Edgar Filing: SI Financial Group, Inc.

form10q.htm

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 June 30, 2011
OR

o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Transition Period from to

Commission File Number: 0-54241

SI FINANCIAL GROUP, INC.

(Exact name of registrant as specified in its charter)

Maryland		80-0643149
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

803 Main Street, Willimantic, Connecticut		06226
(Address of principal executive offices)		(Zip Code)

(860) 423-4581

(Registrant’s telephone number, including area code)

Not Applicable

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large Accelerated Filer o	Accelerated Filer o
Non-Accelerated Filer x	Smaller Reporting Company o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x

As of August 5, 2011, there were 10,576,302 shares of the registrant’s common stock outstanding.

SI FINANCIAL GROUP, INC.

TABLE OF CONTENTS

		Page No.

PART I. FINANCIAL INFORMATION

Item 1.	Financial Statements:

	Consolidated Balance Sheets at June 30, 2011 and December 31, 2010	1

	Consolidated Statements of Income for the three and six months ended June 30, 2011 and 2010	2

	Consolidated Statement of Changes in Shareholders’ Equity for the six months ended June 30, 2011	3

	Consolidated Statements of Cash Flows for the six months ended June 30, 2011 and 2010	4

	Notes to Consolidated Financial Statements	6

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	35

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	46

Item 4.	Controls and Procedures	47

PART II. OTHER INFORMATION

Item 1.	Legal Proceedings	48

Item 1A.	Risk Factors	48

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	48

Item 3	Defaults Upon Senior Securities	48

Item 4.	[Removed and Reserved]	48

Item 5.	Other Information	48

Item 6.	Exhibits	48

SIGNATURES		49

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PART I. FINANCIAL INFORMATION

Item 1. Financial Statements.

SI FINANCIAL GROUP, INC.

CONSOLIDATED BALANCE SHEETS

(In Thousands, Except Share Amounts / Unaudited)

	June 30,			December 31,
	2011			2010
ASSETS:
Cash and due from banks:
Noninterest-bearing	$	12,404		$	11,204
Interest-bearing		2,426			2,287
Federal funds sold		22,600			64,830
Total cash and cash equivalents		37,430			78,321

Trading securities, at fair value		-			248
Available for sale securities, at fair value		235,394			180,036
Loans held for sale		1,374			7,371
Loans receivable (net of allowance for loan losses of $4,761 at June 30, 2011 and $4,799 at December 31, 2010)		623,705			606,214
Federal Home Loan Bank stock, at cost		8,388			8,388
Bank-owned life insurance		8,867			9,024
Premises and equipment, net		12,487			12,123
Goodwill and other intangibles		4,116			4,126
Accrued interest receivable		3,525			3,113
Deferred tax asset, net		5,175			5,729
Other real estate owned, net		715			1,285
Prepaid FDIC deposit insurance assessment		2,124			2,576
Other assets		5,919			7,855
Total assets	$	949,219		$	926,409

LIABILITIES AND SHAREHOLDERS' EQUITY:
Liabilities:
Deposits:
Noninterest-bearing	$	72,765		$	66,845
Interest-bearing		616,571			593,869
Total deposits		689,336			660,714

Mortgagors' and investors' escrow accounts		1,858			3,425
Federal Home Loan Bank advances		109,169			114,169
Junior subordinated debt owed to unconsolidated trust		8,248			8,248
Stock offering escrow		-			48,325
Accrued expenses and other liabilities		10,641			10,424
Total liabilities		819,252			845,305


Shareholders' Equity:
Preferred stock ($.01 par value; 1,000,000 shares authorized; none issued)		-			-
Common stock ($.01 par value; 35,000,000 and 75,000,000 shares authorized; 10,576,849 and 12,563,750 shares issued; 10,576,302 and 11,777,496 shares outstanding at June 30, 2011 and December 31, 2010, respectively)		106			126
Additional paid-in-capital		94,545			52,198
Unallocated common shares held by ESOP		(5,808	)		(2,907	)
Unearned restricted shares		(21	)		(25	)
Retained earnings		41,179			40,859
Accumulated other comprehensive loss		(29	)		(1,108	)
Treasury stock, at cost (547 and 786,254 shares at June 30, 2011 and December 31, 2010, respectively)		(5	)		(8,039	)
Total shareholders' equity		129,967			81,104
Total liabilities and shareholders' equity	$	949,219		$	926,409

See accompanying notes to unaudited interim consolidated financial statements.

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SI FINANCIAL GROUP, INC.

CONSOLIDATED STATEMENTS OF INCOME

(In Thousands, Except Per Share Amounts / Unaudited)

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2011			2010			2011			2010
Interest and dividend income:
Loans, including fees	$	7,806		$	8,445		$	15,714		$	16,856
Securities:
Taxable interest		1,738			1,567			3,299			3,322
Tax-exempt interest		1			14			2			29
Dividends		23			6			43			11
Other		16			26			46			49
Total interest and dividend income		9,584			10,058			19,104			20,267

Interest expense:
Deposits		1,892			2,453			3,789			5,117
Federal Home Loan Bank advances		956			1,036			1,968			2,112
Subordinated debt		84			41			167			80
Total interest expense		2,932			3,530			5,924			7,309

Net interest income		6,652			6,528			13,180			12,958

Provision for loan losses		190			252			400			422

Net interest income after provision for loan losses		6,462			6,276			12,780			12,536

Noninterest income:
Total other-than-temporary impairment losses on securities		-			(194	)		-			(365	)
Portion of losses recognized in other comprehensive income		-			33			-			33
Net impairment losses recognized in earnings		-			(161	)		-			(332	)
Service fees		1,211			1,318			2,391			2,577
Wealth management fees		1,051			1,035			2,117			2,054
Increase in cash surrender value of bank-owned life insurance		71			72			143			143
Net gain on sale of securities		183			414			218			681
Mortgage banking fees		133			225			302			355
Net gain in fair value on trading securities and derivatives		181			-			208			-
Net loss on disposal of equipment		(1	)		-			(8	)		-
Other		67			34			174			72
Total noninterest income		2,896			2,937			5,545			5,550

Noninterest expenses:
Salaries and employee benefits		4,232			4,070			8,376			8,211
Occupancy and equipment		1,388			1,343			2,923			2,764
Computer and electronic banking services		987			953			1,943			1,894
Outside professional services		314			287			581			536
Marketing and advertising		241			208			401			390
Supplies		132			124			267			265
FDIC deposit insurance and regulatory assessments		303			329			608			668
Contribution to SI Financial Group Foundation		-			-			500			-
Other		713			851			1,424			1,574
Total noninterest expenses		8,310			8,165			17,023			16,302

Income before income tax provision		1,048			1,048			1,302			1,784
Income tax provision		341			335			386			578
Net income	$	707		$	713		$	916		$	1,206

Net income per share:
Basic	$	0.07		$	0.07		$	0.09		$	0.12
Diluted	$	0.07		$	0.07		$	0.09		$	0.12

See accompanying notes to unaudited interim consolidated financial statements.

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SI FINANCIAL GROUP, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY

FOR THE SIX MONTHS ENDED JUNE 30, 2011

(In Thousands, Except Share Amounts / Unaudited)

	Common Stock						Additional Paid-in			Unallocated Common Shares Held			Unearned Restricted			Retained			Accumulated Other Comprehensive			Treasury			Total Shareholders'
	Shares			Dollars			Capital			by ESOP			Shares			Earnings			Loss			Stock			Equity

Balance at December 31, 2010		12,563,750		$	126		$	52,198		$	(2,907	)	$	(25	)	$	40,859		$	(1,108	)	$	(8,039	)	$	81,104

Exchange of common stock pursuant to reorganization and concurrent second-step stock offering		(1,986,901	)		(20	)		42,306			-			-			-			-			8,039			50,325
Comprehensive income:
Net income		-			-			-			-			-			916			-			-			916
Net unrealized gain on available for sale securities, net of reclassification adjustment and tax effects		-			-			-			-			-			-			1,156			-			1,156
Net unrealized loss on interest-rate swap derivative		-			-			-			-			-			-			(77	)		-			(77	)
Total comprehensive income																										1,995
Cash dividends declared ($0.06 per share)		-			-			-			-			-			(596	)		-			-			(596	)
Equity incentive plan shares earned		-			-			43			-			4			-			-			-			47
Shares purchased for ESOP pursuant to reorganization (392,670 shares)		-			-			-			(3,141	)		-			-			-			-			(3,141	)
Allocation of 24,318 ESOP shares		-			-			(4	)		240			-			-			-			-			236
Tax benefit from share-based compensation		-			-			2			-			-			-			-			-			2
Treasury stock purchased (547 shares)		-			-			-			-			-			-			-			(5	)		(5	)
Balance at June 30, 2011		10,576,849		$	106		$	94,545		$	(5,808	)	$	(21	)	$	41,179		$	(29	)	$	(5	)	$	129,967

See accompanying notes to unaudited interim consolidated financial statements.

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SI FINANCIAL GROUP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In Thousands / Unaudited)

	Six Months Ended June 30,
	2011			2010
Cash flows from operating activities:
Net income	$	916		$	1,206
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses		400			422
Employee stock ownership plan expense		236			96
Equity incentive plan expense		47			226
Excess tax benefit from share-based compensation		(2	)		-
Amortization of investment premiums and discounts, net		216			223
Amortization of loan premiums and discounts, net		558			311
Depreciation and amortization of premises and equipment		939			965
Amortization of core deposit intangible		10			16
Net gain on sale of securities		(218	)		(681	)
Net gain on trading securities		(182	)		-
Deferred income tax (benefit) provision		(3	)		80
Loans originated for sale		(20,237	)		(21,449	)
Proceeds from sale of loans held for sale		26,196			20,061
Net gain on sale of loans		(211	)		(240	)
Net loss on disposal of equipment		8			-
Net loss on sales or write-downs of other real estate owned		177			284
Increase in cash surrender value of bank-owned life insurance		(143	)		(143	)
Gain on bank-owned life insurance proceeds		(122	)		-
Other-than-temporary impairment losses on securities		-			332
Change in operating assets and liabilities:
Accrued interest receivable		(412	)		8
Other assets		1,868			72
Accrued expenses and other liabilities		(77	)		1,081
Net cash provided by operating activities		9,964			2,870

Cash flows from investing activities:
Purchases of available for sale securities		(107,825	)		(58,460	)
Proceeds from sales of available for sale securities		32,569			33,801
Proceeds from maturities of and principal repayments on available for sale securities		22,082			29,726
Net decrease in loans		22,668			18,791
Purchases of loans		(41,197	)		(19,589	)
Proceeds from sale of other real estate owned		473			2,894
Purchases of premises and equipment		(1,311	)		(417	)
Proceeds from bank-owned life insurance		602			-
Net cash (used in) provided by investing activities		(71,939	)		6,746

Cash flows from financing activities:
Net increase in deposits		28,622			15,656
Net decrease in mortgagors' and investors' escrow accounts		(1,567	)		(1,253	)
Proceeds from Federal Home Loan Bank advances		14,000			23,355
Repayments of Federal Home Loan Bank advances		(19,000	)		(25,286	)
Net proceeds from common stock offering		2,769			-
Excess tax benefit from share-based compensation		2			-
Purchase of shares by ESOP pursuant to reorganization		(3,141	)		-
Cash dividends on common stock		(596	)		(125	)
Treasury stock purchased		(5	)		(74	)
Net cash provided by financing activities		21,084			12,273

(continued on next page)

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SI FINANCIAL GROUP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS (Concluded)

(In Thousands / Unaudited)

	Six Months Ended June 30,
	2011			2010

Net change in cash and cash equivalents		(40,891	)		21,889
Cash and cash equivalents at beginning of period		78,321			24,204
Cash and cash equivalents at end of period	$	37,430		$	46,093

Supplemental cash flow information:
Interest paid	$	5,927		$	7,332
Income taxes paid, net		50			1
Transfer of stock offering escrow for issuance of common shares		47,556			-
Transfer of loans to other real estate owned		80			1,243

See accompanying notes to consolidated financial statements.

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SI FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2011 AND 2010 AND DECEMBER 31, 2010

NOTE 1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Nature of Business

SI Financial Group, Inc. (the “Company”) is the holding company for Savings Institute Bank and Trust Company (the “Bank”). Established in 1842, the Bank is a community-oriented financial institution headquartered in Willimantic, Connecticut. The Bank provides a variety of financial services to individuals, businesses and municipalities through its twenty-one offices in eastern Connecticut. Its primary products include savings, checking and certificate of deposit accounts, residential and commercial mortgage loans, commercial business loans and consumer loans. In addition, wealth management services, which include trust, financial planning, life insurance and investment services, are offered to individuals and businesses through the Bank’s Connecticut offices. SI Trust Servicing, a third-party provider of trust outsourcing services for community banks, expands the wealth management products offered by the Bank, and offers trust services to other community banks. 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.

Effective January 12, 2011, the Company completed its public stock offering and the concurrent conversion of the Bank from the mutual holding company form of organization to the stock form of organization (the “Conversion”). A total of 6,544,493 shares of common stock were sold at $8.00 per share, including 392,670 shares purchased by the Bank’s Employee Stock Ownership Plan (the “ESOP”). Additional shares totaling 4,032,356 were issued in exchange for shares of the former SI Financial Group, Inc., at an exchange ratio of 0.8981. Shares outstanding after the stock offering and the exchange totaled 10,576,849. Proceeds received from the reorganization and stock offering totaled $50.3 million, net of costs of $2.0 million. Net income per share and the weighted average shares outstanding for the three and six months ended June 30, 2010 have been restated to reflect the Conversion.

Principles of Consolidation

The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary, the Bank, and the Bank’s wholly-owned subsidiaries, 803 Financial Corp., SI Mortgage Company and SI Realty Company, Inc. All significant intercompany accounts and transactions have been eliminated.

Basis of Financial Statement Presentation

The interim consolidated financial statements and related notes have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information, with the instructions to Form 10-Q and Rule 8-03 of Regulation S-X of the Securities and Exchange Commission (“SEC”) and general practices within the banking industry. Accordingly, certain information and footnote disclosures required by GAAP for complete financial statements have been omitted. Information in the accompanying interim consolidated financial statements and notes to the financial statements of the Company as of June 30, 2011 and for the three and six months ended June 30, 2011 and 2010 is unaudited. These unaudited interim consolidated financial statements and related notes should be read in conjunction with the audited financial statements of the Company and the accompanying notes for the year ended December 31, 2010 contained in the Company’s Form 10-K.

Interim financial statements are subject to possible adjustment in connection with the annual audit of the Company for the year ending December 31, 2011. In the opinion of management, the accompanying unaudited interim consolidated financial statements reflect all of the adjustments, consisting only of normal and recurring adjustments, necessary for a fair presentation of the financial condition, results of operations and cash flows as of and for the period covered herein. The results of operations for the three and six months ended June 30, 2011 are not necessarily indicative of the operating results for the year ending December 31, 2011.

In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosures of contingent assets and liabilities, as of the date of the balance sheets and reported amounts of revenues and expenses for the periods presented. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses, other-than-temporary impairment (“OTTI”) of securities, deferred income taxes and the impairment of long-lived assets.

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SI FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2011 AND 2010 AND DECEMBER 31, 2010

Reclassifications

Certain amounts in the Company’s 2010 consolidated financial statements have been reclassified to conform to the 2011 presentation. Such reclassifications had no effect on net income.

Loans Receivable

Loans receivable are stated at current unpaid principal balances, net of the allowance for loan losses and deferred loan origination fees and costs. Management has the ability and intent to hold its loans receivable for the foreseeable future or until maturity or pay-off.

A loan is impaired when 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. 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 agreement.

The Company periodically may agree to modify the contractual terms of loans. When a loan is modified and concessions have been made to the original contractual terms, such as reductions of interest rates or deferral of interest or principal payments due to the borrower’s financial condition, the modification is considered a troubled debt restructuring (“TDR”). All TDRs are initially classified as impaired.

Management considers all nonaccrual loans and TDRs to be impaired. In most cases, loan payments less than 90 days past due are considered minor collection delays and the related loans are generally not considered impaired.

Allowance for Loan Losses

The allowance for loan losses, a material estimate which could change significantly in the near-term, is established through a provision for loan losses charged to earnings to account for losses that are inherent in the loan portfolio and estimated to occur, and is maintained at a level that management considers adequate to absorb losses in the loan portfolio. Loan losses are charged against the allowance for loan losses when management believes that the uncollectibility of the principal loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance for loan losses when received. In the determination of the allowance for loan losses, management may obtain independent appraisals for significant properties, if necessary.

Management's judgment in determining the adequacy of the allowance is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available. The allowance for loan losses is evaluated on a monthly basis by management and is based on the evaluation of the known and inherent risk characteristics and size and composition of the loan portfolio, the assessment of current economic and real estate market conditions, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral, historical loan loss experience 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 such loans that are identified as impaired, an allowance is established when the present value of expected cash flows (or collateral value or observable market price if the loan is collateral dependent) of the impaired loan is lower than the carrying value of that loan.

●

General valuation allowance. The general component represents a valuation allowance on the remainder of the loan portfolio, after excluding impaired loans. For this portion of the allowance, loans are segregated by category and assigned an allowance percentage based on historical loan loss experience adjusted for qualitative factors stratified by the following loan segments: residential one- to four-family, multi-family and commercial real estate, construction, commercial business and consumer. Management uses a rolling average of historical losses based on the time frame appropriate to capture relevant loss data for each loan segment. This historical loss factor is adjusted for the following qualitative factors: levels/trends in delinquencies; level of charge-offs and nonperforming loans; trends in terms of loans; effects of changes in risk selection and underwriting standards and other changes in lending policies, procedures and practices; experience/ability and depth of lending management and staff and national and local economic trends and conditions.

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SI FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2011 AND 2010 AND DECEMBER 31, 2010

The qualitative factors are determined based on the various risk characteristics for each loan segment. Risk characteristics relevant to each portfolio segment are as follows:

Residential – 1 to 4 Family – The Company does not originate conventional loans with loan-to-value ratios exceeding 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. 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 Real Estate – Loans in this segment are originated for the purpose of acquiring, developing, improving or refinancing multi-family and commercial real estate where the property is the primary collateral securing the loan, and the income generated from the property is the primary repayment source. The underlying cash flows generated by the properties are adversely impacted by a downturn in the economy as evidenced by increased vacancy rates, which in turn, will have an effect on the credit quality in this segment. Payments on loans secured by income-producing properties often depend on the successful operation and management of the properties. Management continually monitors the cash flows of these loans.

Construction – This segment includes loans to individuals, and to a lesser extent builders, to finance the construction of residential dwellings. The Bank also originates construction loans for commercial development projects. Upon the completion of construction, the loan generally converts to a permanent mortgage loan. Credit risk is affected by cost overruns, time to sell at an adequate price and market conditions.

Commercial Business – Loans in this segment are made to businesses and are generally secured by assets of the business. Repayment is expected from the cash flows of the business. A weakened economy and reduced viability of the industry in which the customer operates will have a negative impact on the credit quality in this segment.

Consumer – Loans in this segment primarily include home equity lines of credit, 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.

●

Unallocated allowance. An unallocated component is maintained to cover uncertainties that could affect management’s estimate of probable losses. The unallocated component of the allowance reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating specific and general losses in the portfolio.

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. 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 market conditions.

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SI FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2011 AND 2010 AND DECEMBER 31, 2010

Although management believes that it uses the best information available to establish the allowance for loan losses, future adjustments to the allowance for loan losses may be necessary and the Company’s results of operations could be adversely affected if circumstances differ substantially from the assumptions used in making the determinations. Furthermore, while management believes it has established the allowance for loan losses in conformity with GAAP, the regulatory agencies, in reviewing the loan portfolio, may request us to increase our allowance for loan losses based on judgments different from ours. In addition, because future events affecting borrowers and collateral cannot be predicted with certainty, the existing allowance for loan losses may not be adequate or increases may be necessary should the quality of any loans deteriorate as a result of the factors discussed above. Any material increase in the allowance for loan losses would adversely affect the Company’s financial condition and results of operations.

Interest and Fees on Loans

Interest on loans is accrued and included in net interest income based on contractual rates applied to principal amounts outstanding. Accrual of interest is discontinued when loan payments are 90 days or more past due, based on contractual terms, or when, in the judgment of management, collectibility of the loan or loan interest becomes uncertain. Subsequent recognition of income occurs only to the extent payment is received subject to management's assessment of the collectibility of the remaining interest and principal. A nonaccrual loan is restored to accrual status when it is no longer delinquent and collectibility of interest and principal is no longer in doubt and the borrower has made regular payments in accordance with the terms of the loan over a period of at least six months. Interest collected on nonaccrual loans and impaired loans is recognized only to the extent cash payments are received, and may be recorded as a reduction to principal if the collectibility of the principal balance of the loan is unlikely.

Loan origination fees and direct loan origination costs are deferred, and the net amount is recognized as an adjustment of the related loan's yield utilizing the interest method over the contractual life of the loan.

Recent Accounting Pronouncements

Credit Quality of Financing Receivables and the Allowance for Credit Losses – In July 2010, the FASB issued guidance requiring additional disclosures that facilitate financial statement users’ evaluation of: (1) the nature of credit risk inherent in the entity’s portfolio of financing receivables, (2) how that risk is analyzed and assessed in arriving at the allowance for credit losses and (3) the changes and reasons for those changes in the allowance for credit losses. For public entities, the disclosures as of the end of a reporting period were effective for interim and annual reporting periods ending on or after December 15, 2010 and the disclosures about activity that occurs during a reporting period are effective for interim and annual reporting periods beginning on or after December 15, 2010. The adoption of this amendment had a significant impact on the Company’s disclosures. See Note 4 for additional disclosures.

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SI FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2011 AND 2010 AND DECEMBER 31, 2010

A Creditor’s Determination of Whether a Restructuring is a Troubled Debt Restructuring – In April 2011, the FASB issued additional guidance to creditors in evaluating whether a modification or restructuring of a loan is a troubled debt restructuring to limit diversity in the application of GAAP which could adversely affect comparability of financial statements. The update provides guidance on (1) how to determine whether a creditor has granted a concession and (2) whether a borrower is experiencing financial difficulty. For public entities, the amendments are effective for the first interim or annual period beginning on or after June 15, 2011 and should be applied retrospectively to restructurings occurring on or after the beginning of the annual period of adoption. This amendment is not expected to have a material impact on the Company’s consolidated financial statements.

Reconsideration of Effective Control for Repurchase Agreements – In April 2011, the FASB issued guidance which affects all entities that enter into agreements to transfer financial assets that both entitle and obligate the transferor to repurchase or redeem the financial assets before their maturity. The amendment removes from the assessment of effective control (1) the criterion requiring the transferor to have the ability to repurchase or redeem the financial assets on substantially the agreed terms, even in the event of default by the transferee, and (2) the collateral maintenance implementation guidance related to that criterion. The amendment is effective for the first interim or annual period beginning on or after December 15, 2011 and should be applied prospectively to transactions or modifications of existing transactions that occur on or after the effective date. This amendment will have no impact on the Company’s consolidated financial statements.

Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements – In May 2011, the FASB amended its standard related to fair value measurement and disclosure requirements in accordance with GAAP and International Financial Reporting Standards. The amendments (1) change the wording used to describe many of the requirements in GAAP for measuring fair value and for disclosing information about fair value measurement, (2) clarify the intent of the application of existing fair value measurement requirements and (3) change the requirements for measuring fair value and for disclosing information about fair value. The amendments are not intended to change the application of existing requirements for fair value measurement. The amendments should be applied prospectively effective during the first interim and annual periods beginning after December 15, 2011. The adoption of these amendments is not expected to have a material impact on the Company’s consolidated financial statements.

Presentation of Comprehensive Income – In June 2011, the FASB amended its standard related to the presentation of comprehensive income. Under this amendment, an entity will have the option to present the total of comprehensive income, the components of net income, and the components of other comprehensive income in a single continuous statement or in two separate but consecutive statements. Regardless of which method an entity chooses, the entity is required to present on the face of the financial statements reclassification adjustments for items that are reclassified from other comprehensive income to net income in the statement(s) where the components of net income and other comprehensive income are presented. The amendments in this update should be applied retrospectively effective for fiscal years and interim periods within those years, beginning after December 15, 2011. Early adoption is permitted. The adoption of this amendment is not expected to have a material impact on the Company’s consolidated financial statements.

NOTE 2. NET INCOME PER SHARE

Basic net income 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 net income per share since the shares participate in dividends and the rights to the dividends are non-forfeitable. Diluted net income per share is computed in a manner similar to basic net income 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. Treasury shares and unallocated common shares held by the Bank’s ESOP are not deemed outstanding for net income per share calculations.

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SI FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2011 AND 2010 AND DECEMBER 31, 2010

Anti-dilutive shares are common stock equivalents with weighted average exercise prices in excess of the weighted average market value for the periods presented. The Company had anti-dilutive common shares outstanding of 333,424 and 375,051 for the three and six months ended June 30, 2011, respectively, and 386,817 and 405,203 for the three and six months ended June 30, 2010, respectively.

The computation of net income per share is as follows:

	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2011		2010		2011		2010
	(In Thousands, Except Share Amounts)

Net income	$	707	$	713	$	916	$	1,206

Weighted average common shares outstanding:(1)
Basic		9,934,883		10,299,751		10,024,108		10,298,817
Effect of dilutive stock options		24,524		2,090		21,637		1,045
Diluted		9,959,407		10,301,841		10,045,745		10,299,862

Net income per share: (1)
Basic	$	0.07	$	0.07	$	0.09	$	0.12
Diluted	$	0.07	$	0.07	$	0.09	$	0.12

(1)

The number of shares outstanding for the three and six months ended June 30, 2010 has been adjusted to reflect that on January 12, 2011, each outstanding share was converted to 0.8981 shares of Company common stock in connection with the Conversion. For comparison purposes, the weighted average shares outstanding and resulting net income per share for the three and six months ended June 30, 2010 were restated to reflect the Conversion.

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SI FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2011 AND 2010 AND DECEMBER 31, 2010

NOTE 3. SECURITIES

Trading securities:

During the third quarter of 2010, the Company elected to record two collateralized debt obligations at fair value, previously reported as available for sale securities, and reclassified them to trading securities in accordance with applicable guidance. Cumulative unrealized losses at the date of election totaling $652,000 were reclassified from accumulated other comprehensive loss to retained earnings as a cumulative effect adjustment resulting from a change in accounting principle. These securities were sold during the quarter ended June 30, 2011. At December 31, 2010, these securities had an aggregate amortized cost and fair value of $248,000. For the three and six months ended June 30, 2011, the net gain in fair value on trading securities was $161,000 and $182,000, respectively, and is included in net gain in fair value on trading securities and derivatives on the statements of income. The Company does not purchase securities with the intent of selling them in the near term, thus there are no other securities in the trading portfolio.

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SI FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2011 AND 2010 AND DECEMBER 31, 2010

Available for sale securities:

The amortized cost, gross unrealized gains and losses and approximate fair values of available for sale securities at June 30, 2011 and December 31, 2010 are as follows:

	June 30, 2011
	Amortized Cost (1)		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
	(In Thousands)
Debt securities:
U.S. Government and agency obligations	$	61,420	$	290	$	(255	)	$	61,455
Government-sponsored enterprises		31,084		406		(20	)		31,470
Mortgage-backed securities:(2)
Agency - residential		100,736		3,294		(113	)		103,917
Non-agency - residential		9,389		119		(630	)		8,878
Non-agency - HELOC		3,472		-		(429	)		3,043
Corporate debt securities		13,636		284		(15	)		13,905
Collateralized debt obligations		6,363		-		(3,060	)		3,303
Obligations of state and political subdivisions		6,643		234		(11	)		6,866
Tax-exempt securities		140		3		-			143
Foreign government securities		75		-		-			75
Total debt securities		232,958		4,630		(4,533	)		233,055

Equity securities:
Equity securities - financial services		539		76		(16	)		599
Equity securities - other		1,696		83		(39	)		1,740
Total equity securities		2,235		159		(55	)		2,339
Total available for sale securities	$	235,193	$	4,789	$	(4,588	)	$	235,394

(1)	Net of OTTI write-downs recognized in earnings.

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

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SI FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2011 AND 2010 AND DECEMBER 31, 2010

	December 31, 2010
	Amortized Cost (1)		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
	(In Thousands)
Debt securities:
U.S. Government and agency obligations	$	23,399	$	197	$	(13	)	$	23,583
Government-sponsored enterprises		29,912		283		(202	)		29,993
Mortgage-backed securities:(2)
Agency - residential		84,408		3,132		(170	)		87,370
Non-agency - residential		11,039		127		(711	)		10,455
Non-agency - HELOC		3,797		-		(598	)		3,199
Corporate debt securities		14,502		252		(37	)		14,717
Collateralized debt obligations		6,466		-		(3,934	)		2,532
Obligations of state and political subdivisions		6,800		157		(52	)		6,905
Tax-exempt securities		140		4		-			144
Foreign government securities		100		-		-			100
Total debt securities		180,563		4,152		(5,717	)		178,998

Equity securities:
Equity securities - financial services		1,024		27		(13	)		1,038
Total available for sale securities	$	181,587	$	4,179	$	(5,730	)	$	180,036

(1)	Net of OTTI write-downs recognized in earnings.

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

The amortized cost and fair value of debt securities by contractual maturities at June 30, 2011 are presented below. Actual maturities of mortgage-backed securities may differ from contractual maturities because the mortgages underlying the securities may be called or repaid without any penalties. 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	$	5,094	$	5,147
After 1 but within 5 years		39,699		40,369
After 5 but within 10 years		17,863		17,986
After 10 years		56,705		53,715
		119,361		117,217
Mortgage-backed securities		113,597		115,838
Total debt securities	$	232,958	$	233,055

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SI FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2011 AND 2010 AND DECEMBER 31, 2010

The following is a summary of realized gains and losses on the sale of securities for the three and six months ended June 30, 2011 and 2010:

	Three Months Ended June 30,					Six Months Ended June 30,
	2011			2010		2011			2010
	(In Thousands)					(In Thousands)
Gross gains on sales	$	230		$	414	$	265		$	899
Gross losses on sales		(47	)		-		(47	)		(218	)
Net gain on sale of securities	$	183		$	414	$	218		$	681

Proceeds from the sale of available for sale securities were $31.5 million and $32.6 million for the three and six months ended June 30, 2011, respectively, and $24.7 million and $33.8 million for the three and six months ended June 30, 2010, respectively.

The following tables present information pertaining to securities with gross unrealized losses at June 30, 2011 and December 31, 2010, 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
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
June 30, 2011:	Value		Losses		Value		Losses		Value		Losses
	(In Thousands)
U.S. Government and agency obligations	$	26,794	$	248	$	685	$	7	$	27,479	$	255
Government-sponsored enterprises		3,957		20		-		-		3,957		20
Mortgage-backed securities:
Agency - residential		11,222		90		739		23		11,961		113
Non-agency - residential		352		10		5,807		620		6,159		630
Non-agency - HELOC		-		-		3,043		429		3,043		429
Corporate debt securities		1,910		15		-		-		1,910		15
Collateralized debt obligations		-		-		3,303		3,060		3,303		3,060
Obligations of state and political subdivisions		1,034		11		-		-		1,034		11
Equity securities - financial services		218		16		-		-		218		16
Equity securities - other		586		39		-		-		586		39
Total	$	46,073	$	449	$	13,577	$	4,139	$	59,650	$	4,588

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SI FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2011 AND 2010 AND DECEMBER 31, 2010

	Less Than 12 Months				12 Months Or More				Total
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
December 31, 2010:	Value		Losses		Value		Losses		Value		Losses
	(In Thousands)
U.S. Government and agency obligations	$	2,053	$	4	$	858	$	9	$	2,911	$	13
Government-sponsored enterprises		16,636		202		-		-		16,636		202
Mortgage-backed securities:
Agency - residential		15,881		170		-		-		15,881		170
Non-agency - residential		2,805		9		6,512		702		9,317		711
Non-agency - HELOC		-		-		3,198		598		3,198		598
Corporate debt securities		3,667		37		-		-		3,667		37
Collateralized debt obligations		28		60		2,504		3,874		2,532		3,934
Obligations of state and political subdivisions		1,493		52		-		-		1,493		52
Equity securities - financial services		-		-		747		13		747		13
Total	$	42,563	$	534	$	13,819	$	5,196	$	56,382	$	5,730

At June 30, 2011, thirty-nine debt securities with gross unrealized losses had aggregate depreciation of 7.15% of the Company’s amortized cost basis. The majority of the unrealized losses related to the Company’s collateralized debt obligations and non-agency mortgage-backed securities as discussed below. The Company did not recognize net impairment losses on securities for the three and six months ended June 30, 2011. For the three and six months ended June 30, 2010, the Company recognized net impairment losses of $161,000 and $332,000, respectively, on investments deemed other-than-temporarily impaired. The following summarizes, by security type, the basis for management’s determination during the preparation of the financial statements of whether the applicable investments within the Company’s securities portfolio were other-than-temporarily impaired at June 30, 2011.

Debt Securities:

U.S. Government and Agency Obligations and Government-Sponsored Enterprises. The unrealized losses on the Company’s U.S. Government and agency obligations and government-sponsored enterprises related primarily to a widening of the rate spread to comparable treasury securities. The contractual terms of these investments do not permit the issuer to settle the securities at a price less than the amortized cost basis of the investments. Because the decline in market value is attributable to changes in interest rates and not credit quality and because the Company does not intend to sell these securities and it is not more likely than not that the Company will be required to sell the securities before their anticipated recovery, which may be maturity, the Company does not consider these securities to be other-than-temporarily impaired at June 30, 2011.

Mortgage-backed Securities - Agency - Residential. The unrealized losses on the Company’s agency–residential mortgage-backed securities were caused by increases in the rate spread to comparable treasury securities. The Company does not expect these securities to settle at a price less than the amortized cost basis of the investments. Because the Company does not intend to sell the investments and it is not more likely than not that the Company will be required to sell the investments before the recovery of their amortized cost basis, which may be at maturity, the Company does not consider these investments to be other-than-temporarily impaired at June 30, 2011.

Mortgage-backed Securities - Non-agency - Residential. The unrealized losses on the Company’s non-agency-residential mortgage-backed securities are primarily due to the fact that these securities continue to trade well below historic levels, particularly those backed by jumbo or hybrid loan collateral. In particular, four non-agency mortgage-backed securities displayed market pricing significantly below book value or were rated below investment grade at June 30, 2011. At June 30, 2011, management evaluated credit rating details for the tranche owned, as well as credit information on subordinate tranches, potential future credit losses and loss analyses. Additionally, management reviewed reports prepared by an independent third party for certain non-agency mortgage-backed securities. The Company previously recorded OTTI losses on one of the non-agency mortgage-backed securities totaling $1.1 million related to credit. The Company did not record any further impairment losses at June 30, 2011 because the Company does not intend to sell the investments and it is not more likely than not that the Company will be required to sell the investments before recovery of their amortized cost basis, which may be at maturity. See the table of non-agency mortgage-backed securities rated below investment grade as of June 30, 2011 for more details.

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SI FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2011 AND 2010 AND DECEMBER 31, 2010

Mortgage-backed Securities - Non-agency - HELOC. The unrealized loss on the Company’s non-agency - HELOC mortgage-backed security is related to one security whose market has been illiquid. This security is collateralized by home equity lines of credit secured by first and second liens and insured by Financial Security Assurance. At June 30, 2011, management evaluated credit rating details, collateral support and loss analyses. All of the unrealized losses on this security relate to factors other than credit. Because the Company does not intend to sell this security and it is not more likely than not that the Company will be required to sell this security before the recovery of its amortized cost basis, which may be at maturity, the Company did not record an impairment loss at June 30, 2011.

Collateralized Debt Obligations. The unrealized losses on the Company’s collateralized debt obligations related to investments in pooled trust preferred securities (“PTPS”). The PTPS market continues to experience significant declines in market value as a result of market saturation. Transactions for PTPS have been limited and have occurred primarily as a result of distressed or forced liquidation sales.

Management evaluated current credit ratings, credit support and stress testing for future defaults related to the Company’s PTPS. Management also reviewed analytics provided by the trustee and independent OTTI reviews and associated cash flow analyses performed by an independent third party. The unrealized losses on the Company’s PTPS investments were caused by a lack of liquidity, credit downgrades and decreasing credit support. The increased number of bank and insurance company failures has decreased the level of credit support for these investments. A number of lower tranche income issues have foregone payments or have received payment in kind through increased principal allocations. At June 30, 2011, based on the existing credit profile, management does not believe that these investments will suffer from any further credit-related losses. Because the Company does not intend to sell the investments and it is not more likely than not that the Company will be required to sell the investments before recovery of their amortized cost basis, which may be at maturity, the Company did not record additional impairment losses at June 30, 2011. See the table of collateralized debt obligations rated below investment grade as of June 30, 2011for more details.

Equity Securities:

The Company’s investments in marketable equity securities consist of common stock of companies in the financial services sector and various other industries. Management evaluated the near-term prospects of the issuers and the Company’s ability and intent to hold the investments for a reasonable period of time sufficient for an anticipated recovery of fair value. Although certain issuers have shown declines in earnings as a result of the weakened economy, no credit issues have been identified that cause management to believe that the declines in market value are other-than-temporary at June 30, 2011.

For debt securities with OTTI losses, the Company estimated the portion of loss attributable to credit using a discounted cash flow model in accordance with applicable guidance. Significant inputs for the non-agency mortgage-backed securities included the estimated cash flows of the underlying collateral based on key assumptions, such as default rate, loss severity and prepayment rate. Assumptions used can vary widely from loan to loan, and are influenced by such factors as loan interest rate, geographical location of the borrower, borrower characteristics and collateral type. Significant inputs for the collateralized debt obligations included estimated cash flows and prospective deferrals, defaults and recoveries based on the underlying seniority status and subordination structure of the pooled trust preferred debt tranche at the time of measurement. Prospective deferral, default and recovery estimates affecting projected cash flows were based on an analysis of the underlying financial condition of the individual issuers, with consideration of the account’s capital adequacy, credit quality, lending concentrations and other factors. All cash flow estimates were based on the securities’ tranche structure and contractual rate and maturity terms. The Company utilized the services of an independent third-party valuation firm to obtain information about the structure in order to determine how the underlying collateral cash flows will be distributed to each security issued from the structure. The present value of the expected cash flows was compared to the Company’s holdings to determine the credit-related impairment loss, if any.

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SI FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2011 AND 2010 AND DECEMBER 31, 2010

To the extent that continued changes in interest rates, credit movements and other factors that influence fair value of investments occur, the Company may be required to record additional impairment charges for OTTI in future periods.

The following table details the Company’s non-agency mortgage-backed security holdings that are rated below investment grade as of June 30, 2011 (dollars in thousands).

Security	Class (1)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value		Lowest Credit Rating (2)	Total Credit- Related OTTI (3)		Credit Support Coverage Ratios (4)

MBS 1	SSNR, AS	$	2,528	$	-	$	502	$	2,026	CCC	$	-		0.54
MBS 2	SSUP, AS		139		91		-		230	CCC		1,059		0.00
MBS 3	PT, AS		363		-		10		353	CCC		-		0.74
MBS 4	CSTR		3,899		-		118		3,781	BB-		-		2.98
		$	6,929	$	91	$	630	$	6,390		$	1,059

(1)

Class definitions: PT – Pass Through, AS – Accelerated, SSNR – Super Senior, SSUP – Senior Support and CSTR – Collateral Strip Interest.

(2)

The Company utilized credit ratings provided by Moody’s, S&P and Fitch in its evaluation of issuers.

(3)

The OTTI amounts provided in the table represent cumulative credit loss amounts through June 30, 2011.

(4)

The credit support coverage ratio, which is the ratio that determines the multiple of credit support, is based on assumptions for the performance of loans within the delinquency pipeline. The assumptions used are: current collateral support/((60 day delinquencies x .60) + (90 day delinquencies x .70) + (foreclosures x 1.00) + (other real estate x 1.00)) x .40 for loss severity.

The following table details the Company’s collateralized debt obligations that are rated below investment grade as of June 30, 2011 (dollars in thousands).

Security	Class	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value		Lowest Credit Rating (1)	Total Credit- Related OTTI		% of Current Performing Collateral Coverage

CDO 1	B1	$	1,000	$	-	$	786	$	214	CCC-	$	-		101.7
CDO 2	B3		1,000		-		784		216	CCC-		-		101.7
CDO 3	A2		2,640		-		973		1,667	CCC-		-		108.3
CDO 4	A1		1,723		-		517		1,206	CCC		-		144.0
		$	6,363	$	-	$	3,060	$	3,303		$	-

(1)

The Company utilized credit ratings provided by Moody’s, S&P and Fitch in its evaluation of issuers.

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SI FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2011 AND 2010 AND DECEMBER 31, 2010

The following table presents a roll-forward of the balance of credit losses on the Company’s debt securities for which a portion of OTTI was recognized in other comprehensive income for the three and six months ended June 30, 2011.

	Three Months Ended June 30, 2011			Six Months Ended June 30, 2011
	(In Thousands)
Balance at beginning of period	$	1,093		$	1,093
Amounts related to credit for which OTTI losses were not previously recognized		-			-
Additional credit losses for which OTTI losses were previously recognized		-			-
Reduction for securities sold during the period (realized)		(34	)		(34	)

Balance at end of period	$	1,059		$	1,059

NOTE 4. LOANS RECEIVABLE AND ALLOWANCE FOR LOAN LOSSES

The composition of the Company’s loan portfolio at June 30, 2011 and December 31, 2010 is as follows:

	June 30, 2011			December 31, 2010
	(In Thousands)
Real estate loans:
Residential - 1 to 4 family	$	260,715		$	270,923
Multi-family and commercial		153,954			160,015
Construction		8,438			6,952
Total real estate loans		423,107			437,890

Commercial business loans:
SBA & USDA guaranteed		148,474			116,492
Other		25,429			26,310
Total commercial business loans		173,903			142,802

Consumer loans:
Home equity		27,103			25,533
Other		2,683			3,167
Total consumer loans		29,786			28,700

Total loans		626,796			609,392

Deferred loan origination costs, net of fees		1,670			1,621
Allowance for loan losses		(4,761	)		(4,799	)
Loans receivable, net	$	623,705		$	606,214

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SI FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2011 AND 2010 AND DECEMBER 31, 2010

Allowance for Loan Losses

The following table summarizes the changes in the allowance for loan losses by portfolio segment for the three and six months ended June 30, 2011 and 2010:


Three Months Ended	Residential -		Multi-family					Commercial
June 30, 2011	1 to 4 Family		and Commercial			Construction		Business		Consumer			Total
	(In Thousands)
Balance at beginning of period	$	707	$	2,598		$	90	$	747	$	421		$	4,563

Provision for loan losses		197		(90	)		47		29		7			190
Loans charged-off		-		-			-		-		(11	)		(11	)
Recoveries of loans previously charged-off		-		-			19		-