SIFI 09.30.2013 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, 2013
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 o     
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 1, 2013, there were 12,789,767 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,
2013
 
December 31,
2012
ASSETS:
 
 
 
Cash and due from banks:
 
 
 
Noninterest-bearing
$
32,997

 
$
16,364

Interest-bearing
10,247

 
21,325

Federal funds sold
9,104

 
—

Total cash and cash equivalents
52,348

 
37,689

 
 
 
 
Available for sale securities, at fair value
184,832

 
176,513

Loans held for sale
1,880

 
5,069

Loans receivable (net of allowance for loan losses of $6,322 at September 30, 2013 and $6,387 at December 31, 2012)
1,031,422

 
685,163

Federal Home Loan Bank stock, at cost
13,109

 
8,078

Bank-owned life insurance
20,553

 
9,060

Premises and equipment, net
21,455

 
11,216

Goodwill and other intangibles
20,339

 
3,451

Accrued interest receivable
4,021

 
3,215

Deferred tax asset, net
6,893

 
4,639

Other real estate owned, net
1,520

 
1,293

Prepaid FDIC deposit insurance assessment
—

 
1,312

Other assets
10,303

 
6,552

Total assets
$
1,368,675

 
$
953,250

 
 
 
 
LIABILITIES AND SHAREHOLDERS' EQUITY:
 

 
 

Liabilities:
 

 
 

Deposits:
 

 
 

Noninterest-bearing
$
140,975

 
$
89,834

Interest-bearing
860,581

 
615,314

Total deposits
1,001,556

 
705,148

 
 
 
 
Mortgagors' and investors' escrow accounts
1,469

 
3,207

Federal Home Loan Bank advances
168,641

 
98,069

Junior subordinated debt owed to unconsolidated trust
8,248

 
8,248

Repurchase agreement
15,048

 
—

Accrued expenses and other liabilities
20,978

 
12,819

Total liabilities
1,215,940

 
827,491

 
 
 
 
Shareholders' Equity:
 

 
 

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

 
—

Common stock ($.01 par value; 35,000,000 shares authorized; 12,797,388 and 10,112,310 shares issued; 12,797,226 and 10,112,310 shares outstanding at September 30, 2013 and December 31, 2012, respectively)
128

 
101

Additional paid-in-capital
125,184

 
94,810

Unallocated common shares held by ESOP
(4,728
)
 
(5,088
)
Unearned restricted shares
(1,854
)
 
(2,210
)
Retained earnings
33,987

 
36,733

Accumulated other comprehensive income
20

 
1,413

Treasury stock, at cost (162 shares at September 30, 2013)
(2
)
 
—

Total shareholders' equity
152,735

 
125,759

Total liabilities and shareholders' equity
$
1,368,675

 
$
953,250

 

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,
 
2013
 
2012
 
2013
 
2012
Interest and dividend income:
 
 
 
 
 
 
 
Loans, including fees
$
8,105

 
$
7,690

 
$
22,822

 
$
22,747

Securities:
 

 
 

 
 
 
 
Taxable interest
986

 
1,150

 
3,078

 
4,141

Tax-exempt interest
42

 
1

 
62

 
2

Dividends
8

 
10

 
15

 
36

Other
10

 
11

 
31

 
35

Total interest and dividend income
9,151

 
8,862

 
26,008

 
26,961

 
 
 
 
 
 
 
 
Interest expense:
 

 
 

 
 
 
 
Deposits
1,241

 
1,479

 
3,877

 
4,589

Federal Home Loan Bank advances
736

 
804

 
2,227

 
2,469

Subordinated debt and other borrowings
87

 
85

 
253

 
253

Total interest expense
2,064

 
2,368

 
6,357

 
7,311

 
 
 
 
 
 
 
 
Net interest income
7,087

 
6,494

 
19,651

 
19,650

 
 
 
 
 
 
 
 
Provision for loan losses
443

 
1,334

 
633

 
2,250

 
 
 
 
 
 
 
 
Net interest income after provision for loan losses
6,644

 
5,160

 
19,018

 
17,400

 
 
 
 
 
 
 
 
Noninterest income:
 

 
 

 
 
 
 
Total other-than-temporary impairment losses
—

 
(311
)
 
(8
)
 
(272
)
Portion of losses recognized in other comprehensive income/loss
—

 
224

 
—

 
149

Net impairment losses
—

 
(87
)
 
(8
)
 
(123
)
Service fees
1,515

 
1,253

 
3,964

 
3,684

Wealth management fees
302

 
288

 
846

 
1,698

Increase in cash surrender value of bank-owned life insurance
90

 
71

 
226

 
213

Net (loss) gain on sales of securities
(922
)
 
(344
)
 
(919
)
 
230

Mortgage banking
69

 
502

 
919

 
1,179

Net gain (loss) on fair value of derivatives
18

 
(79
)
 
191

 
(280
)
Net loss on disposal of equipment
—

 
(5
)
 
—

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

 
—

 
—

 
(698
)
Impairment loss on long-lived assets
—

 
(410
)
 
—

 
(410
)
Other
161

 
43

 
526

 
831

Total noninterest income
1,233

 
1,232

 
5,745

 
6,319

 
 
 
 
 
 
 
 
Noninterest expenses:
 

 
 

 
 
 
 
Salaries and employee benefits
4,394

 
3,838

 
12,923

 
12,092

Occupancy and equipment
1,417

 
1,340

 
4,104

 
4,158

Computer and electronic banking services
1,057

 
930

 
2,896

 
2,819

Outside professional services
298

 
296

 
948

 
973

Marketing and advertising
170

 
162

 
471

 
534

Supplies
110

 
96

 
316

 
324

FDIC deposit insurance and regulatory assessments
251

 
223

 
714

 
715

Merger expenses
1,305

 
—

 
2,198

 
—

Other
1,372

 
523

 
2,594

 
1,700

Total noninterest expenses
10,374

 
7,408

 
27,164

 
23,315

 
 
 
 
 
 
 
 
(Loss) income before income tax (benefit) provision
(2,497
)
 
(1,016
)
 
(2,401
)
 
404

(Loss) income tax (benefit) provision
(755
)
 
(316
)
 
(522
)
 
31

Net (loss) income
$
(1,742
)
 
$
(700
)
 
$
(1,879
)
 
$
373

 
 
 
 
 
 
 
 
(Loss) earnings per share:
 

 
 

 
 
 
 
Basic
$
(0.17
)
 
$
(0.07
)
 
$
(0.19
)
 
$
0.04

Diluted
$
(0.17
)
 
$
(0.07
)
 
$
(0.19
)
 
$
0.04

 

See accompanying notes to unaudited interim consolidated financial statements.

2


SI FINANCIAL GROUP, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Unaudited)

 
 
 
Three Months Ended September 30,
 
Nine Months Ended
September 30,
 
 
 
2013
 
2012
 
2013
 
2012
 
 
 
(In thousands)
Net (loss) income
 
$
(1,742
)
 
$
(700
)
 
$
(1,879
)
 
$
373

Other comprehensive (loss) income, net of tax:
 
 
 
 
 
 
 
 
Net unrealized (loss) gain on available for sale securities:
 
 
 
 
 
 
 
 
Net unrealized holding (loss) gain on available for sale securities
 
(631
)
 
340

 
(2,211
)
 
1,319

Reclassification adjustment for losses (gains) recognized in net (loss) income (1)
 
609

 
227

 
607

 
(152
)
Plus: credit portion of OTTI losses recognized in net (loss) income (2)
 
—

 
57

 
5

 
81

Plus: noncredit portion of OTTI gains on available for sale securities
 
163

 
254

 
124

 
921

Net unrealized (losses) gains on available for sale securities
 
141

 
878

 
(1,475
)
 
2,169

 Net unrealized gain (loss) on interest-rate swap derivative
 
10

 
(15
)
 
82

 
(33
)
Other comprehensive (loss) income
 
151

 
863

 
(1,393
)
 
2,136

Comprehensive (loss) income
 
$
(1,591
)
 
$
163

 
$
(3,272
)
 
$
2,509

 
 
 
 
 
 
 
 
 
 
(1) Amounts are included in net gain (loss) on the sales of securities in noninterest income on the consolidated statements of operations. Income tax expense (benefit) associated with the reclassification adjustment for the three and nine months ended September 30, 2013 was $(313,000) and $(312,000), respectively, and $(117,000) and $78,000 for the three and nine months ended September 30, 2012, respectively.
(2) Amounts are included in net impairment losses recognized in noninterest income on the consolidated statements of operations. Income tax benefit associated with the reclassification adjustment for the three and nine months ended September 30, 2013 totaled $0 and $3,000, respectively, and amounted to $30,000 and $42,000 for the three and nine months ended September 30, 2012, respectively.

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, 2013
(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
 
Treasury
Stock
 
Total
Shareholders'
Equity
 
Shares
 
Dollars
 
 
 
 
 
 
 
Balance at December 31, 2012
10,112,310

 
$
101

 
$
94,810

 
$
(5,088
)
 
$
(2,210
)
 
$
36,733

 
$
1,413

 
$
—

 
$
125,759

Comprehensive loss
—

 
—

 
—

 
—

 
—

 
(1,879
)
 
(1,393
)
 
—

 
(3,272
)
Acquisition of Newport Federal Savings Bank
2,683,099

 
27

 
30,078

 
—

 
—

 
—

 
—

 
—

 
30,105

Cash dividends declared ($0.09 per share)
—

 
—

 
—

 
—

 
—

 
(860
)
 
—

 
—

 
(860
)
Equity incentive plan compensation
—

 
—

 
220

 
—

 
356

 
—

 
—

 
—

 
576

Allocation of 36,477 ESOP shares
—

 
—

 
57

 
360

 
—

 
—

 
—

 
—

 
417

Tax benefit from share-based compensation
—

 
—

 
4

 
—

 
—

 
—

 
—

 
—

 
4

Stock options exercised
2,694

 
—

 
15

 
—

 
—

 
—

 
—

 
—

 
15

Common shares repurchased
(715
)
 
—

 
—

 
—

 
—

 
(7
)
 
—

 
(2
)
 
(9
)
Balance at September 30, 2013
12,797,388

 
$
128

 
$
125,184

 
$
(4,728
)
 
$
(1,854
)
 
$
33,987

 
$
20

 
$
(2
)
 
$
152,735

 
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,
 
2013
 
2012
Cash flows from operating activities:
 
 
 
Net (loss) income
$
(1,879
)
 
$
373

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

Provision for loan losses
633

 
2,250

Employee stock ownership plan expense
417

 
407

Equity incentive plan expense
576

 
86

Excess tax benefit from share-based compensation
(4
)
 
(3
)
Amortization of investment premiums and discounts, net
921

 
932

Amortization of loan premiums and discounts, net
1,071

 
1,045

Depreciation and amortization of premises and equipment
1,355

 
1,406

Amortization of core deposit intangible
55

 
8

Net loss (gain) on sales of securities
919

 
(230
)
Net (gain) loss on fair value of derivatives
(191
)
 
280

Deferred income taxes
67

 
124

Loans originated for sale
(36,927
)
 
(36,303
)
Proceeds from sale of loans held for sale
40,464

 
37,232

Net loss on disposal of SI Trust Servicing operations
—

 
698

Net gain on sales of loans held for sale
(735
)
 
(998
)
Net gain on sales of loans held for investment
(201
)
 
—

Net loss on disposal of equipment
—

 
5

Net loss on sales or write-downs of other real estate owned
25

 
14

Increase in cash surrender value of bank-owned life insurance
(226
)
 
(213
)
Gain on bank-owned life insurance proceeds
—

 
(349
)
Impairment charge on long-lived assets
—

 
410

Other-than-temporary impairment losses on securities
8

 
123

Change in operating assets and liabilities:
 

 
 

Accrued interest receivable
42

 
132

Other assets
(1,781
)
 
290

Accrued expenses and other liabilities
1,974

 
652

Net cash provided by operating activities
6,583

 
8,371

 
 
 
 
Cash flows from investing activities:
 

 
 

Purchases of available for sale securities
(40,863
)
 
(41,721
)
Proceeds from sales of available for sale securities
13,108

 
39,115

Proceeds from maturities of and principal repayments on available for sale securities
31,786

 
42,197

Redemption of Federal Home Loan Bank stock
325

 
—

Net decrease (increase) in loans
28,811

 
(12,908
)
Purchases of loans
(20,115
)
 
(40,788
)
Net cash paid from acquisition of Newport Bancorp, Inc.
(8,935
)
 
—

Proceeds from sales of loans held for investment
3,189

 
—

Proceeds from sales of other real estate owned
1,255

 
1,101

Purchases of premises and equipment
(1,868
)
 
(1,062
)
Proceeds from bank-owned life insurance
—

 
585

Net cash provided by (used in) investing activities
6,693

 
(13,481
)
 
 
 
 

5


SI FINANCIAL GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Concluded)
(In Thousands / Unaudited)
 
Nine Months Ended
September 30,
 
2013
 
2012
Cash flows from financing activities:
 

 
 

Net increase in deposits
7,971

 
5,601

Net decrease in mortgagors' and investors' escrow accounts
(1,738
)
 
(1,789
)
Proceeds from Federal Home Loan Bank advances
40,000

 
—

Repayments of Federal Home Loan Bank advances
(44,000
)
 
(7,000
)
Excess tax benefit from share-based compensation
4

 
3

Cash dividends on common stock
(860
)
 
(885
)
Stock options exercised
15

 
10

Common shares repurchased
(9
)
 
(4,977
)
Net cash provided by (used in) financing activities
1,383

 
(9,037
)
 
 
 
 
 
 
 
 
Net change in cash and cash equivalents
14,659

 
(14,147
)
Cash and cash equivalents at beginning of period
37,689

 
48,412

Cash and cash equivalents at end of period
$
52,348

 
$
34,265

 
 
 
 
Supplemental cash flow information:
 

 
 

Interest paid
$
6,146

 
$
7,315

Income taxes paid, net
1,312

 
113

Transfer of loans to other real estate owned
1,407

 
876

 
 
 
 
In connection with the purchase acquisition detailed in Note 10 to the unaudited interim consolidated financial statements:
 
 
 
Fair value of non-cash assets acquired
$
406,912

 
$
—

Goodwill and core deposit intangibles
16,943

 
—

Fair value of liabilities assumed
384,815

 
—

Value of common shares issued
30,105

 
—

 
 
 
 
 
 
 
 

 See accompanying notes to unaudited interim consolidated financial statements.

6
Table of Contents
SI FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2013 AND 2012 AND DECEMBER 31, 2012
 
 
 
 
 
 


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-six offices in eastern Connecticut and Rhode Island. 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.

On September 6, 2013, the Company acquired Newport Bancorp, Inc. ("Newport"), the holding company for Newport Federal Savings Bank. The acquisition added six full-service banking offices located in eastern Connecticut and Rhode Island. See Note 10 - Acquisition of Newport Bancorp, Inc. for additional details.

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 10.01 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, 2013 and for the three and nine months ended September 30, 2013 and 2012 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, 2012 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, 2013 are not necessarily indicative of the operating results for the year ending December 31, 2013 or for any other period.

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, 2013 AND 2012 AND DECEMBER 31, 2012
 
 
 
 
 
 

Reclassifications
Certain amounts in the Company’s 2012 consolidated financial statements have been reclassified to conform to the 2013 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, to be impaired. Also, all TDRs are initially classified as 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.

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

8
Table of Contents
SI FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2013 AND 2012 AND DECEMBER 31, 2012
 
 
 
 
 
 

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 cash flows of 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 but increasing extent, the Bank provides financing for investors in the time share industry, which are secured by consumer receivables, and finances capital improvements for condominium associations, which are secured by the assigned rights to levy special assessments to condominium owners.


9
Table of Contents
SI FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2013 AND 2012 AND DECEMBER 31, 2012
 
 
 
 
 
 

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. See Note 4 for details.
 
The majority of the Company's loans are collateralized by real estate located in eastern Connecticut and Rhode Island. 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 local 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, the regulatory agencies, 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.

Common Share Repurchases
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. GAAP states 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.

Recent Accounting Pronouncements
Disclosures about Offsetting Assets and Liabilities – In December 2011, the Financial Accounting Standards Board ("FASB") amended its standard related to disclosure requirements for offsetting assets and liabilities. Under this

10
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SI FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2013 AND 2012 AND DECEMBER 31, 2012
 
 
 
 
 
 

amendment, an entity is 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 includes derivatives, sale and repurchase agreements and reverse sale and repurchase agreements, and securities borrowing and securities lending arrangements. The amendments in this update were effective for annual reporting periods beginning on or after January 1, 2013, and interim periods within those annual periods. The adoption of this amendment had no impact on the Company's consolidated financial statements.

Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities - In January 2013, the FASB issued amendments to clarify that the scope of Disclosures about Offsetting Assets and Liabilities applies to derivatives accounted for in accordance with Derivatives and Hedging, including bifurcated embedded derivatives, repurchase agreements, reverse repurchase agreements, securities borrowing and securities lending transactions that are either offset in accordance with applicable guidance or subject to an enforceable master netting arrangement or similar agreement. The amendments in this update were effective for fiscal years beginning on or after
January 1, 2013, and interim periods within those annual periods. The adoption of this amendment had no impact on the Company's consolidated financial statements.

Comprehensive Income - Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income - In February 2012, the FASB issued an amendment to improve the transparency of reporting these reclassifications by requiring an organization to 1) present the effects on the line items of net income of significant amounts reclassified out of accumulated other comprehensive income and 2) cross-reference to other disclosures currently required under GAAP for other reclassification items to be reclassified directly to net income in their entirety in the same reporting period. The amendments were effective for reporting periods beginning after December 15, 2012. The adoption of this amendment did not have a material impact on the Company's consolidated financial statements. See Consolidated Statements of Comprehensive Income (Loss).

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 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 (loss) per share calculations. The Company had anti-dilutive common shares outstanding of 534,492 and 595,761 for the three and nine months ended September 30, 2013, respectively, and 173,138 and 215,987 for the three and nine months ended September 30, 2012, respectively. For the three and nine months ended September 30, 2013 and for the three months ended September 30, 2012, all common stock equivalents were anti-dilutive and were not included in the computation of loss per share because it would result in a reduction in the net loss per share.


11
Table of Contents
SI FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2013 AND 2012 AND DECEMBER 31, 2012
 
 
 
 
 
 

The computation of earnings (loss) per share is as follows:
 
Three Months Ended September 30,
 
Nine Months Ended
September 30,
 
2013
 
2012
 
2013
 
2012
 
(Dollars in Thousands, Except Per Share Data)
Net (loss) income
$
(1,742
)
 
$
(700
)
 
$
(1,879
)
 
$
373

 
 
 
 
 
 
 
 
Weighted average common shares outstanding:
 

 
 

 
 
 
 
Basic
10,310,210

 
9,569,069

 
9,814,017

 
9,785,924

Effect of dilutive stock options
—

 
—

 
—

 
21,774

Diluted
10,310,210

 
9,569,069

 
9,814,017

 
9,807,698

 
 
 
 
 
 
 
 
(Loss) earnings per share:
 

 
 

 
 
 
 
Basic
$
(0.17
)
 
$
(0.07
)
 
$
(0.19
)
 
$
0.04

Diluted
$
(0.17
)
 
$
(0.07
)
 
$
(0.19
)
 
$
0.04


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, 2013 and December 31, 2012 are as follows:
 
 
September 30, 2013
 
 
Amortized
Cost (1)
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
 
 
(In Thousands)
Debt securities:
 
 
 
 
 
 
 
U.S. Government and agency obligations
$
48,179

 
$
527

 
$
(123
)
 
$
48,583

Government-sponsored enterprises
28,533

 
320

 
(245
)
 
28,608

Mortgage-backed securities:(2)
 
 
 

 
 

 
 

Agency - residential
88,754

 
1,499

 
(1,456
)
 
88,797

Non-agency - residential
540

 
27

 
(1
)
 
566

Corporate debt securities
4,515

 
115

 
—

 
4,630

Collateralized debt obligations
3,797

 
—

 
(104
)
 
3,693

Obligations of state and political subdivisions
6,250

 
163

 
(70
)
 
6,343

Tax-exempt securities
3,862

 
—

 
(275
)
 
3,587

Foreign government securities
25

 
—

 
—

 
25

Total available for sale securities
$
184,455

 
$
2,651

 
$
(2,274
)
 
$
184,832

 
 
 
 
 
 
 
 
 
(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.

At September 30, 2013, certain agency-residential mortgage-backed securities were pledged to secure a $15.0 million repurchase agreement assumed in the merger with Newport. These pledged securities have a carrying value of $15.9 million and fair value of $16.3 million at September 30, 2013. In addition, the Company has $4.0 million in cash pledged as collateral to secure this agreement at September 30, 2013. The repurchase agreement has a rate of 2.58% and matures in November 2013.

12
Table of Contents
SI FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2013 AND 2012 AND DECEMBER 31, 2012
 
 
 
 
 
 

 
 
December 31, 2012
 
 
Amortized
Cost (1)
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
 
 
(In Thousands)
Debt securities:
 
 
 
 
 
 
 
U.S. Government and agency obligations
$
55,027

 
$
1,255

 
$
(23
)
 
$
56,259

Government-sponsored enterprises
23,388

 
579

 
—

 
23,967

Mortgage-backed securities:(2)


 


 


 
 

Agency - residential
69,399

 
2,211

 
(66
)
 
71,544

Non-agency - residential
4,784

 
52

 
(124
)
 
4,712

Non-agency - HELOC
2,555

 
—

 
(78
)
 
2,477

Corporate debt securities
7,555

 
188

 
(49
)
 
7,694

Collateralized debt obligations
5,993

 
—

 
(1,597
)
 
4,396

Obligations of state and political subdivisions
5,152

 
262

 
—

 
5,414

Foreign government securities
50

 
—

 
—

 
50

Total available for sale securities
$
173,903

 
$
4,547

 
$
(1,937
)
 
$
176,513

 
 
 
 
 
 
 
 
 
(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, 2013 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 MBSs 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
$
7,983

 
$
8,023

After 1 but within 5 years
25,022

 
25,448

After 5 but within 10 years
15,959

 
15,935

After 10 years
46,197

 
46,063

 
95,161

 
95,469

Mortgage-backed securities
89,294

 
89,363

Total debt securities
$
184,455

 
$
184,832


The following is a summary of realized gains and losses on the sales of securities for the three and nine months ended September 30, 2013 and 2012:
 
Three Months Ended September 30,
 
Nine Months Ended
September 30,
 
2013
 
2012
 
2013
 
2012
 
(In Thousands)
Gross gains on sales
$
37

 
$
113

 
$
40

 
$
740

Gross losses on sales
(959
)
 
(457
)
 
(959
)
 
(510
)
Net (loss) gain on sale of securities
$
(922
)
 
$
(344
)
 
$
(919
)
 
$
230



13
Table of Contents
SI FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2013 AND 2012 AND DECEMBER 31, 2012
 
 
 
 
 
 

Proceeds from the sale of available for sale securities were $12.1 million and $13.1 million for the three and nine months ended September 30, 2013, respectively, and $6.7 million and $39.1 million for the three and nine months ended September 30, 2012, respectively.

The following tables present information pertaining to securities with gross unrealized losses at September 30, 2013 and December 31, 2012, 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, 2013:
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
 
(In Thousands)
U.S. Government and agency obligations
$
13,578

 
$
101

 
$
1,000

 
$
22

 
$
14,578

 
$
123

Government sponsored enterprises
7,864

 
245

 
—

 
—

 
7,864

 
245

Mortgage-backed securities:
 

 
 

 
 

 
 

 
 

 
 

Agency - residential
39,216

 
1,391

 
2,856

 
65

 
42,072

 
1,456

Non-agency - residential
173

 
1

 
—

 
—

 
173

 
1

Collateralized debt obligations
—

 
—

 
3,693

 
104

 
3,693

 
104

Obligations of state and political subdivisions
1,205

 
70

 
—

 
—

 
1,205

 
70

Tax-exempt securities
3,587

 
275

 
—

 
—

 
3,587


275

Total
$
65,623

 
$
2,083

 
$
7,549

 
$
191

 
$
73,172

 
$
2,274


 
Less Than 12 Months
 
12 Months Or More
 
Total
December 31, 2012:
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
 
(In Thousands)
U.S. Government and agency obligations
$
—

 
$
—

 
$
1,367

 
$
23

 
$
1,367

 
$
23

Mortgage-backed securities:
 

 
 

 
 

 
 

 
 

 
 

Agency - residential
6,923

 
37

 
1,404

 
29

 
8,327

 
66

Non-agency - residential
1,926

 
8

 
1,417

 
116

 
3,343

 
124

Non-agency - HELOC
—

 
—

 
2,477

 
78

 
2,477

 
78

Corporate debt securities
—

 
—

 
946

 
49

 
946

 
49

Collateralized debt obligations
—

 
—

 
4,396

 
1,597

 
4,396

 
1,597

Total
$
8,849

 
$
45

 
$
12,007

 
$
1,892

 
$
20,856

 
$
1,937


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

14
Table of Contents
SI FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2013 AND 2012 AND DECEMBER 31, 2012
 
 
 
 
 
 

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 impairment charges for OTTI in future periods.

At September 30, 2013, thirty-three debt securities with gross unrealized losses had aggregate depreciation of approximately 3.01% of the Company’s amortized cost basis. The majority of the unrealized losses related to the Company’s agency mortgage-backed securities. Impairment charges recognized on investments deemed other-than-temporarily impaired were $0 and $8,000 for the three and nine months ended September 30, 2013, respectively compared to $87,000 and $123,000 of net impairment losses recognized by the Company for the three and nine months ended September 30, 2012, respectively. 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, 2013.

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. 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 at maturity, the Company did not consider these securities to be other-than-temporarily impaired at September 30, 2013.

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, 2013.
 
Collateralized Debt Obligations. The unrealized losses on the Company’s collateralized debt obligations relate 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 has 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 tranches have foregone payments or have received payment in kind through increased principal allocations. However, the number of deferring securities has been decreasing and a 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, 2013.  

15
Table of Contents
SI FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2013 AND 2012 AND DECEMBER 31, 2012
 
 
 
 
 
 

The following table details the Company's collateralized debt obligations that are rated below investment grade at September 30, 2013:
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
 
A2
 
$
2,578

 
$
—

 
$
(78
)
 
$
2,500

 
B-
 
$
62

 
127.6
 
 
 
 
$
2,578

 
$
—

 
$
(78
)
 
$
2,500

 
 
 
$
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, 2013.

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 (loss) income for the three and nine months ended September 30, 2013 and 2012.
 
 
Three Months Ended September 30,
 
Nine Months Ended
September 30,
 
2013
 
2012
 
2013
 
2012
 
(In Thousands)
Balance at beginning of period
$
267

 
$
172

 
$
259

 
$
1,207

Amounts related to credit for which OTTI losses were not previously recognized
—

 
—

 
8

 
—

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)
(205
)
 
—

 
(205
)
 
—

Balance at end of period
$
62

 
$
259

 
$
62

 
$
259

 

16
Table of Contents
SI FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2013 AND 2012 AND DECEMBER 31, 2012
 
 
 
 
 
 

NOTE 4.  LOANS RECEIVABLE AND ALLOWANCE FOR LOAN LOSSES

Loan Portfolio
The composition of the Company’s loan portfolio at September 30, 2013 and December 31, 2012 is as follows:
 
 
 
September 30, 2013
 
December 31, 2012
 
 
(In Thousands)
Real estate loans:
 
 
 
Residential - 1 to 4 family
$
456,416

 
$
230,664

Multi-family and commercial
262,543

 
201,951

Construction
9,889

 
3,284

Total real estate loans
728,848

 
435,899

 
 
 
 
 
Commercial business loans:
 

 
 

SBA and USDA guaranteed
142,008

 
148,385

Time share
28,394

 
23,310

Condominium association
18,054

 
15,493

Other
67,874

 
26,339

Total commercial business loans
256,330

 
213,527

 
 
 
 
 
Consumer loans:
 

 
 

Home equity
41,604

 
28,375

Indirect automobile
7,120

 
9,652

Other
2,250

 
2,353

Total consumer loans
50,974

 
40,380

 
 
 
 
 
Total loans
1,036,152

 
689,806

 
 
 
 
 
Deferred loan origination costs, net of fees
1,592

 
1,744

Allowance for loan losses
(6,322
)
 
(6,387
)
Loans receivable, net
$
1,031,422

 
$
685,163


The Company purchased commercial business loans totaling $20.1 million during the nine months ended September 30, 2013. During the nine months ended September 30, 2012, the Company purchased commercial business loans and consumer loans totaling $33.9 million and $6.9 million, respectively.
 













17
Table of Contents
SI FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2013 AND 2012 AND DECEMBER 31, 2012
 
 
 
 
 
 

Allowance for Loan Losses
Changes in the allowance for loan losses for the three and nine months ended September 30, 2013 and 2012 are as follows:
Three Months Ended
September 30, 2013
Residential -
1 to 4 Family
 
Multi-family
and Commercial
 
Construction
 
Commercial
Business
 
Consumer
 
Total
 
(In Thousands)
Balance at beginning of period
$
999

 
$
2,947

 
$
30

 
$
1,531

 
$
500

 
$
6,007

Provision for loan losses
99

 
11

 
83

 
231

 
19

 
443

Loans charged-off
(128
)
 
—

 
—

 
—

 
(10
)
 
(138
)
Recoveries of loans previously charged-off
1

 
1

 
—

 
2

 
6

 
10

Balance at end of period
$
971

 
$
2,959

 
$
113

 
$
1,764

 
$
515

 
$
6,322


Nine Months Ended
September 30, 2013
Residential -
1 to 4 Family
 
Multi-family
and Commercial
 
Construction
 
Commercial
Business
 
Consumer
 
Total
 
(In Thousands)
Balance at beginning of period
$
1,125

 
$
3,028

 
$
22

 
$
1,735

 
$
477

 
$
6,387

Provision for loan losses
401

 
56

 
91

 
27

 
58

 
633

Loans charged-off
(586
)
 
(197
)
 
—

 
—

 
(71
)
 
(854
)
Recoveries of loans previously charged-off
31

 
72

 
—

 
2

 
51

 
156

Balance at end of period
$
971

 
$
2,959

 
$
113

 
$
1,764

 
$
515

 
$
6,322


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


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

 
$
2,337

 
$
280

 
$
1,148

 
$
446

 
$
4,970

Provision (credit) for loan losses
246

 
1,740

 
(256
)
 
346

 
174

 
2,250

Loans charged-off