SI Financial Group, Inc. - FORM 8-K/A - EX-99.1

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8-K/A - CURRENT REPORT - SI Financial Group, Inc.	si8kanov21-13.htm

EXHIBIT 99.1

UNAUDITED COMBINED CONDENSED CONSOLIDATED PRO FORMA FINANCIAL DATA

The following unaudited combined condensed consolidated pro forma financial data and explanatory footnotes show information about SI Financial Group, Inc.’s (“SI Financial”) financial position and operations, including per share data, after giving effect to the merger with Newport Bancorp, Inc. (“Newport Bancorp”). The unaudited combined condensed consolidated pro forma financial data sets forth the information as if the merger had become effective on June 30, 2013, with respect to financial condition data, and at the beginning of the periods presented, with respect to operations data. The pro forma financial data in the tables reflect application of the acquisition method of accounting. Upon consummation of the merger on September 6, 2013, management of SI Financial determined the fair market value of assets and liabilities based on appraisals and estimates. This table should be read in conjunction with, and is qualified in its entirety by, the historical financial statements, including the notes thereto of SI Financial and Newport Bancorp by reference in this document.

The acquisition method of accounting requires that all of Newport Bancorp’s assets and liabilities be adjusted to their fair market values as of the date of acquisition. For purposes of the unaudited pro forma financial statements, the fair market value of assets and liabilities at June 30, 2013 is based upon the calculations completed after the consummation of the merger on September 6, 2013. This information may not necessarily be indicative of the financial position or results of operations that would have occurred if the merger had been consummated on the date or at the beginning of the period indicated or which may be obtained in the future.

Unaudited Combined Condensed Consolidated Pro Forma Statement of Financial Condition

At June 30, 2013*

(In Thousands)

	SIFI Historical			NFSB Historical			Pro Forma Adjustments			Pro Forma Combined

ASSETS
Cash and cash equivalents	$	38,549		$	18,877		$	(35,670	)(1)	$	21,756
Investment securities		190,902			17,085			932	(2)		208,919
Loans receivable, net		670,445			356,289			4,720	(3)		1,031,454
Loans held for sale		525			—			—			525
Other real estate owned		731			160			—			891
Federal Home Loan Bank stock, at cost		7,753			5,356			—			13,109
Bank-owned life insurance		9,196			11,214			—			20,410
Premises and equipment, net		11,458			13,039			(3,100	)(4)		21,397
Deferred tax asset, net		5,448			2,848			(1,242	)(5)		7,054
Core deposit intangible		—			—			8,573	(6)		8,573
Accrued interest receivable		3,242			1,082			—			4,324
Goodwill		3,451			—			8,370	(7)		11,821
Other assets		7,126			662			45	(3)		7,833
Total assets	$	948,826		$	426,612		$	(17,372	)	$	1,358,066

LIABILITIES AND SHAREHOLDERS’ EQUITY Liabilities:
Deposits	$	708,322		$	281,045		$	564	(8)	$	989,931
Mortgagors’ and investors’ escrow accounts		2,786			—			—			2,786
Federal Home Loan Bank advances		93,069			72,346			3,958	(9)		169,373
Repurchase agreement		—			15,000			72	(10)		15,072
Subordinated debentures		8,248			—			—			8,248
Accrued expenses and other liabilities		12,236			3,582			2,569	(11)		18,387
Total liabilities		824,661			371,973			7,163			1,203,797

Shareholders’ Equity:
Common stock		101			49			(22	)(12)		128
Paid-in capital		95,000			50,187			(20,110	)(12)		125,077
Retained earnings		36,016			22,548			(22,548	)(12)		36,016
Unearned restricted shares		(1,973	)		—			—	(12)		(1,973	)
Unallocated common stock held by ESOP		(4,848	)		(1,951	)		1,951	(12)		(4,848	)
Treasury stock, at cost		—			(16,194	)		16,194	(12)		—
Accumulated other comprehensive loss, net of taxes		(131	)		—			—			(131	)
Total shareholders’ equity		124,165			54,639			(24,535	)		154,269
Total liabilities and shareholders’ equity	$	948,826		$	426,612		$	(17,372	)	$	1,358,066

(1)

The adjustment results from the assumption that cash and cash equivalents will be used to pay for after tax one-time merger and integration expenses of Newport Bancorp. These expenses are actually charged against income of Newport Bancorp and result in a charge to SI Financial’s goodwill. The adjustment also includes cash consideration of $30.9 million paid to Newport Bancorp shareholders and option holders of in-the-money Newport Bancorp stock options less repayment of Newport Bancorp’s employee stock ownership plan loan.

(2)	Represents the estimated fair value adjustment to Newport Bancorp’s investment portfolio.

(3)

Represents the estimated fair value adjustment to loans, which includes an estimate of credit losses. The existing Newport Bancorp allowance for loan losses cannot be carried over. The estimated fair value adjustment to loans is $4.7 million, net of the elimination of Newport Bancorp’s allowance for loan losses of $4.0 million as well as write-offs of Newport Bancorp’s net deferred origination costs and other adjustments.

(4)	Represents the difference between fair values and net carrying values of premises and equipment acquired in the acquisition.

(5)	Represents adjustments in the net deferred tax assets resulting from the fair value adjustments related to the acquired assets and liabilities, identifiable intangibles and other deferred tax items. The fair value adjustment in net deferred tax asset assumes a tax rate of 34.0%.

(6)	Represents the recognition of the fair value of the core deposit intangible asset, which is assumed to be 3.97% of core deposit liabilities assumed. Core deposits are defined as total deposits less time deposits.

(7)

Calculated to reflect the acquisition accounting adjustments related to the acquisition of Newport Bancorp. The consideration paid to acquire Newport Bancorp consists of cash of $30.9 million and the issuance of 2,683,099 shares of SI Financial common stock based upon the fixed exchange rate of 1.5129 on 50% of 3,547,372 common shares of Newport Bancorp shares outstanding at September 6, 2013. The value of SI Financial common stock to be issued is based upon the average five-day closing stock price of $11.22 as of September 6, 2013. Acquisition accounting adjustments assume that Newport Bancorp’s equity is eliminated and the purchase price, goodwill and intangible assets are reflected on the financial statements of SI Financial pursuant to the application of acquisition accounting (amounts in thousands).

	Note
Assumptions/Inputs:
Value of SI Financial common stock to be issued			$	30,105
Cash paid to Newport Bancorp’s shareholders and option holders				30,890
Total deal value as of September 6, 2013 merger date				60,995

Newport Bancorp’s net assets at fair value:

Newport Bancorp’s shareholders’ equity				51,291

Fair value adjustments:
Investment securities		(2)		977
Loans		(3)		4,720
Premises and equipment		(4)		(3,100	)
Core deposit intangible		(6)		8,573
Time and brokered deposits		(8)		(564	)
FHLB borrowings		(9)		(3,958	)
Repurchase agreement		(10)		(72	)
Pension liability		(11)		(4,000	)

Fair value adjustments				2,576
Tax effect of fair value adjustments		(5)		(1,242	)
Total adjustment of net assets acquired				1,334

Adjusted net assets acquired				52,625

Estimated goodwill		(7)	$	8,370

(8)

Yield adjustment to reflect the difference between portfolio yields and market rates for time and brokered deposits assumed in the acquisition. Yield adjustments were calculated using present value analysis. Cash flow was discounted to present value using market rates for similar deposits. The yield adjustment is the aggregate present value of the difference.

(9)

Yield adjustments reflect the difference between portfolio yields and market rates for borrowings acquired in the acquisition. Yield adjustments were calculated using present value analysis. Cash flow for each month was calculated as the difference between projected interest costs of the remaining borrowings and hypothetical costs using current market rates based on advances from the Federal Home Loan Bank of Boston. Cash flow was discounted to present value using market rates.

(10)	Reflects the difference between the fair value and net carrying value of the repurchase agreement.

(11)	Reflects the net liability related to Newport Bancorp’s employer tax-qualified defined benefit plan less pre-merger tax benefit.

(12)	Reflects elimination of Newport Bancorp’s equity accounts and the issuance of 2,683,099 shares of SI Financial common stock.

Unaudited Combined Condensed Consolidated Pro Forma Statement of Net Income

For the Year Ended December 31, 2012 (1)

(In Thousands, Except Share Data)


	SIFI Historical			NFSB Historical		Pro Forma Adjustments			Pro Forma Combined

Interest and dividend income:
Loans	$	30,462		$	17,800	$	(173	)(2)	$	48,089
Investments		5,316			1,510		(223	)(2)		6,603
Other interest-earning assets		46			75		—			121
Total interest and dividend income		35,824			19,385		(396	)		54,813
Interest expense:
Deposits		6,019			1,190		(362	)(2)		6,847
FHLB advances/repurchase agreement		3,276			4,390		(1,652	)(2)		6,014
Subordinated debt		338			—		—			338
Total interest expense		9,633			5,580		(2,014	)		13,199

Net interest income before provision for loan losses		26,191			13,805		1,618			41,614
Provision for loan losses		2,896			1,019		—			3,915
Net interest income after provision for loan losses		23,295			12,786		1,618			37,699

Noninterest income:
Service fees		4,935			1,880		—			6,815
Wealth management fees		1,975			—		—			1,975
Increase in cash surrender value of bank- owned life insurance		284			368		—			652
Net gain on sales of securities		273			—		—			273
Mortgage banking fees		1,893			—		—			1,893
Net loss on derivatives		(358	)		—		—			(358	)
Impairment loss on securities		(123	)		—		—			(123	)
Other income (loss)		(162	)		209		—			47
Total noninterest income		8,717			2,457		—			11,174

Noninterest expenses:
Salaries and employee benefits		15,868			6,885		—			22,753
Occupancy and equipment		5,480			2,192		—			7,672
Computer and electronic banking services		3,738			1,682		—			5,420
Outside professional services		1,309			670		—			1,979
Marketing and advertising		705			577		—			1,282
Supplies		442			103		—			545
FDIC deposit insurance and regulatory assessment		933			339		—			1,272
Other		2,178			558		659	(4)		3,395
Total noninterest expenses		30,653			13,006		659			44,318

Income before income taxes		1,359			2,237		959			4,555
Income tax expense		241			676		316	(2)		1,233
Net income	$	1,118		$	1,561	$	643		$	3,322

Earnings per share:
Basic	$	0.11		$	0.47				$	0.27
Diluted	$	0.11		$	0.46				$	0.27

Weighted average shares outstanding:
Basic		9,730,797			3,306,817		(623,718	)		12,413,896
Diluted		9,755,692			3,358,195		(675,096	)		12,438,791

Unaudited Combined Condensed Consolidated Pro Forma Statement of Operations

For the Six Months Ended June 30, 2013 (1)

(In Thousands, Except Share Data)


	SIFI Historical			NFSB Historical		Pro Forma Adjustments			Pro Forma Combined
Interest and dividend income:
Loans	$	14,717		$	8,188	$	(81	)(2)	$	22,824
Investments		2,119			511		(111	)(2)		2,519
Other interest-earning assets		21			25		—			46
Total interest and dividend income		16,857			8,724		(192	)		25,389
Interest expense:
Deposits		2,636			562		(110	)(2)		3,088
FHLB advances/repurchase agreement		1,491			1,432		(550	)(2)		2,373
Subordinated debt		166			—		—			166
Total interest expense		4,293			1,994		(660	)		5,627

Net interest income before provision for loan losses		12,564			6,730		468			19,762
Provision for loan losses		190			14		—			204
Net interest income after provision for loan losses		12,374			6,716		468			19,558

Noninterest income:
Service fees		2,449			933		—			3,382
Wealth management fees		544			—		—			544
Increase in cash surrender value of bank-owned life insurance		136			185		—			321
Net gain on sale of securities		3			—		—			3
Mortgage banking fees		850			—		—			850
Net gain on derivatives		173			—		—			173
Impairment loss on securities		(8	)		—		—			(8	)
Other income		365			14		—			379
Total noninterest income		4,512			1,132		—			5,644

Noninterest expenses:
Salaries and employee benefits		8,529			3,099		—			11,628
Occupancy and equipment		2,687			1,117		—			3,804
Computer and electronic banking services		1,839			832		—			2,671
Outside professional services		650			235		—			885
Marketing and advertising		301			217		—			518
Supplies		206			—		—			206
FDIC deposit insurance and regulatory assessment		463			137		—			600
Acquisition-related expenses		893			628		(1,521	)(3)		—
Other		1,222			316		330	(4)		1,868
Total noninterest expenses		16,790			6,581		(1,191	)(3)		22,180

Income before income taxes		96			1,267		1,659			3,022
Income tax expense		233			562		202	(2)		997
Net income (loss)	$	(137	)	$	705	$	1,457		$	2,025

Earnings (loss) per share:
Basic	$	(0.01	)	$	0.21				$	0.17
Diluted	$	(0.01	)	$	0.21				$	0.16

Weighted average shares outstanding:
Basic		9,561,808			3,323,102		(640,003	)		12,244,907	(5)
Diluted		9,561,808			3,423,240		(696,436	)		12,288,612	(5)

(1)

Assumes that the acquisition of Newport Bancorp was completed as of the beginning of the period presented utilizing the acquisition method of accounting. Estimated fair value adjustments for investment securities, loans, core deposit intangible, time deposits, borrowed funds and repurchase agreement were determined by the management of SI Financial and Newport Bancorp. The resulting premiums and discounts for purposes of the unaudited combined condensed consolidated pro forma financial data, where appropriate, are being amortized and accreted into income as more fully described in the notes below.

(2)	The following table summarizes the estimated impact of the amortization (accretion) of the accretable acquisition accounting adjustments on the pro forma statement of operations (in thousands).


Category	Premium/ (Discounts)			Estimated Life in Years		Amortization (Accretion) Method	Amortization (Accretion)
Category	Premium/ (Discounts)			Estimated Life in Years		Amortization (Accretion) Method	Year Ended December 31, 2012			Six Months Ended June 30, 2013
Loans	$	734			5.0	EY	$	173		$	81
Investment securities		667			3.0	EY		223			111
Core deposit intangible		8,573			13.0	SL		659			330
Time and brokered deposits		(485	)		5.0	EY		(362	)		(110	)
Borrowed funds		(3,820	)		4.0	EY		(1,580	)		(550	)
Repurchase agreement		(72	)		0.3	SL		(72	)		—

EY = effective yield method

SL = straight line method

The following table summarizes the estimated impact of the amortization/(accretion) of the acquisition accounting adjustments made in connection with the merger on SI Financial’s results of operations for the years following the merger assuming such transaction was effected on January 1, 2012 (in thousands).


Projected Amounts for the Years Ended December 31,	Amortization of Intangibles		Net Amortization (Accretion)			Net Increase (Decrease) in Income Before Taxes
2012	$	659	$	(1,618	)	$	959
2013		659		(936	)		277
2014		659		(234	)		(425	)
2015		659		(265	)		(394	)
2016		659		59			(718	)
thereafter		5,278		18			(5,296	)

(3)

Noninterest expenses also do not include one-time merger and integration expenses which will be expensed against income and which are accounted for as balance sheet adjustments to cash and equity in these pro forma financial statements. SI Financial will incur approximately $2.4 million ($1.9 million after tax) in total transaction costs as a result of the merger. Through September 30, 2013 transaction costs of $2.2 million and $1.3 million have been recognized by SI Financial and Newport Bancorp, respectively.

A summary of SI Financial’s transaction costs is as follows (in thousands):


Professional fees	$	1,245
Other merger-related expenses		1,140
Estimated pre-tax transaction costs		2,385
Less related tax benefit		515
Estimated transaction costs, net of taxes	$	1,870

Professional fees include investment banking, legal, accounting and other professional fees and expenses associated with the merger transaction. Other merger-related expenses include marketing, printing, integration, contract termination costs and other expenses. The foregoing estimates may be refined subsequent to the completion of the merger.

(4)	Represents the amortization of the core deposit intangible.

(5)	Basic and diluted weighted average common shares outstanding were determined by adding the number of shares issued to Newport Bancorp shareholders to SI Financial’s historical weighted average basic and diluted outstanding common shares.

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