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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549



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FORM 10-Q



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|x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ---------------------------------------------------------------------------------------



For the Quarterly Period Ended September 30, 2005



| ̈ | 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: 0-50801



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SI FINANCIAL GROUP, INC.

(Exact name of registrant as specified in its charter)



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|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|United States                                                  |  | 84-1655232                          
|(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)



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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 ̈



Indicate by check mark whether the Registrant is an
accelerated filer (as defined in Rule 12b-2 of the Exchange Act).    Yes ̈No  x



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



As of October 31, 2005, there were 12,563,750 shares of the Registrants common stock outstanding.



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##### Table of Contents

SI FINANCIAL GROUP, INC. AND SUBSIDIARIES



TABLE OF CONTENTS



|           |  |                                                                                                                  |  |         
|---------- |  | ---------------------------------------------------------------------------------------------------------------- |  | --------
|           |  |                                                                                                                  |  | Page No.
|PART I.    |  | FINANCIAL INFORMATION                                                                                            |  |         
|           |  |                                                                                                                 
|Item 1.    |  | Consolidated Financial Statements of SI Financial Group, Inc. and Subsidiaries (unaudited):                      |  |         
|           |  |                                                                                                                 
|           |  | Consolidated Statements of Financial Condition at September 30, 2005 and December 31, 2004                       |  | 1       
|           |  |                                                                                                                 
|           |  | Consolidated Statements of Income (Loss) for the three and nine months ended September 30, 2005 and 2004         |  | 2       
|           |  |                                                                                                                 
|           |  | Consolidated Statements of Changes in Stockholders Equity for the nine months ended September 30, 2005 and 2004 |  | 4       
|           |  |                                                                                                                 
|           |  | Consolidated Statements of Cash Flows for the nine months ended September 30, 2005 and 2004                      |  | 5       
|           |  |                                                                                                                 
|           |  | Notes to Consolidated Financial Statements                                                                       |  | 7       
|           |  |                                                                                                                 
|Item 2.    |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                            |  | 12      
|           |  |                                                                                                                 
|Item 3.    |  | Quantitative and Qualitative Disclosures about Market Risk                                                       |  | 26      
|           |  |                                                                                                                 
|Item 4.    |  | Controls and Procedures                                                                                          |  | 28      
|           |  |                                                                                                                 
|PART II.   |  | OTHER INFORMATION                                                                                                |  |         
|           |  |                                                                                                                 
|Item 1.    |  | Legal Proceedings                                                                                                |  | 29      
|           |  |                                                                                                                 
|Item 2.    |  | Unregistered Sales of Equity Securities and Use of Proceeds                                                      |  | 29      
|           |  |                                                                                                                 
|Item 3.    |  | Defaults Upon Senior Securities                                                                                  |  | 29      
|           |  |                                                                                                                 
|Item 4.    |  | Submission of Matters to a Vote of Security Holders                                                              |  | 29      
|           |  |                                                                                                                 
|Item 5.    |  | Other Information                                                                                                |  | 29      
|           |  |                                                                                                                 
|Item 6.    |  | Exhibits                                                                                                         |  | 29      
|           | 
|SIGNATURES |  | 30                                                                                                              



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##### Table of Contents

PART I. FINANCIAL INFORMATION



Item 1. Financial Statements.



SI FINANCIAL GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION



|                                                                                                                                                  |  |                    |         |   |                   |   |         |  
|------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------ | ------- | - | ----------------- | - | ------- | -
|(Unaudited / Dollars in Thousands, Except Share Amounts)                                                                                          |  | September 30, 2005 |         |   | December 31, 2004 |  
|ASSETS:                                                                                                                                           |  |                    |         |   |                   |   |         |  
|Cash and due from banks:                                                                                                                          |  |                    |         |   |                   |   |         |  
|Noninterest-bearing deposits and cash                                                                                                             |  | $                  | 17,468  |   |                   | $ | 21,647  |  
|Interest-bearing deposits                                                                                                                         |  |                    | 9,398   |   |                   |   | 8,728   |  
|Federal funds sold                                                                                                                                |  |                    | 2,300   |   |                   |   | 400     |  
|                                                                                                                                                  |  |                    |         |   |                   |   |         |  
|Cash and cash equivalents                                                                                                                         |  |                    | 29,166  |   |                   |   | 30,775  |  
|                                                                                                                                                  |  |                   
|Available for sale securities, at fair value                                                                                                      |  |                    | 117,199 |   |                   |   | 120,557 |  
|Loans held for sale                                                                                                                               |  |                    | 157     |   |                   |   | 200     |  
|Loans receivable (net of allowance for loan losses of $3.6 million at September 30, 2005 and $3.2 million at December 31,
2004)                   |  |                    | 493,679 |   |                   |   | 447,957 |  
|Accrued interest receivable                                                                                                                       |  |                    | 3,037   |   |                   |   | 2,638   |  
|Federal Home Loan Bank Stock, at cost                                                                                                             |  |                    | 5,638   |   |                   |   | 4,313   |  
|Cash surrender value of bank-owned life insurance                                                                                                 |  |                    | 7,767   |   |                   |   | 7,561   |  
|Other real estate owned                                                                                                                           |  |                    | 350     |   |                   |   |        |  
|Premises and equipment, net                                                                                                                       |  |                    | 8,394   |   |                   |   | 6,586   |  
|Core deposit intangible                                                                                                                           |  |                    | 219     |   |                   |   | 292     |  
|Deferred tax asset, net                                                                                                                           |  |                    | 2,662   |   |                   |   | 2,044   |  
|Other assets                                                                                                                                      |  |                    | 2,448   |   |                   |   | 1,726   |  
|                                                                                                                                                  |  |                    |         |   |                   |   |         |  
|TOTAL ASSETS                                                                                                                                      |  | $                  | 670,716 |   |                   | $ | 624,649 |  
|                                                                                                                                                  |  |                    |         |   |                   |   |         |  
|LIABILITIES AND STOCKHOLDERS EQUITY:                                                                                                             |  |                    |         |   |                   |   |         |  
|Liabilities:                                                                                                                                      |  |                    |         |   |                   |   |         |  
|Deposits:                                                                                                                                         |  |                    |         |   |                   |   |         |  
|Noninterest-bearing                                                                                                                               |  | $                  | 51,021  |   |                   | $ | 46,049  |  
|Interest-bearing                                                                                                                                  |  |                    | 435,283 |   |                   |   | 411,709 |  
|                                                                                                                                                  |  |                    |         |   |                   |   |         |  
|Total deposits                                                                                                                                    |  |                    | 486,304 |   |                   |   | 457,758 |  
|                                                                                                                                                  |  |                   
|Mortgagors and investors escrow accounts                                                                                                        |  |                    | 1,399   |   |                   |   | 2,722   |  
|Federal Home Loan Bank advances                                                                                                                   |  |                    | 91,128  |   |                   |   | 72,674  |  
|Junior subordinated debt owed to unconsolidated trust                                                                                             |  |                    | 7,217   |   |                   |   | 7,217   |  
|Accrued expenses and other liabilities                                                                                                            |  |                    | 4,186   |   |                   |   | 3,469   |  
|                                                                                                                                                  |  |                    |         |   |                   |   |         |  
|TOTAL LIABILITIES                                                                                                                                 |  |                    | 590,234 |   |                   |   | 543,840 |  
|                                                                                                                                                  |  |                    |         |   |                   |   |         |  
|Stockholders Equity:                                                                                                                             |  |                    |         |   |                   |   |         |  
|Preferred stock ($.01 par value; 1,000,000 shares authorized; no shares issued and outstanding)                                                   |  |                    |        |   |                   |   |        |  
|Common stock ($.01 par value; 75,000,000 shares authorized; 12,563,750 shares issued and outstanding at September 30, 2005 and
December 31, 2004) |  |                    | 126     |   |                   |   | 126     |  
|Additional paid-in capital                                                                                                                        |  |                    | 52,159  |   |                   |   | 50,947  |  
|Unallocated common shares held by ESOP                                                                                                            |  |                    | (4,844  | ) |                   |   | (4,844  | )
|Unearned restricted shares                                                                                                                        |  |                    | (2,301  | ) |                   |   |        |  
|Retained earnings                                                                                                                                 |  |                    | 36,689  |   |                   |   | 34,870  |  
|Accumulated other comprehensive loss                                                                                                              |  |                    | (1,347  | ) |                   |   | (290    | )
|                                                                                                                                                  |  |                    |         |   |                   |   |         |  
|TOTAL STOCKHOLDERS EQUITY                                                                                                                        |  |                    | 80,482  |   |                   |   | 80,809  |  
|                                                                                                                                                  |  |                    |         |   |                   |   |         |  
|TOTAL LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                        |  | $                  | 670,716 |   |                   | $ | 624,649 |  
|                                                                                                                                                  |  |                    |         |   |                   |   |         |  



See accompanying notes to unaudited
interim consolidated financial statements.



1



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##### Table of Contents

SI FINANCIAL GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME (LOSS)



|                                                                  |  |                                  |       |   |                                 |   |        |      |  |      |        |  |   |        |  
|----------------------------------------------------------------- |  | -------------------------------- | ----- | - | ------------------------------- | - | ------ | ---- |  | ---- | ------ |  | - | ------ | -
|                                                                  |  | Three Months Ended September 30, |       |   | Nine Months Ended September 30, |  
|(Unaudited / Dollars in
Thousands)                                |  | 2005                             |       |   | 2004                            |   |        | 2005 |  | 2004 |       
|Interest and dividend income:                                     |  |                                  |       |   |                                 |   |        |      |  |      |        |  |   |        |  
|Loans, including fees                                             |  | $                                | 7,382 |   |                                 | $ | 6,115  |      |  | $    | 20,808 |  | $ | 17,980 |  
|Investment securities:                                            |  |                                  |       |   |                                 |   |        |      |  |      |        |  |   |        |  
|Taxable                                                           |  |                                  | 1,185 |   |                                 |   | 880    |      |  |      | 3,567  |  |   | 2,572  |  
|Tax-exempt                                                        |  |                                  | 5     |   |                                 |   | 6      |      |  |      | 16     |  |   | 18     |  
|Dividends                                                         |  |                                  | 62    |   |                                 |   | 39     |      |  |      | 169    |  |   | 93     |  
|Other                                                             |  |                                  | 77    |   |                                 |   | 111    |      |  |      | 235    |  |   | 174    |  
|                                                                  |  |                                  |       |   |                                 |   |        |      |  |      |        |  |   |        |  
|TOTAL INTEREST AND DIVIDEND INCOME                                |  |                                  | 8,711 |   |                                 |   | 7,151  |      |  |      | 24,795 |  |   | 20,837 |  
|                                                                  |  |                                  |       |   |                                 |   |        |      |  |      |        |  |   |        |  
|Interest expense:                                                 |  |                                  |       |   |                                 |   |        |      |  |      |        |  |   |        |  
|Deposits                                                          |  |                                  | 2,237 |   |                                 |   | 1,614  |      |  |      | 6,057  |  |   | 4,647  |  
|Federal Home Loan Bank advances                                   |  |                                  | 842   |   |                                 |   | 669    |      |  |      | 2,211  |  |   | 2,017  |  
|Subordinated debt                                                 |  |                                  | 127   |   |                                 |   | 91     |      |  |      | 354    |  |   | 267    |  
|                                                                  |  |                                  |       |   |                                 |   |        |      |  |      |        |  |   |        |  
|TOTAL INTEREST EXPENSE                                            |  |                                  | 3,206 |   |                                 |   | 2,374  |      |  |      | 8,622  |  |   | 6,931  |  
|                                                                  |  |                                  |       |   |                                 |   |        |      |  |      |        |  |   |        |  
|NET INTEREST AND DIVIDEND INCOME BEFORE PROVISION FOR LOAN LOSSES |  |                                  | 5,505 |   |                                 |   | 4,777  |      |  |      | 16,173 |  |   | 13,906 |  
|                                                                  |  |                                  |       |  
|Provision for loan losses                                         |  |                                  | 75    |   |                                 |   | 100    |      |  |      | 310    |  |   | 400    |  
|                                                                  |  |                                  |       |   |                                 |   |        |      |  |      |        |  |   |        |  
|NET INTEREST AND DIVIDEND INCOME AFTER PROVISION FOR LOAN LOSSES  |  |                                  | 5,430 |   |                                 |   | 4,677  |      |  |      | 15,863 |  |   | 13,506 |  
|                                                                  |  |                                  |       |   |                                 |   |        |      |  |      |        |  |   |        |  
|Noninterest income:                                               |  |                                  |       |   |                                 |   |        |      |  |      |        |  |   |        |  
|Service fees                                                      |  |                                  | 1,094 |   |                                 |   | 747    |      |  |      | 3,102  |  |   | 2,194  |  
|Wealth management fees                                            |  |                                  | 233   |   |                                 |   | 240    |      |  |      | 745    |  |   | 727    |  
|Increase in cash surrender value of bank-owned life insurance     |  |                                  | 69    |   |                                 |   | 70     |      |  |      | 206    |  |   | 229    |  
|Net gain (loss) on available for sale securities                  |  |                                  | 24    |   |                                 |   | (355   | )    |  |      | 59     |  |   | (169   | )
|Net gain (loss) on sale of loans                                  |  |                                  | 26    |   |                                 |   | 11     |      |  |      | 173    |  |   | (9     | )
|Other                                                             |  |                                  | (21   | ) |                                 |   | 41     |      |  |      | 96     |  |   | 86     |  
|                                                                  |  |                                  |       |   |                                 |   |        |      |  |      |        |  |   |        |  
|TOTAL NONINTEREST INCOME                                          |  |                                  | 1,425 |   |                                 |   | 754    |      |  |      | 4,381  |  |   | 3,058  |  
|                                                                  |  |                                  |       |   |                                 |   |        |      |  |      |        |  |   |        |  
|Noninterest expenses:                                             |  |                                  |       |   |                                 |   |        |      |  |      |        |  |   |        |  
|Salaries and employee benefits                                    |  |                                  | 3,269 |   |                                 |   | 2,500  |      |  |      | 9,142  |  |   | 7,336  |  
|Occupancy and equipment                                           |  |                                  | 929   |   |                                 |   | 732    |      |  |      | 2,726  |  |   | 2,688  |  
|Computer and electronic banking services                          |  |                                  | 436   |   |                                 |   | 405    |      |  |      | 1,322  |  |   | 1,245  |  
|Outside professional services                                     |  |                                  | 247   |   |                                 |   | 150    |      |  |      | 907    |  |   | 529    |  
|Marketing                                                         |  |                                  | 202   |   |                                 |   | 143    |      |  |      | 517    |  |   | 364    |  
|Impairment charge  other asset                                   |  |                                  |      |   |                                 |   |       |      |  |      |       |  |   | 51     |  
|Contribution to SI Financial Group Foundation                     |  |                                  |      |   |                                 |   | 2,513  |      |  |      |       |  |   | 2,513  |  
|Other real estate operations                                      |  |                                  | 30    |   |                                 |   | (73    | )    |  |      | 36     |  |   | 12     |  
|Other                                                             |  |                                  | 525   |   |                                 |   | 627    |      |  |      | 1,793  |  |   | 1,650  |  
|                                                                  |  |                                  |       |   |                                 |   |        |      |  |      |        |  |   |        |  
|TOTAL NONINTEREST EXPENSES                                        |  |                                  | 5,638 |   |                                 |   | 6,997  |      |  |      | 16,443 |  |   | 16,388 |  
|                                                                  |  |                                  |       |   |                                 |   |        |      |  |      |        |  |   |        |  
|INCOME (LOSS) BEFORE INCOME TAX PROVISION                         |  |                                  | 1,217 |   |                                 |   | (1,566 | )    |  |      | 3,801  |  |   | 176    |  
|                                                                  |  |                                  |       |  
|Income tax provision (benefit)                                    |  |                                  | 405   |   |                                 |   | (556   | )    |  |      | 1,242  |  |   | (10    | )
|                                                                  |  |                                  |       |   |                                 |   |        |      |  |      |        |  |   |        |  
|NET INCOME (LOSS)                                                 |  | $                                | 812   |   |                                 | $ | (1,010 | )    |  | $    | 2,559  |  | $ | 186    |  
|                                                                  |  |                                  |       |   |                                 |   |        |      |  |      |        |  |   |        |  



See accompanying notes to unaudited
interim consolidated financial statements.



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##### Table of Contents

SI FINANCIAL GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME (LOSS)  Continued



|                                            |  |                                  |            |                                 |     |      |   |            |  |    
|------------------------------------------- |  | -------------------------------- | ---------- | ------------------------------- | --- | ---- | - | ---------- |  | ---
|                                            |  | Three Months Ended September 30, |            | Nine Months Ended September 30,
|(Unaudited)                                 |  | 2005                             |            | 2004                            |     | 2005 |   | 2004      
|NET INCOME PER COMMON SHARE:                |  |                                  |            |                                 |     |      |   |            |  |    
|Basic                                       |  | $                                | 0.07       |                                 | N/A |      | $ | 0.21       |  | N/A
|Diluted                                     |  | $                                | 0.07       |                                 | N/A |      | $ | 0.21       |  | N/A
|                                            |  |                                  |            |                                
|WEIGHTED-AVERAGE COMMON SHARES OUTSTANDING: |  |                                  |            |                                 |     |      |   |            |  |    
|Basic                                       |  |                                  | 12,026,119 |                                 | N/A |      |   | 12,064,016 |  | N/A
|Diluted                                     |  |                                  | 12,146,514 |                                 | N/A |      |   | 12,101,886 |  | N/A



See accompanying notes to unaudited
interim consolidated financial statements.



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##### Table of Contents

SI FINANCIAL GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY

NINE MONTHS ENDED SEPTEMBER 30, 2005 AND 2004



|                                                                                                                                |  |              |  |                            |     |  |                                        |        |   |                            |   |        |                   |  |   |                                               |   |  |                            |        |   |  |   |        |   |  |   |        |  
|------------------------------------------------------------------------------------------------------------------------------- |  | ------------ |  | -------------------------- | --- |  | -------------------------------------- | ------ | - | -------------------------- | - | ------ | ----------------- |  | - | --------------------------------------------- | - |  | -------------------------- | ------ | - |  | - | ------ | - |  | - | ------ | -
|                                                                                                                                |  | Common Stock |  | Additional Paid-in Capital |     |  | Unallocated Common Shares Held By ESOP |        |   | Unearned Restricted Shares |   |        | Retained Earnings |  |   | Accumulated Other Comprehensive Income (Loss) |   |  | Total Stockholders Equity |       
|(Unaudited / Dollars in Thousands, Except Share Amounts)                                                                        |  | Shares       |  | Dollars                    |     |  |                                        |        |   |                           
|BALANCE AT DECEMBER 31, 2003                                                                                                    |  |             |  | $                          |    |  | $                                      |       |   |                            | $ |       |                   |  | $ |                                              |   |  | $                          | 33,582 |   |  | $ | 517    |   |  | $ | 34,099 |  
|                                                                                                                                |  |              |  |                            |     |  |                                        |       
|Issuance of common stock for initial public offering, net of expenses of $1.8 million                                           |  | 5,025,500    |  |                            | 50  |  |                                        | 48,430 |   |                            |   |       |                   |  |   |                                              |   |  |                            |       |   |  |   |       |   |  |   | 48,480 |  
|                                                                                                                                |  |              |  |                            |     |  |                                        |       
|Issuance of common stock to SI Bancorp, MHC                                                                                     |  | 7,286,975    |  |                            | 73  |  |                                        | (73    | ) |                            |   |       |                   |  |   |                                              |   |  |                            |       |   |  |   |       |   |  |   |       |  
|                                                                                                                                |  |              |  |                            |     |  |                                        |       
|Issuance of common stock to SI Financial Group Foundation including additional tax benefit due to higher basis for tax
purposes |  | 251,275      |  |                            | 3   |  |                                        | 2,578  |   |                            |   |       |                   |  |   |                                              |   |  |                            |       |   |  |   |       |   |  |   | 2,581  |  
|                                                                                                                                |  |              |  |                            |     |  |                                        |       
|Shares purchased for ESOP                                                                                                       |  |             |  |                            |    |  |                                        |       |   |                            |   | (4,925 | )                 |  |   |                                              |   |  |                            |       |   |  |   |       |   |  |   | (4,925 | )
|                                                                                                                                |  |              |  |                            |     |  |                                        |       
|Comprehensive loss:                                                                                                             |  |              |  |                            |     |  |                                        |        |   |                            |   |        |                   |  |   |                                               |   |  |                            |        |   |  |   |        |   |  |   |        |  
|Net income                                                                                                                      |  |             |  |                            |    |  |                                        |       |   |                            |   |       |                   |  |   |                                              |   |  |                            | 186    |   |  |   |       |   |  |   | 186    |  
|Change in net unrealized losses on available for sale securities, net of taxes                                                  |  |             |  |                            |    |  |                                        |       |   |                            |   |       |                   |  |   |                                              |   |  |                            |       |   |  |   | (532   | ) |  |   | (532   | )
|                                                                                                                                |  |              |  |                            |     |  |                                        |        |   |                            |   |        |                   |  |   |                                               |   |  |                            |        |   |  |   |        |   |  |   |        |  
|Total comprehensive loss                                                                                                        |  |             |  |                            |    |  |                                        |       |   |                            |   |       |                   |  |   |                                              |   |  |                            | 186    |   |  |   | (532   | ) |  |   | (346   | )
|                                                                                                                                |  |              |  |                            |     |  |                                        |        |   |                            |   |        |                   |  |   |                                               |   |  |                            |        |   |  |   |        |   |  |   |        |  
|BALANCE AT SEPTEMBER 30, 2004                                                                                                   |  | 12,563,750   |  | $                          | 126 |  | $                                      | 50,935 |   |                            | $ | (4,925 | )                 |  | $ |                                              |   |  | $                          | 33,768 |   |  | $ | (15    | ) |  | $ | 79,889 |  
|                                                                                                                                |  |              |  |                            |     |  |                                        |        |   |                            |   |        |                   |  |   |                                               |   |  |                            |        |   |  |   |        |   |  |   |        |  
|BALANCE AT DECEMBER 31, 2004                                                                                                    |  | 12,563,750   |  | $                          | 126 |  | $                                      | 50,947 |   |                            | $ | (4,844 | )                 |  | $ |                                              |   |  | $                          | 34,870 |   |  | $ | (290   | ) |  | $ | 80,809 |  
|                                                                                                                                |  |              |  |                            |     |  |                                        |       
|Cash dividends declared ($0.03 per share)                                                                                       |  |             |  |                            |    |  |                                        |       |   |                            |   |       |                   |  |   |                                              |   |  |                            | (475   | ) |  |   |       |   |  |   | (475   | )
|                                                                                                                                |  |              |  |                            |     |  |                                        |       
|Restricted share grants and purchases                                                                                           |  |             |  |                            |    |  |                                        | 1,113  |   |                            |   |       |                   |  |   | (2,487                                        | ) |  |                            | (265   | ) |  |   |       |   |  |   | (1,639 | )
|                                                                                                                                |  |              |  |                            |     |  |                                        |       
|Equity incentive plan shares earned                                                                                             |  |             |  |                            |    |  |                                        | 99     |   |                            |   |       |                   |  |   | 186                                           |   |  |                            |       |   |  |   |       |   |  |   | 285    |  
|                                                                                                                                |  |              |  |                            |     |  |                                        |       
|Comprehensive income:                                                                                                           |  |              |  |                            |     |  |                                        |        |   |                            |   |        |                   |  |   |                                               |   |  |                            |        |   |  |   |        |   |  |   |        |  
|Net income                                                                                                                      |  |             |  |                            |    |  |                                        |       |   |                            |   |       |                   |  |   |                                              |   |  |                            | 2,559  |   |  |   |       |   |  |   | 2,559  |  
|Change in net unrealized losses on available for sale securities, net of taxes                                                  |  |             |  |                            |    |  |                                        |       |   |                            |   |       |                   |  |   |                                              |   |  |                            |       |   |  |   | (1,057 | ) |  |   | (1,057 | )
|                                                                                                                                |  |              |  |                            |     |  |                                        |        |   |                            |   |        |                   |  |   |                                               |   |  |                            |        |   |  |   |        |   |  |   |        |  
|Total comprehensive income                                                                                                      |  |             |  |                            |    |  |                                        |       |   |                            |   |       |                   |  |   |                                              |   |  |                            | 2,559  |   |  |   | (1,057 | ) |  |   | 1,502  |  
|                                                                                                                                |  |              |  |                            |     |  |                                        |        |   |                            |   |        |                   |  |   |                                               |   |  |                            |        |   |  |   |        |   |  |   |        |  
|BALANCE AT SEPTEMBER 30, 2005                                                                                                   |  | 12,563,750   |  | $                          | 126 |  | $                                      | 52,159 |   |                            | $ | (4,844 | )                 |  | $ | (2,301                                        | ) |  | $                          | 36,689 |   |  | $ | (1,347 | ) |  | $ | 80,482 |  
|                                                                                                                                |  |              |  |                            |     |  |                                        |        |   |                            |   |        |                   |  |   |                                               |   |  |                            |        |   |  |   |        |   |  |   |        |  



See accompanying notes to unaudited
interim consolidated financial statements.



4



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##### Table of Contents

SI FINANCIAL GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS



|                                                                                      |  |                                 |         |   |      |   |         |  
|------------------------------------------------------------------------------------- |  | ------------------------------- | ------- | - | ---- | - | ------- | -
|                                                                                      |  | Nine Months Ended September 30, |        
|(Unaudited / Dollars in Thousands)                                                    |  | 2005                            |         |   | 2004 |  
|CASH FLOWS FROM OPERATING ACTIVITIES:                                                 |  |                                 |         |   |      |   |         |  
|Net income                                                                            |  | $                               | 2,559   |   |      | $ | 186     |  
|Adjustments to reconcile net income to net cash provided by operating activities:     |  |                                 |         |   |      |   |         |  
|Provision for loan losses                                                             |  |                                 | 310     |   |      |   | 400     |  
|Contribution of common stock to charitable foundation                                 |  |                                 |        |   |      |   | 2,513   |  
|Employee stock ownership plan expense                                                 |  |                                 | 270     |   |      |   |        |  
|Equity incentive plan expense                                                         |  |                                 | 285     |   |      |   |        |  
|Amortization and accretion of investment premiums and discounts, net                  |  |                                 | 49      |   |      |   | 89      |  
|Amortization and accretion of loan premiums and discounts, net                        |  |                                 | 181     |   |      |   | 230     |  
|Depreciation and amortization of premises and equipment                               |  |                                 | 972     |   |      |   | 802     |  
|Amortization of core deposit intangible                                               |  |                                 | 73      |   |      |   | 73      |  
|Amortization of deferred debt issuance costs                                          |  |                                 | 26      |   |      |   | 26      |  
|Amortization of mortgage servicing rights                                             |  |                                 | 46      |   |      |   |        |  
|Net loss (gain) on available for sale securities                                      |  |                                 | (59     | ) |      |   | 169     |  
|Deferred income taxes                                                                 |  |                                 | (73     | ) |      |   |        |  
|Loans originated for sale                                                             |  |                                 | (6,186  | ) |      |   | (14,251 | )
|Proceeds from sale of loans                                                           |  |                                 | 6,247   |   |      |   | 14,242  |  
|Net loss (gain) on sale of loans                                                      |  |                                 | (173    | ) |      |   | 9       |  
|Net gain on sale of bank premises and equipment                                       |  |                                 | (31     | ) |      |   |        |  
|Write-down of other real estate owned                                                 |  |                                 |        |   |      |   | 60      |  
|Increase in cash surrender value of bank-owned life insurance                         |  |                                 | (206    | ) |      |   | (229    | )
|Impairment charge  long-lived assets                                                 |  |                                 |        |   |      |   | 337     |  
|Impairment charge  other assets                                                      |  |                                 |        |   |      |   | 51      |  
|Change in operating assets and liabilities:                                           |  |                                 |         |   |      |   |         |  
|Accrued interest receivable                                                           |  |                                 | (399    | ) |      |   | (202    | )
|Other assets                                                                          |  |                                 | (795    | ) |      |   | (142    | )
|Accrued expenses and other liabilities                                                |  |                                 | 289     |   |      |   | (191    | )
|                                                                                      |  |                                 |         |   |      |   |         |  
|NET CASH PROVIDED BY OPERATING ACTIVITIES                                             |  |                                 | 3,385   |   |      |   | 4,172   |  
|                                                                                      |  |                                 |         |   |      |   |         |  
|CASH FLOWS FROM INVESTING ACTIVITIES:                                                 |  |                                 |         |   |      |   |         |  
|Purchases of available for sale securities                                            |  |                                 | (18,819 | ) |      |   | (61,770 | )
|Proceeds from sales of available for sale securities                                  |  |                                 | 159     |   |      |   | 22,596  |  
|Proceeds from maturities of and principal repayments on available for sale securities |  |                                 | 20,427  |   |      |   | 18,693  |  
|Proceeds from maturities of and principal repayments on held to maturity securities   |  |                                 |        |   |      |   | 1,376   |  
|Net increase in loans                                                                 |  |                                 | (74,068 | ) |      |   | (36,658 | )
|Proceeds from sale of loans held for investment                                       |  |                                 | 27,660  |   |      |   |        |  
|Purchases of Federal Home Loan Bank stock                                             |  |                                 | (1,325  | ) |      |   | (1,243  | )
|Proceeds from sale of other real estate owned                                         |  |                                 |        |   |      |   | 268     |  
|Proceeds from sale of bank premises and equipment                                     |  |                                 | 485     |   |      |   |        |  
|Purchases of bank premises and equipment                                              |  |                                 | (3,234  | ) |      |   | (927    | )
|                                                                                      |  |                                 |         |   |      |   |         |  
|NET CASH USED IN INVESTING ACTIVITIES                                                 |  |                                 | (48,715 | ) |      |   | (57,665 | )
|                                                                                      |  |                                 |         |   |      |   |         |  
|CASH FLOWS FROM FINANCING ACTIVITIES:                                                 |  |                                 |         |   |      |   |         |  
|Net increase in deposits                                                              |  |                                 | 28,546  |   |      |   | 30,020  |  
|Net decrease in mortgagors and investors escrow accounts                            |  |                                 | (1,323  | ) |      |   | (1,321  | )
|Proceeds from Federal Home Loan Bank advances                                         |  |                                 | 42,827  |   |      |   | 21,687  |  
|Repayments of Federal Home Loan Bank advances                                         |  |                                 | (24,373 | ) |      |   | (18,004 | )
|Net proceeds from common stock offering                                               |  |                                 |        |   |      |   | 48,480  |  



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SI FINANCIAL GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS - Continued



|                                                 |  |                                 |        |   |      |   |        |  
|------------------------------------------------ |  | ------------------------------- | ------ | - | ---- | - | ------ | -
|                                                 |  | Nine Months Ended September 30, |       
|(Unaudited / Dollars in Thousands)               |  | 2005                            |        |   | 2004 |  
|Acquisition of common stock by ESOP              |  |                                 |       |   |      |   | (4,925 | )
|Cash dividends paid                              |  |                                 | (317   | ) |      |   |       |  
|Purchase common stock for equity incentive plan  |  |                                 | (1,639 | ) |      |   |       |  
|                                                 |  |                                 |        |   |      |   |        |  
|NET CASH PROVIDED BY FINANCING ACTIVITIES        |  |                                 | 43,721 |   |      |   | 75,937 |  
|                                                 |  |                                 |        |   |      |   |        |  
|NET CHANGE IN CASH AND CASH EQUIVALENTS          |  |                                 | (1,609 | ) |      |   | 22,444 |  
|CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD |  |                                 | 30,775 |   |      |   | 29,577 |  
|                                                 |  |                                 |        |   |      |   |        |  
|CASH AND CASH EQUIVALENTS AT END OF PERIOD       |  | $                               | 29,166 |   |      | $ | 52,021 |  
|                                                 |  |                                 |        |   |      |   |        |  
|SUPPLEMENTAL CASH FLOW INFORMATION:              |  |                                 |        |   |      |   |        |  
|Interest paid                                    |  | $                               | 8,467  |   |      | $ | 6,874  |  
|                                                 |  |                                 |        |   |      |   |        |  
|Income taxes paid                                |  | $                               | 1,402  |   |      | $ | 921    |  
|                                                 |  |                                 |        |   |      |   |        |  
|Transfer of loans to other real estate owned     |  | $                               | 350    |   |      | $ |       |  
|                                                 |  |                                 |        |   |      |   |        |  



See accompanying notes to unaudited
interim consolidated financial statements.



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##### Table of Contents

SI FINANCIAL GROUP, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2005 AND 2004 AND DECEMBER 31, 2004



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



Nature of Business



On August 6, 2004, SI Financial Group, Inc. (the Company), a
federally-chartered mid-tier stock holding company, was formed. On that date, SI Bancorp, Inc., a Connecticut mutual holding company organized in 2000, converted from a state-chartered mutual holding company to a federally-chartered mutual holding
company operating under the name SI Bancorp, MHC. In addition, Savings Institute Bank and Trust Company (the Bank), formerly operating under the name Savings Institute, completed its conversion from a state-chartered stock savings bank
to a federally-chartered stock savings bank. SI Bancorp, Inc. transferred its ownership in all of the stock of Savings Institute Bank and Trust Company to SI Financial Group, Inc. in exchange for all of the outstanding shares of SI Financial Group,
Inc. In addition, SI Financial Group, Inc. received all other assets and liabilities held by SI Bancorp, Inc., including $7.2 million of subordinated debt.



On September 30, 2004, the Company sold 5,025,500 shares of its common stock, representing 40% of the 12,563,750 shares outstanding, at $10.00 per share to eligible
account holders and the Employee Stock Ownership Plan (ESOP) of the Bank in a subscription offering pursuant to a Plan of Reorganization and Minority Stock Issuance. SI Bancorp, MHC was issued 58% of the Companys common stock. SI
Bancorp, MHC does not conduct any business other than owning a majority of the common stock of SI Financial Group, Inc.



In connection with the offering, SI Financial Group, Inc. established SI Financial Group Foundation (the Foundation), a charitable foundation dedicated to
community activities and the promotion of charitable causes in areas in which the Bank operates. The Foundation was funded on September 30, 2004 with a contribution of 2%, or 251,275 shares, of the Companys common stock. This contribution
resulted in the recognition of a $2.5 million expense, equal to the value of the common shares contributed by the Company (net of taxes), for the period ended December 31, 2004. The Company recognized an additional tax benefit of $68,000 as an
increase to stockholders equity resulting from the higher tax basis of the contribution.



The Bank established the ESOP for the benefit of its eligible employees. The Bank borrowed the necessary funds from the Company to purchase 3.92%, or 492,499 shares, of the common shares issued and outstanding. The
Bank intends to make annual contributions adequate to fund the payment of regular debt service requirements under the ESOP.



The Banks deposits are insured under the Bank Insurance Fund, which is administered by the Federal Deposit Insurance Corporation. The Bank is headquartered in
Willimantic, Connecticut with sixteen offices in eastern Connecticut. The Bank is a full service community-oriented financial institution dedicated to servicing the financial service needs of its consumer and commercial customers within its market
area.



Principles of Consolidation



The accompanying consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiary, Savings Institute Bank and Trust Company, 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 for interim financial information, with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X of the
Securities and Exchange Commission and generally accepted practices within the banking industry. Accordingly, certain information and footnote disclosures required by accounting principles generally accepted in the United States of America 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 September 30, 2005 and for the three and nine months ended
September 30, 2005 and 2004 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, 2004 contained in the Companys Form 10-K.



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SI FINANCIAL GROUP, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2005 AND
2004 AND DECEMBER 31, 2004



Interim financial statements are subject to
possible adjustment in connection with the annual audit of the Company for the year ended December 31, 2005. In the opinion of management, the accompanying unaudited interim consolidated financial statements reflect all of the adjustments
(consisting only of normal and recurring in nature) necessary for a fair presentation of the financial condition, results of operation and cash flows as of and for the period covered herein. The results of operation for the three and nine months
ended September 30, 2005 are not necessarily indicative of the operating results for the twelve months ending December 31, 2005.



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 statement of financial condition and reported amounts of revenues and expenses for the periods presented. Actual results could differ from those estimates. A material
estimate that is particularly susceptible to significant change in the near term relates to the determination of the allowance for loan losses and the impairment of long-lived assets.



Recent Accounting Pronouncements



In May 2005, the Financial Accounting Standards Board issued Statement of Financial Accounting Standard No. 154, Accounting
Changes and Error Corrections (SFAS 154). This Statement replaces Accounting Principles Board Opinion No. 20 (APB 20), Accounting Changes and Statement of Financial Accounting Standard
No. 3, Reporting Accounting Changes in Interim Financial Statements, and changes the requirements for the accounting for and reporting of a change in accounting principle. In accordance with the prior guidance of APB 20, most
voluntary changes in an accounting principle required recognizing the cumulative effect of a change in accounting principle in net income in the period of change. SFAS 154 requires retrospective application to prior periods financial
statements for the direct effects of a change in accounting principle, unless it is impracticable to determine either the period-specific effects of the cumulative effect of the change. Indirect effects of a change in accounting principle should be
recognized in the period of accounting change. SFAS 154 carries forward the guidance of APB 20 relating to the reporting for correction of an error in previously issued financial statements, change in accounting estimate and the justification
requirement for a change in accounting principle on the basis of preferability. Provisions of this statement are effective for accounting changes made in the fiscal years beginning after December 15, 2005. At this time, the Company is uncertain
how the application of SFAS 154 will impact prior period financial statements for the implementation of future accounting pronouncements.



NOTE 2. EARNINGS PER SHARE



Basic net income per common share is calculated by dividing the net income available to common stockholders by the weighted-average number of common shares outstanding
during the period. Diluted net income per common share is computed in a manner similar to basic net income per common 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 option and
restricted stock awards. 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 no anti-dilutive common shares outstanding for
the three and nine months ended September 30, 2005. Unallocated common shares held by the ESOP are not included in the weighted-average number of common shares outstanding for purposes of calculating both basic and diluted net income per common
share.



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SI FINANCIAL GROUP, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2005 AND
2004 AND DECEMBER 31, 2004



|                                                              |  |                                 |            |      |                                |        |      |  |      |            |  |   |    
|------------------------------------------------------------- |  | ------------------------------- | ---------- | ---- | ------------------------------ | ------ | ---- |  | ---- | ---------- |  | - | ---
|                                                              |  | Three Months EndedSeptember 30, |            |      | Nine Months EndedSeptember 30,
|                                                              |  | 2005                            |            | 2004 |                                |        | 2005 |  | 2004
|Net income (loss)                                             |  | $                               | 812        |      | $                              | (1,010 | )    |  | $    | 2,559      |  | $ | 186
|                                                              |  |                                 |            |     
|Weighted-average common shares outstanding:                   |  |                                 |            |      |                                |        |      |  |      |            |  |   |    
|Basic                                                         |  |                                 | 12,026,119 |      |                                | N/A    |      |  |      | 12,064,016 |  |   | N/A
|Effect of dilutive stock options and restrictive stock awards |  |                                 | 120,395    |      |                                | N/A    |      |  |      | 37,870     |  |   | N/A
|                                                              |  |                                 |            |      |                                |        |      |  |      |            |  |   |    
|Diluted                                                       |  |                                 | 12,146,514 |      |                                | N/A    |      |  |      | 12,101,886 |  |   | N/A
|                                                              |  |                                 |            |     
|Net income per common share:                                  |  |                                 |            |      |                                |        |      |  |      |            |  |   |    
|Basic                                                         |  | $                               | 0.07       |      |                                | N/A    |      |  | $    | 0.21       |  |   | N/A
|Diluted                                                       |  | $                               | 0.07       |      |                                | N/A    |      |  | $    | 0.21       |  |   | N/A



Per common share data is not presented
for the three months and the nine months ended September 30, 2004, as the Company had no shares outstanding prior to the Companys initial public offering on September 30, 2004.



NOTE 3. INVESTMENT SECURITIES



The carrying values and approximate fair values of investment securities at
September 30, 2005 and December 31, 2004 are as follows:



|                                                |  |                |         |                        |   |                         |  |   |            |   |  |   |        
|----------------------------------------------- |  | -------------- | ------- | ---------------------- | - | ----------------------- |  | - | ---------- | - |  | - | -------
|September 30, 2005 (Dollars in Thousands)       |  | Amortized Cost |         | Gross Unrealized Gains |   | Gross Unrealized Losses |  |   | Fair Value
|AVAILABLE FOR SALE SECURITIES:                  |  |                |         |                        |   |                         |  |   |            |   |  |   |        
|Debt securities:                                |  |                |         |                        |   |                         |  |   |            |   |  |   |        
|U.S. Government and agency obligations          |  | $              | 78,472  |                        | $ | 63                      |  | $ | (1,451     | ) |  | $ | 77,084 
|Mortgage-backed securities                      |  |                | 33,536  |                        |   | 24                      |  |   | (709       | ) |  |   | 32,851 
|Corporate debt securities                       |  |                | 4,543   |                        |   | 2                       |  |   | (10        | ) |  |   | 4,535  
|Obligations of state and political subdivisions |  |                | 1,499   |                        |   | 55                      |  |   |           |   |  |   | 1,554  
|Tax-exempt securities                           |  |                | 560     |                        |   |                        |  |   |           |   |  |   | 560    
|Foreign government securities                   |  |                | 75      |                        |   |                        |  |   |           |   |  |   | 75     
|                                                |  |                |         |                        |   |                         |  |   |            |   |  |   |        
|Total debt securities                           |  |                | 118,685 |                        |   | 144                     |  |   | (2,170     | ) |  |   | 116,659
|                                                |  |                |         |                       
|Equity securities:                              |  |                |         |                        |   |                         |  |   |            |   |  |   |        
|Marketable equity securities                    |  |                | 555     |                        |   |                        |  |   | (15        | ) |  |   | 540    
|                                                |  |                |         |                        |   |                         |  |   |            |   |  |   |        
|TOTAL AVAILABLE FOR SALE SECURITIES             |  | $              | 119,240 |                        | $ | 144                     |  | $ | (2,185     | ) |  | $ | 117,199
|                                                |  |                |         |                        |   |                         |  |   |            |   |  |   |        



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SI FINANCIAL GROUP, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2005 AND
2004 AND DECEMBER 31, 2004



|                                                |  |                |         |                        |   |                         |  |   |            |   |  |   |        
|----------------------------------------------- |  | -------------- | ------- | ---------------------- | - | ----------------------- |  | - | ---------- | - |  | - | -------
|                                                |  |                |         |                       
|December 31, 2004 (Dollars in Thousands)        |  | Amortized Cost |         | Gross Unrealized Gains |   | Gross Unrealized Losses |  |   | Fair Value
|AVAILABLE FOR SALE SECURITIES:                  |  |                |         |                        |   |                         |  |   |            |   |  |   |        
|Debt securities:                                |  |                |         |                        |   |                         |  |   |            |   |  |   |        
|U.S. Government and agency obligations          |  | $              | 73,950  |                        | $ | 201                     |  | $ | (475       | ) |  | $ | 73,676 
|Mortgage-backed securities                      |  |                | 40,926  |                        |   | 86                      |  |   | (418       | ) |  |   | 40,594 
|Corporate debt securities                       |  |                | 3,498   |                        |   | 65                      |  |   |           |   |  |   | 3,563  
|Obligations of state and political subdivisions |  |                | 1,499   |                        |   | 85                      |  |   |           |   |  |   | 1,584  
|Tax-exempt securities                           |  |                | 560     |                        |   |                        |  |   |           |   |  |   | 560    
|Foreign government securities                   |  |                | 75      |                        |   |                        |  |   |           |   |  |   | 75     
|                                                |  |                |         |                        |   |                         |  |   |            |   |  |   |        
|Total debt securities                           |  |                | 120,508 |                        |   | 437                     |  |   | (893       | ) |  |   | 120,052
|                                                |  |                |         |                       
|Equity securities:                              |  |                |         |                        |   |                         |  |   |            |   |  |   |        
|Marketable equity securities                    |  |                | 488     |                        |   | 17                      |  |   |           |   |  |   | 505    
|                                                |  |                |         |                        |   |                         |  |   |            |   |  |   |        
|TOTAL AVAILABLE FOR SALE SECURITIES             |  | $              | 120,996 |                        | $ | 454                     |  | $ | (893       | ) |  | $ | 120,557
|                                                |  |                |         |                        |   |                         |  |   |            |   |  |   |        



NOTE 4. OTHER COMPREHENSIVE LOSS



Other comprehensive loss, which is comprised solely of the change in
unrealized gains and losses on available for sale securities, net of taxes, for the nine months ended September 30, 2005 and 2004 is as follows:



|                                                                         |  |                   |        |   |                       |   |     |                   |  |   |        |  
|------------------------------------------------------------------------ |  | ----------------- | ------ | - | --------------------- | - | --- | ----------------- |  | - | ------ | -
|Nine Months Ended September 30, 2005 (Dollars in Thousands)              |  | Before-Tax Amount |        |   | Tax Benefit (Expense) |   |     | Net of Tax Amount | 
|Unrealized holding losses arising during the period                      |  | $                 | (1,543 | ) |                       | $ | 525 |                   |  | $ | (1,018 | )
|Reclassification adjustment for gains recognized in net income           |  |                   | (59    | ) |                       |   | 20  |                   |  |   | (39    | )
|                                                                         |  |                   |        |   |                       |   |     |                   |  |   |        |  
|UNREALIZED HOLDING LOSSES ON AVAILABLE FOR SALE SECURITIES, NET OF TAXES |  | $                 | (1,602 | ) |                       | $ | 545 |                   |  | $ | (1,057 | )
|                                                                         |  |                   |        |   |                       |   |     |                   |  |   |        |  
|                                                                         |  |                   |       
|Nine Months Ended September 30, 2004 (Dollars in Thousands)              |  | Before-TaxAmount  |        |   | Tax Benefit (Expense) |   |     | Net of Tax Amount | 
|Unrealized holding losses arising during the period                      |  | $                 | (976   | ) |                       | $ | 333 |                   |  | $ | (643   | )
|Reclassification adjustment for losses recognized in net income          |  |                   | 169    |   |                       |   | (58 | )                 |  |   | 111    |  
|                                                                         |  |                   |        |   |                       |   |     |                   |  |   |        |  
|UNREALIZED HOLDING LOSSES ON AVAILABLE FOR SALE SECURITIES, NET OF TAXES |  | $                 | (807   | ) |                       | $ | 275 |                   |  | $ | (532   | )
|                                                                         |  |                   |        |   |                       |   |     |                   |  |   |        |  



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##### Table of Contents

SI FINANCIAL GROUP, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2005 AND
2004 AND DECEMBER 31, 2004



NOTE 5. EQUITY INCENTIVE PLAN



At the annual meeting of stockholders on May 11, 2005, stockholders
of the Company approved the SI Financial Group, Inc. 2005 Equity Incentive Plan (the Incentive Plan). Under the Incentive Plan, the Company may grant 615,623 stock options and 246,249 shares of restricted stock to its employees,
officers, directors and directors emeritus. Both incentive stock options and non-statutory stock options may be granted under the plan.



On May 17, 2005, 467,000 options to purchase the Companys common stock and 246,249 shares of restricted stock were awarded. Stock option awards were granted
with an exercise price equal to the market price of the Companys stock at the date of grant with maximum terms of ten years. Both stock option and restricted stock awards vest at 20% per year beginning on the first anniversary of the date
of grant.



Stock option and restricted stock awards are considered common stock
equivalents for the purpose of computing earnings per share on a diluted basis.



The Company has elected to comply with FAS 123R beginning with the period ended June 30, 2005, prior to the mandatory compliance date for the Company of January 1, 2006. In accordance with FAS 123R, the Company has recorded
share-based compensation expense related to outstanding stock option and restricted stock awards based upon the fair value at the date of grant over the vesting period of such awards on a straight-line basis. The fair value of each restricted stock
allocation, based on the market price at the date of grant, is recorded to unearned restricted shares. Unearned restricted shares are amortized to salaries and employee benefits expense over the vesting period of the restricted stock awards. The
fair value of each stock option award is estimated on the date of grant using the Black-Scholes option pricing model which includes several assumptions such as volatility, expected dividends, expected term and risk-free rate for each stock option
award. The Company recorded share-based compensation expense of $189,000 and $285,000, respectively, for the three and nine months ended September 30, 2005 in connection with the stock option and restricted stock awards.



The weighted-average fair value of stock options granted on May 17, 2005 using the
Black-Scholes option pricing model was $2.89 per share. Assumptions used to determine the weighted-average fair value of stock options granted were as follows:



|                        |  |          |  
|----------------------- |  | -------- | -
|Dividend yield:         |  | 1.50     | %
|Expected volatility:    |  | 17.00    | %
|Risk-free rate:         |  | 4.32     | %
|Expected life in years: |  | 10 years |  



NOTE 6. DIVIDENDS



On September 22, 2005, the Companys Board of Directors declared a cash
dividend of $0.03 per outstanding common share, which was paid on October 28, 2005, to stockholders of record as of the close of business on October 7, 2005. SI Bancorp, MHC, the Companys mutual holding company parent, waived receipt
of its dividend upon non-objection from the Office of Thrift Supervision (OTS).



NOTE 7. SUBSEQUENT EVENT



On
November 2, 2005, the Bank signed an agreement to acquire certain assets of the former Circle Trust Company, currently under receivership of the Connecticut Banking Commissioner. The terms of the agreement require the Company to pay $680,000 in
consideration for the acquisition of certain assets of the Private Trust Services and Bank Trust Services divisions of the former Circle Trust Company. This transaction is not expected to have a material impact on the financial condition of the Bank
or the Company.



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Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operation.



The following analysis discusses changes in financial condition at September 30, 2005 and December 31, 2004 and results of operation for the three and nine
months ended September 30, 2005 and 2004 and should be read in conjunction with the Companys consolidated financial statements and notes thereto, appearing in Part I, Item I of this document. This discussion and analysis updates, and
should be read in conjunction with, Managements Discussion and Analysis included in the Companys 2004 Annual Report on Form 10-K.



Forward-Looking Statements



This report contains forward-looking statements that are based on assumptions and may describe future plans, strategies and expectations of the Company. These
forward-looking statements are generally identified by the use of the words believe, expect, intend, anticipate, estimate, project or similar expressions. The Companys
ability to predict results or the actual effect of future plans or strategies is inherently uncertain. Factors which could have a material adverse effect on the operations of the Company and its subsidiaries include, but are not limited to, changes
in interest rates, national and regional economic conditions, legislative and regulatory changes, monetary and fiscal policies of the United States government, including policies of the United States Treasury and the Federal Reserve Board, the
quality and composition of the loan or investment portfolios, demand for loan products, deposit flows, competition, demand for financial services in the Companys market area, changes in real estate market values in the Companys market
area and changes in relevant accounting principles and guidelines. These risks and uncertainties should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements. Except as required by
applicable law or regulation, the Company does not undertake, and specifically disclaims any obligation, to release publicly the result of any revisions that may be made to any forward-looking statements to reflect events or circumstances after the
date of the statements or to reflect the occurrence of anticipated or unanticipated events.



Critical Accounting Policies



The Company considers accounting policies involving significant judgments and assumptions by management that have, or could have, a material impact on the carrying value of certain assets or on income to be critical accounting policies. The
Company considers the allowance for loan losses and the impairment of long-lived assets to be its critical accounting policies.



Allowance for Loan Losses. Determining the amount of allowance for loan losses necessarily involves a high degree of judgment. Management reviews the level
of the allowance on a monthly basis and establishes the allowance for loan losses based on the size and the composition of the loan portfolio, delinquency levels, loss experience, the level of nonperforming loans, classified assets and charge-offs,
economic conditions and other factors related to the collectibility of the loan portfolio. A portion of the allowance is established by segregating the loans by loan category and assigning allocation percentages based on the Companys
historical loss experience and delinquency trends. The applied loss factors are re-evaluated annually to ensure their relevance in the current real estate environment. Accordingly, increases in the size of the loan portfolio and the increased
emphasis on commercial real estate and commercial business loans, which carry a higher degree of risk of default and, thus, a higher allocation percentage, increase the allowance. Additionally, a portion of the allowance is established based on the
level of specific nonperforming loans, classified assets or charged-off loans.



Although the Company believes that it uses the best information available to establish the allowance for loan losses, future additions to the allowance may be necessary based on estimates that are susceptible to change as a result of
changes in economic conditions and other factors. In addition, the OTS, as an integral part of its examination process, periodically reviews the Companys allowance for loan losses. Such agency may require the Company to recognize adjustments
to the allowance based on its judgments about information available to it at the time of its examination.



Impairment of Long-Lived Assets. The Company is required to record certain assets it has acquired, including identifiable intangible assets such as core deposit intangibles and certain liabilities
that it has assumed, at fair value. This may involve making estimates based on third party valuations, appraisals, internal valuations, discounted cash flow analyses or other valuation techniques. Further, long-lived assets, including intangible
assets and premises and equipment, that are held and used by the Company, are presumed to have a useful life.



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##### Table of Contents

The determination of the useful lives of intangible assets is subjective, as is the appropriate amortization period for
such intangible and long-lived assets. Additionally, long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. If impairment is indicated by that
review, the asset is written down to its estimated fair value through a charge to noninterest expenses. Testing for impairment is a subjective process, the application of which could result in different evaluations of impairment.



Comparison of Financial Condition at September 30, 2005 and December 31, 2004



Summary:



Assets.The Companys total assets increased $46.1 million, or
7.4%, to $670.7 million at September 30, 2005, as compared to $624.6 million at December 31, 2004, primarily due to increases in loans receivable, premises and equipment and Federal Home Loan Bank stock, at cost, offset by a decrease in
available for sale securities and cash and cash equivalents. Net loans receivable increased $45.7 million, or 10.2%, to $493.7 million at September 30, 2005, reflecting loan originations of $134.2 million, offset by the sale of $33.9 million of
predominately fixed-rate residential mortgage loans. Premises and equipment increased $1.8 million as a result of a rise in capital expenditures associated with branch expansion during the first nine months of 2005. Federal Home Loan Bank stock
increased $1.3 million, directly correlated with an increase in FHLB advances. Available for sale securities decreased $3.4 million, or 2.8%, to $117.2 million, resulting primarily from a decrease in mortgage-backed securities, offset by an increase
in U.S. government and agency obligations and corporate debt securities.



Liabilities. Total liabilities increased $46.4 million, or 8.5%, from December 31, 2004 to September 30, 2005 primarily as a result of increases in deposits and FHLB advances. Deposits, including mortgagors and
investors escrow accounts, increased $27.2 million, or 5.9%, to $487.7 million at September 30, 2005. The increase in deposits reflects increases in NOW and money market accounts and variable-rate certificates of deposit, reflecting
promotion and marketing initiatives and customers reluctance to invest funds in longer-term and lower-rate certificates of deposit during a rising interest rate environment. FHLB advances increased $18.5 million, or 25.4%, to $91.1 million at
September 30, 2005 to fund loan originations and to invest in securities yielding greater returns than the cost of funds.



Equity. Total stockholders equity decreased $327,000 to $80.5 million at September 30, 2005, due to a decrease of $1.4 million related to stock
option and restricted stock awards granted under the Companys new equity incentive plan, dividends declared of $475,000, and an increase in net unrealized holding losses on available for sale securities aggregating $1.1 million (net of taxes),
offset by net income of $2.6 million for the nine months ended September 30, 2005.



Investment Activities:



At September 30,
2005, the Companys investment portfolio, excluding Federal Home Loan Bank stock, consisted solely of available for sale securities which amounted to $117.2 million, or 17.5% of assets. At December 31, 2004, the Companys available
for sale securities totaled $120.6 million, or 19.3% of assets. The decrease in available for sale securities of $3.4 million, or 2.8%, was primarily due to a reduction in mortgage-backed securities resulting from principal repayments, offset by the
purchase of U.S. government and agency obligations and corporate debt securities with a majority of the bond durations of five years or less. For the nine months ended September 30, 2005, the Companys decision to invest primarily in U.S.
government and agency obligations and corporate debt securities was based on a combination of higher-yielding interest rates and predictability of cash flows arising from these securities.



The net unrealized losses on available for sale securities, net of taxes, increased $1.1
million to $1.3 million for the nine months ended September 30, 2005, primarily due to a decline in the market value of the debt securities portfolio, which was recognized in accumulated other comprehensive loss on the consolidated balance
sheet and the consolidated statement of changes in stockholders equity. Management believes that none of the unrealized losses on these securities are other than temporary because substantially all of the unrealized losses relate to debt and
mortgage-backed securities issued by the U.S. Treasury or government agencies or private issuers that



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##### Table of Contents

maintain investment grade ratings, which the Company has both the intent and the ability to hold until maturity or until
the fair value fully recovers. In addition, management considers the issuers of the securities to be financially sound and believes the Company will receive all contractual principal and interest related to these investments.



Lending Activities:



General.The Companys loan portfolio consists primarily of one- to
four-family residential mortgage loans, multi-family and commercial real estate loans and commercial business loans. To a lesser extent, the Companys loan portfolio includes construction and consumer loans. The Company historically and
currently originates loans primarily for investment purposes. However, the Company sold $33.9 million of predominately fixed-rate residential mortgage loans in 2005. At September 30, 2005 and December 31, 2004, loans held for sale were
$157,000 and $200,000, respectively.



Loan Portfolio. At
September 30, 2005, the Companys loan portfolio, net, was $493.7 million, or 73.6% of assets. The following table summarizes the composition of the loan portfolio in dollar amounts and as a percentage of the respective portfolio at the
dates indicated.



|                                             |  |                    |         |   |                   |        |   |        |   |         |                  |  |        |  
|-------------------------------------------- |  | ------------------ | ------- | - | ----------------- | ------ | - | ------ | - | ------- | ---------------- |  | ------ | -
|                                             |  | September 30, 2005 |         |   | December 31, 2004 |       
|(Dollars in Thousands)                       |  | Amount             |         |   | Percent of Total  |        |   | Amount |   |         | Percent of Total | 
|Real estate loans:                           |  |                    |         |   |                   |        |   |        |   |         |                  |  |        |  
|Residential  1 to 4 family                  |  | $                  | 257,154 |   |                   | 51.81  | % |        | $ | 252,180 |                  |  | 55.99  | %
|Multi-family and commercial                  |  |                    | 95,171  |   |                   | 19.18  |   |        |   | 82,213  |                  |  | 18.25  |  
|Construction                                 |  |                    | 42,778  |   |                   | 8.62   |   |        |   | 35,773  |                  |  | 7.94   |  
|                                             |  |                    |         |   |                   |        |   |        |   |         |                  |  |        |  
|Total real estate loans                      |  |                    | 395,103 |   |                   | 79.61  |   |        |   | 370,166 |                  |  | 82.18  |  
|                                             |  |                    |         |  
|Consumer loans:                              |  |                    |         |   |                   |        |   |        |   |         |                  |  |        |  
|Home equity                                  |  |                    | 21,211  |   |                   | 4.27   |   |        |   | 18,335  |                  |  | 4.07   |  
|Other                                        |  |                    | 2,945   |   |                   | 0.59   |   |        |   | 2,790   |                  |  | 0.62   |  
|                                             |  |                    |         |   |                   |        |   |        |   |         |                  |  |        |  
|Total consumer loans                         |  |                    | 24,156  |   |                   | 4.86   |   |        |   | 21,125  |                  |  | 4.69   |  
|                                             |  |                    |         |  
|Commercial business loans                    |  |                    | 77,064  |   |                   | 15.53  |   |        |   | 59,123  |                  |  | 13.13  |  
|                                             |  |                    |         |   |                   |        |   |        |   |         |                  |  |        |  
|TOTAL LOANS                                  |  |                    | 496,323 |   |                   | 100.00 | % |        |   | 450,414 |                  |  | 100.00 | %
|                                             |  |                    |         |   |                   |        |   |        |   |         |                  |  |        |  
|Deferred loan origination costs, net of fees |  |                    | 925     |   |                   |        |   |        |   | 743     |                  |  |        |  
|Allowance for loan losses                    |  |                    | (3,569  | ) |                   |        |   |        |   | (3,200  | )                |  |        |  
|                                             |  |                    |         |   |                   |        |   |        |   |         |                  |  |        |  
|LOANS RECEIVABLE, NET                        |  | $                  | 493,679 |   |                   |        |   |        | $ | 447,957 |                  |  |        |  
|                                             |  |                    |         |   |                   |        |   |        |   |         |                  |  |        |  



The Companys net loan portfolio
increased $45.7 million, or 10.2%, resulting from strong loan originations, offset by loan sales of $33.9 million of predominately fixed-rate residential mortgage loans during the first nine months of 2005. The sale of loans is expected to mitigate
the Companys exposure to interest rate risk while improving liquidity. Despite the aforementioned mortgage loan sales, residential mortgage loans increased $5.0 million, or 2.0%, as a result of loan originations of $76.7 million. Commercial
loans, including commercial real estate and commercial business loans, increased $30.9 million, or 21.9%, due to the Companys continued emphasis on the commercial market. Consumer loans increased $3.0 million, or 14.4%, as a result of an
increase in home equity lines of credit. The Companys level of loan closings was strong due to several factors, including promotional and sales activities, competitive pricing initiatives, a strong housing market and a relatively stable local
economy.



Allowance for Loan Losses.The allowance for loan
losses is a valuation allowance for losses inherent in the loan portfolio that are estimated to occur. The allowance is maintained through a provision for loan losses that is charged to earnings. Actual loan losses are charged against the allowance
when management believes the uncollectibility of the loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance. The Company evaluates the allowance for loan losses on a monthly basis.



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##### Table of Contents

The methodology for assessing the appropriateness of the allowance for loan losses
consists of three key elements:



| |  |  | Specific allowances for identified problem loans, including certain impaired or collateral-dependent loans. The loan portfolio is segregated first between loans that
are on the Companys Managed Asset Report and loans that are not. The Managed Asset Report includes: (1) loans that are sixty or more days delinquent, (2) loans with anticipated losses, (3) loans referred to attorneys
for collection or in the process of foreclosure, (4) nonaccrual loans, (5) loans classified as substandard, doubtful or loss by either the Companys internal classification system or by regulators
during the course of their examination of the Company and (6) troubled debt restructurings and other nonperforming loans.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



The Managed Asset Committee, consisting of Company officers, reviews each loan on the Managed Asset Report and may establish an individual reserve
allocation on certain loans based on such factors as (1) the strength of the customers personal or business cash flow; (2) the availability of other sources of repayment; (3) the amount due or past due; (4) the type and
value of collateral; (5) the strength of the Companys collateral position; (6) the estimated cost to sell the collateral; and (7) the borrowers effort to cure the delinquency.



The Company also reviews and establishes, as needed, a specific allowance
for certain identified non-homogeneous problem loans. In accordance with the Statement of Financial Accounting Standards No. 114, Accounting by Creditors for Impairment of a Loan, a loan is impaired when, based on current
information and events, it is probable that a creditor will be unable to collect all amounts due under the contractual terms of the loan agreement. Measurement of the impairment is based on the present value of expected future cash flows or the fair
value of the collateral, if the loan is collateral dependent. A specific allowance on impaired loans is established if the present value of the expected future cash flows, or fair value of the collateral for collateral dependent loans, is lower than
the carrying value of the loan.



| |  |  | General valuation allowance on certain identified problem loans. The Company establishes a general allowance for loans on the Managed Asset Report that do not have an
individual allowance. The Company segregates these loans by loan category and assigns allowance percentages to each category based on inherent losses associated with each type of lending and consideration that these loans, in the aggregate,
represent an above-average credit risk and that more of these loans will prove to be uncollectible compared to loans in the general portfolio.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | General valuation allowance on the remainder of the loan portfolio. The Company establishes another general allowance for loans that are not on the Managed Asset
Report to recognize the probable losses associated with lending activities, but which, unlike specific allowances, has not been allocated to particular problem assets. This general valuation allowance is determined by segregating the loans by loan
category and assigning allowance percentages based on the Companys historical loss experience and delinquency trends. The allowance may be adjusted for significant factors that, in managements judgment, affect the collectibility of the
portfolio as of the evaluation date. These significant factors may include changes in lending policies and procedures, changes in existing general economic and business conditions affecting the Companys primary lending areas, credit quality
trends, collateral value, loan volumes and concentrations, seasoning of the loan portfolio, specific industry conditions within portfolio segments, recent loss experience in particular segments of the portfolio, duration of the current business
cycle and bank regulatory examination results. The applied loss factors are re-evaluated annually to ensure their relevance in the current economic environment.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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##### Table of Contents

The following table summarizes the activity in the allowance for loan losses at and for the three months and the nine
months ended September 30, 2005 and 2004.



|                                                 |      |                                                 |       |      |                                               |   |       |   |  |      |         |   |  |   |       |  
|------------------------------------------------ | ---- | ----------------------------------------------- | ----- | ---- | --------------------------------------------- | - | ----- | - |  | ---- | ------- | - |  | - | ----- | -
|(Dollars in Thousands)                           |      | At and For the Three Months Ended September 30, |       |      | At and For the Nine MonthsEnded September 30, |  
|                                                 | 2005 |                                                 |       | 2004 |                                               |   | 2005  |   |  | 2004 |        
|BALANCE AT BEGINNING OF PERIOD                   |      | $                                               | 3,510 |      |                                               | $ | 2,967 |   |  | $    | 3,200   |   |  | $ | 2,688 |  
|                                                 |      |                                                 |       |     
|Provision for loan losses                        |      |                                                 | 75    |      |                                               |   | 100   |   |  |      | 310     |   |  |   | 400   |  
|Loans charged-off                                |      |                                                 | (24   | )    |                                               |   | (18   | ) |  |      | (27     | ) |  |   | (63   | )
|Recoveries of loans previously charged-off       |      |                                                 | 8     |      |                                               |   | 7     |   |  |      | 86      |   |  |   | 31    |  
|                                                 |      |                                                 |       |      |                                               |   |       |   |  |      |         |   |  |   |       |  
|Net recoveries (charge-offs)                     |      |                                                 | (16   | )    |                                               |   | (11   | ) |  |      | 59      |   |  |   | (32   | )
|                                                 |      |                                                 |       |      |                                               |   |       |   |  |      |         |   |  |   |       |  
|BALANCE AT END OF PERIOD                         |      | $                                               | 3,569 |      |                                               | $ | 3,056 |   |  | $    | 3,569   |   |  | $ | 3,056 |  
|                                                 |      |                                                 |       |      |                                               |   |       |   |  |      |         |   |  |   |       |  
|Allowance for loan losses to total loans         |      |                                                 |       |      |                                               |   |       |   |  |      | 0.72    | % |  |   | 0.72  | %
|Allowance for loan losses to nonperforming loans |      |                                                 |       |      |                                               |   |       |   |  |      | 1450.81 | % |  |   | 198.7 | %



Although the Company 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 its allowance for loan losses in conformity with generally accepted accounting principles, there can be no assurance that
regulators, in reviewing the Companys loan portfolio, will not request the Company to increase its allowance for loan losses. In addition, because future events affecting borrowers and collateral cannot be predicted with certainty, there can
be no assurance that the existing allowance for loan losses is adequate or that increases will not 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.



Nonperforming Assets and Restructured Loans.When a loan becomes ninety days delinquent, the loan is placed on nonaccrual status, at which time the accrual of interest ceases and the allowance for any
uncollectible accrued interest is established and charged against operations. Typically, payments received on nonaccrual loans are applied to the outstanding principal and interest balance as determined at the time of collection of the loan.



The Company considers repossessed assets and loans that are ninety days or
more past due to be nonperforming assets. Real estate that the Company acquires as a result of foreclosure or by deed-in-lieu of foreclosure is classified as other real estate owned until it is sold. When property is acquired, it is recorded at the
lower of its cost, which is the unpaid balance of the loan plus foreclosure costs or fair value at the date of the foreclosure. Holding costs and declines in fair value after acquisition of the property are charged against income as incurred.



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##### Table of Contents

The following table provides information with respect to the Companys nonperforming assets and troubled debt
restructurings as of the dates indicated.



|                                                                            |  |                    |      |   |                   |   |       |  
|--------------------------------------------------------------------------- |  | ------------------ | ---- | - | ----------------- | - | ----- | -
|(Dollars in Thousands)                                                      |  | September 30, 2005 |      |   | December 31, 2004 |  
|Nonaccrual loans:                                                           |  |                    |      |   |                   |   |       |  
|Real estate loans                                                           |  | $                  | 231  |   |                   | $ | 943   |  
|Commercial business loans                                                   |  |                    |     |   |                   |   |      |  
|Consumer loans                                                              |  |                    | 15   |   |                   |   | 1     |  
|                                                                            |  |                    |      |   |                   |   |       |  
|Total nonaccrual loans                                                      |  |                    | 246  |   |                   |   | 944   |  
|                                                                            |  |                   
|Real estate owned, net                                                      |  |                    | 350  |   |                   |   |      |  
|                                                                            |  |                    |      |   |                   |   |       |  
|TOTAL NONPERFORMING ASSETS                                                  |  |                    | 596  |   |                   |   | 944   |  
|                                                                            |  |                   
|Troubled debt restructurings                                                |  |                    | 74   |   |                   |   | 76    |  
|                                                                            |  |                    |      |   |                   |   |       |  
|TOTAL NONPERFORMING ASSETS AND TROUBLED DEBT RESTRUCTURINGS                 |  | $                  | 670  |   |                   | $ | 1,020 |  
|                                                                            |  |                    |      |   |                   |   |       |  
|Total nonperforming loans to total loans                                    |  |                    | 0.05 | % |                   |   | 0.21  | %
|Total nonperforming loans to total assets                                   |  |                    | 0.05 |   |                   |   | 0.15  |  
|Total nonperforming assets and troubled debt restructurings to total assets |  |                    | 0.10 |   |                   |   | 0.16  |  



Other than the loans disclosed in the
above table, there were no additional loans at September 30, 2005 that management had serious doubts about the ability of the borrowers to comply with the present loan repayment terms.



Deposits:



The following table sets forth the distribution of the Companys deposit accounts at the dates
indicated.



|                                    |  |                    |         |                   |   |         |  |   |        |  
|----------------------------------- |  | ------------------ | ------- | ----------------- | - | ------- |  | - | ------ | -
|(Dollars in Thousands)              |  | September 30, 2005 |         | December 31, 2004 |   | Change  | 
|Noninterest-bearing demand deposits |  | $                  | 51,021  |                   | $ | 46,049  |  | $ | 4,972  |  
|NOW and money market accounts       |  |                    | 124,124 |                   |   | 110,564 |  |   | 13,560 |  
|Savings accounts(1)                 |  |                    | 90,845  |                   |   | 95,310  |  |   | (4,465 | )
|Certificates of deposit(2)          |  |                    | 221,713 |                   |   | 208,557 |  |   | 13,156 |  
|                                    |  |                    |         |                   |   |         |  |   |        |  
|TOTAL DEPOSITS                      |  | $                  | 487,703 |                   | $ | 460,480 |  | $ | 27,223 |  
|                                    |  |                    |         |                   |   |         |  |   |        |  

---

|(1) | Includes mortgagors and investors escrow accounts in the amount of $1.4 million and $2.7 million at September 30, 2005 and December 31, 2004,
respectively.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | Includes brokered deposits of $5.0 million at September 30, 2005 and December 31, 2004.
|--- | ---------------------------------------------------------------------------------------



Deposits, including mortgagors and investors escrow accounts, increased $27.2
million, or 5.9%, to $487.7 million at September 30, 2005. An increase in personal and commercial checking accounts contributed to the rise in noninterest-bearing demand deposits. Interest-bearing deposits increased $22.3 million, or 5.4%,
primarily due to promotion and marketing initiatives, aggressive pricing on certificates of deposit to attract additional funds and efforts to capitalize on opportunities to increase deposits due to the consolidation of financial institutions in the
Companys market area. The decrease in savings accounts of $4.5 million was mainly due to a reduction in money market savings accounts and mortgagors and investors escrow accounts as a result of periodic real estate tax
disbursements.



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##### Table of Contents

Analysis of Net Interest and Dividend Income



Average Balance Sheet. The following table presents information regarding average balances of assets and liabilities, the
total dollar amounts of interest and dividend income from average interest-earning assets, the total dollar amounts of interest expense on average interest-bearing liabilities and the resulting average yields and costs. The yields and costs for the
periods indicated are derived by dividing income or expense by the average balances of assets or liabilities, respectively, for the periods presented. For purposes of this table, average balances have been calculated using average daily balances.



|                                                                                  |                 |      |                      |  |      |                     |   |  |                 |   |                      |   |         |                     |   |       |   |  |        |  
|--------------------------------------------------------------------------------- | --------------- | ---- | -------------------- |  | ---- | ------------------- | - |  | --------------- | - | -------------------- | - | ------- | ------------------- | - | ----- | - |  | ------ | -
|At or For The Three Months Ended September 30, (Dollars in Thousands)             |                 | 2005 |                      |  | 2004 |                    
|                                                                                  | Average Balance |      | Interest & Dividends |  |      | Average Yield/ Rate |   |  | Average Balance |   | Interest & Dividends |   |         | Average Yield/ Rate |  
|ASSETS:                                                                           |                 |      |                      |  |      |                     |   |  |                 |   |                      |   |         |                     |   |       |   |  |        |  
|INTEREST-EARNING ASSETS:                                                          |                 |      |                      |  |      |                     |   |  |                 |   |                      |   |         |                     |   |       |   |  |        |  
|Loans(1)(2)                                                                       |                 | $    | 483,944              |  | $    | 7,382               |   |  | 6.05            | % |                      | $ | 416,175 |                     | $ | 6,115 |   |  | 5.85   | %
|Investment securities(3)                                                          |                 |      | 127,894              |  |      | 1,254               |   |  | 3.89            |   |                      |   | 92,710  |                     |   | 927   |   |  | 3.98   |  
|Other interest-earning assets                                                     |                 |      | 11,324               |  |      | 77                  |   |  | 2.70            |   |                      |   | 30,855  |                     |   | 111   |   |  | 1.43   |  
|                                                                                  |                 |      |                      |  |      |                     |   |  |                 |   |                      |   |         |                     |   |       |   |  |        |  
|TOTAL INTEREST-EARNING ASSETS                                                     |                 |      | 623,162              |  |      | 8,713               |   |  | 5.55            |   |                      |   | 539,740 |                     |   | 7,153 |   |  | 5.27   |  
|                                                                                  |                 |      |                      |  |      |                    
|Noninterest-earning assets                                                        |                 |      | 39,644               |  |      |                     |   |  |                 |   |                      |   | 42,541  |                     |   |       |   |  |        |  
|                                                                                  |                 |      |                      |  |      |                     |   |  |                 |   |                      |   |         |                     |   |       |   |  |        |  
|TOTAL ASSETS                                                                      |                 | $    | 662,806              |  |      |                     |   |  |                 |   |                      | $ | 582,281 |                     |   |       |   |  |        |  
|                                                                                  |                 |      |                      |  |      |                     |   |  |                 |   |                      |   |         |                     |   |       |   |  |        |  
|LIABILITIES AND EQUITY:                                                           |                 |      |                      |  |      |                     |   |  |                 |   |                      |   |         |                     |   |       |   |  |        |  
|INTEREST-BEARING LIABILITIES:                                                     |                 |      |                      |  |      |                     |   |  |                 |   |                      |   |         |                     |   |       |   |  |        |  
|Deposits:                                                                         |                 |      |                      |  |      |                     |   |  |                 |   |                      |   |         |                     |   |       |   |  |        |  
|NOW and money market                                                              |                 | $    | 124,692              |  |      | 212                 |   |  | 0.67            |   |                      | $ | 113,089 |                     |   | 101   |   |  | 0.36   |  
|Savings(4)                                                                        |                 |      | 92,098               |  |      | 221                 |   |  | 0.95            |   |                      |   | 92,711  |                     |   | 183   |   |  | 0.79   |  
|Certificates of deposit(5)                                                        |                 |      | 217,373              |  |      | 1,804               |   |  | 3.29            |   |                      |   | 194,750 |                     |   | 1,330 |   |  | 2.72   |  
|                                                                                  |                 |      |                      |  |      |                     |   |  |                 |   |                      |   |         |                     |   |       |   |  |        |  
|Total interest-bearing deposits                                                   |                 |      | 434,163              |  |      | 2,237               |   |  | 2.04            |   |                      |   | 400,550 |                     |   | 1,614 |   |  | 1.60   |  
|                                                                                  |                 |      |                      |  |      |                    
|FHLB advances                                                                     |                 |      | 85,223               |  |      | 842                 |   |  | 3.92            |   |                      |   | 66,194  |                     |   | 669   |   |  | 4.02   |  
|Subordinated debt                                                                 |                 |      | 7,217                |  |      | 127                 |   |  | 6.98            |   |                      |   | 7,217   |                     |   | 91    |   |  | 5.02   |  
|                                                                                  |                 |      |                      |  |      |                     |   |  |                 |   |                      |   |         |                     |   |       |   |  |        |  
|TOTAL INTEREST-BEARING LIABILITIES                                                |                 |      | 526,603              |  |      | 3,206               |   |  | 2.42            |   |                      |   | 473,961 |                     |   | 2,374 |   |  | 1.99   |  
|                                                                                  |                 |      |                      |  |      |                    
|Noninterest-bearing liabilities                                                   |                 |      | 54,713               |  |      |                     |   |  |                 |   |                      |   | 72,721  |                     |   |       |   |  |        |  
|                                                                                  |                 |      |                      |  |      |                     |   |  |                 |   |                      |   |         |                     |   |       |   |  |        |  
|TOTAL LIABILITIES                                                                 |                 |      | 581,316              |  |      |                     |   |  |                 |   |                      |   | 546,682 |                     |   |       |   |  |        |  
|                                                                                  |                 |      |                      |  |      |                     |   |  |                 |   |                      |   |         |                     |   |       |   |  |        |  
|TOTAL STOCKHOLDERS EQUITY                                                        |                 |      | 81,490               |  |      |                     |   |  |                 |   |                      |   | 35,599  |                     |   |       |   |  |        |  
|                                                                                  |                 |      |                      |  |      |                     |   |  |                 |   |                      |   |         |                     |   |       |   |  |        |  
|TOTAL LIABILITIES AND STOCKHOLDERS EQUITY                                        |                 | $    | 662,806              |  |      |                     |   |  |                 |   |                      | $ | 582,281 |                     |   |       |   |  |        |  
|                                                                                  |                 |      |                      |  |      |                     |   |  |                 |   |                      |   |         |                     |   |       |   |  |        |  
|NET INTEREST-EARNING ASSETS                                                       |                 | $    | 96,559               |  |      |                     |   |  |                 |   |                      | $ | 65,779  |                     |   |       |   |  |        |  
|                                                                                  |                 |      |                      |  |      |                     |   |  |                 |   |                      |   |         |                     |   |       |   |  |        |  
|TAX EQUIVALENT NET INTEREST AND DIVIDEND INCOME(3)                                |                 |      |                      |  |      | 5,507               |   |  |                 |   |                      |   |         |                     |   | 4,779 |   |  |        |  
|                                                                                  |                 |      |                      |  |      |                    
|TAX EQUIVALENT INTEREST RATE SPREAD (6)                                           |                 |      |                      |  |      |                     |   |  | 3.13            |   |                      |   |         |                     |   |       |   |  | 3.28   |  
|                                                                                  |                 |      |                      |  |      |                    
|TAX EQUIVALENT NET INTEREST MARGIN AS A PERCENTAGE OF INTEREST-EARNING ASSETS (7) |                 |      |                      |  |      |                     |   |  | 3.51            |   |                      |   |         |                     |   |       |   |  | 3.52   |  
|                                                                                  |                 |      |                      |  |      |                    
|AVERAGE OF INTEREST-EARNING ASSETS TO AVERAGE INTEREST-BEARING LIABILITIES        |                 |      |                      |  |      |                     |   |  | 118.34          |   |                      |   |         |                     |   |       |   |  | 113.88 |  
|                                                                                  |                 |      |                      |  |      |                    
|LESS: TAX EQUIVALENT ADJUSTMENT (3)                                               |                 |      |                      |  |      | (2                  | ) |  |                 |   |                      |   |         |                     |   | (2    | ) |  |        |  
|                                                                                  |                 |      |                      |  |      |                     |   |  |                 |   |                      |   |         |                     |   |       |   |  |        |  
|NET INTEREST AND DIVIDEND INCOME PER STATEMENTS OF INCOME                         |                 |      |                      |  | $    | 5,505               |   |  |                 |   |                      |   |         |                     | $ | 4,777 |   |  |        |  
|                                                                                  |                 |      |                      |  |      |                     |   |  |                 |   |                      |   |         |                     |   |       |   |  |        |  

---

|(1) | Amount is net of deferred loan origination fees and costs. Average balances include
nonaccrual loans and loans held for sale.
|--- | -----------------------------------------------------------------------------------------------------------------------------



18



---

##### Table of Contents

|(2) | Loan fees are included in interest income and are insignificant.
|--- | ----------------------------------------------------------------

|(3) | Investment securities income and net interest and dividend income are presented on a tax
equivalent basis using a tax rate of 34%. The tax equivalent adjustment is deducted from tax equivalent net interest and dividend income to agree to the amount reported in the statements of income.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(4) | Includes mortgagors and investors escrow accounts.
|--- | ----------------------------------------------------

|(5) | Includes brokered deposits.
|--- | ---------------------------

|(6) | Tax equivalent net interest rate spread represents the difference between the
weighted-average tax equivalent yield on interest-earning assets and the weighted-average cost of interest-bearing liabilities.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(7) | Tax equivalent net interest margin represents tax equivalent net interest and dividend income
divided by average interest-earning assets.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------



|                                                                                  |                 |      |                      |  |      |                     |   |  |                 |   |                      |   |         |                     |   |        |   |  |        |  
|--------------------------------------------------------------------------------- | --------------- | ---- | -------------------- |  | ---- | ------------------- | - |  | --------------- | - | -------------------- | - | ------- | ------------------- | - | ------ | - |  | ------ | -
|At or For The Nine Months Ended
September 30, (Dollars in Thousands)              |                 | 2005 |                      |  | 2004 |                    
|                                                                                  | Average Balance |      | Interest & Dividends |  |      | Average Yield/ Rate |   |  | Average Balance |   | Interest & Dividends |   |         | Average Yield/ Rate |  
|ASSETS:                                                                           |                 |      |                      |  |      |                     |   |  |                 |   |                      |   |         |                     |   |        |   |  |        |  
|INTEREST-EARNING ASSETS:                                                          |                 |      |                      |  |      |                     |   |  |                 |   |                      |   |         |                     |   |        |   |  |        |  
|Loans(1)(2)                                                                       |                 | $    | 461,508              |  | $    | 20,808              |   |  | 6.03            | % |                      | $ | 403,800 |                     | $ | 17,980 |   |  | 5.95   | %
|Investment securities(3)                                                          |                 |      | 128,520              |  |      | 3,758               |   |  | 3.91            |   |                      |   | 89,169  |                     |   | 2,689  |   |  | 4.03   |  
|Other interest-earning assets                                                     |                 |      | 11,975               |  |      | 235                 |   |  | 2.62            |   |                      |   | 19,220  |                     |   | 174    |   |  | 1.21   |  
|                                                                                  |                 |      |                      |  |      |                     |   |  |                 |   |                      |   |         |                     |   |        |   |  |        |  
|TOTAL INTEREST-EARNING ASSETS                                                     |                 |      | 602,003              |  |      | 24,801              |   |  | 5.51            |   |                      |   | 512,189 |                     |   | 20,843 |   |  | 5.44   |  
|                                                                                  |                 |      |                      |  |      |                    
|Noninterest-earning assets                                                        |                 |      | 39,707               |  |      |                     |   |  |                 |   |                      |   | 39,367  |                     |   |        |   |  |        |  
|                                                                                  |                 |      |                      |  |      |                     |   |  |                 |   |                      |   |         |                     |   |        |   |  |        |  
|TOTAL ASSETS                                                                      |                 | $    | 641,710              |  |      |                     |   |  |                 |   |                      | $ | 551,556 |                     |   |        |   |  |        |  
|                                                                                  |                 |      |                      |  |      |                     |   |  |                 |   |                      |   |         |                     |   |        |   |  |        |  
|LIABILITIES AND EQUITY:                                                           |                 |      |                      |  |      |                     |   |  |                 |   |                      |   |         |                     |   |        |   |  |        |  
|INTEREST-BEARING LIABILITIES:                                                     |                 |      |                      |  |      |                     |   |  |                 |   |                      |   |         |                     |   |        |   |  |        |  
|Deposits:                                                                         |                 |      |                      |  |      |                     |   |  |                 |   |                      |   |         |                     |   |        |   |  |        |  
|NOW and money market                                                              |                 | $    | 117,147              |  |      | 459                 |   |  | 0.52            |   |                      | $ | 108,593 |                     |   | 283    |   |  | 0.35   |  
|Savings(4)                                                                        |                 |      | 93,320               |  |      | 622                 |   |  | 0.89            |   |                      |   | 90,871  |                     |   | 454    |   |  | 0.67   |  
|Certificates of deposit(5)                                                        |                 |      | 213,690              |  |      | 4,976               |   |  | 3.11            |   |                      |   | 191,754 |                     |   | 3,910  |   |  | 2.72   |  
|                                                                                  |                 |      |                      |  |      |                     |   |  |                 |   |                      |   |         |                     |   |        |   |  |        |  
|Total interest-bearing deposits                                                   |                 |      | 424,157              |  |      | 6,057               |   |  | 1.91            |   |                      |   | 391,218 |                     |   | 4,647  |   |  | 1.59   |  
|                                                                                  |                 |      |                      |  |      |                    
|FHLB advances                                                                     |                 |      | 76,579               |  |      | 2,211               |   |  | 3.86            |   |                      |   | 64,583  |                     |   | 2,017  |   |  | 4.17   |  
|Subordinated debt                                                                 |                 |      | 7,217                |  |      | 354                 |   |  | 6.56            |   |                      |   | 7,217   |                     |   | 267    |   |  | 4.94   |  
|                                                                                  |                 |      |                      |  |      |                     |   |  |                 |   |                      |   |         |                     |   |        |   |  |        |  
|TOTAL INTEREST-BEARING LIABILITIES                                                |                 |      | 507,953              |  |      | 8,622               |   |  | 2.27            |   |                      |   | 463,018 |                     |   | 6,931  |   |  | 2.00   |  
|                                                                                  |                 |      |                      |  |      |                    
|Noninterest-bearing liabilities                                                   |                 |      | 52,405               |  |      |                     |   |  |                 |   |                      |   | 53,448  |                     |   |        |   |  |        |  
|                                                                                  |                 |      |                      |  |      |                     |   |  |                 |   |                      |   |         |                     |   |        |   |  |        |  
|TOTAL LIABILITIES                                                                 |                 |      | 560,358              |  |      |                     |   |  |                 |   |                      |   | 516,466 |                     |   |        |   |  |        |  
|                                                                                  |                 |      |                      |  |      |                     |   |  |                 |   |                      |   |         |                     |   |        |   |  |        |  
|TOTAL STOCKHOLDERS EQUITY                                                        |                 |      | 81,352               |  |      |                     |   |  |                 |   |                      |   | 35,090  |                     |   |        |   |  |        |  
|                                                                                  |                 |      |                      |  |      |                     |   |  |                 |   |                      |   |         |                     |   |        |   |  |        |  
|TOTAL LIABILITIES AND STOCKHOLDERS EQUITY                                        |                 | $    | 641,710              |  |      |                     |   |  |                 |   |                      | $ | 551,556 |                     |   |        |   |  |        |  
|                                                                                  |                 |      |                      |  |      |                     |   |  |                 |   |                      |   |         |                     |   |        |   |  |        |  
|NET INTEREST-EARNING ASSETS                                                       |                 | $    | 94,050               |  |      |                     |   |  |                 |   |                      | $ | 49,171  |                     |   |        |   |  |        |  
|                                                                                  |                 |      |                      |  |      |                     |   |  |                 |   |                      |   |         |                     |   |        |   |  |        |  
|TAX EQUIVALENT NET INTEREST AND DIVIDEND INCOME (3)                               |                 |      |                      |  |      | 16,179              |   |  |                 |   |                      |   |         |                     |   | 13,912 |   |  |        |  
|                                                                                  |                 |      |                      |  |      |                     |   |  |                 |   |                      |   |         |                     |   |        |   |  |        |  
|TAX EQUIVALENT INTEREST RATE SPREAD (6)                                           |                 |      |                      |  |      |                     |   |  | 3.24            |   |                      |   |         |                     |   |        |   |  | 3.44   |  
|                                                                                  |                 |      |                      |  |      |                    
|TAX EQUIVALENT NET INTEREST MARGIN AS A PERCENTAGE OF INTEREST-EARNING ASSETS (7) |                 |      |                      |  |      |                     |   |  | 3.59            |   |                      |   |         |                     |   |        |   |  | 3.63   |  
|                                                                                  |                 |      |                      |  |      |                    
|AVERAGE OF INTEREST-EARNING ASSETS TO AVERAGE INTEREST-BEARING LIABILITIES        |                 |      |                      |  |      |                     |   |  | 118.52          |   |                      |   |         |                     |   |        |   |  | 110.62 |  
|                                                                                  |                 |      |                      |  |      |                    
|LESS: TAX EQUIVALENT ADJUSTMENT (3)                                               |                 |      |                      |  |      | (6                  | ) |  |                 |   |                      |   |         |                     |   | (6     | ) |  |        |  
|                                                                                  |                 |      |                      |  |      |                     |   |  |                 |   |                      |   |         |                     |   |        |   |  |        |  
|NET INTEREST AND DIVIDEND INCOME PER STATEMENTS OF INCOME                         |                 |      |                      |  | $    | 16,173              |   |  |                 |   |                      |   |         |                     | $ | 13,906 |   |  |        |  
|                                                                                  |                 |      |                      |  |      |                     |   |  |                 |   |                      |   |         |                     |   |        |   |  |        |  

---

|(1) | Amount is net of deferred loan origination fees and costs. Average balances include
nonaccrual loans and loans held for sale.
|--- | -----------------------------------------------------------------------------------------------------------------------------



19



---

##### Table of Contents

|(2) | Loan fees are included in interest income and are insignificant.
|--- | ----------------------------------------------------------------

|(3) | Investment securities income and net interest and dividend income are presented on a tax
equivalent basis using a tax rate of 34%. The tax equivalent adjustment is deducted from tax equivalent net interest and dividend income to agree to the amount reported in the statements of income.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(4) | Includes mortgagors and investors escrow accounts.
|--- | ----------------------------------------------------

|(5) | Includes brokered deposits.
|--- | ---------------------------

|(6) | Tax equivalent net interest rate spread represents the difference between the
weighted-average tax equivalent yield on interest-earning assets and the weighted-average cost of interest-bearing liabilities.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(7) | Tax equivalent net interest margin represents tax equivalent net interest and dividend income
divided by average interest-earning assets.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------



Rate/Volume
Analysis.The following table sets forth the extent to which changes in interest rates and changes in volume of interest-earning assets and interest-bearing liabilities have on the Companys interest income and interest expense
for the periods presented. The rate column shows the effects attributable to changes in rate (changes in rate multiplied by prior volume). The volume column shows the effects attributable to changes in volume (changes in volume multiplied by prior
rate). The net column represents the sum of the rate and volume columns. For purposes of this table, changes attributable to both changes in rate and volume that cannot be segregated have been allocated proportionately based on the changes due to
rate and the changes due to volume.



|                                               |                            |                                                |      |        |                                               |   |                            |   |  |      |       |   |        |   |      |     |  |   |       |   |  |   |      
|---------------------------------------------- | -------------------------- | ---------------------------------------------- | ---- | ------ | --------------------------------------------- | - | -------------------------- | - |  | ---- | ----- | - | ------ | - | ---- | --- |  | - | ----- | - |  | - | -----
|(Dollars in Thousands)                         |                            | Three Months Ended September 30, 2005 and 2004 |      |        | Nine Months Ended September 30, 2005 and 2004
|                                               | Increase (Decrease) Due To |                                                |      |        |                                               |   | Increase (Decrease) Due To |   |  |     
|                                               | Rate                       |                                                |      | Volume |                                               |   | Net                        |   |  | Rate |       |   | Volume |   |      | Net
|INTEREST-EARNING ASSETS:                       |                            |                                                |      |        |                                               |   |                            |   |  |      |       |   |        |   |      |     |  |   |       |   |  |   |      
|Interest and Dividend Income:                  |                            |                                                |      |        |                                               |   |                            |   |  |      |       |   |        |   |      |     |  |   |       |   |  |   |      
|Loans(1)(2)                                    |                            | $                                              | 226  |        |                                               | $ | 1,041                      |   |  | $    | 1,267 |   |        | $ | 244  |     |  | $ | 2,584 |   |  | $ | 2,828
|Investment securities(3)                       |                            |                                                | (135 | )      |                                               |   | 462                        |   |  |      | 327   |   |        |   | (132 | )   |  |   | 1,201 |   |  |   | 1,069
|Other interest-earning assets                  |                            |                                                | 185  |        |                                               |   | (219                       | ) |  |      | (34   | ) |        |   | 119  |     |  |   | (58   | ) |  |   | 61   
|                                               |                            |                                                |      |        |                                               |   |                            |   |  |      |       |   |        |   |      |     |  |   |       |   |  |   |      
|TOTAL INTEREST-EARNING ASSETS                  |                            |                                                | 276  |        |                                               |   | 1,284                      |   |  |      | 1,560 |   |        |   | 231  |     |  |   | 3,727 |   |  |   | 3,958
|                                               |                            |                                                |      |        |                                               |  
|INTEREST-BEARING LIABILITIES:                  |                            |                                                |      |        |                                               |   |                            |   |  |      |       |   |        |   |      |     |  |   |       |   |  |   |      
|Interest Expense:                              |                            |                                                |      |        |                                               |   |                            |   |  |      |       |   |        |   |      |     |  |   |       |   |  |   |      
|Deposits(4)                                    |                            |                                                | 445  |        |                                               |   | 178                        |   |  |      | 623   |   |        |   | 900  |     |  |   | 510   |   |  |   | 1,410
|FHLB advances                                  |                            |                                                | (109 | )      |                                               |   | 282                        |   |  |      | 173   |   |        |   | (231 | )   |  |   | 425   |   |  |   | 194  
|Subordinated debt                              |                            |                                                | 36   |        |                                               |   |                           |   |  |      | 36    |   |        |   | 87   |     |  |   |      |   |  |   | 87   
|                                               |                            |                                                |      |        |                                               |   |                            |   |  |      |       |   |        |   |      |     |  |   |       |   |  |   |      
|TOTAL INTEREST-BEARING LIABILITIES             |                            |                                                | 372  |        |                                               |   | 460                        |   |  |      | 832   |   |        |   | 756  |     |  |   | 935   |   |  |   | 1,691
|                                               |                            |                                                |      |        |                                               |   |                            |   |  |      |       |   |        |   |      |     |  |   |       |   |  |   |      
|CHANGE IN NET INTEREST AND DIVIDEND INCOME (3) |                            | $                                              | (96  | )      |                                               | $ | 824                        |   |  | $    | 728   |   |        | $ | (525 | )   |  | $ | 2,792 |   |  | $ | 2,267
|                                               |                            |                                                |      |        |                                               |   |                            |   |  |      |       |   |        |   |      |     |  |   |       |   |  |   |      

---

|(1) | Amount is net of deferred loan origination fees and costs. Average balances include
nonaccrual loans and loans held for sale.
|--- | -----------------------------------------------------------------------------------------------------------------------------



20



---

##### Table of Contents

|(2) | Loans fees are included in interest income and are insignificant.
|--- | -----------------------------------------------------------------

|(3) | Investment securities income and net interest and dividend income are presented on a tax
equivalent basis using a tax rate of 34%. The tax equivalent adjustment is deducted from tax equivalent net interest and dividend income to agree to the amount reported in the statements of income.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(4) | Includes mortgagors and investors escrow accounts and brokered deposits.
|--- | --------------------------------------------------------------------------



Results of Operations for the Three Months and the Nine
Months Ended September 30, 2005 and 2004



General.The Companys results of operations depend primarily on net interest and dividend income, which is the difference between the interest and dividend income earned on the Companys interest-earning
assets, such as loans and investments, and the interest expense on its interest-bearing liabilities, such as deposits and borrowings. The Company also generates noninterest income such as gains on securities and loan sales, fees from deposit and
trust and investment management services, insurance commissions, increases in cash surrender value of bank-owned life insurance and other fees. The Companys noninterest expenses primarily consist of salaries and employee benefits, occupancy
and equipment, computer and electronic banking services, outside professional services, marketing and other general and administrative expenses. The Companys results of operations are also significantly affected by general economic and
competitive conditions, particularly changes in market interest rates, governmental policies and actions of regulatory agencies.



Summary.The Company recorded net income of $812,000 for the three months ended September 30, 2005, an increase of $1.8 million compared to a
net loss of $1.0 million for the three months ended September 30, 2004. The increase was primarily attributable to a decrease in noninterest expenses of $1.4 million and increases of $728,000 in net interest and dividend income and $671,000 in
noninterest income and a decrease of $25,000 in the provision for loan losses, offset by an increase of $961,000 in the provision for income taxes.



Net income increased $2.4 million to $2.6 million for the nine months ended September 30, 2005 due to increases in net interest and dividend income of $2.3 million,
noninterest income of $1.3 million and a decrease of $90,000 in the provision for loan losses, offset by increases of $1.3 million in the provision for income taxes and $55,000 in noninterest expenses.



For both the three months and the nine months ended September 30, 2005, net interest and
dividend income rose in response to an increase in average interest-earning assets, offset by an increase in the cost of funds. Despite increases in net interest and dividend income, the net interest margin decreased 1 basis point for the three
months ended September 30, 2005 and 4 basis points for the nine months ended September 30, 2005. The continual flattening of the yield curve and compression of the margins provides challenges for management in an effort to minimize the
impact on net interest and dividend income.



For the three months and the nine
months ended September 30, 2004, noninterest expenses included a contribution of $2.5 million to SI Financial Group Foundation.



Interest and Dividend Income. Interest and dividend income increased $1.6 million, or 21.8%, to $8.7 million for the three months ended September 30,
2005 as a result of an increase in the volume of interest-earning assets from $539.7 million to $623.2 million and an increase in the average yield on interest-earning assets from 5.27% to 5.55%. Interest income from loans increased as a result of
increases of $67.8 million in the average balance and 20 basis points in the average yield from 5.85% to 6.05%. Although the average yield declined 9 basis points in the third quarter of 2005, interest and dividend income on investment securities
increased in response to an increase of $35.2 million in the average amount of securities outstanding.



For the nine months ended September 30, 2005, interest and dividend income increased $4.0 million to $24.8 million due to a higher average balance of earning assets and a 7 basis point increase in the average
yield from 5.44% to 5.51%. The average balance on loans and investment securities increased $57.7 million and $39.4 million, respectively. The average yield on loans increased 8 basis points while the average yield on investment securities decreased
12 basis points.



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Interest Expense. Interest expense increased $832,000, or 35.0%, to $3.2 million for the three months ended
September 30, 2005 compared to $2.4 million for the three months ended September 30, 2004 due primarily to increases in the average balance of interest-bearing deposit accounts and FHLB debt outstanding during the period, as well as an
increase in the average yields paid on deposits and subordinated debt. The average rate paid on interest-bearing deposit accounts increased 44 basis points from 1.60% to 2.04% due primarily to aggressive pricing on certificates of deposit. The
average yield on FHLB advances decreased from 4.02% to 3.92%, but increased on subordinated debt from 5.02% to 6.98% for the third quarter of 2005.



For the nine months ended September 30, 2005, interest expense increased $1.7 million as a result of increases in both the average balance of interest-bearing
liabilities from $463.0 million to $508.0 million and the average yield from 2.00% to 2.27%. The increase of $32.9 million in interest-bearing deposits and $12.0 million in FHLB advances and the 32 basis point increase in the average yield on
deposit accounts, which was partially offset by a 31 basis point decrease in the average rate of FHLB advances, were the primary reasons for the rise in interest expense for the period.



Provision for Loan Losses. The Companys provision for loan losses decreased $25,000 to $75,000 for the three months
ended September 30, 2005 from $100,000 for the three months ended September 30, 2004. For the nine months ended September 30, 2005, the provision for loan losses decreased $90,000 to $310,000 from $400,000 for the same period in 2004.
Continued improvements in the real estate market has favorably impacted both the Companys customers and the improved asset quality of the loan portfolio. The higher quality loan portfolio is evidenced by a reduction in nonperforming loans to
$246,000 at September 30, 2005 compared to $1.5 million at September 30, 2004 and net recoveries from loan losses of $59,000 for the nine months ended September 30, 2005 compared to net charge-offs of $32,000 for the nine months ended
September 30, 2004. Net charge-off for the three months ended September 30, 2005 were $16,000, an increase of $5,000, compared to $11,000 for the three months ended September 30, 2004. Despite improved asset quality, the Company
continues to monitor the impact that the rise in short-term interest rates will have on variable-rate borrowers and the implications on the quality of the loan portfolio.



Noninterest Income. The following table shows the components of noninterest income and the dollar changes for the three months
and the nine months ended September 30, 2005 and 2004.



|                                                              |      |                                  |       |      |                                 |   |        |   |  |      |     |      |  |   |        |  |   |       |   |  |   |       |  
|------------------------------------------------------------- | ---- | -------------------------------- | ----- | ---- | ------------------------------- | - | ------ | - |  | ---- | --- | ---- |  | - | ------ |  | - | ----- | - |  | - | ----- | -
|(Dollars in Thousands)                                        |      | Three Months Ended September 30, |       |      | Nine Months Ended September 30, |  
|                                                              | 2005 |                                  |       | 2004 |                                 |   | Change |   |  | 2005 |     | 2004 |  |   | Change | 
|Service fees                                                  |      | $                                | 1,094 |      |                                 | $ | 747    |   |  | $    | 347 |      |  | $ | 3,102  |  | $ | 2,194 |   |  | $ | 908   |  
|Wealth management fees                                        |      |                                  | 233   |      |                                 |   | 240    |   |  |      | (7  | )    |  |   | 745    |  |   | 727   |   |  |   | 18    |  
|Increase in cash surrender value of bank-owned life insurance |      |                                  | 69    |      |                                 |   | 70     |   |  |      | (1  | )    |  |   | 206    |  |   | 229   |   |  |   | (23   | )
|Net gain (loss) on sale of securities                         |      |                                  | 24    |      |                                 |   | (355   | ) |  |      | 379 |      |  |   | 59     |  |   | (169  | ) |  |   | 228   |  
|Net gain (loss) on sale of loans                              |      |                                  | 26    |      |                                 |   | 11     |   |  |      | 15  |      |  |   | 173    |  |   | (9    | ) |  |   | 182   |  
|Other                                                         |      |                                  | (21   | )    |                                 |   | 41     |   |  |      | (62 | )    |  |   | 96     |  |   | 86    |   |  |   | 10    |  
|                                                              |      |                                  |       |      |                                 |   |        |   |  |      |     |      |  |   |        |  |   |       |   |  |   |       |  
|TOTAL NONINTEREST INCOME                                      |      | $                                | 1,425 |      |                                 | $ | 754    |   |  | $    | 671 |      |  | $ | 4,381  |  | $ | 3,058 |   |  | $ | 1,323 |  
|                                                              |      |                                  |       |      |                                 |   |        |   |  |      |     |      |  |   |        |  |   |       |   |  |   |       |  



For both the three months and the nine
months ended September 30, 2005, the rise in service fees resulted from the Banks new courtesy overdraft protection program offered to its deposit customers, which commenced in the first quarter of 2005, as well as electronic banking fees
as a result of customers escalating usage of the Banks electronic banking products. Wealth management fees, which include trust and investment services fees, decreased for the three months ended September 30, 2005 which resulted
from lower investment services fees and fees associated with the Banks insurance products due to reductions in sales volume. Additional assets under management for trust services contributed to the increase in wealth management fees for the
nine months ended September 30, 2005. Decreases in cash surrender value of bank-owned life insurance policies related to lower interest rates for both the three and nine month ended September 30, 2005. Despite a reduction in the volume of
securities sold resulting from unrealized losses on certain available for sale securities, 2005 experienced net gains on the sale of securities compared to net losses on the sale of securities in 2004. The net loss on the sale of securities for the
three and nine months ended September 30, 2004 reflects managements decision to mitigate the Banks exposure to



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corporate and non-agency mortgage-backed securities. Net gains on the sale of loans reflect the sale of $33.9 million of
loans during the first nine months of 2005, compared to loan sales of $14.3 million for the same period in 2004. Other noninterest income included a net loss of $41,000 from the sale of a former branch location during the three months ended
September 30, 2005 and a net gain of $31,000 from the sale of real property for the nine months ended September 30, 2005.



Noninterest Expenses. The following table shows the components of noninterest expenses and the dollar changes for the three months and the nine
months ended September 30, 2005 and 2004.



|                                         |      |                                  |       |  |                                 |        |   |  |      |        |      |  |        |        |  |   |        |  |   |        |  
|---------------------------------------- | ---- | -------------------------------- | ----- |  | ------------------------------- | ------ | - |  | ---- | ------ | ---- |  | ------ | ------ |  | - | ------ |  | - | ------ | -
|(Dollars in Thousands)                   |      | Three Months Ended September 30, |       |  | Nine Months Ended September 30, |       
|                                         | 2005 |                                  | 2004  |  |                                 | Change |   |  | 2005 |        | 2004 |  | Change |       
|Salaries and employee benefits           |      | $                                | 3,269 |  | $                               | 2,500  |   |  | $    | 769    |      |  | $      | 9,142  |  | $ | 7,336  |  | $ | 1,806  |  
|Occupancy and equipment                  |      |                                  | 929   |  |                                 | 732    |   |  |      | 197    |      |  |        | 2,726  |  |   | 2,688  |  |   | 38     |  
|Computer and electronic banking services |      |                                  | 436   |  |                                 | 405    |   |  |      | 31     |      |  |        | 1,322  |  |   | 1,245  |  |   | 77     |  
|Outside professional services            |      |                                  | 247   |  |                                 | 150    |   |  |      | 97     |      |  |        | 907    |  |   | 529    |  |   | 378    |  
|Marketing                                |      |                                  | 202   |  |                                 | 143    |   |  |      | 59     |      |  |        | 517    |  |   | 364    |  |   | 153    |  
|Impairment charge  other assets         |      |                                  |      |  |                                 |       |   |  |      |       |      |  |        |       |  |   | 51     |  |   | (51    | )
|Contribution to Foundation               |      |                                  |      |  |                                 | 2,513  |   |  |      | (2,513 | )    |  |        |       |  |   | 2,513  |  |   | (2,513 | )
|Other real estate operations             |      |                                  | 30    |  |                                 | (73    | ) |  |      | 103    |      |  |        | 36     |  |   | 12     |  |   | 24     |  
|Other                                    |      |                                  | 525   |  |                                 | 627    |   |  |      | (102   | )    |  |        | 1,793  |  |   | 1,650  |  |   | 143    |  
|                                         |      |                                  |       |  |                                 |        |   |  |      |        |      |  |        |        |  |   |        |  |   |        |  
|TOTAL NONINTEREST EXPENSES               |      | $                                | 5,638 |  | $                               | 6,997  |   |  | $    | (1,359 | )    |  | $      | 16,443 |  | $ | 16,388 |  | $ | 55     |  
|                                         |      |                                  |       |  |                                 |        |   |  |      |        |      |  |        |        |  |   |        |  |   |        |  



For both the three and the nine month
periods of 2005, the increase in salaries and employee benefits primarily reflects additional salaries, benefits and taxes for elevated staffing levels in response to the expansion of branch facilities and the commercial lending division. The
adoption of SFAS 123R during the second quarter of 2005, resulted in share-based compensation expense related to the amortization of stock option and restricted stock awards over their requisite service period of $189,000 and $285,000, respectively,
for the three months and the nine months ended September 30, 2005. In addition, for the three months and the nine months ended September 30, 2005, the Company recorded compensation expense in connection with the employee stock ownership
plan in the amount of $90,000 and $270,000, respectively. Increases in outside professional services were attributable to higher legal and auditing costs associated with the Companys public reporting requirements and consulting costs for
assistance with Sarbanes Oxley compliance. In 2005, marketing expenses increased as a result of an aggressive marketing campaign for the Banks products and services and promotions related to new branch openings. Additionally, other noninterest
expenses increased due to a rise in printing and supplies related to various direct mailings to customers. The first nine months of 2004 included a $51,000 impairment charge which was recorded to reduce the carrying value of the Companys
investment in a Small Business Investment Company (SBIC) limited partnership, an impairment charge of $337,000 to reduce the carrying value on a former branch facility to its estimated net market value and a $60,000 charge to reduce the
carrying value of other real estate owned property.



Income Tax
Provision. For the three and nine months ended September 30, 2005, the Companys income tax expense increased $961,000 and $1.3 million, respectively, as a result of higher taxable income. The effective tax rate for the three
months ended September 30, 2005 and 2004 was 33.3% and 35.5%, respectively. The effective income tax rate for the nine months ended September 30, 2005 and 2004 was 32.7% and 5.7%, respectively.



Liquidity and Capital Resources



Liquidity is the ability to meet current and future financial obligations of a short-term
nature. The Companys primary sources of funds consist of deposit inflows, loan repayments and sales, maturities and sales of investment securities and borrowings from the FHLB. While maturities and scheduled amortization of loans and
securities are predictable sources of funds, deposit flows, mortgage prepayments and loan sales are greatly influenced by general interest rates, economic conditions and competition.



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The Company regularly adjusts its investments in liquid assets based upon its assessment of (1) expected loan
demand, (2) expected deposit flows, (3) yields available on interest-earning deposits and securities and (4) the objectives of our asset/liability management, funds management and liquidity policies. The Companys policy is to
maintain liquid assets less short-term liabilities within a range of 12.5% to 20.0% of total assets. Excess liquid assets are generally invested in interest-earning deposits and short- and intermediate-term U.S. government and agency obligations.



The Companys most liquid assets are cash and cash equivalents. The
levels of these assets depend on the Companys operating, financing, lending and investing activities during any given period. At September 30, 2005, cash and cash equivalents totaled $29.2 million, which included interest-bearing
deposits, including federal funds sold, of $11.7 million.



Securities
classified as available for sale, which provide additional sources of liquidity, totaled $117.2 million at September 30, 2005. In addition, at September 30, 2005, the Company had the ability to borrow a total of approximately $192.7
million from the FHLB, which included overnight lines of credit of $6.2 million, before deducting outstanding advances. On that date, the Company had advances outstanding of $91.1 million and no overnight lines of credit advances outstanding. The
Company believes that its most liquid assets combined with the available line from the FHLB provide adequate liquidity to meet its current financial obligations.



At September 30, 2005, the Company had $94.7 million in loan commitments outstanding, which included $28.4 million in undisbursed
construction loans, $21.4 million in unused home equity lines of credit, $10.1 million in commercial lines of credit and $1.1 million in standby letters of credit. Certificates of deposit due within one year of September 30, 2005 totaled $94.7
million, or 19.4%, of total deposits (including mortgagors and investors escrow accounts). Management believes that the amount of deposits in shorter-term certificates of deposit reflects customers hesitancy to invest their funds
in longer-term certificates of deposit in the current interest rate environment. If these maturing certificates of deposit do not remain with the Company, it will be required to seek other sources of funds, including other certificates of deposit
and lines of credit. Depending on market conditions, the Company may be required to pay higher rates on such deposits or other borrowings than it currently pays on the certificates of deposit. Additionally, the Company maintains a shorter duration
in its securities portfolio to provide necessary liquidity to compensate for any deposit outflows. The Company believes, based on past experience that a significant portion of the Companys certificates of deposit will remain with it. The
Company has the ability to attract and retain deposits by favorably adjusting the interest rates offered to its customers.



The Companys primary investing activities are the origination of loans and the purchase of securities. For the nine months ended September 30, 2005, the
Company originated $134.2 million of loans and purchased $18.8 million of securities. For the twelve months ended December 31, 2004, the Company originated $178.4 million of loans and purchased $90.7 million of securities.



Financing activities consist primarily of activities in deposit accounts and FHLB advances.
Liquidity needed to fund asset growth has been provided through deposits, FHLB borrowings, raising capital through the issuance of trust preferred securities and the initial public offering. The Company experienced a net increase in total deposits,
including mortgagors and investors escrow accounts, of $27.2 million, $43.2 million and $19.0 million for the nine months ended September 30, 2005 and for the years ended December 31, 2004 and 2003, respectively. Deposit flows
are affected by the overall level of interest rates, products offered by the Company and its local competitors and other factors. The Company generally manages the pricing of its deposits to be competitive and to increase core deposits and
commercial banking relationships. Occasionally, the Company offers promotional rates on certain deposit products to attract deposits. The Company experienced a net increase of $18.5 million in FHLB advances for the nine months ended
September 30, 2005 to fund loan demand and to invest in securities. The Company had net increases of $15.5 million and $13.3 million in FHLB advances for the years ended December 31, 2004 and 2003, respectively. For the nine months
ended September 30, 2005, the Company utilized $1.6 million for the purchase of common shares to fund restricted stock awards during the third quarter of 2005.



Payments Due Under Contractual Obligations



Information relating to payments due under contractual obligations is presented in the Companys 10-K for the year ended
December 31, 2004. There were no material changes in the Companys payments due under contractual obligations during the nine months ended September 30, 2005.



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Off-Balance Sheet Arrangements



In the normal course of operations, the Company engages in a variety of financial transactions that, in accordance with accounting
principles generally accepted in the United States of America, are not recorded in its financial statements. These transactions involve, to varying degrees, elements of credit, interest rate and liquidity risk. Such transactions are used primarily
to manage customers requests for funding and take the form of loan commitments, lines of credit and letters of credit.



The contractual amount of commitments to extend credit represent the amount of potential accounting losses should the contract be fully drawn upon, the customer defaults
and the value of any existing collateral becomes worthless. The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments. Financial instruments whose contract amounts
represent credit risk at September 30, 2005 and December 31, 2004 are as follows:



|                                        |  |                   |        |                  |   |       
|--------------------------------------- |  | ----------------- | ------ | ---------------- | - | ------
|(Dollars in Thousands)                  |  | September 30,2005 |        | December 31,2004
|Commitments to extend credit: (1)       |  |                   |        |                  |   |       
|Future loan commitments(2)              |  | $                 | 32,509 |                  | $ | 27,073
|Undisbursed construction loans          |  |                   | 28,429 |                  |   | 27,527
|Undisbursed home equity lines of credit |  |                   | 21,380 |                  |   | 19,351
|Undisbursed commercial lines of credit  |  |                   | 10,082 |                  |   | 8,433 
|Overdraft protection lines              |  |                   | 1,208  |                  |   | 1,060 
|Standby letters of credit(3)            |  |                   | 1,124  |                  |   | 997   
|                                        |  |                   |        |                  |   |       
|TOTAL COMMITMENTS                       |  | $                 | 94,732 |                  | $ | 84,441
|                                        |  |                   |        |                  |   |       

---

|(1) | Commitments to extend credit are agreements to lend to a customer as long as there is no
violation of any condition established in the contract. Commitments may require payment of a fee and generally have fixed expiration dates or other termination clauses.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | Includes fixed-rate loan commitments of $9.1 million at interest rates ranging from 4.500% to
7.625% and $10.2 million at interest rates ranging from 4.875% to 7.125% at September 30, 2005 and December 31, 2004, respectively.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) | Standby letters of credit are conditional commitments issued to guarantee the performance of
a customer to a third party.
|--- | -------------------------------------------------------------------------------------------------------------------------



In 1998, the Bank became a limited
partner in a SBIC and made a commitment to make a capital investment of $1.0 million in the limited partnership. At September 30, 2005 and December 31, 2004, the Banks remaining off-balance sheet commitment for capital investment in
the SBIC was approximately $194,000.



In 2004, the Bank established the ESOP
for the benefit of its eligible employees. As of December 31, 2004, the Bank repaid principal payments on the loan to the ESOP of $56,000 and released 8,069 shares held in a suspense account for allocation to participants. As of
September 30, 2005, the amount of unallocated common shares held in the suspense account totaled 484,430, with a fair value of $6.0 million, representing a potential commitment of the Bank to the ESOP.



For the nine months ended September 30, 2005, with the exception of the aforementioned
commitments, the Company did not engage in any additional off-balance sheet transactions reasonably likely to have a material effect on our financial condition, results of operation or cash flows.



Regulatory Capital



The Bank is subject to various regulatory capital requirements administered by the OTS,
including a risk-based capital measure. The risk-based capital guidelines include both a definition of capital and a framework for calculating risk-weighted assets by assigning balance sheet assets and off-balance sheet items to broad risk
categories. As a savings and loan holding company regulated by the OTS, the Company is not subject to any separate regulatory capital requirements.



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At September 30, 2005 and December 31, 2004, the Bank met all capital adequacy requirements to which it was
subject and the Bank is considered well capitalized under regulatory guidelines.



The following is a summary of the Banks regulatory capital amounts and ratios as of September 30, 2005 and December 31, 2004.





|                                          |        |        |        |  |                              |        |  |                                                               |        |  |        |   |       |   |        |  |       |  
|----------------------------------------- | ------ | ------ | ------ |  | ---------------------------- | ------ |  | ------------------------------------------------------------- | ------ |  | ------ | - | ----- | - | ------ |  | ----- | -
|September 30, 2005 (Dollars in Thousands) |        | Actual |        |  | For CapitalAdequacy Purposes |        |  | To Be WellCapitalized UnderPrompt CorrectiveAction Provisions |       
|                                          | Amount |        | Ratio  |  |                              | Amount |  | Ratio                                                         |        |  | Amount |   | Ratio |  
|Total Capital to Risk Weighted Assets     |        | $      | 66,462 |  | 17.19                        | %      |  | $                                                             | 30,931 |  | 8.00   | % |       | $ | 38,663 |  | 10.00 | %
|Tier I Capital to Risk Weighted Assets    |        |        | 62,900 |  | 16.27                        |        |  |                                                               | 15,464 |  | 4.00   |   |       |   | 23,196 |  | 6.00  |  
|Tier I Capital to Total Assets            |        |        | 62,900 |  | 9.66                         |        |  |                                                               | 26,046 |  | 4.00   |   |       |   | 32,557 |  | 5.00  |  
|Tangible Equity Ratio                     |        |        | 62,900 |  | 9.66                         |        |  |                                                               | 9,767  |  | 1.50   |   |       |   | N/A    |  | N/A   |  
|                                          |        |        |       
|December 31, 2004 (Dollars in Thousands)  |        | Actual |        |  | For CapitalAdequacy Purposes |        |  | To Be WellCapitalized UnderPrompt CorrectiveAction Provisions |       
|                                          | Amount |        | Ratio  |  |                              | Amount |  | Ratio                                                         |        |  | Amount |   | Ratio |  
|Total Capital to Risk Weighted Assets     |        | $      | 63,459 |  | 18.03                        | %      |  | $                                                             | 28,157 |  | 8.00   | % |       | $ | 35,196 |  | 10.00 | %
|Tier I Capital to Risk Weighted Assets    |        |        | 60,253 |  | 17.12                        |        |  |                                                               | 14,078 |  | 4.00   |   |       |   | 21,117 |  | 6.00  |  
|Tier I Capital to Total Assets            |        |        | 60,253 |  | 9.99                         |        |  |                                                               | 24,125 |  | 4.00   |   |       |   | 30,157 |  | 5.00  |  
|Tangible Equity Ratio                     |        |        | 60,253 |  | 9.99                         |        |  |                                                               | 9,047  |  | 1.50   |   |       |   | N/A    |  | N/A   |  



Item 3. Quantitative and Qualitative Disclosures About Market Risk.



Qualitative Aspects of Market Risk



The primary market risk factor affecting the financial condition and operating results of the Company is interest rate risk. Interest rate risk is the exposure of current and future earnings and capital arising from
movements in interest rates. This risk is managed by periodic evaluation of the interest rate risk inherent in interest-earning assets and interest-bearing liabilities in an effort to minimize the adverse effects of changes in the interest rate
environment. Deposit accounts typically react more quickly to changes in market interest rates than mortgage loans because of the shorter maturities of deposits. As a result, sharp increases in interest rates may adversely affect earnings while
decreases in interest rates may beneficially affect earnings. To reduce the potential volatility of earnings, the Company has sought to improve the match between asset and liability maturities and rates, while maintaining an acceptable interest rate
spread. Pursuant to this strategy, the Company originates adjustable-rate mortgage loans for retention in its loan portfolio. However, the ability to originate adjustable-rate loans depends, to a great extent, on market interest rates and
borrowers preferences. As an alternative to adjustable-rate mortgage loans, the Company offers fixed-rate mortgage loans with maturities of fifteen years. This product enables the Company to compete in the fixed-rate mortgage market while
maintaining a shorter maturity. Fixed-rate mortgage loans typically have an adverse effect on interest rate sensitivity compared to adjustable-rate loans. Accordingly, the Company has sold more long-term fixed-rate mortgage loans in the secondary
market in recent periods to manage interest rate risk. In recent years, the Company also has used investment securities with terms of three years or less, longer-term borrowings from the FHLB and a four-year $5.0 million brokered deposit to help
manage interest rate risk. The Company currently does not participate in hedging programs, interest rate swaps or other activities involving the use of derivative financial instruments.



The Company has an Asset/Liability Committee to communicate, coordinate and control all aspects involving asset/liability management. The
committee establishes and monitors the volume, maturities, pricing and mix of assets and funding sources with the objective of managing assets and funding sources to provide results that are consistent with liquidity, growth, risk limits and
profitability goals.



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Quantitative Aspects of Market Risk



The Company analyzes its interest rate sensitivity position to manage the risk associated
with interest rate movements through the use of interest income simulation. The matching of assets and liabilities may be analyzed by examining the extent to which such assets and liabilities are interest rate sensitive. An asset or
liability is said to be interest rate sensitive within a specific time period if it will mature or reprice within that time period. The Companys goal is to manage asset and liability positions to moderate the effect of interest rate
fluctuations on net interest and dividend income.



Income Simulation
Analysis. Interest income simulations are completed quarterly and presented to the Companys Asset/Liability Committee. The simulations provide an estimate of the impact of changes in interest rates on net interest and dividend income
under a range of assumptions. The numerous assumptions used in the simulation process are reviewed by the Asset/Liability Committee on a quarterly basis. Changes to these assumptions can significantly affect the results of the simulation. The
simulation incorporates assumptions regarding the potential timing in the repricing of certain assets and liabilities when market rates change and the changes in spreads between different market rates. The simulation analysis incorporates
managements current assessment of the risk that pricing margins will change adversely over time due to competition or other factors. Simulation analysis is only an estimate of the Companys interest rate risk exposure at a particular
point in time. The Company continually reviews the potential effect that changes in interest rates could have on the repayment of rate sensitive assets and funding requirements of rate sensitive liabilities.



The tables below set forth an approximation of the Companys exposure as a percentage of
estimated net interest and dividend income for the next twelve and twenty-four month periods using interest income simulation. The simulation uses projected repricing of assets and liabilities at September 30, 2005 and at December 31, 2004
on the basis of contractual maturities, anticipated repayments and scheduled rate adjustments. Prepayment rates can have a significant impact on interest income simulation. Because of the Companys large percentage of loans and mortgage-backed
securities, rising or falling interest rates have a significant impact on the prepayment speeds of its earning assets that in turn affect the rate sensitivity position. The prepayment rates on investment securities are assumed to fluctuate between
8% and 18% in a flat interest rate environment, between 5% and 12% in an increasing interest rate environment and between 18% and 36% in a decreasing interest rate environment, depending on the type of security. Loan prepayment rates are assumed to
fluctuate between 8% and 24% in a flat interest rate environment, between 6% and 18% in a rising rate environment and between 6% and 48% in a falling rate environment, depending on the type of loan. As evidenced by these assumptions, when interest
rates rise, prepayments tend to slow and when interest rates fall, prepayments tend to increase. The Companys asset sensitivity would be reduced if prepayments slow and vice versa. Because prospective effects of hypothetical interest rate
changes are based on a number of assumptions, these computations should not be relied upon as indicative of actual results. While the Company believes such assumptions to be reasonable, there can be no assurance that assumed prepayment rates will
approximate actual future mortgage-backed securities, collateralized mortgage obligations and loan repayment activity. Further, the computations do not reflect any actions that management may undertake in response to changes in interest rates.
Management periodically reviews its rate assumptions based on existing and projected economic conditions.



The Companys management generally simulates changes to net interest and dividend income using three different interest rate scenarios. The first scenario anticipates the maximum foreseeable increase in rates
over the next twelve months; management currently assumes this to be 300 basis points. The second scenario anticipates managements view of the most likely change in interest rates over the next twelve months; managements current
assumption is a 100 basis point increase in rates. The third scenario anticipates the maximum foreseeable decrease in rates over the next twelve months; managements assumption was 200 basis points at September 30, 2005 and 100 basis
points at December 31, 2004. The basis point change in each of the three scenarios is assumed to occur evenly over both the twelve and twenty-four months presented. As of September 30, 2005 and December 31, 2004, the Companys
estimated exposure as a percentage of estimated net interest and dividend income for the twelve-month and twenty-four month periods are as follows:



|                                  |           |                                                                 |    |           |       |   
|--------------------------------- | --------- | --------------------------------------------------------------- | -- | --------- | ----- | --
|September 30, 2005:               |           | Percent Change in EstimatedNet Interest and DividendIncome Over |   
|                                  | 12 Months |                                                                 |    | 24 Months |      
|300 basis point increase in rates |           | (5.99                                                           | )% |           | (7.64 | )%
|100 basis point increase in rates |           | 0.83                                                            |    |           | 1.26  |   
|200 basis point decrease in rates |           | (4.38                                                           | )  |           | (7.24 | ) 



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##### Table of Contents

|                                  |           |                                                                 |    |           |        |   
|--------------------------------- | --------- | --------------------------------------------------------------- | -- | --------- | ------ | --
|                                  |          
|December 31, 2004:                |           | Percent Change in EstimatedNet Interest and DividendIncome Over |   
|                                  | 12 Months |                                                                 |    | 24 Months |       
|300 basis point increase in rates |           | (9.95                                                           | )% |           | (12.57 | )%
|100 basis point increase in rates |           | (3.20                                                           | )  |           | (4.25  | ) 
|100 basis point decrease in rates |           | (3.70                                                           | )  |           | (6.35  | ) 



As of September 30, 2005, based
on the scenarios above, net interest and dividend income would be adversely affected in both the twelve and twenty-four month periods if interest rate increase 300 basis points or if interest rates decrease 200 basis points. Net interest and
dividend income is positively impacted if interest rates increase 100 basis points. Using net interest and dividend income for the quarter ended September 30, 2005, for each percentage point change in net interest and dividend income, the
effect on the Companys annual net income would be $145,000, assuming a 34% income tax rate.



As of December 31, 2004, based on the scenarios above, net interest and dividend income would be adversely affected in both the twelve and twenty-four month periods if interest rates rose by 100 or 300 basis
points or if interest rates decreased 100 basis points. Using net interest and dividend income for the quarter ended December 31, 2004, for each percentage point change in net interest and dividend income, the effect on the Companys
annual net income would be $140,000, assuming a 34% income tax rate.



For both
the twelve and twenty-four month periods, the effect on net interest and dividend income has improved, in the event of a sudden and sustained increase in prevailing market interest rates of 100 and 300 basis points at September 30, 2005
compared to December 31, 2004, as a result of the Companys strategy to better position the balance sheet for the eventual rise in market interest rates primarily through the sale of fixed-rate residential mortgages.



Item 4. Controls and Procedures.



The
Companys management, including the Companys principal executive officer and principal financial officer, have evaluated the effectiveness of the Companys disclosure controls and procedures, as such term is defined in
Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended, (the Exchange Act). Based upon their evaluation, the principal executive officer and principal financial officer concluded that, as of the end of the
period covered by this report, the Companys disclosure controls and procedures were effective for the purpose of ensuring that the information required to be disclosed in the reports that the Company files or submits under the Exchange Act
with the Securities and Exchange Commission (1) is recorded, processed, summarized and reported within the time periods specified in the SECs rules and forms and (2) is accumulated and communicated to the Companys management,
including its principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.



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##### Table of Contents

PART II. OTHER INFORMATION



Item 1. Legal Proceedings.



Periodically, there have been various claims and lawsuits against the Bank, such as claims to enforce liens, condemnation proceedings on properties in which the Bank holds a security interest, claims involving the making and servicing of
real property loans and other issues incident to our business. The Company is not a party to any pending legal proceedings that it believes would have a material adverse effect on its financial condition, results of operations or cash flows.



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



The Company did not repurchase any shares of its common stock during the quarter ended September 30, 2005.



Item 3. Defaults Upon Senior Securities.



None.



Item 4. Submission of Matters to a Vote of Security Holders.



None.



Item 5. Other Information.



None.



Item 6. Exhibits.



|     |  |                                                                                                                                                                             
|---- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|3.1  |  | Charter of SI Financial Group, Inc.(1)                                                                                                                                      
|     | 
|3.2  |  | Bylaws of SI Financial Group, Inc.(1)                                                                                                                                       
|     | 
|4.0  |  | Specimen Stock Certificate of SI Financial Group, Inc.(1)                                                                                                                   
|     | 
|31.1 |  | Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer                                                                                                           
|     | 
|31.2 |  | Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer                                                                                                           
|     | 
|32.0 |  | Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

---

|(1) | Incorporated by reference into this document from the Exhibits filed with the Securities and Exchange Commission on the Registration Statement on Form S-1, and any
amendments thereto, Registration No. 333-116381.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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##### Table of Contents

SIGNATURES



Pursuant to the
requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.



|                  |  |                          |  |                                                                
|----------------- |  | ------------------------ |  | ---------------------------------------------------------------
|                  |  | SI FINANCIAL GROUP, INC.
|                  |  |                         
|November 10, 2005 |  | By:                      |  | /s/ Rheo A. Brouillard                                         
|                  |  |                          |  | Rheo A. Brouillard                                             
|                  |  |                          |  | President and Chief Executive Officer                          
|                  |  |                          |  | (principal executive officer)                                  
|                  |  |                         
|November 10, 2005 |  | By:                      |  | /s/ Brian J. Hull                                              
|                  |  |                          |  | Brian J. Hull                                                  
|                  |  |                          |  | Executive Vice President, Treasurer and Chief Financial
Officer
|                  |  |                          |  | (principal financial and accounting officer)                   



30