Document

10-Q 1 a10-qsifi03312019.htm 10-Q 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, 2019



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, every Interactive Data File required to be submitted 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 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 x
		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 6, 2019, there were 12,034,193 shares of the registrant’s common stock outstanding.

Securities registered pursuant to Section 12(b) of the Act:



Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common	SIFI	The Nasdaq Stock Market LLC

SI FINANCIAL GROUP, INC.

TABLE OF CONTENTS



		Page No.

PART I. FINANCIAL INFORMATION

Item 1.	Financial Statements (Unaudited):

	Consolidated Balance Sheets at March 31, 2019 and December 31, 2018	1

	Consolidated Statements of Income for the three months ended March 31, 2019 and 2018	2

	Consolidated Statements of Comprehensive Income for the three months ended March 31, 2019 and 2018	3

	Consolidated Statement of Changes in Shareholders’ Equity for the three months ended March 31, 2019	4

	Consolidated Statements of Cash Flows for the three months ended March 31, 2019 and 2018	5

	Notes to Consolidated Financial Statements	6

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	36

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	47

Item 4.	Controls and Procedures	48

PART II. OTHER INFORMATION

Item 1.	Legal Proceedings	49

Item 1A.	Risk Factors	49

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	49

Item 3.	Defaults Upon Senior Securities	49

Item 4.	Mine Safety Disclosures	49

Item 5.	Other Information	49

Item 6.	Exhibits	49

	SIGNATURES	50

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements.

SI FINANCIAL GROUP, INC.

CONSOLIDATED BALANCE SHEETS

(In Thousands, Except Share Amounts / Unaudited)



	March 31, 2019			December 31, 2018
ASSETS:
Cash and due from banks:
Noninterest-bearing	$	14,489		$	17,433
Interest-bearing	106,230			70,496
Total cash and cash equivalents	120,719			87,929

Available for sale securities, at fair value	139,079			143,822
Loans held for sale	1,324			1,915
Loans receivable (net of allowance for loan losses of $15,213 at March 31, 2019 and $14,682 at December 31, 2018)	1,316,229			1,312,565
Federal Home Loan Bank stock, at cost	8,168			9,035
Federal Reserve Bank stock, at cost	3,638			3,638
Bank-owned life insurance	34,847			34,633
Premises and equipment, net	19,232			19,552
Operating leases right-of-use assets	9,704			—
Goodwill and other intangibles	16,141			16,291
Accrued interest receivable	5,099			4,921
Deferred tax asset, net	6,649			6,921
Other real estate owned, net	222			720
Other assets	10,090			7,885
Total assets	$	1,691,141		$	1,649,827

LIABILITIES AND SHAREHOLDERS' EQUITY:
Liabilities:
Deposits:
Noninterest-bearing	$	249,833		$	250,065
Interest-bearing	1,067,176			1,037,966
Total deposits	1,317,009			1,288,031

Mortgagors' and investors' escrow accounts	3,138			4,701
Federal Home Loan Bank advances	151,621			151,836
Junior subordinated debt owed to unconsolidated trust	8,248			8,248
Operating lease liability	9,753			—
Accrued expenses and other liabilities	25,579			24,883
Total liabilities	1,515,348			1,477,699

Shareholders' Equity:
Preferred stock ($.01 par value; 1,000,000 shares authorized; none issued)	—			—
Common stock ($.01 par value; 35,000,000 shares authorized; 12,054,785 shares issued and outstanding at March 31, 2019 and December 31, 2018)	121			121
Additional paid-in-capital	126,232			126,153
Unallocated common shares held by ESOP	(2,088		)	(2,208		)
Unearned restricted shares	(229		)	(226		)
Retained earnings	52,852			50,426
Accumulated other comprehensive loss	(1,095		)	(2,138		)
Total shareholders' equity	175,793			172,128
Total liabilities and shareholders' equity	$	1,691,141		$	1,649,827

See accompanying notes to unaudited interim consolidated financial statements.

SI FINANCIAL GROUP, INC.

CONSOLIDATED STATEMENTS OF INCOME

(In Thousands, Except Per Share Amounts / Unaudited)



	Three Months Ended March 31,
	2019		2018
Interest and dividend income:
Loans, including fees	$	14,056	$	12,663
Securities:
Taxable interest	915		677
Tax-exempt interest	13		14
Dividends	199		180
Other	524		220
Total interest and dividend income	15,707		13,754

Interest expense:
Deposits	3,339		1,955
Federal Home Loan Bank advances	775		806
Subordinated debt and other borrowings	89		68
Total interest expense	4,203		2,829

Net interest income	11,504		10,925

Provision for loan losses	518		725

Net interest income after provision for loan losses	10,986		10,200

Noninterest income:
Service fees	1,833		1,712
Wealth management fees	2		9
Increase in cash surrender value of bank-owned life insurance	214		215
Mortgage banking	197		214
Net gain on disposal of equipment	13		—
Other	504		244
Total noninterest income	2,763		2,394

Noninterest expenses:
Salaries and employee benefits	5,377		5,210
Occupancy and equipment	1,730		1,851
Computer and electronic banking services	1,281		1,288
Outside professional services	229		356
Marketing and advertising	173		234
Supplies	126		147
FDIC deposit insurance and regulatory assessments	191		173
Merger expenses	66		—
Core deposit intangible amortization	150		151
Other real estate owned operations	45		135
Other	317		506
Total noninterest expenses	9,685		10,051

Income before income tax provision	4,064		2,543
Income tax provision	930		537
Net income	$	3,134	$	2,006

Earnings per share:
Basic	$	0.27	$	0.17
Diluted	$	0.27	$	0.17

See accompanying notes to unaudited interim consolidated financial statements.

SI FINANCIAL GROUP, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In Thousands / Unaudited)



	Three Months Ended March 31,
	2019		2018
Net income	$	3,134	$	2,006
Other comprehensive income (loss), net of tax:
Net unrealized holding gains (losses) on available for sale securities	1,043		(1,078		)
Other comprehensive income (loss)	1,043		(1,078		)
Comprehensive income	$	4,177	$	928

See accompanying notes to unaudited interim consolidated financial statements.

SI FINANCIAL GROUP, INC.

CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY

FOR THE THREE MONTHS ENDED MARCH 31, 2019

(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		Additional Paid-in Capital		Unallocated Common Shares Held by ESOP			Unearned Restricted Shares			Retained Earnings			Accumulated Other Comprehensive Loss			Total Shareholders' Equity
Balance at December 31, 2018	12,054,785	$	121	$	126,153	$	(2,208	)	$	(226	)	$	50,426		$	(2,138	)	$	172,128
Comprehensive income	—	—		—		—			—			3,134			1,043			4,177
Cash dividends declared ($0.06 per share)	—	—		—		—			—			(708		)	—			(708		)
Equity incentive plans compensation	—	—		33		—			(3		)	—			—			30
Allocation of 12,159 ESOP shares	—	—		46		120			—			—			—			166
Balance at March 31, 2019	12,054,785	$	121	$	126,232	$	(2,088	)	$	(229	)	$	52,852		$	(1,095	)	$	175,793

See accompanying notes to unaudited interim consolidated financial statements.

SI FINANCIAL GROUP, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (In Thousands / Unaudited)

	Three Months Ended March 31,
	2019			2018
Cash flows from operating activities:
Net income	$	3,134		$	2,006
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses	518			725
Employee stock ownership plan expense	166			175
Equity incentive plan expense	30			51
Amortization of investment premiums and discounts, net	130			324
Amortization of loan premiums and discounts, net	246			228
Depreciation and amortization of premises and equipment	502			582
Amortization of core deposit intangible	150			151
Deferred income tax benefit	(6		)	(6		)
Loans originated for sale	(8,051		)	(5,811		)
Proceeds from sale of loans held for sale	8,694			5,776
Net gain on sales of loans held for sale	(90		)	(120		)
Net gain on disposal of equipment	(13		)	—
Net loss on sales or write-downs of other real estate owned	6			81
Increase in cash surrender value of bank-owned life insurance	(214		)	(215		)
Operating leases right-of-use assets amortization	49			—
Change in operating assets and liabilities:
Accrued interest receivable	(178		)	(9		)
Other assets	(2,167		)	1,269
Accrued expenses and other liabilities	696			154
Net cash provided by operating activities	3,602			5,361

Cash flows from investing activities:
Purchases of available for sale securities	—			(1,993		)
Proceeds from maturities of and principal repayments on available for sale securities	5,934			8,890
Purchases of Federal Reserve Bank stock	—			(2		)
Redemption of Federal Home Loan Bank stock	867			—
Loan principal originations, net of principal collections	8,173			(24,579		)
Purchases of loans	(12,601		)	(2,382		)
Proceeds from sales of other real estate owned	492			71
Purchases of premises and equipment	(169		)	(560		)
Net cash provided by (used in) investing activities	2,696			(20,555		)

	Three Months Ended March 31,
	2019			2018
Cash flows from financing activities:
Net increase in deposits	28,978			14,473
Net decrease in mortgagors' and investors' escrow accounts	(1,563		)	(1,310		)
Proceeds from Federal Home Loan Bank advances	—			14,817
Repayments of Federal Home Loan Bank advances	(215		)	(11,210		)
Cash dividends on common stock	(708		)	(716		)
Net cash provided by financing activities	26,492			16,054

Net change in cash and cash equivalents	32,790			860
Cash and cash equivalents at beginning of period	87,929			83,486
Cash and cash equivalents at end of period	$	120,719		$	84,346

Supplemental cash flow information:
Interest paid	$	4,097		$	2,831

See accompanying notes to unaudited interim consolidated financial statements.

Table of Contents

SI FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2019 AND 2018 AND DECEMBER 31, 2018

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 23 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. 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, 2019 and for the three months ended March 31, 2019 and 2018 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, 2018 contained in Item 8. Financial Statements and Supplementary Data in the Company’s Form 10-K.

In the opinion of management, the accompanying unaudited interim consolidated financial statements reflect all of the adjustments, consisting only of normal and recurring adjustments, necessary for a fair presentation of the financial condition, results of operations and cash flows as of and for the periods covered herein. The results of operations for the three months ended March 31, 2019 are not necessarily indicative of the operating results for the year ending December 31, 2019 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.

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SI FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2019 AND 2018 AND DECEMBER 31, 2018

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 TDR 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

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SI FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2019 AND 2018 AND DECEMBER 31, 2018

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

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SI FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2019 AND 2018 AND DECEMBER 31, 2018

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 loans, which are secured by medical equipment.

•

Consumer – Loans in this segment primarily include home equity lines of credit (representing both first and second liens) 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

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SI FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2019 AND 2018 AND DECEMBER 31, 2018

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.

Leases

The Company leases certain properties and equipment under operating leases. For leases in effect upon adoption of Accounting Standards Update 2016-02 - Leases (Topic 842) at January 1, 2019 and for any leases commencing thereafter, the Company recognized a liability to make lease payments, the "lease liability," and an asset representing the right to use the underlying asset during the lease term, the "right-of-use asset." The lease liability is measured at the present value of the remaining lease payments, discounted at the Company's incremental borrowing rate. The right-of-use asset is measured at the amount of the lease liability adjusted for the remaining balance of the lease incentives received, any cumulative prepaid or accrued rent if the lease payments are uneven throughout the term, any unamortized initial direct costs and any impairment of the right-of-use asset. Operating lease expense consists of a single lease cost calculated so that the remaining cost of the lease is allocated over the remaining lease term on a straight-line basis, variable lease payments not included in the lease liability and any impairment of the right-of-use asset.

Certain of the Company's leases contain options to renew the lease; however, these renewal options are not included in the calculation of the lease liabilities as they are not reasonably certain to be exercised. The Company's leases do not contain residual value guarantees or material variable lease payments. The Company does not have any material restrictions or covenants imposed by leases that would impact the Company's ability to pay dividends or cause the Company to incur additional financial obligations.

The Company has made an accounting policy election to not apply the recognition requirements in Topic 842 to short-term leases. The Company has also elected to use the practical expedient to make an accounting policy election for property leases to include both lease and nonlease components as a single component and account for it as a lease.

The Company's leases are not complex; therefore there were no significant assumptions or judgments made in applying the requirements of Topic 842, including the determination of whether the contracts contained a lease, the allocation of consideration in the contracts between lease and nonlease components and the determination of the discount rates for the leases.

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

Leases (Topic 842) - In February 2016, the Financial Accounting Standards Board ("FASB") issued amended guidance to increase transparency and comparability among organizations by recognizing lease assets and lease

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SI FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2019 AND 2018 AND DECEMBER 31, 2018

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 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 became effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The new standard was adopted by the Company on January 1, 2019. The Company elected to to apply the new standard as of the beginning of the period of adoption (January 1, 2019) and did restate comparative periods. The initial balance sheet gross up upon adoption was primarily related to operating leases of certain real estate properties. The Company has no finance leases or material subleases or leasing arrangements for which it is the lessor of property or equipment. The Company has elected to apply the package of practical expedients allowed by the new standard under which the Company need not reassess whether any expired or existing contracts are leases or contain certain leases, the Company need not reassess the lease classification for any expired or existing lease, and the Company need not reassess initial direct costs for any existing leases. Adoption of this standard is not expected to materially change the Company's recognition of lease expense in future periods. See Note 10 - Operating Leases - Right of Use Assets for additional disclosures related to leases.

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 adjustment 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.

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

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2019 AND 2018 AND DECEMBER 31, 2018

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 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 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. 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 adoption of this guidance on January 1, 2019 did not have a material impact on the Company's consolidated financial statements due to limited holdings with callable features.

Fair Value Measurement (Topic 820): In August 2018, the FASB issued guidance which removes, modifies and adds disclosure requirements related to fair value measurements. The amendments in this update become effective for fiscal years and interim periods within those fiscal years, beginning after December 15, 2019. Certain amendments are to be applied prospectively for only the most recent interim or annual period presented in the initial fiscal year of adoption. All other amendments should be applied retrospectively to all periods presented upon their effective date. Early adoption is permitted. The Company does not expect the adoption of this guidance to have a material impact on its 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 129,422 and 133,342 for the three months ended March 31, 2019 and 2018, respectively.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2019 AND 2018 AND DECEMBER 31, 2018

The computation of earnings per share is as follows:



	Three Months Ended March 31,
	2019		2018
	(Dollars in Thousands, Except Per Share Amounts)
Net income	$	3,134	$	2,006

Weighted average common shares outstanding:
Basic	11,769,717		11,909,028
Effect of dilutive stock options	33,352		86,270
Diluted	11,803,069		11,995,298

Earnings per share:
Basic	$	0.27	$	0.17
Diluted	$	0.27	$	0.17

NOTE 3. SECURITIES

The amortized cost, gross unrealized gains and losses and fair values of available for sale securities at March 31, 2019 and December 31, 2018 are as follows:



	March 31, 2019
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
	(In Thousands)
Debt securities:
U.S. Government and agency obligations	$	55,678	$	359	$	(1,068	)	$	54,969
Government-sponsored enterprises	9,974		43		(18		)	9,999
Mortgage-backed securities:⁽¹⁾
Agency - residential	70,985		253		(1,022		)	70,216
Non-agency - residential	48		—		(4		)	44
Collateralized debt obligation	772		40		—			812
Obligations of state and political subdivisions	500		—		—			500
Tax-exempt securities	2,509		30		—			2,539
Total available for sale securities	$	140,466	$	725	$	(2,112	)	$	139,079

⁽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.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2019 AND 2018 AND DECEMBER 31, 2018



	December 31, 2018
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
	(In Thousands)
Debt securities:
U.S. Government and agency obligations	$	58,296	$	145	$	(1,403	)	$	57,038
Government-sponsored enterprises	9,969		39		(63		)	9,945
Mortgage-backed securities:⁽¹⁾
Agency - residential	74,412		113		(1,586		)	72,939
Non-agency - residential	51		—		(4		)	47
Collateralized debt obligation	786		40		—			826
Obligations of state and political subdivisions	500		—		—			500
Tax-exempt securities	2,516		13		(2		)	2,527
Total available for sale securities	$	146,530	$	350	$	(3,058	)	$	143,822

⁽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, 2019 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	$	6,516	$	6,496
After 1 but within 5 years	21,966		21,888
After 5 but within 10 years	3,099		3,139
After 10 years	37,852		37,296
	69,433		68,819
Mortgage-backed securities	71,033		70,260
Total debt securities	$	140,466	$	139,079

There were no sales of available for sale securities for the three months ended March 31, 2019 and 2018.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2019 AND 2018 AND DECEMBER 31, 2018

The following tables present information pertaining to securities with gross unrealized losses at March 31, 2019 and December 31, 2018, 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, 2019	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
	(In Thousands)
U.S. Government and agency obligations	$	—	$	—	$	35,362	$	1,068	$	35,362	$	1,068
Government-sponsored enterprises	—		—		6,961		18		6,961		18
Mortgage-backed securities:
Agency - residential	2,272		22		46,758		1,000		49,030		1,022
Non-agency - residential	—		—		44		4		44		4
Total	$	2,272	$	22	$	89,125	$	2,090	$	91,397	$	2,112



	Less Than 12 Months				12 Months or More				Total
December 31, 2018	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
	(In Thousands)
U.S. Government and agency obligations	$	2,982	$	12	$	35,673	$	1,391	$	38,655	$	1,403
Government-sponsored enterprises	2,962		9		3,949		54		6,911		63
Mortgage-backed securities:
Agency - residential	5,310		22		51,840		1,564		57,150		1,586
Non-agency - residential	—		—		47		4		47		4
Tax-exempt securities	321		1		540		1		861		2
Total	$	11,575	$	44	$	92,049	$	3,014	$	103,624	$	3,058

At March 31, 2019, 64 debt securities with gross unrealized losses had an aggregate depreciation of 2.3% of the Company’s amortized cost basis. The unrealized losses are primarily related to the Company’s agency mortgage-backed securities and U.S. Government and agency obligations. There were no investments deemed other-than-temporarily impaired for the three months ended March 31, 2019 and 2018. 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, 2019.

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.

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SI FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2019 AND 2018 AND DECEMBER 31, 2018

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, 2019 and December 31, 2018 is as follows:



	March 31, 2019			December 31, 2018
	(In Thousands)
Real estate loans:
Residential - 1 to 4 family	$	379,203		$	384,353
Multi-family and commercial	597,033			568,889
Construction	43,467			43,320
Total real estate loans	1,019,703			996,562

Commercial business loans:
SBA and USDA guaranteed	64,389			68,481
Time share	37,759			39,391
Condominium association	33,710			35,899
Medical loans	37,244			37,454
Other	85,429			97,220
Total commercial business loans	258,531			278,445

Consumer loans:
Home equity	48,076			47,502
Other	1,742			1,569
Total consumer loans	49,818			49,071

Total loans	1,328,052			1,324,078

Deferred loan origination costs, net of fees	3,390			3,169
Allowance for loan losses	(15,213		)	(14,682		)
Loans receivable, net	$	1,316,229		$	1,312,565

The Company purchased commercial loans totaling $12.6 million during the three months ended March 31, 2019. For the twelve months ended December 31, 2018, the Company purchased commercial loans totaling $56.0 million.

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SI FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2019 AND 2018 AND DECEMBER 31, 2018

Allowance for Loan Losses

Changes in the allowance for loan losses for the three months ended March 31, 2019 and 2018 are as follows:



Three Months Ended March 31, 2019	Residential - 1 to 4 Family			Multi-family and Commercial		Construction		Commercial Business		Consumer			Total
	(In Thousands)
Balance at beginning of period	$	1,196		$	8,140	$	1,120	$	3,599	$	627		$	14,682
Provision (credit) for loan losses	(55		)	538		21		19		(5		)	518
Loans charged-off	—			—		—		—		(1		)	(1		)
Recoveries of loans previously charged-off	—			2		—		12		—			14
Balance at end of period	$	1,141		$	8,680	$	1,141	$	3,630	$	621		$	15,213



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

Further information pertaining to the allowance for loan losses at March 31, 2019 and December 31, 2018 is as follows:



March 31, 2019	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	$	324	$	1,531	$	—	$	265	$	21	$	2,141
Allowance for loans individually or collectively evaluated and not deemed to be impaired	817		7,149		1,141		3,365		600		13,072
Allowance for loans acquired with deteriorated credit quality	—		—		—		—		—		—
Total loan loss allowance	$	1,141	$	8,680	$	1,141	$	3,630	$	621	$	15,213

Loans individually evaluated and deemed to be impaired	$	6,060	$	10,048	$	—	$	490	$	405	$	17,003
Loans individually or collectively evaluated and not deemed to be impaired	373,143		586,661		43,467		258,041		49,413		1,310,725
Amount of loans acquired with deteriorated credit quality	—		324		—		—		—		324
Total loans	$	379,203	$	597,033	$	43,467	$	258,531	$	49,818	$	1,328,052

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SI FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2019 AND 2018 AND DECEMBER 31, 2018



December 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	$	283	$	1,346	$	—	$	266	$	27	$	1,922
Allowance for loans individually or collectively evaluated and not deemed to be impaired	913		6,794		1,120		3,333		600		12,760
Allowance for loans acquired with deteriorated credit quality	—		—		—		—		—		—
Total loan loss allowance	$	1,196	$	8,140	$	1,120	$	3,599	$	627	$	14,682

Loans individually evaluated and deemed to be impaired	$	5,837	$	12,056	$	—	$	495	$	307	$	18,695
Loans individually or collectively evaluated and not deemed to be impaired	378,516		556,173		43,320		277,950		48,764		1,304,723
Amount of loans acquired with deteriorated credit quality	—		660		—		—		—		660
Total loans	$	384,353	$	568,889	$	43,320	$	278,445	$	49,071	$	1,324,078

Past Due Loans

The following represents an aging of loans at March 31, 2019 and December 31, 2018:



March 31, 2019	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		Past Due 90 Days or More and Accruing
	(In Thousands)
Real Estate:
Residential - 1 to 4 family	$	6,913	$	711	$	2,128	$	9,752	$	369,451	$	379,203	$	—
Multi-family and commercial	7,337		3,211		838		11,386		585,647		597,033		335
Construction	212		—		—		212		43,255		43,467		—
Commercial Business:
SBA and USDA guaranteed	602		—		—		602		63,787		64,389		—
Time share	—		—		—		—		37,759		37,759		—
Condominium association	—		—		—		—		33,710		33,710		—
Medical loans	—		—		—		—		37,244		37,244		—
Other	3,690		—		322		4,012		81,417		85,429		—
Consumer:
Home equity	437		167		220		824		47,252		48,076		—
Other	5		1		—		6		1,736		1,742		—
Total	$	19,196	$	4,090	$	3,508	$	26,794	$	1,301,258	$	1,328,052	$	335

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SI FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2019 AND 2018 AND DECEMBER 31, 2018



December 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		Past Due 90 Days or More and Accruing
	(In Thousands)
Real Estate:
Residential - 1 to 4 family	$	5,585	$	1,233	$	2,331	$	9,149	$	375,204	$	384,353	$	—
Multi-family and commercial	1,441		295		1,513		3,249		565,640		568,889		522
Construction	—		—		—		—		43,320		43,320		—
Commercial Business:
SBA and USDA guaranteed	993		—		—		993		67,488		68,481		—
Time share	—		—		—		—		39,391		39,391		—
Condominium association	—		—		—		—		35,899		35,899		—
Medical loans	43		—		—		43		37,411		37,454		—
Other	324		—		325		649		96,571		97,220		—
Consumer:
Home equity	247		54		109		410		47,092		47,502		—
Other	2		1		1		4		1,565		1,569		—
Total	$	8,635	$	1,583	$	4,279	$	14,497	$	1,309,581	$	1,324,078	$	522

Impaired and Nonaccrual Loans

The following is a summary of impaired loans and nonaccrual loans at March 31, 2019 and December 31, 2018:



	Impaired Loans⁽¹⁾
March 31, 2019	Recorded Investment		Unpaid Principal Balance		Related Allowance		Nonaccrual Loans
	(In Thousands)
Impaired loans without valuation allowance:
Real Estate:
Residential - 1 to 4 family	$	3,860	$	3,860			$	3,153
Multi-family and commercial	4,474		4,671				1,614
Commercial business - Other	65		65				65
Consumer:
Home equity	253		253				253
Other	—		—				2
Total impaired loans without valuation allowance	8,652		8,849				5,087

Impaired loans with valuation allowance:
Real Estate:
Residential - 1 to 4 family	2,200		2,211		$	324	612
Multi-family and commercial	5,898		5,898		1,531		2,108
Commercial business - Other	425		1,053		265		257
Consumer home equity	152		152		21		53
Total impaired loans with valuation allowance	8,675		9,314		2,141		3,030
Total impaired loans	$	17,327	$	18,163	$	2,141	$	8,117

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

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MARCH 31, 2019 AND 2018 AND DECEMBER 31, 2018



	Impaired Loans⁽¹⁾
December 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	$	3,863	$	3,863			$	3,153
Multi-family and commercial	7,854		7,854				2,996
Commercial business - Other	68		68				68
Consumer:
Consumer - Home equity	172		172				172
Consumer - Indirect automobile	—		—				2
Total impaired loans without valuation allowance	11,957		11,957				6,391

Impaired loans with valuation allowance:
Real Estate:
Residential - 1 to 4 family	1,974		1,985		$	283	504
Multi-family and commercial	4,862		4,862		1,346		2,108
Commercial business - Other	427		1,055		266		257
Consumer - Home equity	135		135		27		36
Total impaired loans with valuation allowance	7,398		8,037		1,922		2,905
Total impaired loans	$	19,355	$	19,994	$	1,922	$	9,296

⁽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. For the periods presented, the Company concluded that certain impaired loans required no valuation allowance as a result of management’s measurement of impairment. No additional funds are committed to be 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, 2019
	Average Recorded Investment		Interest Income Recognized		Interest Income Recognized on Cash Basis
	(In Thousands)
Real Estate:
Residential - 1 to 4 family	$	6,115	$	42	$	19
Multi-family and commercial	10,736		213		106
Commercial business other	1,134		10		—
Consumer:
Consumer home equity	356		4		3
Other	2		—		—
Total	$	18,343	$	269	$	128

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SI FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2019 AND 2018 AND DECEMBER 31, 2018



	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

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.

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SI FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2019 AND 2018 AND DECEMBER 31, 2018

The following tables present the Company’s loans by risk rating at March 31, 2019 and December 31, 2018:



March 31, 2019	Not Rated		Pass		Special Mention		Substandard		Doubtful		Loss		Total
	(In Thousands)
Real Estate:
Residential - 1 to 4 family	$	—	$	370,722	$	1,439	$	7,042	$	—	$	—	$	379,203
Multi-family and commercial	—		562,416		11,006		23,611		—		—		597,033
Construction	—		33,763		9,704		—		—		—		43,467
Total real estate loans	—		966,901		22,149		30,653		—		—		1,019,703

Commercial Business:
SBA and USDA guaranteed	64,389		—		—		—		—		—		64,389
Time share	—		37,759		—		—		—		—		37,759
Condominium association	—		33,710		—		—		—		—		33,710
Medical loans	—		37,237		7		—		—		—		37,244
Other	—		80,982		3,969		221		257		—		85,429
Total commercial business loans	64,389		189,688		3,976		221		257		—		258,531

Consumer:
Home equity	—		47,515		156		405		—		—		48,076
Other	—		1,741		—		1		—		—		1,742
Total consumer loans	—		49,256		156		406		—		—		49,818
Total loans	$	64,389	$	1,205,845	$	26,281	$	31,280	$	257	$	—	$	1,328,052



December 31, 2018	Not Rated		Pass		Special Mention		Substandard		Doubtful		Loss		Total
	(In Thousands)
Real Estate:
Residential - 1 to 4 family	$	—	$	375,896	$	1,323	$	7,134	$	—	$	—	$	384,353
Multi-family and commercial	—		531,630		12,636		24,623		—		—		568,889
Construction	—		33,670		9,650		—		—		—		43,320
Total real estate loans	—		941,196		23,609		31,757		—		—		996,562

Commercial Business:
SBA and USDA guaranteed	68,481		—		—		—		—		—		68,481
Time share	—		39,391		—		—		—		—		39,391
Condominium association	—		35,899		—		—		—		—		35,899
Medical loans	—		37,439		—		15		—		—		37,454
Other	—		92,995		3,750		218		257		—		97,220
Total commercial business loans	68,481		205,724		3,750		233		257		—		278,445

Consumer:
Home equity	—		47,044		121		337		—		—		47,502
Other	—		1,567		—		2		—		—		1,569
Total consumer loans	—		48,611		121		339		—		—		49,071
Total loans	$	68,481	$	1,195,531	$	27,480	$	32,329	$	257	$	—	$	1,324,078

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SI FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2019 AND 2018 AND DECEMBER 31, 2018

The following tables provide information on loans modified as TDRs during the three months ended March 31, 2019 and 2018. 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,
	2019					2018
				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
Consumer - Home equity	—	—		—		1	100		10
Total	—	$	—	$	—	3	$	462	$	71

The following table provides the recorded investment, by type of modification, during the three months ended March 31, 2019 and 2018 for modified loans identified as TDRs.



	Three Months Ended March 31,
	2019		2018
	(In Thousands)
Interest rate adjustments	$	—	$	77
Combination of rate and payment ⁽¹⁾	—		385
Total	$	—	$	462

⁽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, 2019 and March 31, 2018.

As of March 31, 2019, the Company held $1.8 million 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, 2019 and December 31, 2018.



	Contractual Required Payments Receivable			Cash Expected To Be Collected			Non-Accretable Discount		Accretable Yield			Loans Receivable
	(In Thousands)
Balance at December 31, 2018	$	798		$	660		$	138	$	20		$	640
Collections	(7		)	(7		)	—		(1		)	(6		)
Dispositions	(310		)	(310		)	—		—			(310		)
Balance at March 31, 2019	$	481		$	343		$	138	$	19		$	324

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SI FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2019 AND 2018 AND DECEMBER 31, 2018

NOTE 5. PREMISES AND EQUIPMENT

Premises and equipment at March 31, 2019 and December 31, 2018 are summarized as follows:



	March 31, 2019			December 31, 2018
	(In Thousands)
Land	$	4,746		$	4,746
Buildings	13,911			13,829
Leasehold improvements	12,703			12,635
Furniture and equipment	13,371			13,525
	44,731			44,735
Accumulated depreciation and amortization	(25,499		)	(25,183		)
Premises and equipment, net	$	19,232		$	19,552

NOTE 6. OTHER COMPREHENSIVE LOSS

Accounting principles generally require that 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, 2019
	Before Tax Amount		Tax Effects			Net of Tax Amount
Securities:	(In Thousands)
Unrealized holding gains on available for sale securities	$	1,321	$	(278	)	$	1,043
Other comprehensive income	$	1,321	$	(278	)	$	1,043

The components of accumulated other comprehensive loss included in shareholders’ equity are as follows:



	March 31, 2019
	Before Tax Amount			Tax Effects		Net of Tax Amount
	(In Thousands)
Net unrealized losses on available for sale securities	$	(1,387	)	$	292	$	(1,095	)
Accumulated other comprehensive loss	$	(1,387	)	$	292	$	(1,095	)



	December 31, 2018
	Before Tax Amount			Tax Effects		Net of Tax Amount
	(In Thousands)
Net unrealized losses on available for sale securities	$	(2,708	)	$	570	$	(2,138	)
Accumulated other comprehensive loss	$	(2,708	)	$	570	$	(2,138	)

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SI FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2019 AND 2018 AND DECEMBER 31, 2018

NOTE 7. REGULATORY CAPITAL

The Bank is subject to regulatory capital requirements promulgated by federal bank regulatory agencies. Failure by 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 Bank must meet specific capital guidelines that involve quantitative measures of the Bank’s assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. 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 Bank to maintain certain minimum capital amounts and ratios. Federal bank regulators require 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, 2019, 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, 2019 that would materially adversely change 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 has been phased in over a multi-year schedule with full compliance required by January 1, 2019. Management believes the Bank's capital level will remain characterized as "well-capitalized" under the new rules.

As a result of the recently enacted Economic Growth, Regulatory Relief, and Consumer Protection Act, the Federal Reserve Board amended its Small Bank Holding Company Policy Statement to provide that bank holding companies and savings and loan companies with consolidated assets of less than $3 billion that (i) are not engaged in significant nonbanking activities, (ii) do not conduct significant off-balance sheet activities, and (iii) do not have a material amount of SEC-registered debt or equity securities, other than trust preferred securities, that contribute to an organization’s complexity, will no longer be subject to regulatory capital requirements, effective no later than November 2018.

In addition, as a result of the legislation, the federal banking agencies are required to develop a “Community Bank Leverage Ratio” (the ratio of a bank’s tangible equity capital to average total consolidated assets) for financial institutions with assets of less than $10 billion. A “qualifying community bank” that exceeds this ratio will be deemed to be in compliance with all other capital and leverage requirements, including the capital requirements to be considered “well capitalized” under Prompt Corrective Action statutes. The federal banking agencies may consider a financial institution’s risk profile when evaluating whether it qualifies as a community bank for purposes of the capital ratio requirement. The federal banking agencies must set the minimum capital for the new Community Bank Leverage Ratio at not less than 8% and not more than 10%. A financial institution can elect to be subject to this new definition.

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SI FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2019 AND 2018 AND DECEMBER 31, 2018

The Bank's regulatory capital amounts and ratios at March 31, 2019 and December 31, 2018, compared to the FDIC's requirements for classification as a well capitalized institution and for minimum capital adequacy, were as follows:



	Actual				Minimum Capital Requirement				Minimum To Be Well Capitalized
March 31, 2019	Amount		Ratio		Amount		Ratio		Amount		Ratio
	(Dollars in Thousands)
Common Equity Tier 1 Capital	$	157,809	12.89	%	$	55,105	4.50	%	$	79,596	6.50	%
Tier 1 Capital to Risk Weighted Assets	157,809		12.89		73,473		6.00		97,964		8.00
Total Capital to Risk Weighted Assets	173,121		14.14		97,964		8.00		122,455		10.00
Tier 1 Capital to Average Assets	157,809		9.68		65,194		4.00		81,493		5.00



	Actual				Minimum Capital Requirement				Minimum To Be Well Capitalized
December 31, 2018	Amount		Ratio		Amount		Ratio		Amount		Ratio
	(Dollars in Thousands)
Common Equity Tier 1 Capital	$	154,215	12.88	%	$	53,865	4.50	%	$	77,805	6.50	%
Tier 1 Capital to Risk Weighted Assets	154,215		12.88		71,820		6.00		95,760		8.00
Total Capital to Risk Weighted Assets	169,182		14.13		95,760		8.00		119,700		10.00
Tier 1 Capital to Average Assets	154,215		9.58		64,374		4.00		80,468		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.


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

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SI FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2019 AND 2018 AND DECEMBER 31, 2018

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.


•	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

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SI FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2019 AND 2018 AND DECEMBER 31, 2018

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.


•	Interest rate swap agreements. The fair value of interest rate swap agreements are obtained from a third-party pricing service and are determined using a discounted cash flow approach and utilize observable inputs such as the LIBOR swap curve, effective date, maturity date, notional amount and stated interest rate. Such derivatives do not have embedded interest rate caps or floors.


•	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.

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, 2019 and December 31, 2018. The Company had no significant transfers into or out of Levels 1, 2 or 3 during the three months ended March 31, 2019.



	March 31, 2019
	Level 1		Level 2		Level 3		Total
	(In Thousands)
Assets:
U.S. Government and agency obligations	$	16,954	$	38,015	$	—	$	54,969
Government-sponsored enterprises	—		9,999		—		9,999
Mortgage-backed securities	—		70,260		—		70,260
Collateralized debt obligation	—		—		812		812
Obligations of state and political subdivisions	—		500		—		500
Tax-exempt securities	—		2,539		—		2,539
Forward loan sale commitments and derivative loan commitments	—		—		71		71
Interest rate swap agreements	—		3,163		—		3,163
Total assets	$	16,954	$	124,476	$	883	$	142,313

Liabilities:
Forward loan sale commitments	$	—	$	—	$	4	$	4
Interest rate swap agreements	—		3,163		—		3,163
Total liabilities	$	—	$	3,163	$	4	$	3,167

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SI FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2019 AND 2018 AND DECEMBER 31, 2018



	December 31, 2018
	Level 1		Level 2		Level 3		Total
	(In Thousands)
Assets:
U.S. Government and agency obligations	$	18,391	$	38,647	$	—	$	57,038
Government-sponsored enterprises	—		9,945		—		9,945
Mortgage-backed securities	—		72,986		—		72,986
Collateralized debt obligation	—		—		826		826
Obligations of state and political subdivisions	—		500		—		500
Tax-exempt securities	—		2,527		—		2,527
Forward loan sale commitments and derivative loan commitments	—		—		89		89
Interest rate swap agreements	—		1,533		—		1,533
Total assets	$	18,391	$	126,138	$	915	$	145,444

Liabilities:
Forward loan sale commitments	$	—	$	—	$	1	$	1
Interest rate swap agreements	—		1,533		—		1,533
Total liabilities	$	—	$	1,533	$	1	$	1,534

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, 2018	$	826		$	88
Total realized losses included in net income	—			(21		)
Principal payments and net accretion	(14		)	—
Balance at March 31, 2019	$	812		$	67

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, 2019 and December 31, 2018. There were no liabilities measured at fair value on a nonrecurring basis at March 31, 2019 and December 31, 2018.



	At March 31, 2019						At December 31, 2018
	Level 1		Level 2		Level 3		Level 1		Level 2		Level 3
	(In Thousands)
Impaired loans	$	—	$	—	$	993	$	—	$	—	$	1,016
Other real estate owned	—		—		222		—		—		720
Total assets	$	—	$	—	$	1,215	$	—	$	—	$	1,736

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SI FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2019 AND 2018 AND DECEMBER 31, 2018

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,
	2019		2018
	(In Thousands)
Impaired loans	$	241	$	266
Other real estate owned	—		26
Total losses	$	241	$	292

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 realized in a sales transaction at March 31, 2019 and December 31, 2018. The estimated fair value amounts at March 31, 2019 and December 31, 2018 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.

Table of Contents

SI FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2019 AND 2018 AND DECEMBER 31, 2018

As of March 31, 2019 and December 31, 2018, the recorded carrying amounts and estimated fair values of the Company's financial instruments are as follows:



	March 31, 2019
	Carrying Amount		Fair Value
			Level 1		Level 2		Level 3		Total
	(In Thousands)
Financial Assets:
Cash and cash equivalents	$	120,719	$	120,719	$	—	$	—	$	120,719
Available for sale securities	139,079		16,954		121,313		812		139,079
Loans held for sale	1,324		—		—		1,379		1,379
Loans receivable, net	1,316,229		—		—		1,306,251		1,306,251
Federal Home Loan Bank stock	8,168		—		—		8,168		8,168
Federal Reserve Bank stock	3,638		—		—		3,638		3,638
Accrued interest receivable	5,099		—		—		5,099		5,099
Financial Liabilities:
Deposits	1,317,009		—		—		1,317,732		1,317,732
Mortgagors' and investors' escrow accounts	3,138		—		—		3,138		3,138
Federal Home Loan Bank advances	151,621		—		150,413		—		150,413
Junior subordinated debt owed to unconsolidated trust	8,248		—		—		6,439		6,439
On-balance Sheet Derivative Financial Instruments:
Assets:
Derivative loan commitments	25		—		—		25		25
Forward loan sale commitments	46		—		—		46		46
Interest rate swap agreements	3,163		—		3,163		—		3,163
Liabilities:
Forward loan sale commitments	4		—		—		4		4
Interest rate swap agreements	3,163		—		3,163		—		3,163

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SI FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2019 AND 2018 AND DECEMBER 31, 2018



	December 31, 2018
	Carrying Amount		Fair Value
			Level 1		Level 2		Level 3		Total
	(In Thousands)
Financial Assets:
Cash and cash equivalents	$	87,929	$	87,929	$	—	$	—	$	87,929
Available for sale securities	143,822		18,391		124,605		826		143,822
Loans held for sale	1,915		—		—		1,950		1,950
Loans receivable, net	1,312,565		—		—		1,285,733		1,285,733
Federal Home Loan Bank stock	9,035		—		—		9,035		9,035
Federal Reserve Bank stock	3,638		—		—		3,638		3,638
Accrued interest receivable	4,921		—		—		4,921		4,921
Financial Liabilities:
Deposits	1,288,031		—		—		1,288,238		1,288,238
Mortgagors' and investors' escrow accounts	4,701		—		—		4,701		4,701
Federal Home Loan Bank advances	151,836		—		149,838		—		149,838
Junior subordinated debt owed to unconsolidated trust	8,248		—		6,613		—		6,613
On-balance Sheet Derivative Financial Instruments:
Assets:
Derivative loan commitments	23		—		—		23		23
Forward loan sale commitments	66		—		—		66		66
Interest rate swap agreement	1,533		—		1,533		—		1,533
Liabilities:
Forward loan sale commitments	1		—		—		1		1
Interest rate swap agreement	1,533		—		1,533		—		1,533

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

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SI FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2019 AND 2018 AND DECEMBER 31, 2018

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.

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 Swap Agreements - The Company does not use derivatives for trading or speculative purposes. Interest rate swap derivatives not designated as hedges are offered to certain qualifying commercial customers and to manage the Company's exposure to interest rate movements but do not meet the strict hedge accounting definition under FASB Topic 815, "Derivatives and Hedging." As of March 31, 2019, based on the current position of the Company's interest rate swap agreements, the Company paid $3.5 million into a collateral account with the correspondent bank to collateralize its net liability position. The Company and correspondent bank have an agreement to secure any outstanding payable in excess of $100,000.

The Company's agreements with its derivative counterparties contain the following provisions related to contingent credit risk:


•	if the Company defaults on any of its indebtedness, including a default where repayment of the indebtedness has not been accelerated by the lender, then the Company could also be declared in default on its derivative obligations;


•	if the Company fails to maintain its status as a well/adequately capitalized institution, then the counterparty could terminate the derivative position, and the Company would be required to settle its obligations under the agreements;


•	if the Company fails to maintain a specified minimum leverage ratio, then the Company could be declared in default on its derivative obligations; and


•	if a specified event or condition occurs that materially changes the Company's creditworthiness in an adverse manner, it may be required to fully collateralize its obligations under the derivative instrument.

The Company is in compliance with the above provisions as of March 31, 2019.

The Company has established a derivative policy which sets forth the parameters for such transactions (including underwriting guidelines, rate setting process, maximum maturity, approval and documentation requirements), as well as identifies internal controls for the management of risks related to these hedging activities (such as approval of counterparties, limits on counterparty credit risk, maximum loan amounts and limits to single dealer counterparties).

The interest rate swap derivatives executed with our customers and our counterparties are marked to market and are included in other assets and other liabilities on the consolidated balance sheets at fair value.

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SI FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2019 AND 2018 AND DECEMBER 31, 2018

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, 2019 and December 31, 2018.



		March 31, 2019
	Balance Sheet Location	Notional Amount		Weighted-Average Remaining Maturity (In years)	Weighted-Average Rate Received		Weighted-Average Rate Paid		Estimated Fair Value
		(In Thousands)
Derivatives not designated as hedging instruments:
Derivative loan commitments	Other Assets	$	2,164	—	—	%	—	%	$	25
Forward loan sale commitments	Other Assets	3,488		—	—		—		42
Commercial loan customer interest rate swap position	Other Assets	67,712		8.90	4.45		4.45		3,163
Counterparty interest rate swap position	Other Liabilities	67,712		8.90	4.45		4.45		3,163



		December 31, 2018
	Balance Sheet Location	Notional Amount		Weighted-Average Remaining Maturity (In years)	Weighted-Average Rate Received		Weighted-Average Rate Paid		Estimated Fair Value
		(In Thousands)
Derivatives not designated as hedging instruments:
Derivative loan commitments	Other Assets	$	2,541	—	—	%	—	%	$	23
Forward loan sale commitments	Other Assets	4,009		—	—		—		65
Commercial loan customer interest rate swap position	Other Assets	40,988		10.23	4.64		4.64		1,533
Counterparty interest rate swap position	Other Liabilities	40,988		10.23	4.64		4.64		1,533

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SI FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2019 AND 2018 AND DECEMBER 31, 2018

NOTE 10. OPERATING LEASES - RIGHT-OF-USE ASSETS

The Company has various operating leases for office space that expire through 2039. At March 31, 2019, the Company had lease liabilities totaling $9.8 million and right-of-use assets totaling $9.7 million related to these leases. For the three months ended March 31, 2019, the weighted-average remaining lease term for operating leases was 6.6 years and the weighted-average discount rate used in the measurement of operating lease liabilities was 3.51%.

During the three months ended March 31, 2019, the Company recognized $237,000 in operating lease costs, which are included in noninterest expenses in the Company's consolidated statement of income. During the three months ended March 31, 2019, operating cash flows from operating leases was $223,000.

There were no sale and leaseback transactions or leveraged leases during the three months ended March 31, 2019. At March 31, 2019, the Company had no leases that had not yet commenced.

At March 31, 2019, a maturity analysis of operating lease liabilities and reconciliation of the undiscounted cash flows to total operating lease liability are as follows:



	March 31, 2019
	(Dollars in thousands)
Lease payments due:
Within one year	$	1,314
After one but within two years	1,296
After two but within three years	1,154
After three but within four years	1,053
After four but within five years	1,049
After five years	6,176
Total undiscounted cash flows	12,042
Discount on cash flows	(2,289		)
Total lease liability	$	9,753

NOTE 11. MERGER AGREEMENT WITH BERKSHIRE HILLS BANCORP, INC.

On December 11, 2018, the Company entered into a Merger Agreement with Berkshire Hills Bancorp, Inc. ("Berkshire"). Under the Merger Agreement, the Company will merge with and into Berkshire, with Berkshire as the surviving corporation, in an all-stock transaction. The stockholders of the Company approved the Merger Agreement at a meeting of the Company's stockholders held on April 2, 2019. The Company anticipates the merger with Berkshire to be completed in the second quarter of 2019, subject to regulatory approvals and other customary closing conditions.

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SI FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2019 AND 2018 AND DECEMBER 31, 2018

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, 2019 and December 31, 2018 and the results of operations for the three months ended March 31, 2019 and 2018. 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 Item 8. Financial Statements and Supplementary Data in the Company’s 2018 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 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.

On December 11, 2018, the Company entered into an Agreement and Plan of Merger ("Merger Agreement") with Berkshire Hills Bancorp, Inc. ("Berkshire"). Under the Merger Agreement, the Company will merge with and into Berkshire, with Berkshire as the surviving corporation, in an all-stock transaction that we refer to as the "merger". Additional factors relating to our proposed merger with Berkshire include the occurrence of any event, change or other circumstances that could give rise to the termination of the Merger Agreement; the risk that the necessary regulatory approvals may not be obtained, may be delayed, or may be obtained subject to conditions that are not anticipated; delays in closing the Merger Agreement or other risks that any of the closing conditions to the Merger Agreement may not be satisfied in a timely manner or at all; the diversion of management’s time from existing business operations due to time spent related to the merger or integration efforts; the risk that our business and the business of Berkshire will not be integrated successfully or such integration may be more difficult, time consuming or costly than expected; expected revenue and other synergies and cost savings from the merger may not be fully realized or realized within the expected time frame; revenues following the merger may be lower than expected; and expenses related to the merger and costs following the merger that are higher than expected.

In connection with the merger, Berkshire has filed with the SEC a Registration Statement on Form S-4 that includes proxy statement/prospectus business and financial information about Berkshire and the Company from documents that Berkshire and the Company have previously filed with the SEC. The Registration Statement was declared effective on February 25, 2019. Shareholders of the Company are urged to read the registration statement and the proxy statement/prospectus regarding the merger and other relevant documents filed with the SEC, as well as any amendments or supplements to those documents.

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 Item 8. Financial Statements and Supplementary Data in the Company’s 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, 2019 and December 31, 2018

Assets:

Summary. Assets increased $41.3 million, or 2.5%, to $1.69 billion at March 31, 2019, compared to $1.65 billion at December 31, 2018, principally due to increases of $32.8 million in cash and cash equivalents, $9.7 million in operating leases right-of-use assets and $3.7 million in net loans receivable, offset by decreases of $4.7 million in available for sale securities, $867,000 in Federal Home Loan Bank stock, $591,000 in loans held for sale and $498,000 in other real estate owned. The increase in cash and cash equivalents reflects the maturation of securities and deposit growth that together exceeded loan growth. The increase of $9.7 million in operating leases right-of-use assets was a result of the adoption of new lease accounting guidance requiring the recognition of lease assets and liabilities on the balance sheet.

Loans Receivable, Net. Net loans increased $3.7 million primarily due to increases of $28.1 million in multi-family and commercial real estate loans, offset by decreases of $19.9 million in commercial business loans and $5.2 million in residential mortgage loans. Changes in the loan portfolio consisted of the following:

•

Residential Real Estate. Residential mortgage loans comprised 28.6% of the total loan portfolio at March 31, 2019 and decreased $5.2 million to $379.2 million as compared to $384.4 million at December 31, 2018. The reduction in residential mortgage loans reflects the sale of $8.1 million of long-term fixed-rate loans in the secondary market during 2019. The Company sold $5.8 million of such loans in the three months ended March 31, 2018. Residential mortgage loan originations decreased $4.9 million during the three months ended March 31, 2019 over the comparable period in 2018 as a result of decreased activity in the housing market due in part to the higher interest rate environment. Proceeds from loans sold for the three months ended March 31, 2019 were $8.7 million compared to $5.8 million for the three months ended March 31, 2018.

•

Multi-family and Commercial Real Estate. Multi-family and commercial real estate loans represented 45.0% of total loans at March 31, 2019 and increased $28.1 million, or 4.9%, during the three months ended March 31, 2019 to $597.0 million. Originations for multi-family and commercial real estate loans were $36.9 million during the three months ended March 31, 2019, representing a decrease of $21.3 million compared to the same period in 2018.


•	Construction. Construction loans, which include both residential and commercial construction loans, increased $147,000 to $43.5 million for the three months ended March 31, 2019, primarily due to increased commercial real estate activity.

•

Commercial Business. Commercial business loans represented 19.5% of total loans at March 31, 2019. Commercial business loans decreased $19.9 million, or 7.2%, for the three months ended March 31, 2019, primarily due to decreases of $11.8 million in other commercial business loans, $4.1 million in SBA and USDA guaranteed loans, $2.2 million in condominium association loans and $1.6 million in time share loans. Commercial business loan originations increased $1.3 million during the three months ended March 31, 2019 as compared to the same period in 2018. At March 31, 2019, unfunded lines of credit related to time share lending totaled $9.4 million.

•

Consumer. Consumer loans represented 3.8% of the Company’s total loan portfolio at March 31, 2019. Consumer loans increased $747,000 during the three months ended March 31, 2019, due to increases of $574,000 in home equity loans and $173,000 in other consumer loans. Loan originations for consumer loans totaled $2.4 million, representing a decrease of $3.0 million for the three months ended March 31, 2019 over the comparable period in 2018.

The allowance for loan losses totaled $15.2 million at March 31, 2019 compared to $14.7 million at December 31, 2018. The ratio of the allowance for loan losses to total loans increased to 1.15% at March 31, 2019 from 1.11% at

December 31, 2018, primarily due to increases in reserves for impaired loans and a higher provision related to the increase in the commercial real estate loan portfolio, which carries a higher degree of risk (excluding guaranteed SBA and USDA loans) than other loans held in the portfolio and 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.

The following table provides information with respect to nonperforming assets and TDRs as of the dates indicated.



	March 31, 2019			December 31, 2018
Nonaccrual loans:	(Dollars in Thousands)
Real estate loans:
Residential - 1 to 4 family	$	3,765		$	3,657
Multi-family and commercial	3,722			5,104
Total real estate loans	7,487			8,761
Commercial business loans:
Other	322			325
Total commercial business loans	322			325
Consumer loans:
Home equity	306			208
Other	2			2
Total consumer loans	308			210
Total nonaccrual loans	8,117			9,296
Accruing loans past due 90 days or more	335			522
Total nonperforming loans ⁽¹⁾	8,452			9,818
Other real estate owned, net ⁽²⁾	222			720
Total nonperforming assets	8,674			10,538
Accruing troubled debt restructurings	9,212			9,731
Total nonperforming assets and troubled debt restructurings	$	17,886		$	20,269

Allowance for loan losses as a percent of nonperforming loans	180.00		%	149.54		%
Total nonperforming loans to total loans	0.64		%	0.74		%
Total nonperforming loans to total assets	0.50		%	0.60		%
Total nonperforming assets and troubled debt restructurings to total assets	1.06		%	1.23		%

⁽¹⁾ Includes nonperforming TDRs totaling $666,000 million and $2.9 million at March 31, 2019 and December 31, 2018, respectively.

⁽²⁾ Other real estate owned balances are shown net of related write-downs.

The decrease in nonperforming loans was primarily due to decreases in nonperforming multi-family and commercial real estate loans of $1.4 million.

Other real estate owned decreased $498,000 to $222,000 at March 31, 2019, primarily due to the sale of one commercial property totaling $492,000. At March 31, 2019, other real estate owned consisted of two residential 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 decreased $2.8 million to $9.9 million at March 31, 2019, compared to $12.6 million at December 31, 2018. Of the TDRs, $9.2 million and $9.7 million were performing in accordance with their restructured terms at March 31, 2019 and December 31, 2018, respectively. The Company anticipates these borrowers will repay all contractual principal and interest in accordance with the terms of their restructured loan agreements.

Liabilities:

Summary. Liabilities increased $37.6 million, or 2.5%, to $1.52 billion at March 31, 2019 compared to $1.48 billion at December 31, 2018. Deposits increased $29.0 million, or 2.2%, which included an increase in certificates of deposit of $38.1 million, partially offset by decreases of $8.2 million in NOW and money market accounts and savings accounts of $686,000. Although market competition continues to be intense, deposit growth remained strong because of competitively-priced deposit products and marketing initiatives. Borrowings decreased $215,000 from $160.1 million at December 31, 2018 to $159.9 million at March 31, 2019, resulting from repayments of FHLB advances with funds from excess deposits. The increase in total liabilities includes operating lease liabilities of $9.8 million related to the adoption of the new lease accounting standard.

Equity:

Summary. Shareholders’ equity increased $3.7 million from $172.1 million at December 31, 2018 to $175.8 million at March 31, 2019. The increase in shareholders' equity was attributable to net income of $3.1 million and a decrease in unrealized losses on securities included in other comprehensive income of $1.0 million, partially offset by dividends paid of $708,000.

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 $1.1 million at March 31, 2019 and $2.1 million at December 31, 2018.

Results of Operations for the Three Months Ended March 31, 2019 and 2018

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 $3.1 million for the three months ended March 31, 2019 compared to $2.0 million for the three months ended March 31, 2018.

Interest and Dividend Income. Total interest and dividend income increased $2.0 million, or 14.2%, to $15.7 million for the quarter ended March 31, 2019, compared to $13.8 million for the same period in 2018. The increase in interest and dividend income was primarily a result of increases in the average rates and balances of loans and other interest-earning assets and average rate on investment securities, partially offset by a decrease in the average balance on investment securities. Interest income on loans and securities reflects net accretion of $46,000 and net accretion of $2,000 for the quarters ended March 31, 2019 and 2018, 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, 2019 increased 33 basis points to 4.10% compared to 3.77% for the quarter ended March 31, 2018, due to increases of 83 basis points in the average yield earned on other interest-earning assets, 82 basis points in the average yield earned on securities and 26 basis points in the average yield earned on loans. The increase in yields reflects the rising interest rate environment. The average balance of interest-earning assets increased $73.2 million to $1.56 billion for the three months ended March 31, 2019 due to increases of $53.2 million in the average balance of loans and $31.7 million in the average balance of other interest-earning assets, partially offset by a decrease of $11.7 million in the average balance of securities compared to the same period in 2018.

Interest Expense. For the quarter ended March 31, 2019, interest expense increased $1.4 million, or 48.6%, primarily resulting from higher average rates paid on deposits and borrowings and an increase in the average balance of deposits, partially offset by a reduction in the average balance of FHLB advances compared to the same quarter in 2018. The average balance of interest-bearing deposits increased $49.7 million to $1.05 billion for the quarter ended March 31, 2019 compared to the same period in 2018, primarily due to increases of $83.1 million in the average balance of certificates of deposit, offset by decreases of $24.6 million in the average balance of NOW and money market accounts and $8.5 million in the average balance of savings deposits. The average rate paid on interest-bearing deposits increased 50 basis points to 1.29%. The average balance of FHLB advances decreased $20.8 million for the quarter ended March 31, 2019, and the average rate paid increased 17 basis points to 2.07%. The average rate paid on subordinated debt increased 104 basis points to 4.38%, compared to the same period in 2018, due to increases in the three-month LIBOR rate.

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,
	2019							2018
	Average Balance		Interest & Dividends			Average Yield/ Rate		Average Balance		Interest & Dividends			Average Yield/ Rate
	(Dollars in Thousands)
Interest-earning assets:
Loans ^{(1) (2) (3)}	$	1,314,466	$	14,097		4.35	%	$	1,261,265	$	12,730		4.09	%
Securities ⁽³⁾	156,030		1,130			2.94		167,728		876			2.12
Other interest-earning assets	88,751		524			2.39		57,023		220			1.56
Total interest-earning assets	1,559,247		15,751			4.10		1,486,016		13,826			3.77

Noninterest-earning assets	93,366							92,581
Total assets	$	1,652,613						$	1,578,597

Interest-bearing liabilities:
Deposits:
Business checking	$	536	—			—		$	671	—			—
NOW and money market	488,949		363			0.30		513,598		276			0.22
Savings ⁽⁴⁾	25,677		29			0.46		34,224		25			0.30
Certificates of deposit ⁽⁵⁾	534,038		2,947			2.24		450,977		1,654			1.49
Total interest-bearing deposits	1,049,200		3,339			1.29		999,470		1,955			0.79

Federal Home Loan Bank advances	151,694		775			2.07		172,487		806			1.90
Subordinated debt	8,248		89			4.38		8,248		68			3.34
Total interest-bearing liabilities	1,209,142		4,203			1.41		1,180,205		2,829			0.97

Noninterest-bearing liabilities	268,786							228,646
Total liabilities	1,477,928							1,408,851

Total shareholders' equity	174,685							169,746

Total liabilities and shareholders' equity	$	1,652,613						$	1,578,597

Net interest-earning assets	$	350,105						$	305,811

Tax equivalent net interest income ⁽³⁾			11,548							10,997

Tax equivalent interest rate spread ⁽⁶⁾						2.69	%						2.80	%

Tax equivalent net interest margin as a percentage of interest-earning assets ⁽⁷⁾						3.00	%						3.00	%

Average of interest-earning assets to average interest-bearing liabilities						128.95	%						125.91	%

Less tax equivalent adjustment ⁽³⁾			(44		)					(72		)

Net interest income			$	11,504						$	10,925




⁽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%. 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, 2019 and 2018
	Increase (Decrease) Due To
	Rate		Volume			Net
	(In Thousands)
Interest-earning assets:
Interest and dividend income:
Loans ^(1)(2)(3)	$	844	$	523		$	1,367
Securities ⁽³⁾	311		(57		)	254
Other interest-earning assets	215		89			304
Total interest-earning assets	1,370		555			1,925
Interest-bearing liabilities:
Interest expense:
Deposits ⁽⁴⁾	1,137		247			1,384
Federal Home Loan Bank advances	61		(92		)	(31		)
Subordinated debt	21		—			21
Total interest-bearing liabilities	1,219		155			1,374
Change in net interest income	$	151	$	400		$	551




⁽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%. 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 decreased $207,000 for the quarter ended March 31, 2019 compared to the same period in 2018, primarily due to decreases in general reserve risk factors as well as reductions in net loan charge-offs. At March 31, 2019, nonperforming loans increased to $8.5 million compared to $7.9 million at March 31, 2018, primarily resulting from increases in nonperforming residential real estate loans

and multi-family and commercial real estate loans of $691,000 and $402,000, respectively. Net loan recoveries were $13,000 for the quarter ended March 31, 2019 compared to net loan charge-offs of $55,000 for the quarter ended March 31, 2018.

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
	2019		2018		Dollars			Percent
	(Dollars in Thousands)
Service fees	$	1,833	$	1,712	$	121		7.1	%
Wealth management fees	2		9		(7		)	(77.8	)
Increase in cash surrender value of bank-owned life insurance	214		215		(1		)	(0.5	)
Mortgage banking	197		214		(17		)	(7.9	)
Net gain on disposal of equipment	13		—		13			N/A
Other	504		244		260			106.6
Total noninterest income	$	2,763	$	2,394	$	369		15.4	%

Noninterest income increased $369,000 to $2.8 million for the quarter ended March 31, 2019 compared to $2.4 million for the same period in the prior year, primarily due to fee income of $255,000 from interest rate swap agreements entered into during the first quarter of 2019. Service fees increased $121,000 for the quarter ended March 31, 2019 compared to the first quarter of 2018 due to a higher volume of electronic banking transactions and an increase in service and overdraft fees. Despite higher volume during the first quarter of 2019, income from mortgage banking activities decreased $17,000 compared to the same period in 2018 due to lower average gains on residential fixed-rate loan sales.

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
	2019		2018		Dollars			Percent
	(Dollars in Thousands)
Salaries and employee benefits	$	5,377	$	5,210	$	167		3.2	%
Occupancy and equipment	1,730		1,851		(121		)	(6.5	)
Computer and electronic banking services	1,281		1,288		(7		)	(0.5	)
Outside professional services	229		356		(127		)	(35.7	)
Marketing and advertising	173		234		(61		)	(26.1	)
Supplies	126		147		(21		)	(14.3	)
FDIC deposit insurance and regulatory assessments	191		173		18			10.4
Merger expenses	66		—		66			N/A
Core deposit intangible amortization	150		151		(1		)	(0.7	)
Other real estate operations	45		135		(90		)	(66.7	)
Other	317		506		(189		)	(37.4	)
Total noninterest expenses	$	9,685	$	10,051	$	(366	)	(3.6	)%

Noninterest expenses decreased $366,000 for the first quarter of 2019 compared to the same period in 2018, primarily due to a decrease of $189,000 in other noninterest expense, which was in large part due to a reduction in the provision for credit losses and losses on electronic banking. Outside professional services decreased

$127,000 for the quarter ended March 31, 2019 versus the same period in 2018 due to a decrease in legal expenses. Occupancy and equipment decreased $121,000 during the first quarter of 2019 compared to the same period in 2018 primarily due to lower building maintenance and equipment expense. Compared to the same period in 2018, expense from other real estate owned decreased $90,000 for the quarter ended March 31, 2019 as a result of write-downs of existing foreclosed properties and the sale of three foreclosed properties held by the Bank. Salaries and benefits increased $167,000 for the first quarter of 2019 versus the comparable period in 2018 primarily attributable to an increase in salaries and related compensation, benefits and taxes.

Income Tax Provision. The provision for income taxes increased $393,000 for the quarter ended March 31, 2019 compared to the same period in 2018 due to higher income. The effective tax rate for the quarter ended March 31, 2019 and 2018 was 22.9% and 21.1%, 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, 2019, cash and cash equivalents totaled $120.7 million. Securities classified as available for sale, which provide additional sources of liquidity, totaled $139.1 million at March 31, 2019. In addition, at March 31, 2019, the Bank had the ability to borrow an additional $130.4 million from the FHLB, which included overnight lines of credit of $10.0 million. On that date, the Bank had FHLB advances outstanding of $151.6 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 of credit 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 of securities. For the three months ended March 31, 2019, the Bank originated $62.1 million of loans, and purchased $12.6 million of loans and purchased no securities. For the year ended December 31, 2018, the Bank originated $336.1 million of loans and purchased $56.0 million of loans and $34.9 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 $27.4 million for the three months ended March 31, 2019. FHLB advances decreased $215,000 for the three months ended March 31, 2019 and decreased $18.3 million for the year ended December 31, 2018. The decrease in borrowings for the first three months of 2019 resulted from the net repayments of FHLB advances with excess deposits. Certificates of deposit due within one year of March 31, 2019 totaled $255.8 million, or 19.4% 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 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 2019 and repurchased 215,000 shares of the Company’s common stock at a cost of $3.2 million during the year ended December 31, 2018. Additional discussion about the Company’s liquidity and capital resources is contained in Item 7 in the Company’s 2018 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 continue to 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, 2019, on an unconsolidated basis, the Company had cash and cash equivalents of $1.4 million and available for sale securities of $6.9 million.

Payments Due Under Contractual Obligations

Information relating to payments due under contractual obligations is presented in the Company’s Form 10-K for the year ended December 31, 2018. There were no material changes in the Company’s payments due under contractual obligations between December 31, 2018 and March 31, 2019.

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, 2019 and December 31, 2018 are as follows:



	March 31, 2019		December 31, 2018
	(In Thousands)
Commitments to extend credit:
Commitments to originate loans	$	27,596	$	23,441
Undisbursed construction loans	33,656		42,848
Undisbursed home equity lines of credit	58,630		59,314
Undisbursed commercial lines of credit	56,888		67,576
Overdraft protection lines	1,264		1,249
Standby letters of credit	338		338
Total commitments	$	178,372	$	194,766

Future loan commitments at March 31, 2019 and December 31, 2018 included fixed-rate loan commitments of $9.5 million and $13.0 million, respectively, at interest rates ranging from 3.00% to 6.00% and 3.00% to 6.88%, respectively.

The Bank is a limited partner in three small business investment corporations ("SBICs"). At March 31, 2019, 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, 2019, 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 2018 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. 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. In addition, the Company utilizes interest rate swap derivatives with certain commercial customers as a fixed rate loan alternative to manage exposure to interest rate risk. 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 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, 2019 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, 2019.



	Percentage Change in Estimated Net Interest Income Over
	12 Months		24 Months
100 basis point decrease in rates	(4.94	)%	(4.10	)%
200 basis point increase in rates	6.76		4.49
300 basis point increase in rates	8.91		4.63

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 and interest rate swap agreements for certain longer-term commercial loans to manage exposure to interest rate movements.

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) and 15d-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, 2019 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

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 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.

On February 20, 2019, one purported SI Financial stockholder filed a putative class action lawsuit against SI Financial, Berkshire Hills and the members of the SI Financial board of directors in the Circuit Court for Baltimore County, captioned Parshall v. Mark Alliod, et al., Docket No. C-03-CV-19-000124 (the "Complaint"). The plaintiff, on behalf of himself and similarly-situated SI Financial stockholders, generally alleged that the defendants breached their fiduciary duties to SI Financial and its stockholders in connection with the Merger Agreement. The Complaint alleged that the defendants failed to secure adequate value for SI Financial stockholders in connection with the merger and that the registration statement filed with the SEC on February 4, 2019 contained materially incomplete information regarding the merger. The plaintiff seeks injunctive relief, rescission of the merger or rescissory damages (if the merger is consummated), other unspecified damages, and an award of attorneys' fees and expenses.

On March 5, 2019, one purported SI Financial stockholder filed a putative class action lawsuit against SI Financial and the members of the SI Financial board of directors in the United States District Court for the District of Connecticut, captioned Bushanksy v. SI Financial Group, Inc. et al., Case No. 3:19-cv-00321. The plaintiff, on behalf of himself and similarly-situated SI Financial stockholders, generally alleged that the Proxy Statement/Prospectus contained material misstatements and omissions in violation of Section 14(a) and Section 20(a) of the Exchange Act, and Rule 14a-9 promulgated thereunder. The plaintiff seeks injunctive relief, rescission of the merger or rescissory damages (if the merger is consummated), declaratory relief, and an award of attorneys’ fees and expenses.

In addition, on March 5, 2019, one purported SI Financial stockholder filed a putative class action lawsuit against SI Financial and the members of the SI Financial board of directors in the United States District Court for the Southern District of New York, captioned Raul v. SI Financial Group, Inc. et al., Case No. 1:19-cv-02038. The plaintiff generally alleged that the proxy statement/prospectus filed on February 26, 2019 with the SEC contains material and misleading statements or material misrepresentations or omissions in violation of Section 14(a) and Section 20(a) of the Exchange Act, and Rule 14a-9 promulgated thereunder. The plaintiff seeks injunctive relief, unspecified damages, a direction that SI Financial and the SI Financial board of directors disseminate a corrective amendment to the Proxy Statement/Prospectus, and an award of attorneys' fees and expenses.

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, 2018. 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.

On May 9, 2018, the Company announced that the Board of Directors had approved a stock repurchase program authorizing the Company to repurchase up to 5%, or 612,122 shares, of its common stock from time to time, depending on market conditions. The repurchase program will continue until it is completed or terminated by the Company's Board of Directors. The Company did not repurchase any shares of its equity securities for the three months ended March 31, 2019. As of March 31, 2019, 397,122 shares remain available for purchase under the program.

Item 3. Defaults Upon Senior Securities.

None.

Item 4. Mine Safety Disclosures.

None.

Item 5. Other Information.

None.

Item 6. Exhibits.



3.1	Articles of Incorporation of SI Financial Group, Inc. (Incorporated herein by reference into this document from Exhibit 3.1 to 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)
3.2	Amended and Restated Bylaws of SI Financial Group, Inc. (Incorporated herein by reference into this document from Exhibit 3.2 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)
4	Specimen Stock Certificate of SI Financial Group, Inc. (Incorporated herein by reference into this document from Exhibit 4.0 to 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)
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	18 U.S.C. Section 1350 Certifications
101	The following materials from the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2019, 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.

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 9, 2019	/s/ Rheo A. Brouillard
		Rheo A. Brouillard
		President and Chief Executive Officer
		(principal executive officer)



Date:	May 9, 2019	/s/ Lauren L. Murphy
		Lauren L. Murphy
		Executive Vice President and Chief Financial Officer
		(principal accounting and financial officer)