Document
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 FORM 10-Q
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended March 31, 2018
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, a smaller reporting company, or an emerging growth company.  See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
 
Large Accelerated Filer  o
Accelerated Filer x
 
 
Non-Accelerated Filer  o
Smaller Reporting Company  o
 
 
 
Emerging growth company o
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period
for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange
Act. 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 May 4, 2018, there were 12,247,734 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):
 
 
 
 
 
 
 
Consolidated Balance Sheets at March 31, 2018 and December 31, 2017
 
 
 
 
 
 
Consolidated Statements of Income for the three months ended
March 31, 2018 and 2017
 
 
 
 
 
 
Consolidated Statements of Comprehensive Income for the three months ended March 31, 2018 and 2017
 
 
 
 
 
 
Consolidated Statement of Changes in Shareholders’ Equity for the three months ended March 31, 2018
 
 
 
 
 
 
Consolidated Statements of Cash Flows for the three months ended March 31, 2018 and 2017
 
 
 
 
 
 
 
 
 
 
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)
 
March 31,
2018
 
December 31,
2017
ASSETS:
 
 
 
Cash and due from banks:
 
 
 
Noninterest-bearing
$
14,136

 
$
16,872

Interest-bearing
70,210

 
66,614

Total cash and cash equivalents
84,346

 
83,486

 
 
 
 
Available for sale securities, at fair value
145,467

 
154,053

Loans held for sale
921

 
835

Loans receivable (net of allowance for loan losses of $13,004 at March 31, 2018 and $12,334 at December 31, 2017)
1,263,182

 
1,237,174

Federal Home Loan Bank stock, at cost
9,856

 
9,856

Federal Reserve Bank stock, at cost
3,638

 
3,636

Bank-owned life insurance
33,941

 
33,726

Premises and equipment, net
19,387

 
19,409

Goodwill and other intangibles
16,742

 
16,893

Accrued interest receivable
4,793

 
4,784

Deferred tax asset, net
6,705

 
6,412

Other real estate owned, net
1,074

 
1,226

Other assets
8,266

 
9,466

Total assets
$
1,598,318

 
$
1,580,956

 
 
 
 
LIABILITIES AND SHAREHOLDERS' EQUITY:
 

 
 

Liabilities:
 

 
 

Deposits:
 

 
 

Noninterest-bearing
$
211,699

 
$
220,877

Interest-bearing
1,010,821

 
987,170

Total deposits
1,222,520

 
1,208,047

 
 
 
 
Mortgagors' and investors' escrow accounts
3,108

 
4,418

Federal Home Loan Bank advances
173,701

 
170,094

Junior subordinated debt owed to unconsolidated trust
8,248

 
8,248

Accrued expenses and other liabilities
21,822

 
21,668

Total liabilities
1,429,399

 
1,412,475

 
 
 
 
Shareholders' Equity:
 

 
 

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

 

Common stock ($.01 par value; 35,000,000 shares authorized; 12,242,434 shares issued and outstanding at both March 31, 2018 and December 31, 2017)
122

 
122

Additional paid-in-capital
126,643

 
126,540

Unallocated common shares held by ESOP
(2,568
)
 
(2,688
)
Unearned restricted shares
(232
)
 
(235
)
Retained earnings
47,466

 
46,176

Accumulated other comprehensive loss
(2,512
)
 
(1,434
)
Total shareholders' equity
168,919

 
168,481

Total liabilities and shareholders' equity
$
1,598,318

 
$
1,580,956

 

See accompanying notes to unaudited interim consolidated financial statements.

1



SI FINANCIAL GROUP, INC.
CONSOLIDATED STATEMENTS OF INCOME
(In Thousands, Except Per Share Amounts / Unaudited)
 
Three Months Ended
March 31,
 
2018
 
2017
Interest and dividend income:
 
 
 
Loans, including fees
$
12,663

 
$
12,150

Securities:
 

 
 

Taxable interest
677

 
743

Tax-exempt interest
14

 
14

Dividends
180

 
177

Other
220

 
118

Total interest and dividend income
13,754

 
13,202

 
 
 
 
Interest expense:
 

 
 

Deposits
1,955

 
1,750

Federal Home Loan Bank advances
806

 
900

Subordinated debt and other borrowings
68

 
54

Total interest expense
2,829

 
2,704

 
 
 
 
Net interest income
10,925

 
10,498

 
 
 
 
Provision for loan losses
725

 
160

 
 
 
 
Net interest income after provision for loan losses
10,200

 
10,338

 
 
 
 
Noninterest income:
 

 
 

Service fees
1,712

 
1,684

Wealth management fees
9

 
327

Increase in cash surrender value of bank-owned life insurance
215

 
130

Mortgage banking
214

 
155

Other
244

 
213

Total noninterest income
2,394

 
2,509

 
 
 
 
Noninterest expenses:
 

 
 

Salaries and employee benefits
5,210

 
5,208

Occupancy and equipment
1,851

 
1,776

Computer and electronic banking services
1,288

 
1,380

Outside professional services
356

 
401

Marketing and advertising
234

 
190

Supplies
147

 
134

FDIC deposit insurance and regulatory assessments
173

 
194

Core deposit intangible amortization
151

 
150

Other real estate owned operations
135

 
110

Other
506

 
799

Total noninterest expenses
10,051

 
10,342

 
 
 
 
Income before income tax provision
2,543

 
2,505

Income tax provision
537

 
786

Net income
$
2,006

 
$
1,719

 
 
 
 
Earnings per share:
 

 
 

Basic
$
0.17

 
$
0.15

Diluted
$
0.17

 
$
0.14

 
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 March 31,
 
 
 
 
2018
 
2017
Net income
 
$
2,006

 
$
1,719

Other comprehensive income, net of tax:
 
 
 
 
    Net unrealized holding gains (losses) on available for sale securities
 
(1,078
)
 
30

Other comprehensive income (loss)
 
(1,078
)
 
30

Comprehensive income
 
$
928

 
$
1,749

    
See accompanying notes to unaudited interim consolidated financial statements.


    
 



3



SI FINANCIAL GROUP, INC.
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 2018
(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
Loss
 
Total
Shareholders'
Equity
 
Shares
 
Dollars
 
 
 
 
 
 
Balance at December 31, 2017
1,242,434

 
$
122

 
$
126,540

 
$
(2,688
)
 
$
(235
)
 
$
46,176

 
$
(1,434
)
 
$
168,481

Comprehensive income

 

 

 

 

 
2,006

 
(1,078
)
 
928

Cash dividends declared ($0.06 per share)

 

 

 

 

 
(716
)
 

 
(716
)
Equity incentive plans compensation

 

 
48

 

 
3

 

 

 
51

Allocation of 12,159 ESOP shares

 

 
55

 
120

 

 

 

 
175

Balance at March 31, 2018
1,242,434

 
$
122

 
$
126,643

 
$
(2,568
)
 
$
(232
)
 
$
47,466

 
$
(2,512
)
 
$
168,919

 
See accompanying notes to unaudited interim consolidated financial statements.


4



SI FINANCIAL GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands / Unaudited)
 
Three Months Ended
March 31,
 
2018
 
2017
Cash flows from operating activities:
 
 
 
Net income
$
2,006

 
$
1,719

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

Provision for loan losses
725

 
160

Employee stock ownership plan expense
175

 
179

Equity incentive plan expense
51

 
140

Amortization of investment premiums and discounts, net
324

 
265

Amortization of loan premiums and discounts, net
228

 
250

Depreciation and amortization of premises and equipment
582

 
554

Amortization of core deposit intangible
151

 
150

Deferred income tax provision (benefit)
(6
)
 
78

Loans originated for sale
(5,811
)
 
(9,927
)
Proceeds from sale of loans held for sale
5,776

 
7,791

Net gain on sales of loans held for sale
(120
)
 
(104
)
Net loss on sales or write-downs of other real estate owned
81

 
27

Increase in cash surrender value of bank-owned life insurance
(215
)
 
(130
)
Change in operating assets and liabilities:
 

 
 

Accrued interest receivable
(9
)
 
(52
)
Other assets
1,269

 
(165
)
Accrued expenses and other liabilities
154

 
(384
)
Net cash provided by operating activities
5,361

 
551

 
 
 
 
Cash flows from investing activities:
 

 
 

Purchases of available for sale securities
(1,993
)
 
(13,986
)
Proceeds from maturities of and principal repayments on available for sale securities
8,890

 
7,312

Purchases of Federal Home Loan Bank stock

 
(69
)
Purchases of Federal Reserve Bank stock
(2
)
 
(7
)
Loan principal originations, net of principal collections
(24,579
)
 
(8,175
)
Purchases of loans
(2,382
)
 
(11,222
)
Proceeds from sales of other real estate owned
71

 
119

Purchases of premises and equipment
(560
)
 
(779
)
Net cash used in investing activities
(20,555
)
 
(26,807
)
 
 
 
 

5



SI FINANCIAL GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Concluded)
(In Thousands / Unaudited)
 
Three Months Ended
March 31,
 
2018
 
2017
Cash flows from financing activities:
 

 
 

Net increase in deposits
14,473

 
45,618

Net decrease in mortgagors' and investors' escrow accounts
(1,310
)
 
(1,238
)
Proceeds from Federal Home Loan Bank advances
14,817

 
14,500

Repayments of Federal Home Loan Bank advances
(11,210
)
 
(17,827
)
Cash dividends on common stock
(716
)
 
(593
)
Common shares repurchased

 
(138
)
Net cash provided by financing activities
16,054

 
40,322

 
 
 
 
 
 
 
 
Net change in cash and cash equivalents
860

 
14,066

Cash and cash equivalents at beginning of period
83,486

 
73,186

Cash and cash equivalents at end of period
$
84,346

 
$
87,252

 
 
 
 
Supplemental cash flow information:
 

 
 

Interest paid
$
2,831

 
$
2,675

Income taxes paid, net

 
25


 See accompanying notes to unaudited interim consolidated financial statements.

6

Table of Contents
SI FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2018 AND 2017 AND DECEMBER 31, 2017

 
 
 
 
 
 


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 24 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, construction loans and consumer loans.  In addition, life insurance and annuities 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.

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, 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, the instructions to Form 10-Q and Rule 10.01 of Regulation S-X of the Securities and Exchange Commission and general practices within the banking industry. Accordingly, certain information and footnote disclosures required by GAAP for complete financial statements have been omitted.  Information in the accompanying interim consolidated financial statements and notes to the financial statements of the Company as of March 31, 2018 and for the three months ended March 31, 2018 and 2017 is unaudited. These unaudited interim consolidated financial statements and related notes should be read in conjunction with the audited consolidated financial statements of the Company and the accompanying notes for the year ended December 31, 2017 contained in the Company’s Annual Report on 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 periods covered herein. The results of operations for the three months ended March 31, 2018 are not necessarily indicative of the operating results for the year ending December 31, 2018 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, deferred income taxes and the impairment of long-lived assets such as goodwill and other intangibles.

Reclassifications
Amounts in the Company’s prior year consolidated financial statements are reclassified to conform to the current year presentation.  Such reclassifications had no effect on net income.


7

Table of Contents
SI FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2018 AND 2017 AND DECEMBER 31, 2017

 
 
 
 
 
 

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.

Troubled Debt Restructurings
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 due to the borrower's financial condition that would not otherwise be considered for a borrower with similar risk characteristics, such as reductions of interest rates, deferral of interest or principal payments, or maturity extensions, the modification is considered a TDR. Modified terms are dependent upon the financial position and needs of the individual borrower. If the modification agreement is violated, the loan is handled by the Company’s Collections Department for resolution, which may result in foreclosure.

Management considers all nonaccrual loans, with the exception of certain consumer loans, to be impaired. Also, all TDRs are initially classified as impaired and follow the Company's nonaccrual policy. However, if the loan was current prior to modification, nonaccrual status would not be required. If the loan was on nonaccrual prior to modification or if the payment amount significantly increases, the loan will remain on nonaccrual for a period of at least six months. Loans qualify for return to accrual status once the borrower has demonstrated the willingness and the ability to perform in accordance with the restructured terms of the loan agreement for a period of not less than six consecutive months. 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.

Impaired classification may be removed after a year following the restructure if the borrower demonstrates compliance with the modified terms and the restructuring agreement specifies an interest rate equal to that which would be provided to a borrower with similar risk characteristics at the time of restructuring.

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 management considers adequate to absorb losses in the loan portfolio. Loan losses are charged against the allowance for loan losses when management believes the uncollectibility of the principal loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance for loan losses when received.

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

8

Table of Contents
SI FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2018 AND 2017 AND DECEMBER 31, 2017

 
 
 
 
 
 

and real estate market conditions, adverse situations that may affect a borrower’s ability to repay, estimated value of any underlying collateral, historical loan loss experience, the amount and trends 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 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. In the determination of the allowance for loan losses, management may obtain independent appraisals for significant properties, when necessary.

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: changes in lending policies and procedures, including changes in underwriting standards and collections, charge-off and recovery practices; changes in national, regional and local economic and business conditions and developments that affect the collectibility of the portfolio, including the condition of various market segments; changes in the size and composition of the loan portfolio and in the terms of the loans; changes in the experience, ability and depth of lending and underwriting management and other relevant staff; changes in the volume and severity of past due loans, the volume of nonaccrual loans and the volume and severity of adversely classified or graded loans; changes in the quality of the loan review system; changes in the underlying collateral for collateral-dependent loans; the existence and effect of any concentrations of credit and changes in the level of such concentrations; the effect of other external factors such as competition and legal and regulatory requirements on the level of estimated credit losses in the portfolio.

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 to acquire, develop, improve or refinance 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 can be impacted by the economy as evidenced by increased vacancy rates. 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

9

Table of Contents
SI FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2018 AND 2017 AND DECEMBER 31, 2017

 
 
 
 
 
 

development projects. Upon the completion of construction, the loan generally converts to a permanent mortgage loan. Credit risk is affected by cost overruns, whether estimates of the sale price of the property are correct, the time it takes 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. The Bank provides loans to investors in the time share industry, which are secured by consumer receivables, and provides loans for capital improvements to condominium associations, which are secured by the assigned rights to levy special assessments to condominium owners. Additionally, the Bank purchases loans primarily out of our market area from a company specializing in medical loan originations, which are secured by medical equipment.

Consumer – Loans in this segment primarily include home equity lines of credit (representing both first and second liens), 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 and Rhode Island. To a lesser extent, certain commercial real estate loans are secured by collateral located outside of our primary market area with concentrations in Massachusetts and New Hampshire. 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 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

10

Table of Contents
SI FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2018 AND 2017 AND DECEMBER 31, 2017

 
 
 
 
 
 

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, direct loan origination costs and loan purchase premiums 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. In addition, discounts related to fair value adjustments for loans receivable acquired in a business combination or asset purchase are accreted into earnings over the contractual term as an adjustment of the related loan's yield. The Company periodically evaluates the cash flows expected to be collected for loans acquired with deteriorated credit quality. Changes in the expected cash flows compared to the expected cash flows as of the date of acquisition may impact the accretable yield or result in a charge to the provision for loan losses to the extent of a shortfall.

Common Share Repurchases
The Company is chartered in 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 is allocated to common stock, additional paid-in capital and retained earnings balances.

Recent Accounting Pronouncements
Revenue from Contracts with Customers (Topic 606): In May 2014, the Financial Accounting Standards Board ("FASB") issued guidance that improves the revenue recognition requirements for contracts with customers. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To achieve the core principle, a company should apply a five step approach to revenue recognition. The guidance in this update affects any entity that either enters into contracts with customers to transfer goods or services or entered into contracts for the transfer of nonfinancial assets unless those contracts are within the scope of other standards. Accordingly, the guidance does not apply to, among other things, the following: receivables (i.e. loans), debt and equity investments, equity method investments, joint ventures, derivatives and hedging, financial instruments and transfers and servicing. This guidance became effective for fiscal years beginning after December 15, 2017. Significantly all of the Company's revenues are excluded from the scope of the guidance; therefore, adoption of this guidance on January 1, 2018 did not have a material impact on the Company's consolidated financial statements.

Financial Instruments (Subtopic 825-10): In January 2016, the FASB issued guidance addressing certain aspects of recognition, measurement, presentation and disclosure of financial instruments. Targeted improvements to GAAP include the requirement for equity investments (except those accounted for under the equity method of accounting or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income and the elimination of the requirement for public business entities to disclose the methods and significant assumptions used to estimate the fair value for financial instruments measured at amortized cost. The amendments in this update became effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The adoption of this guidance on January 1, 2018 did not have a material impact on the Company's consolidated financial statements.

Leases (Topic 842): In February 2016, the FASB issued amended guidance to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. Disclosures are required by lessees and lessors to meet the objective of enabling users of financial statements to assess the amount, timing and uncertainty of cash flows arising from leases. In transition, lessees and lessors are required to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach. The modified retrospective approach includes a number of optional practical expedients that entities may elect to apply. An entity that elects

11

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SI FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2018 AND 2017 AND DECEMBER 31, 2017

 
 
 
 
 
 

to apply the practical expedients will, in effect, continue to account for leases that commence before the effective date in accordance with previous GAAP unless the lease is modified, except that lessees are required to recognize a right-of-use asset and a lease liability for all operating leases at each reporting date based on the present value of the remaining minimum rental payments that were tracked and disclosed under previous GAAP. The amendments in this update are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. It is expected that assets and liabilities will increase based on the present value of remaining lease payments for leases in place at the adoption date; however, based on the current level of long-term leases in place, this is not expected to be material to the Company's consolidated financial statements.

Financial Instruments - Credit Losses (Topic 326): In June 2016, the FASB issued guidance that significantly changes how entities will measure credit losses for most financial assets and certain other instruments that are not measured at fair value through net income. The update will replace today's "incurred loss" approach with an "expected loss" model. The new model, referred to as the current expected credit loss ("CECL") model, will apply to (1) financial assets subject to credit losses and measured at amortized cost and (2) certain off-balance sheet credit exposures. This includes, but is not limited to, loans, leases, held-to-maturity securities, loan commitments and financial guarantees. The CECL model does not apply to available for sale ("AFS") debt securities. For AFS debt securities with unrealized losses, entities will measure credit losses in a manner similar to current accounting guidance, except that losses will be recognized as allowances rather than reductions in the amortized cost of the securities. The update also simplifies the accounting model for purchased credit-impaired debt securities and loans. Disclosure requirements under the update have been expanded to include the entity's assumptions, models and methods for estimating the allowance for loan and lease losses. In addition, entities will need to disclose the amortized cost balance for each class of financial asset by credit quality indicator, disaggregated by year of origination. The update is effective for interim and annual reporting periods beginning after December 15, 2019; early adoption is permitted for interim and annual periods beginning after December 15, 2018. The update requires a modified retrospective transition under which a cumulative effect to equity will be recognized in the period of adoption. Management has developed a focus team that is reviewing and monitoring additional developments and accounting guidance to determine the impact to the Company's consolidated financial statements. Management is evaluating the models and related requirements and is developing an implementation plan.

Statement of Cash Flows - Classification of Certain Cash Receipts and Cash Payments (Topic 230): In August 2016, the FASB issued guidance to reduce the existing diversity in practice in how certain cash receipts and cash payments are presented and classified in the statement of cash flows. This update provides guidance on eight specific cash flow issues. The update became effective for fiscal years beginning after December 15, 2017, and for interim periods within those fiscal years. The amendments in this update should be applied using a retrospective transition method to each period presented. The adoption of this guidance on January 1, 2018 did not have a material impact on the Company's consolidated financial statements.

Intangibles - Goodwill and Other - Simplifying the Test for Goodwill Impairment (Topic 350): In January, 2017, the FASB issued guidance aimed at simplifying the subsequent measurement of goodwill. Under these amendments, an entity should perform its annual or interim goodwill impairment test by comparing the fair value of reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit's fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. Additionally, an entity should consider income tax effects from tax deductible goodwill on the carrying amount of a reporting unit when measuring the goodwill impairment loss, if applicable. The Board also eliminated the requirements for any reporting unit with a zero or negative carrying amount to perform a qualitative assessment and, if it fails that qualitative test, to perform Step 2 of the goodwill impairment test. Therefore, the same impairment assessment applies to all reporting units. An entity is required to disclose the amount of goodwill allocated to each reporting unit with a zero or negative carrying amount of net assets. An entity still has the option to perform the qualitative assessment for a reporting unit to

12

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SI FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2018 AND 2017 AND DECEMBER 31, 2017

 
 
 
 
 
 

determine if the quantitative impairment test is necessary. The amendments in this update should be applied on a prospective basis and are effective for annual and goodwill impairment tests in fiscal years beginning after December 15, 2019. The Company does not expect the adoption of this guidance to have a material impact on its consolidated financial statements.

Receivables - Nonrefundable Fees and Other Costs (Subtopic 310-20): In March 2017, the FASB issued guidance shortening the amortization period for certain callable debt securities held at a premium. Specifically, the amendments require the premium to be amortized to the earliest call date. The amendments do not require an accounting change for securities held at a discount; the discount continues to be amortized to maturity. The amendments in this update are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. Early adoption is permitted, including adoption in an interim period. The amendments in this update should be applied on a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption. Additionally, in the period of adoption, an entity should provide disclosures about a change in accounting principle. The Company does not expect the adoption of this guidance to have a material impact on its consolidated financial statements due to limited
holdings with callable features.

Compensation - Stock Compensation (Topic 718): In May 2017, the FASB issued guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting in Topic 718. An entity should account for the effects of a modification unless all of the following are met: 1) the fair value of the modified award is the same as the fair value of the original award immediately before the original award is modified; 2) the vesting conditions of the modified award are the same as the vesting conditions of the original award immediately before the original award is modified; and 3) the classification of the modified award as an equity instrument or a liability instrument is the same as the classification of the original award immediately before the original award is modified. The amendments in this update became effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2017. The amendments in this update should be applied prospectively to an award modified on or after the adoption date. The adoption of this guidance on January 1, 2018 did not have a material impact on the Company's consolidated financial statements.

NOTE 2.  EARNINGS PER SHARE

Basic earnings per share is calculated by dividing the net income 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 per share since the shares participate in dividends and the rights to the dividends are non-forfeitable. Diluted earnings per share is computed in a manner similar to basic earnings 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 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 133,342 and 130,000 for the three months ended March 31, 2018 and March 31, 2017, respectively.

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SI FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2018 AND 2017 AND DECEMBER 31, 2017

 
 
 
 
 
 


The computation of earnings per share is as follows:
 
Three Months Ended
March 31,
 
2018
 
2017
 
(Dollars in Thousands, Except Per Share Amounts)
Net income
$
2,006

 
$
1,719

 
 
 
 
Weighted average common shares outstanding:
 

 
 

Basic
11,909,028

 
11,828,136

Effect of dilutive stock options
86,270

 
87,053

Diluted
11,995,298

 
11,915,189

 
 
 
 
Earnings per share:
 

 
 

Basic
$
0.17

 
$
0.15

Diluted
$
0.17

 
$
0.14


NOTE 3.  SECURITIES

The amortized cost, gross unrealized gains and losses and fair values of available for sale securities at March 31, 2018 and December 31, 2017 are as follows:
 
 
March 31, 2018
 
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
 
 
(In Thousands)
Debt securities:
 
 
 
 
 
 
 
U.S. Government and agency obligations
$
59,427

 
$

 
$
(1,391
)
 
$
58,036

Government-sponsored enterprises
9,206

 

 
(74
)
 
9,132

Mortgage-backed securities:(1)
 
 
 

 
 

 
 
Agency - residential
75,258

 
129

 
(1,884
)
 
73,503

Non-agency - residential
64

 

 
(5
)
 
59

Collateralized debt obligation
1,087

 
26

 

 
1,113

Obligations of state and political subdivisions
500

 

 

 
500

Tax-exempt securities
3,106

 
20

 
(2
)
 
3,124

Total available for sale securities
$
148,648

 
$
175

 
$
(3,356
)
 
$
145,467

 
 
 
 
 
 
 
 
 
(1) 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 any of the GSEs or the U.S. Government.

14

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SI FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2018 AND 2017 AND DECEMBER 31, 2017

 
 
 
 
 
 

 
 
December 31, 2017
 
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
 
 
(In Thousands)
Debt securities:
 
 
 
 
 
 
 
U.S. Government and agency obligations
$
62,749

 
$
17

 
$
(998
)
 
$
61,768

Government-sponsored enterprises
9,212

 
16

 
(11
)
 
9,217

Mortgage-backed securities:(1)
 
 
 
 
 
 
 

Agency - residential
79,134

 
231

 
(1,135
)
 
78,230

Non-agency - residential
70

 

 
(5
)
 
65

Collateralized debt obligation
1,090

 
34

 

 
1,124

Obligations of state and political subdivisions
500

 

 

 
500

Tax-exempt securities
3,114

 
37

 
(2
)
 
3,149

Total available for sale securities
$
155,869

 
$
335

 
$
(2,151
)
 
$
154,053

 
 
 
 
 
 
 
 
 
(1) Agency securities refer to debt obligations issued or guaranteed by government corporations or GSEs.  Non-agency securities, or private-label securities, are the sole obligation of their issuer and are not guaranteed by any of the GSEs or the U.S. Government.

The amortized cost and fair value of debt securities by contractual maturities at March 31, 2018 are presented below. Maturities are based on the final contractual payment dates and do not reflect the impact of potential prepayments or early redemptions. Because mortgage-backed securities are not due at a single maturity date, they are not included in the maturity categories in the following maturity summary.
 
 
Amortized
Cost
 
Fair
Value
 
(In Thousands)
Within 1 year
$
16,065

 
$
16,034

After 1 but within 5 years
19,634

 
19,310

After 5 but within 10 years
169

 
173

After 10 years
37,458

 
36,388

 
73,326

 
71,905

Mortgage-backed securities
75,322

 
73,562

Total debt securities
$
148,648

 
$
145,467


There were no sales of available for sale securities for the three months ended March 31, 2018 and 2017.


15

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SI FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2018 AND 2017 AND DECEMBER 31, 2017

 
 
 
 
 
 

The following tables present information pertaining to securities with gross unrealized losses at March 31, 2018 and December 31, 2017, aggregated by investment category and length of time the individual securities have been in a continuous unrealized loss position.
 
 
Less Than 12 Months
 
12 Months or More
 
Total
March 31, 2018
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
 
(In Thousands)
U.S. Government and agency obligations
$
33,398

 
$
443

 
$
24,638

 
$
948

 
$
58,036

 
$
1,391

Government sponsored enterprises
8,889

 
68

 
243

 
6

 
9,132

 
74

Mortgage-backed securities:
 

 
 

 
 

 
 

 
 

 
 

Agency - residential
32,801

 
694

 
31,130

 
1,190

 
63,931

 
1,884

Non-agency - residential

 

 
59

 
5

 
59

 
5

Tax-exempt securities
1,114

 
2

 

 

 
1,114


2

Total
$
76,202

 
$
1,207

 
$
56,070

 
$
2,149

 
$
132,272

 
$
3,356


 
Less Than 12 Months
 
12 Months or More
 
Total
December 31, 2017
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
 
(In Thousands)
U.S. Government and agency obligations
$
28,871

 
$
156

 
$
26,461

 
$
842

 
$
55,332

 
$
998

Government-sponsored enterprises
5,992

 
7

 
259

 
4

 
6,251

 
11

Mortgage-backed securities:
 

 
 

 
 

 
 

 
 

 
 

Agency - residential
34,562

 
239

 
32,572

 
896

 
67,134

 
1,135

Non-agency - residential

 

 
65

 
5

 
65

 
5

Tax-exempt securities
1,116

 
2

 

 

 
1,116

 
2

Total
$
70,541

 
$
404

 
$
59,357

 
$
1,747

 
$
129,898

 
$
2,151


At March 31, 2018, 82 debt securities with gross unrealized losses had an aggregate depreciation of 2.54% of the Company’s amortized cost basis. The unrealized losses are primarily related to the Company’s U.S. Government and agency obligations and agency mortgage-backed securities. There were no investments deemed other-than-temporarily impaired for the three months ended March 31, 2018 and 2017. 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 not other-than-temporarily impaired at March 31, 2018.

U.S. Government and Agency Obligations and Mortgage-backed Securities - Agency - Residential. The unrealized losses on the Company’s U.S. Government and agency obligations and mortgage-backed agency-residential securities related primarily to a widening of the rate spread to comparable treasury securities. The Company does not expect these securities to settle at a price less than the par value of the securities.

Government Sponsored Enterprises. The unrealized losses on the Company's government sponsored enterprises were also caused by interest rate movement. The contractual cash flows of these investments are guaranteed by a government sponsored agency. Accordingly, it is expected that the securities would not be settled at a price less than the amortized cost of our investment.


16

Table of Contents
SI FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2018 AND 2017 AND DECEMBER 31, 2017

 
 
 
 
 
 

Mortgage-backed Securities - Non-Agency - Residential. The unrealized losses on the Company's non-agency-residential mortgage-backed securities relate to one investment which has been evaluated by management and no potential credit loss was identified.

NOTE 4.  LOANS RECEIVABLE AND ALLOWANCE FOR LOAN LOSSES

Loan Portfolio
The composition of the Company’s loan portfolio at March 31, 2018 and December 31, 2017 is as follows:
 
 
 
March 31, 2018
 
December 31, 2017
 
 
(In Thousands)
Real estate loans:
 
 
 
Residential - 1 to 4 family
$
398,888

 
$
397,277

Multi-family and commercial
521,292

 
481,998

Construction
30,053

 
28,765

Total real estate loans
950,233

 
908,040

 
 
 
 
 
Commercial business loans:
 

 
 

SBA and USDA guaranteed
80,282

 
89,514

Time share
47,467

 
50,526

Condominium association
27,920

 
27,096

Medical loans
27,847

 
27,803

Other
86,798

 
88,566

Total commercial business loans
270,314

 
283,505

 
 
 
 
 
Consumer loans:
 

 
 

Home equity
51,046

 
53,480

Indirect automobile
21

 
57

Other
1,830

 
1,835

Total consumer loans
52,897

 
55,372

 
 
 
 
 
Total loans
1,273,444

 
1,246,917

 
 
 
 
 
Deferred loan origination costs, net of fees
2,742

 
2,591

Allowance for loan losses
(13,004
)
 
(12,334
)
Loans receivable, net
$
1,263,182

 
$
1,237,174


The Company purchased commercial loans totaling $2.4 million during the three months ended March 31, 2018. For the twelve months ended December 31, 2017, the Company purchased commercial loans totaling $36.1 million.


17

Table of Contents
SI FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2018 AND 2017 AND DECEMBER 31, 2017

 
 
 
 
 
 

Allowance for Loan Losses
Changes in the allowance for loan losses for the three months ended March 31, 2018 and 2017 are as follows:
Three Months Ended
March 31, 2018
Residential -
1 to 4 Family
 
Multi-family
and Commercial
 
Construction
 
Commercial
Business
 
Consumer
 
Total
 
(In Thousands)
Balance at beginning of period
$
1,093

 
$
6,627

 
$
633

 
$
3,308

 
$
673

 
$
12,334

Provision (credit) for loan losses
104

 
326

 
94

 
225

 
(24
)
 
725

Loans charged-off

 

 

 
(64
)
 

 
(64
)
Recoveries of loans previously charged-off

 

 

 
9

 

 
9

Balance at end of period
$
1,197

 
$
6,953

 
$
727

 
$
3,478

 
$
649

 
$
13,004


Three Months Ended
March 31, 2017
Residential -
1 to 4 Family
 
Multi-family
and Commercial
 
Construction
 
Commercial
Business
 
Consumer
 
Total
 
(In Thousands)
Balance at beginning of period
$
1,149

 
$
5,724

 
$
952

 
$
3,266

 
$
729

 
$
11,820

Provision (credit) for loan losses
37

 
415

 
(411
)
 
116

 
3

 
160

Loans charged-off

 

 

 

 

 

Recoveries of loans previously charged-off
3

 

 

 
15

 
2

 
20

Balance at end of period
$
1,189

 
$
6,139

 
$
541

 
$
3,397

 
$
734

 
$
12,000


Further information pertaining to the allowance for loan losses at March 31, 2018 and December 31, 2017 is as follows:
March 31, 2018
Residential -
1 to 4 Family
 
Multi-family
and Commercial
 
Construction
 
Commercial
Business
 
Consumer
 
Total
 
(In Thousands)
Allowance for loans individually evaluated and deemed to be impaired
$
316

 
$
235

 
$

 
$
238

 
$
10

 
$
799

Allowance for loans individually or collectively evaluated and not deemed to be impaired
881

 
6,718

 
727

 
3,240

 
639

 
12,205

Allowance for loans acquired with deteriorated credit quality

 

 

 

 

 

Total loan loss allowance
$
1,197

 
$
6,953

 
$
727

 
$
3,478

 
$
649

 
$
13,004

 
 
 
 
 
 
 
 
 
 
 
 
Loans individually evaluated and deemed to be impaired
$
5,471

 
$
9,528

 
$

 
$
1,232

 
$
388

 
$
16,619

Loans individually or collectively evaluated and not deemed to be impaired
393,417

 
510,280

 
30,053

 
269,082

 
52,509

 
1,255,341

Amount of loans acquired with deteriorated credit quality

 
1,484

 

 

 

 
1,484

Total loans
$
398,888

 
$
521,292

 
$
30,053

 
$
270,314

 
$
52,897

 
$
1,273,444


18

Table of Contents
SI FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2018 AND 2017 AND DECEMBER 31, 2017

 
 
 
 
 
 

 
December 31, 2017
Residential -
1 to 4 Family
 
Multi-family
and Commercial
 
Construction
 
Commercial
Business
 
Consumer
 
Total
 
(In Thousands)
Allowance for loans individually evaluated and deemed to be impaired
$
231

 
$
251

 
$

 
$

 
$

 
$
482

Allowance for loans individually or collectively evaluated and not deemed to be impaired
862

 
6,376

 
633

 
3,308

 
673

 
11,852

Allowance for loans acquired with deteriorated credit quality

 

 

 

 

 

Total loan loss allowance
$
1,093

 
$
6,627

 
$
633

 
$
3,308

 
$
673

 
$
12,334

 
 
 
 
 
 
 
 
 
 
 
 
Loans individually evaluated and deemed to be impaired
$
5,113

 
$
9,646

 
$

 
$
334

 
$
292

 
$
15,385

Loans individually or collectively evaluated and not deemed to be impaired
392,164

 
470,433

 
28,765

 
283,171

 
55,080

 
1,229,613

Amount of loans acquired with deteriorated credit quality

 
1,919

 

 

 

 
1,919

Total loans
$
397,277

 
$
481,998

 
$
28,765

 
$
283,505

 
$
55,372

 
$
1,246,917



19

Table of Contents
SI FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2018 AND 2017 AND DECEMBER 31, 2017

 
 
 
 
 
 

Past Due Loans
The following represents an aging of loans at March 31, 2018 and December 31, 2017:
March 31, 2018
30-59
Days
Past Due
 
60-89
Days
Past Due
 
90 Days or More
Past Due
 
Total 30
Days or More
Past Due
 
Current
 
Total
Loans
 
(In Thousands)
Real Estate:
 

 
 

 
 
 
 
 
 
 
 
Residential - 1 to 4 family
$
7,079

 
$
371

 
$
1,145

 
$
8,595

 
$
390,293

 
$
398,888

Multi-family and commercial
2,317

 
998

 

 
3,315

 
517,977

 
521,292

Construction

 

 

 

 
30,053

 
30,053

Commercial Business:
 

 
 

 
 

 
 

 
 

 
 

SBA and USDA guaranteed
638

 
84

 

 
722

 
79,560

 
80,282

Time share

 

 

 

 
47,467

 
47,467

Condominium association

 

 

 

 
27,920

 
27,920

Medical loans
34

 
181

 

 
215

 
27,632

 
27,847

Other
186

 


77

 
263

 
86,535

 
86,798

Consumer:
 
 
 
 
 
 
 
 
 
 
 
Home equity
175

 
39

 
63

 
277

 
50,769

 
51,046

Indirect automobile

 

 

 

 
21

 
21

Other
17

 

 

 
17

 
1,813

 
1,830

Total
$
10,446

 
$
1,673

 
$
1,285

 
$
13,404

 
$
1,260,040

 
$
1,273,444


December 31, 2017
30-59
Days
Past Due
 
60-89
Days
Past Due
 
90 Days or More
Past Due
 
Total 30
Days or More
Past Due
 
Current
 
Total
Loans
 
(In Thousands)
Real Estate:
 

 
 

 
 
 
 
 
 
 
 
Residential - 1 to 4 family
$
6,243

 
$
1,582

 
$
1,280

 
$
9,105

 
$
388,172

 
$
397,277

Multi-family and commercial
3,633

 

 
27

 
3,660

 
478,338

 
481,998

Construction

 

 

 

 
28,765

 
28,765

Commercial Business:
 

 
 

 
 

 
 

 
 

 
 

SBA and USDA guaranteed
483

 

 

 
483

 
89,031

 
89,514

Time share

 

 

 

 
50,526

 
50,526

Condominium association

 

 

 

 
27,096

 
27,096

Medical loans
139

 
99

 

 
238

 
27,565

 
27,803

Other
77

 
183

 
26

 
286

 
88,280

 
88,566

Consumer:
 

 
 

 
 

 
 

 
 

 
 

Home equity
475

 

 

 
475

 
53,005

 
53,480

Indirect automobile
2

 
3

 

 
5

 
52

 
57

Other
8

 

 

 
8

 
1,827

 
1,835

Total
$
11,060

 
$
1,867

 
$
1,333

 
$
14,260

 
$
1,232,657

 
$
1,246,917


The Company did not have any loans that were past due 90 days or more and still accruing interest at March 31, 2018 or December 31, 2017.

20

Table of Contents
SI FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2018 AND 2017 AND DECEMBER 31, 2017

 
 
 
 
 
 

Impaired and Nonaccrual Loans
The following is a summary of impaired loans and nonaccrual loans at March 31, 2018 and December 31, 2017:
 
Impaired Loans(1)
 
 
March 31, 2018
Recorded
Investment
 
Unpaid
Principal
Balance
 
Related
Allowance
 
Nonaccrual
Loans
 
(In Thousands)
Impaired loans without valuation allowance:
 
 
 
 
 
 
 
Real Estate:
 
 
 
 
 
 
 
Residential - 1 to 4 family
$
3,033

 
$
3,033

 
$

 
$
2,252

Multi-family and commercial
7,013

 
7,210

 

 
3,095

Commercial Business:
 
 
 
 
 
 
 
  Medical loans
92

 
92

 

 
92

  Other
249

 
249

 

 
240

Consumer:
 
 
 
 
 
 
 
Home equity
288

 
288

 

 
287

Other

 

 

 
1

Total impaired loans without valuation allowance
10,675

 
10,872

 

 
5,967

 
 
 
 
 
 
 
 
Impaired loans with valuation allowance:
 

 
 

 
 

 
 

Real Estate:
 
 
 
 
 
 
 
Residential - 1 to 4 family
2,438

 
2,449

 
316

 
822

Multi-family and commercial
3,999

 
3,999

 
235

 
225

Commercial business - Other
891

 
891

 
238

 
891

Consumer - Home equity
100

 
100

 
10

 

Total impaired loans with valuation allowance
7,428

 
7,439

 
799

 
1,938

Total impaired loans
$
18,103

 
$
18,311

 
$
799

 
$
7,905

 
 
 
 
 
 
 
 
 
(1) Includes loans acquired with deteriorated credit quality from the Newport Federal Savings Bank ("Newport") merger and performing troubled debt restructurings.


21

Table of Contents
SI FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2018 AND 2017 AND DECEMBER 31, 2017

 
 
 
 
 
 

 
Impaired Loans(1)
 
 
December 31, 2017
Recorded
Investment
 
Unpaid
Principal
Balance
 
Related
Allowance
 
Nonaccrual
Loans
 
(In Thousands)
Impaired loans without valuation allowance:
 
 
 
 
 
 
 
Real Estate:
 
 
 
 
 
 
 
Residential - 1 to 4 family
$
3,097

 
$
3,156

 
$

 
$
2,024

Multi-family and commercial
7,120

 
7,317

 

 
3,169

Commercial business - Other
308

 
308

 

 
298

Consumer - Home equity
292

 
292

 

 
192

Consumer - Indirect automobile

 

 

 
1

Total impaired loans without valuation allowance
10,817

 
11,073

 

 
5,684

 
 
 
 
 
 
 
 
 
Impaired loans with valuation allowance:
 

 
 

 
 

 
 

Real Estate:
 
 
 
 
 
 
 
Residential - 1 to 4 family
2,016

 
2,027

 
231

 
381

Multi-family and commercial
4,029

 
4,029

 
251

 
313

Commercial business - Other
26

 
26

 

 
26

Total impaired loans with valuation allowance
6,071

 
6,082

 
482

 
720

Total impaired loans
$
16,888

 
$
17,155

 
$
482

 
$
6,404

 
 
 
 
 
 
 
 
 
(1) Includes loans acquired with deteriorated credit quality from the Newport merger and performing troubled debt restructurings.

The Company reviews and establishes, if necessary, an allowance for certain impaired loans for the amount by which the present value of expected cash flows (or observable market price of loan or fair value of the collateral if the loan is collateral dependent) are lower than the carrying value of the loan. At March 31, 2018 and December 31, 2017, the Company concluded that certain impaired loans required no valuation allowance as a result of management’s measurement of impairment. No additional funds are advanced to those borrowers whose loans are deemed impaired without prior approval of the Loan Committee or the Board of Directors.

Additional information related to impaired loans is as follows:
 
Three Months Ended
March 31, 2018
 
Average Recorded
Investment
 
Interest Income
Recognized
 
Interest
Income Recognized
on Cash Basis
 
(In Thousands)
Real Estate:
 
 
 
 
 
Residential - 1 to 4 family
$
5,462

 
$
28

 
$

Multi-family and commercial
10,245

 
104

 
6

Commercial business:
 
 
 
 
 
     Medical loans
46

 

 

     Other
1,402

 
22

 
14

Consumer:
 
 
 
 
 
     Home equity
340

 
1

 

     Other
1

 

 

Total
$
17,496

 
$
155

 
$
20


22

Table of Contents
SI FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2018 AND 2017 AND DECEMBER 31, 2017

 
 
 
 
 
 


 
Three Months Ended
March 31, 2017
 
Average Recorded
Investment
 
Interest Income
Recognized
 
Interest
Income Recognized
on Cash Basis
 
(In Thousands)
Real Estate:
 
 
 
 
 
Residential - 1 to 4 family
$
6,340

 
$
39

 
$
6

Multi-family and commercial
8,793

 
124

 
11

Commercial business:
 
 
 
 
 
     Other
988

 
8

 

Consumer:
 
 
 
 
 
     Home equity
425

 
2

 
1

     Other
3

 

 

Total
$
16,549

 
$
173

 
$
18


Credit Quality Information
The Company utilizes an eight-grade internal loan rating system for all loans in the portfolio, with the exception of its purchased SBA and USDA commercial business loans that are fully guaranteed by the U.S. government, as follows:
o
Pass (Ratings 1-4): Loans in these categories are considered low to average risk.
o
Special Mention (Rating 5): Loans in this category are starting to show signs of potential weakness and are being closely monitored by management.
o
Substandard (Rating 6): Generally, a loan is considered substandard if it is inadequately protected by the current net worth and paying capacity of the obligors and/or the collateral pledged. There is a distinct possibility that the Company will sustain some loss if the weakness is not corrected.
o
Doubtful (Rating 7): Loans classified as doubtful have all the weaknesses inherent in those classified substandard with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, highly questionable and improbable.
o
Loss (Rating 8): Loans in this category are considered uncollectible and of such little value that their continuance as assets is not warranted.

Management periodically reviews the ratings described above and the Company’s internal audit function reviews components of the credit files, including the assigned risk ratings, of certain commercial loans as part of its loan review.  


23

Table of Contents
SI FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2018 AND 2017 AND DECEMBER 31, 2017

 
 
 
 
 
 

The following tables present the Company’s loans by risk rating at March 31, 2018 and December 31, 2017:
March 31, 2018
Not Rated
 
Pass
 
Special Mention
 
Substandard
 
Doubtful
 
Loss
 
Total
 
(In Thousands)
Real Estate:
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential - 1 to 4 family
$

 
$
390,837

 
$
1,405

 
$
6,646

 
$

 
$

 
$
398,888

Multi-family and commercial

 
496,545

 
14,274

 
10,473

 

 

 
521,292

Construction

 
28,153

 
1,900

 

 

 

 
30,053

Total real estate loans

 
915,535

 
17,579

 
17,119

 

 

 
950,233

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial Business:
 
 
 
 
 
 
 
 
 
 
 
 
 
SBA and USDA guaranteed
80,282

 

 

 

 

 

 
80,282

Time share

 
47,467

 

 

 

 

 
47,467

Condominium association

 
27,920

 

 

 

 

 
27,920

Medical loans

 
27,755

 

 
92

 

 

 
27,847

Other

 
81,826

 
3,673

 
1,299

 

 

 
86,798

Total commercial business loans
80,282

 
184,968

 
3,673

 
1,391

 

 

 
270,314

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Consumer:
 
 
 
 
 
 
 
 
 
 
 
 
 
Home equity

 
50,561

 
178

 
307

 

 

 
51,046

Indirect automobile

 
21

 

 

 

 

 
21

Other

 
1,829

 

 
1

 

 

 
1,830

Total consumer loans

 
52,411

 
178

 
308

 

 

 
52,897

Total loans
$
80,282

 
$
1,152,914

 
$
21,430

 
$
18,818

 
$

 
$

 
$
1,273,444


24

Table of Contents
SI FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2018 AND 2017 AND DECEMBER 31, 2017

 
 
 
 
 
 

December 31, 2017
Not Rated
 
Pass
 
Special Mention
 
Substandard
 
Doubtful
 
Loss
 
Total
 
(In Thousands)
Real Estate:
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential - 1 to 4 family
$

 
$
389,276

 
$
1,592

 
$
6,409

 
$

 
$

 
$
397,277

Multi-family and commercial

 
457,395

 
13,362

 
11,241

 

 

 
481,998

Construction

 
28,765

 

 

 

 

 
28,765

Total real estate loans

 
875,436

 
14,954

 
17,650

 

 

 
908,040

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial Business:
 
 
 
 
 
 
 
 
 
 
 
 
 
SBA and USDA guaranteed
89,514

 

 

 

 

 

 
89,514

Time share

 
50,526

 

 

 

 

 
50,526

Condominium association

 
27,096

 

 

 

 

 
27,096

Medical loans

 
27,803

 

 

 

 

 
27,803

Other

 
83,742

 
3,559

 
1,265

 

 

 
88,566

Total commercial business loans
89,514

 
189,167

 
3,559

 
1,265

 

 

 
283,505

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Consumer:
 
 
 
 
 
 
 
 
 
 
 
 
 
Home equity

 
53,086

 
137

 
257

 

 

 
53,480

Indirect automobile

 
57

 

 

 

 

 
57

Other

 
1,834

 

 
1

 

 

 
1,835

Total consumer loans

 
54,977

 
137

 
258

 

 

 
55,372

Total loans
$
89,514

 
$
1,119,580

 
$
18,650

 
$
19,173

 
$

 
$

 
$
1,246,917


The following tables provide information on loans modified as TDRs during the three months ended March 31, 2018 and 2017. During the modification process, there were no loan charge-offs or principal reductions for the loans included in the table below.
 
Three Months Ended March 31,
 
2018
 
2017
 
 
 
 
 
Allowance for Loan Losses (End of Period)
 
 
 
 
 
Allowance for Loan Losses (End of Period)
 
 
 
 
 
 
 
 
 
 
 
Number of Loans
 
Recorded Investment
 
 
Number of Loans
 
Recorded Investment
 
 
(Dollars in Thousands)
Residential - 1 to 4 family
2
 
$
362

 
$
61

 
1
 
$
293

 
$

Consumer - Home equity
1
 
100

 
10

 
 

 

Total
3
 
$
462

 
$
71

 
1
 
$
293

 
$



25

Table of Contents
SI FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2018 AND 2017 AND DECEMBER 31, 2017

 
 
 
 
 
 

The following table provides the recorded investment, by type of modification, during the three months ended March 31, 2018 and 2017 for modified loans identified as TDRs.
 
 
Three Months Ended March 31,
 
 
2018
 
2017
 
 
(In Thousands)
Interest rate adjustments
$
77

 
$

Combination of rate and payment (1)
385

 

Maturity only

 
293

Total
$
462

 
$
293

 
 
 
 
 
(1) Terms include combination of rate adjustments and interest-only payment with deferral of principal.

There were no TDRs in payment default (defined as 90 days or more past due) within twelve months of restructure for the three months ended March 31, 2018 and March 31, 2017.

As of March 31, 2018, the Company held $605,000 in consumer mortgage loans collateralized by residential real estate properties that are in the process of foreclosure according to local requirements of the applicable jurisdiction.

Loans Acquired with Deteriorated Credit Quality
The following is a summary of loans acquired from Newport with evidence of credit deterioration as of March 31, 2018 and December 31, 2017.
 
Contractual Required Payments Receivable
 
Cash Expected To Be Collected
 
Non-Accretable Discount
 
Accretable Yield
 
Loans Receivable
 
(In Thousands)
Balance at December 31, 2017
$
2,141

 
$
1,919

 
$
222

 
$
143

 
$
1,776

Collections
(24
)
 
(24
)
 

 

 
(24
)
Dispositions
(411
)
 
(411
)
 

 

 
(411
)
Balance at March 31, 2018
$
1,706

 
$
1,484

 
$
222

 
$
143

 
$
1,341


NOTE 5.  PREMISES AND EQUIPMENT
 
Premises and equipment at March 31, 2018 and December 31, 2017 are summarized as follows:
 
March 31, 2018
 
December 31, 2017
 
(In Thousands)
Land
$
4,746

 
$
4,746

Buildings
13,675

 
13,675

Leasehold improvements
11,753

 
11,746

Furniture and equipment
13,007

 
12,561

Construction in process
73

 
7

 
43,254

 
42,735

Accumulated depreciation and amortization
(23,867
)
 
(23,326
)
Premises and equipment, net
$
19,387

 
$
19,409


At March 31, 2018, construction in process related to the construction, design and site costs associated with a new ATM location and construction costs of remodeling an existing branch. At March 31, 2018, the Company had outstanding commitments related to the remodeling of an existing branch totaling $890,000. Construction in process related to construction, design and site costs associated with a new off-site ATM at December 31, 2017.

NOTE 6.  OTHER COMPREHENSIVE LOSS

Accounting principles generally require recognized revenue, expenses, gains and losses be included in net income. Although certain changes in assets and liabilities are reported as a separate component of shareholders’ equity on the balance sheet, such items along with net income are components of comprehensive income.

Components of other comprehensive loss and related tax effects are as follows:
 
Three Months Ended March 31, 2018
 
Before Tax
Amount
 
Tax
Effects
 
Net of Tax
Amount
Securities:
(In Thousands)
Unrealized holding losses on available for sale securities
$
(1,365
)
 
$
287

 
$
(1,078
)
Other comprehensive loss
$
(1,365
)
 
$
287

 
$
(1,078
)

The components of accumulated other comprehensive loss included in shareholders’ equity are as follows:
 
March 31, 2018
 
Before Tax
Amount
 
Tax
Effects
 
Net of Tax
Amount
 
(In Thousands)
Net unrealized losses on available for sale securities
$
(3,181
)
 
$
669

 
$
(2,512
)
Accumulated other comprehensive loss
$
(3,181
)
 
$
669

 
$
(2,512
)


26

Table of Contents
SI FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2018 AND 2017 AND DECEMBER 31, 2017

 
 
 
 
 
 

 
 
December 31, 2017
 
 
Before Tax
Amount
 
Tax
Effects
 
Net of Tax
Amount
 
 
(In Thousands)
Net unrealized losses on available for sale securities
$
(1,816
)
 
$
618

 
$
(1,198
)
Reclassification of stranded tax effect from change in tax law(1)

 
(236
)
 
(236
)
Accumulated other comprehensive loss
$
(1,816
)
 
$
382

 
$
(1,434
)
 
 
 
 
 
 
 
(1) Reclassification was due to the one-time revaluation of the net deferred tax assets as a result of the Tax Cuts and Jobs Act.

NOTE 7.  REGULATORY CAPITAL

The Company and the Bank are subject to regulatory capital requirements promulgated by federal bank regulatory agencies. Failure by the Company or the Bank to meet minimum capital requirements could result in certain mandatory and discretionary actions by regulators that could have a material adverse effect on our consolidated financial statements. Under Basel III capital requirements, the Company and the Bank must meet specific capital guidelines that involve quantitative measures of the Company’s and the Bank’s assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. The Company’s and the Bank’s capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk weightings and other factors.

Quantitative measures established by regulation require the Company and the Bank to maintain certain minimum capital amounts and ratios. Federal bank regulators require the Company and the Bank to maintain minimum ratios of core capital to adjusted average assets, common equity tier 1 capital to risk-weighted assets, tier 1 capital to risk-weighted assets and total risk-based capital to risk-weighted assets. At March 31, 2018, the Company and the Bank met all the capital adequacy requirements to which they were subject and were “well capitalized” under the regulatory requirements. Management believes no conditions or events have occurred since March 31, 2018 that would materially adversely change the Company’s and the Bank’s capital classifications.

Effective January 1, 2016, Basel III implemented a requirement for all banking organizations to maintain a capital conservation buffer exclusively composed of common equity Tier 1 capital in an amount greater than 2.5% of total risk-weighted assets to avoid being subject to limitations on capital distributions, stock repurchases and discretionary bonus payments to executive officers. The capital conservation buffer increases the three risk-based capital ratios and will be phased in over a multi-year schedule with full compliance in 2019. Management believes the Company and the Bank's capital level will remain characterized as "well-capitalized" under the new rules.

The Company and Bank's regulatory capital amounts and ratios at March 31, 2018 and December 31, 2017, compared to the FDIC's requirements for classification as a well capitalized institution and for minimum capital adequacy, were as follows:

27

Table of Contents
SI FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2018 AND 2017 AND DECEMBER 31, 2017

 
 
 
 
 
 

 
Actual
 
Minimum Capital Requirement
 
Minimum To Be Well
Capitalized
March 31, 2018
Amount
 
Ratio
 
Amount
 
Ratio
 
Amount
 
Ratio
 
(Dollars in Thousands)
Common Equity Tier 1 Capital:
 
 
 
 
 
 
 
 
 
 
 
Company
$
155,175

 
14.12
%
 
$
49,446

 
4.50
%
 
$
71,422

 
6.50
%
Bank
147,950

 
13.48

 
49,375

 
4.50

 
71,319

 
6.50

Tier 1 Capital to Risk Weighted Assets:
 
 
 
 
 
 
 
 
 
 
 
Company
163,175

 
14.85

 
65,928

 
6.00

 
87,904

 
8.00

Bank
147,950

 
13.48

 
65,833

 
6.00

 
87,777

 
8.00

Total Capital to Risk Weighted Assets:
 
 
 
 
 
 
 
 
 
 
 
Company
176,693

 
16.08

 
87,904

 
8.00

 
109,880

 
10.00

Bank
161,468

 
14.72

 
87,777

 
8.00

 
109,722

 
10.00

Tier 1 Capital to Average Assets:
 
 
 
 
 
 
 
 
 
 
 
Company
163,175

 
10.44

 
62,494

 
4.00

 
78,117

 
5.00

Bank
147,950

 
9.52

 
62,176

 
4.00

 
77,719

 
5.00


 
Actual
 
Minimum Capital Requirement
 
Minimum To Be Well
Capitalized
December 31, 2017
Amount
 
Ratio
 
Amount
 
Ratio
 
Amount
 
Ratio
 
(Dollars in Thousands)
Common Equity Tier 1 Capital:
 
 
 
 
 
 
 
 
 
 
 
Company
$
154,532

 
14.54
%
 
$
47,842

 
4.50
%
 
$
69,106

 
6.50
%
Bank
146,509

 
13.81

 
47,740

 
4.50

 
68,958

 
6.50

Tier 1 Capital to Risk Weighted Assets:


 


 


 


 
 
 
 
Company
162,532

 
15.29

 
63,790

 
6.00

 
85,053

 
8.00

Bank
146,509

 
13.81

 
63,653

 
6.00

 
84,871

 
8.00

Total Capital to Risk Weighted Assets:
 
 
 
 
 
 
 
 
 
 
 
Company
175,326

 
16.49

 
85,053

 
8.00

 
106,316

 
10.00

Bank
159,303

 
15.02

 
84,871

 
8.00

 
106,089

 
10.00

Tier 1 Capital to Average Assets:


 


 


 


 


 


Company
162,532

 
10.36

 
62,757

 
4.00

 
78,446

 
5.00

Bank
146,509

 
9.40

 
62,348

 
4.00

 
77,934

 
5.00


NOTE 8.  FAIR VALUE OF ASSETS AND LIABILITIES

Fair Value Hierarchy
The Company groups its assets and liabilities in three levels based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value. Transfers between levels are recognized at the end of a reporting period, if applicable.

Level 1:
Valuation is based on quoted prices in active markets for identical assets or liabilities. Level 1 assets and liabilities generally include debt and equity securities that are traded in an active exchange market. Valuations are obtained from readily available pricing sources for market transactions involving identical assets or liabilities.


28

Table of Contents
SI FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2018 AND 2017 AND DECEMBER 31, 2017

 
 
 
 
 
 

Level 2: 
Valuation is based on observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

Level 3:
Valuation is based on unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Level 3 assets and liabilities include assets or liabilities whose value is determined using unobservable inputs to pricing models, discounted cash flow methodologies, or similar techniques, as well as assets or liabilities for which the determination of fair value requires significant management judgment or estimation.    

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

The following methods and assumptions were used by the Company in estimating fair value disclosures of its financial instruments:
 
Cash and cash equivalents. The carrying amounts of cash and cash equivalents approximate the fair values based on the short-term nature of the assets.

Securities available for sale. Included in the available for sale category are debt securities. The securities measured at fair value in Level 1 are based on quoted market prices in an active exchange market. Securities measured at fair value in Level 2 are based on pricing models that consider standard input factors such as observable market data, benchmark yields, interest rate volatilities, broker/dealer quotes, credit spreads and new issue data. The Company utilizes a nationally-recognized third-party pricing service to estimate fair value measurements for the majority of its portfolio. The pricing service evaluates each asset class based on relevant market information considering observable data, but these prices do not represent binding quotes. The fair value prices on all investments are reviewed for reasonableness by management. Securities measured at fair value in Level 3 include one collateralized debt obligation that was backed by a trust preferred security issued by banks and insurance companies. Management determined that an orderly and active market for this security and similar securities did not exist based on a significant reduction in trading volume and widening spreads relative to historical levels. The Company estimates future cash flows discounted using a rate management believes is representative of current market conditions. Factors in determining the discount rate include the current level of deferrals and/or defaults, changes in credit rating and the financial condition of the debtors within the underlying securities, broker quotes for securities with similar structure and credit risk, interest rate movements and pricing for new issuances.

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

Federal Reserve Bank stock. The carrying value of Federal Reserve Bank ("FRB") stock approximates fair value based on the redemption provisions of the FRB.


29

Table of Contents
SI FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2018 AND 2017 AND DECEMBER 31, 2017

 
 
 
 
 
 

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

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

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

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

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

Junior subordinated debt owed to unconsolidated trust. Rates currently available for debt with similar terms and remaining maturities are used to estimate fair value of existing debt.

Forward loan sale commitments and derivative loan commitments. Forward loan sale commitments and derivative loan commitments are based on the fair values of the underlying mortgage loans, including the servicing rights for derivative loan commitments, and the probability of such commitments being exercised. Significant management judgment and estimation is required in determining these fair value measurements.

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


30

Table of Contents
SI FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2018 AND 2017 AND DECEMBER 31, 2017

 
 
 
 
 
 

Assets and Liabilities Measured at Fair Value on a Recurring Basis
The following tables present assets and liabilities measured at fair value on a recurring basis as of March 31, 2018 and December 31, 2017.  The Company had no significant transfers into or out of Levels 1, 2 or 3 during the three months ended March 31, 2018.
 
March 31, 2018
 
Level 1
 
Level 2
 
Level 3
 
Total
 
(In Thousands)
Assets:
 
 
 
 
 
 
 
U.S. Government and agency obligations
$
19,382

 
$
38,654

 
$

 
$
58,036

Government-sponsored enterprises

 
9,132

 

 
9,132

Mortgage-backed securities

 
73,562

 

 
73,562

Collateralized debt obligation

 

 
1,113

 
1,113

Obligations of state and political subdivisions

 
500

 

 
500

Tax-exempt securities

 
3,124

 

 
3,124

Forward loan sale commitments and derivative loan commitments

 

 
81

 
81

Total assets
$
19,382

 
$
124,972

 
$
1,194

 
$
145,548

 
 
 
 
 
 
 
 
Liabilities:
 

 
 

 
 

 
 

Forward loan sale commitments and derivative loan commitments
$

 
$

 
$
2

 
$
2

Total liabilities
$

 
$

 
$
2

 
$
2

 
 
December 31, 2017
 
Level 1
 
Level 2
 
Level 3
 
Total
 
(In Thousands)
Assets:
 
 
 
 
 
 
 
U.S. Government and agency obligations
$
19,435

 
$
42,333

 
$

 
$
61,768

Government-sponsored enterprises

 
9,217

 

 
9,217

Mortgage-backed securities

 
78,295

 

 
78,295

Collateralized debt obligation

 

 
1,124

 
1,124

Obligations of state and political subdivisions

 
500

 

 
500

Tax-exempt securities

 
3,149

 

 
3,149

Forward loan sale commitments and derivative loan commitments

 

 
43

 
43

Total assets
$
19,435

 
$
133,494

 
$
1,167

 
$
154,096

 
The following table shows a reconciliation of the beginning and ending balances for Level 3 assets:
 
 
Collateralized
Debt
Obligations
 
Derivative Loan and Forward Loan Sale Commitments, Net
 
(In Thousands)
Balance at December 31, 2017
$
1,124

 
$
43

Total realized gains included in net income

 
36

Total unrealized losses included in other comprehensive loss
(11
)
 

Balance at March 31, 2018
$
1,113

 
$
79



31

Table of Contents
SI FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2018 AND 2017 AND DECEMBER 31, 2017

 
 
 
 
 
 

Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis
The Company may also be required from time to time to measure certain other financial assets on a nonrecurring basis in accordance with generally accepted accounting principles. These adjustments to fair value usually result from the application of lower-of-cost-or-market accounting or write-downs of individual assets. The following table summarizes the fair value hierarchy used to determine each adjustment and the carrying value of the related individual assets at March 31, 2018 and December 31, 2017. There were no liabilities measured at fair value on a nonrecurring basis at March 31, 2018 and December 31, 2017.

 
 
At March 31, 2018
 
At December 31, 2017
 
Level 1
 
Level 2
 
Level 3
 
Level 1
 
Level 2
 
Level 3
 
(In Thousands)
Impaired loans
$

 
$

 
$
923

 
$

 
$

 
$
337

Other real estate owned

 

 
1,074

 

 

 
1,226

Total assets
$

 
$

 
$
1,997

 
$

 
$

 
$
1,563


The following table summarizes losses resulting from fair value adjustments for assets measured at fair value on a nonrecurring basis.
 
 
Three Months Ended March 31,
 
2018
 
2017
 
(In Thousands)
Impaired loans
$
266

 
$
16

Other real estate owned
26

 
16

Total losses
$
292

 
$
32


The Company measures the impairment of loans that are collateral dependent based on the fair value of the collateral (Level 3). The fair value of collateral used by the Company represents the amount expected to be received from the sale of the property, net of selling costs, as determined by an independent, licensed or certified appraiser using observable market data. This data includes information such as selling price of similar properties, expected future cash flows or earnings of the subject property based on current market expectations, and relevant legal, physical and economic factors. The appraised values of collateral are adjusted as necessary by management based on observable inputs for specific properties. Losses applicable to write-downs of impaired loans are based on the appraised market value of the underlying collateral, assuming foreclosure of these loans is imminent, and are recorded through the provision for loan losses.

The amount of other real estate owned represents the carrying value of the collateral based on the appraised value of the underlying collateral less estimated selling costs. The loss on foreclosed assets represents adjustments in the valuation recorded during the time period indicated and not for losses incurred on sales.

Summary of Fair Values of Financial Instruments
The estimated fair values and related carrying or notional amounts of the Company’s financial instruments are presented in the following table. Certain financial instruments and all nonfinancial instruments are exempt from disclosure requirements. Accordingly, the aggregate fair value amounts presented do not represent the underlying value of the Company.

Management uses its best judgment in estimating the fair value of the Company's financial instruments; however, there are inherent weaknesses in any estimation technique. Therefore, for substantially all financial instruments, the fair value estimates presented herein are not necessarily indicative of the amounts the Company could have

32

Table of Contents
SI FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2018 AND 2017 AND DECEMBER 31, 2017

 
 
 
 
 
 

realized in a sales transaction at March 31, 2018 and December 31, 2017. The estimated fair value amounts at March 31, 2018 and December 31, 2017 have been measured as of each respective date, and have not been re-evaluated or updated for purposes of the consolidated financial statements subsequent to those respective dates. As such, the estimated fair values of these financial instruments subsequent to the respective reporting dates may be different than the amounts reported at each period-end. The information presented should not be interpreted as an estimate of the fair value of the entire Company since a fair value calculation is only required for a limited portion of the Company's assets. Due to the wide range of valuation techniques and the degree of subjectivity used in making the estimate, comparisons between the Company's disclosures and those of other banks may not be meaningful.

As of March 31, 2018 and December 31, 2017, the recorded carrying amounts and estimated fair values of the Company's financial instruments are as follows:
 
March 31, 2018
 
Carrying
Amount
 
Fair Value
 
 
 
 
Level 1
 
Level 2
 
Level 3
 
Total
 
(In Thousands)
Financial Assets:
 
Cash and cash equivalents
$
84,346

 
$
84,346

 
$

 
$

 
$
84,346

Available for sale securities
145,467

 
19,382

 
124,972

 
1,113

 
145,467

Loans held for sale
921

 

 

 
1,247

 
1,247

Loans receivable, net
1,263,182

 

 

 
1,232,607

 
1,232,607

Federal Home Loan Bank stock
9,856

 

 

 
9,856

 
9,856

Federal Reserve Bank stock
3,638

 

 

 
3,638

 
3,638

Accrued interest receivable
4,793

 

 

 
4,793

 
4,793

Financial Liabilities:
 

 
 

 
 

 
 

 
 
Deposits
1,222,520

 

 

 
1,223,326

 
1,223,326

Mortgagors' and investors' escrow accounts
3,108

 

 

 
3,108

 
3,108

Federal Home Loan Bank advances
173,701

 

 
170,520

 

 
170,520

Junior subordinated debt owed to unconsolidated trust
8,248

 

 
6,401

 

 
6,401

On-balance Sheet Derivative Financial Instruments:
 
 
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
 
 
Derivative loan commitments
32

 

 

 
32

 
32

    Forward loan sale commitments
49

 

 

 
49

 
49

Liabilities:
 
 
 
 
 
 
 
 
 
Derivative loan commitments
2

 

 

 
2

 
2



33

Table of Contents
SI FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2018 AND 2017 AND DECEMBER 31, 2017

 
 
 
 
 
 

 
 
December 31, 2017
 
Carrying
Amount
 
Fair Value
 
 
 
 
Level 1
 
Level 2
 
Level 3
 
Total
 
(In Thousands)
Financial Assets:
 
  Cash and cash equivalents
$
83,486

 
$
83,486

 
$

 
$

 
$
83,486

  Available for sale securities
154,053

 
19,435

 
133,494

 
1,124

 
154,053

  Loans held for sale
835

 

 

 
847

 
847

  Loans receivable, net
1,237,174

 

 

 
1,229,696

 
1,229,696

  Federal Home Loan Bank stock
9,856

 

 

 
9,856

 
9,856

  Federal Reserve Bank stock
3,636

 

 

 
3,636

 
3,636

  Accrued interest receivable
4,784

 

 

 
4,784

 
4,784

Financial Liabilities:
 
 
 
 
 
 
 
 
 
  Deposits
1,208,047

 

 

 
1,209,458

 
1,209,458

  Mortgagors' and investors' escrow accounts
4,418

 

 

 
4,418

 
4,418

  Federal Home Loan Bank advances
170,094

 

 
163,568

 

 
163,568

  Junior subordinated debt owed to unconsolidated trust
8,248

 

 
6,231

 

 
6,231

On-balance Sheet Derivative Financial Instruments:
 
 
 
 
 
 
 
 
 
  Assets:
 
 
 
 
 
 
 
 
 
  Derivative loan commitments
27

 

 

 
27

 
27

  Forward loan sale commitments
16

 

 

 
16

 
16


NOTE 9.  DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

Derivative Instruments Not Designated As Hedging Instruments
Certain derivative instruments do not meet the requirements to be accounted for as hedging instruments. These undesignated derivative instruments are recognized on the consolidated balance sheets at fair value, with changes in fair value recorded in noninterest income.

Derivative Loan Commitments - Mortgage loan commitments are referred to as derivative loan commitments if the loan that will result from exercise of the commitment will be held for sale upon funding. The Company enters into commitments to fund residential mortgage loans at specified times in the future, with the intention that these loans will subsequently be sold in the secondary market. A mortgage loan commitment binds the Company to lend funds to a potential borrower at a specified interest rate and within a specified period of time, generally up to 60 days after inception of the rate lock.

Outstanding derivative loan commitments expose the Company to the risk that the price of the loans arising from exercise of the loan commitment might decline from inception of the rate lock to funding of the loan due to increases in mortgage interest rates. If interest rates increase, the values of these loan commitments decrease. Conversely, if interest rates decrease, the value of these loan commitments increase.

Forward Loan Sale Commitments - To protect against the price risk inherent in the exercise of derivative loan commitments resulting from potential decreases in the value of loans, the Company utilizes both “mandatory delivery” and "best efforts" forward loan sale commitments.

With a “mandatory delivery” contract, the Company commits to deliver a certain principal amount of mortgage loans to an investor at a specified price on or before a specified date. If the Company fails to deliver the amount of mortgages necessary to fulfill the commitment by the specified date, it is obligated to pay a “pair-off” fee, based on then-current market prices, to the investor to compensate the investor for the shortfall.


34

Table of Contents
SI FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2018 AND 2017 AND DECEMBER 31, 2017

 
 
 
 
 
 

With a "best efforts" contract, the Company commits to deliver an individual mortgage loan of a specified principal amount and quality to an investor if the loan to the underlying borrower closes. Generally, the price the investor will pay the seller for an individual loan is specified prior to the loan being funded (e.g., on the same day the lender commits to lend funds to a potential borrower).

The Company expects that these forward loan sale commitments will experience changes in fair value opposite to the change in fair value of derivative loan commitments.

Interest Rate Risk Management - Derivative Instruments
The following table presents the fair values of derivative instruments as well as their classification on the consolidated balance sheets at March 31, 2018 and December 31, 2017.
 
 
 
March 31, 2018
 
December 31, 2017
 
Balance Sheet Location
 
Notional Amount
 
Estimated Fair Value
 
Notional Amount
 
Estimated Fair Value
 
 
 
(In Thousands)
Derivatives not designated as hedging instruments:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Derivative loan commitments
Other Assets
 
$
4,286

 
$
30

 
$
3,133

 
$
27

Forward loan sale commitments
Other Assets
 
3,401

 
49

 
2,752

 
16



35



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

Management’s discussion and analysis of financial condition and results of operations is intended to assist in understanding changes in the Company’s financial condition as of March 31, 2018 and December 31, 2017 and the results of operations for the three months ended March 31, 2018 and 2017. The information contained in this section should be read in conjunction with the consolidated financial statements and notes thereto appearing in Part I, Item 1 of this document as well as with management’s discussion and analysis of financial condition and results of operations and the consolidated financial statements included in the Company’s 2017 Annual Report on Form 10-K.

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

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

Critical Accounting Policies

The Company considers accounting policies involving significant judgments and assumptions by management that have, or could have, a material impact on the carrying value of certain assets or on income to be critical accounting policies. The Company considers the determination of allowance for loan losses, deferred income taxes and the impairment of long-lived assets, such as goodwill and other intangibles, to be its critical accounting policies. Additional information about the Company’s accounting policies is included in the notes to the Company’s consolidated financial statements contained in Part I, Item 1 of this document and in the Company’s 2017 Annual Report on Form 10-K.

Impact of New Accounting Standards

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

Comparison of Financial Condition at March 31, 2018 and December 31, 2017

Assets:
Summary. Assets increased $17.4 million, or 1.1%, to $1.60 billion at March 31, 2018, compared to $1.58 billion at December 31, 2017, principally due to increases of $26.0 million in net loans receivable and $860,000 in cash and cash equivalents, offset by a decrease of $8.6 million in available for sale securities.

36




Loans Receivable, Net. Net loans increased $26.0 million primarily due to increases of $39.3 million, $1.6 million and $1.3 million in multi-family and commercial real estate loans, residential mortgage loans and construction loans, respectively, offset by decreases of $9.2 million, $3.1 million, $2.5 million and $1.8 million in SBA and USDA guaranteed loans, time share loans, consumer loans and other commercial business loans, respectively. Changes in the loan portfolio consisted of the following:

Residential Real Estate. Residential mortgage loans comprised 31.3% of the total loan portfolio at March 31, 2018 and increased $1.6 million to $398.9 million as compared to $397.3 million at December 31, 2017. Residential mortgage loan originations decreased $4.5 million during the first three months ended March 31, 2018 over the comparable period in 2017 as a result of decreased activity in the housing market. Loans sold for the three months ended March 31, 2018 were $5.8 million compared to $7.8 million for the three months ended March 31, 2017.

Multi-family and Commercial Real Estate. Multi-family and commercial real estate loans represented 40.9% of total loans at March 31, 2018 and increased $39.3 million, or 8.2%, during the first three months of 2018. Originations for multi-family and commercial real estate loans were $58.2 million during the first three months of 2018, representing an increase of $42.5 million compared to the same period in 2017.

Construction. Construction loans, which include both residential and commercial construction loans, increased $1.3 million to $30.1 million for the first three months of 2018.
  
Commercial Business. Commercial business loans represented 21.2% of total loans at March 31, 2018. Commercial business loans decreased $13.2 million, or 4.7%, for the first three months of 2018, primarily due to decreases of $9.2 million in SBA and USDA guaranteed loans, $3.1 million in time share loans and $1.8 million in other commercial business loans, offset by increases of $824,000 in condominium association loans. Commercial business loan originations decreased $8.2 million as compared to the same period in 2017. At March 31, 2018, unfunded lines of credit related to time share lending totaled $24.7 million as a result of focused efforts within the time share industry.

Consumer. Consumer loans represented 4.2% of the Company’s total loan portfolio at March 31, 2018. Consumer loans decreased $2.5 million during the first three months of 2018, primarily as a result of a decrease of $2.4 million in home equity loans. Loan originations for consumer loans totaled $5.4 million, representing a decrease of $1.2 million for the first three months of 2018 over the comparable period in 2017.

The allowance for loan losses totaled $13.0 million at March 31, 2018 compared to $12.3 million at December 31, 2017. The ratio of the allowance for loan losses to total loans increased to 1.02% at March 31, 2018 from 0.99% at December 31, 2017, primarily due to increases in nonperforming loans, reserves for impaired loans and an increase in the commercial loan portfolio, which carries a higher degree of risk (excluding guaranteed SBA and USDA loans) than other loans held in the portfolio, a decrease in SBA and USDA loans, which because of the government guarantee on these loans, does not require a corresponding allowance for loan losses, and $55,000 of net loan charge-offs for the period.


37



The following table provides information with respect to nonperforming assets and TDRs as of the dates indicated.
 
 
March 31, 2018
 
December 31, 2017
Nonaccrual loans:
(Dollars in Thousands)
Real estate loans:
 
 
 
Residential - 1 to 4 family
$
3,074

 
$
2,405

Multi-family and commercial
3,320

 
3,482

Total real estate loans
6,394

 
5,887

Commercial business loans:
 
 
 
     Medical Loans
92

 

     Other
1,131

 
324

Total commercial business loans
1,223

 
324

Consumer loans:
 
 
 
     Home equity
287

 
192

     Other
1

 
1

Total consumer loans
288

 
193

Total nonaccrual loans
7,905

 
6,404

Accruing loans past due 90 days or more

 

Total nonperforming loans (1)
7,905

 
6,404

Other real estate owned, net (2)
1,074

 
1,226

Total nonperforming assets
8,979

 
7,630

Accruing troubled debt restructurings
9,160

 
9,438

Total nonperforming assets and troubled debt restructurings
$
18,139

 
$
17,068

 
 
 
 
 
Allowance for loan losses as a percent of nonperforming loans
164.50
%
 
192.60
%
Total nonperforming loans to total loans
0.62
%
 
0.51
%
Total nonperforming loans to total assets
0.49
%
 
0.41
%
Total nonperforming assets and troubled debt restructurings to total assets
1.13
%
 
1.08
%
 
 
 
 
 
(1) Includes nonperforming TDRs totaling $4.1 million and $3.6 million at March 31, 2018 and December 31, 2017, respectively.
(2) Other real estate owned balances are shown net of related write-downs.

The increase in nonperforming loans was primarily due to increases in nonperforming commercial business loans of $899,000, residential real estate loans of $669,000 and nonperforming home equity loans of $95,000, offset by a decrease in nonperforming multi-family and commercial real estate loans of $162,000.

Other real estate owned decreased $152,000 to $1.1 million at March 31, 2018, primarily due to reductions of the carrying value on two properties totaling $81,000 and the sale of a residential property of $71,000. At March 31, 2018, other real estate owned consisted of three residential properties and two commercial properties.
 
Over the past few years, the Company has sought to restructure nonperforming loans rather than pursue foreclosure or liquidation, believing this approach achieves the best economic outcome for the Company in view of the current economic environment. Modified payment terms for TDRs generally involve deferred principal payments, interest rate concessions, maturity extensions, or a combination of these items. TDRs increased slightly to $13.2 million at March 31, 2018, compared to $13.1 million at December 31, 2017. Of the TDRs, $9.2 million and $9.4 million were performing in accordance with their restructured terms at March 31, 2018 and December 31, 2017, respectively. The Company anticipates these borrowers will repay all contractual principal and interest in accordance with the terms of their restructured loan agreements.


38



Liabilities:
Summary. Liabilities increased $16.9 million, or 1.2%, to $1.43 billion at March 31, 2018 compared to $1.41 billion at December 31, 2017. Deposits increased $14.5 million, or 1.2%, which included increases in NOW and money market accounts of $19.1 million and certificates of deposit of $6.0 million, offset by decreases in noninterest-bearing deposits of $9.2 million and savings accounts of $1.6 million. Deposit growth was due to marketing and promotional initiatives and competitively-priced deposit products. Borrowings increased $3.6 million from $178.3 million at December 31, 2017 to $181.9 million at March 31, 2018, which were used to fund the growth in commercial lending.

Equity:
Summary. Shareholders’ equity increased $438,000 from $168.5 million at December 31, 2017 to $168.9 million at March 31, 2018. The increase in shareholders' equity was primarily attributable to net income of $2.0 million, partially offset by an increase of $1.1 million in unrealized losses on securities included in other comprehensive loss and dividends paid of $716,000.

Accumulated Other Comprehensive Loss. Accumulated other comprehensive loss is comprised of the unrealized gains and losses on available for sale securities. The net unrealized losses on available for sale securities, net of taxes, totaled $2.5 million at March 31, 2018 and $1.2 million at December 31, 2017. In addition, accumulated other comprehensive loss includes $236,000 of the tax effect from the change in tax law that was reclassified to retained earnings in 2017.

Results of Operations for the Three Ended March 31, 2018 and 2017

General. The Company’s results of operations depend primarily on net interest income, which is the difference between the interest income earned on the Company’s interest-earning assets, such as loans and investments, and the interest expense on its interest-bearing liabilities, such as deposits and borrowings. The Company also generates noninterest income such as fees earned from mortgage banking activities, fees from deposits and other fees. The Company’s noninterest expenses primarily consist of employee compensation and benefits, occupancy, computer services, furniture and equipment, outside professional services, electronic banking fees, FDIC deposit insurance and regulatory assessments, marketing and other general and administrative expenses. The Company’s results of operations are also significantly affected by general economic and competitive conditions, particularly changes in market interest rates, governmental policies and actions of regulatory agencies.

Summary. The Company reported net income of $2.0 million for the three months ended March 31, 2018 compared to $1.7 million for the three months ended March 31, 2017.

Interest and Dividend Income. Total interest and dividend income increased $552,000, or 4.2%, to $13.8 million for the quarter ended March 31, 2018, compared to $13.2 million for the same period in 2017. The increase in interest and dividend income was primarily a result of increases in the average balance of loans and average yield earned on loans and other interest-earning assets. Interest income on loans and securities reflect net accretion of $2,000 and $11,000 for the quarters ended March 31, 2018 and 2017, respectively, related to fair value adjustments of loans and securities resulting from the Newport acquisition. The average yield earned on interest-earning assets for the quarter ended March 31, 2018 increased 14 basis points to 3.77% compared to 3.63% for the quarter ended March 31, 2017, primarily due to a 78 basis point increase in the average yield earned on other interest-earning assets and a 10 basis point increase in the average yield earned on loans. The increase in yields reflects the rising interest rate environment. The average balance of interest-earning assets decreased $1.3 million to $1.49 billion at March 31, 2018 due to decreases of $13.6 million in the average balance of securities and $4.7 million in the average balance of other interest-earning assets, offset by an increase of $17.0 million in the average balance of loans, compared to March 31, 2017.

Interest Expense. For the quarter ended March 31, 2018, interest expense increased $125,000, or 4.6%, primarily resulting from an increase in the average balance of deposits and higher average rates paid on deposits and borrowings, partially offset by a reduction in the average balance of FHLB advances compared to the same quarter

39



in 2017. Higher interest expense on interest-bearing liabilities reflects net amortization of $13,000 and net accretion of $114,000 for the three months ended March 31, 2018 and 2017, respectively, related to fair value adjustments of deposits and borrowings resulting from the Newport acquisition. The average balance of interest-bearing deposits increased $41.7 million to $999.5 million for the quarter ended March 31, 2018 and the average rate paid increased five basis points to 0.79%, compared to the same period in 2017, primarily due to increases in the average balance of NOW and money market accounts of $38.6 million and certificates of deposit of $4.9 million. The average balance of FHLB advances decreased $43.3 million for the quarter ended March 31, 2018, and the average rate paid increased 21 basis points to 1.90%. The average rate paid on subordinated debt increased 68 basis points to 3.34%, compared to the same period in 2017, due to increases in the three-month LIBOR rate.

40



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

 
At or For the Three Months Ended March 31,
 
2018
 
2017
 
Average
Balance
 
Interest &
Dividends
 
Average
Yield/
Rate
 
Average
Balance
 
Interest &
Dividends
 
Average
Yield/
Rate
 
(Dollars in Thousands)
Interest-earning assets:
 
 
 
 
 
 
 
 
 
 
 
Loans (1) (2) (3)
$
1,261,265

 
$
12,730

 
4.09
%
 
$
1,244,285

 
$
12,243

 
3.99
%
Securities (3)
167,728

 
876

 
2.12

 
181,322

 
939

 
2.10

Other interest-earning assets
57,023

 
220

 
1.56

 
61,746

 
118

 
0.78

Total interest-earning assets
1,486,016

 
13,826

 
3.77

 
1,487,353

 
13,300

 
3.63

 
 
 
 
 
 
 
 
 
 
 
 
Noninterest-earning assets
92,581

 
 

 
 

 
82,917

 
 

 
 

Total assets
$
1,578,597

 
 

 
 

 
$
1,570,270

 
 

 
 

 
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing liabilities:
 

 
 

 
 

 
 

 
 

 
 

Deposits:
 

 
 

 
 

 
 

 
 

 
 

Business checking
$
671

 

 

 
$
1,026

 

 

NOW and money market
513,598

 
276

 
0.22

 
475,019

 
167

 
0.14

Savings (4)
34,224

 
25

 
0.30

 
35,654

 
28

 
0.32

Certificates of deposit (5)
450,977

 
1,654

 
1.49

 
446,061

 
1,555

 
1.41

Total interest-bearing deposits
999,470

 
1,955

 
0.79

 
957,760

 
1,750

 
0.74

 
 
 
 
 
 
 
 
 
 
 
 
Federal Home Loan Bank advances
172,487

 
806

 
1.90

 
215,782

 
900

 
1.69

Subordinated debt
8,248

 
68

 
3.34

 
8,248

 
54

 
2.66

Total interest-bearing liabilities
1,180,205

 
2,829

 
0.97

 
1,181,790

 
2,704

 
0.93

 
 
 
 
 
 
 
 
 
 
 
 
Noninterest-bearing liabilities
228,646

 
 

 
 

 
221,864

 
 

 
 

Total liabilities
1,408,851

 
 

 
 

 
1,403,654

 
 

 
 

 
 
 
 
 
 
 
 
 
 
 
 
Total shareholders' equity
169,746

 
 

 
 

 
166,616

 
 

 
 

 
 
 
 
 
 
 
 
 
 
 
 
Total liabilities and shareholders' equity
$
1,578,597

 
 

 
 

 
$
1,570,270

 
 

 
 

 
 
 
 
 
 
 
 
 
 
 
 
Net interest-earning assets
$
305,811

 
 

 
 

 
$
305,563

 
 

 
 

 
 
 
 
 
 
 
 
 
 
 
 
Tax equivalent net interest income (3)
 

 
10,997

 
 

 
 

 
10,596

 
 

 
 
 
 
 
 
 
 
 
 
 
 
Tax equivalent interest rate spread (6)
 

 
 

 
2.80
%
 
 

 
 

 
2.70
%
 
 
 
 
 
 
 
 
 
 
 
 
Tax equivalent net interest margin as a percentage of interest-earning assets (7)
 

 
 

 
3.00
%
 
 

 
 

 
2.89
%
 
 
 
 
 
 
 
 
 
 
 
 
Average of interest-earning assets to average interest-bearing liabilities
 

 
 

 
125.91
%
 
 

 
 

 
125.86
%
 
 
 
 
 
 
 
 
 
 
 
 
Less tax equivalent adjustment (3)
 
 
(72
)
 
 
 
 
 
(98
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net interest income
 

 
$
10,925

 
 

 
 

 
$
10,498

 
 


41



 
 
(1) Amount is net of deferred loan origination fees and costs.  Average balances include nonaccrual loans and loans held for sale and excludes the allowance for loan losses.
(2) Loan fees are included in interest income and are immaterial.
(3) Municipal securities income, tax-exempt loan income and net interest income are presented on a tax equivalent basis using a tax rate of 21% and 34% for the periods ended March 31, 2018 and 2017, respectively.  The tax equivalent adjustment is deducted from tax equivalent net interest income to agree to the amounts reported in the statements of income.
(4) Includes mortgagors’ and investors’ escrow accounts.
(5) Includes brokered deposits.
(6) Tax equivalent net interest rate spread represents the difference between the weighted average yield on interest-earning assets and the weighted average cost of interest-bearing liabilities.
(7) Tax equivalent net interest margin represents tax equivalent net interest income divided by average interest-earning assets.

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

 
Three Months Ended
March 31, 2018 and 2017
 
Increase (Decrease) Due To
 
Rate
 
Volume
 
Net
 
(In Thousands)
Interest-earning assets:
 
 
 
 
 
Interest and dividend income:
 
 
 
 
 
Loans (1)(2)(3)
$
321

 
$
166

 
$
487

Securities (3)
6

 
(69
)
 
(63
)
Other interest-earning assets
110

 
(8
)
 
102

Total interest-earning assets
437

 
89

 
526

Interest-bearing liabilities:
 

 
 

 
 

Interest expense:
 

 
 

 
 

Deposits (4)
176

 
29

 
205

Federal Home Loan Bank advances
74

 
(168
)
 
(94
)
Subordinated debt
14

 

 
14

Total interest-bearing liabilities
264

 
(139
)
 
125

Change in net interest income
$
173

 
$
228

 
$
401

 
 
 
(1) Amount is net of deferred loan origination fees and costs.  Average balances include nonaccrual loans and loans held for sale.
(2) Loan fees are included in interest income and are immaterial.
(3) Municipal securities income, tax-exempt loan income and net interest income are presented on a tax equivalent basis using a tax rate of 21% and 34% for the periods ended March 31, 2018 and 2017, respectively.  The tax equivalent adjustment is deducted from tax equivalent net interest income to agree to the amount reported in the statements of income.
(4) Includes mortgagors’ and investors’ escrow accounts and brokered deposits.

Provision for Loan Losses. The provision for loan losses increased $565,000 for the quarter ended March 31, 2018, respectively, compared to the same period in 2017, primarily due to increases in nonperforming loans, reserves for impaired loans and an increase in commercial loans, which carry a higher degree of risk than other

42



loans held in the loan portfolio. At March 31, 2018, nonperforming loans increased to $7.9 million compared to $5.0 million at March 31, 2017, resulting from increases in nonperforming multi-family and commercial real estate of $2.7 million and commercial business loans of $550,000, offset by a decrease of $315,000 in nonperforming residential real estate loans. Net loan charge-offs were $55,000 for the quarter ended March 31, 2018 consisting of commercial business net loan charge-offs, compared to net loan recoveries of $20,000 for the quarter ended March 31, 2017.

Noninterest Income.  The following table shows the components of noninterest income and the dollar and percentage changes for the periods presented.
 
Three Months Ended March 31,
 
Change
 
2018
 
2017
 
Dollars
 
Percent
 
(Dollars in Thousands)
Service fees
$
1,712

 
$
1,684

 
$
28

 
1.7
 %
Wealth management fees
9

 
327

 
(318
)
 
(97.2
)
Increase in cash surrender value of bank-owned life insurance
215

 
130

 
85

 
65.4

Mortgage banking
214

 
155

 
59

 
38.1

Other
244

 
213

 
31

 
14.6

Total noninterest income
$
2,394

 
$
2,509

 
$
(115
)
 
(4.6
)%
 
Noninterest income decreased $115,000 to $2.4 million for the quarter ended March 31, 2018 compared to $2.5 million for the same period in the prior year, due to a decrease in wealth management fees of $318,000 resulting from the sale of the Company's trust and asset management business in May 2017. The cash surrender value of bank owned life insurance, mortgage banking fees and service fees increased $85,000, $59,000 and $28,000, respectively, for the first quarter of 2018 compared to the same quarter in 2017.

Noninterest Expenses. The following table shows the components of noninterest expenses and the dollar and percentage changes for the periods presented.
 
Three Months Ended March 31,
 
Change
 
2018
 
2017
 
Dollars
 
Percent
 
(Dollars in Thousands)
Salaries and employee benefits
$
5,210

 
$
5,208

 
$
2

 
 %
Occupancy and equipment
1,851

 
1,776

 
75

 
4.2

Computer and electronic banking services
1,288

 
1,380

 
(92
)
 
(6.7
)
Outside professional services
356

 
401

 
(45
)
 
(11.2
)
Marketing and advertising
234

 
190

 
44

 
23.2

Supplies
147

 
134

 
13

 
9.7

FDIC deposit insurance and regulatory assessments
173

 
194

 
(21
)
 
(10.8
)
Core deposit intangible amortization
151

 
150

 
1

 
0.7

Other real estate operations
135

 
110

 
25

 
22.7

Other
506

 
799

 
(293
)
 
(36.7
)
Total noninterest expenses
$
10,051

 
$
10,342

 
$
(291
)
 
(2.8
)%

Noninterest expenses decreased $291,000 for the first quarter of 2018 compared to the same period in 2017, primarily due to fraudulent debit card transactions of $373,000 that occurred in the first quarter of 2017. Computer and electronic banking expenses decreased $92,000 for the first quarter ended March 31, 2018 versus the comparable period in 2017 as a result of reconfiguration of the telecommunication infrastructure and contract

43



renegotiations with a third party provider. Outside professional services decreased $45,000 for the quarter ended March 31, 2018 versus the same period in 2017 due to decreases in legal and consulting expenses. Regulatory assessments decreased $21,000 for the first quarter ended March 31, 2018 as a result of a lower FDIC assessment rate. Occupancy expense increased $75,000 primarily due to higher snow removal costs.

Income Tax Provision. The provision for income taxes decreased $249,000 for the quarter ended March 31, 2018 compared to the same period in 2017. The decrease in the income tax provision was due to passage of the Tax Cuts and Jobs Act on December 22, 2017, which reduced the statutory corporate income tax rate from 35% to 21% effective for January 1, 2018. The effective tax rate for the quarter ended March 31, 2018 and 2017 was 21.1% and 31.4%, respectively.
 
Liquidity and Capital Resources

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

The Bank's most liquid assets are cash and cash equivalents. The levels of these assets depend on the Bank's operating, financing, lending and investing activities during any given period. At March 31, 2018, cash and cash equivalents totaled $84.3 million. Securities classified as available for sale, which provide additional sources of liquidity, totaled $145.5 million at March 31, 2018. In addition, at March 31, 2018, the Bank had the ability to borrow an additional $129.7 million from the FHLB, which included overnight lines of credit of $10.0 million. On that date, the Bank had FHLB advances outstanding of $173.7 million and no overnight advances outstanding. Additionally, the Bank has the ability to access the Federal Reserve Bank’s Discount Window on a collateralized basis and maintains a $25.0 million unsecured line of credit with a financial institution to access federal funds. The Bank believes that its liquid assets combined with the available lines from the FHLB provide adequate liquidity to meet its current financial obligations.

The Bank's primary investing activities are the origination, purchase and sale of loans and the purchase and sale of securities. For the three months ended March 31, 2018, the Bank originated $90.0 million of loans and purchased $2.4 million of loans and $2.0 million of securities. For the year ended December 31, 2017, the Bank originated $234.5 million of loans and purchased $36.1 million of loans and $32.0 million of securities.

Financing activities consist primarily of activity in deposit accounts and in borrowed funds. The net increase in total deposits, including mortgagors’ and investors’ escrow accounts, was $13.2 million for the three months ended March 31, 2018. FHLB advances increased $3.6 million for the three months ended March 31, 2018 and decreased $47.7 million for the year ended December 31, 2017. The increase in borrowings for the first quarter of 2018 was used to fund the growth in the commercial lending portfolio. Certificates of deposit due within one year of March 31, 2018 totaled $292.2 million, or 23.9% of total deposits. Management believes the amount of deposits in shorter-term certificates of deposit reflects customers’ hesitancy to invest their funds in longer-term certificates of deposit due to the uncertain interest rate environment. To compensate, the Bank has increased the duration of its borrowings with the FHLB. The Bank will be required to seek other sources of funds, including other certificates of deposit and lines of credit, if maturing certificates of deposit are not retained. Depending on market conditions, the Bank may be required to pay higher rates on such deposits or other borrowings than are currently paid on certificates of deposit. Additionally, a shorter duration in the securities portfolio may be necessary to provide liquidity to compensate for any deposit outflows. The Bank believes, however, based on past experience, a significant portion of its certificates of deposit will be retained. The Bank has the ability, if necessary, to adjust the interest rates offered to its customers in an effort to attract and retain deposits.  

Deposit flows are affected by the overall level of interest rates, the interest rates and products offered by the Bank and its local competitors and other factors. The Bank generally manages the pricing of its deposits to be

44



competitive and to increase core deposits and commercial banking relationships. Occasionally, the Bank offers promotional rates on certain deposit products to attract deposits.

The Company did not repurchase any shares of the Company's common stock during the first three months of 2018 and repurchased 13,806 shares of the Company’s common stock at a cost of $178,000 during the year ended December 31, 2017. Additional discussion about the Company’s liquidity and capital resources is contained in Item 7 in the Company’s 2017 Annual Report on Form 10-K.

SI Financial Group, Inc. is a separate legal entity from the Bank and must provide for its own liquidity. In addition to its operating expenses, the Company is responsible for paying any dividends declared to its shareholders and making payments on its subordinated debentures. The Company may repurchase shares of its common stock in the future. The Company’s primary sources of funds are interest and dividends on securities and dividends received from the Bank. The amount of dividends the Bank may declare and pay to the Company in any calendar year, without prior regulatory approval, cannot exceed net income for that year to date plus retained net income (as defined) for the preceding two calendar years. The Company believes such restriction will not have an impact on the Company's ability to meet its ongoing cash obligations. At March 31, 2018, on an unconsolidated basis, the Company had cash and cash equivalents of $3.4 million and available for sale securities of $7.9 million.

Payments Due Under Contractual Obligations

Information relating to payments due under contractual obligations is presented in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017. There were no material changes in the Company’s payments due under contractual obligations between December 31, 2017 and March 31, 2018.

Off-Balance Sheet Arrangements

As a financial services provider, we routinely are a party to various financial instruments with off-balance sheet risks, such as commitments to extend credit, standby letters of credit and unused lines of credit. While these contractual obligations represent our future cash requirements, a significant portion of the commitments to extend credit may expire without being drawn upon. The contractual amounts of commitments to extend credit represent the amounts of potential accounting loss should the contract be fully drawn upon, the customer defaults and the value of any existing collateral becomes worthless. The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments.

Financial instruments whose contract amounts represent credit risk at March 31, 2018 and December 31, 2017 are as follows:
 
 
March 31, 2018
 
December 31, 2017
 
(In Thousands)
Commitments to extend credit:
 
 
 
Commitments to originate loans
$
55,646

 
$
60,360

Undisbursed construction loans
12,893

 
9,027

Undisbursed home equity lines of credit
57,498

 
56,044

Undisbursed commercial lines of credit
53,932

 
50,054

Overdraft protection lines
1,288

 
1,306

Standby letters of credit
133

 
134

Total commitments
$
181,390

 
$
176,925


Future loan commitments at March 31, 2018 and December 31, 2017 included fixed-rate loan commitments of $23.4 million and $34.1 million, respectively, at interest rates ranging from 3.00% to 5.99% and 2.88% to 6.00%, respectively.


45



The Bank is a limited partner in three small business investment corporations ("SBICs"). At March 31, 2018, the Bank’s remaining off-balance sheet commitment for the capital investment in the SBICs was $787,000.

For the three months ended March 31, 2018, with the exception of the aforementioned commitments, the Company did not engage in any additional off-balance sheet transactions reasonably likely to have a material effect on the Company’s financial condition, results of operations or cash flows. See Notes 6 and 12 to the consolidated financial statements contained in the Company’s 2017 Annual Report on Form 10-K.

Item 3.  Quantitative and Qualitative Disclosures About Market Risk.

Qualitative Aspects of Market Risk
The primary market risk affecting the financial condition and operating results of the Company is interest rate risk. Interest rate risk is the exposure of current and future earnings and capital arising from movements in interest rates. The Company manages the interest rate sensitivity of its interest-bearing liabilities and interest-earning assets in an effort to minimize the adverse effects of changes in the interest rate environment. To reduce the volatility of its earnings, the Company has sought to improve the match between asset and liability maturities and rates, while maintaining an acceptable interest rate spread. The Company’s strategy for managing interest rate risk generally is to emphasize the origination of adjustable-rate mortgage loans for retention in its loan portfolio. However, the ability to originate adjustable-rate loans depends to a great extent on market interest rates and borrowers’ preferences. As an alternative to adjustable-rate mortgage loans, the Company may occasionally purchase variable-rate SBA and USDA loans in the secondary market that are fully guaranteed by the U.S. government. These loans have a significantly shorter duration than fixed-rate mortgage loans. Fixed-rate mortgage loans typically have an adverse effect on interest rate sensitivity compared to adjustable-rate loans. Accordingly, the Company has sold more longer-term fixed-rate mortgage loans in the secondary market in recent periods to manage interest rate risk. The Company offers 10-year fixed-rate mortgage loans that it retains in its portfolio. The Company may offer attractive rates for existing certificates of deposit accounts to extend their maturities. The Company also uses shorter-term investment securities and longer-term borrowings from the FHLB to help manage interest rate risk.

The Company has an Asset/Liability Committee to communicate, coordinate and control all aspects involving asset/liability management. The committee establishes and monitors the volume, maturities, pricing and mix of assets and funding sources with the objective of managing assets and funding sources to provide results that are consistent with liquidity, growth, risk limits and profitability goals.

Quantitative Aspects of Market Risk
The Company analyzes its interest rate sensitivity position to manage the risk associated with interest rate movements through the use of interest income simulation. The matching of assets and liabilities may be analyzed by examining the extent to which such assets and liabilities are “interest rate sensitive.” An asset or liability is said to be interest rate sensitive within a specific time period if it will mature or reprice within that time period. The Company’s goal is to manage asset and liability positions to moderate the effect of interest rate fluctuations on net interest income.

Net Interest Income Simulation Analysis
The interest income simulations provide an estimate of the impact of changes in interest rates on net interest income under a range of assumptions and are completed quarterly. Interest income simulations and the numerous assumptions used in the simulation process are presented and reviewed by the Asset/Liability Committee on a quarterly basis. Changes to these assumptions can significantly affect the results of the simulation. The simulation incorporates assumptions regarding the potential timing in the repricing of certain assets and liabilities when market rates change and the changes in spreads between different market rates. The simulation analysis incorporates management’s current assessment of the risk that pricing margins will change adversely over time due to competition or other factors. Simulation analysis is only an estimate of the Company’s interest rate risk exposure at a particular point in time. The Company continually reviews the potential effect

46



changes in interest rates could have on the repayment of rate sensitive assets and funding requirements of rate sensitive liabilities.

The table below sets forth an approximation of the Company’s exposure as a percentage of estimated net interest income for the next 12- and 24-month periods using interest income simulation. The simulation uses projected repricing of assets and liabilities at March 31, 2018 on the basis of contractual maturities, anticipated repayments and scheduled rate adjustments. Prepayment rates can have a significant impact on interest income simulation. Because of the large percentage of loans and mortgage-backed securities the Company holds, rising or falling interest rates have a significant impact on the prepayment speeds of the Company’s earning assets that in turn affect the rate sensitivity position. When interest rates rise, prepayments tend to slow. When interest rates fall, prepayments tend to rise. The Company’s asset sensitivity would be reduced if prepayments slow and vice versa. While the Company believes such assumptions to be reasonable, there can be no assurance that assumed prepayment rates will approximate actual future mortgage-backed security and loan repayment activity.

The following table reflects changes in estimated net interest income for the Company at March 31, 2018.
 
Percentage Change in Estimated
Net Interest Income Over
 
12 Months
 
24 Months
100 basis point decrease in rates
(2.85
)%
 
(3.28
)%
200 basis point increase in rates
2.70

 
2.90

300 basis point increase in rates
2.68

 
2.04


As indicated by the results of the above scenarios, net interest income would be adversely affected (within our internal guidelines) if rates decreased 100 basis points in the 12- and 24-month periods. Conversely, net interest income would be positively impacted in the 12- and 24-month periods if rates increased 200 or 300 basis points as a result of the Company's initiative to position the balance sheet for the anticipated increase in market interest rates. The Company’s strategy for mitigating interest rate risk includes the purchase of adjustable-rate investment securities that will reprice in a rising rate environment, selling longer-term and lower fixed-rate residential mortgage loans in the secondary market, extending the duration of FHLB advances and utilizing certain derivative instruments such as forward loan sale commitments to manage the risk of loss associated with its mortgage banking activities.

Item 4.  Controls and Procedures.

The Company’s management, including the Company’s principal executive officer and principal financial officer, have evaluated the effectiveness of the Company’s “disclosure controls and procedures,” as such term is defined in Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended, (the “Exchange Act”). Based upon their evaluation, the principal executive officer and principal financial officer concluded that, as of the end of the period covered by this report, the Company’s disclosure controls and procedures were effective for ensuring that the information required to be disclosed in the reports that the Company files or submits under the Exchange Act with the Securities and Exchange Commission (the "SEC") (1) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and (2) is accumulated and communicated to the Company’s management, including its principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure. No changes in the Company’s internal control over financial reporting occurred during the quarter ended March 31, 2018 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.


47



PART II.  OTHER INFORMATION

Item 1.  Legal Proceedings.

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

Item 1A.  Risk Factors.

There are no material changes from the risk factors set forth under Part I, Item 1A. “Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017.  However, the risks described in the Company’s Annual Report on Form 10-K are not the only risks that the Company faces.  Additional risks and uncertainties not currently known to the Company or that the Company currently deems to be immaterial also may materially adversely affect the Company’s business, financial condition and/or operating results.

Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds.
 
The Company did not repurchase equity securities during the three months ended March 31, 2018.

Item 3.  Defaults Upon Senior Securities.

None.

Item 4.  Mine Safety Disclosures.

None.

Item 5.  Other Information.

None.

Item 6.  Exhibits.
 
Articles of Incorporation of SI Financial Group, Inc. (1)
Amended and Restated Bylaws of SI Financial Group, Inc. (2)
Specimen Stock Certificate of SI Financial Group, Inc. (1)
Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer
Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer
18 U.S.C. Section 1350 Certifications
The following materials from the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2018, formatted in eXtensible Business Reporting Language (XBRL):  (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Income, (iii) the Consolidated Statements of Comprehensive Income, (iv) the Statement of Changes in Shareholders' Equity, (v) the Consolidated Statements of Cash Flows and (vi) related Notes to Consolidated Financial Statements.
 
 
(1) Incorporated herein by reference into this document from the Exhibits on the Registration Statement on Form S-1 (File No. 333-169302), and any amendments thereto, filed with the Securities and Exchange Commission on September 10, 2010.
(2) Incorporated herein by reference into this document from the Exhibits to the Company’s Current Report on Form 8-K (File No. 000-54241) filed with the Securities and Exchange Commission on August 23, 2017.


48



SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 
 
 
SI FINANCIAL GROUP, INC.
 
 
 
 
 
 
 
 
Date:
May 8, 2018
 
/s/ Rheo A. Brouillard
 
 
 
Rheo A. Brouillard
 
 
 
President and Chief Executive Officer
 
 
 
(principal executive officer)

Date:
May 8, 2018
 
 /s/ Lauren L. Murphy
 
 
 
Lauren L. Murphy
 
 
 
Executive Vice President and Chief Financial Officer
 
 
 
(principal accounting and financial officer)


49