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

SI Financial Group, Inc. 10-Q