes the changes in the allowance for loan losses by portfolio segment for the three and nine months ended September 30, 2012 and 2011:

Three Months Ended
September 30, 2012
Residential -
1 to 4 Family
 
Multi-family
and Commercial
 
Construction
 
Commercial
Business
 
Consumer
 
Total
 
(In Thousands)
Balance at beginning of period
$
725

 
$
2,700

 
$
314

 
$
1,418

 
$
487

 
$
5,644

Provision (credit) for loan losses
241

 
1,279

 
(290
)
 
88

 
16

 
1,334

Loans charged-off
(127
)
 
(1,165
)
 
—

 
—

 
(27
)
 
(1,319
)
Recoveries of loans previously charged-off
26

 
134

 
—

 
3

 
4

 
167

Balance at end of period
$
865

 
$
2,948

 
$
24

 
$
1,509

 
$
480

 
$
5,826



19
Table of Contents
SI FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2012 AND 2011 AND DECEMBER 31, 2011
 
 
 
 
 
 

Nine Months Ended
September 30, 2012
Residential -
1 to 4 Family
 
Multi-family
and Commercial
 
Construction
 
Commercial
Business
 
Consumer
 
Total
 
(In Thousands)
Balance at beginning of period
$
759