##### Table of Contents





UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549





FORM 10-Q







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

For the Quarterly Period Ended June 30, 2010

OR



| ̈ | 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





SI FINANCIAL GROUP, INC.

(Exact name of registrant as specified in its charter)







|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|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)





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

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



|                        |  |   |  |                           |  |  
|----------------------- |  | - |  | ------------------------- |  | -
|Large Accelerated Filer |  |  ̈ |  | Accelerated Filer         |  |  ̈
|                        |  |   | 
|Non-Accelerated Filer   |  |  ̈ |  | Smaller Reporting Company |  | 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 August 6, 2010, there were 11,777,496 shares of the registrants common stock outstanding.









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##### Table of Contents

SI FINANCIAL GROUP, INC.

TABLE OF CONTENTS



|           |  |                                                                                                  |  |         
|---------- |  | ------------------------------------------------------------------------------------------------ |  | --------
|           |  |                                                                                                  |  | Page No.
|           |  |                                                                                                 
|PART I.    |  | FINANCIAL INFORMATION                                                                            |  |         
|           |  |                                                                                                 
|Item 1.    |  | Financial Statements:                                                                            |  |         
|           |  |                                                                                                 
|           |  | Consolidated Balance Sheets at June 30, 2010 and December 31, 2009                               |  | 1       
|           |  |                                                                                                 
|           |  | Consolidated Statements of Operations for the three and six months ended June 30, 2010 and
2009  |  | 2       
|           |  |                                                                                                 
|           |  | Consolidated Statement of Changes in Stockholders Equity for the six months ended June 30,
2010 |  | 3       
|           |  |                                                                                                 
|           |  | Consolidated Statements of Cash Flows for the six months ended June 30, 2010 and
2009            |  | 4       
|           |  |                                                                                                 
|           |  | Notes to Consolidated Financial Statements                                                       |  | 6       
|           |  |                                                                                                 
|Item 2.    |  | Managements Discussion and Analysis of Financial Condition and Results of
Operations            |  | 25      
|           |  |                                                                                                 
|Item 3.    |  | Quantitative and Qualitative Disclosures about Market Risk                                       |  | 36      
|           |  |                                                                                                 
|Item 4(T). |  | Controls and Procedures                                                                          |  | 36      
|           |  |                                                                                                 
|PART II.   |  | OTHER INFORMATION                                                                                |  |         
|           |  |                                                                                                 
|Item 1.    |  | Legal Proceedings                                                                                |  | 36      
|           |  |                                                                                                 
|Item 1A.   |  | Risk Factors                                                                                     |  | 36      
|           |  |                                                                                                 
|Item 2.    |  | Unregistered Sales of Equity Securities and Use of Proceeds                                      |  | 37      
|           |  |                                                                                                 
|Item 3.    |  | Defaults Upon Senior Securities                                                                  |  | 37      
|           |  |                                                                                                 
|Item 4.    |  | [Removed and Reserved]                                                                           |  | 37      
|           |  |                                                                                                 
|Item 5.    |  | Other Information                                                                                |  | 37      
|           |  |                                                                                                 
|Item 6.    |  | Exhibits                                                                                         |  | 37      
|           |  |                                                                                                 
|SIGNATURES |  |                                                                                                  |  | 39      



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##### Table of Contents

PART I. FINANCIAL INFORMATION



|Item 1. | Financial Statements.
|------- | ---------------------

SI FINANCIAL GROUP, INC.

CONSOLIDATED BALANCE SHEETS

(Dollars in Thousands, Except Share Amounts/Unaudited)



|                                                                                                                                                                                         |  |          |         |   |              |   |         |  
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | -------- | ------- | - | ------------ | - | ------- | -
|                                                                                                                                                                                         |  | June 30, |         |   | December 31, |  
|                                                                                                                                                                                         |  | 2010     |         |   | 2009         |  
|ASSETS:                                                                                                                                                                                  |  |          |         |   |              |   |         |  
|Cash and due from banks:                                                                                                                                                                 |  |          |         |   |              |   |         |  
|Noninterest-bearing                                                                                                                                                                      |  | $        | 13,332  |   |              | $ | 12,889  |  
|Interest-bearing                                                                                                                                                                         |  |          | 4,811   |   |              |   | 2,350   |  
|Federal funds sold                                                                                                                                                                       |  |          | 27,950  |   |              |   | 8,965   |  
|                                                                                                                                                                                         |  |          |         |   |              |   |         |  
|Total cash and cash equivalents                                                                                                                                                          |  |          | 46,093  |   |              |   | 24,204  |  
|                                                                                                                                                                                         |  |         
|Available for sale securities, at fair value                                                                                                                                             |  |          | 182,210 |   |              |   | 183,562 |  
|Loans held for sale                                                                                                                                                                      |  |          | 1,835   |   |              |   | 396     |  
|Loans receivable (net of allowance for loan losses of $4,878 at June 30, 2010 and $4,891 at December 31,
2009)                                                                           |  |          | 606,514 |   |              |   | 607,692 |  
|Federal Home Loan Bank stock, at cost                                                                                                                                                    |  |          | 8,388   |   |              |   | 8,388   |  
|Bank-owned life insurance                                                                                                                                                                |  |          | 8,877   |   |              |   | 8,734   |  
|Premises and equipment, net                                                                                                                                                              |  |          | 12,418  |   |              |   | 12,966  |  
|Goodwill and other intangibles                                                                                                                                                           |  |          | 4,179   |   |              |   | 4,195   |  
|Accrued interest receivable                                                                                                                                                              |  |          | 3,333   |   |              |   | 3,341   |  
|Deferred tax asset, net                                                                                                                                                                  |  |          | 4,778   |   |              |   | 6,078   |  
|Other real estate owned                                                                                                                                                                  |  |          | 1,745   |   |              |   | 3,680   |  
|Prepaid FDIC deposit insurance assessment                                                                                                                                                |  |          | 3,056   |   |              |   | 3,549   |  
|Other assets                                                                                                                                                                             |  |          | 6,009   |   |              |   | 5,569   |  
|                                                                                                                                                                                         |  |          |         |   |              |   |         |  
|Total assets                                                                                                                                                                             |  | $        | 889,435 |   |              | $ | 872,354 |  
|                                                                                                                                                                                         |  |          |         |   |              |   |         |  
|                                                                                                                                                                                         |  |         
|LIABILITIES AND STOCKHOLDERS EQUITY:                                                                                                                                                    |  |          |         |   |              |   |         |  
|Liabilities:                                                                                                                                                                             |  |          |         |   |              |   |         |  
|Deposits:                                                                                                                                                                                |  |          |         |   |              |   |         |  
|Noninterest-bearing                                                                                                                                                                      |  | $        | 68,259  |   |              | $ | 65,407  |  
|Interest-bearing                                                                                                                                                                         |  |          | 606,184 |   |              |   | 593,380 |  
|                                                                                                                                                                                         |  |          |         |   |              |   |         |  
|Total deposits                                                                                                                                                                           |  |          | 674,443 |   |              |   | 658,787 |  
|                                                                                                                                                                                         |  |         
|Mortgagors and investors escrow accounts                                                                                                                                               |  |          | 2,338   |   |              |   | 3,591   |  
|Federal Home Loan Bank advances                                                                                                                                                          |  |          | 114,169 |   |              |   | 116,100 |  
|Junior subordinated debt owed to unconsolidated trust                                                                                                                                    |  |          | 8,248   |   |              |   | 8,248   |  
|Accrued expenses and other liabilities                                                                                                                                                   |  |          | 9,077   |   |              |   | 8,166   |  
|                                                                                                                                                                                         |  |          |         |   |              |   |         |  
|Total liabilities                                                                                                                                                                        |  |          | 808,275 |   |              |   | 794,892 |  
|                                                                                                                                                                                         |  |          |         |   |              |   |         |  
|                                                                                                                                                                                         |  |         
|Stockholders Equity:                                                                                                                                                                    |  |          |         |   |              |   |         |  
|Preferred stock ($.01 par value; 1,000,000 shares authorized; none issued)                                                                                                               |  |          |        |   |              |   |        |  
|Common stock ($.01 par value; 75,000,000 shares authorized; 12,563,750 shares issued; 11,777,496 and 11,789,202 shares
outstanding at June 30, 2010 and December 31, 2009, respectively) |  |          | 126     |   |              |   | 126     |  
|Additional paid-in-capital                                                                                                                                                               |  |          | 52,226  |   |              |   | 52,230  |  
|Unallocated common shares held by ESOP                                                                                                                                                   |  |          | (3,068  | ) |              |   | (3,230  | )
|Unearned restricted shares                                                                                                                                                               |  |          | (29     | ) |              |   | (193    | )
|Retained earnings                                                                                                                                                                        |  |          | 39,964  |   |              |   | 38,883  |  
|Accumulated other comprehensive loss                                                                                                                                                     |  |          | (20     | ) |              |   | (2,389  | )
|Treasury stock at cost (786,254 and 774,548 shares at June 30, 2010 and December 31, 2009,
respectively)                                                                                 |  |          | (8,039  | ) |              |   | (7,965  | )
|                                                                                                                                                                                         |  |          |         |   |              |   |         |  
|                                                                                                                                                                                         |  |         
|Total stockholders equity                                                                                                                                                               |  |          | 81,160  |   |              |   | 77,462  |  
|                                                                                                                                                                                         |  |          |         |   |              |   |         |  
|Total liabilities and stockholders equity                                                                                                                                               |  | $        | 889,435 |   |              | $ | 872,354 |  
|                                                                                                                                                                                         |  |          |         |   |              |   |         |  

See accompanying notes to unaudited interim consolidated financial statements.



1



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##### Table of Contents

SI FINANCIAL GROUP, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(Dollars in Thousands Except Per Share Amounts/Unaudited)



|                                                              |  |                |        |   |                |   |        |      |  |   |        |   |  |   |        |  
|------------------------------------------------------------- |  | -------------- | ------ | - | -------------- | - | ------ | ---- |  | - | ------ | - |  | - | ------ | -
|                                                              |  | Three Months   |        |   | Six Months     |  
|                                                              |  | Ended June 30, |        |   | Ended June 30, |  
|                                                              |  | 2010           |        |   | 2009           |   |        | 2010 |  |   | 2009   |  
|Interest and dividend income:                                 |  |                |        |   |                |   |        |      |  |   |        |   |  |   |        |  
|Loans, including fees                                         |  | $              | 8,445  |   |                | $ | 9,105  |      |  | $ | 16,856 |   |  | $ | 18,039 |  
|Securities:                                                   |  |                |        |   |                |   |        |      |  |   |        |   |  |   |        |  
|Taxable interest                                              |  |                | 1,567  |   |                |   | 2,023  |      |  |   | 3,322  |   |  |   | 4,048  |  
|Tax-exempt interest                                           |  |                | 14     |   |                |   | 10     |      |  |   | 29     |   |  |   | 13     |  
|Dividends                                                     |  |                | 6      |   |                |   | 13     |      |  |   | 11     |   |  |   | 27     |  
|Other                                                         |  |                | 26     |   |                |   | 25     |      |  |   | 49     |   |  |   | 77     |  
|                                                              |  |                |        |   |                |   |        |      |  |   |        |   |  |   |        |  
|Total interest and dividend income                            |  |                | 10,058 |   |                |   | 11,176 |      |  |   | 20,267 |   |  |   | 22,204 |  
|                                                              |  |                |        |   |                |   |        |      |  |   |        |   |  |   |        |  
|                                                              |  |                |        |  
|Interest expense:                                             |  |                |        |   |                |   |        |      |  |   |        |   |  |   |        |  
|Deposits                                                      |  |                | 2,453  |   |                |   | 3,377  |      |  |   | 5,117  |   |  |   | 6,831  |  
|Federal Home Loan Bank advances                               |  |                | 1,036  |   |                |   | 1,440  |      |  |   | 2,112  |   |  |   | 2,921  |  
|Subordinated debt                                             |  |                | 41     |   |                |   | 59     |      |  |   | 80     |   |  |   | 130    |  
|                                                              |  |                |        |   |                |   |        |      |  |   |        |   |  |   |        |  
|Total interest expense                                        |  |                | 3,530  |   |                |   | 4,876  |      |  |   | 7,309  |   |  |   | 9,882  |  
|                                                              |  |                |        |   |                |   |        |      |  |   |        |   |  |   |        |  
|                                                              |  |                |        |  
|Net interest income                                           |  |                | 6,528  |   |                |   | 6,300  |      |  |   | 12,958 |   |  |   | 12,322 |  
|                                                              |  |                |        |  
|Provision for loan losses                                     |  |                | 252    |   |                |   | 1,440  |      |  |   | 422    |   |  |   | 1,930  |  
|                                                              |  |                |        |   |                |   |        |      |  |   |        |   |  |   |        |  
|                                                              |  |                |        |  
|Net interest income after provision for loan losses           |  |                | 6,276  |   |                |   | 4,860  |      |  |   | 12,536 |   |  |   | 10,392 |  
|                                                              |  |                |        |   |                |   |        |      |  |   |        |   |  |   |        |  
|                                                              |  |                |        |  
|Noninterest income:                                           |  |                |        |   |                |   |        |      |  |   |        |   |  |   |        |  
|Total other-than-temporary impairment losses on securities    |  |                | (194   | ) |                |   |       |      |  |   | (365   | ) |  |   | (150   | )
|Portion of losses recognized in other comprehensive income    |  |                | 33     |   |                |   |       |      |  |   | 33     |   |  |   |       |  
|                                                              |  |                |        |   |                |   |        |      |  |   |        |   |  |   |        |  
|Net impairment losses recognized in earnings                  |  |                | (161   | ) |                |   |       |      |  |   | (332   | ) |  |   | (150   | )
|Service fees                                                  |  |                | 1,318  |   |                |   | 1,257  |      |  |   | 2,577  |   |  |   | 2,448  |  
|Wealth management fees                                        |  |                | 1,035  |   |                |   | 969    |      |  |   | 2,054  |   |  |   | 1,927  |  
|Increase in cash surrender value of bank-owned life insurance |  |                | 72     |   |                |   | 73     |      |  |   | 143    |   |  |   | 146    |  
|Net gain on sale of securities                                |  |                | 414    |   |                |   | 117    |      |  |   | 681    |   |  |   | 254    |  
|Net gain on disposal of equipment                             |  |                |       |   |                |   |       |      |  |   |       |   |  |   | 104    |  
|Mortgage banking fees                                         |  |                | 225    |   |                |   | 199    |      |  |   | 355    |   |  |   | 338    |  
|Other                                                         |  |                | 34     |   |                |   | 56     |      |  |   | 72     |   |  |   | (252   | )
|                                                              |  |                |        |   |                |   |        |      |  |   |        |   |  |   |        |  
|Total noninterest income                                      |  |                | 2,937  |   |                |   | 2,671  |      |  |   | 5,550  |   |  |   | 4,815  |  
|                                                              |  |                |        |   |                |   |        |      |  |   |        |   |  |   |        |  
|                                                              |  |                |        |  
|Noninterest expenses:                                         |  |                |        |   |                |   |        |      |  |   |        |   |  |   |        |  
|Salaries and employee benefits                                |  |                | 4,070  |   |                |   | 4,248  |      |  |   | 8,211  |   |  |   | 8,202  |  
|Occupancy and equipment                                       |  |                | 1,343  |   |                |   | 1,351  |      |  |   | 2,764  |   |  |   | 2,806  |  
|Computer and electronic banking services                      |  |                | 953    |   |                |   | 832    |      |  |   | 1,894  |   |  |   | 1,623  |  
|Outside professional services                                 |  |                | 287    |   |                |   | 249    |      |  |   | 536    |   |  |   | 469    |  
|Marketing and advertising                                     |  |                | 208    |   |                |   | 201    |      |  |   | 390    |   |  |   | 409    |  
|Supplies                                                      |  |                | 124    |   |                |   | 131    |      |  |   | 265    |   |  |   | 282    |  
|FDIC deposit insurance and regulatory assessments             |  |                | 329    |   |                |   | 690    |      |  |   | 668    |   |  |   | 872    |  
|Other                                                         |  |                | 851    |   |                |   | 743    |      |  |   | 1,574  |   |  |   | 1,376  |  
|                                                              |  |                |        |   |                |   |        |      |  |   |        |   |  |   |        |  
|Total noninterest expenses                                    |  |                | 8,165  |   |                |   | 8,445  |      |  |   | 16,302 |   |  |   | 16,039 |  
|                                                              |  |                |        |   |                |   |        |      |  |   |        |   |  |   |        |  
|                                                              |  |                |        |  
|Income (loss) before income tax provision (benefit)           |  |                | 1,048  |   |                |   | (914   | )    |  |   | 1,784  |   |  |   | (832   | )
|Income tax provision (benefit)                                |  |                | 335    |   |                |   | (295   | )    |  |   | 578    |   |  |   | (269   | )
|                                                              |  |                |        |   |                |   |        |      |  |   |        |   |  |   |        |  
|Net income (loss)                                             |  | $              | 713    |   |                | $ | (619   | )    |  | $ | 1,206  |   |  | $ | (563   | )
|                                                              |  |                |        |   |                |   |        |      |  |   |        |   |  |   |        |  
|                                                              |  |                |        |  
|Net income (loss) per share:                                  |  |                |        |   |                |   |        |      |  |   |        |   |  |   |        |  
|Basic                                                         |  | $              | 0.06   |   |                | $ | (0.05  | )    |  | $ | 0.11   |   |  | $ | (0.05  | )
|Diluted                                                       |  | $              | 0.06   |   |                | $ | (0.05  | )    |  | $ | 0.11   |   |  | $ | (0.05  | )

See accompanying notes to
unaudited interim consolidated financial statements.



2



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##### Table of Contents

SI FINANCIAL GROUP, INC.

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS EQUITY

FOR THE SIX MONTHS ENDED JUNE 30, 2010

(Dollars in Thousands, Except Share Amounts/Unaudited)



|                                                                                                          |  |              |  |         |     |            |      |        |             |            |   |          |          |  |          |               |   |             |          |        |       |               |   |        |   |  |   |        |   |  |   |        |  
|--------------------------------------------------------------------------------------------------------- |  | ------------ |  | ------- | --- | ---------- | ---- | ------ | ----------- | ---------- | - | -------- | -------- |  | -------- | ------------- | - | ----------- | -------- | ------ | ----- | ------------- | - | ------ | - |  | - | ------ | - |  | - | ------ | -
|                                                                                                          |  |              |  |         |     |            |      |        | Unallocated |            |   |          |          |  |          |               |   |             |          |        |       |               |   |        |  
|                                                                                                          |  |              |  |         |     |            |      |        | Common      |            |   |          |          |  |          |               |   | Accumulated |          |        |       |               |   |        |  
|                                                                                                          |  |              |  |         |     | Additional |      |        | Shares      |            |   | Unearned |          |  |          |               |   | Other       |          |        |       |               |   | Total  |  
|                                                                                                          |  | Common Stock |  | Paid-in |     |            | Held |        |             | Restricted |   |          | Retained |  |          | Comprehensive |   |             | Treasury |        |       | Stockholders |  
|                                                                                                          |  | Shares       |  | Dollars |     | Capital    |      |        | by ESOP     |            |   | Shares   |          |  | Earnings |               |   | Loss        |          |        | Stock |               |   | Equity |  
|                                                                                                          |  |              |  |         |     |            |      |        |            
|Balance at December 31, 2009                                                                              |  | 12,563,750   |  | $       | 126 |            | $    | 52,230 |             |            | $ | (3,230   | )        |  | $        | (193          | ) |             | $        | 38,883 |       |               | $ | (2,389 | ) |  | $ | (7,965 | ) |  | $ | 77,462 |  
|                                                                                                          |  |              |  |         |     |            |      |        |             |            |   |          |          |  |          |               |   |             |          |        |       |               |   |        |   |  |   |        |   |  |   |        |  
|                                                                                                          |  |              |  |         |     |            |      |        |            
|Comprehensive income:                                                                                     |  |              |  |         |     |            |      |        |             |            |   |          |          |  |          |               |   |             |          |        |       |               |   |        |   |  |   |        |   |  |   |        |  
|Net income                                                                                                |  |             |  |         |    |            |      |       |             |            |   |         |          |  |          |              |   |             |          | 1,206  |       |               |   |       |   |  |   |       |   |  |   | 1,206  |  
|Net unrealized gains on available for sale securities, net of reclassification adjustment and tax effects |  |             |  |         |    |            |      |       |             |            |   |         |          |  |          |              |   |             |          |       |       |               |   | 2,369  |   |  |   |       |   |  |   | 2,369  |  
|                                                                                                          |  |              |  |         |     |            |      |        |             |            |   |          |          |  |          |               |   |             |          |        |       |               |   |        |   |  |   |        |   |  |   |        |  
|Total comprehensive income                                                                                |  |              |  |         |     |            |      |        |             |            |   |          |          |  |          |               |   |             |          |        |       |               |   |        |   |  |   |        |   |  |   | 3,575  |  
|                                                                                                          |  |              |  |         |     |            |      |        |            
|Cash dividends declared ($0.03 per share)                                                                 |  |             |  |         |    |            |      |       |             |            |   |         |          |  |          |              |   |             |          | (125   | )     |               |   |       |   |  |   |       |   |  |   | (125   | )
|                                                                                                          |  |              |  |         |     |            |      |        |            
|Treasury stock purchased                                                                                  |  |             |  |         |    |            |      |       |             |            |   |         |          |  |          |              |   |             |          |       |       |               |   |       |   |  |   | (74    | ) |  |   | (74    | )
|                                                                                                          |  |              |  |         |     |            |      |        |            
|Equity incentive plan shares earned                                                                       |  |             |  |         |    |            |      | 62     |             |            |   |         |          |  |          | 164           |   |             |          |       |       |               |   |       |   |  |   |       |   |  |   | 226    |  
|                                                                                                          |  |              |  |         |     |            |      |        |            
|Committed to release 16,148 ESOP shares                                                                   |  |             |  |         |    |            |      | (66    | )           |            |   | 162      |          |  |          |              |   |             |          |       |       |               |   |       |   |  |   |       |   |  |   | 96     |  
|                                                                                                          |  |              |  |         |     |            |      |        |             |            |   |          |          |  |          |               |   |             |          |        |       |               |   |        |   |  |   |        |   |  |   |        |  
|                                                                                                          |  |              |  |         |     |            |      |        |            
|Balance at June 30, 2010                                                                                  |  | 12,563,750   |  | $       | 126 |            | $    | 52,226 |             |            | $ | (3,068   | )        |  | $        | (29           | ) |             | $        | 39,964 |       |               | $ | (20    | ) |  | $ | (8,039 | ) |  | $ | 81,160 |  
|                                                                                                          |  |              |  |         |     |            |      |        |             |            |   |          |          |  |          |               |   |             |          |        |       |               |   |        |   |  |   |        |   |  |   |        |  

See accompanying notes to unaudited interim consolidated financial statements.



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##### Table of Contents

SI FINANCIAL GROUP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in Thousands/Unaudited)



|                                                                                         |  |                           |         |   |      |   |         |  
|---------------------------------------------------------------------------------------- |  | ------------------------- | ------- | - | ---- | - | ------- | -
|                                                                                         |  | Six Months Ended June 30, |        
|                                                                                         |  | 2010                      |         |   | 2009 |  
|Cash flows from operating activities:                                                    |  |                           |         |   |      |   |         |  
|Net income (loss)                                                                        |  | $                         | 1,206   |   |      | $ | (563    | )
|Adjustments to reconcile net income (loss) to net cash provided by operating activities: |  |                           |         |   |      |   |         |  
|Provision for loan losses                                                                |  |                           | 422     |   |      |   | 1,930   |  
|Employee stock ownership plan expense                                                    |  |                           | 96      |   |      |   | 81      |  
|Equity incentive plan expense                                                            |  |                           | 226     |   |      |   | 376     |  
|Amortization (accretion) of investment premiums and discounts, net                       |  |                           | 223     |   |      |   | (112    | )
|Amortization of loan premiums and discounts, net                                         |  |                           | 311     |   |      |   | 113     |  
|Depreciation and amortization of premises and equipment                                  |  |                           | 965     |   |      |   | 960     |  
|Amortization of core deposit intangible                                                  |  |                           | 16      |   |      |   | 21      |  
|Amortization of mortgage servicing rights                                                |  |                           | 93      |   |      |   | 69      |  
|Net gain on sale of securities                                                           |  |                           | (681    | ) |      |   | (254    | )
|Deferred income tax provision                                                            |  |                           | 80      |   |      |   | 6       |  
|Loans originated for sale                                                                |  |                           | (21,449 | ) |      |   | (28,830 | )
|Proceeds from sale of loans held for sale                                                |  |                           | 20,061  |   |      |   | 27,203  |  
|Net gain on sale of loans                                                                |  |                           | (240    | ) |      |   | (382    | )
|Net gain on disposal of equipment                                                        |  |                           |        |   |      |   | (104    | )
|Net loss on sale of other real estate owned                                              |  |                           | 42      |   |      |   |        |  
|Increase in cash surrender value of bank-owned life insurance                            |  |                           | (143    | ) |      |   | (146    | )
|Impairment losses on securities                                                          |  |                           | 332     |   |      |   | 150     |  
|Reduction in carrying value of other real estate owned                                   |  |                           | 242     |   |      |   |        |  
|Change in operating assets and liabilities:                                              |  |                           |         |   |      |   |         |  
|Accrued interest receivable                                                              |  |                           | 8       |   |      |   | 212     |  
|Other assets                                                                             |  |                           | (21     | ) |      |   | 556     |  
|Accrued expenses and other liabilities                                                   |  |                           | 1,081   |   |      |   | (482    | )
|                                                                                         |  |                           |         |   |      |   |         |  
|Net cash provided by operating activities                                                |  |                           | 2,870   |   |      |   | 804     |  
|                                                                                         |  |                           |         |   |      |   |         |  
|                                                                                         |  |                          
|Cash flows from investing activities:                                                    |  |                           |         |   |      |   |         |  
|Purchases of available for sale securities                                               |  |                           | (58,460 | ) |      |   | (37,573 | )
|Proceeds from sales of available for sale securities                                     |  |                           | 33,801  |   |      |   | 9,558   |  
|Proceeds from maturities of and principal repayments on available for sale securities    |  |                           | 29,726  |   |      |   | 29,184  |  
|Net decrease in loans                                                                    |  |                           | 18,791  |   |      |   | 9,290   |  
|Purchases of loans receivable                                                            |  |                           | (19,589 | ) |      |   | (21,806 | )
|Proceeds from sale of other real estate owned                                            |  |                           | 2,894   |   |      |   |        |  
|Purchases of premises and equipment                                                      |  |                           | (417    | ) |      |   | (3,145  | )
|Net cash paid for branch sale                                                            |  |                           |        |   |      |   | (619    | )
|                                                                                         |  |                           |         |   |      |   |         |  
|Net cash provided by (used in) investing activities                                      |  |                           | 6,746   |   |      |   | (15,111 | )
|                                                                                         |  |                           |         |   |      |   |         |  
|                                                                                         |  |                          
|Cash flows from financing activities:                                                    |  |                           |         |   |      |   |         |  
|Net increase in deposits                                                                 |  |                           | 15,656  |   |      |   | 30,020  |  
|Net (decrease) increase in mortgagors and investors escrow accounts                    |  |                           | (1,253  | ) |      |   | 124     |  
|Proceeds from Federal Home Loan Bank advances                                            |  |                           | 23,355  |   |      |   | 4,032   |  
|Repayments of Federal Home Loan Bank advances                                            |  |                           | (25,286 | ) |      |   | (15,032 | )
|Cash dividends on common stock                                                           |  |                           | (125    | ) |      |   |        |  
|Treasury stock purchased                                                                 |  |                           | (74     | ) |      |   | (68     | )
|Other, net                                                                               |  |                           |        |   |      |   | (3      | )
|                                                                                         |  |                           |         |   |      |   |         |  
|Net cash provided by financing activities                                                |  |                           | 12,273  |   |      |   | 19,073  |  
|                                                                                         |  |                           |         |   |      |   |         |  



(continued on next page)



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##### Table of Contents

SI FINANCIAL GROUP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in Thousands/Unaudited)



|                                                                                                                                                               |  |                           |        |      |   |       
|-------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------- | ------ | ---- | - | ------
|                                                                                                                                                               |  | Six Months Ended June 30,
|                                                                                                                                                               |  | 2010                      |        | 2009
|                                                                                                                                                               |  |                          
|Net change in cash and cash equivalents                                                                                                                        |  |                           | 21,889 |      |   | 4,766 
|Cash and cash equivalents at beginning of period                                                                                                               |  |                           | 24,204 |      |   | 23,203
|                                                                                                                                                               |  |                           |        |      |   |       
|Cash and cash equivalents at end of period                                                                                                                     |  | $                         | 46,093 |      | $ | 27,969
|                                                                                                                                                               |  |                           |        |      |   |       
|                                                                                                                                                               |  |                          
|Supplemental cash flow information:                                                                                                                            |  |                           |        |      |   |       
|Interest paid                                                                                                                                                  |  | $                         | 7,332  |      | $ | 9,945 
|Income taxes paid, net                                                                                                                                         |  |                           | 1      |      |   | 731   
|Transfer of loans to other real estate owned                                                                                                                   |  |                           | 1,243  |      |   | 418   
|                                                                                                                                                               |  |                          
|Branch sale:                                                                                                                                                   |  |                           |        |      |   |       
|Cash paid for the disposition of net liabilities related to the sale of the branch office located in Gales Ferry, Connecticut in
January 2009 were as follows: |  |                           |        |      |   |       
|                                                                                                                                                               |  |                          
|Assets:                                                                                                                                                        |  |                           |        |      |   |       
|Loans receivable                                                                                                                                               |  |                           |        |      | $ | 3     
|Fixed assets, net                                                                                                                                              |  |                           |        |      |   | 950   
|Other assets                                                                                                                                                   |  |                           |        |      |   | 96    
|                                                                                                                                                               |  |                           |        |      |   |       
|Total assets                                                                                                                                                   |  |                           |        |      |   | 1,049 
|                                                                                                                                                               |  |                           |        |      |   |       
|Liabilities:                                                                                                                                                   |  |                           |        |      |   |       
|Deposits                                                                                                                                                       |  |                           |        |      |   | 1,668 
|                                                                                                                                                               |  |                           |        |      |   |       
|Total liabilities                                                                                                                                              |  |                           |        |      |   | 1,668 
|                                                                                                                                                               |  |                           |        |      |   |       
|                                                                                                                                                               |  |                          
|Net liabilities                                                                                                                                                |  |                           |        |      | $ | 619   
|                                                                                                                                                               |  |                           |        |      |   |       

See accompanying notes to unaudited interim
consolidated financial statements.



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##### Table of Contents

SI FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2010 AND 2009 AND DECEMBER 31, 2009

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

Nature of Business

SI Financial Group, Inc. (the Company) is the holding company for Savings Institute Bank and Trust Company (the Bank). Established
in 1842, the Bank is a community-oriented financial institution headquartered in Willimantic, Connecticut. The Bank provides a variety of financial services to individuals, businesses and municipalities through its twenty-one offices in eastern
Connecticut. Its primary products include savings, checking and certificate of deposit accounts, residential and commercial mortgage loans, commercial business loans and consumer loans. In addition, wealth management services, which include trust,
financial planning, life insurance and investment services, are offered to individuals and businesses through the Banks Connecticut offices. SI Trust Servicing, the third-party provider of trust outsourcing services for community banks,
expands the wealth management products offered by the Bank, and offers trust services to other community banks. The Company does not conduct any material business other than owning all of the stock of the Bank and making payments on its subordinated
debentures it holds.

Principles of Consolidation

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

Basis of Financial Statement Presentation

The interim consolidated financial statements and related notes have been prepared in accordance with accounting principles generally accepted in the
United States of America (GAAP) for interim financial information, with the instructions to Form 10-Q and Rule 8-03 of Regulation S-X of the Securities and Exchange Commission (SEC) and general practices within the banking
industry. Accordingly, certain information and footnote disclosures required by GAAP for complete financial statements have been omitted. Information in the accompanying interim consolidated financial statements and notes to the financial statements
of the Company as of June 30, 2010 and for the three and six months ended June 30, 2010 and 2009 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, 2009 contained in the Companys Form 10-K.

Interim financial statements are subject to possible adjustment in connection with the annual audit of the Company for the year ending December 31,
2010. In the opinion of management, the accompanying unaudited interim consolidated financial statements reflect all of the adjustments, consisting only of normal and recurring adjustments, necessary for a fair presentation of the financial
condition, results of operations and cash flows as of and for the period covered herein. The results of operations for the three and six months ended June 30, 2010 are not necessarily indicative of the operating results for the year ending
December 31, 2010.

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



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SI FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

JUNE 30, 2010 AND 2009 AND DECEMBER 31, 2009



Reclassifications

Certain amounts in the Companys 2009 consolidated financial statements have been reclassified to conform to the 2010 presentation. Income statement
amounts totaling $237,000 and $561,000 of net deferred loan origination fees and costs were reclassified from salaries and benefits expense to loan interest and fee income and mortgage banking fees for the three and six months ended June 30,
2009, respectively. Such reclassifications had no effect on net income.

Recent Accounting Pronouncements

Transfers of Financial Assets In June 2009, the Financial Accounting Standards Board (FASB) issued new
requirements related to the accounting for transfers of financial assets, including securitization transactions. These requirements: (1) eliminate the concept of a qualifying special-purpose entity, (2) change the requirements for
derecognizing financial assets and (3) require additional disclosures to enhance information reported to users of financial statements by providing greater transparency about transfers of financial assets and an entitys continuing
involvement in transferred financial assets. These requirements were effective for a reporting entitys first annual reporting period that begins after November 15, 2009. Transfers of financial assets occurring on or after the effective
date are subject to the new requirements. The Company adopted these new requirements effective January 1, 2010, which did not have a material impact on the Companys consolidated financial statements.

Fair Value Measurement Disclosures In January 2010, the FASB amended its standards related to the disclosure of fair value measurements to
require: (1) separate disclosure of significant amounts transferred in and out of Levels 1 and 2 fair value measurement categories, (2) a reconciliation of activity in the Level 3 fair value measurement category to present separately
information relating to purchases, sales, issuances and settlements, (3) greater disaggregation of the assets and liabilities for which fair value measurements are presented and (4) expanded disclosure of the valuation techniques and
inputs used to measure assets and liabilities in Levels 2 and 3 fair value measurement categories. The Company adopted these amendments effective January 1, 2010, with the exception of the requirement related to the reconciliation of activity
in Level 3 fair value measurement category, which is effective for fiscal years beginning after December 15, 2010. The adoption of this amendment did not have a material impact on the Companys consolidated financial statements.

Subsequent Events In February 2010, the FASB amended its standard to require SEC filers to evaluate subsequent events through
the date the financial statements are issued and eliminates the requirement to disclose the evaluation date in both issued and revised financial statements to alleviate potential conflicts with SEC requirements. This amendment was effective upon
issuance and did not have a material impact on the Companys consolidated financial statements.

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



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SI FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

JUNE 30, 2010 AND 2009 AND DECEMBER 31, 2009



NOTE 2. EARNINGS PER SHARE

Basic net income per share is calculated by dividing the net income available to common stockholders by the weighted average number of common shares
outstanding during the period. Unvested restricted shares are considered outstanding in the computation of basic earnings per share since the shares participate in dividends and the rights to the dividends are non-forfeitable. Diluted net income per
share is computed in a manner similar to basic net income per share except that the weighted average number of shares outstanding is increased to include the incremental common shares (as computed using the treasury stock method) that would have
been outstanding if all potentially dilutive common stock equivalents were issued during the period. The Companys common stock equivalents relate solely to stock options. Treasury shares and unallocated common shares held by the Employee Stock
Ownership Plan (ESOP) are not deemed outstanding for earnings per share calculations.

Anti-dilutive shares are common stock
equivalents with weighted average exercise prices in excess of the weighted average market value for the periods presented. For the three and six months ended June 30, 2009, all common stock equivalents were anti-dilutive and were not included
in the computation of diluted earnings per share. The Company had weighted average anti-dilutive options outstanding of 430,706 and 437,142 for the three and six months ended June 30, 2010, respectively, and 472,750 and 475,525 for the three
and six months ended June 30, 2009, respectively. The computation of earnings per share is as follows:



|                                                 |  |                |            |      |                |            |      |  |      |            |  |   |            |  
|------------------------------------------------ |  | -------------- | ---------- | ---- | -------------- | ---------- | ---- |  | ---- | ---------- |  | - | ---------- | -
|                                                 |  | Three Months   |            |      | Six Months     |           
|                                                 |  | Ended June 30, |            |      | Ended June 30, |           
|(Dollars in Thousands, Except Per Share Amounts) |  | 2010           |            | 2009 |                |            | 2010 |  | 2009 |           
|Net income (loss)                                |  | $              | 713        |      | $              | (619       | )    |  | $    | 1,206      |  | $ | (563       | )
|                                                 |  |                |            |      |                |            |      |  |      |            |  |   |            |  
|                                                 |  |                |            |     
|Weighted-average common shares outstanding:      |  |                |            |      |                |            |      |  |      |            |  |   |            |  
|Basic                                            |  |                | 11,468,378 |      |                | 11,448,292 |      |  |      | 11,467,339 |  |   | 11,446,797 |  
|Effect of dilutive stock options                 |  |                | 9,237      |      |                |           |      |  |      | 4,618      |  |   |           |  
|                                                 |  |                |            |      |                |            |      |  |      |            |  |   |            |  
|Diluted                                          |  |                | 11,477,615 |      |                | 11,448,292 |      |  |      | 11,471,957 |  |   | 11,446,797 |  
|                                                 |  |                |            |      |                |            |      |  |      |            |  |   |            |  
|                                                 |  |                |            |     
|Net income (loss) per share:                     |  |                |            |      |                |            |      |  |      |            |  |   |            |  
|Basic                                            |  | $              | 0.06       |      | $              | (0.05      | )    |  | $    | 0.11       |  | $ | (0.05      | )
|Diluted                                          |  | $              | 0.06       |      | $              | (0.05      | )    |  | $    | 0.11       |  | $ | (0.05      | )



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##### Table of Contents

SI FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

JUNE 30, 2010 AND 2009 AND DECEMBER 31, 2009



NOTE 3. SECURITIES

The amortized cost, gross unrealized gains and losses and approximate fair values of available for sale securities at June 30, 2010 and
December 31, 2009 are as follows:



|                                                |  |               |         |            |   |            |  |   |        |   |  |   |        
|----------------------------------------------- |  | ------------- | ------- | ---------- | - | ---------- |  | - | ------ | - |  | - | -------
|                                                |  | June 30, 2010
|                                                |  |               |         | Gross      |   | Gross      |  |   |       
|                                                |  | Amortized     |         | Unrealized |   | Unrealized |  |   | Fair  
|(Dollars in Thousands)                          |  | Cost (1)      |         | Gains      |   | Losses     |  |   | Value 
|Debt Securities:                                |  |               |         |            |   |            |  |   |        |   |  |   |        
|U.S. Government and agency obligations          |  | $             | 28,028  |            | $ | 171        |  | $ | (75    | ) |  | $ | 28,124 
|Government-sponsored enterprises                |  |               | 15,075  |            |   | 330        |  |   |       |   |  |   | 15,405 
|Mortgage-backed
securities:(2)                  |  |               |         |            |   |            |  |   |        |   |  |   |        
|Agency - residential                            |  |               | 92,541  |            |   | 3,955      |  |   | (16    | ) |  |   | 96,480 
|Non-agency - residential                        |  |               | 13,889  |            |   | 46         |  |   | (1,029 | ) |  |   | 12,906 
|Non-agency - HELOC                              |  |               | 4,157   |            |   |           |  |   | (701   | ) |  |   | 3,456  
|Corporate debt securities                       |  |               | 10,341  |            |   | 184        |  |   | (47    | ) |  |   | 10,478 
|Collateralized debt obligations                 |  |               | 8,129   |            |   | 2          |  |   | (3,097 | ) |  |   | 5,034  
|Obligations of state and political subdivisions |  |               | 5,756   |            |   | 225        |  |   | (1     | ) |  |   | 5,980  
|Tax-exempt securities                           |  |               | 3,210   |            |   | 8          |  |   |       |   |  |   | 3,218  
|Foreign government securities                   |  |               | 100     |            |   |           |  |   |       |   |  |   | 100    
|                                                |  |               |         |            |   |            |  |   |        |   |  |   |        
|Total debt securities                           |  |               | 181,226 |            |   | 4,921      |  |   | (4,966 | ) |  |   | 181,181
|                                                |  |               |         |           
|Equity securities:                              |  |               |         |            |   |            |  |   |        |   |  |   |        
|Equity securities - financial services          |  |               | 1,015   |            |   | 39         |  |   | (25    | ) |  |   | 1,029  
|                                                |  |               |         |            |   |            |  |   |        |   |  |   |        
|                                                |  |               |         |           
|Total available for sale securities             |  | $             | 182,241 |            | $ | 4,960      |  | $ | (4,991 | ) |  | $ | 182,210
|                                                |  |               |         |            |   |            |  |   |        |   |  |   |        



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

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



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SI FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

JUNE 30, 2010 AND 2009 AND DECEMBER 31, 2009



|                                                |  |                   |         |            |   |            |  |   |        |   |  |   |        
|----------------------------------------------- |  | ----------------- | ------- | ---------- | - | ---------- |  | - | ------ | - |  | - | -------
|                                                |  | December 31, 2009
|                                                |  |                   |         | Gross      |   | Gross      |  |   |       
|                                                |  | Amortized         |         | Unrealized |   | Unrealized |  |   | Fair  
|(Dollars in Thousands)                          |  | Cost (1)          |         | Gains      |   | Losses     |  |   | Value 
|Debt Securities:                                |  |                   |         |            |   |            |  |   |        |   |  |   |        
|U.S. Government and agency obligations          |  | $                 | 35,945  |            | $ | 393        |  | $ | (109   | ) |  | $ | 36,229 
|Government-sponsored enterprises                |  |                   | 13,980  |            |   | 137        |  |   | (82    | ) |  |   | 14,035 
|Mortgage-backed
securities:(2)                  |  |                   |         |            |   |            |  |   |        |   |  |   |        
|Agency - residential                            |  |                   | 89,751  |            |   | 3,467      |  |   | (119   | ) |  |   | 93,099 
|Non-agency - residential                        |  |                   | 18,690  |            |   |           |  |   | (2,471 | ) |  |   | 16,219 
|Non-agency - HELOC                              |  |                   | 4,328   |            |   |           |  |   | (2,132 | ) |  |   | 2,196  
|Corporate debt securities                       |  |                   | 6,979   |            |   | 355        |  |   | (13    | ) |  |   | 7,321  
|Collateralized debt obligations                 |  |                   | 8,153   |            |   | 1          |  |   | (3,116 | ) |  |   | 5,038  
|Obligations of state and political subdivisions |  |                   | 5,003   |            |   | 145        |  |   | (17    | ) |  |   | 5,131  
|Tax-exempt securities                           |  |                   | 3,210   |            |   | 9          |  |   |       |   |  |   | 3,219  
|Foreign government securities                   |  |                   | 100     |            |   |           |  |   |       |   |  |   | 100    
|                                                |  |                   |         |            |   |            |  |   |        |   |  |   |        
|Total debt securities                           |  |                   | 186,139 |            |   | 4,507      |  |   | (8,059 | ) |  |   | 182,587
|                                                |  |                   |         |           
|Equity securities:                              |  |                   |         |            |   |            |  |   |        |   |  |   |        
|Equity securities - financial services          |  |                   | 1,043   |            |   | 19         |  |   | (87    | ) |  |   | 975    
|                                                |  |                   |         |            |   |            |  |   |        |   |  |   |        
|                                                |  |                   |         |           
|Total available for sale securities             |  | $                 | 187,182 |            | $ | 4,526      |  | $ | (8,146 | ) |  | $ | 183,562
|                                                |  |                   |         |            |   |            |  |   |        |   |  |   |        



|(1) | Net of OTTI write-downs recognized in earnings, other than such noncredit-related amounts reclassified on January 1, 2009 as a cumulative effect
adjustment for a change in accounting principle.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

The amortized cost and fair value of debt securities by contractual maturities at June 30, 2010 are presented below. Actual maturities of
mortgage-backed securities may differ from contractual maturities because the mortgages underlying the securities may be called or repaid without any penalties. Because mortgage-backed securities are not due at a single maturity date, they are not
included in the maturity categories in the following maturity summary.



|                            |  |           |         |       |   |        
|--------------------------- |  | --------- | ------- | ----- | - | -------
|                            |  | Amortized |         | Fair 
|(Dollars in Thousands)      |  | Cost      |         | Value
|                            |  |          
|Within 1 year               |  | $         | 5,122   |       | $ | 5,178  
|After 1 but within 5 years  |  |           | 25,314  |       |   | 25,892 
|After 5 but within 10 years |  |           | 10,723  |       |   | 10,735 
|After 10 years              |  |           | 29,480  |       |   | 26,534 
|                            |  |           |         |       |   |        
|                            |  |           | 70,639  |       |   | 68,339 
|Mortgage-backed securities  |  |           | 110,587 |       |   | 112,842
|                            |  |           |         |       |   |        
|Total debt securities       |  | $         | 181,226 |       | $ | 181,181
|                            |  |           |         |       |   |        



10



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##### Table of Contents

SI FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

JUNE 30, 2010 AND 2009 AND DECEMBER 31, 2009



The following is a summary of realized gains and losses on the sale of securities for the three and six
months ended June 30, 2010 and 2009:



|                               |  |                |     |                |   |      |  |   |      |   |  |   |      |  
|------------------------------ |  | -------------- | --- | -------------- | - | ---- |  | - | ---- | - |  | - | ---- | -
|                               |  | Three Months   |     | Six Months     |  
|                               |  | Ended June 30, |     | Ended June 30, |  
|(Dollars in Thousands)         |  | 2010           |     | 2009           |   | 2010 |  |   | 2009 |  
|                               |  |                |     |               
|Gross gains on sales           |  | $              | 414 |                | $ | 117  |  | $ | 899  |   |  | $ | 481  |  
|Gross losses on sales          |  |                |    |                |   |     |  |   | (218 | ) |  |   | (227 | )
|                               |  |                |     |                |   |      |  |   |      |   |  |   |      |  
|Net gain on sale of securities |  | $              | 414 |                | $ | 117  |  | $ | 681  |   |  | $ | 254  |  
|                               |  |                |     |                |   |      |  |   |      |   |  |   |      |  

Proceeds from the sale of available for sale securities were $24.7 million and $33.8 million for the three and six months
ended June 30, 2010, respectively, and $1.1 million and $9.6 million for the three and six months ended June 30, 2009, respectively.

The following tables present information pertaining to securities with gross unrealized losses at June 30, 2010 and December 31, 2009,
aggregated by investment category and length of time the individual securities have been in a continuous unrealized loss position.



|                                                |  |                     |        |                   |   |       |  |            |        |       |   |            |  |   |        |  |   |      
|----------------------------------------------- |  | ------------------- | ------ | ----------------- | - | ----- |  | ---------- | ------ | ----- | - | ---------- |  | - | ------ |  | - | -----
|June 30, 2010:                                  |  | Less Than 12 Months |        | 12 Months Or More |   | Total
|                                                |  | Fair                |        | Unrealized        |   | Fair  |  | Unrealized |        | Fair  |   | Unrealized
|(Dollars in Thousands)                          |  | Value               |        | Losses            |   | Value |  | Losses     |        | Value |   | Losses    
|                                                |  |                     |        |                   |   |      
|U.S. Government and agency obligations          |  | $                   | 13,323 |                   | $ | 61    |  | $          | 1,118  |       | $ | 14         |  | $ | 14,441 |  | $ | 75   
|Mortgage-backed securities:                     |  |                     |        |                   |   |       |  |            |        |       |   |            |  |   |        |  |   |      
|Agency - residential                            |  |                     | 2,450  |                   |   | 16    |  |            |       |       |   |           |  |   | 2,450  |  |   | 16   
|Non-agency - residential                        |  |                     |       |                   |   |      |  |            | 8,679  |       |   | 1,029      |  |   | 8,679  |  |   | 1,029
|Non-agency - HELOC                              |  |                     |       |                   |   |      |  |            | 3,456  |       |   | 701        |  |   | 3,456  |  |   | 701  
|Corporate debt securities                       |  |                     | 2,170  |                   |   | 47    |  |            |       |       |   |           |  |   | 2,170  |  |   | 47   
|Collateralized debt obligations                 |  |                     | 41     |                   |   | 121   |  |            | 4,903  |       |   | 2,976      |  |   | 4,944  |  |   | 3,097
|Obligations of state and political subdivisions |  |                     | 752    |                   |   | 1     |  |            |       |       |   |           |  |   | 752    |  |   | 1    
|Equity securities - financial services          |  |                     |       |                   |   |      |  |            | 734    |       |   | 25         |  |   | 734    |  |   | 25   
|                                                |  |                     |        |                   |   |       |  |            |        |       |   |            |  |   |        |  |   |      
|Total                                           |  | $                   | 18,736 |                   |   | 246   |  | $          | 18,890 |       | $ | 4,745      |  | $ | 37,626 |  | $ | 4,991
|                                                |  |                     |        |                   |   |       |  |            |        |       |   |            |  |   |        |  |   |      



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##### Table of Contents

SI FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

JUNE 30, 2010 AND 2009 AND DECEMBER 31, 2009



|                                                |  |                     |        |                   |   |       |  |            |        |       |   |            |  |   |        |  |   |      
|----------------------------------------------- |  | ------------------- | ------ | ----------------- | - | ----- |  | ---------- | ------ | ----- | - | ---------- |  | - | ------ |  | - | -----
|December 31, 2009:                              |  | Less Than 12 Months |        | 12 Months Or More |   | Total
|                                                |  | Fair                |        | Unrealized        |   | Fair  |  | Unrealized |        | Fair  |   | Unrealized
|(Dollars in Thousands)                          |  | Value               |        | Losses            |   | Value |  | Losses     |        | Value |   | Losses    
|                                                |  |                     |        |                   |   |      
|U.S. Government and agency obligations          |  | $                   | 17,114 |                   | $ | 90    |  | $          | 1,631  |       | $ | 19         |  | $ | 18,745 |  | $ | 109  
|Government-sponsored enterprises                |  |                     | 5,899  |                   |   | 82    |  |            |       |       |   |           |  |   | 5,899  |  |   | 82   
|Mortgage-backed securities:                     |  |                     |        |                   |   |       |  |            |        |       |   |            |  |   |        |  |   |      
|Agency - residential                            |  |                     | 11,126 |                   |   | 119   |  |            |       |       |   |           |  |   | 11,126 |  |   | 119  
|Non-agency - residential                        |  |                     | 5,094  |                   |   | 80    |  |            | 11,125 |       |   | 2,391      |  |   | 16,219 |  |   | 2,471
|Non-agency - HELOC                              |  |                     |       |                   |   |      |  |            | 2,196  |       |   | 2,132      |  |   | 2,196  |  |   | 2,132
|Corporate debt securities                       |  |                     | 995    |                   |   | 13    |  |            |       |       |   |           |  |   | 995    |  |   | 13   
|Collateralized debt obligations                 |  |                     | 1,337  |                   |   | 826   |  |            | 3,613  |       |   | 2,290      |  |   | 4,950  |  |   | 3,116
|Obligations of state and political subdivisions |  |                     | 483    |                   |   | 17    |  |            |       |       |   |           |  |   | 483    |  |   | 17   
|Equity securities - financial services          |  |                     | 201    |                   |   | 62    |  |            | 734    |       |   | 25         |  |   | 935    |  |   | 87   
|                                                |  |                     |        |                   |   |       |  |            |        |       |   |            |  |   |        |  |   |      
|Total                                           |  | $                   | 42,249 |                   | $ | 1,289 |  | $          | 19,299 |       | $ | 6,857      |  | $ | 61,548 |  | $ | 8,146
|                                                |  |                     |        |                   |   |       |  |            |        |       |   |            |  |   |        |  |   |      

Management evaluates securities for OTTI at least on a quarterly basis
and more frequently when economic or market conditions warrant such an evaluation. Marketable equity securities are evaluated for OTTI based on the severity and duration of the impairment and, if deemed to be other-than-temporary, the declines in
fair value are reflected in earnings as realized losses. For debt securities, OTTI is required to be recognized (1) if the Company intends to sell the security; (2) if it is more likely than notthat the Company will be
required to sell the security before recovery of its amortized cost basis; or (3) if the present value of expected cash flows is not sufficient to recover the entire amortized cost basis. For all impaired debt securities that the Company
intends to sell, or more likely than not will be required to sell, the full amount of the depreciation is recognized as OTTI through earnings. Credit-related OTTI for all other impaired debt securities is recognized through earnings.
Noncredit-related OTTI for such debt securities is recognized in other comprehensive income, net of applicable taxes.

At June 30, 2010,
forty-one debt securities with gross unrealized losses had aggregate depreciation of 11.7% of the Companys amortized cost basis. The majority of the unrealized losses related to the Companys non-agency mortgage-backed securities and
collateralized debt obligations as discussed below.

Debt Securities:

U.S. Government and Agency Obligations and Government-Sponsored Enterprises. The unrealized losses on the
Companys U.S. Government and agency obligations and government-sponsored enterprises related primarily to a widening of the rate spread to comparable treasury securities. The contractual terms of these investments do not permit the issuer to
settle the securities at a price less than the amortized cost basis of the investments. Because the decline in market value is attributable to changes in interest rates and not credit quality and because the Company does not intend to sell these
securities and it is not more likely than not that the Company will be required to sell the securities before their anticipated recovery, which may be maturity, the Company does not consider these investments to be other-than-temporarily impaired at
June 30, 2010.

Mortgage-backed Securities - Agency - Residential.The unrealized losses on the Companys
agencyresidential mortgage-backed securities were caused by increases in the rate spread to comparable treasury securities. The Company does not expect these securities to settle at a price less than the amortized cost basis of the
investments. Because the Company does not intend to sell the investments



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##### Table of Contents

SI FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

JUNE 30, 2010 AND 2009 AND DECEMBER 31, 2009



and it is not more likely than not that the Company will be required to sell the investments before the recovery of their amortized cost basis, which may be at maturity, the Company does not
consider these investments to be other-than-temporarily impaired at June 30, 2010.

Mortgage-backed Securities -
Non-agency - Residential. The unrealized losses on the Companys non-agency-residential mortgage-backed securities are primarily due to the fact that these securities continue to trade well below historic levels, particularly those backed
by jumbo or hybrid loan collateral. In particular, three non-agency mortgage-backed securities displayed market pricing below book value and were rated below investment grade at June 30, 2010. At June 30, 2010, management evaluated credit
rating details for the tranche owned, as well as credit information on subordinate tranches, potential future credit losses and loss analyses. Additionally, management reviewed reports prepared by an independent third party for certain non-agency
mortgage-backed securities. The Company previously recorded OTTI on one of these non-agency mortgage-backed securities totaling $738,000 related to credit and recognized additional credit-related losses of $161,000 during the quarter ended
June 30, 2010. The Company did not record any further impairment losses at June 30, 2010 because the Company does not intend to sell the investments and it is not more likely than not that the Company will be required to sell the
investments before recovery of their amortized cost basis, which may be at maturity. See the table of non-agency mortgage-backed securities rated below investment grade as of June 30, 2010 for more details.

Mortgage-backed Securities - Non-agency - HELOC.The unrealized loss on the Companys non-agencyHELOC mortgage-backed
security is related to one security whose market has been illiquid. This security is collateralized by home equity lines of credit secured by first and second liens and insured by Financial Security Assurance. At June 30, 2010, management
evaluated credit rating details, collateral support and loss analyses. All of the unrealized losses on this security relate to factors other than credit. Because the Company does not intend to sell this security and it is not more likely than not
that the Company will be required to sell this security before the recovery of its amortized cost basis, which may be at maturity, the Company did not record an impairment loss at June 30, 2010.

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

Management evaluated current credit ratings, credit support and stress testing for
future defaults related to the Companys PTPS. Management also reviewed analytics provided by the trustee and independent OTTI review and associated cash flow analyses performed by an independent third party. The unrealized losses on the
Companys PTPS investments were caused by a lack of liquidity, credit downgrades and decreasing credit support. The increased number of bank and insurance company failures has decreased the level of credit support for these investments. A
number of lower tranche income issues have foregone payments or have received payment in kind through increased principal allocations. The Company previously recorded OTTI losses on three PTPS investments totaling $1.2 million related to credit
factors. At June 30, 2010, based on the existing credit profile, management does not believe that these investments will suffer from any further credit-related losses. Because the Company does not intend to sell the investments and it is not
more likely than not that the Company will be required to sell the investments before recovery of their amortized cost basis, which may be at maturity, the Company did not record additional impairment losses at June 30, 2010. See the table
of collateralized debt obligations rated below investment grade as of June 30, 2010 for more details.

Equity
Securities:

The Companys investments in marketable equity securities consist of common and preferred stock of
companies in the financial services sector. Management evaluated the near-term prospects of the



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SI FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

JUNE 30, 2010 AND 2009 AND DECEMBER 31, 2009



issuers and the Companys ability and intent to hold the investments for a reasonable period of time sufficient for an anticipated recovery of fair value. Although the issuers have shown
declines in earnings as a result of the weakened economy, no credit issues have been identified that cause management to believe that the declines in market value are other-than-temporary at June 30, 2010.

As of June 30, 2010, for debt securities with OTTI losses, the Company estimated the portion of loss attributable to credit using a discounted cash
flow model in accordance with applicable guidance. Significant inputs for the non-agency mortgage-backed securities included the estimated cash flows of the underlying collateral based on key assumptions, such as default rate, loss severity and
prepayment rate. Assumptions used can vary widely from loan to loan, and are influenced by such factors as loan interest rate, geographical location of the borrower, borrower characteristics and collateral type. Significant inputs for the
collateralized debt obligations included estimated cash flows and prospective deferrals, defaults and recoveries based on the underlying seniority status and subordination structure of the pooled trust preferred debt tranche at the time of
measurement. Prospective deferral, default and recovery estimates affecting projected cash flows were based on an analysis of the underlying financial condition of the individual issuers, with consideration of the accounts capital adequacy,
credit quality, lending concentrations and other factors. All cash flow estimates were based on the securities tranche structure and contractual rate and maturity terms. The Company utilized the services of a third-party valuation firm to
obtain information about the structure in order to determine how the underlying collateral cash flows will be distributed to each security issued from the structure. The present value of the expected cash flows was compared to the Companys
holdings to determine the credit-related impairment loss, if any. To the extent that continued changes in interest rates, credit movements and other factors that influence fair value of investments occur, the Company may be required to record
additional impairment charges for OTTI in future periods.

The following table details the Companys non-agency mortgage-backed security
holdings that are rated below investment grade as of June 30, 2010 (dollars in thousands).



|         |  |           |  |           |       |            |   |            |  |       |     |            |   |          |  |            |  |   |     |  |      
|-------- |  | --------- |  | --------- | ----- | ---------- | - | ---------- |  | ----- | --- | ---------- | - | -------- |  | ---------- |  | - | --- |  | -----
|         |  |           |  |           |       |            |   |            |  |       |     |            |   | Total    |  | Credit    
|         |  |           |  |           |       | Gross      |   | Gross      |  |       |     | Lowest     |   | Credit-  |  | Support   
|         |  |           |  | Amortized |       | Unrealized |   | Unrealized |  | Fair  |     | Credit     |   | Related  |  | Coverage  
|Security |  | Class (1) |  | Cost      |       | Gains      |   | Losses     |  | Value |     | Rating (2) |   | OTTI (3) |  | Ratios (4)
|         |  |           |  |           |       |            |   |           
|MBS 1    |  | SSNR, AS  |  | $         | 3,176 |            | $ |           |  | $     | 498 |            | $ | 2,678    |  | CCC        |  | $ |    |  | 1.016
|MBS 2    |  | SSUP, AS  |  |           | 606   |            |   |           |  |       | 33  |            |   | 573      |  | CC         |  |   | 899 |  | 0.512
|MBS 3    |  | PT, AS    |  |           | 511   |            |   |           |  |       | 10  |            |   | 501      |  | CCC        |  |   |    |  | 0.878
|         |  |           |  |           |       |            |   |            |  |       |     |            |   |          |  |            |  |   |     |  |      
|         |  |           |  | $         | 4,293 |            | $ |           |  | $     | 541 |            | $ | 3,752    |  |            |  | $ | 899 |  |      
|         |  |           |  |           |       |            |   |            |  |       |     |            |   |          |  |            |  |   |     |  |      



|(1) | Class definitions: PT - Pass Through, AS - Accelerated, SSNR - Super Senior and SSUP - Senior Support.
|--- | ------------------------------------------------------------------------------------------------------

|(2) | The Company utilized credit ratings provided by Moodys, S&P and Fitch in its evaluation of issuers.
|--- | ----------------------------------------------------------------------------------------------------

|(3) | The OTTI amounts provided in the table represent cumulative credit loss amounts through June 30, 2010.
|--- | ------------------------------------------------------------------------------------------------------

|(4) | The credit support coverage ratio, which is the ratio that determines the multiple of credit support, is based on assumptions for the performance of
the loans within the delinquency pipeline. The assumptions used are: current collateral support/((60 day delinquencies x .60)+(90 day delinquencies x .70)+(foreclosures x 1.00) + (other real estate x 1.00)) x .40 for loss severity.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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##### Table of Contents

SI FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

JUNE 30, 2010 AND 2009 AND DECEMBER 31, 2009



The following table details the Companys collateralized debt obligations that are rated below
investment grade as of June 30, 2010 (dollars in thousands).



|         |  |       |  |           |       |            |   |            |  |       |       |            |   |          |  |              |  |   |       |  |     
|-------- |  | ----- |  | --------- | ----- | ---------- | - | ---------- |  | ----- | ----- | ---------- | - | -------- |  | ------------ |  | - | ----- |  | ----
|         |  |       |  |           |       |            |   |            |  |       |       |            |   |          |  | % ofCurrent 
|         |  |       |  |           |       |            |   |            |  |       |       |            |   | Total    |  | Defaults and
|         |  |       |  |           |       | Gross      |   | Gross      |  |       |       | Lowest     |   | Credit-  |  | Deferrals to
|         |  |       |  | Amortized |       | Unrealized |   | Unrealized |  | Fair  |       | Credit     |   | Related  |  | Total       
|Security |  | Class |  | Cost      |       | Gains      |   | Losses     |  | Value |       | Rating (1) |   | OTTI (2) |  | Collateral  
|         |  |       |  |           |       |            |   |           
|CDO 1    |  | B1    |  | $         | 1,000 |            | $ |           |  | $     | 363   |            | $ | 637      |  | B+           |  | $ |      |  | 9.0 
|CDO 2    |  | B3    |  |           | 1,000 |            |   |           |  |       | 367   |            |   | 633      |  | B+           |  |   |      |  | 9.0 
|CDO 3    |  | MEZ   |  |           | 88    |            |   | 2          |  |       |      |            |   | 90       |  | CC           |  |   | 35    |  | 25.9
|CDO 4    |  | B     |  |           | 1,480 |            |   |           |  |       | 866   |            |   | 614      |  | CCC+         |  |   | 376   |  | 21.1
|CDO 5    |  | C     |  |           | 163   |            |   |           |  |       | 122   |            |   | 41       |  | C            |  |   | 809   |  | 23.8
|CDO 6    |  | A2    |  |           | 2,629 |            |   |           |  |       | 799   |            |   | 1,830    |  | B+           |  |   |      |  | 28.4
|CDO 7    |  | A1    |  |           | 1,769 |            |   |           |  |       | 580   |            |   | 1,189    |  | BB           |  |   |      |  | 31.4
|         |  |       |  |           |       |            |   |            |  |       |       |            |   |          |  |              |  |   |       |  |     
|         |  |       |  | $         | 8,129 |            | $ | 2          |  | $     | 3,097 |            | $ | 5,034    |  |              |  | $ | 1,220 |  |     
|         |  |       |  |           |       |            |   |            |  |       |       |            |   |          |  |              |  |   |       |  |     



|(1) | The Company
utilized credit ratings provided by Moodys, S&P and Fitch in its evaluation of issuers.
|--- | ----------------------------------------------------------------------------------------------------

|(2) | The OTTI amounts provided in the table represent cumulative credit loss amounts through June 30, 2010.
|--- | ------------------------------------------------------------------------------------------------------

The following table presents a roll-forward of the balance of credit losses on the Companys debt securities for which a portion of OTTI was
recognized in other comprehensive income for the three and six months ended June 30, 2010.



|                                                                               |  |               |       |               |   |      
|------------------------------------------------------------------------------ |  | ------------- | ----- | ------------- | - | -----
|                                                                               |  | Three Months  |       | Six Months   
|                                                                               |  | Ended         |       | Ended        
|(Dollars in Thousands)                                                         |  | June 30, 2010 |       | June 30, 2010
|                                                                               |  |              
|Balance at beginning of period                                                 |  | $             | 1,958 |               | $ | 1,787
|Amounts related to credit for which OTTI losses were not previously recognized |  |               |      |               |   |     
|Additional credit losses for which OTTI losses were previously recognized      |  |               | 161   |               |   | 332  
|                                                                               |  |               |       |               |   |      
|                                                                               |  |              
|Balance at end of period                                                       |  | $             | 2,119 |               | $ | 2,119
|                                                                               |  |               |       |               |   |      



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##### Table of Contents

SI FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

JUNE 30, 2010 AND 2009 AND DECEMBER 31, 2009



NOTE 4. LOANS RECEIVABLE

The composition of the Companys loan portfolio at June 30, 2010 and December 31, 2009 is as follows:



|                                             |  |          |         |   |              |   |         |  
|-------------------------------------------- |  | -------- | ------- | - | ------------ | - | ------- | -
|                                             |  | June 30, |         |   | December 31, |  
|(Dollars in Thousands)                       |  | 2010     |         |   | 2009         |  
|Real estate loans:                           |  |          |         |   |              |   |         |  
|Residential - 1 to 4 family                  |  | $        | 292,447 |   |              | $ | 306,244 |  
|Multi-family and commercial                  |  |          | 161,798 |   |              |   | 159,781 |  
|Construction                                 |  |          | 9,327   |   |              |   | 11,400  |  
|                                             |  |          |         |   |              |   |         |  
|Total real estate loans                      |  |          | 463,572 |   |              |   | 477,425 |  
|                                             |  |         
|Consumer loans:                              |  |          |         |   |              |   |         |  
|Home equity                                  |  |          | 23,961  |   |              |   | 22,573  |  
|Other                                        |  |          | 3,478   |   |              |   | 3,513   |  
|                                             |  |          |         |   |              |   |         |  
|Total consumer loans                         |  |          | 27,439  |   |              |   | 26,086  |  
|                                             |  |         
|Commercial business loans:                   |  |          |         |   |              |   |         |  
|SBA & USDA guaranteed                        |  |          | 90,777  |   |              |   | 77,310  |  
|Other                                        |  |          | 28,075  |   |              |   | 30,239  |  
|                                             |  |          |         |   |              |   |         |  
|Total commercial business loans              |  |          | 118,852 |   |              |   | 107,549 |  
|                                             |  |         
|Total loans                                  |  |          | 609,863 |   |              |   | 611,060 |  
|                                             |  |         
|Deferred loan origination costs, net of fees |  |          | 1,529   |   |              |   | 1,523   |  
|Allowance for loan losses                    |  |          | (4,878  | ) |              |   | (4,891  | )
|                                             |  |          |         |   |              |   |         |  
|Loans receivable, net                        |  | $        | 606,514 |   |              | $ | 607,692 |  
|                                             |  |          |         |   |              |   |         |  

The following is a summary of information pertaining to impaired loans and nonaccrual loans.



|                                                  |  |          |       |              |   |      
|------------------------------------------------- |  | -------- | ----- | ------------ | - | -----
|                                                  |  | June 30, |       | December 31,
|(Dollars in Thousands)                            |  | 2010     |       | 2009        
|                                                  |  |         
|Impaired loans without valuation allowance        |  | $        | 4,847 |              | $ | 2,107
|Impaired loans with valuation allowance           |  |          | 2,222 |              |   | 967  
|                                                  |  |          |       |              |   |      
|Total impaired loans                              |  | $        | 7,069 |              | $ | 3,074
|                                                  |  |          |       |              |   |      
|Valuation allowance related to impaired loans     |  | $        | 516   |              | $ | 267  
|                                                  |  |          |       |              |   |      
|Average recorded investment in impaired loans     |  | $        | 6,353 |              | $ | 7,808
|                                                  |  |          |       |              |   |      
|Nonaccrual loans                                  |  | $        | 4,267 |              | $ | 3,007
|                                                  |  |          |       |              |   |      
|Loans past due 90 days or more and still accruing |  | $        |      |              | $ |     
|                                                  |  |          |       |              |   |      



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##### Table of Contents

SI FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

JUNE 30, 2010 AND 2009 AND DECEMBER 31, 2009



NOTE 5. PREMISES AND EQUIPMENT

Premises and equipment at June 30, 2010 and December 31, 2009 are summarized as follows:



|                                          |  |          |         |   |              |   |         |  
|----------------------------------------- |  | -------- | ------- | - | ------------ | - | ------- | -
|                                          |  | June 30, |         |   | December 31, |  
|(Dollars in Thousands)                    |  | 2010     |         |   | 2009         |  
|                                          |  |         
|Land                                      |  | $        | 2,098   |   |              | $ | 2,098   |  
|Buildings                                 |  |          | 6,054   |   |              |   | 6,043   |  
|Leasehold improvements                    |  |          | 7,747   |   |              |   | 7,736   |  
|Furniture and equipment                   |  |          | 11,023  |   |              |   | 10,711  |  
|Construction in process                   |  |          | 8       |   |              |   |        |  
|                                          |  |          |         |   |              |   |         |  
|                                          |  |          | 26,930  |   |              |   | 26,588  |  
|Accumulated depreciation and amortization |  |          | (14,512 | ) |              |   | (13,622 | )
|                                          |  |          |         |   |              |   |         |  
|Premises and equipment, net               |  | $        | 12,418  |   |              | $ | 12,966  |  
|                                          |  |          |         |   |              |   |         |  

At June 30, 2010, construction in process primarily related to incidental branch improvements.

NOTE 6. ACCUMULATED OTHER COMPREHENSIVE LOSS

Accounting principles generally require that recognized revenue, expenses, gains and losses be included in net income. Although certain changes in assets
and liabilities are reported as a separate component of the equity section of the balance sheet, such items along with net income are components of comprehensive income.

Other comprehensive income, which is comprised solely of the changes in unrealized gains and losses on available for sale securities, for the six months
ended June 30, 2010 is as follows:



|                                                                        |  |            |       |   |         |   |        |            |  |   |       |  
|----------------------------------------------------------------------- |  | ---------- | ----- | - | ------- | - | ------ | ---------- |  | - | ----- | -
|                                                                        |  | Before Tax |       |   | Tax     |   |        | Net of Tax | 
|(Dollars in Thousands)                                                  |  | Amount     |       |   | Effects |   |        | Amount     | 
|                                                                        |  |            |      
|Unrealized holding gains on available for sale securities               |  | $          | 3,451 |   |         | $ | (1,173 | )          |  | $ | 2,278 |  
|Credit portion of OTTI losses recognized in net income                  |  |            | 332   |   |         |   | (113   | )          |  |   | 219   |  
|Noncredit portion of OTTI losses on available for sale securities       |  |            | 487   |   |         |   | (166   | )          |  |   | 321   |  
|Reclassification adjustment for gains recognized in net income          |  |            | (681  | ) |         |   | 232    |            |  |   | (449  | )
|                                                                        |  |            |       |   |         |   |        |            |  |   |       |  
|Unrealized holding gains on available for sale securities, net of taxes |  | $          | 3,589 |   |         | $ | (1,220 | )          |  | $ | 2,369 |  
|                                                                        |  |            |       |   |         |   |        |            |  |   |       |  



17



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##### Table of Contents

SI FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

JUNE 30, 2010 AND 2009 AND DECEMBER 31, 2009



The components of accumulated other comprehensive loss included in stockholders equity are as
follows:



|                                                                  |  |          |        |   |              |   |        |  
|----------------------------------------------------------------- |  | -------- | ------ | - | ------------ | - | ------ | -
|                                                                  |  | June 30, |        |   | December 31, |  
|(Dollars in Thousands)                                            |  | 2010     |        |   | 2009         |  
|                                                                  |  |         
|Securities:                                                       |  |          |        |   |              |   |        |  
|                                                                  |  |         
|Net unrealized gains on securities                                |  | $        | 988    |   |              | $ | 2,003  |  
|Tax effect                                                        |  |          | (335   | ) |              |   | (681   | )
|                                                                  |  |          |        |   |              |   |        |  
|Net of tax amount                                                 |  |          | 653    |   |              |   | 1,322  |  
|                                                                  |  |         
|Noncredit portion of OTTI losses on available for sale securities |  |          | (1,019 | ) |              |   | (1,506 | )
|Tax effect                                                        |  |          | 346    |   |              |   | 512    |  
|                                                                  |  |          |        |   |              |   |        |  
|Net of tax amount                                                 |  |          | (20    | ) |              |   | 328    |  
|                                                                  |  |          |        |   |              |   |        |  
|                                                                  |  |         
|Cumulative effect of adoption of securities impairment guidance   |  |          |       |   |              |   | (2,717 | )
|                                                                  |  |          |        |   |              |   |        |  
|                                                                  |  |         
|Accumulated other comprehensive loss                              |  | $        | (20    | ) |              | $ | (2,389 | )
|                                                                  |  |          |        |   |              |   |        |  

NOTE 7. REGULATORY CAPITAL

The Bank is subject to various regulatory capital requirements administered by the Office of Thrift Supervision (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.

At
June 30, 2010 and December 31, 2009, the Bank met all capital adequacy requirements to which it was subject and the Bank was considered well capitalized under regulatory guidelines at each of those dates.

The following is a summary of the Banks regulatory capital amounts and ratios as of June 30, 2010 and December 31, 2009.



|                                |  |        |        |       |          |   |             |                   |        |                   |      |            |  |       |        |  |       |  
|------------------------------- |  | ------ | ------ | ----- | -------- | - | ----------- | ----------------- | ------ | ----------------- | ---- | ---------- |  | ----- | ------ |  | ----- | -
|                                |  |        |        |       |          |   |             |                   |        |                   |      | To Be Well | 
|                                |  |        |        |       |          |   | For Capital |                   |        | Capitalized Under |     
|                                |  |        |        |       |          |   | Adequacy    |                   |        | Prompt Corrective |     
|June 30, 2010                   |  | Actual |        |       | Purposes |   |             | Action Provisions |       
|(Dollars in Thousands)          |  | Amount |        | Ratio |          |   | Amount      |                   | Ratio  |                   |      | Amount     |  | Ratio |       
|                                |  |        |        |       |          |  
|Total Risk-Based Capital Ratio  |  | $      | 75,324 |       | 14.84    | % |             | $                 | 40,606 |                   | 8.00 | %          |  | $     | 50,757 |  | 10.00 | %
|Tier I Risk-Based Capital Ratio |  |        | 70,633 |       | 13.91    |   |             |                   | 20,311 |                   | 4.00 |            |  |       | 30,467 |  | 6.00  |  
|Tier I Capital Ratio            |  |        | 70,633 |       | 8.08     |   |             |                   | 34,967 |                   | 4.00 |            |  |       | 43,709 |  | 5.00  |  
|Tangible Equity Ratio           |  |        | 70,633 |       | 8.08     |   |             |                   | 13,113 |                   | 1.50 |            |  |       | N/A    |  | N/A   |  



18



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##### Table of Contents

SI FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

JUNE 30, 2010 AND 2009 AND DECEMBER 31, 2009



|                                |  |        |        |       |          |   |             |                   |        |                   |      |            |  |       |        |  |       |  
|------------------------------- |  | ------ | ------ | ----- | -------- | - | ----------- | ----------------- | ------ | ----------------- | ---- | ---------- |  | ----- | ------ |  | ----- | -
|                                |  |        |        |       |          |   |             |                   |        |                   |      | To Be Well | 
|                                |  |        |        |       |          |   | For Capital |                   |        | Capitalized Under |     
|                                |  |        |        |       |          |   | Adequacy    |                   |        | Prompt Corrective |     
|December 31, 2009               |  | Actual |        |       | Purposes |   |             | Action Provisions |       
|(Dollars in Thousands)          |  | Amount |        | Ratio |          |   | Amount      |                   | Ratio  |                   |      | Amount     |  | Ratio |       
|                                |  |        |        |       |          |  
|Total Risk-Based Capital Ratio  |  | $      | 74,095 |       | 14.30    | % |             | $                 | 41,452 |                   | 8.00 | %          |  | $     | 51,815 |  | 10.00 | %
|Tier I Risk-Based Capital Ratio |  |        | 69,201 |       | 13.36    |   |             |                   | 20,719 |                   | 4.00 |            |  |       | 31,078 |  | 6.00  |  
|Tier I Capital Ratio            |  |        | 69,201 |       | 8.02     |   |             |                   | 34,514 |                   | 4.00 |            |  |       | 43,143 |  | 5.00  |  
|Tangible Equity Ratio           |  |        | 69,201 |       | 8.02     |   |             |                   | 12,943 |                   | 1.50 |            |  |       | N/A    |  | N/A   |  

NOTE 8. INCOME TAXES

The Company does not have any uncertain tax positions as of June 30, 2010 which require accrual or disclosure. In accordance with the
provisions of applicable accounting guidance, in future periods, the Company may record a liability for unrecognized tax benefits related to the recognition, derecognition or change in measurement of a tax position as a result of new tax positions,
changes in managements judgment about the level of uncertainty of existing tax positions, expiration of open income tax returns due to the statutes of limitation, status of examinations and litigation and legislative activity.

The Company has elected to report future interest and penalties related to unrecognized tax benefits, if any, as income tax expense in the Companys
consolidated statements of operations.

With limited exception, the Company is no longer subject to United States federal, state and local
income tax examinations by the tax authorities for the years prior to 2006.

NOTE 9. FAIR VALUE OF ASSETS AND LIABILITIES

Fair Value Hierarchy

The Company groups its financial assets and financial liabilities in three levels based on the markets in which the assets and liabilities are traded and
the reliability of the assumptions used to determine fair value.



|         |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|-------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Level 1: |  | Valuation is based on quoted prices in active markets for identical assets or liabilities. Level 1 assets and liabilities generally include debt and equity securities that are
traded in an active exchange market. Valuations are obtained from readily available pricing sources for market transactions involving identical assets or liabilities.                                                                                                                
|         | 
|Level 2: |  | Valuation is based on observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other
inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.                                                                                                                                          
|         | 
|Level 3: |  | Valuation is based on unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Level 3 assets
and liabilities include financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management
judgment or estimation.



19



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##### Table of Contents

SI FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

JUNE 30, 2010 AND 2009 AND DECEMBER 31, 2009



Determination of Fair Value

The Company uses fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. The
fair value of a financial instrument is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value is best determined based upon quoted
market prices. However, in many instances, there are no quoted market prices for the Companys various financial instruments. In cases where quoted market prices are not available, fair values are based on estimates using present value or other
valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. Accordingly, the fair value estimates may not be realized in an immediate settlement of the
instrument.

The following methods and assumptions were used by the Company in estimating fair value disclosures of its financial instruments:



| |  |  | Cash and cash equivalents.The carrying amounts of cash and short-term instruments approximate the fair values based on the
short-term nature of the assets.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Securities available for sale.Included in the available for sale category are both debt and equity securities. The securities measured at fair
value in Level 1 are based on quoted market prices in an active exchange market. Securities measured at fair value in Level 2 are based on pricing models that consider standard input factors such as observable market data, benchmark yields, interest
rate volatilities, broker/dealer quotes, credit spreads and new issue data. The Company utilizes Interactive Data Corp. (IDC), a third-party, nationally-recognized pricing service to estimate fair value measurements for the majority of
its portfolio. The pricing service evaluates each asset class based on relevant market information considering observable data but these prices do not represent binding quotes. The fair value prices on all investments are reviewed for reasonableness
by management, which resulted in no adjustments to the IDC pricing as of June 30, 2010. Securities measured at fair value in Level 3 include collateralized debt obligations that are backed by trust preferred securities issued by banks, thrifts
and insurance companies. Management determined that an orderly and active market for these securities and similar securities did not exist based on a significant reduction in trading volume and widening spreads relative to historical levels. The
Company estimates future cash flows discounted using a rate management believes is representative of current market conditions. Factors in determining the discount rate include the current level of deferrals and/or defaults and changes in credit
rating as described in Note 3 and the financial condition of the debtors within the underlying securities, broker quotes for securities with similar structure and credit risk, interest rate movements and pricing for new issuances.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Federal Home Loan Bank stock.The carrying value of Federal Home Loan Bank (FHLB) stock approximates fair value based on the
redemption provisions of the Federal Home Loan Bank.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Loans held for sale.The fair value of loans held for sale is estimated using quoted market prices.
| | - |  | --------------------------------------------------------------------------------------------------



| |  |  | Loans receivable. For variable rate loans which reprice frequently and have no significant change in credit risk, fair values are based on
carrying values. The fair value of fixed-rate loans are estimated by discounting the future cash flows using the year-end rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Accrued interest receivable. The carrying amount of accrued interest approximates fair value.
| | - |  | ---------------------------------------------------------------------------------------------



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##### Table of Contents

SI FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

JUNE 30, 2010 AND 2009 AND DECEMBER 31, 2009



| |  |  | Deposits. The fair value of demand deposits, negotiable orders of withdrawal, regular savings, certain money market deposits and
mortgagors and investors escrow accounts is the amount payable on demand at the reporting date. The fair value of certificates of deposit and other time deposits is estimated using a discounted cash flow calculation that applies interest
rates currently being offered for deposits of similar remaining maturities to a schedule of aggregated expected maturities on such deposits.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Federal Home Loan Bank advances. The fair value of the advances is estimated using a discounted cash flow calculation that applies current FHLB
interest rates for advances of similar maturity to a schedule of maturities of such advances.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Junior subordinated debt owed to unconsolidated trust. Rates currently available for debt with similar terms and remaining maturities are used
to estimate fair value of existing debt.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Off-balance sheet instruments. Fair values for off-balance sheet lending commitments are based on fees currently charged to enter into similar
agreements, taking into account the remaining terms of the agreements and the counterparties credit standings.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Assets and Liabilities Measured at Fair Value on a Recurring Basis

The following table presents available for sale securities, representing the balances of assets, measured at fair value on a recurring basis as of
June 30, 2010 and December 31, 2009. There were no liabilities measured at fair value on a recurring basis as of June 30, 2010 and December 31, 2009. The Company had no significant transfers into or out of Levels 1, 2 or 3 during
the six months ended June 30, 2010.



|                                                |  |               |       |         |   |         |  |       |       |  |   |        
|----------------------------------------------- |  | ------------- | ----- | ------- | - | ------- |  | ----- | ----- |  | - | -------
|                                                |  | June 30, 2010
|(Dollars in Thousands)                          |  | Level 1       |       | Level 2 |   | Level 3 |  | Total
|                                                |  |               |       |        
|U.S. Government and agency obligations          |  | $             | 1,021 |         | $ | 27,103  |  | $     |      |  | $ | 28,124 
|Government-sponsored enterprises                |  |               |      |         |   | 15,405  |  |       |      |  |   | 15,405 
|Mortgage-backed securities                      |  |               |      |         |   | 112,842 |  |       |      |  |   | 112,842
|Corporate debt securities                       |  |               |      |         |   | 10,478  |  |       |      |  |   | 10,478 
|Collateralized debt obligations                 |  |               |      |         |   |        |  |       | 5,034 |  |   | 5,034  
|Obligations of state and political subdivisions |  |               |      |         |   | 5,980   |  |       |      |  |   | 5,980  
|Tax-exempt securities                           |  |               |      |         |   | 3,218   |  |       |      |  |   | 3,218  
|Foreign government securities                   |  |               |      |         |   | 100     |  |       |      |  |   | 100    
|Equity securities                               |  |               | 302   |         |   | 727     |  |       |      |  |   | 1,029  
|                                                |  |               |       |         |   |         |  |       |       |  |   |        
|Total assets at fair value                      |  | $             | 1,323 |         | $ | 175,853 |  | $     | 5,034 |  | $ | 182,210
|                                                |  |               |       |         |   |         |  |       |       |  |   |        



21



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##### Table of Contents

SI FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

JUNE 30, 2010 AND 2009 AND DECEMBER 31, 2009



|                                                |  |                   |       |         |   |         |  |       |       |  |   |        
|----------------------------------------------- |  | ----------------- | ----- | ------- | - | ------- |  | ----- | ----- |  | - | -------
|                                                |  | December 31, 2009
|(Dollars in Thousands)                          |  | Level 1           |       | Level 2 |   | Level 3 |  | Total
|                                                |  |                   |       |        
|U.S. Government and agency obligations          |  | $                 | 1,939 |         | $ | 34,290  |  | $     |      |  | $ | 36,229 
|Government-sponsored enterprises                |  |                   |      |         |   | 14,035  |  |       |      |  |   | 14,035 
|Mortgage-backed securities                      |  |                   |      |         |   | 111,514 |  |       |      |  |   | 111,514
|Corporate debt securities                       |  |                   |      |         |   | 7,321   |  |       |      |  |   | 7,321  
|Collateralized debt obligations                 |  |                   |      |         |   |        |  |       | 5,038 |  |   | 5,038  
|Obligations of state and political subdivisions |  |                   |      |         |   | 5,131   |  |       |      |  |   | 5,131  
|Tax-exempt securities                           |  |                   |      |         |   | 3,219   |  |       |      |  |   | 3,219  
|Foreign government securities                   |  |                   |      |         |   | 100     |  |       |      |  |   | 100    
|Equity securities                               |  |                   | 247   |         |   | 728     |  |       |      |  |   | 975    
|                                                |  |                   |       |         |   |         |  |       |       |  |   |        
|Total assets at fair value                      |  | $                 | 2,186 |         | $ | 176,338 |  | $     | 5,038 |  | $ | 183,562
|                                                |  |                   |       |         |   |         |  |       |       |  |   |        

The following table shows a reconciliation of the beginning and ending
balances for Level 3 assets:



|                                                                            |  |   |       |  
|--------------------------------------------------------------------------- |  | - | ----- | -
|(Dollars in Thousands)                                                      |  |   |      
|                                                                            | 
|Balance at January 1, 2010                                                  |  | $ | 5,038 |  
|Transfers to/from level 3                                                   |  |   |      |  
|Impairment charges included in net income                                   |  |   |      |  
|Decrease in fair value of securities included in other comprehensive income |  |   | (4    | )
|                                                                            |  |   |       |  
|Balance at June 30, 2010                                                    |  | $ | 5,034 |  
|                                                                            |  |   |       |  

Assets Measured at Fair Value on a Nonrecurring Basis

The Company may also be required, from time to time, to measure certain other financial assets on a nonrecurring basis in accordance with generally
accepted accounting principles. These adjustments to fair value usually result from the application of lower-of-cost-or-market accounting or adjustments of individual assets. The following table summarizes the fair value hierarchy used to determine
each adjustment and the carrying value of the related individual assets as of June 30, 2010 and 2009. The losses represent the amount of adjustments recorded on assets held at June 30, 2010 and 2009. There were no liabilities measured at
fair value on a nonrecurring basis at June 30, 2010 and 2009.



|                        |  |                  |   |               |   |               |  |                    |       |                  |   |     |  |   |    
|----------------------- |  | ---------------- | - | ------------- | - | ------------- |  | ------------------ | ----- | ---------------- | - | --- |  | - | ---
|                        |  |                  |   |               |   |               |  | Three Months Ended |       | Six Months Ended
|                        |  | At June 30, 2010 |   | June 30, 2010 |   | June 30, 2010
|(Dollars in Thousands)  |  | Level 1          |   | Level 2       |   | Level 3       |  | Total Losses       |       | Total Losses    
|Impaired loans          |  | $                |  |               | $ |              |  | $                  | 1,706 |                  | $ | 373 |  | $ | 397
|Other real estate owned |  |                  |  |               |   |              |  |                    | 1,745 |                  |   | 242 |  |   | 242
|                        |  |                  |   |               |   |               |  |                    |       |                  |   |     |  |   |    
|Total assets            |  | $                |  |               | $ |              |  | $                  | 3,451 |                  | $ | 615 |  | $ | 639
|                        |  |                  |   |               |   |               |  |                    |       |                  |   |     |  |   |    
|                        |  |                  |   |               |  
|                        |  |                  |   |               |   |               |  | Three Months Ended |       | Six Months Ended
|                        |  | At June 30, 2009 |   | June 30, 2009 |   | June 30, 2009
|(Dollars in Thousands)  |  | Level 1          |   | Level 2       |   | Level 3       |  | Total Gains        |       | Total Gains     
|Impaired loans          |  | $                |  |               | $ |              |  | $                  | 872   |                  | $ | 35  |  | $ | 624
|                        |  |                  |   |               |   |               |  |                    |       |                  |   |     |  |   |    
|Total assets            |  | $                |  |               | $ |              |  | $                  | 872   |                  | $ | 35  |  | $ | 624
|                        |  |                  |   |               |   |               |  |                    |       |                  |   |     |  |   |    



22



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##### Table of Contents

SI FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

JUNE 30, 2010 AND 2009 AND DECEMBER 31, 2009



The Company measures the impairment of loans that are collateral dependent based on the fair value of
the collateral (Level 3). The fair value of collateral used by the Company represents the amount expected to be received from the sale of the property, net of selling costs, as determined by an independent, licensed or certified appraiser using
observable market data. This data includes information such as selling price of similar properties, expected future cash flows or earnings of the subject property based on current market expectations, relevant legal, physical and economic factors.
Losses applicable to write-downs of impaired loans are based on the appraised market value of the underlying collateral, assuming foreclosure of these loans is imminent.

The amount of other real estate owned represents the carrying value of the collateral based on the appraised value of the underlying collateral less
selling costs. The Company recognized losses of $242,000 for the three and six months ended June 30, 2010 to reduce the carrying value on other real estate owned at June 30, 2010. There were no recognized losses on other real estate owned
for the three and six months ended June 30, 2009.

Summary of Fair Values of Financial Instruments

The estimated fair values, and related carrying or notional amounts, of the Companys financial instruments are presented in the
following table. Certain financial instruments and all nonfinancial instruments are exempt from disclosure requirements. Accordingly, the aggregate fair value amounts presented do not represent the underlying value of the Company.

Management uses its best judgment in estimating the fair value of the Companys financial instruments; however, there are inherent weaknesses in any
estimation technique. Therefore, for substantially all financial instruments, the fair value estimates presented herein are not necessarily indicative of the amounts the Company could have realized in a sales transaction at June 30, 2010 and
December 31, 2009. The estimated fair value amounts at June 30, 2010 and December 31, 2009 have been measured as of each respective date, and the estimated fair value amounts at December 31, 2009 have not been re-evaluated or
updated for purposes of the consolidated financial statements subsequent to that date. As such, the estimated fair values of these financial instruments subsequent to the respective reporting dates may be different than the amounts reported at each
period-end. The information presented should not be interpreted as an estimate of the fair value of the entire Company since a fair value calculation is only required for a limited portion of the Companys assets. Due to the wide range of
valuation techniques and the degree of subjectivity used in making the estimate, comparisons between the Companys disclosures and those of other banks may not be meaningful.



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SI FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

JUNE 30, 2010 AND 2009 AND DECEMBER 31, 2009



As of June 30, 2010 and December 31, 2009, the recorded carrying amounts and estimated fair
values of the Companys financial instruments are as follows:



|                                                                           |  |               |         |                   |   |          |  |       |         |  |   |        
|-------------------------------------------------------------------------- |  | ------------- | ------- | ----------------- | - | -------- |  | ----- | ------- |  | - | -------
|                                                                           |  | June 30, 2010 |         | December 31, 2009
|                                                                           |  | Carrying      |         | Fair              |   | Carrying |  | Fair 
|(Dollars in Thousands)                                                     |  | Amount        |         | Value             |   | Amount   |  | Value
|                                                                           |  |               |         |                  
|Financial Assets:                                                          |  |               |         |                   |   |          |  |       |         |  |   |        
|Noninterest-bearing deposits                                               |  | $             | 13,332  |                   | $ | 13,332   |  | $     | 12,889  |  | $ | 12,889 
|Interest-bearing deposits                                                  |  |               | 4,811   |                   |   | 4,811    |  |       | 2,350   |  |   | 2,350  
|Federal funds sold                                                         |  |               | 27,950  |                   |   | 27,950   |  |       | 8,965   |  |   | 8,965  
|Available for sale securities                                              |  |               | 182,210 |                   |   | 182,210  |  |       | 183,562 |  |   | 183,562
|Loans held for sale                                                        |  |               | 1,835   |                   |   | 1,835    |  |       | 396     |  |   | 396    
|Loans receivable, net                                                      |  |               | 606,514 |                   |   | 612,161  |  |       | 607,692 |  |   | 609,155
|Federal Home Loan Bank stock                                               |  |               | 8,388   |                   |   | 8,388    |  |       | 8,388   |  |   | 8,388  
|Accrued interest receivable                                                |  |               | 3,333   |                   |   | 3,333    |  |       | 3,341   |  |   | 3,341  
|                                                                           |  |               |         |                  
|Financial Liabilities:                                                     |  |               |         |                   |   |          |  |       |         |  |   |        
|Savings deposits                                                           |  |               | 63,590  |                   |   | 63,590   |  |       | 61,312  |  |   | 61,312 
|Demand deposits, negotiable orders of withdrawal and money market accounts |  |               | 307,797 |                   |   | 307,797  |  |       | 286,166 |  |   | 286,166
|Certificates of deposit                                                    |  |               | 303,056 |                   |   | 306,750  |  |       | 311,309 |  |   | 315,777
|Mortgagors and investors escrow accounts                                 |  |               | 2,338   |                   |   | 2,338    |  |       | 3,591   |  |   | 3,591  
|Federal Home Loan Bank advances                                            |  |               | 114,169 |                   |   | 119,265  |  |       | 116,100 |  |   | 118,693
|Junior subordinated debt owed to unconsolidated trust                      |  |               | 8,248   |                   |   | 5,480    |  |       | 8,248   |  |   | 5,734  

Off-Balance
Sheet Instruments

Loan commitments on which the committed interest rate is less than the current market rate are immaterial at
June 30, 2010 and December 31, 2009.

The Company assumes interest rate risk, which represents the risk that general interest rate
levels will change, as a result of its normal operations. As a result, the fair values of the Companys financial instruments will change when interest rate levels change and that change may be either favorable or unfavorable to the Company.
Management attempts to match maturities of assets and liabilities to the extent believed necessary to minimize interest rate risk. However, borrowers with fixed-rate obligations are less likely to prepay in a rising rate environment and more likely
to prepay in a falling rate environment. Conversely, depositors who are receiving fixed rates are more likely to withdraw funds before maturity in a rising rate environment and less likely to do so in a falling rate environment. Management monitors
rates and maturities of assets and liabilities and attempts to minimize interest rate risk by adjusting terms of new loans and deposits and by investing in securities with terms that mitigate the Companys overall interest rate risk.



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##### Table of Contents

|Item 2. | Managements Discussion and Analysis of Financial Condition and Results of Operations.
|------- | --------------------------------------------------------------------------------------

Managements discussion and analysis of financial condition and results of operations is intended to assist in understanding changes in the
Companys financial condition as of June 30, 2010 and December 31, 2009 and its results of operations for the three and six months ended June 30, 2010 and 2009. The information contained in this section should be read in
conjunction with the consolidated financial statements and notes thereto appearing in Part I, Item 1 of this document as well as with managements discussion and analysis of financial condition and results of operations and consolidated
financial statements included in the Companys 2009 Annual Report on Form 10-K.

This report may contain certain forward-looking
statements within the meaning of the federal securities laws, which are made in good faith pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These statements are not historical facts;
rather, they are statements based on managements current expectations regarding its business strategies, intended results and future performance. Forward-looking statements are generally preceded by terms such as expects,
believes, anticipates, intends, estimates, projects and similar expressions.

Managements ability to predict results or the effect of future plans or strategies is inherently uncertain. Factors that could have a material
adverse effect on the operations of the Company and its subsidiaries include, but are not limited to, changes in interest rates, national and regional economic conditions, legislative and regulatory changes, monetary and fiscal policies of the
United States government, including policies of the United States Treasury and the Federal Reserve Board, the quality and composition of the loan 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. Additional factors that may affect the Companys results are
discussed in Item 1A. Risk Factorsin this Form 10-Q and in the Companys Annual Report on Form 10-K and in other reports filed with the Securities and Exchange Commission. These risks and uncertainties should be
considered in evaluating forward-looking statements and undue reliance should not be placed on such statements. Except as required by applicable law or regulation, the Company does not undertake, and specifically disclaims any obligation, to release
publicly the result of any revisions that may be made to any forward-looking statements to reflect events or circumstances after the date of the statements or to reflect the occurrence of anticipated or unanticipated events.

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, OTTI of securities, deferred income taxes and the impairment of long-lived assets to be its critical
accounting policies. Additional information about the Companys accounting policies is included in the notes to the Companys consolidated financial statements contained in Part I, Item 1 of this document and in the Companys
2009 Annual Report on Form 10-K.

Impact of New Accounting Standards

Refer to Note 1 of the consolidated financial statements in this report for a discussion of recent accounting pronouncements.



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##### Table of Contents

Comparison of Financial Condition at June 30, 2010 and December 31, 2009

Assets:

Summary.Total assets increased $17.1 million, or 2.0%, to $889.4 million at June 30, 2010 from $872.4 million at December 31,
2009, primarily due to increases of $21.9 million in cash and cash equivalents and $1.4 million in loans held for sale, offset by decreases of $1.9 million in other real estate owned, $1.4 million in securities, $1.3 million in net deferred tax
assets and $1.2 million in net loans receivable. Cash and cash equivalents increased as a result of an increase in deposits. During the first half of 2010, the Company acquired four properties with a carrying value of $1.1 million and sold seven
other real estate owned properties with an aggregate carrying value of $2.9 million. The sale of U.S. government and agency obligations contributed to the decline in securities. The reduction in net unrealized losses on available for sale securities
resulted in a decrease in net deferred tax assets.

Loans Receivable, Net.The net loan portfolio decreased $1.2 million. Loan
originations decreased $40.6 million, or 44.5%, during 2010 as related to the comparable period in 2009 due to reduced demand and more prudent underwriting standards, as a result of adverse economic conditions. Changes in the loan portfolio
consisted of the following:



| |  |  | Residential Mortgage Loans. Residential mortgage loans continue to represent the largest segment of the Companys loan portfolio at
June 30, 2010, comprising 48.0% of the total loan portfolio. Residential mortgage loans decreased $13.8 million, or 4.5%. Contributing to the decrease was the sale of $20.0 million of longer-term fixed-rate residential mortgage loans. Loan
originations for residential mortgage loans decreased $43.4 million for the first half of 2010 compared to the same period in 2009.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Commercial Loans. At June 30, 2010, the commercial loan portfolio, which includes multi-family and commercial mortgage and commercial
business loans, represented 46.0% of total loans. Multi-family and commercial mortgage loans increased $2.0 million, or 1.3%. Loan originations for multi-family and commercial mortgage loans increased $1.4 million during the first six months of 2010
compared to the same period in 2009. Commercial business loans increased $11.3 million, or 10.5%, for 2010 primarily due to the purchase of $19.6 million in United States Department of Agriculture (USDA) and Small Business Administration
(SBA) loans that are fully guaranteed by the U.S. Government. As a result of the reduced loan demand, loan originations for commercial business loans declined $322,000 during the first half of 2010 compared to the first half of 2009.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Consumer Loans. Consumer loans represent 4.5% of the Companys total loan portfolio. Consumer loans increased $1.4 million during the first
half of 2010. Increases in home equity loans of $1.4 million were offset by decreases in other consumer loans. Loan originations for consumer loans, primarily home equity lines of credit, increased $1.8 million for the six months ended June 30,
2010 from the comparable period in 2009.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The allowance for loan losses totaled $4.9 million at June 30, 2010 and
December 31, 2009. The ratio of the allowance for loan losses to total loans remained unchanged at 0.80% at June 30, 2010 and December 31, 2009. The USDA and SBA loan purchases, which are fully guaranteed by the full faith and credit
of the U.S. government, required no allowance for loan losses.



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##### Table of Contents

The following table summarizes the activity in the allowance for loan losses at and for the three and six
months ended June 30, 2010 and 2009.



|                                           |  |                |       |   |                |   |        |      |  |   |       |   |  |   |        |  
|------------------------------------------ |  | -------------- | ----- | - | -------------- | - | ------ | ---- |  | - | ----- | - |  | - | ------ | -
|                                           |  | Three Months   |       |   | Six Months     |  
|                                           |  | Ended June 30, |       |   | Ended June 30, |  
|(Dollars in Thousands)                     |  | 2010           |       |   | 2009           |   |        | 2010 |  |   | 2009  |  
|Balance at beginning of period             |  | $              | 4,793 |   |                | $ | 5,271  |      |  | $ | 4,891 |   |  | $ | 6,047  |  
|                                           |  |                |       |  
|Provision for loan losses                  |  |                | 252   |   |                |   | 1,440  |      |  |   | 422   |   |  |   | 1,930  |  
|Loans charged-off                          |  |                | (172  | ) |                |   | (1,714 | )    |  |   | (442  | ) |  |   | (2,998 | )
|Recoveries of loans previously charged-off |  |                | 5     |   |                |   | 4      |      |  |   | 7     |   |  |   | 22     |  
|                                           |  |                |       |   |                |   |        |      |  |   |       |   |  |   |        |  
|                                           |  |                |       |  
|Balance at end of period                   |  | $              | 4,878 |   |                | $ | 5,001  |      |  | $ | 4,878 |   |  | $ | 5,001  |  
|                                           |  |                |       |   |                |   |        |      |  |   |       |   |  |   |        |  

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



|                                                                            |  |          |       |   |              |   |       |  
|--------------------------------------------------------------------------- |  | -------- | ----- | - | ------------ | - | ----- | -
|                                                                            |  | June 30, |       |   | December 31, |  
|(Dollars in Thousands)                                                      |  | 2010     |       |   | 2009         |  
|Nonaccrual loans:                                                           |  |          |       |   |              |   |       |  
|Real estate loans                                                           |  | $        | 3,847 |   |              | $ | 2,972 |  
|Commercial business loans                                                   |  |          | 420   |   |              |   | 35    |  
|                                                                            |  |          |       |   |              |   |       |  
|Total nonaccrual loans                                                      |  |          | 4,267 |   |              |   | 3,007 |  
|                                                                            |  |         
|Real estate owned, net                                                      |  |          | 1,745 |   |              |   | 3,680 |  
|                                                                            |  |          |       |   |              |   |       |  
|Total nonperforming assets                                                  |  |          | 6,012 |   |              |   | 6,687 |  
|                                                                            |  |         
|Accruing troubled debt restructurings                                       |  |          | 2,574 |   |              |   | 67    |  
|                                                                            |  |          |       |   |              |   |       |  
|Total nonperforming assets and troubled debt restructurings                 |  | $        | 8,586 |   |              | $ | 6,754 |  
|                                                                            |  |          |       |   |              |   |       |  
|                                                                            |  |         
|Total nonperforming loans to total loans                                    |  |          | 0.70  | % |              |   | 0.49  | %
|Total nonperforming loans to total assets                                   |  |          | 0.48  | % |              |   | 0.34  | %
|Total nonperforming assets and troubled debt restructurings to total assets |  |          | 0.97  | % |              |   | 0.77  | %

Other real estate owned decreased $1.9
million from December 31, 2009 to June 30, 2010, primarily as a result of the sale of five residential and two commercial properties with an aggregate carrying value of $2.9 million. During the first half of 2010, the Company acquired one
commercial and three residential properties with a carrying value totaling $1.1 million and reduced the carrying value of one commercial property in the amount of $111,000.

As of June 30, 2010, troubled debt restructurings increased $3.5 million as a result of interest rate concessions for two commercial mortgage loans.
The Company anticipates that the borrowers will repay all contractual principal and interest in accordance with the terms of their restructured loan agreements.

Liabilities:

Summary. Total liabilities increased $13.4 million, or 1.7%, from December 31, 2009 to June 30, 2010 primarily as a result of
increases in deposits of $15.7 million, offset by a decrease in FHLB advances of $1.9 million. Deposits increased 2.4% to $674.4 million at June 30, 2010. Interest-bearing deposits increased $12.8 million, or 2.2%, which included increases in
NOW and money market accounts of $18.8 million and savings accounts of $2.3 million, offset by a decrease in certificates of deposit of $8.3 million. Noninterest-bearing deposits increased $2.9 million. Deposit growth was the result of marketing and
promotional initiatives, as well as competitively-priced deposit products. Borrowings decreased $1.9 million to $122.4 million at June 30, 2010, resulting from net repayments of FHLB advances.



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##### Table of Contents

Equity:

Summary. Total stockholders equity increased $3.7 million from $77.5 million at December 31, 2009 to $81.2 million at
June 30, 2010. The increase in stockholders equity was attributable to a decrease in net unrealized losses on securities aggregating $2.4 million (net of taxes) and earnings of $1.2 million.

Accumulated Other Comprehensive Loss. Accumulated other comprehensive loss is comprised solely of the unrealized gains and losses on
available for sale securities, net of taxes. Net unrealized losses on securities, net of taxes, totaled $20,000 and $2.4 million at June 30, 2010 and December 31, 2009, respectively. Unrealized losses on available for sale securities
resulted from a decline in the market value of primarily the debt securities portfolio, which was recognized in accumulated other comprehensive loss on the consolidated balance sheets and a component of comprehensive income on the consolidated
statement of changes in stockholders equity. A majority of the unrealized losses relate to the Companys collateralized debt obligations and non-agency mortgage-backed securities. The Company does not intend to sell such securities and it
is not more likely than not that it will be required to sell such securities prior to the recovery of its amortized cost basis, which may be at maturity, less any credit losses.

Results of Operations for the Three and Six Months Ended June 30, 2010 and 2009

General.The Companys results of operations are dependent primarily on net interest income, which is the difference between the
interest income earned on the Companys interest-earning assets, such as loans and investments, and the interest expense on its interest-bearing liabilities, such as deposits and borrowings. The Company also generates noninterest income such as
service fees on deposits, gains on securities, mortgage banking fees, 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 consist of employee compensation and benefits, occupancy and equipment, computer and electronic banking services, outside professional services, marketing, FDIC deposit insurance and regulatory assessments 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 $713,000 for the three months ended June 30, 2010,
an increase of $1.3 million, compared to a net loss of $619,000 for the three months ended June 30, 2009. The increase in net income was due to increases in noninterest income and net interest income and decreases in the provision for loan
losses and noninterest expenses.

The Company reported net income of $1.2 million for the six months ended June 30, 2010, an increase of
$1.8 million, compared to a net loss of $563,000 for the six months ended June 30, 2009. The increase in net income was due to increases in noninterest income and net interest income and a decrease in the provision for loan losses, offset by an
increase in noninterest expenses.

Interest and Dividend Income. Total interest and dividend income decreased $1.1 million, or
10.0%, for the second quarter of 2010, primarily due to lower yields on interest-earning assets, offset by an increase in the average balance of securities. The yield on interest-earning assets decreased 66 basis points to 4.81% for the second
quarter of 2010 from 5.47% for the same period in 2009, as a result of lower market interest rates. The average balance of securities increased $21.6 million, while the rate earned declined from 4.66% to 3.23%. Lower rates on securities were
impacted by both a decrease in market interest rates and the composition of the portfolio resulting, in part, from a shift from U.S. government and agency obligations and non-agency mortgage-backed securities to corporate debt securities and agency
mortgage-backed securities. The average balance of loans decreased $18.9 million and the rate earned declined 25 basis points to 5.56% for the quarter ended June 30, 2010. The average balance of federal funds and other interest-earning assets
increased $17.0 million, offset by a decline in yield of 34 basis points, resulting from lower market interest rates.



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##### Table of Contents

For the six months ended June 30, 2010, interest and dividend income decreased $1.9 million, or 8.7%,
to $20.3 million due to a lower yield earned on interest-earning assets, offset by an increase in the average balance of interest-earning assets of $12.7 million, of which average securities increased $22.9 million. The yield on interest-earning
assets decreased 56 basis points to 4.93%, with the yield on securities contributing the largest decrease of 132 basis points to 3.49%. The Company experienced declines in the balance of loans of $18.8 million and the yield on loans of 21 basis
points. The decrease in yields were due to lower market interest rates.

Interest Expense. Interest expense decreased $1.3
million, or 27.6%, to $3.5 million for the second quarter of 2010 compared to $4.9 million for the comparable period in 2009, as a result of a decrease in the rates paid on interest-bearing liabilities and a lower average balance of FHLB advances,
offset by an increase of $30.6 million in the average balance of deposits. Overall, rates continued to decline in 2010 as a result of the lower interest rate environment. NOW and money market accounts increased $39.8 million, offset by a decrease in
the average rate paid of 38 basis points. The average balance on certificates of deposit decreased $11.2 million and the rate paid decreased 89 basis points to 2.54%. The average balance of FHLB advances decreased $22.4 million and the average yield
decreased 59 basis points to 3.64% for the second quarter of 2010. The reduction in the average yield on FHLB advances was the result of debt restructuring and extending the maturities of certain FHLB advances during the second half of 2009 and the
first half of 2010 to benefit from the low interest rate environment. Rates on subordinated borrowings decreased 88 basis points due to a reduction in the three-month LIBOR rate.

Interest expense decreased $2.6 million for the six months ended June 30, 2010 as compared to the same period in 2009, resulting from decreases in
the rates paid on deposits and borrowings and a $22.7 million decrease in the average balance of FHLB advances, offset by an increase in average deposits of $29.1 million. Rates paid on average deposits decreased 69 basis points from 2.39% to 1.70%.
The rates paid on FHLB advances and subordinated debt decreased 57 basis points and 122 basis points, respectively. Contributing to higher average deposits were increases in NOW and money market accounts and savings accounts of $35.7 million and
$1.6 million, respectively, offset by a decrease of $8.2 million in certificates of deposit accounts.

Average Balance Sheet.The following tables set forth information regarding average balances of assets and liabilities as well as the total dollar amounts of interest income from average interest-earning assets and interest expense on average interest-bearing
liabilities, resulting yields and rates paid, interest rate spread, net interest margin and the ratio of average interest-earning assets to average interest-bearing liabilities for the periods indicated.



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|                                                                                  |  |                                           |         |            |      |        |         |  |        |         |  |            |         |  |         |        |   |  |        |  
|--------------------------------------------------------------------------------- |  | ----------------------------------------- | ------- | ---------- | ---- | ------ | ------- |  | ------ | ------- |  | ---------- | ------- |  | ------- | ------ | - |  | ------ | -
|                                                                                  |  | At or For the Three Months Ended June 30, |        
|                                                                                  |  | 2010                                      |         |            | 2009 |       
|                                                                                  |  |                                           |         |            |      |        | Average |  |        |         |  |            |         |  | Average |       
|                                                                                  |  | Average                                   |         | Interest & |      |        | Yield/  |  |        | Average |  | Interest & |         |  | Yield/  |       
|(Dollars in Thousands)                                                            |  | Balance                                   |         | Dividends  |      |        | Rate    |  |        | Balance |  | Dividends  |         |  | Rate    |       
|Interest-earning assets:                                                          |  |                                           |         |            |      |        |         |  |        |         |  |            |         |  |         |        |   |  |        |  
|Loans(1) (2)                                                                      |  | $                                         | 609,405 |            | $    | 8,445  |         |  | 5.56   | %       |  | $          | 628,354 |  | $       | 9,105  |   |  | 5.81   | %
|Securities(3)                                                                     |  |                                           | 197,845 |            |      | 1,592  |         |  | 3.23   |         |  |            | 176,213 |  |         | 2,048  |   |  | 4.66   |  
|Other interest-earning assets                                                     |  |                                           | 31,973  |            |      | 26     |         |  | 0.33   |         |  |            | 14,983  |  |         | 25     |   |  | 0.67   |  
|                                                                                  |  |                                           |         |            |      |        |         |  |        |         |  |            |         |  |         |        |   |  |        |  
|Total interest-earning assets                                                     |  |                                           | 839,223 |            |      | 10,063 |         |  | 4.81   |         |  |            | 819,550 |  |         | 11,178 |   |  | 5.47   |  
|                                                                                  |  |                                           |         |            |      |        |         |  |        |         |  |            |         |  |         |        |   |  |        |  
|                                                                                  |  |                                           |         |            |      |       
|Noninterest-earning assets                                                        |  |                                           | 51,962  |            |      |        |         |  |        |         |  |            | 48,221  |  |         |        |   |  |        |  
|                                                                                  |  |                                           |         |            |      |        |         |  |        |         |  |            |         |  |         |        |   |  |        |  
|Total assets                                                                      |  | $                                         | 891,185 |            |      |        |         |  |        |         |  | $          | 867,771 |  |         |        |   |  |        |  
|                                                                                  |  |                                           |         |            |      |        |         |  |        |         |  |            |         |  |         |        |   |  |        |  
|                                                                                  |  |                                           |         |            |      |       
|Interest-bearing liabilities:                                                     |  |                                           |         |            |      |        |         |  |        |         |  |            |         |  |         |        |   |  |        |  
|Deposits:                                                                         |  |                                           |         |            |      |        |         |  |        |         |  |            |         |  |         |        |   |  |        |  
|NOW and money market                                                              |  | $                                         | 241,550 |            |      | 439    |         |  | 0.73   |         |  | $          | 201,760 |  |         | 557    |   |  | 1.11   |  
|Savings(4)                                                                        |  |                                           | 65,628  |            |      | 82     |         |  | 0.50   |         |  |            | 63,580  |  |         | 111    |   |  | 0.70   |  
|Certificates of deposit(5)                                                        |  |                                           | 305,490 |            |      | 1,932  |         |  | 2.54   |         |  |            | 316,710 |  |         | 2,709  |   |  | 3.43   |  
|                                                                                  |  |                                           |         |            |      |        |         |  |        |         |  |            |         |  |         |        |   |  |        |  
|Total interest-bearing deposits                                                   |  |                                           | 612,668 |            |      | 2,453  |         |  | 1.61   |         |  |            | 582,050 |  |         | 3,377  |   |  | 2.33   |  
|                                                                                  |  |                                           |         |            |      |       
|FHLB advances                                                                     |  |                                           | 114,153 |            |      | 1,036  |         |  | 3.64   |         |  |            | 136,545 |  |         | 1,440  |   |  | 4.23   |  
|Subordinated debt                                                                 |  |                                           | 8,248   |            |      | 41     |         |  | 1.99   |         |  |            | 8,248   |  |         | 59     |   |  | 2.87   |  
|                                                                                  |  |                                           |         |            |      |        |         |  |        |         |  |            |         |  |         |        |   |  |        |  
|Total interest-bearing liabilities                                                |  |                                           | 735,069 |            |      | 3,530  |         |  | 1.93   |         |  |            | 726,843 |  |         | 4,876  |   |  | 2.69   |  
|                                                                                  |  |                                           |         |            |      |        |         |  |        |         |  |            |         |  |         |        |   |  |        |  
|                                                                                  |  |                                           |         |            |      |       
|Noninterest-bearing liabilities                                                   |  |                                           | 75,403  |            |      |        |         |  |        |         |  |            | 66,713  |  |         |        |   |  |        |  
|                                                                                  |  |                                           |         |            |      |        |         |  |        |         |  |            |         |  |         |        |   |  |        |  
|Total liabilities                                                                 |  |                                           | 810,472 |            |      |        |         |  |        |         |  |            | 793,556 |  |         |        |   |  |        |  
|                                                                                  |  |                                           |         |            |      |       
|Total stockholders equity                                                        |  |                                           | 80,713  |            |      |        |         |  |        |         |  |            | 74,215  |  |         |        |   |  |        |  
|                                                                                  |  |                                           |         |            |      |        |         |  |        |         |  |            |         |  |         |        |   |  |        |  
|                                                                                  |  |                                           |         |            |      |       
|Total liabilities and stockholders equity                                        |  | $                                         | 891,185 |            |      |        |         |  |        |         |  | $          | 867,771 |  |         |        |   |  |        |  
|                                                                                  |  |                                           |         |            |      |        |         |  |        |         |  |            |         |  |         |        |   |  |        |  
|                                                                                  |  |                                           |         |            |      |       
|Net interest-earning assets                                                       |  | $                                         | 104,154 |            |      |        |         |  |        |         |  | $          | 92,707  |  |         |        |   |  |        |  
|                                                                                  |  |                                           |         |            |      |        |         |  |        |         |  |            |         |  |         |        |   |  |        |  
|                                                                                  |  |                                           |         |            |      |       
|Tax equivalent net interest income
(3)                                            |  |                                           |         |            |      | 6,533  |         |  |        |         |  |            |         |  |         | 6,302  |   |  |        |  
|Tax equivalent interest rate spread
(6)                                           |  |                                           |         |            |      |        |         |  | 2.88   | %       |  |            |         |  |         |        |   |  | 2.78   | %
|                                                                                  |  |                                           |         |            |      |        |         |  |        |         |  |            |         |  |         |        |   |  |        |  
|Tax equivalent net interest margin as a percentage of interest-earning assets
(7) |  |                                           |         |            |      |        |         |  | 3.12   | %       |  |            |         |  |         |        |   |  | 3.08   | %
|                                                                                  |  |                                           |         |            |      |        |         |  |        |         |  |            |         |  |         |        |   |  |        |  
|Average of interest-earning assets to average interest-bearing liabilities        |  |                                           |         |            |      |        |         |  | 114.17 | %       |  |            |         |  |         |        |   |  | 112.75 | %
|                                                                                  |  |                                           |         |            |      |        |         |  |        |         |  |            |         |  |         |        |   |  |        |  
|Less tax equivalent adjustment
(3)                                                |  |                                           |         |            |      | (5     | )       |  |        |         |  |            |         |  |         | (2     | ) |  |        |  
|                                                                                  |  |                                           |         |            |      |        |         |  |        |         |  |            |         |  |         |        |   |  |        |  
|Net interest income                                                               |  |                                           |         |            | $    | 6,528  |         |  |        |         |  |            |         |  | $       | 6,300  |   |  |        |  
|                                                                                  |  |                                           |         |            |      |        |         |  |        |         |  |            |         |  |         |        |   |  |        |  



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

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

|(3) | Securities income and net interest 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 income to agree to the amounts reported in the statements of income.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

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

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

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



30



---

##### Table of Contents

|                                                                                  |  |                                         |         |            |      |        |         |  |        |         |  |            |         |  |         |        |   |  |        |  
|--------------------------------------------------------------------------------- |  | --------------------------------------- | ------- | ---------- | ---- | ------ | ------- |  | ------ | ------- |  | ---------- | ------- |  | ------- | ------ | - |  | ------ | -
|                                                                                  |  | At or For the Six Months Ended June 30, |        
|                                                                                  |  | 2010                                    |         |            | 2009 |       
|                                                                                  |  |                                         |         |            |      |        | Average |  |        |         |  |            |         |  | Average |       
|                                                                                  |  | Average                                 |         | Interest & |      |        | Yield/  |  |        | Average |  | Interest & |         |  | Yield/  |       
|(Dollars in Thousands)                                                            |  | Balance                                 |         | Dividends  |      |        | Rate    |  |        | Balance |  | Dividends  |         |  | Rate    |       
|Interest-earning assets:                                                          |  |                                         |         |            |      |        |         |  |        |         |  |            |         |  |         |        |   |  |        |  
|Loans(1) (2)                                                                      |  | $                                       | 608,308 |            | $    | 16,856 |         |  | 5.59   | %       |  | $          | 627,156 |  | $       | 18,039 |   |  | 5.80   | %
|Securities(3)                                                                     |  |                                         | 194,617 |            |      | 3,372  |         |  | 3.49   |         |  |            | 171,686 |  |         | 4,091  |   |  | 4.81   |  
|Other interest-earning assets                                                     |  |                                         | 26,164  |            |      | 49     |         |  | 0.38   |         |  |            | 17,534  |  |         | 77     |   |  | 0.89   |  
|                                                                                  |  |                                         |         |            |      |        |         |  |        |         |  |            |         |  |         |        |   |  |        |  
|Total interest-earning assets                                                     |  |                                         | 829,089 |            |      | 20,277 |         |  | 4.93   |         |  |            | 816,376 |  |         | 22,207 |   |  | 5.49   |  
|                                                                                  |  |                                         |         |            |      |        |         |  |        |         |  |            |         |  |         |        |   |  |        |  
|                                                                                  |  |                                         |         |            |      |       
|Noninterest-earning assets                                                        |  |                                         | 52,648  |            |      |        |         |  |        |         |  |            | 46,495  |  |         |        |   |  |        |  
|                                                                                  |  |                                         |         |            |      |        |         |  |        |         |  |            |         |  |         |        |   |  |        |  
|Total assets                                                                      |  | $                                       | 881,737 |            |      |        |         |  |        |         |  | $          | 862,871 |  |         |        |   |  |        |  
|                                                                                  |  |                                         |         |            |      |        |         |  |        |         |  |            |         |  |         |        |   |  |        |  
|                                                                                  |  |                                         |         |            |      |       
|Interest-bearing liabilities:                                                     |  |                                         |         |            |      |        |         |  |        |         |  |            |         |  |         |        |   |  |        |  
|Deposits:                                                                         |  |                                         |         |            |      |        |         |  |        |         |  |            |         |  |         |        |   |  |        |  
|NOW and money market                                                              |  | $                                       | 234,443 |            |      | 904    |         |  | 0.78   |         |  | $          | 198,718 |  |         | 1,186  |   |  | 1.20   |  
|Savings(4)                                                                        |  |                                         | 64,030  |            |      | 161    |         |  | 0.51   |         |  |            | 62,408  |  |         | 225    |   |  | 0.73   |  
|Certificates of deposit(5)                                                        |  |                                         | 307,447 |            |      | 4,052  |         |  | 2.66   |         |  |            | 315,666 |  |         | 5,420  |   |  | 3.46   |  
|                                                                                  |  |                                         |         |            |      |        |         |  |        |         |  |            |         |  |         |        |   |  |        |  
|Total interest-bearing deposits                                                   |  |                                         | 605,920 |            |      | 5,117  |         |  | 1.70   |         |  |            | 576,792 |  |         | 6,831  |   |  | 2.39   |  
|                                                                                  |  |                                         |         |            |      |       
|FHLB advances                                                                     |  |                                         | 116,151 |            |      | 2,112  |         |  | 3.67   |         |  |            | 138,893 |  |         | 2,921  |   |  | 4.24   |  
|Subordinated debt                                                                 |  |                                         | 8,248   |            |      | 80     |         |  | 1.96   |         |  |            | 8,248   |  |         | 130    |   |  | 3.18   |  
|                                                                                  |  |                                         |         |            |      |        |         |  |        |         |  |            |         |  |         |        |   |  |        |  
|Total interest-bearing liabilities                                                |  |                                         | 730,319 |            |      | 7,309  |         |  | 2.02   |         |  |            | 723,933 |  |         | 9,882  |   |  | 2.75   |  
|                                                                                  |  |                                         |         |            |      |        |         |  |        |         |  |            |         |  |         |        |   |  |        |  
|                                                                                  |  |                                         |         |            |      |       
|Noninterest-bearing liabilities                                                   |  |                                         | 71,310  |            |      |        |         |  |        |         |  |            | 65,063  |  |         |        |   |  |        |  
|                                                                                  |  |                                         |         |            |      |        |         |  |        |         |  |            |         |  |         |        |   |  |        |  
|Total liabilities                                                                 |  |                                         | 801,629 |            |      |        |         |  |        |         |  |            | 788,996 |  |         |        |   |  |        |  
|                                                                                  |  |                                         |         |            |      |       
|Total stockholders equity                                                        |  |                                         | 80,108  |            |      |        |         |  |        |         |  |            | 73,875  |  |         |        |   |  |        |  
|                                                                                  |  |                                         |         |            |      |        |         |  |        |         |  |            |         |  |         |        |   |  |        |  
|                                                                                  |  |                                         |         |            |      |       
|Total liabilities and stockholders equity                                        |  | $                                       | 881,737 |            |      |        |         |  |        |         |  | $          | 862,871 |  |         |        |   |  |        |  
|                                                                                  |  |                                         |         |            |      |        |         |  |        |         |  |            |         |  |         |        |   |  |        |  
|                                                                                  |  |                                         |         |            |      |       
|Net interest-earning assets                                                       |  | $                                       | 98,770  |            |      |        |         |  |        |         |  | $          | 92,443  |  |         |        |   |  |        |  
|                                                                                  |  |                                         |         |            |      |        |         |  |        |         |  |            |         |  |         |        |   |  |        |  
|                                                                                  |  |                                         |         |            |      |       
|Tax equivalent net interest income
(3)                                            |  |                                         |         |            |      | 12,968 |         |  |        |         |  |            |         |  |         | 12,325 |   |  |        |  
|Tax equivalent interest rate spread
(6)                                           |  |                                         |         |            |      |        |         |  | 2.91   | %       |  |            |         |  |         |        |   |  | 2.74   | %
|                                                                                  |  |                                         |         |            |      |        |         |  |        |         |  |            |         |  |         |        |   |  |        |  
|Tax equivalent net interest margin as a percentage of interest-earning assets
(7) |  |                                         |         |            |      |        |         |  | 3.15   | %       |  |            |         |  |         |        |   |  | 3.04   | %
|                                                                                  |  |                                         |         |            |      |        |         |  |        |         |  |            |         |  |         |        |   |  |        |  
|Average of interest-earning assets to average interest-bearing liabilities        |  |                                         |         |            |      |        |         |  | 113.52 | %       |  |            |         |  |         |        |   |  | 112.77 | %
|                                                                                  |  |                                         |         |            |      |        |         |  |        |         |  |            |         |  |         |        |   |  |        |  
|Less tax equivalent adjustment
(3)                                                |  |                                         |         |            |      | (10    | )       |  |        |         |  |            |         |  |         | (3     | ) |  |        |  
|                                                                                  |  |                                         |         |            |      |        |         |  |        |         |  |            |         |  |         |        |   |  |        |  
|Net interest income                                                               |  |                                         |         |            | $    | 12,958 |         |  |        |         |  |            |         |  | $       | 12,322 |   |  |        |  
|                                                                                  |  |                                         |         |            |      |        |         |  |        |         |  |            |         |  |         |        |   |  |        |  



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

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

|(3) | Securities income and net interest 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 income to agree to the amounts reported in the statements of income.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

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

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

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



31



---

##### Table of Contents

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



|                                   |  |                            |        |   |                            |   |      |     |  |   |        |   |  |        |        |   |     |   |      |   |  |   |        |  
|---------------------------------- |  | -------------------------- | ------ | - | -------------------------- | - | ---- | --- |  | - | ------ | - |  | ------ | ------ | - | --- | - | ---- | - |  | - | ------ | -
|                                   |  | Three Months Ended         |        |   | Six Months Ended           |  
|                                   |  | June 30, 2010 and 2009     |        |   | June 30, 2010 and 2009     |  
|                                   |  | Increase (Decrease) Due To |        |   | Increase (Decrease) Due To |  
|(Dollars in Thousands)             |  | Rate                       |        |   | Volume                     |   |      | Net |  |   | Rate   |   |  | Volume |        |   | Net |  
|Interest-earning assets:           |  |                            |        |   |                            |   |      |     |  |   |        |   |  |        |        |   |     |   |      |   |  |   |        |  
|Interest and dividend income:      |  |                            |        |   |                            |   |      |     |  |   |        |   |  |        |        |   |     |   |      |   |  |   |        |  
|Loans(1)(2)                        |  | $                          | (390   | ) |                            | $ | (270 | )   |  | $ | (660   | ) |  | $      | (650   | ) |     | $ | (533 | ) |  | $ | (1,183 | )
|Securities(3)                      |  |                            | (685   | ) |                            |   | 229  |     |  |   | (456   | ) |  |        | (1,216 | ) |     |   | 497  |   |  |   | (719   | )
|Other interest-earning assets      |  |                            | (17    | ) |                            |   | 18   |     |  |   | 1      |   |  |        | (56    | ) |     |   | 28   |   |  |   | (28    | )
|                                   |  |                            |        |   |                            |   |      |     |  |   |        |   |  |        |        |   |     |   |      |   |  |   |        |  
|Total interest-earning assets      |  |                            | (1,092 | ) |                            |   | (23  | )   |  |   | (1,115 | ) |  |        | (1,922 | ) |     |   | (8   | ) |  |   | (1,930 | )
|                                   |  |                            |        |   |                            |   |      |     |  |   |        |   |  |        |        |   |     |   |      |   |  |   |        |  
|                                   |  |                            |        |   |                            |  
|Interest-bearing liabilities:      |  |                            |        |   |                            |   |      |     |  |   |        |   |  |        |        |   |     |   |      |   |  |   |        |  
|Interest expense:                  |  |                            |        |   |                            |   |      |     |  |   |        |   |  |        |        |   |     |   |      |   |  |   |        |  
|Deposits(4)                        |  |                            | (931   | ) |                            |   | 7    |     |  |   | (924   | ) |  |        | (1,770 | ) |     |   | 56   |   |  |   | (1,714 | )
|Federal Home Loan Bank advances    |  |                            | (186   | ) |                            |   | (218 | )   |  |   | (404   | ) |  |        | (366   | ) |     |   | (443 | ) |  |   | (809   | )
|Subordinated debt                  |  |                            | (18    | ) |                            |   |     |     |  |   | (18    | ) |  |        | (50    | ) |     |   |     |   |  |   | (50    | )
|                                   |  |                            |        |   |                            |   |      |     |  |   |        |   |  |        |        |   |     |   |      |   |  |   |        |  
|Total interest-bearing liabilities |  |                            | (1,135 | ) |                            |   | (211 | )   |  |   | (1,346 | ) |  |        | (2,186 | ) |     |   | (387 | ) |  |   | (2,573 | )
|                                   |  |                            |        |   |                            |   |      |     |  |   |        |   |  |        |        |   |     |   |      |   |  |   |        |  
|                                   |  |                            |        |   |                            |  
|Change in net interest income
(3)  |  | $                          | 43     |   |                            | $ | 188  |     |  | $ | 231    |   |  | $      | 264    |   |     | $ | 379  |   |  | $ | 643    |  
|                                   |  |                            |        |   |                            |   |      |     |  |   |        |   |  |        |        |   |     |   |      |   |  |   |        |  



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

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

|(3) | Securities income and net interest 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 income to agree to the amount reported in the statements of income.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

Provision for Loan Losses. The provision for loan losses decreased $1.2 million and $1.5 million for the three and six months ended
June 30, 2010, respectively, compared to the same periods in 2009. The lower provision in 2010 resulted from declines in nonperforming loans and net loan charge-offs, predominately in commercial real estate loans. At June 30, 2010,
nonperforming loans totaled $4.3 million, compared to $8.6 million at June 30, 2009. Specific reserves relating to nonperforming loans increased to $516,000 at June 30, 2010, compared to $252,000 at June 30, 2009. Net loan charge-offs
were $167,000 and $435,000 for the three and six months ended June 30, 2010, respectively, compared to $1.7 million and $3.0 million for the three and six months ended June 30, 2009, respectively. Higher loan charge-offs during the first
half of 2009 primarily related to two commercial construction relationships aggregating $2.3 million.



32



---

##### Table of Contents

Noninterest Income. The following table shows the components of noninterest income and the
dollar and percentage changes for the periods presented.



|                                                              |  |                             |       |   |                           |   |        |  |   |         |   |  |       |   |  |      |       |   |        |   |       |         |  |   |      |   |  |        |  
|------------------------------------------------------------- |  | --------------------------- | ----- | - | ------------------------- | - | ------ |  | - | ------- | - |  | ----- | - |  | ---- | ----- | - | ------ | - | ----- | ------- |  | - | ---- | - |  | ------ | -
|                                                              |  | Three Months Ended June 30, |       |   | Six Months Ended June 30, |  
|                                                              |  |                             |       |   |                           |   | Dollar |  |   | Percent |   |  |       |   |  |      |       |   | Dollar |   |       | Percent | 
|(Dollars in Thousands)                                        |  | 2010                        |       |   | 2009                      |   | Change |  |   | Change  |   |  | 2010  |   |  | 2009 |       |   | Change |   |       | Change  | 
|Service fees                                                  |  | $                           | 1,318 |   |                           | $ | 1,257  |  | $ | 61      |   |  | 4.9   | % |  | $    | 2,577 |   |        | $ | 2,448 |         |  | $ | 129  |   |  | 5.3    | %
|Wealth management fees                                        |  |                             | 1,035 |   |                           |   | 969    |  |   | 66      |   |  | 6.8   |   |  |      | 2,054 |   |        |   | 1,927 |         |  |   | 127  |   |  | 6.6    |  
|Increase in cash surrender value of bank-owned life insurance |  |                             | 72    |   |                           |   | 73     |  |   | (1      | ) |  | (1.4  | ) |  |      | 143   |   |        |   | 146   |         |  |   | (3   | ) |  | (2.1   | )
|Net gain on sale of securities                                |  |                             | 414   |   |                           |   | 117    |  |   | 297     |   |  | 253.8 |   |  |      | 681   |   |        |   | 254   |         |  |   | 427  |   |  | 168.1  |  
|Net impairment losses recognized in earnings                  |  |                             | (161  | ) |                           |   |       |  |   | (161    | ) |  | 0.0   |   |  |      | (332  | ) |        |   | (150  | )       |  |   | (182 | ) |  | 121.3  |  
|Mortgage banking fees                                         |  |                             | 225   |   |                           |   | 199    |  |   | 26      |   |  | 13.1  |   |  |      | 355   |   |        |   | 338   |         |  |   | 17   |   |  | 5.0    |  
|Net gain on disposal of equipment                             |  |                             |      |   |                           |   |       |  |   |        |   |  | 0.0   |   |  |      |      |   |        |   | 104   |         |  |   | (104 | ) |  | (100.0 | )
|Other                                                         |  |                             | 34    |   |                           |   | 56     |  |   | (22     | ) |  | (39.3 | ) |  |      | 72    |   |        |   | (252  | )       |  |   | 324  |   |  | (128.6 | )
|                                                              |  |                             |       |   |                           |   |        |  |   |         |   |  |       |   |  |      |       |   |        |   |       |         |  |   |      |   |  |        |  
|Total noninterest income                                      |  | $                           | 2,937 |   |                           | $ | 2,671  |  | $ | 266     |   |  | 10.0  | % |  | $    | 5,550 |   |        | $ | 4,815 |         |  | $ | 735  |   |  | 15.3   | %
|                                                              |  |                             |       |   |                           |   |        |  |   |         |   |  |       |   |  |      |       |   |        |   |       |         |  |   |      |   |  |        |  

Contributing to higher noninterest income for 2010 were increases in the net gain on the sale of securities, wealth
management fees, service fees and, for the six month period, other noninterest income. Increases in the net gains on the sale of securities totaling $297,000 and $427,000 were reported for the three and six months ended June 30, 2010,
respectively, compared to the same periods in 2009. Higher wealth management fees of $66,000 and $127,000 resulted from an increase in trust service fees for the three and six months ended June 30, 2010, respectively, compared to the same
periods in 2009. Service fees increased $61,000 and $129,000 for the quarter and first half of 2010 primarily due to higher electronic banking usage. The Company recorded other-than-temporary impairment charges on certain securities totaling
$161,000 and $332,000 for the three and six months ended June 30, 2010, respectively, compared to $0 and $150,000 for the three and six months ended June 30, 2009, respectively. The increase in other noninterest income for the first half
of 2010 was the result of impairment charges of $12,000 for the six months ended June 30, 2010 that were recorded to reduce the carrying value in the Banks investment in two small business investment company limited partnerships compared
to $336,000 for the six months ended June 30, 2009.

Noninterest Expenses. The following table shows the components
of noninterest expenses and the dollar and percentage changes for the periods presented.



|                                                  |  |                             |       |      |                           |        |  |   |         |   |  |       |    |      |   |        |  |   |         |  |   |      |   |  |       |  
|------------------------------------------------- |  | --------------------------- | ----- | ---- | ------------------------- | ------ |  | - | ------- | - |  | ----- | -- | ---- | - | ------ |  | - | ------- |  | - | ---- | - |  | ----- | -
|                                                  |  | Three Months Ended June 30, |       |      | Six Months Ended June 30, |       
|                                                  |  |                             |       |      |                           | Dollar |  |   | Percent |   |  |       |    |      |   | Dollar |  |   | Percent | 
|(Dollars in Thousands)                            |  | 2010                        |       | 2009 |                           | Change |  |   | Change  |   |  | 2010  |    | 2009 |   | Change |  |   | Change  | 
|Salaries and employee benefits                    |  | $                           | 4,070 |      | $                         | 4,248  |  | $ | (178    | ) |  | (4.2  | )% |      | $ | 8,211  |  | $ | 8,202   |  | $ | 9    |   |  | 0.1   | %
|Occupancy and equipment                           |  |                             | 1,343 |      |                           | 1,351  |  |   | (8      | ) |  | (0.6  | )  |      |   | 2,764  |  |   | 2,806   |  |   | (42  | ) |  | (1.5  | )
|Computer and electronic banking services          |  |                             | 953   |      |                           | 832    |  |   | 121     |   |  | 14.5  |    |      |   | 1,894  |  |   | 1,623   |  |   | 271  |   |  | 16.7  |  
|Outside professional services                     |  |                             | 287   |      |                           | 249    |  |   | 38      |   |  | 15.3  |    |      |   | 536    |  |   | 469     |  |   | 67   |   |  | 14.3  |  
|Marketing and advertising                         |  |                             | 208   |      |                           | 201    |  |   | 7       |   |  | 3.5   |    |      |   | 390    |  |   | 409     |  |   | (19  | ) |  | (4.6  | )
|Supplies                                          |  |                             | 124   |      |                           | 131    |  |   | (7      | ) |  | (5.3  | )  |      |   | 265    |  |   | 282     |  |   | (17  | ) |  | (6.0  | )
|FDIC deposit insurance and regulatory assessments |  |                             | 329   |      |                           | 690    |  |   | (361    | ) |  | (52.3 | )  |      |   | 668    |  |   | 872     |  |   | (204 | ) |  | (23.4 | )
|Other                                             |  |                             | 851   |      |                           | 743    |  |   | 108     |   |  | 14.5  |    |      |   | 1,574  |  |   | 1,376   |  |   | 198  |   |  | 14.4  |  
|                                                  |  |                             |       |      |                           |        |  |   |         |   |  |       |    |      |   |        |  |   |         |  |   |      |   |  |       |  
|Total noninterest expenses                        |  | $                           | 8,165 |      | $                         | 8,445  |  | $ | (280    | ) |  | (3.3  | )% |      | $ | 16,302 |  | $ | 16,039  |  | $ | 263  |   |  | 1.6   | %
|                                                  |  |                             |       |      |                           |        |  |   |         |   |  |       |    |      |   |        |  |   |         |  |   |      |   |  |       |  

Salaries and employee benefits were lower for the quarter ended June 30, 2010 partly due to a reduction in share-based
compensation expense. For both the three and six months ended June 30, 2010, the Company



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experienced increases in costs associated with other real estate owned and in computer and electronic banking services expense as a result of increased telecommunications costs and transaction
activity. Noninterest expenses for the second quarter of 2009 reflected an FDIC-imposed industry-wide 5 basis point special assessment of $393,000 and prepayment penalties totaling $111,000 for the early extinguishment of Federal Home Loan Bank
borrowings.

Income Tax Provision. For the three and six months ended June 30, 2010, the Companys income tax expense
increased $630,000 and $847,000, respectively, due to increases in pre-tax income. The effective tax rate for the three months ended June 30, 2010 and 2009 was 32.0% and 32.3%, respectively. The effective tax rate for the six months ended
June 30, 2010 and 2009 was 32.4% and 32.3%, 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 FHLB and subordinated debt borrowings. While maturities and scheduled amortization of loans and securities are predictable sources of funds, deposit flows,
mortgage prepayments and loan and security sales are greatly influenced by general interest rates, economic conditions and competition.

The
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 June 30, 2010, cash and cash equivalents
totaled $46.1 million. Interest-bearing deposits and federal funds sold totaled $32.8 million.

Securities classified as available for sale,
which provide additional sources of liquidity, totaled $182.2 million at June 30, 2010. In addition, at June 30, 2010, the Company had a potential borrowing capacity of $187.7 million from the FHLB, which included overnight lines of credit
of $10.0 million. On that date, the Company had FHLB advances outstanding of $114.2 million and no overnight advances outstanding. Additionally, the Company has the ability to access the Federal Reserve Banks Discount Window on a
collateralized basis. The Company believes that its liquid assets combined with the available line from the FHLB provide adequate liquidity to meet its current financial obligations.

The Companys primary investing activities are the origination of loans and the purchase of securities and loans. For the six months ended
June 30, 2010, the Company originated $50.6 million of loans and purchased $58.5 million of securities and $19.6 million of loans. For the year ended December 31, 2009, the Company originated $146.3 million of loans and purchased $95.1
million of securities and $40.9 million of loans.

Financing activities consist primarily of activity in deposit accounts and in Federal Home
Loan Bank advances. The Company utilizes Federal Home Loan Bank advances and deposits to fund asset growth. The Company experienced a net increase in total deposits, offset by a decrease in mortgagors and investors escrow accounts, of
$14.4 million for the six months ended June 30, 2010 and a net increase in total deposits, including mortgagors and investors escrow accounts, of $38.1 million for the year ended December 31, 2009, respectively. Certificates of
deposit due within one year of June 30, 2010 totaled $175.1 million, or 26.0%, of total deposits. Deposit flows are affected by the overall level of interest rates, the interest rates and 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 decrease of $1.9 million in Federal Home Loan Bank advances for the six months ended June 30, 2010 and $23.5 million for the year ended December 31, 2009.

In February 2008, the Companys Board of Directors approved the repurchase of up to 596,000 shares of the Companys outstanding stock. For the
six months ended June 30, 2010, the Company repurchased 11,706



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shares of the Companys common stock, which represents the shares withheld from employees to satisfy tax withholding obligations, at a cost of $74,000. At June 30, 2010, the remaining
shares that may be repurchased under this plan totaled 499,336. Additional discussion about the Companys liquidity and capital resources is contained in Item 7 in the Companys 2009 Annual Report on Form 10-K.

SI Financial Group, Inc. is a separate legal entity from the Bank and must provide for its own liquidity. In addition to its operating expenses, SI
Financial Group is responsible for paying any dividends declared to its shareholders and making payments on its subordinated debentures. SI Financial Group also has repurchased shares of its common stock. SI Financial Groups primary sources of
funds are interest and dividends on securities and dividends received from the Bank. The amount of dividends that the Bank may declare and pay to SI Financial Group in any calendar year, without the receipt of prior approval from the OTS but with
prior notice to the OTS, cannot exceed net income for that year to date plus retained net income (as defined) for the preceding two calendar years. At June 30, 2010, SI Financial Group had cash and cash equivalents of $4.6 million.

Payments Due Under Contractual Obligations

Information relating to payments due under contractual obligations is presented in the Companys Form 10-K for the year ended December 31, 2009.
There were no material changes in the Companys payments due under contractual obligations between December 31, 2009 and June 30, 2010.

Off-Balance Sheet Arrangements

In the normal course of operations, the Company engages in a variety of financial transactions that, in accordance with GAAP, are not recorded on 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 amounts of potential accounting
loss should the contract be fully drawn upon, the customer defaults and the value of any existing collateral becomes worthless. The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance
sheet instruments. Financial instruments whose contract amounts represent credit risk at June 30, 2010 and December 31, 2009 are as follows:



|                                        |  |          |        |              |   |       
|--------------------------------------- |  | -------- | ------ | ------------ | - | ------
|                                        |  | June 30, |        | December 31,
|(Dollars in Thousands)                  |  | 2010     |        | 2009        
|Commitments to extend credit:(1)        |  |          |        |              |   |       
|Future loan commitments                 |  | $        | 14,057 |              | $ | 8,648 
|Undisbursed construction loans          |  |          | 9,272  |              |   | 9,843 
|Undisbursed home equity lines of credit |  |          | 20,908 |              |   | 18,733
|Undisbursed commercial lines of credit  |  |          | 13,369 |              |   | 12,390
|Overdraft protection lines              |  |          | 1,390  |              |   | 1,425 
|Standby letters of credit(2)            |  |          | 717    |              |   | 784   
|                                        |  |          |        |              |   |       
|Total commitments                       |  | $        | 59,713 |              | $ | 51,823
|                                        |  |          |        |              |   |       



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

The Bank is a limited partner in two Small Business Investment Corporations (SBIC). At June 30, 2010, the Banks remaining
off-balance sheet commitment for the capital investment in the SBICs was $757,000. The Bank recognized write-downs of $12,000 and $336,000 on its investment in the SBICs during the six months ended June 30, 2010 and 2009, respectively.



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At June 30, 2010, the Bank had outstanding commitments to purchase $6.8 million in guaranteed USDA and
SBA loans.

For the six months ended June 30, 2010, with the exception of the aforementioned commitments, the Company
did not engage in any additional off-balance sheet transactions reasonably likely to have a material effect on the Companys financial condition, results of operations or cash flows. See Notes 6 and 12 to the consolidated financial
statements contained in the Companys 2009 Annual Report on Form 10-K.



|Item 3. | Quantitative and Qualitative Disclosures About Market Risk.
|------- | -----------------------------------------------------------

Not applicable as the Company is a smaller reporting company.



|Item 4(T). | 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 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. No changes in the Companys internal control over financial reporting occurred during the quarter ended
June 30, 2010 that have materially affected, or are reasonably likely to materially affect, the Companys internal control over financial reporting.

PART II. OTHER INFORMATION



|Item 1. | Legal Proceedings.
|------- | ------------------

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



|Item 1A. | Risk Factors.
|-------- | -------------

Recently enacted
regulatory reform may have a material impact on our operations.On July 21, 2010, the President signed into law The Dodd-Frank Wall Street Reform and Consumer Protection Act (the Dodd-Frank Act). The Dodd-Frank Act
restructures the regulation of depository institutions. Under the Dodd-Frank Act, the Office of Thrift Supervision will be merged into the Office of the Comptroller of the Currency, which regulates national banks. Savings and loan holding companies
will be regulated by the Federal Reserve Board. The Dodd-Frank Act contains various provisions designed to enhance the regulation of depository institutions and prevent the recurrence of a financial crisis such as occurred in 2008-2009. Also
included is the creation of a new federal agency to administer and enforce consumer and fair lending laws, a function that is now performed by the depository institution regulators. The federal preemption of state laws currently accorded federally
chartered depository institutions will be reduced as well. The Dodd-Frank Act also will impose consolidated capital requirements on savings and loan holding companies effective in five years, which will limit our ability to borrow at the holding
company and invest the proceeds from such borrowings as capital in the Bank that could be leveraged to support additional



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growth. The Dodd-Frank Act permanently raises deposit insurance levels to $250,000, retroactive to January 1, 2008, and extends for two years the Transaction Account Guarantee Program, which
will become mandatory for all insured depository institutions. The full impact of the Dodd-Frank Act on our business and operations will not be known for years until regulations implementing the statute are written and adopted. The Dodd-Frank Act
may have a material impact on our operations, particularly through increased compliance costs resulting from possible future consumer and fair lending regulations.

Other than the aforementioned risk factor, there are no material changes from the risk factors set forth under Part I, Item 1A. Risk
Factors in the Companys Annual Report on Form 10-K for the year ended December 31, 2009, which could materially and adversely affect the Companys business, financial condition or future results. The risks described in the
Companys Annual Report on Form 10-K are not the only risks that the Company faces. Additional risks and uncertainties not currently known to the Company or that the Company currently deems to be immaterial also may materially adversely affect
the Companys business, financial condition and/or operating results.



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

The Companys repurchases of equity securities for the three months ended June 30, 2010 were as follows:



|                   |  |                 |  |           |      |                  |        |                  |        
|------------------ |  | --------------- |  | --------- | ---- | ---------------- | ------ | ---------------- | -------
|                   |  |                 |  |           |      | Total Number     |        | Maximum         
|                   |  |                 |  |           |      | of Shares        |        | Number of Shares
|                   |  | Total           |  | Average   |      | Purchased as     |        | that May Yet be 
|                   |  | Number of       |  | Price     |      | Part of Publicly |        | Purchased Under 
|                   |  | Shares          |  | Paid      |      | Announced Plans  |        | the Plans or    
|Period             |  | Purchased(1)(2) |  | Per Share |      | or Programs      |        | Programs        
|April 1 - 30, 2010 |  |                |  | $         |     |                  |       |                  | 499,336
|May 1 - 31, 2010   |  | 11,226          |  |           | 6.34 |                  | 11,226 |                  | 499,336
|June 1 - 30, 2010  |  |                |  |           |     |                  |       |                  | 499,336
|                   |  |                 |  |           |      |                  |        |                  |        
|Total              |  | 11,226          |  | $         | 6.34 |                  | 11,226 |                  |        
|                   |  |                 |  |           |      |                  |        |                  |        



|(1) | On February 20, 2008, the Company announced that the Board of Directors had approved a stock repurchase program authorizing the Company to
repurchase up to 596,000 shares of its common stock. The repurchase program will continue until it is completed or terminated by the Companys Board of Directors.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | This table includes 11,226 shares withheld from employees to satisfy tax withholding requirements upon the vesting of restricted stock awards. These
shares are not included in the total number of shares purchased as part of the Companys publicly announced plans.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|Item 3. | Defaults Upon Senior Securities.
|------- | --------------------------------

None.



|Item 4. | [Removed and Reserved].
|------- | -----------------------



|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.(2)                                     
|     | 
|3.3  |  | Amendment to Bylaws of SI Financial Group, Inc. re: age limitation(3)     
|     | 
|3.4  |  | Amendment to Bylaws of SI Financial Group, Inc. re: number of directors(4)
|     | 
|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         



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|     |  |                                      
|---- |  | -------------------------------------
|     | 
|32.0 |  | 18 U.S.C. Section 1350 Certifications



|(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.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | Incorporated by reference into this document from the Exhibit filed with the Companys Form 8-K, filed with the Securities and Exchange Commission
on May 8, 2008.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) | Incorporated by reference into this document from the Exhibit filed with the Companys Form 8-K, filed with the Securities and Exchange Commission
on November 19, 2009.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(4) | Incorporated by reference into this document from the Exhibit filed with the Companys Form 8-K, filed with the Securities and Exchange Commission
on January 28, 2010.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------



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SIGNATURES

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



|                      |  |  |  |                                             
|--------------------- |  |  |  | --------------------------------------------
|                      |  |  |  | SI FINANCIAL GROUP, INC.                    
|                      |  | 
|Date: August 12, 2010 |  |  |  | /S/    RHEO A.
BROUILLARD                   
|                      |  |  |  | Rheo A. Brouillard                          
|                      |  |  |  | President and Chief Executive Officer       
|                      |  |  |  | (principal executive officer)               
|                      |  | 
|Date: August 12, 2010 |  |  |  | /S/    BRIAN J.
HULL                        
|                      |  |  |  | Brian J. Hull                               
|                      |  |  |  | Executive Vice President, Treasurer and     
|                      |  |  |  | Chief Financial Officer                     
|                      |  |  |  | (principal financial and accounting officer)



39