1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
------------
FORM 10-Q
(Mark One)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 2004
OR
/_/ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND
EXCHANGE ACT OF 1934
For the transition period from ______________ to _____________
Commission file number: 0-50801
SI FINANCIAL GROUP, INC.
--------------------------
(Exact name of registrant as specified in its charter)
FEDERAL 84-1655232
- ---------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
803 MAIN STREET, WILLIMANTIC, CONNECTICUT 06226
- ------------------------------------------------- -------------
(Address of principal executive offices) (Zip Code)
(860) 423-4581
-----------------------------------------------------
(Registrant's telephone number, including area code)
N/A
-----------------------------------------------------------------------
(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 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 No X
---------- --------------
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Exchange Act).
Yes No X
---------- --------------
As of September 27, 2004, there were 1,000 shares of the registrant's
common stock outstanding.
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SI FINANCIAL GROUP, INC.
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION PAGE NO.
Item 1. Financial Statements of SI Bancorp, Inc. and Subsidiaries
Consolidated Statements of Financial Condition at June 30, 2004 (unaudited) and
December 31, 2003.............................................................. 2
Consolidated Statements of Income (unaudited) for the three and six months ended
June 30, 2004 and 2003......................................................... 3
Consolidated Statements of Comprehensive Income (unaudited)
for the three and six months ended June 30, 2004 and 2003...................... 4
Consolidated Statements of Cash Flows (unaudited) for the six months ended
June 30, 2004 and 2003......................................................... 5
Notes to Consolidated Financial Statements..................................... 7
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.................................................................. 13
Item 3. Quantitative and Qualitative Disclosures about Market Risk..................... 19
Item 4. Controls and Procedures........................................................ 22
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.............................................................. 22
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.................... 22
Item 3. Defaults upon Senior Securities................................................ 22
Item 4. Submission of Matters to a Vote of Security Holders............................ 22
Item 5. Other Information.............................................................. 22
Item 6. Exhibits and Reports on Form 8-K............................................... 23
SIGNATURES
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Item 1. Financial Statements
SI BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Financial Condition
(Dollars in Thousands)
June 30, December 31,
2004 2003
------------ --------------
(Unaudited)
ASSETS
Cash and due from banks:
Non-interest bearing deposits and cash $ 22,331 $ 20,336
Interest bearing deposits 4,298 4,441
Federal funds sold 4,000 4,800
-------- --------
CASH AND CASH EQUIVALENTS 30,629 29,577
Available for sale securities (at fair value) 91,935 77,693
Held to maturity securities, at cost (fair value $ 1,407 at June 30, 2004
and $1,344 at December 31, 2003) 1,643 1,728
Loans receivable (net of allowance for loan losses of $ 2,967 at June 30,
2004 and $2,688 at December 31, 2003) 407,288 386,924
Accrued interest receivable on loans 1,612 1,580
Accrued interest receivable on investment securities 766 658
Federal Home Loan Bank Stock, at cost 3,960 2,858
Cash surrender value of bank-owned life insurance 7,417 7,258
Other real estate owned 268 328
Deferred tax asset, net 1,014 601
Bank premises and equipment, net 6,184 6,675
Core deposit intangible 340 389
Other assets 2,148 1,872
-------- --------
TOTAL ASSETS $555,204 $518,141
======== ========
LIABILITIES AND CAPITAL
Liabilities:
Deposits:
Non-interest bearing $ 43,745 $ 40,371
Interest bearing 398,330 374,719
-------- --------
TOTAL DEPOSITS 442,075 415,090
Mortgagors' and investors' escrow accounts 2,423 2,221
Accrued expenses and other liabilities 4,171 2,346
Advances from the Federal Home Loan Bank 64,825 57,168
Subordinated debt 7,217 7,217
-------- --------
TOTAL LIABILITIES 520,711 484,042
======== ========
Commitments and contingencies
Capital
Surplus 1,000 1,000
Undivided profits 33,778 32,582
Accumulated other comprehensive income - net unrealized
(loss) gain on available for sale securities, net of taxes (285) 517
-------- --------
TOTAL CAPITAL 34,493 34,099
-------- --------
TOTAL LIABILITIES AND CAPITAL $555,204 $518,141
======== ========
See Notes to Consolidated Financial Statements.
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SI BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Income (Unaudited)
(Dollars in Thousands)
Three Months Six Months
Ended June 30, Ended June 30,
------------------------------ -------------------------
2004 2003 2004 2003
---------- ---------- ---------- ----------
Interest and dividend income
Interest and fees on loans $ 5,955 $ 6,018 $ 11,865 $ 11,895
Debt securities
Taxable 878 971 1,692 2,006
Tax exempt 6 7 12 14
Dividends 29 30 54 60
Other 35 61 63 107
-------------------------------------------------------------
TOTAL INTEREST AND DIVIDEND INCOME 6,903 7,087 13,686 14,082
-------------------------------------------------------------
Interest expense
Interest on deposits 1,539 1,703 3,033 3,494
Interest on Federal Home Loan Bank advances 679 568 1,348 1,119
Interest on subordinated debt 89 90 176 183
Interest on collateralized borrowings - 18 - 37
-------------------------------------------------------------
TOTAL INTEREST EXPENSE 2,307 2,379 4,557 4,833
-------------------------------------------------------------
NET INTEREST INCOME 4,596 4,708 9,129 9,249
Provision for loan losses 150 967 300 1,142
-------------------------------------------------------------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 4,446 3,741 8,829 8,107
-------------------------------------------------------------
Noninterest income
Service charges 802 805 1,605 1,540
Wealth management fees 237 219 487 416
Net gain on available for sale securities 2 58 186 114
Net gain (loss) on sale of loans 5 102 (20) 187
Other 23 18 46 161
-------------------------------------------------------------
TOTAL NONINTEREST INCOME 1,069 1,202 2,304 2,418
-------------------------------------------------------------
Noninterest Expenses
Salaries and employee benefits 2,554 2,255 4,836 4,419
Occupancy 865 494 1,448 1,045
Furniture and equipment 248 240 508 490
Computer services 257 196 513 426
Electronic banking fees 166 141 327 273
Professional services 117 80 259 146
Marketing 101 106 221 208
Supplies 66 71 148 163
FDIC deposit insurance and state assessment 18 20 42 39
Impairment charge- other asset - - 51 -
Other real estate operations 78 (23) 85 (12)
Other 488 614 953 1,103
-------------------------------------------------------------
TOTAL NONINTEREST EXPENSES 4,958 4,194 9,391 8,300
-------------------------------------------------------------
INCOME BEFORE INCOME TAXES 557 749 1,742 2,225
Provision for income taxes 165 231 546 757
-------------------------------------------------------------
NET INCOME $ 392 $ 518 $ 1,196 $ 1,468
=============================================================
See Notes to Consolidated Financial Statements
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SI BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income (Unaudited)
(Dollars in Thousands)
2004 2003
------- ------
Three months ended June 30,
Net income $ 392 $ 518
Unrealized holding (losses) gains on available for sale
securities arising during the period, net of taxes (978) 204
--------------------------
Comprehensive income $ (586) $ 722
==========================
2004 2003
------- ------
Six months ended June 30,
Net income $ 1,196 $ 1,468
Unrealized holding losses on available for sale
securities arising during the period, net of taxes (802) (289)
----------------------------
Comprehensive income $ 394 $ 1,179
============================
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See Notes to Consolidated Financial Statements
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SI BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows (Unaudited)
(Dollars in Thousands)
Six Months
Ended June 30,
--------------------------------
2004 2003
------------ ----------
Cash flows from Operating Activities:
Net income $ 1,196 $ 1,468
Adjustments to reconcile net income to net cash
provided by operating activities:
Amortization and accretion of premiums and
discounts on investments, net 61 358
Net gain from available for sale securities (186) (114)
Provision for loan losses 300 1,142
Amortization and accretion of loan premiums and
discounts, net 170 80
Loans originated for sale (5,300) (13,342)
Proceeds from sale of loans 5,280 13,529
Net decrease in loans held for sale - 184
Net loss (gain) on sale of loans 20 (187)
Net gain on sale of other real estate owned - (13)
Writedown of other real estate owned 60 -
Depreciation and amortization of premises and equipment 549 533
Impairment charge - long lived assets 337 -
Impairment charge - other assets 51 -
Increase in cash surrender value of bank-owned life insurance (159) (86)
Amortization of core deposit intangible 49 48
Amortization of deferred debt issuance costs 18 17
Change in assets and liabilities:
Change in deferred loan fees and costs (174) (233)
(Increase) decrease in accrued interest receivable (140) 151
Increase in other assets (344) (54)
Increase in accrued expenses and other liabilities 1,825 1,646
---------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 3,613 5,127
----------------------------------
Cash flows from investing activities:
Proceeds from sales of available for sale securities 4,992 8,309
Proceeds from maturities of and principal repayments on
available for sale securities 13,349 19,627
Purchases of available for sale securities (33,673) (28,118)
Proceeds from maturities of and principal repayments on
held to maturity securities 84 7,463
Purchases of Federal Home Loan Bank stock (1,102) (139)
Net increase in loans (20,660) (26,321)
Proceeds from sales of other real estate owned - 407
Purchases of bank premises and equipment (395) (667)
Purchase of bank-owned life insurance - (7,000)
-------------------------------------
NET CASH USED IN INVESTING ACTIVITIES (37,405) (26,439)
-------------------------------------
(Continued)
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SI BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows (Unaudited)
(Dollars in Thousands)
Six Months
Ended June 30,
--------------------------------
2004 2003
------------ ----------
Cash flows from financing activities:
Net increase in demand, money market and savings deposits $ 20,408 $ 23,427
Net increase (decrease) in certificates of deposit 6,577 (908)
Increase in mortgagors' and investors' escrow accounts 202 185
Proceeds from Federal Home Loan Bank advances 11,000 8,000
Repayments of Federal Home Loan Bank advances (3,343) (1,416)
Net decrease in collateralized borrowings - (851)
---------------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 34,844 28,437
---------------------------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 1,052 7,125
Cash and cash equivalents:
Beginning 29,577 37,517
---------------------------------
Ending $ 30,629 $ 44,642
=================================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid for:
Interest $ 4,584 $ 4,843
=================================
Income taxes $ 721 $ 1,091
=================================
NONCASH INVESTING AND FINANCIAL ACTIVITIES
Unrealized loss on securities arising during the period $ (1,216) $ (437)
=================================
Transfer of loans to other real estate owned $ - $ 703
=================================
See Notes to Consolidated Financial Statements.
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SI BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
(1) NATURE OF BUSINESS AND BASIS OF PRESENTATION
Nature of business
On August 6, 2004, SI Financial Group, Inc., a federal stock
corporation was formed. On that date, SI Bancorp, MHC, a federal mutual holding
company (the "Company"), transferred its ownership of all of the stock of
Savings Institute Bank and Trust Company, a federally chartered stock savings
bank (the "Bank"), to SI Financial Group in exchange for all of the outstanding
shares of SI Financial Group. While SI Financial Group is the reporting person
filing this Form 10-Q, since it was not an operating company at June 30, 2004,
the information presented herein only relates to the Company, the Bank and their
subsidiaries.
The Company was organized in 2000 as a Connecticut mutual holding
company. On June 5, 2000, the Company acquired all the outstanding shares of
SI-Stock Savings Bank, a then newly formed state-chartered capital stock bank.
On August 6, 2004, the Company converted to a federal charter operating under
the name SI Bancorp, MHC.
On June 5, 2000, Savings Institute, formerly a Connecticut mutual
savings bank, merged with and into SI-Stock Savings Bank to form a Connecticut
stock savings bank operating under the name Savings Institute. On August 6,
2004, Savings Institute converted to a federal charter operating under the name
Savings Institute Bank and Trust Company. The Bank's deposits are insured under
the Bank Insurance Fund, which is administered by the Federal Deposit Insurance
Corporation. The Bank provides a full range of banking services to consumer and
commercial customers through its main office in Willimantic, Connecticut, and
fourteen branches located in eastern Connecticut.
On March 25, 2002, the Company formed SI Capital Trust I for the
purpose of issuing trust preferred securities and investing the proceeds in
subordinated debentures issued by the Company, and on April 10, 2002, $7,217 of
debt securities were issued.
SI Financial Group will offer a minority of its shares of common stock
for sale to certain depositors of the Bank. The majority of its shares will be
issued to the Company. In connection with the stock offering, SI Financial Group
Foundation, Inc., a charitable foundation, will be formed and funded with 2% of
the outstanding shares of SI Financial Group.
Basis of financial statement presentation
The consolidated balance sheet at December 31, 2003 has been derived
from the audited financial statements of the Company at that date, but does not
include all of the information and footnotes required by accounting principles
generally accepted in the United States of America for complete financial
statements.
The accompanying unaudited financial statements and related notes have
been prepared pursuant to the rules and regulations of the Securities and
Exchange Commission. Accordingly, certain information and footnote disclosures
normally included in financial statements prepared in accordance with accounting
principles generally accepted in the United States of America have been omitted.
The accompanying consolidated financial statements and related notes should be
read in conjunction with the audited financial statements of the Company and
notes thereto for the year ended December 31, 2003.
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The information furnished reflects, in the opinion of management, all
normal recurring adjustments necessary for a fair presentation of the results
for the interim periods presented. The results of operations for the three and
six months ended June 30, 2004 are not necessarily indicative of the results of
operations that may be expected for all of 2004.
Principles of consolidation
The accompanying consolidated financial statements include the accounts
of the Company and its wholly-owned subsidiaries, SI Capital Trust I and the
Bank, and the Bank's wholly-owned subsidiaries, 803 Financial Corp., SI Mortgage
Company and SI Realty Company, Inc. All significant intercompany accounts and
transactions have been eliminated in consolidation.
(2) INVESTMENT SECURITIES
The carrying and approximate fair values of investment securities at June 30,
2004 and December 31, 2003 are as follows:
Gross Gross
June 30, 2004 Amortized Unrealized Unrealized Fair
- ------------- Cost Gains Losses Value
---------------------------------------------------------
Available for Sale:
U.S. Government and agency securities $ 56,752 $ 285 $ (780) $ 56,257
Mortgage backed securities 20,156 57 (611) 19,602
Corporate debt securities 11,876 569 - 12,445
Obligations of state and political subdivisions 2,499 39 - 2,538
Tax exempt securities 630 - - 630
Foreign government securities 75 - - 75
---------------------------------------------------------
Total debt securities 91,988 950 (1,391) 91,547
Marketable equity securities 378 10 - 388
---------------------------------------------------------
$ 92,366 $ 960 $ (1,391) $ 91,935
=========================================================
Held to Maturity:
Mortgage backed securities $ 1,643 $ - $ (236) $ 1,407
=========================================================
Gross Gross
Amortized Unrealized Unrealized Fair
December 31, 2003 Cost Gains Losses Value
- ----------------- ---------------------------------------------------------
Available for Sale:
U.S. Government and agency securities $ 38,583 $ 524 $ (108) $ 38,999
Mortgage backed securities 19,050 87 (773) 18,364
Corporate debt securities 15,540 911 - 16,451
Obligations of state and political subdivisions 2,499 88 - 2,587
Tax exempt securities 630 - - 630
Foreign government securities 75 - - 75
---------------------------------------------------------
Total debt securities 76,377 1,610 (881) 77,106
Marketable equity securities 531 56 - 587
---------------------------------------------------------
$ 76,908 $ 1,666 $ (881) $ 77,693
=========================================================
Held to Maturity:
Mortgage backed securities $ 1,728 $ - $ (384) $ 1,344
=========================================================
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The following tables present the Company's available for sale and held to
maturity securities' gross unrealized losses and fair value, aggregated by the
length of time the individual securities have been in a continuous unrealized
loss position, at June 30, 2004 and December 31, 2003:
Less Than 12 Months 12 Months or More Total
------------------------- ------------------------- -----------------------
Fair Unrealized Fair Unrealized Fair Unrealized
June 30, 2004 Value Loss Value Losses Value Loss
- ------------- ------------------------- ------------------------- -----------------------
U.S. Government and agency $ 39,405 $ 753 $ 656 $ 27 $ 40,061 $ 780
securities
Mortgage backed securities 7,782 43 8,163 804 15,945 847
------------------------------------------------------------------------------
Totals $ 47,187 $ 796 $ 8,819 $ 831 $ 56,006 $ 1,627
==============================================================================
Less Than 12 Months 12 Months or More Total
------------------------- ------------------------- -----------------------
Fair Unrealized Fair Unrealized Fair Unrealized
December 31, 2003 Value Loss Value Losses Value Loss
- ----------------- ------------------------- ------------------------- -----------------------
U.S. Government and agency $ 8,351 $ 84 $ 1,291 $ 24 $ 9,642 $ 108
securities
Mortgage backed securities 11,772 744 2,768 413 14,540 1,157
------------------------------------------------------------------------------
Totals $ 20,123 $ 828 $ 4,059 $ 437 $ 24,182 $ 1,265
==============================================================================
At June 30, 2004 and December 31, 2003, unrealized losses on securities that
have existed for a period of twelve months or more totaled $831 and $437,
respectively. Management believes that none of the unrealized losses on these
securities are other than temporary because all of the unrealized losses relate
to debt and mortgage-backed securities issued by the U.S. Treasury or Government
Agencies and private issuers that maintain investment grade ratings, which the
Company has both the intent and the ability to hold until maturity or until the
fair value fully recovers. In addition, management considers the issuers of the
securities to be financially sound and believes the Company will receive all
contractual principal and interest related to these investments.
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(3) LOANS
A summary of the Company's loan portfolio at June 30, 2004 and December 31, 2003 is as follows:
June 30, December 31,
2004 2003
----------- ---------------
Real estate loans:
Residential - 1 to 4 family $ 239,978 $ 226,881
Commercial 74,407 73,428
Construction 22,849 20,652
----------- -----------
337,234 320,961
Commercial business loans 53,093 50,746
----------- -----------
Consumer loans 19,367 17,518
----------- -----------
TOTAL LOANS 409,694 389,225
Net deferred loan costs 561 387
Allowance for loan losses (2,967) (2,688)
------------ ------------
LOANS, NET $ 407,288 $ 386,924
=========== ===========
(4) DEPOSITS
A summary of the Company's deposits at June 30, 2004 and December 31, 2003 is as follows:
June 30, December 31,
2004 2003
----------- ---------------
Noninterest bearing demand deposits $ 43,745 $ 40,371
----------- -----------
Interest bearing accounts:
NOW and money market 115,060 101,852
Savings 91,451 87,625
Time certificates of deposit 191,819 185,242
----------- -----------
398,330 374,719
----------- -----------
$ 442,075 $ 415,090
=========== ===========
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(5) FEDERAL HOME LOAN BANK BORROWINGS
The Bank is a member of the Federal Home Loan Bank of Boston (the "FHLBB"). At
June 30, 2004 and December 31, 2003, the Bank had access to a pre-approved
secured line of credit with the FHLBB of $6,202, and the capacity to obtain
additional advances up to a certain percentage of the value of its qualified
collateral, as defined in the FHLBB Statement of Credit Policy. In accordance
with an agreement with the FHLBB, the qualified collateral must be free and
clear of liens, pledges and encumbrances. At June 30, 2004 and December 31,
2003, there were no advances outstanding under the line of credit. Other
outstanding advances from the FHLBB aggregated $64,825 at June 30, 2004, at
interest rates ranging from 1.87% to 5.84%, and $57,168 at December 31, 2003, at
interest rates ranging from 1.89% to 5.84%.
(6) OTHER COMPREHENSIVE INCOME
Other comprehensive income, which is comprised solely of the change in
unrealized gains and losses on available for sale securities, is as follows:
Three Months Ended June 30, 2004
-----------------------------------------------------
Before-Tax Tax Benefit Net-of-Tax
Amount (Expense) Amount
-----------------------------------------------------
Unrealized holding losses arising during the period $ (1,480) $ 503 $ (977)
Less reclassification adjustment for gains recognized
in net income (2) 1 (1)
-----------------------------------------------------
Unrealized holding losses on available for sale
securities, net of taxes $ (1,482) $ 504 $ (978)
=====================================================
Three Months Ended June 30, 2003
-----------------------------------------------------
Before-Tax Tax Benefit Net-of-Tax
Amount (Expense) Amount
-----------------------------------------------------
Unrealized holding gains arising during the period $ 368 $ (126) $ 242
Less reclassification adjustment for gains
recognized in net income (58) 20 (38)
-----------------------------------------------------
Unrealized holding gains on available for sale
securities, net of taxes $ 310 $ (106) $ 204
=====================================================
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Six Months Ended June 30, 2004
-----------------------------------------------------
Before-Tax Tax Benefit Net-of-Tax
Amount (Expense) Amount
-----------------------------------------------------
Unrealized holding losses arising during the period $ (1,030) $ 351 $ (679)
Less reclassification adjustment for gains
recognized in net income (186) 63 (123)
-----------------------------------------------------
Unrealized holding losses on available for sale
securities, net of taxes $ (1,216) $ 414 $ (802)
=====================================================
Six Months Ended June 30, 2003
-----------------------------------------------------
Before-Tax Tax Benefit Net-of-Tax
Amount (Expense) Amount
-----------------------------------------------------
Unrealized holding losses arising during the period $ (323) $ 109 $ (214)
Less reclassification adjustment for gains
recognized in net income (114) 39 (75)
-----------------------------------------------------
Unrealized holding losses on available for sale
securities, net of taxes $ (437) $ 148 $ (289)
=====================================================
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS
The following analysis discusses changes in the financial condition and
results of operations at and for the three and six months ended June 30, 2004
and 2003, and should be read in conjunction with the Consolidated Financial
Statements and the notes thereto, appearing in Part I, Item 1 of this document.
This report contains forward-looking statements that are based on
assumptions and may describe future plans, strategies and expectations of SI
Bancorp, MHC, SI Financial Group and Savings Institute Bank and Trust Company.
These forward-looking statements are generally identified by use of the words
"believe," "expect," "intend," "anticipate," "estimate," "project" or similar
expressions. SI Bancorp, MHC's, SI Financial Group's and Savings Institute's
ability to predict results or the actual effect of future plans or strategies is
inherently uncertain. Factors which could have a material adverse effect on the
operations of SI Financial Group 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 U.S. government, including policies of the U.S. Treasury and the Federal
Reserve Board, the quality and composition of the loan or investment portfolios,
demand for loan products, deposit flows, competition, demand for financial
services in SI Financial Group's and Savings Institute's market area, changes in
real estate market values in SI Financial Group's and Savings Institute's market
area, and changes in relevant accounting principles and guidelines. 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, SI Financial Group 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.
COMPARISON OF FINANCIAL CONDITION AT JUNE 30, 2004 AND DECEMBER 31, 2003
Total assets increased $37.1 million, or 7.2%, to $555.2 million at
June 30, 2004, primarily due to an increase in loans and securities. Net loans
receivable increased $20.4 million, or 5.3%, to $407.3 million at June 30, 2004,
primarily due to an increase in one- to four-family loans. One- to four-family
loans increased $13.1 million, or 5.8%, due primarily to a lower rate of
prepayments because of increasing interest rates during the period and continued
strong originations due to increased home purchases in our market area.
Construction loans increased $2.2 million, or 10.6%, primarily due to new
housing development in our market area. Commercial business loans increased $2.3
million, or 4.6%, due to our continued emphasis on these types of loans and the
expansion of our commercial lending staff. Consumer loans increased $1.8
million, or 10.6%, primarily due to the increase in home equity loans due to an
aggressive marketing campaign. Securities available-for-sale increased $14.2
million, or 18.3%, to $91.9 million as management invested excess liquidity into
securities. Federal Home Loan Bank of Boston stock increased $1.1 million, or
38.6%, to $4.0 million at June 30, 2004, primarily due to the implementation of
their new capital plan and to support a higher level of borrowings.
Deposits, including mortgagors' escrow accounts, increased $27.2
million, or 6.5%, to $444.5 million at June 30, 2004. Interest-bearing deposits
increased $23.8 million, or 6.3%, primarily due to a promotion on individual
retirement accounts, aggressive pricing on certificates of deposit to attract
additional funds, and efforts to capitalize on opportunities to increase
deposits due to the consolidation of financial institutions in our market area.
Additionally, noninterest-bearing demand deposits increased $3.4 million, or
8.4%, primarily due to an increase in commercial deposits. Federal Home Loan
Bank advances increased $7.7 million, or 13.4%, to $64.8 million at June 30,
2004. The Federal Home Loan Bank borrowing increases were longer term fixed rate
advances used to fund strong loan demand. The
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increase in accrued expenses and other liabilities was due to the timing of the
settlement of security purchases.
Total capital increased $394,000, or 1.2%, to $34.5 million at June 30,
2004. The increase was due to net earnings recorded for the period, partially
offset by the decrease in other comprehensive income.
RESULTS OF OPERATIONS FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2004 AND 2003
OVERVIEW. Net income for the three months ended June 30, 2004,
decreased $126,000, or 24.3%, to $392,000, compared with net income of $518,000
for the three months ended June 30, 2003, primarily due to an increase in
noninterest expense and a decrease in net interest income and noninterest
income, offset by a lower provision for loan losses. Noninterest expense
increased primarily as a result of a $337,000 impairment charge recorded on a
prior branch facility as management concluded that this property was not
suitable for future use and reduced its carrying value to its estimated net
market value. We also reduced the carrying value of a real estate owned property
by $60,000. This property is currently under contract and its book value was
reduced to the expected proceeds from sale. We also accrued $86,000 for future
benefits payable to two directors who retired in April 2004.
Net income for the six months ended June 30, 2004, decreased $272,000,
or 18.5%, to $1.2 million, compared with net income of $1.5 million for the
three months ended June 30, 2003, primarily due to an increase in noninterest
expense, offset by a lower provision for loan losses.
NET INTEREST INCOME. For the three months ended June 30, 2004, net
interest income decreased $112,000, or 2.4%, to $4.6 million. For the six months
ended June 30, 2004, net interest income decreased $120,000, or 1.3%, to $9.1
million. The primary reason for the decrease in net interest income for both the
three and the six month periods was a decrease in the average yield partially
offset by a decrease in the cost of funds and an increase in the volume of
interest-earning assets.
The following table summarizes changes in interest income and expense
for the three and six months ended June 30, 2004 and 2003.
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
-------------------------- % ----------------------- %
2004 2003 CHANGE 2004 2003 CHANGE
---------- ---------- ---------- ----------- ---------- ----------
(DOLLARS IN THOUSANDS)
INTEREST AND DIVIDEND INCOME:
Loans receivable $5,955 $6,018 (1.0)% $11,865 $11,895 (0.3)%
Investment securities 913 1,008 (9.4) 1,758 2,080 (15.5)
Other interest-earning assets 35 61 (42.6) 63 107 (41.1)
------ ------ ------- -------
Total interest and dividend
income 6,903 7,087 (2.6) 13,686 14,082 (2.8)
------ ------ ------- -------
INTEREST EXPENSE:
Deposits 1,539 1,703 (9.6) 3,033 3,494 (13.2)
FHLB advances 679 568 19.5 1,348 1,119 20.5
Subordinated debt 89 90 (1.1) 176 183 (3.8)
Other borrowings - 18 N/A - 37 N/A
------ ------ ------- -------
Total interest expense 2,307 2,379 (3.0) 4,557 4,833 (5.7)
------ ------ ------- -------
Net interest income $4,596 $4,708 (2.4) $ 9,129 $ 9,249 (1.3)
====== ====== ======= =======
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16
The following table summarizes average balances and average yield and costs for the three and
six months ended June 30, 2004 and 2003.
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
-------------------------------------------------------------------------------
2004 2003 2004 2003
AVERAGE YIELD/ AVERAGE YIELD/ AVERAGE YIELD/ AVERAGE YIELD/
BALANCE COST BALANCE COST BALANCE COST BALANCE COST
-------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
Loans $402,311 5.95% $348,613 6.92% $397,544 6.00% $345,436 6.94%
Investment securities 92,309 3.98 92,595 4.37 87,899 4.02 96,133 4.36
Other interest-earning assets 14,760 0.95 21,205 1.15 13,338 0.95 18,306 1.18
Interest-bearing deposits 394,768 1.57 371,322 1.84 386,500 1.58 366,664 1.92
FHLB advances 64,887 4.21 47,655 4.78 63,768 4.25 46,416 4.86
Subordinated debt 7,217 4.96 7,217 5.00 7,217 4.90 7,217 5.11
Other borrowings - - 1,101 6.56 - - 1,373 5.43
Total interest and dividend income decreased $184,000, or 2.6%, for the
three months ended June 30, 2004, as a result of a decrease in the average yield
on interest-earning assets from 6.15% to 5.45% as a result of the lower interest
rate environment, which more than offset the increase in average balance of
interest-earning assets from $462.4 million to $509.4 million. Total interest
income decreased $396,000, or 2.8%, for the six months ended June 30, 2004, as a
result of a decrease in the average yield on interest-earning assets from 6.18%
to 5.52% as a result of the lower interest rate environment, which more than
offset an increase in the average balance of interest-earning assets from $459.9
million to $498.8 million. Interest on loans decreased during the three months
ended June 30, 2004, and the six months ended June 30, 2004, due to a decrease
in the average yield due to the lower interest rate environment. Interest on
investment securities decreased during the three and six months ended June 30,
2004 due to a decrease in the average balance and in the average yield as a
result of the lower interest rate environment.
Interest expense decreased $72,000, or 3.0%, for the three months ended
June 30, 2004 due to a 24 basis point decline in the average rate paid,
partially offset by a 9.3% increase in average interest-bearing liabilities.
Interest expense decreased $276,000, or 5.7%, for the six months ended June 30,
2004, as the average rate paid declined 31 basis points to 2.00%, which was
partially offset by an 8.5% increase in average interest-bearing liabilities.
The decline in the average cost of interest-bearing liabilities for the three
and six-month period was due to the prevailing low interest rate environment.
PROVISION FOR LOAN LOSSES. The following table summarizes the activity
in the allowance for loan losses for the three and six months ended June 30,
2004 and 2003.
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
2004 2003 2004 2003
--------------- -------------- ------------- --------------
(DOLLARS IN THOUSANDS)
Allowance at beginning of period $2,835 $3,011 $2,688 $3,067
------ ------ ------ ------
Provision for loan losses 150 967 300 1,142
Charge-offs (39) (917) (45) (1,200)
Recoveries 21 47 24 99
------- ------- ------- ------
Net charge-offs (18) (870) (21) (1,101)
------- ------- ------- -------
Allowance at end of period $2,967 $3,108 $2,967 $3,108
====== ====== ====== ======
15
17
The provision for loan losses decreased $817,000, or 84.5%, from
$967,000 for the three months ended June 30, 2003 to $150,000 for the three
months ended June 30, 2004. The provision for loan losses decreased $842,000, or
73.7%, from $1.1 million for the six months ended June 30, 2003 to $300,000 for
the six months ended June 30, 2004. The lower provisions for the three and six
months ended June 30, 2004 reflect a significantly lower level of charge-offs in
2004 as compared to 2003.
At June 30, 2004, the allowance for loan losses represented 0.72% of
total loans and 200.34% of nonperforming loans compared to 0.85% of total loans
and 224.73% of nonperforming loans at June 30, 2003. The allowance for loan
losses decreased from $3.1 million at June 30, 2003 to $3.0 million at June 30,
2004.
The following table provides information with respect to our nonperforming assets at the dates
indicated.
AT JUNE 30, AT DECEMBER 31,
2004 2003 %CHANGE
-------------- ---------------- -------------
(DOLLARS IN THOUSANDS)
Nonaccrual loans $1,481 $1,295 14.4%
Accruing loans past due 90 days or more - - -
Real estate owned 268 328 (18.3)
------ ------
Total nonperforming assets 1,749 1,623 7.8
Troubled debt restructurings 76 77 (1.3)
------ ------
Troubled debt restructurings and nonperforming assets $1,825 $1,700 7.4
====== ======
Total nonperforming loans to total loans 0.36% 0.33% 9.1
Total nonperforming loans to total assets 0.27% 0.25% 8.0
Total nonperforming assets and troubled
debt restructurings to total assets 0.33% 0.33% -
NONINTEREST INCOME. The following table summarizes noninterest income for the three and six months
ended June 30, 2004 and 2003.
THREE MONTHS SIX MONTHS
ENDED JUNE 30, % ENDED JUNE 30, %
2004 2003 CHANGE 2004 2003 CHANGE
------------- ----------- ------------ ------------ ------------- ------------
(DOLLARS IN THOUSANDS)
Service charges $ 802 $ 805 (0.4)% $1,605 $1,540 4.2%
Wealth management fees 237 219 8.2 487 416 17.1
Net gain on sale of securities 2 58 (96.6) 186 114 63.2
Net gain (loss) on sale of loans 5 102 (95.1) (20) 187 (110.7)
Other 23 18 27.8 46 161 (71.4)
------ ------ ------ ------
Total $1,069 $1,202 (11.1) $2,304 $2,418 (4.7)
====== ====== ====== ======
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For the three months ended June 30, 2004, noninterest income decreased
$133,000, or 11.1%, primarily due to a decrease of $97,000, or 95.1%, in net
gain on sale of loans and a decrease of $56,000, or 96.6%, in net gain on sale
of securities. For the six months ended June 30, 2004, noninterest income
decreased $114,000, or 4.7%, primarily due to a decrease in net gain on sale of
loans and a decrease in other income. Other income decreased due to nonrecurring
credits associated with discontinued employee benefit plans recognized in 2003.
These decreases were offset by a $71,000, or 17.1%, increase in wealth
management fees as a result of the increased balance of assets under management
and a $72,000, or 63.2%, net gain on the sales of securities. The decrease in
gain on the sale of loans reflected lower loan sales in 2004. More loans were
sold in 2003 as part of our interest rate risk and liquidity management
strategies.
NONINTEREST EXPENSE. The following table summarizes noninterest expense for the three and six
months ended June 30, 2004 and 2003.
THREE MONTHS SIX MONTHS
ENDED JUNE 30, % ENDED JUNE 30, %
2004 2003 CHANGE 2004 2003 CHANGE
----------- ---------- ------------- ------------ ------------- ------------
(DOLLARS IN THOUSANDS)
Salaries and employee benefits $2,554 $2,255 13.3% $4,836 $4,419 9.4%
Occupancy 865 494 75.1 1,448 1,045 38.6
Furniture and equipment 248 240 3.3 508 490 3.7
Computer services 257 196 31.1 513 426 20.4
Electronic banking fees 166 141 17.7 327 273 19.8
Professional services 117 80 46.3 259 146 77.4
Marketing 101 106 (4.7) 221 208 6.3
Supplies 66 71 (7.0) 148 163 (9.2)
FDIC deposit insurance
and state assessment 18 20 (10.0) 42 39 7.7
Impairment charge - other assets - - N/A 51 - N/A
Other real estate operations 78 (23) (439.1) 85 (12) (808.3)
Other 488 614 (20.5) 953 1,103 (13.6)
------ ------ ------ ------
Total $4,958 $4,194 18.2 $9,391 $8,300 13.1
====== ====== ====== ======
Salary and employee benefits increased due to salary increases and
additional compensation related to an increase in employees, higher commissions
due to higher levels of residential mortgage loan originations and higher
payroll taxes and pension expense. In addition, we accrued $86,000 for future
benefits payable to two directors who retired in April 2004. Occupancy expense
increased primarily due to an impairment charge of $337,000 to a prior branch
facility, reducing its carrying value to its estimated net market value.
Computer services expense increased due to increased fees and services.
Electronic banking fees increased due to increased customer use of electronic
banking services. Professional services expense increased primarily due to costs
associated with our conversion to a federally chartered mutual holding company.
The increase in other real estate operations expense was primarily related to a
$60,000 reduction in the carrying value of a real estate owned property.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity is the ability to meet current and future financial
obligations of a short-term nature. Our primary sources of funds consist of
deposit inflows, loan repayments, maturities and sales of investment securities
and borrowings from the Federal Home Loan Bank of Boston. While maturities and
scheduled
17
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amortization of loans and securities are predictable sources of funds, deposit
flows and mortgage prepayments are greatly influenced by general interest rates,
economic conditions and competition.
We regularly adjust our investments in liquid assets based upon our
assessment of (1) expected loan demand, (2) expected deposit flows, (3) yields
available on interest-earning deposits and securities and (4) the objectives of
our asset/liability management, funds management and liquidity policies. Our
policy is to maintain liquid assets less short term liabilities within a range
of 12.5% to 20% of total assets. Excess liquid assets are invested generally in
interest-earning deposits and short- and intermediate-term U.S. Government
agency obligations.
Our most liquid assets are cash and cash equivalents and
interest-bearing deposits. The levels of these assets depend on our operating,
financing, lending and investing activities during any given period. At June 30,
2004, cash and cash equivalents totaled $30.6 million, including
interest-bearing deposits of $8.3 million. Securities classified as
available-for-sale, which provide additional sources of liquidity, totaled $91.9
million at June 30, 2004. In addition, at June 30, 2004, we had the ability to
borrow a total of approximately $110.0 million from the Federal Home Loan Bank
of Boston. On that date, we had advances outstanding of $64.8 million.
Additionally, we had arranged overnight lines of credit of $6.2 million from the
Federal Home Loan Bank of Boston. On that date, we had no overnight advances
outstanding.
At June 30, 2004, we had $77.1 million in loan commitments outstanding,
which included $22.9 million in undisbursed construction loans, $17.5 million in
unused home equity lines of credit, $7.6 million in commercial lines of credit
and $886,000 thousand in standby letters of credit. Certificates of deposit due
within one year of June 30, 2004 totaled $101.5 million, or 22.8% of total
deposits. Management believes that the large percentage of deposits in
shorter-term certificates of deposit reflects customers' hesitancy to invest
their funds in long-term certificates of deposit in the current low interest
rate environment. To compensate, we have increased the duration of our
borrowings with the Federal Home Loan Bank of Boston. If these maturing
certificates of deposit do not remain with us, we will be required to seek other
sources of funds, including other certificates of deposit and lines of credit.
Depending on market conditions, we may be required to pay higher rates on such
deposits or other borrowings than we currently pay on the certificates of
deposit due on or before June 30, 2005. Additionally, we maintain a shorter
duration in our securities portfolio to provide necessary liquidity to
compensate for any deposit outflows. We believe, however, based on past
experience, that a significant portion of our certificates of deposit will
remain with us. We have the ability to attract and retain deposits by adjusting
the interest rates offered.
Our primary investing activities are the origination of loans and the
purchase of securities. For the six months ended June 30, 2004, we originated
$79.3 million of loans and purchased $33.7 million of securities. In fiscal
2003, we originated $207.7 million of loans and purchased $45.1 million of
securities.
Financing activities consist primarily of activity in deposit accounts
and in Federal Home Loan Bank advances. Asset growth has outpaced deposit growth
during the last three years. The increased liquidity needed to fund asset growth
over the last three years has been provided through increased Federal Home Loan
Bank borrowings and raising capital through the issuance of trust preferred
securities. We experienced a net increase in total deposits of $27.2 million,
$19.0 million, $35.3 million and $41.2 million for the six months ended June 30,
2004 and the years ended December 31, 2003, 2002 and 2001, respectively. Deposit
flows are affected by the overall level of interest rates, the interest rates
and products offered by us and our local competitors and other factors. We
generally manage the pricing of our deposits to be competitive and to increase
core deposit and commercial banking relationships. Occasionally, we offer
promotional rates on certain deposit products to attract deposits. We
experienced
18
20
increases in Federal Home Loan Bank advances of $7.7 million, $13.3 million,
$8.7 million and $9.5 million for the six months ended June 30, 2004 and the
years ended December 31, 2003, 2002 and 2001, respectively. Additionally, we
generated $7.0 million in net proceeds from the issuance of trust preferred
securities in 2002.
We are subject to various regulatory capital requirements administered
by the Office of Thrift Supervision, including a risk-based capital measure. The
risk-based capital guidelines include both a definition of capital and a
framework for calculating risk-weighted assets by assigning balance sheet assets
and off-balance sheet items to broad risk categories. At June 30, 2004, we
exceeded all of our regulatory capital requirements. We are considered "well
capitalized" under regulatory guidelines.
SI Financial Group will offer a minority of its shares of common stock
for sale to certain depositors of the Bank, which will result in increased
capital and liquidity. For a presentation of the affect on our capital and a
discussion of how we intend to use the proceeds from the offering see
"Capitalization" and "Use of Proceeds" in SI Financial Group's Registration
Statement on Form S-1, as amended. Over time, our liquidity will be reduced as
net proceeds from the stock offering are deployed. Our financial condition and
results of operations will be enhanced by the capital from the offering,
resulting in increased net interest-earning assets and net income. However, the
large increase in equity resulting from the capital raised in the offering will,
initially, have an adverse impact on our return on equity. Following the
offering, we may use capital management tools such as cash dividends and common
share repurchases. However, under Office of Thrift Supervision regulations, we
will not be allowed to repurchase any shares during the first year following the
offering, except to fund the restricted stock awards under the stock-based
benefit plans, unless extraordinary circumstances exist and we receive
regulatory approval.
OFF-BALANCE SHEET ARRANGEMENTS
In the normal course of operations, we engage in a variety of financial
transactions that, in accordance with generally accepted accounting principles,
are not recorded in our financial statements. These transactions involve, to
varying degrees, elements of credit, interest rate, and liquidity risk. Such
transactions are used primarily to manage customers' requests for funding and
take the form of loan commitments, lines of credit, and letters of credit. At
June 30, 2004, loan commitments, lines of credit and letters of credit
(available and used) totaled $50.0 million, $26.2 million and $886,000,
respectively.
For the six months ended June 30, 2004 and the year ended December 31,
2003, we did not engage in any off-balance-sheet transactions reasonably likely
to have a material effect on our financial condition, results of operations or
cash flows.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
QUALITATIVE ASPECTS OF MARKET RISK. Our most significant form of market
risk is interest rate risk. We manage the interest rate sensitivity of our
interest-bearing liabilities and interest-earning assets in an effort to
minimize the adverse effects of changes in the interest rate environment.
Deposit accounts typically react more quickly to changes in market interest
rates than mortgage loans because of the shorter maturities of deposits. As a
result, sharp increases in interest rates may adversely affect our earnings
while decreases in interest rates may beneficially affect our earnings. To
reduce the potential volatility of our earnings, we have sought to improve the
match between asset and liability maturities and rates, while maintaining an
acceptable interest rate spread. Pursuant to this strategy, we originate
adjustable-rate mortgage loans for retention in our 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, we offer fixed-rate mortgage loans with maturities of fifteen
years. This
19
21
product enables us to compete in the fixed-rate mortgage market while
maintaining a shorter maturity. Fixed-rate mortgage loans typically have an
adverse effect on interest rate sensitivity compared to adjustable-rate loans.
Accordingly, we have sold more longer-term fixed-rate mortgage loans in the
secondary market in recent periods to manage interest rate risk. In recent
years, we also have used investment securities with terms of three years or
less, longer-term borrowings from the Federal Home Loan Bank and a 4-year $5.0
million brokered deposit to help manage interest rate risk. We currently do not
participate in hedging programs, interest rate swaps or other activities
involving the use of derivative financial instruments.
We have 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. We analyze our 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 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.
Our goal is to manage asset and liability positions to moderate the
effects of interest rate fluctuations on net interest income. Interest income
simulations are completed quarterly and presented to the Asset/Liability
Committee. The simulations provide an estimate of the impact of changes in
interest rates on net interest income under a range of assumptions. The numerous
assumptions used in the simulation process are 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 our interest rate risk
exposure at a particular point in time. We continually review the potential
effect changes in interest rates could have on the repayment of rate sensitive
assets and funding requirements of rate sensitive liabilities.
The tables below set forth an approximation of our exposure as a
percentage of estimated net interest income for the next twelve and twenty-four
month periods using interest income simulation. The simulation uses projected
repricing of assets and liabilities at June 30, 2004 and at December 31, 2003 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 we hold, rising or falling interest rates have a significant impact
on the prepayment speeds of our earning assets that in turn effect the rate
sensitivity position. The prepayment rates on investment securities are assumed
to fluctuate between 9% in a flat interest rate environment and 27% in a
decreasing interest rate environment and between 6% and 15% in an increasing
interest rate environment, depending on the type of security. Loan prepayment
rates are assumed to fluctuate between 6% and 36% in a flat or decreasing
interest rate environment and between 6% in a flat interest rate environment and
15% in an increasing interest rate environment, depending on the type of loan.
As evidenced by these assumptions, when interest rates rise, prepayments tend to
slow and when interest rates fall, prepayments tend to rise. Our asset
sensitivity would be reduced if prepayments slow and vice versa. While we
believe such assumptions to be reasonable, there can be no assurance that
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22
assumed prepayment rates will approximate actual future mortgage-backed
security, collateralized mortgage obligation and loan repayment activity.
AT JUNE 30, 2004
----------------------------
PERCENTAGE CHANGE IN
ESTIMATED
NET INTEREST INCOME OVER
----------------------------
12 MONTHS 24 MONTHS
----------- -----------
300 basis point increase in rates (7.76%) (8.35%)
175 basis point increase in rates (0.69%) (2.51%)
100 basis point decrease in rates (1.24%) (4.51%)
AT DECEMBER 31, 2003
----------------------------
PERCENTAGE CHANGE IN
ESTIMATED
NET INTEREST INCOME OVER
----------------------------
12 MONTHS 24 MONTHS
----------- -----------
300 basis point increase in rates (9.80%) (9.29%)
100 basis point increase in rates 0.84% 3.13%
100 basis point decrease in rates (1.94%) (4.69%)
The Asset/Liability Committee policy states that the Company has established
acceptable levels of interest rate risk as follows:
"Projected Net Interest Income over the next twelve months will not be
reduced by more than 5% given a change in interest rates for each 100 basis
points (+ or -) over a one year horizon. This limit will be re-evaluated on a
periodic basis (not less than annually) and may be modified, as appropriate."
Management generally simulates changes to net interest income using
three different interest rate scenarios. One scenario anticipates the maximum
foreseeable increase in rates over the next 12 months; management currently
assumes this to be 300 basis points. A second scenario anticipates the maximum
foreseeable decrease in rates over the next 12 months; management's current
assumption is 100 basis points. The third scenario anticipates management's view
of the most likely change in interest rates over the next 12 months. At June 30,
2004 management utilized a 175 basis point increase in rates. At December 31,
2003 management utilized a 100 basis point increase in rates. Management
periodically reviews its rate assumptions based on existing and projected
economic conditions.
The 300, 175 and 100 basis point change in rates in the above table at
June 30, 2004 is assumed to occur evenly over the next twelve months. Based on
the scenario above, net interest income would be adversely affected (within our
internal guidelines) in both the twelve and twenty-four month periods if rates
rose by 175 or 300 basis points or in a declining rate environment. Using data
at June 30, 2004, for each percentage point change in net interest income, the
effect on annual net income would be $121,000, assuming a 34% tax rate.
The 300 basis point change in rates in the above table at December 31,
2003 is assumed to occur evenly over the next twelve months. Based on the
scenario above, net income would be adversely affected (within our internal
guidelines) in both the twelve and twenty-four months periods in a declining
rate environment. If rates rose by 300 basis points, net interest income would
be adversely affected over
21
23
the next twelve and twenty-four months. An increase in rates of 100 basis points
would slightly increase net interest income in both the twelve and twenty-four
month periods. Using data at December 31, 2003, for each percentage point change
in net interest income, the effect on net income would be $123,000, assuming a
34% tax rate.
The changes in interest rate sensitivity at June 30, 2004 and December
31, 2003 reflects management's belief that the economy is entering a phase of
increasing interest rates.
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 the purpose of 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 and principal financial officers,
as appropriate to allow timely decisions regarding required disclosure. There
were no changes in the Company's internal control over financial reporting
identified in connection with the evaluation described above that occurred
during the Company's fiscal quarter ended June 30, 2004 that has materially
affected, or is reasonably likely to materially affect, the Company's internal
control over financial reporting.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
SI Financial Group is not involved in any pending legal proceedings.
Savings Institute is not involved in any pending legal proceedings other than
routine legal proceedings occurring in the ordinary course of business. Such
routine legal proceedings, in the aggregate, are believed by management to be
immaterial to its financial condition and results of operations.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Not Applicable
Item 3. Defaults upon Senior Securities
Not Applicable
Item 4. Submission of Matters to a Vote of Security Holders
Not Applicable
Item 5. Other Information
None
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Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
3.1 Charter of SI Financial Group, Inc. (1)
3.2 Bylaws of SI Financial Group, Inc. (1)
4.0 Stock Certificate of SI Financial Group, Inc. (1)
31.1 Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer
31.2 Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer
32.0 Section 1350 Certification
___________________________________
(1) Incorporated by reference into this document from the
Exhibits filed with the Securities and Exchange Commission on
the Registration Statement on Form S-1, and any amendments
thereto, Registration No. 333-116381.
(b) Reports on Form 8-K
None
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SI FINANCIAL GROUP, INC.
Dated: September 27, 2004 By: /s/ Rheo A. Brouillard
-------------------------------------
Rheo A. Brouillard
President and Chief Executive Officer
(principal executive officer)
Dated: September 27, 2004 By: /s/ Brian J. Hull
-------------------------------------
Brian J. Hull
Executive Vice President, Treasurer
and Chief Financial Officer
(principal financial and accounting
officer)