##### 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 March 31, 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 May 6, 2010, there were 11,788,722 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 March 31, 2010 and December 31, 2009                                 |  | 1       
|           |  |                                                                                                    
|           |  | Consolidated Statements of Income for the three months ended March 31, 2010 and 2009                |  | 2       
|           |  |                                                                                                    
|           |  | Consolidated Statement of Changes in Stockholders Equity for the three months ended March 31, 2010 |  | 3       
|           |  |                                                                                                    
|           |  | Consolidated Statements of Cash Flows for the three months ended March 31, 2010 and 2009            |  | 4       
|           |  |                                                                                                    
|           |  | Notes to Consolidated Financial Statements                                                          |  | 6       
|           |  |                                                                                                    
|Item 2.    |  | Managements Discussion and Analysis of Financial Condition and Results of Operations               |  | 23      
|           |  |                                                                                                    
|Item 3.    |  | Quantitative and Qualitative Disclosures about Market Risk                                          |  | 32      
|           |  |                                                                                                    
|Item 4T.   |  | Controls and Procedures                                                                             |  | 32      
|           |  |                                                                                                    
|PART II.   |  | OTHER INFORMATION                                                                                   |  |         
|           |  |                                                                                                    
|Item 1.    |  | Legal Proceedings                                                                                   |  | 32      
|           |  |                                                                                                    
|Item 1A.   |  | Risk Factors                                                                                        |  | 32      
|           |  |                                                                                                    
|Item 2.    |  | Unregistered Sales of Equity Securities and Use of Proceeds                                         |  | 33      
|           |  |                                                                                                    
|Item 3.    |  | Defaults Upon Senior Securities                                                                     |  | 33      
|           |  |                                                                                                    
|Item 4.    |  | [Removed and Reserved]                                                                              |  | 33      
|           |  |                                                                                                    
|Item 5.    |  | Other Information                                                                                   |  | 33      
|           |  |                                                                                                    
|Item 6.    |  | Exhibits                                                                                            |  | 33      
|           | 
|SIGNATURES |  | 34                                                                                                 



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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)



|                                                                                                                                                                                          |  |               |         |   |                  |   |         |  
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------- | ------- | - | ---------------- | - | ------- | -
|                                                                                                                                                                                          |  | March 31,2010 |         |   | December 31,2009 |  
|ASSETS:                                                                                                                                                                                   |  |               |         |   |                  |   |         |  
|Cash and due from banks:                                                                                                                                                                  |  |               |         |   |                  |   |         |  
|Noninterest-bearing                                                                                                                                                                       |  | $             | 14,109  |   |                  | $ | 12,889  |  
|Interest-bearing                                                                                                                                                                          |  |               | 6,084   |   |                  |   | 2,350   |  
|Federal funds sold                                                                                                                                                                        |  |               | 12,850  |   |                  |   | 8,965   |  
|                                                                                                                                                                                          |  |               |         |   |                  |   |         |  
|Total cash and cash equivalents                                                                                                                                                           |  |               | 33,043  |   |                  |   | 24,204  |  
|                                                                                                                                                                                          |  |              
|Available for sale securities, at fair value                                                                                                                                              |  |               | 188,276 |   |                  |   | 183,562 |  
|Loans held for sale                                                                                                                                                                       |  |               | 2,052   |   |                  |   | 396     |  
|Loans receivable (net of allowance for loan losses of $4,793 at March 31, 2010 and $4,891 at December 31,
2009)                                                                           |  |               | 600,683 |   |                  |   | 607,692 |  
|Federal Home Loan Bank stock, at cost                                                                                                                                                     |  |               | 8,388   |   |                  |   | 8,388   |  
|Bank-owned life insurance                                                                                                                                                                 |  |               | 8,805   |   |                  |   | 8,734   |  
|Premises and equipment, net                                                                                                                                                               |  |               | 12,617  |   |                  |   | 12,966  |  
|Goodwill and other intangibles                                                                                                                                                            |  |               | 4,187   |   |                  |   | 4,195   |  
|Accrued interest receivable                                                                                                                                                               |  |               | 3,372   |   |                  |   | 3,341   |  
|Deferred tax asset, net                                                                                                                                                                   |  |               | 5,341   |   |                  |   | 6,078   |  
|Other real estate owned                                                                                                                                                                   |  |               | 4,206   |   |                  |   | 3,680   |  
|Prepaid FDIC deposit insurance assessment                                                                                                                                                 |  |               | 3,308   |   |                  |   | 3,549   |  
|Other assets                                                                                                                                                                              |  |               | 7,821   |   |                  |   | 5,569   |  
|                                                                                                                                                                                          |  |               |         |   |                  |   |         |  
|Total assets                                                                                                                                                                              |  | $             | 882,099 |   |                  | $ | 872,354 |  
|                                                                                                                                                                                          |  |               |         |   |                  |   |         |  
|                                                                                                                                                                                          |  |              
|LIABILITIES AND STOCKHOLDERS EQUITY:                                                                                                                                                     |  |               |         |   |                  |   |         |  
|Liabilities:                                                                                                                                                                              |  |               |         |   |                  |   |         |  
|Deposits:                                                                                                                                                                                 |  |               |         |   |                  |   |         |  
|Noninterest-bearing                                                                                                                                                                       |  | $             | 61,648  |   |                  | $ | 65,407  |  
|Interest-bearing                                                                                                                                                                          |  |               | 608,122 |   |                  |   | 593,380 |  
|                                                                                                                                                                                          |  |               |         |   |                  |   |         |  
|Total deposits                                                                                                                                                                            |  |               | 669,770 |   |                  |   | 658,787 |  
|                                                                                                                                                                                          |  |              
|Mortgagors and investors escrow accounts                                                                                                                                                |  |               | 1,890   |   |                  |   | 3,591   |  
|Federal Home Loan Bank advances                                                                                                                                                           |  |               | 114,100 |   |                  |   | 116,100 |  
|Junior subordinated debt owed to unconsolidated trust                                                                                                                                     |  |               | 8,248   |   |                  |   | 8,248   |  
|Accrued expenses and other liabilities                                                                                                                                                    |  |               | 8,425   |   |                  |   | 8,166   |  
|                                                                                                                                                                                          |  |               |         |   |                  |   |         |  
|Total liabilities                                                                                                                                                                         |  |               | 802,433 |   |                  |   | 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; 11,788,722 and 11,789,202 shares
outstanding at March 31, 2010 and December 31, 2009, respectively) |  |               | 126     |   |                  |   | 126     |  
|Additional paid-in capital                                                                                                                                                                |  |               | 52,242  |   |                  |   | 52,230  |  
|Unallocated common shares held by ESOP                                                                                                                                                    |  |               | (3,149  | ) |                  |   | (3,230  | )
|Unearned restricted shares                                                                                                                                                                |  |               | (84     | ) |                  |   | (193    | )
|Retained earnings                                                                                                                                                                         |  |               | 39,376  |   |                  |   | 38,883  |  
|Accumulated other comprehensive loss                                                                                                                                                      |  |               | (877    | ) |                  |   | (2,389  | )
|Treasury stock, at cost (775,028 and 774,548 shares at March 31, 2010 and December 31, 2009,
respectively)                                                                                |  |               | (7,968  | ) |                  |   | (7,965  | )
|                                                                                                                                                                                          |  |               |         |   |                  |   |         |  
|Total stockholders equity                                                                                                                                                                |  |               | 79,666  |   |                  |   | 77,462  |  
|                                                                                                                                                                                          |  |               |         |   |                  |   |         |  
|Total liabilities and stockholders equity                                                                                                                                                |  | $             | 882,099 |   |                  | $ | 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 INCOME

(Dollars in Thousands, Except Per Share Amounts / Unaudited)



|                                                              |      |                             |        |      |  |   |        |  
|------------------------------------------------------------- | ---- | --------------------------- | ------ | ---- |  | - | ------ | -
|                                                              |      | Three MonthsEnded March 31, |       
|                                                              | 2010 |                             |        | 2009 | 
|Interest and dividend income:                                 |      |                             |        |      |  |   |        |  
|Loans, including fees                                         |      | $                           | 8,411  |      |  | $ | 8,934  |  
|Securities:                                                   |      |                             |        |      |  |   |        |  
|Taxable interest                                              |      |                             | 1,755  |      |  |   | 2,025  |  
|Tax-exempt interest                                           |      |                             | 15     |      |  |   | 3      |  
|Dividends                                                     |      |                             | 5      |      |  |   | 14     |  
|Other                                                         |      |                             | 23     |      |  |   | 52     |  
|                                                              |      |                             |        |      |  |   |        |  
|Total interest and dividend income                            |      |                             | 10,209 |      |  |   | 11,028 |  
|                                                              |      |                             |        |      |  |   |        |  
|                                                              |      |                            
|Interest expense:                                             |      |                             |        |      |  |   |        |  
|Deposits                                                      |      |                             | 2,664  |      |  |   | 3,454  |  
|Federal Home Loan Bank advances                               |      |                             | 1,076  |      |  |   | 1,481  |  
|Subordinated debt                                             |      |                             | 39     |      |  |   | 71     |  
|                                                              |      |                             |        |      |  |   |        |  
|Total interest expense                                        |      |                             | 3,779  |      |  |   | 5,006  |  
|                                                              |      |                             |        |      |  |   |        |  
|                                                              |      |                            
|Net interest income                                           |      |                             | 6,430  |      |  |   | 6,022  |  
|                                                              |      |                            
|Provision for loan losses                                     |      |                             | 170    |      |  |   | 490    |  
|                                                              |      |                             |        |      |  |   |        |  
|                                                              |      |                            
|Net interest income after provision for loan losses           |      |                             | 6,260  |      |  |   | 5,532  |  
|                                                              |      |                             |        |      |  |   |        |  
|                                                              |      |                            
|Noninterest income:                                           |      |                             |        |      |  |   |        |  
|Total other-than-temporary impairment losses on securities    |      |                             | (378   | )    |  |   | (150   | )
|Portion of losses recognized in other comprehensive income    |      |                             | 207    |      |  |   |       |  
|                                                              |      |                             |        |      |  |   |        |  
|Net impairment losses recognized in earnings                  |      |                             | (171   | )    |  |   | (150   | )
|Service fees                                                  |      |                             | 1,259  |      |  |   | 1,191  |  
|Wealth management fees                                        |      |                             | 1,019  |      |  |   | 958    |  
|Increase in cash surrender value of bank-owned life insurance |      |                             | 71     |      |  |   | 73     |  
|Net gain on sale of securities                                |      |                             | 267    |      |  |   | 137    |  
|Net gain on disposal of equipment                             |      |                             |       |      |  |   | 104    |  
|Mortgage banking fees                                         |      |                             | 130    |      |  |   | 139    |  
|Other                                                         |      |                             | 38     |      |  |   | (308   | )
|                                                              |      |                             |        |      |  |   |        |  
|Total noninterest income                                      |      |                             | 2,613  |      |  |   | 2,144  |  
|                                                              |      |                             |        |      |  |   |        |  
|                                                              |      |                            
|Noninterest expenses:                                         |      |                             |        |      |  |   |        |  
|Salaries and employee benefits                                |      |                             | 4,141  |      |  |   | 3,954  |  
|Occupancy and equipment                                       |      |                             | 1,421  |      |  |   | 1,455  |  
|Computer and electronic banking services                      |      |                             | 941    |      |  |   | 791    |  
|Outside professional services                                 |      |                             | 249    |      |  |   | 220    |  
|Marketing and advertising                                     |      |                             | 182    |      |  |   | 208    |  
|Supplies                                                      |      |                             | 141    |      |  |   | 151    |  
|FDIC deposit insurance and regulatory assessments             |      |                             | 339    |      |  |   | 182    |  
|Other                                                         |      |                             | 723    |      |  |   | 633    |  
|                                                              |      |                             |        |      |  |   |        |  
|Total noninterest expenses                                    |      |                             | 8,137  |      |  |   | 7,594  |  
|                                                              |      |                             |        |      |  |   |        |  
|                                                              |      |                            
|Income before income tax provision                            |      |                             | 736    |      |  |   | 82     |  
|Income tax provision                                          |      |                             | 243    |      |  |   | 26     |  
|                                                              |      |                             |        |      |  |   |        |  
|Net income                                                    |      | $                           | 493    |      |  | $ | 56     |  
|                                                              |      |                             |        |      |  |   |        |  
|                                                              |      |                            
|Net income per share:                                         |      |                             |        |      |  |   |        |  
|Basic                                                         |      | $                           | 0.04   |      |  | $ | 0.00   |  
|Diluted                                                       |      | $                           | 0.04   |      |  | $ | 0.00   |  

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 THREE MONTHS ENDED MARCH 31, 2010

(Dollars in Thousands, Except Share Amounts / Unaudited)



|                                                                                                          |        |              |         |                           |     |  |                                      |        |   |                           |   |        |                  |  |                                   |      |   |               |   |        |                          |   |        |   |  |   |        |   |  |   |        |  
|--------------------------------------------------------------------------------------------------------- | ------ | ------------ | ------- | ------------------------- | --- |  | ------------------------------------ | ------ | - | ------------------------- | - | ------ | ---------------- |  | --------------------------------- | ---- | - | ------------- | - | ------ | ------------------------ | - | ------ | - |  | - | ------ | - |  | - | ------ | -
|                                                                                                          |        | Common Stock |         | AdditionalPaid-in
Capital |     |  | UnallocatedCommon
Shares Heldby ESOP |        |   | UnearnedRestricted
Shares |   |        | RetainedEarnings |  | AccumulatedOtherComprehensiveLoss |      |   | TreasuryStock |   |        | TotalStockholdersEquity |  
|                                                                                                          | Shares |              | Dollars |                           |     |  |                                      |        |   |                          
|                                                                                                          |        |              |         |                           |     |  |                                      |        |  
|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                                                                                                |        |             |         |                           |    |  |                                      |       |   |                           |   |       |                  |  |                                   |     |   |               |   | 493    |                          |   |       |   |  |   |       |   |  |   | 493    |  
|Net unrealized gains on available for sale securities, net of reclassification adjustment and tax effects |        |             |         |                           |    |  |                                      |       |   |                           |   |       |                  |  |                                   |     |   |               |   |       |                          |   | 1,512  |   |  |   |       |   |  |   | 1,512  |  
|                                                                                                          |        |              |         |                           |     |  |                                      |        |   |                           |   |        |                  |  |                                   |      |   |               |   |        |                          |   |        |   |  |   |        |   |  |   |        |  
|Total comprehensive income                                                                                |        |              |         |                           |     |  |                                      |        |   |                           |   |        |                  |  |                                   |      |   |               |   |        |                          |   |        |   |  |   |        |   |  |   | 2,005  |  
|                                                                                                          |        |              |         |                           |     |  |                                      |        |  
|Treasury stock purchased                                                                                  |        |             |         |                           |    |  |                                      |       |   |                           |   |       |                  |  |                                   |     |   |               |   |       |                          |   |       |   |  |   | (3     | ) |  |   | (3     | )
|                                                                                                          |        |              |         |                           |     |  |                                      |        |  
|Restricted shares activity                                                                                |        |             |         |                           |    |  |                                      | 2      |   |                           |   |       |                  |  |                                   |     |   |               |   |       |                          |   |       |   |  |   |       |   |  |   | 2      |  
|                                                                                                          |        |              |         |                           |     |  |                                      |        |  
|Equity incentive plan shares earned                                                                       |        |             |         |                           |    |  |                                      | 46     |   |                           |   |       |                  |  |                                   | 109  |   |               |   |       |                          |   |       |   |  |   |       |   |  |   | 155    |  
|                                                                                                          |        |              |         |                           |     |  |                                      |        |  
|Committed to release 8,074 ESOP shares                                                                    |        |             |         |                           |    |  |                                      | (36    | ) |                           |   | 81     |                  |  |                                   |     |   |               |   |       |                          |   |       |   |  |   |       |   |  |   | 45     |  
|                                                                                                          |        |              |         |                           |     |  |                                      |        |   |                           |   |        |                  |  |                                   |      |   |               |   |        |                          |   |        |   |  |   |        |   |  |   |        |  
|                                                                                                          |        |              |         |                           |     |  |                                      |        |  
|Balance at March 31, 2010                                                                                 |        | 12,563,750   |         | $                         | 126 |  | $                                    | 52,242 |   |                           | $ | (3,149 | )                |  | $                                 | (84  | ) |               | $ | 39,376 |                          | $ | (877   | ) |  | $ | (7,968 | ) |  | $ | 79,666 |  
|                                                                                                          |        |              |         |                           |     |  |                                      |        |   |                           |   |        |                  |  |                                   |      |   |               |   |        |                          |   |        |   |  |   |        |   |  |   |        |  

See accompanying notes to unaudited interim consolidated financial statements.



3



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##### Table of Contents

SI FINANCIAL GROUP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in Thousands / Unaudited)



|                                                                                            |      |                              |         |      |  |   |         |  
|------------------------------------------------------------------------------------------- | ---- | ---------------------------- | ------- | ---- |  | - | ------- | -
|                                                                                            |      | Three Months Ended March 31, |        
|                                                                                            | 2010 |                              |         | 2009 | 
|Cash flows from operating activities:                                                       |      |                              |         |      |  |   |         |  
|Net income                                                                                  |      | $                            | 493     |      |  | $ | 56      |  
|Adjustments to reconcile net income to net cash (used in) provided by operating activities: |      |                              |         |      |  |   |         |  
|Provision for loan losses                                                                   |      |                              | 170     |      |  |   | 490     |  
|Employee stock ownership plan expense                                                       |      |                              | 45      |      |  |   | 43      |  
|Equity incentive plan expense                                                               |      |                              | 155     |      |  |   | 188     |  
|Excess tax benefit from share-based compensation                                            |      |                              | (2      | )    |  |   |        |  
|Amortization (accretion) of investment premiums and discounts, net                          |      |                              | 54      |      |  |   | (69     | )
|Amortization of loan premiums and discounts, net                                            |      |                              | 154     |      |  |   | 70      |  
|Depreciation and amortization of premises and equipment                                     |      |                              | 475     |      |  |   | 476     |  
|Amortization of core deposit intangible                                                     |      |                              | 8       |      |  |   | 10      |  
|Amortization of mortgage servicing rights                                                   |      |                              | 45      |      |  |   | 33      |  
|Net gain on sale of securities                                                              |      |                              | (267    | )    |  |   | (137    | )
|Deferred income tax benefit                                                                 |      |                              | (43     | )    |  |   | (97     | )
|Loans originated for sale                                                                   |      |                              | (9,280  | )    |  |   | (16,228 | )
|Proceeds from sale of loans held for sale                                                   |      |                              | 7,624   |      |  |   | 15,227  |  
|Net gain on sale of loans                                                                   |      |                              | (67     | )    |  |   | (191    | )
|Net gain on disposal of equipment                                                           |      |                              |        |      |  |   | (104    | )
|Net loss on sale of other real estate owned                                                 |      |                              | 34      |      |  |   |        |  
|Increase in cash surrender value of bank-owned life insurance                               |      |                              | (71     | )    |  |   | (73     | )
|Impairment losses on securities                                                             |      |                              | 171     |      |  |   | 150     |  
|Change in operating assets and liabilities:                                                 |      |                              |         |      |  |   |         |  
|Accrued interest receivable                                                                 |      |                              | (31     | )    |  |   | 324     |  
|Other assets                                                                                |      |                              | (2,159  | )    |  |   | 890     |  
|Accrued expenses and other liabilities                                                      |      |                              | 431     |      |  |   | (75     | )
|                                                                                            |      |                              |         |      |  |   |         |  
|Net cash (used in) provided by operating activities                                         |      |                              | (2,061  | )    |  |   | 983     |  
|                                                                                            |      |                              |         |      |  |   |         |  
|                                                                                            |      |                             
|Cash flows from investing activities:                                                       |      |                              |         |      |  |   |         |  
|Purchases of available for sale securities                                                  |      |                              | (26,764 | )    |  |   | (18,830 | )
|Proceeds from sale of available for sale securities                                         |      |                              | 9,071   |      |  |   | 8,492   |  
|Proceeds from maturities of and principal repayments on available for sale securities       |      |                              | 15,313  |      |  |   | 17,510  |  
|Net decrease in loans                                                                       |      |                              | 12,978  |      |  |   | 8,045   |  
|Purchases of loans receivable                                                               |      |                              | (7,296  | )    |  |   | (14,933 | )
|Proceeds from sale of other real estate owned                                               |      |                              | 443     |      |  |   |        |  
|Purchases of premises and equipment                                                         |      |                              | (126    | )    |  |   | (317    | )
|Net cash paid for branch sale                                                               |      |                              |        |      |  |   | (619    | )
|                                                                                            |      |                              |         |      |  |   |         |  
|Net cash provided by (used in) investing activities                                         |      |                              | 3,619   |      |  |   | (652    | )
|                                                                                            |      |                              |         |      |  |   |         |  
|                                                                                            |      |                             
|Cash flows from financing activities:                                                       |      |                              |         |      |  |   |         |  
|Net increase in deposits                                                                    |      |                              | 10,983  |      |  |   | 17,173  |  
|Net decrease in mortgagors and investors escrow accounts                                  |      |                              | (1,701  | )    |  |   | (1,653  | )
|Proceeds from Federal Home Loan Bank advances                                               |      |                              | 7,386   |      |  |   | 4,032   |  
|Repayments of Federal Home Loan Bank advances                                               |      |                              | (9,386  | )    |  |   | (6,032  | )
|Excess tax benefit from share-based compensation                                            |      |                              | 2       |      |  |   |        |  
|Treasury stock purchased                                                                    |      |                              | (3      | )    |  |   |        |  
|                                                                                            |      |                              |         |      |  |   |         |  
|Net cash provided by financing activities                                                   |      |                              | 7,281   |      |  |   | 13,520  |  
|                                                                                            |      |                              |         |      |  |   |         |  

(continued on next page)



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##### Table of Contents

SI FINANCIAL GROUP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS (concluded)

(Dollars in Thousands / Unaudited)



|                                                                                                                                                               |  |                              |        |      |   |       
|-------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---------------------------- | ------ | ---- | - | ------
|                                                                                                                                                               |  | Three Months Ended March 31,
|                                                                                                                                                               |  | 2010                         |        | 2009
|                                                                                                                                                               |  |                             
|Net change in cash and cash equivalents                                                                                                                        |  |                              | 8,839  |      |   | 13,851
|Cash and cash equivalents at beginning of period                                                                                                               |  |                              | 24,204 |      |   | 23,203
|                                                                                                                                                               |  |                              |        |      |   |       
|Cash and cash equivalents at end of period                                                                                                                     |  | $                            | 33,043 |      | $ | 37,054
|                                                                                                                                                               |  |                              |        |      |   |       
|                                                                                                                                                               |  |                             
|Supplemental cash flow information:                                                                                                                            |  |                              |        |      |   |       
|Interest paid                                                                                                                                                  |  | $                            | 3,784  |      | $ | 5,004 
|Income taxes paid, net                                                                                                                                         |  |                              | 1      |      |   | 176   
|Transfer of loans to other real estate owned                                                                                                                   |  |                              | 1,003  |      |   | 70    
|Due from broker                                                                                                                                                |  |                              | 2,160  |      |   |      
|                                                                                                                                                               |  |                             
|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.



5



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##### Table of Contents

SI FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 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. The Company does not conduct any material business other than owning all of the stock of the Bank and
making payments on the subordinated debentures 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 March 31, 2010 and for the three months ended March 31, 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 months ended March 31, 2010 are not necessarily indicative of the operating results for the year ending
December 31, 2010 or for any other period.

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



6



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##### Table of Contents

SI FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

MARCH 31, 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 $324,000 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 months ended March 31, 2009. 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.

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.



7



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##### Table of Contents

SI FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

MARCH 31, 2010 AND 2009 AND DECEMBER 31, 2009





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 months ended March 31, 2010 and 2009, all common stock equivalents were anti-dilutive and were not included in the computation of diluted earnings per share. The Company had
anti-dilutive shares outstanding of 471,650 and 478,330 for the three months ended March 31, 2010 and 2009, respectively. The computation of earnings per share is as follows:



|                                                 |      |                             |            |  |   |           
|------------------------------------------------ | ---- | --------------------------- | ---------- |  | - | ----------
|(Dollars in Thousands, Except Per Share Amounts) |      | Three MonthsEnded March 31,
|                                                 | 2010 |                             | 2009      
|Net income                                       |      | $                           | 493        |  | $ | 56        
|                                                 |      |                             |            |  |   |           
|                                                 |      |                            
|Weighted-average common shares outstanding:      |      |                             |            |  |   |           
|Basic                                            |      |                             | 11,466,289 |  |   | 11,445,285
|Effect of dilutive stock options                 |      |                             |           |  |   |          
|                                                 |      |                             |            |  |   |           
|Diluted                                          |      |                             | 11,466,289 |  |   | 11,445,285
|                                                 |      |                             |            |  |   |           
|                                                 |      |                            
|Net income per share:                            |      |                             |            |  |   |           
|Basic                                            |      | $                           | 0.04       |  | $ | 0.00      
|Diluted                                          |      | $                           | 0.04       |  | $ | 0.00      

NOTE 3. SECURITIES AVAILABLE FOR
SALE

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



|                                                |  |                   |         |                      |   |                       |  |   |           |   |  |   |        
|----------------------------------------------- |  | ----------------- | ------- | -------------------- | - | --------------------- |  | - | --------- | - |  | - | -------
|                                                |  | March 31, 2010   
|(Dollars in Thousands)                          |  | AmortizedCost
(1) |         | GrossUnrealizedGains |   | GrossUnrealizedLosses |  |   | FairValue
|Debt securities:                                |  |                   |         |                      |   |                       |  |   |           |   |  |   |        
|U.S. Government and agency obligations          |  | $                 | 35,878  |                      | $ | 270                   |  | $ | (130      | ) |  | $ | 36,018 
|Government-sponsored enterprises                |  |                   | 16,080  |                      |   | 183                   |  |   | (14       | ) |  |   | 16,249 
|Mortgage-backed securities:(2)                  |  |                   |         |                      |   |                       |  |   |           |   |  |   |        
|Agency  residential                            |  |                   | 93,927  |                      |   | 3,537                 |  |   | (68       | ) |  |   | 97,396 
|Non-agency  residential                        |  |                   | 14,641  |                      |   | 31                    |  |   | (1,338    | ) |  |   | 13,334 
|Non-agency  HELOC                              |  |                   | 4,255   |                      |   |                      |  |   | (911      | ) |  |   | 3,344  
|Corporate debt securities                       |  |                   | 7,352   |                      |   | 92                    |  |   | (9        | ) |  |   | 7,435  
|Collateralized debt obligations                 |  |                   | 8,137   |                      |   | 2                     |  |   | (3,117    | ) |  |   | 5,022  
|Obligations of state and political subdivisions |  |                   | 5,002   |                      |   | 186                   |  |   | (2        | ) |  |   | 5,186  
|Tax-exempt securities                           |  |                   | 3,210   |                      |   | 10                    |  |   |          |   |  |   | 3,220  
|Foreign government securities                   |  |                   | 100     |                      |   |                      |  |   |          |   |  |   | 100    
|                                                |  |                   |         |                      |   |                       |  |   |           |   |  |   |        
|Total debt securities                           |  |                   | 188,582 |                      |   | 4,311                 |  |   | (5,589    | ) |  |   | 187,304
|                                                |  |                   |         |                     
|Equity securities:                              |  |                   |         |                      |   |                       |  |   |           |   |  |   |        
|Equity securities  financial services          |  |                   | 1,022   |                      |   |                      |  |   | (50       | ) |  |   | 972    
|                                                |  |                   |         |                      |   |                       |  |   |           |   |  |   |        
|                                                |  |                   |         |                     
|Total available for sale securities             |  | $                 | 189,604 |                      | $ | 4,311                 |  | $ | (5,639    | ) |  | $ | 188,276
|                                                |  |                   |         |                      |   |                       |  |   |           |   |  |   |        



|(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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##### Table of Contents

SI FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

MARCH 31, 2010 AND 2009 AND DECEMBER 31, 2009





|                                                |  |                   |         |                      |   |                       |  |   |           |   |  |   |        
|----------------------------------------------- |  | ----------------- | ------- | -------------------- | - | --------------------- |  | - | --------- | - |  | - | -------
|                                                |  | December 31, 2009
|(Dollars in Thousands)                          |  | AmortizedCost
(1) |         | GrossUnrealizedGains |   | GrossUnrealizedLosses |  |   | FairValue
|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 March 31, 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.



|                            |  |               |         |           |   |        
|--------------------------- |  | ------------- | ------- | --------- | - | -------
|(Dollars in Thousands)      |  | AmortizedCost |         | FairValue
|                            |  |              
|Within 1 year               |  | $             | 3,123   |           | $ | 3,128  
|After 1 but within 5 years  |  |               | 25,123  |           |   | 25,490 
|After 5 but within 10 years |  |               | 23,462  |           |   | 23,505 
|After 10 years              |  |               | 24,051  |           |   | 21,107 
|                            |  |               |         |           |   |        
|                            |  |               | 75,759  |           |   | 73,230 
|Mortgage-backed securities  |  |               | 112,823 |           |   | 114,074
|                            |  |               |         |           |   |        
|Total debt securities       |  | $             | 188,582 |           | $ | 187,304
|                            |  |               |         |           |   |        



9



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##### Table of Contents

SI FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

MARCH 31, 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 months
ended March 31, 2010 and 2009:



|                               |      |                              |      |      |  |   |      |  
|------------------------------ | ---- | ---------------------------- | ---- | ---- |  | - | ---- | -
|(Dollars in Thousands)         |      | Three MonthsEnded March 
31, |     
|                               | 2010 |                              |      | 2009 | 
|                               |      |                             
|Gross gains on sales           |      | $                            | 485  |      |  | $ | 364  |  
|Gross losses on sales          |      |                              | (218 | )    |  |   | (227 | )
|                               |      |                              |      |      |  |   |      |  
|Net gain on sale of securities |      | $                            | 267  |      |  | $ | 137  |  
|                               |      |                              |      |      |  |   |      |  

Proceeds from the sale of available for sale securities were $9.1 million and $8.5 million for the three months ended
March 31, 2010 and 2009, respectively.

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

March 31, 2010:



|                                                |  |                     |        |                   |   |           |  |                  |        |           |   |                  |  |   |        |  |   |      
|----------------------------------------------- |  | ------------------- | ------ | ----------------- | - | --------- |  | ---------------- | ------ | --------- | - | ---------------- |  | - | ------ |  | - | -----
|                                                |  | Less Than 12 Months |        | 12 Months Or More |   | Total    
|(Dollars in Thousands)                          |  | FairValue           |        | UnrealizedLosses  |   | FairValue |  | UnrealizedLosses |        | FairValue |   | UnrealizedLosses
|                                                |  |                     |        |                   |   |          
|U.S. Government and agency obligations          |  | $                   | 15,959 |                   | $ | 112       |  | $                | 1,281  |           | $ | 18               |  | $ | 17,240 |  | $ | 130  
|Government-sponsored enterprises                |  |                     | 2,005  |                   |   | 14        |  |                  |       |           |   |                 |  |   | 2,005  |  |   | 14   
|Mortgage-backed securities:                     |  |                     |        |                   |   |           |  |                  |        |           |   |                  |  |   |        |  |   |      
|Agency  residential                            |  |                     | 13,901 |                   |   | 68        |  |                  |       |           |   |                 |  |   | 13,901 |  |   | 68   
|Non-agency  residential                        |  |                     |       |                   |   |          |  |                  | 8,916  |           |   | 1,338            |  |   | 8,916  |  |   | 1,338
|Non-agency  HELOC                              |  |                     |       |                   |   |          |  |                  | 3,344  |           |   | 911              |  |   | 3,344  |  |   | 911  
|Corporate debt securities                       |  |                     | 1,818  |                   |   | 9         |  |                  |       |           |   |                 |  |   | 1,818  |  |   | 9    
|Collateralized debt obligations                 |  |                     | 130    |                   |   | 33        |  |                  | 4,801  |           |   | 3,084            |  |   | 4,931  |  |   | 3,117
|Obligations of state and political subdivisions |  |                     | 499    |                   |   | 2         |  |                  |       |           |   |                 |  |   | 499    |  |   | 2    
|Equity securities  financial services          |  |                     | 231    |                   |   | 31        |  |                  | 741    |           |   | 19               |  |   | 972    |  |   | 50   
|                                                |  |                     |        |                   |   |           |  |                  |        |           |   |                  |  |   |        |  |   |      
|Total                                           |  | $                   | 34,543 |                   | $ | 269       |  | $                | 19,083 |           | $ | 5,370            |  | $ | 53,626 |  | $ | 5,639
|                                                |  |                     |        |                   |   |           |  |                  |        |           |   |                  |  |   |        |  |   |      

December 31, 2009:



|                                                |  |                     |        |                   |   |           |  |                  |        |           |   |                  |  |   |        |  |   |      
|----------------------------------------------- |  | ------------------- | ------ | ----------------- | - | --------- |  | ---------------- | ------ | --------- | - | ---------------- |  | - | ------ |  | - | -----
|                                                |  | Less Than 12 Months |        | 12 Months Or More |   | Total    
|(Dollars in Thousands)                          |  | FairValue           |        | UnrealizedLosses  |   | FairValue |  | UnrealizedLosses |        | FairValue |   | UnrealizedLosses
|                                                |  |                     |        |                   |   |          
|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
|                                                |  |                     |        |                   |   |           |  |                  |        |           |   |                  |  |   |        |  |   |      



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##### Table of Contents

SI FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

MARCH 31, 2010 AND 2009 AND DECEMBER 31, 2009





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 March 31, 2010, forty-one debt securities with gross unrealized
losses have aggregate depreciation of 9.6% 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 fair value is attributable to changes in interest rates and illiquidity, 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 at maturity, the Company does not consider these securities to be
other-than-temporarily impaired at March 31, 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 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 March 31, 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, six non-agency mortgage-backed securities
displayed market pricing below book value, three of which were rated below investment grade at March 31, 2010. At March 31, 2010, management evaluated credit rating details for the tranche, 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 $567,000 related to credit and recognized additional credit-related losses of $171,000 during the quarter ended March 31, 2010. The Company did not record any further impairment losses at
March 31, 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 March 31, 2010 for more details.



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##### Table of Contents

SI FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

MARCH 31, 2010 AND 2009 AND DECEMBER 31, 2009





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 March 31, 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 March 31, 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 March 31, 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
March 31, 2010. See the table of collateralized debt obligations rated below investment grade as of March 31, 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 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 March 31, 2010.

As of March 31, 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 collateralized
debt obligations included estimated cash flows and prospective deferrals, defaults and recoveries based on the underlying seniority status and subordination structure of the



12



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##### Table of Contents

SI FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

MARCH 31, 2010 AND 2009 AND DECEMBER 31, 2009





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 the fair value of investments occur, the Company may be required to record additional impairment charges for OTTI in future periods.

The following table presents in more detail the Companys non-agency mortgage-backed security holdings that are rated below investment grade as of
March 31, 2010 (dollars in thousands).



|         |  |          |  |               |       |                      |   |                       |  |           |     |                         |   |                              |  |                                |  |   |     |  |      
|-------- |  | -------- |  | ------------- | ----- | -------------------- | - | --------------------- |  | --------- | --- | ----------------------- | - | ---------------------------- |  | ------------------------------ |  | - | --- |  | -----
|Security |  | Class(1) |  | AmortizedCost |       | GrossUnrealizedGains |   | GrossUnrealizedLosses |  | FairValue |     | LowestCreditRating 
(2) |   | TotalCredit RelatedOTTI
(3) |  | CreditSupportCoverageRatios(4)
|MBS 1    |  | SSNR, AS |  | $             | 3,188 |                      | $ |                      |  | $         | 554 |                         | $ | 2,634                        |  | CCC                            |  | $ |    |  | 1.252
|MBS 2    |  | SSUP, AS |  |               | 772   |                      |   |                      |  |           | 207 |                         |   | 565                          |  | CC                             |  |   | 738 |  | 0.682
|MBS 3    |  | PT, AS   |  |               | 543   |                      |   |                      |  |           | 24  |                         |   | 519                          |  | CCC                            |  |   |    |  | 0.979
|         |  |          |  |               |       |                      |   |                       |  |           |     |                         |   |                              |  |                                |  |   |     |  |      
|         |  |          |  | $             | 4,503 |                      | $ |                      |  | $         | 785 |                         | $ | 3,718                        |  |                                |  | $ | 738 |  |      
|         |  |          |  |               |       |                      |   |                       |  |           |     |                         |   |                              |  |                                |  |   |     |  |      



|(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 March 31, 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.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The following table presents in more detail the Companys collateralized debt obligations that are rated below
investment grade as of March 31, 2010 (dollars in thousands).



|         |  |       |  |               |       |                      |   |                       |  |           |       |                       |   |                              |  |                                                   |  |   |       |  |     
|-------- |  | ----- |  | ------------- | ----- | -------------------- | - | --------------------- |  | --------- | ----- | --------------------- | - | ---------------------------- |  | ------------------------------------------------- |  | - | ----- |  | ----
|Security |  | Class |  | AmortizedCost |       | GrossUnrealizedGains |   | GrossUnrealizedLosses |  | FairValue |       | LowestCreditRating(1) |   | TotalCredit RelatedOTTI
(2) |  | % ofCurrentDefaultsandDeferrals toTotalCollateral
|CDO 1    |  | B1    |  | $             | 1,000 |                      | $ |                      |  | $         | 366   |                       | $ | 634                          |  | B+                                                |  | $ |      |  | 9.0 
|CDO 2    |  | B3    |  |               | 1,000 |                      |   |                      |  |           | 371   |                       |   | 629                          |  | B+                                                |  |   |      |  | 9.0 
|CDO 3    |  | MEZ   |  |               | 88    |                      |   | 2                     |  |           |      |                       |   | 90                           |  | CC                                                |  |   | 35    |  | 25.9
|CDO 4    |  | B     |  |               | 1,480 |                      |   |                      |  |           | 855   |                       |   | 625                          |  | CCC+                                              |  |   | 376   |  | 18.1
|CDO 5    |  | C     |  |               | 163   |                      |   |                      |  |           | 33    |                       |   | 130                          |  | C                                                 |  |   | 809   |  | 20.5
|CDO 6    |  | A2    |  |               | 2,626 |                      |   |                      |  |           | 883   |                       |   | 1,743                        |  | B+                                                |  |   |      |  | 26.4
|CDO 7    |  | A1    |  |               | 1,780 |                      |   |                      |  |           | 609   |                       |   | 1,171                        |  | BB                                                |  |   |      |  | 28.2
|         |  |       |  |               |       |                      |   |                       |  |           |       |                       |   |                              |  |                                                   |  |   |       |  |     
|         |  |       |  | $             | 8,137 |                      | $ | 2                     |  | $         | 3,117 |                       | $ | 5,022                        |  |                                                   |  | $ | 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 March 31, 2010.
|--- | -------------------------------------------------------------------------------------------------------



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SI FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

MARCH 31, 2010 AND 2009 AND DECEMBER 31, 2009





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 months ended March 31, 2010.



|                                                                               |  |   |      
|------------------------------------------------------------------------------ |  | - | -----
|(Dollars in Thousands)                                                         |  |  
|                                                                               | 
|Balance at beginning of period                                                 |  | $ | 1,787
|Amounts related to credit for which OTTI losses were not previously recognized |  |   |     
|Additional credit losses for which OTTI losses were previously recognized      |  |   | 171  
|                                                                               |  |   |      
|Balance at end of period                                                       |  | $ | 1,958
|                                                                               |  |   |      

NOTE 4. LOANS RECEIVABLE

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



|                                             |  |               |         |   |                  |   |         |  
|-------------------------------------------- |  | ------------- | ------- | - | ---------------- | - | ------- | -
|(Dollars in Thousands)                       |  | March 31,2010 |         |   | December 31,2009 |  
|Real estate loans:                           |  |               |         |   |                  |   |         |  
|Residential  1 to 4 family                  |  | $             | 298,174 |   |                  | $ | 306,244 |  
|Multi-family and commercial                  |  |               | 158,608 |   |                  |   | 159,781 |  
|Construction                                 |  |               | 11,313  |   |                  |   | 11,400  |  
|                                             |  |               |         |   |                  |   |         |  
|Total real estate loans                      |  |               | 468,095 |   |                  |   | 477,425 |  
|                                             |  |              
|Consumer loans:                              |  |               |         |   |                  |   |         |  
|Home equity                                  |  |               | 22,734  |   |                  |   | 22,573  |  
|Other                                        |  |               | 3,340   |   |                  |   | 3,513   |  
|                                             |  |               |         |   |                  |   |         |  
|Total consumer loans                         |  |               | 26,074  |   |                  |   | 26,086  |  
|                                             |  |              
|Commercial business loans:                   |  |               |         |   |                  |   |         |  
|SBA & USDA guaranteed                        |  |               | 80,537  |   |                  |   | 77,310  |  
|Other                                        |  |               | 29,260  |   |                  |   | 30,239  |  
|                                             |  |               |         |   |                  |   |         |  
|Total commercial business loans              |  |               | 109,797 |   |                  |   | 107,549 |  
|                                             |  |              
|Total loans                                  |  |               | 603,966 |   |                  |   | 611,060 |  
|                                             |  |              
|Deferred loan origination costs, net of fees |  |               | 1,510   |   |                  |   | 1,523   |  
|Allowance for loan losses                    |  |               | (4,793  | ) |                  |   | (4,891  | )
|                                             |  |               |         |   |                  |   |         |  
|Loans receivable, net                        |  | $             | 600,683 |   |                  | $ | 607,692 |  
|                                             |  |               |         |   |                  |   |         |  

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



|                                                  |  |               |       |                  |   |      
|------------------------------------------------- |  | ------------- | ----- | ---------------- | - | -----
|(Dollars in Thousands)                            |  | March 31,2010 |       | December 31,2009
|                                                  |  |              
|Impaired loans without valuation allowance        |  | $             | 5,054 |                  | $ | 2,107
|Impaired loans with valuation allowance           |  |               | 1,046 |                  |   | 967  
|                                                  |  |               |       |                  |   |      
|Total impaired loans                              |  | $             | 6,100 |                  | $ | 3,074
|                                                  |  |               |       |                  |   |      
|Valuation allowance related to impaired loans     |  | $             | 246   |                  | $ | 267  
|                                                  |  |               |       |                  |   |      
|Average recorded investment in impaired loans     |  | $             | 6,850 |                  | $ | 7,808
|                                                  |  |               |       |                  |   |      
|Nonaccrual loans                                  |  | $             | 3,510 |                  | $ | 3,007
|                                                  |  |               |       |                  |   |      
|Loans past due 90 days or more and still accruing |  | $             |      |                  | $ |     
|                                                  |  |               |       |                  |   |      



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SI FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

MARCH 31, 2010 AND 2009 AND DECEMBER 31, 2009





NOTE 5. PREMISES AND EQUIPMENT

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



|                                          |  |               |         |   |                  |   |         |  
|----------------------------------------- |  | ------------- | ------- | - | ---------------- | - | ------- | -
|(Dollars in Thousands)                    |  | March 31,2010 |         |   | December 31,2009 |  
|                                          |  |              
|Land                                      |  | $             | 2,098   |   |                  | $ | 2,098   |  
|Buildings                                 |  |               | 6,050   |   |                  |   | 6,043   |  
|Leasehold improvements                    |  |               | 7,743   |   |                  |   | 7,736   |  
|Furniture and equipment                   |  |               | 10,822  |   |                  |   | 10,711  |  
|                                          |  |               |         |   |                  |   |         |  
|                                          |  |               | 26,713  |   |                  |   | 26,588  |  
|Accumulated depreciation and amortization |  |               | (14,096 | ) |                  |   | (13,622 | )
|                                          |  |               |         |   |                  |   |         |  
|Premises and equipment, net               |  | $             | 12,617  |   |                  | $ | 12,966  |  
|                                          |  |               |         |   |                  |   |         |  

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 three
months ended March 31, 2010 is as follows:



|                                                                        |  |                  |       |   |            |   |      |                   |  |   |       |  
|----------------------------------------------------------------------- |  | ---------------- | ----- | - | ---------- | - | ---- | ----------------- |  | - | ----- | -
|(Dollars in Thousands)                                                  |  | Before TaxAmount |       |   | TaxEffects |   |      | Net of 
TaxAmount | 
|                                                                        |  |                  |      
|Unrealized holding gains on available for sale securities               |  | $                | 2,595 |   |            | $ | (883 | )                 |  | $ | 1,712 |  
|Credit portion of OTTI losses recognized in net income                  |  |                  | 171   |   |            |   | (58  | )                 |  |   | 113   |  
|Noncredit portion of OTTI losses on available for sale securities       |  |                  | (207  | ) |            |   | 70   |                   |  |   | (137  | )
|Reclassification adjustment for gains recognized in net income          |  |                  | (267  | ) |            |   | 91   |                   |  |   | (176  | )
|                                                                        |  |                  |       |   |            |   |      |                   |  |   |       |  
|Unrealized holding gains on available for sale securities, net of taxes |  | $                | 2,292 |   |            | $ | (780 | )                 |  | $ | 1,512 |  
|                                                                        |  |                  |       |   |            |   |      |                   |  |   |       |  



15



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##### Table of Contents

SI FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

MARCH 31, 2010 AND 2009 AND DECEMBER 31, 2009





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



|                                                                  |  |               |        |   |                  |   |        |  
|----------------------------------------------------------------- |  | ------------- | ------ | - | ---------------- | - | ------ | -
|(Dollars in Thousands)                                            |  | March 31,2010 |        |   | December 31,2009 |  
|                                                                  |  |              
|Securities:                                                       |  |               |        |   |                  |   |        |  
|Net unrealized (losses) gains on securities                       |  | $             | (237   | ) |                  | $ | 2,003  |  
|Tax effect                                                        |  |               | 81     |   |                  |   | (681   | )
|                                                                  |  |               |        |   |                  |   |        |  
|Net of tax amount                                                 |  |               | (156   | ) |                  |   | 1,322  |  
|                                                                  |  |              
|Noncredit portion of OTTI losses on available for sale securities |  |               | (1,092 | ) |                  |   | (1,506 | )
|Tax effect                                                        |  |               | 371    |   |                  |   | 512    |  
|                                                                  |  |               |        |   |                  |   |        |  
|Net of tax amount                                                 |  |               | (877   | ) |                  |   | 328    |  
|                                                                  |  |               |        |   |                  |   |        |  
|                                                                  |  |              
|Cumulative effect of adoption of securities impairment guidance   |  |               |       |   |                  |   | (2,717 | )
|                                                                  |  |               |        |   |                  |   |        |  
|                                                                  |  |              
|Accumulated other comprehensive loss                              |  | $             | (877   | ) |                  | $ | (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
March 31, 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 March 31, 2010 and December 31, 2009.



|                                |  |        |        |       |                             |   |        |                                                               |        |  |      |        |  |       |        |  |       |  
|------------------------------- |  | ------ | ------ | ----- | --------------------------- | - | ------ | ------------------------------------------------------------- | ------ |  | ---- | ------ |  | ----- | ------ |  | ----- | -
|March 31, 2010                  |  | Actual |        |       | For CapitalAdequacyPurposes |   |        | To Be WellCapitalized UnderPrompt CorrectiveAction Provisions |       
|(Dollars in Thousands)          |  | Amount |        | Ratio |                             |   | Amount |                                                               | Ratio  |  |      | Amount |  | Ratio |       
|                                |  |        |        |       |                             |  
|Total Risk-based Capital Ratio  |  | $      | 74,922 |       | 14.74                       | % |        | $                                                             | 40,663 |  | 8.00 | %      |  | $     | 50,829 |  | 10.00 | %
|Tier I Risk-based Capital Ratio |  |        | 70,077 |       | 13.79                       |   |        |                                                               | 20,327 |  | 4.00 |        |  |       | 30,490 |  | 6.00  |  
|Tier I Capital Ratio            |  |        | 70,077 |       | 8.07                        |   |        |                                                               | 34,735 |  | 4.00 |        |  |       | 43,418 |  | 5.00  |  
|Tangible Equity Ratio           |  |        | 70,077 |       | 8.07                        |   |        |                                                               | 13,025 |  | 1.50 |        |  |       | n/a    |  | n/a   |  



16



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##### Table of Contents

SI FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

MARCH 31, 2010 AND 2009 AND DECEMBER 31, 2009







|                                |  |        |        |       |                             |   |        |                                                               |        |  |      |        |  |       |        |  |       |  
|------------------------------- |  | ------ | ------ | ----- | --------------------------- | - | ------ | ------------------------------------------------------------- | ------ |  | ---- | ------ |  | ----- | ------ |  | ----- | -
|December 31, 2009               |  | Actual |        |       | For CapitalAdequacyPurposes |   |        | To Be WellCapitalized UnderPrompt CorrectiveAction 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 at March 31, 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 statement of income.

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.
|-------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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SI FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

MARCH 31, 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 March 31, 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 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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SI FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

MARCH 31, 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
March 31, 2010 and December 31, 2009. There were no liabilities measured at fair value on a recurring basis as of March 31, 2010 and December 31, 2009. The Company had no significant transfers into or out of Levels 1, 2 or 3
during the three months ended March 31, 2010.



|                                                |  |                |       |         |   |         |  |       |       |  |   |        
|----------------------------------------------- |  | -------------- | ----- | ------- | - | ------- |  | ----- | ----- |  | - | -------
|                                                |  | March 31, 2010
|(Dollars in Thousands)                          |  | Level 1        |       | Level 2 |   | Level 3 |  | Total
|                                                |  |                |       |        
|U.S. Government and agency obligations          |  | $              | 987   |         | $ | 35,031  |  | $     |      |  | $ | 36,018 
|Government-sponsored enterprises                |  |                |      |         |   | 16,249  |  |       |      |  |   | 16,249 
|Mortgage-backed securities                      |  |                |      |         |   | 114,074 |  |       |      |  |   | 114,074
|Corporate debt securities                       |  |                |      |         |   | 7,435   |  |       |      |  |   | 7,435  
|Collateralized debt obligations                 |  |                |      |         |   |        |  |       | 5,022 |  |   | 5,022  
|Obligations of state and political subdivisions |  |                |      |         |   | 5,186   |  |       |      |  |   | 5,186  
|Tax-exempt securities                           |  |                |      |         |   | 3,220   |  |       |      |  |   | 3,220  
|Foreign government securities                   |  |                |      |         |   | 100     |  |       |      |  |   | 100    
|Equity securities                               |  |                | 240   |         |   | 732     |  |       |      |  |   | 972    
|                                                |  |                |       |         |   |         |  |       |       |  |   |        
|Total assets at fair value                      |  | $              | 1,227 |         | $ | 182,027 |  | $     | 5,022 |  | $ | 188,276
|                                                |  |                |       |         |   |         |  |       |       |  |   |        



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SI FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

MARCH 31, 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 |  |   | (16   | )
|                                                                            |  |   |       |  
|Balance at March 31, 2010                                                   |  | $ | 5,022 |  
|                                                                            |  |   |       |  

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 write-downs of individual assets. The following table summarizes the fair value hierarchy used to determine
each adjustment and the carrying value of the related individual assets as of March 31, 2010 and December 31, 2009. The losses represent the amount of write-down recorded on assets held at March 31, 2010 and December 31, 2009.
There were no liabilities measured at fair value on a nonrecurring basis at March 31, 2010 and December 31, 2009.



|                        |  |                      |   |                                  |   |         |  |              |       |  |   |    
|----------------------- |  | -------------------- | - | -------------------------------- | - | ------- |  | ------------ | ----- |  | - | ---
|                        |  | At March 31, 2010    |   | Three Months EndedMarch 31, 2010
|(Dollars in Thousands)  |  | Level 1              |   | Level 2                          |   | Level 3 |  | Total Losses
|Impaired loans          |  | $                    |  |                                  | $ |        |  | $            | 800   |  | $ | 24 
|Other real estate owned |  |                      |  |                                  |   |        |  |              | 4,206 |  |   |   
|                        |  |                      |   |                                  |   |         |  |              |       |  |   |    
|Total assets            |  | $                    |  |                                  | $ |        |  | $            | 5,006 |  | $ | 24 
|                        |  |                      |   |                                  |   |         |  |              |       |  |   |    
|                        |  |                     
|                        |  | At December 31, 2009 |   | Year EndedDecember 31, 2009     
|(Dollars in Thousands)  |  | Level 1              |   | Level 2                          |   | Level 3 |  | Total Losses
|Impaired loans          |  | $                    |  |                                  | $ |        |  | $            | 700   |  | $ | 267
|Other real estate owned |  |                      |  |                                  |   |        |  |              | 3,680 |  |   |   
|Goodwill                |  |                      |  |                                  |   |        |  |              | 910   |  |   | 57 
|                        |  |                      |   |                                  |   |         |  |              |       |  |   |    
|Total assets            |  | $                    |  |                                  | $ |        |  | $            | 5,290 |  | $ | 324
|                        |  |                      |   |                                  |   |         |  |              |       |  |   |    



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##### Table of Contents

SI FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

MARCH 31, 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.

In accordance with applicable accounting guidance, goodwill related to the Companys New London, Connecticut branch acquisition with a carrying
value of $967,000 was written down to its implied fair value of $910,000, resulting in an impairment charge of $57,000, which was included in earnings for the twelve months ended December 31, 2009.

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. There were no recognized losses on other real estate owned for the three months ended March 31, 2010 and for the year ended December 31, 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 as follows. Certain financial
instruments and all nonfinancial instruments are exempt from disclosure requirements. Accordingly, the aggregate fair value amounts presented do not represent the underlying value of the Company.

Management uses its best judgment in estimating the fair value of the Companys financial instruments; however, there are inherent weaknesses in any
estimation technique. Therefore, for substantially all financial instruments, the fair value estimates presented herein are not necessarily indicative of the amounts the Company could have realized in a sales transaction at March 31, 2010 and
December 31, 2009. The estimated fair value amounts at March 31, 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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##### Table of Contents

SI FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

MARCH 31, 2010 AND 2009 AND DECEMBER 31, 2009





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



|                                                                           |  |                |         |                   |   |                |  |           |         |  |   |        
|-------------------------------------------------------------------------- |  | -------------- | ------- | ----------------- | - | -------------- |  | --------- | ------- |  | - | -------
|                                                                           |  | March 31, 2010 |         | December 31, 2009
|(Dollars in Thousands)                                                     |  | CarryingAmount |         | FairValue         |   | CarryingAmount |  | FairValue
|                                                                           |  |                |         |                  
|Financial Assets:                                                          |  |                |         |                   |   |                |  |           |         |  |   |        
|Noninterest-bearing deposits                                               |  | $              | 14,109  |                   | $ | 14,109         |  | $         | 12,889  |  | $ | 12,889 
|Interest-bearing deposits                                                  |  |                | 6,084   |                   |   | 6,084          |  |           | 2,350   |  |   | 2,350  
|Federal funds sold                                                         |  |                | 12,850  |                   |   | 12,850         |  |           | 8,965   |  |   | 8,965  
|Available for sale securities                                              |  |                | 188,276 |                   |   | 188,276        |  |           | 183,562 |  |   | 183,562
|Loans held for sale                                                        |  |                | 2,052   |                   |   | 2,052          |  |           | 396     |  |   | 396    
|Loans receivable, net                                                      |  |                | 600,683 |                   |   | 602,889        |  |           | 607,692 |  |   | 609,155
|Federal Home Loan Bank stock                                               |  |                | 8,388   |                   |   | 8,388          |  |           | 8,388   |  |   | 8,388  
|Accrued interest receivable                                                |  |                | 3,372   |                   |   | 3,372          |  |           | 3,341   |  |   | 3,341  
|                                                                           |  |                |         |                  
|Financial Liabilities:                                                     |  |                |         |                   |   |                |  |           |         |  |   |        
|Savings deposits                                                           |  |                | 61,375  |                   |   | 61,375         |  |           | 61,312  |  |   | 61,312 
|Demand deposits, negotiable orders of withdrawal and money market accounts |  |                | 297,528 |                   |   | 297,528        |  |           | 286,166 |  |   | 286,166
|Certificates of deposit                                                    |  |                | 310,867 |                   |   | 314,383        |  |           | 311,309 |  |   | 315,777
|Mortgagors and investors escrow accounts                                 |  |                | 1,890   |                   |   | 1,890          |  |           | 3,591   |  |   | 3,591  
|Federal Home Loan Bank advances                                            |  |                | 114,100 |                   |   | 117,400        |  |           | 116,100 |  |   | 118,693
|Junior subordinated debt owed to unconsolidated trust                      |  |                | 8,248   |                   |   | 6,326          |  |           | 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
March 31, 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 March 31, 2010 and December 31, 2009 and its results of operations for the three months ended March 31, 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 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 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 its 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.

Comparison of Financial Condition at March 31, 2010 and December 31, 2009

Assets:

Summary.Total assets increased $9.7 million, or 1.1%, to $882.1 million at March 31, 2010, as compared to $872.4 million at December 31, 2009, primarily due to increases of $8.8 million in cash and cash



23



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##### Table of Contents

equivalents, $4.7 million in available for sale securities, $2.3 million in other assets and $1.7 million in loans held for sale, offset by decreases of $7.0 million in net loans receivable and
$737,000 in net deferred tax assets. Cash and cash equivalents increased as a result of an increase in customer deposits. Securities increased with the purchase of predominantly government-sponsored enterprise and mortgage-backed securities. The
increase in other assets was attributed to the settlement of security sales subsequent to March 31, 2010. The increase in loans held for sale related to longer-term fixed-rate residential mortgage loans. Lower unrealized losses on available for
sale securities resulted in a decrease in net deferred tax assets.

Loans Receivable, Net.The net loan portfolio decreased $7.0
million. Loan originations decreased $24.0 million during the first three months of 2010 from the comparable period in 2009. During the first quarter of 2009 record residential mortgage loan originations resulted from lower market interest rates.
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
March 31, 2010, comprising 49.4% of total loans. Residential mortgage loans decreased $8.1 million, or 2.6%. Contributing to the decrease was the sale of $7.6 million of longer-term fixed-rate residential mortgage loans. Loan originations for
residential mortgage loans decreased $23.3 million for the first three months of 2010 due to higher market interest rates compared to the same period in 2009.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Commercial Loans. At March 31, 2010, the commercial loan portfolio, which includes multi-family and commercial mortgage and commercial
business loans, represented 44.4% of total loans. Multi-family and commercial mortgage loans decreased $1.2 million, or 0.7%. Loan originations for multi-family and commercial mortgage loans decreased $751,000 during the first three months of 2010
compared to the same period in 2009. Commercial business loans increased $2.2 million, or 2.1%, for 2010 primarily due to the purchase of $7.3 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 reduced loan demand, loan originations declined $928,000 during the first three months of 2010 compared to the same period in the prior year.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Consumer Loans. Consumer loans represent 3.8% of the Companys total loan portfolio. Consumer loans decreased $12,000 during the first
three months of 2010. Increases in home equity loans were offset by decreases in other consumer loans. Loan originations for consumer loans, primarily home equity lines of credit, increased $996,000 for the three months ended March 31, 2010
from the comparable period in 2009.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The allowance for loan losses totaled $4.8 million at March 31, 2010 compared to
$4.9 million at December 31, 2009. The ratio of the allowance for loan losses to total loans decreased from 0.80% at December 31, 2009 to 0.79% at March 31, 2010. This decrease was due, in part, to the increase in purchased USDA and
SBA guaranteed loans, which are fully guaranteed by the full faith and credit of the U.S. government, thus requiring no allowance for loan losses.

The following table summarizes the activity in the allowance for loan losses at and for the three months ended March 31, 2010 and 2009.



|                                           |      |                             |       |      |  |   |        |  
|------------------------------------------ | ---- | --------------------------- | ----- | ---- |  | - | ------ | -
|(Dollars in Thousands)                     |      | Three MonthsEnded March 31, |      
|                                           | 2010 |                             |       | 2009 | 
|Balance at beginning of period             |      | $                           | 4,891 |      |  | $ | 6,047  |  
|                                           |      |                            
|Provision for loan losses                  |      |                             | 170   |      |  |   | 490    |  
|Loans charged-off                          |      |                             | (270  | )    |  |   | (1,284 | )
|Recoveries of loans previously charged-off |      |                             | 2     |      |  |   | 18     |  
|                                           |      |                             |       |      |  |   |        |  
|                                           |      |                            
|Balance at end of period                   |      | $                           | 4,793 |      |  | $ | 5,271  |  
|                                           |      |                             |       |      |  |   |        |  



24



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##### Table of Contents

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



|                                                                            |  |               |        |   |                  |   |       |  
|--------------------------------------------------------------------------- |  | ------------- | ------ | - | ---------------- | - | ----- | -
|(Dollars in Thousands)                                                      |  | March 31,2010 |        |   | December 31,2009 |  
|Nonaccrual loans:                                                           |  |               |        |   |                  |   |       |  
|Real estate loans                                                           |  | $             | 3,428  |   |                  | $ | 2,972 |  
|Commercial business loans                                                   |  |               | 82     |   |                  |   | 35    |  
|Consumer loans                                                              |  |               |       |   |                  |   |      |  
|                                                                            |  |               |        |   |                  |   |       |  
|Total nonaccrual loans                                                      |  |               | 3,510  |   |                  |   | 3,007 |  
|                                                                            |  |              
|Real estate owned, net                                                      |  |               | 4,206  |   |                  |   | 3,680 |  
|                                                                            |  |               |        |   |                  |   |       |  
|Total nonperforming assets                                                  |  |               | 7,716  |   |                  |   | 6,687 |  
|                                                                            |  |              
|Troubled debt restructurings                                                |  |               | 2,590  |   |                  |   | 67    |  
|                                                                            |  |               |        |   |                  |   |       |  
|Total nonperforming assets and troubled debt restructurings                 |  | $             | 10,306 |   |                  | $ | 6,754 |  
|                                                                            |  |               |        |   |                  |   |       |  
|                                                                            |  |              
|Total nonperforming loans to total loans                                    |  |               | 0.58   | % |                  |   | 0.49  | %
|Total nonperforming loans to total assets                                   |  |               | 0.40   | % |                  |   | 0.34  | %
|Total nonperforming assets and troubled debt restructurings to total assets |  |               | 1.17   | % |                  |   | 0.77  | %

As of March 31, 2010, troubled debt
restructurings increased as a result of an interest rate concession for one commercial mortgage loan totaling $2.5 million. The Company anticipates that the borrower will repay all contractual principal and interest in accordance with the terms of
their restructured loan agreement.

Liabilities:

Total liabilities increased $7.5 million, or 0.9%, from December 31, 2009 to March 31, 2010 primarily as a result of increases in deposits of
$11.0 million, offset by decreases in Federal Home Loan Bank (FHLB) advances of $2.0 million and mortgagors and investors escrow of $1.7 million. Deposits increased 1.7% to $669.8 million at March 31, 2010.
Interest-bearing deposits increased $14.7 million, or 2.5%, which included increases in NOW and money market accounts of $15.1 million and savings accounts of $64,000, offset by decreases in certificates of deposit of $443,000 and
noninterest-bearing deposits of $3.8 million. Deposit growth was the result of marketing and promotional initiatives, as well as competitively-priced deposit products. Borrowings decreased $2.0 million to $122.3 million at March 31, 2010 from
$124.3 million at December 31, 2009, resulting from net repayments of FHLB advances.

Equity:

Summary. Total stockholders equity increased $2.2 million from $77.5 million at December 31, 2009 to $79.7 million at
March 31, 2010. The increase in equity was primarily attributable to a decrease in net unrealized holding losses on available for sale securities aggregating $1.5 million (net of taxes), earnings of $493,000 and amortization of equity incentive
plan awards totaling $202,000.

Accumulated Other Comprehensive Loss. Accumulated other comprehensive loss is comprised solely
of the unrealized holding gains and losses on available for sale securities, net of taxes. Net unrealized holding losses on available for sale securities, net of taxes, totaled $877,000 and $2.4 million at March 31, 2010 and December 31,
2009, respectively. Unrealized holding 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 their amortized cost basis, which may be at maturity, less
any credit losses.



25



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##### Table of Contents

Results of Operations for the Three Months Ended March 31, 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 $493,000 for the three months ended
March 31, 2010, an increase of $437,000, compared to net income of $56,000 for the three months ended March 31, 2009. The increase in net income was due to increases in net interest income and noninterest 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 $819,000, or 7.4%, for the first 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 44 basis
points to 5.06% for the first quarter of 2010 from 5.50% for the comparable period in 2009. Average securities increased $24.2 million, while the rate earned declined from 4.96% to 3.77%. Lower rates earned on securities were impacted by both a
decrease in market interest rates and the composition of the portfolio resulting, in part, from a shift in corporate debt securities to U.S. government and agency obligations. The average balance of loans decreased $18.7 million and the rate earned
declined 17 basis points to 5.62% for the quarter ended March 31, 2010.

Interest Expense. Interest expense decreased $1.2
million, or 24.5%, to $3.8 million for the first quarter of 2010 compared to $5.0 million for the first quarter of 2009, as a result of decreases in the rates paid on average deposits and borrowings and a lower average balance of FHLB advances,
offset by an increase of $27.6 million in the average balance of deposits.

An increase in NOW and money market accounts totaling $31.6
million contributed the largest increase to the average balance for deposit accounts, and the average yield on these products decreased 47 basis points. The average balance of certificates of deposit decreased $5.2 million and the rate paid
decreased 72 basis points.

The average balance of FHLB advances decreased $23.1 million and the average yield decreased 56 basis points to
3.69% for the first 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 to benefit from the low interest rate
environment. Rates on subordinated borrowings decreased 157 basis points due to a reduction in the three-month LIBOR rate.



26



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##### Table of Contents

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.



|                                                                                  |                |                                            |                      |  |      |                   |   |  |                |   |                     |   |         |                   |   |        |   |  |        |  
|--------------------------------------------------------------------------------- | -------------- | ------------------------------------------ | -------------------- |  | ---- | ----------------- | - |  | -------------- | - | ------------------- | - | ------- | ----------------- | - | ------ | - |  | ------ | -
|                                                                                  |                | At or For the Three Months Ended March 31, |                     
|(Dollars in Thousands)                                                            |                | 2010                                       |                      |  | 2009 |                  
|                                                                                  | AverageBalance |                                            | Interest 
&Dividends |  |      | AverageYield/Rate |   |  | AverageBalance |   | Interest &Dividends |   |         | AverageYield/Rate |  
|Interest-earning assets:                                                          |                |                                            |                      |  |      |                   |   |  |                |   |                     |   |         |                   |   |        |   |  |        |  
|Loans(1)(2)                                                                       |                | $                                          | 607,198              |  | $    | 8,411             |   |  | 5.62           | % |                     | $ | 625,944 |                   | $ | 8,934  |   |  | 5.79   | %
|Securities(3)                                                                     |                |                                            | 191,353              |  |      | 1,780             |   |  | 3.77           |   |                     |   | 167,108 |                   |   | 2,043  |   |  | 4.96   |  
|Other interest-earning assets                                                     |                |                                            | 20,293               |  |      | 23                |   |  | 0.46           |   |                     |   | 20,113  |                   |   | 52     |   |  | 1.05   |  
|                                                                                  |                |                                            |                      |  |      |                   |   |  |                |   |                     |   |         |                   |   |        |   |  |        |  
|Total interest-earning assets                                                     |                |                                            | 818,844              |  |      | 10,214            |   |  | 5.06           |   |                     |   | 813,165 |                   |   | 11,029 |   |  | 5.50   |  
|                                                                                  |                |                                            |                      |  |      |                   |   |  |                |   |                     |   |         |                   |   |        |   |  |        |  
|                                                                                  |                |                                            |                      |  |      |                  
|Noninterest-earning assets                                                        |                |                                            | 53,341               |  |      |                   |   |  |                |   |                     |   | 44,752  |                   |   |        |   |  |        |  
|                                                                                  |                |                                            |                      |  |      |                   |   |  |                |   |                     |   |         |                   |   |        |   |  |        |  
|Total assets                                                                      |                | $                                          | 872,185              |  |      |                   |   |  |                |   |                     | $ | 857,917 |                   |   |        |   |  |        |  
|                                                                                  |                |                                            |                      |  |      |                   |   |  |                |   |                     |   |         |                   |   |        |   |  |        |  
|                                                                                  |                |                                            |                      |  |      |                  
|Interest-bearing liabilities:                                                     |                |                                            |                      |  |      |                   |   |  |                |   |                     |   |         |                   |   |        |   |  |        |  
|Deposits:                                                                         |                |                                            |                      |  |      |                   |   |  |                |   |                     |   |         |                   |   |        |   |  |        |  
|NOW and money market                                                              |                | $                                          | 227,257              |  |      | 465               |   |  | 0.83           |   |                     | $ | 195,643 |                   |   | 629    |   |  | 1.30   |  
|Savings(4)                                                                        |                |                                            | 62,413               |  |      | 79                |   |  | 0.51           |   |                     |   | 61,222  |                   |   | 114    |   |  | 0.76   |  
|Certificates of deposit(5)                                                        |                |                                            | 309,427              |  |      | 2,120             |   |  | 2.78           |   |                     |   | 314,610 |                   |   | 2,711  |   |  | 3.49   |  
|                                                                                  |                |                                            |                      |  |      |                   |   |  |                |   |                     |   |         |                   |   |        |   |  |        |  
|Total interest-bearing deposits                                                   |                |                                            | 599,097              |  |      | 2,664             |   |  | 1.80           |   |                     |   | 571,475 |                   |   | 3,454  |   |  | 2.45   |  
|                                                                                  |                |                                            |                      |  |      |                  
|FHLB advances                                                                     |                |                                            | 118,171              |  |      | 1,076             |   |  | 3.69           |   |                     |   | 141,267 |                   |   | 1,481  |   |  | 4.25   |  
|Subordinated debt                                                                 |                |                                            | 8,248                |  |      | 39                |   |  | 1.92           |   |                     |   | 8,248   |                   |   | 71     |   |  | 3.49   |  
|                                                                                  |                |                                            |                      |  |      |                   |   |  |                |   |                     |   |         |                   |   |        |   |  |        |  
|Total interest-bearing liabilities                                                |                |                                            | 725,516              |  |      | 3,779             |   |  | 2.11           |   |                     |   | 720,990 |                   |   | 5,006  |   |  | 2.82   |  
|                                                                                  |                |                                            |                      |  |      |                   |   |  |                |   |                     |   |         |                   |   |        |   |  |        |  
|                                                                                  |                |                                            |                      |  |      |                  
|Noninterest-bearing liabilities                                                   |                |                                            | 67,172               |  |      |                   |   |  |                |   |                     |   | 63,396  |                   |   |        |   |  |        |  
|                                                                                  |                |                                            |                      |  |      |                   |   |  |                |   |                     |   |         |                   |   |        |   |  |        |  
|Total liabilities                                                                 |                |                                            | 792,688              |  |      |                   |   |  |                |   |                     |   | 784,386 |                   |   |        |   |  |        |  
|                                                                                  |                |                                            |                      |  |      |                   |   |  |                |   |                     |   |         |                   |   |        |   |  |        |  
|                                                                                  |                |                                            |                      |  |      |                  
|Total stockholders equity                                                        |                |                                            | 79,497               |  |      |                   |   |  |                |   |                     |   | 73,531  |                   |   |        |   |  |        |  
|                                                                                  |                |                                            |                      |  |      |                   |   |  |                |   |                     |   |         |                   |   |        |   |  |        |  
|                                                                                  |                |                                            |                      |  |      |                  
|Total liabilities and stockholders equity                                        |                | $                                          | 872,185              |  |      |                   |   |  |                |   |                     | $ | 857,917 |                   |   |        |   |  |        |  
|                                                                                  |                |                                            |                      |  |      |                   |   |  |                |   |                     |   |         |                   |   |        |   |  |        |  
|                                                                                  |                |                                            |                      |  |      |                  
|Net interest-earning assets                                                       |                | $                                          | 93,328               |  |      |                   |   |  |                |   |                     | $ | 92,175  |                   |   |        |   |  |        |  
|                                                                                  |                |                                            |                      |  |      |                   |   |  |                |   |                     |   |         |                   |   |        |   |  |        |  
|                                                                                  |                |                                            |                      |  |      |                  
|Tax equivalent net interest income
(3)                                            |                |                                            |                      |  |      | 6,435             |   |  |                |   |                     |   |         |                   |   | 6,023  |   |  |        |  
|                                                                                  |                |                                            |                      |  |      |                   |   |  |                |   |                     |   |         |                   |   |        |   |  |        |  
|Tax equivalent interest rate spread
(6)                                           |                |                                            |                      |  |      |                   |   |  | 2.95           | % |                     |   |         |                   |   |        |   |  | 2.68   | %
|                                                                                  |                |                                            |                      |  |      |                   |   |  |                |   |                     |   |         |                   |   |        |   |  |        |  
|Tax equivalent net interest margin as a percentage of interest-earning assets
(7) |                |                                            |                      |  |      |                   |   |  | 3.19           | % |                     |   |         |                   |   |        |   |  | 3.00   | %
|                                                                                  |                |                                            |                      |  |      |                   |   |  |                |   |                     |   |         |                   |   |        |   |  |        |  
|Average of interest-earning assets to average interest-bearing liabilities        |                |                                            |                      |  |      |                   |   |  | 112.86         | % |                     |   |         |                   |   |        |   |  | 112.78 | %
|                                                                                  |                |                                            |                      |  |      |                   |   |  |                |   |                     |   |         |                   |   |        |   |  |        |  
|Less tax equivalent adjustment
(3)                                                |                |                                            |                      |  |      | (5                | ) |  |                |   |                     |   |         |                   |   | (1     | ) |  |        |  
|                                                                                  |                |                                            |                      |  |      |                   |   |  |                |   |                     |   |         |                   |   |        |   |  |        |  
|Net interest income                                                               |                |                                            |                      |  | $    | 6,430             |   |  |                |   |                     |   |         |                   | $ | 6,022  |   |  |        |  
|                                                                                  |                |                                            |                      |  |      |                   |   |  |                |   |                     |   |         |                   |   |        |   |  |        |  



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



27



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##### 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 EndedMarch 31, 2010
and 2009 |       
|                                   |  | Increase (Decrease) Due To                |       
|(Dollars in Thousands)             |  | Rate                                      |        |   | Volume |   |      | Net | 
|Interest-earning assets:           |  |                                           |        |   |        |   |      |     |  |   |        |  
|Interest and dividend income:      |  |                                           |        |   |        |   |      |     |  |   |        |  
|Loans(1)(2)                        |  | $                                         | (259   | ) |        | $ | (264 | )   |  | $ | (523   | )
|Securities(3)                      |  |                                           | (533   | ) |        |   | 270  |     |  |   | (263   | )
|Other interest-earning assets      |  |                                           | (29    | ) |        |   |     |     |  |   | (29    | )
|                                   |  |                                           |        |   |        |   |      |     |  |   |        |  
|Total interest-earning assets      |  |                                           | (821   | ) |        |   | 6    |     |  |   | (815   | )
|                                   |  |                                           |        |   |        |   |      |     |  |   |        |  
|                                   |  |                                           |       
|Interest-bearing liabilities:      |  |                                           |        |   |        |   |      |     |  |   |        |  
|Interest expense:                  |  |                                           |        |   |        |   |      |     |  |   |        |  
|Deposits(4)                        |  |                                           | (839   | ) |        |   | 49   |     |  |   | (790   | )
|Federal Home Loan Bank advances    |  |                                           | (181   | ) |        |   | (224 | )   |  |   | (405   | )
|Subordinated debt                  |  |                                           | (32    | ) |        |   |     |     |  |   | (32    | )
|                                   |  |                                           |        |   |        |   |      |     |  |   |        |  
|Total interest-bearing liabilities |  |                                           | (1,052 | ) |        |   | (175 | )   |  |   | (1,227 | )
|                                   |  |                                           |        |   |        |   |      |     |  |   |        |  
|                                   |  |                                           |       
|Change in net interest income
(3)  |  | $                                         | 231    |   |        | $ | 181  |     |  | $ | 412    |  
|                                   |  |                                           |        |   |        |   |      |     |  |   |        |  



|(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 $320,000 to $170,000 for the three months ended March 31, 2010. The
lower provision in 2010 resulted from declines in net loan charge-offs and nonperforming loans. At March 31, 2010, nonperforming loans totaled $3.5 million, compared to $9.5 million at March 31, 2009. Specific reserves relating to
nonperforming loans decreased to $246,000 at March 31, 2010 compared to $498,000 at March 31, 2009. Net loan charge-offs were $268,000 for the quarter ended March 31, 2010, compared to $1.3 million for the three months ended
March 31, 2009. Contributing to higher loan charge-offs during the first quarter of 2009 was one commercial construction loan totaling $1.0 million.



28



---

##### Table of Contents

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



|                                                              |      |                              |       |      |  |   |              |   |  |               |      |   |  |        |  
|------------------------------------------------------------- | ---- | ---------------------------- | ----- | ---- |  | - | ------------ | - |  | ------------- | ---- | - |  | ------ | -
|(Dollars in Thousands)                                        |      | Three Months Ended March 31, |      
|                                                              | 2010 |                              |       | 2009 |  |   | DollarChange |   |  | PercentChange |     
|Service fees                                                  |      | $                            | 1,259 |      |  | $ | 1,191        |   |  | $             | 68   |   |  | 5.7    | %
|Wealth management fees                                        |      |                              | 1,019 |      |  |   | 958          |   |  |               | 61   |   |  | 6.4    |  
|Increase in cash surrender value of bank-owned life insurance |      |                              | 71    |      |  |   | 73           |   |  |               | (2   | ) |  | (2.7   | )
|Net gain on sale of securities                                |      |                              | 267   |      |  |   | 137          |   |  |               | 130  |   |  | 94.9   |  
|Net impairment losses recognized in earnings                  |      |                              | (171  | )    |  |   | (150         | ) |  |               | (21  | ) |  | 14.0   |  
|Mortgage banking fees                                         |      |                              | 130   |      |  |   | 139          |   |  |               | (9   | ) |  | (6.5   | )
|Net gain on disposal of equipment                             |      |                              |      |      |  |   | 104          |   |  |               | (104 | ) |  | (100.0 | )
|Other                                                         |      |                              | 38    |      |  |   | (308         | ) |  |               | 346  |   |  | (112.3 | )
|                                                              |      |                              |       |      |  |   |              |   |  |               |      |   |  |        |  
|Total noninterest income                                      |      | $                            | 2,613 |      |  | $ | 2,144        |   |  | $             | 469  |   |  | 21.9   | %
|                                                              |      |                              |       |      |  |   |              |   |  |               |      |   |  |        |  

Higher noninterest income for the three months ended March 31, 2010 was primarily attributable to increases in the net
gain on sale of securities, service fees, wealth management fees and other noninterest income. The Company realized net gains on the sale of bonds and stocks of $485,000, offset by losses on the sale of bonds of $218,000 during the quarter ended
March 31, 2010. Service fees increased as a result of higher electronic banking usage. Wealth management fees increased due to higher market values of trust assets under administration and trust service fees compared to the same period in 2009.
Included in other noninterest income were impairment charges of $12,000 and $336,000 that were recorded to reduce the carrying value of the Banks investment in two small business investment company limited partnerships during the quarters
ended March 31, 2010 and 2009, respectively. The Company recorded OTTI losses related to credit factors on one non-agency mortgage-backed security during the three months ended March 31, 2010. For the first quarter of 2009, the Company
reported a gain of $104,000 on the sale of equipment in connection with the sale of the Gales Ferry, Connecticut branch office in January 2009.

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



|                                                  |      |                              |       |  |              |       |  |               |     |   |  |       |  
|------------------------------------------------- | ---- | ---------------------------- | ----- |  | ------------ | ----- |  | ------------- | --- | - |  | ----- | -
|(Dollars in Thousands)                            |      | Three Months Ended March 31, |      
|                                                  | 2010 |                              | 2009  |  | DollarChange |       |  | PercentChange |    
|Salaries and employee benefits                    |      | $                            | 4,141 |  | $            | 3,954 |  | $             | 187 |   |  | 4.7   | %
|Occupancy and equipment                           |      |                              | 1,421 |  |              | 1,455 |  |               | (34 | ) |  | (2.3  | )
|Computer and electronic banking services          |      |                              | 941   |  |              | 791   |  |               | 150 |   |  | 19.0  |  
|Outside professional services                     |      |                              | 249   |  |              | 220   |  |               | 29  |   |  | 13.2  |  
|Marketing and advertising                         |      |                              | 182   |  |              | 208   |  |               | (26 | ) |  | (12.5 | )
|Supplies                                          |      |                              | 141   |  |              | 151   |  |               | (10 | ) |  | (6.6  | )
|FDIC deposit insurance and regulatory assessments |      |                              | 339   |  |              | 182   |  |               | 157 |   |  | 86.3  |  
|Other                                             |      |                              | 723   |  |              | 633   |  |               | 90  |   |  | 14.2  |  
|                                                  |      |                              |       |  |              |       |  |               |     |   |  |       |  
|Total noninterest expenses                        |      | $                            | 8,137 |  | $            | 7,594 |  | $             | 543 |   |  | 7.2   | %
|                                                  |      |                              |       |  |              |       |  |               |     |   |  |       |  

Noninterest expenses increased $543,000 for the three months ended March 31, 2010 as compared to the same period in
2009, mainly due to increases in salaries and benefits, FDIC deposit insurance assessments, computer and electronic banking services and other real estate owned expenses. The increase in salaries and benefits was the result of lower deferred loan
origination costs associated with a decline in loan originations for 2010 compared to 2009. The increase in the FDIC deposit insurance assessment of $157,000 was attributable to an industry-wide increase in the assessment rate for 2010. Computer and
electronic banking services expense rose as a result of increased telecommunication costs and transaction activity.



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Income Tax Provision. For the three months ended March 31, 2010, the Companys
income tax expense increased $217,000 due to higher pre-tax income. The effective tax rate for the three months ended March 31, 2010 and 2009 was 33.0% and 31.7%, respectively. The higher effective tax rate for the three months ended
March 31, 2010 was due primarily to higher pre-tax income.

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 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 March 31, 2010, cash and cash
equivalents totaled $33.0 million. Interest-bearing deposits and federal funds sold totaled $18.9 million, which included a $1.5 million certificate of deposit pledged to support a letter of credit for MasterCards settlement guarantee program.

Securities classified as available for sale, which provide additional sources of liquidity, totaled $188.3 million at March 31, 2010. In
addition, at March 31, 2010, the Company had a potential borrowing capacity of $190.4 million from the FHLB, which included overnight lines of credit of $10.0 million. On that date, the Company had FHLB advances outstanding of $114.1 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 three months ended March 31, 2010, the Company originated $20.3 million of loans and purchased $26.8 million of securities and $7.3 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, including mortgagors and investors escrow accounts, of $9.3 million and $38.1 million for the three months ended March 31,
2010 and for the year ended December 31, 2009, respectively. Certificates of deposit due within one year March 31, 2010 totaled $216.8 million, or 31.0%, 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 $2.0 million in FHLB advances for the three months ended March 31, 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 common stock. For the three months ended March 31, 2010, the Company repurchased 480 shares of the Companys common stock at a cost of $3,000. At March 31, 2010, the remaining shares that may be
repurchased under this plan totaled 448,972. 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.



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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 March 31, 2010, SI Financial Group had cash and cash
equivalents of $4.7 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 March 31, 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 March 31, 2010 and December 31, 2009 are as follows:



|                                        |  |               |        |                  |   |       
|--------------------------------------- |  | ------------- | ------ | ---------------- | - | ------
|(Dollars in Thousands)                  |  | March 31,2010 |        | December 31,2009
|Commitments to extend credit:(1)        |  |               |        |                  |   |       
|Future loan commitments                 |  | $             | 5,618  |                  | $ | 8,648 
|Undisbursed construction loans          |  |               | 10,208 |                  |   | 9,843 
|Undisbursed home equity lines of credit |  |               | 19,566 |                  |   | 18,733
|Undisbursed commercial lines of credit  |  |               | 11,809 |                  |   | 12,390
|Overdraft protection lines              |  |               | 1,401  |                  |   | 1,425 
|Standby letters of credit(2)            |  |               | 654    |                  |   | 784   
|                                        |  |               |        |                  |   |       
|Total commitments                       |  | $             | 49,256 |                  | $ | 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 March 31, 2010, the Banks remaining
off-balance sheet commitment for the capital investment in the SBICs was $757,000. The Bank recognized a write-down of $12,000 and $336,000 on its investment in the SBICs during the three months ended March 31, 2010 and 2009, respectively.



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At March 31, 2010, the Bank had outstanding commitments to purchase $1.6 million in guaranteed USDA and
SBA loans.

For the three months ended March 31, 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 4T. | 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
March 31, 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.
|-------- | -------------

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.



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

The Companys repurchases of equity securities for the three months ended March 31, 2010 were as follows:



|                      |  |                                      |  |                           |      |                                                                             |     |                                                                            |        
|--------------------- |  | ------------------------------------ |  | ------------------------- | ---- | --------------------------------------------------------------------------- | --- | -------------------------------------------------------------------------- | -------
|Period                |  | TotalNumber
ofSharesPurchased (1)(2) |  | AveragePricePaidPer Share |      | Total Numberof
SharesPurchased asPart of
PubliclyAnnounced Plansor Programs |     | MaximumNumber of 
Sharesthat May Yet bePurchased Underthe
Plans orPrograms
|                      |  |                                      |  |                          
|January 1  31, 2010  |  |                                     |  | $                         |     |                                                                             |    |                                                                            | 449,452
|February 1  28, 2010 |  |                                     |  |                           |     |                                                                             |    |                                                                            | 449,452
|March 1  31, 2010    |  | 480                                  |  |                           | 6.60 |                                                                             | 480 |                                                                            | 448,972
|                      |  |                                      |  |                           |      |                                                                             |     |                                                                            |        
|Total                 |  | 480                                  |  | $                         | 6.60 |                                                                             | 480 |                                                                            |        
|                      |  |                                      |  |                           |      |                                                                             |     |                                                                            |        



|(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 480 shares withheld from employees to satisfy tax withholding requirements upon the vesting of restricted stock awards.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------



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



34