##### Table of Contents





UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549





FORM 10-Q







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

For the Quarterly Period Ended June 30, 2008

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 is
a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definition 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   ̈     (Do not check if a smaller reporting company)
        Smaller Reporting Company  x

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

As of August 1, 2008, there were 11,813,445 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.    |  | Consolidated Financial Statements of SI Financial Group, Inc. and Subsidiaries (unaudited):      |  |         
|           |  |                                                                                                 
|           |  | Consolidated Balance Sheets at June 30, 2008 and December 31, 2007                               |  | 1       
|           |  |                                                                                                 
|           |  | Consolidated Statements of Income for the three and six months ended June 30, 2008 and 2007      |  | 2       
|           |  |                                                                                                 
|           |  | Consolidated Statement of Changes in Stockholders Equity for the six months ended June 30, 2008 |  | 3       
|           |  |                                                                                                 
|           |  | Consolidated Statements of Cash Flows for the six months ended June 30, 2008 and 2007            |  | 4       
|           |  |                                                                                                 
|           |  | Notes to Consolidated Financial Statements                                                       |  | 6       
|           |  |                                                                                                 
|Item 2.    |  | Managements Discussion and Analysis of Financial Condition and Results of Operations            |  | 14      
|           |  |                                                                                                 
|Item 3.    |  | Quantitative and Qualitative Disclosures about Market Risk                                       |  | 24      
|           |  |                                                                                                 
|Item 4.    |  | Controls and Procedures                                                                          |  | 24      
|           |  |                                                                                                 
|PART II.   |  | OTHER INFORMATION                                                                                |  |         
|           |  |                                                                                                 
|Item 1.    |  | Legal Proceedings                                                                                |  | 25      
|           |  |                                                                                                 
|Item 1A.   |  | Risk Factors                                                                                     |  | 25      
|           |  |                                                                                                 
|Item 2.    |  | Unregistered Sales of Equity Securities and Use of Proceeds                                      |  | 25      
|           |  |                                                                                                 
|Item 3.    |  | Defaults Upon Senior Securities                                                                  |  | 25      
|           |  |                                                                                                 
|Item 4.    |  | Submission of Matters to a Vote of Security Holders                                              |  | 26      
|           |  |                                                                                                 
|Item 5.    |  | Other Information                                                                                |  | 26      
|           |  |                                                                                                 
|Item 6.    |  | Exhibits                                                                                         |  | 26      
|           |  |                                                                                                 
|SIGNATURES |  |                                                                                                  |  | 27      





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PART I. FINANCIAL INFORMATION



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

SI FINANCIAL GROUP, INC.

CONSOLIDATED BALANCE SHEETS

(Dollars in Thousands, Except Share Amounts / Unaudited)



|                                                                                                                                                                                         |  |              |         |   |                  |   |         |  
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------ | ------- | - | ---------------- | - | ------- | -
|                                                                                                                                                                                         |  | June 30,2008 |         |   | December 31,2007 |  
|ASSETS:                                                                                                                                                                                  |  |              |         |   |                  |   |         |  
|Cash and due from banks:                                                                                                                                                                 |  |              |         |   |                  |   |         |  
|Noninterest-bearing                                                                                                                                                                      |  | $            | 14,678  |   |                  | $ | 14,543  |  
|Interest-bearing                                                                                                                                                                         |  |              | 1,905   |   |                  |   | 5,126   |  
|Federal funds sold                                                                                                                                                                       |  |              | 10,900  |   |                  |   | 1,000   |  
|                                                                                                                                                                                         |  |              |         |   |                  |   |         |  
|Total cash and cash equivalents                                                                                                                                                          |  |              | 27,483  |   |                  |   | 20,669  |  
|Available for sale securities, at fair value                                                                                                                                             |  |              | 178,303 |   |                  |   | 141,914 |  
|Loans held for sale                                                                                                                                                                      |  |              |        |   |                  |   | 410     |  
|Loans receivable (net of allowance for loan losses of $5,427 at June 30, 2008 and $5,245 at December 31, 2007)                                                                           |  |              | 609,550 |   |                  |   | 587,538 |  
|Accrued interest receivable                                                                                                                                                              |  |              | 3,594   |   |                  |   | 3,528   |  
|Federal Home Loan Bank stock, at cost                                                                                                                                                    |  |              | 8,299   |   |                  |   | 7,802   |  
|Bank-owned life insurance                                                                                                                                                                |  |              | 8,562   |   |                  |   | 8,410   |  
|Other real estate owned                                                                                                                                                                  |  |              |        |   |                  |   | 913     |  
|Premises and equipment, net                                                                                                                                                              |  |              | 12,808  |   |                  |   | 11,806  |  
|Goodwill and other intangibles                                                                                                                                                           |  |              | 4,268   |   |                  |   | 643     |  
|Deferred tax asset, net                                                                                                                                                                  |  |              | 4,451   |   |                  |   | 3,270   |  
|Other assets                                                                                                                                                                             |  |              | 3,543   |   |                  |   | 3,295   |  
|                                                                                                                                                                                         |  |              |         |   |                  |   |         |  
|Total assets                                                                                                                                                                             |  | $            | 860,861 |   |                  | $ | 790,198 |  
|                                                                                                                                                                                         |  |              |         |   |                  |   |         |  
|LIABILITIES AND STOCKHOLDERS EQUITY:                                                                                                                                                    |  |              |         |   |                  |   |         |  
|Liabilities:                                                                                                                                                                             |  |              |         |   |                  |   |         |  
|Deposits:                                                                                                                                                                                |  |              |         |   |                  |   |         |  
|Noninterest-bearing                                                                                                                                                                      |  | $            | 61,297  |   |                  | $ | 56,762  |  
|Interest-bearing                                                                                                                                                                         |  |              | 559,976 |   |                  |   | 491,573 |  
|                                                                                                                                                                                         |  |              |         |   |                  |   |         |  
|Total deposits                                                                                                                                                                           |  |              | 621,273 |   |                  |   | 548,335 |  
|Mortgagors and investors escrow accounts                                                                                                                                               |  |              | 3,355   |   |                  |   | 3,437   |  
|Federal Home Loan Bank advances                                                                                                                                                          |  |              | 139,636 |   |                  |   | 141,619 |  
|Junior subordinated debt owed to unconsolidated trust                                                                                                                                    |  |              | 8,248   |   |                  |   | 8,248   |  
|Accrued expenses and other liabilities                                                                                                                                                   |  |              | 10,601  |   |                  |   | 6,472   |  
|                                                                                                                                                                                         |  |              |         |   |                  |   |         |  
|Total liabilities                                                                                                                                                                        |  |              | 783,113 |   |                  |   | 708,111 |  
|                                                                                                                                                                                         |  |              |         |   |                  |   |         |  
|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; 11,813,445 and 12,071,100 shares outstanding at
June 30, 2008 and December 31, 2007, respectively) |  |              | 126     |   |                  |   | 126     |  
|Additional paid-in capital                                                                                                                                                               |  |              | 51,992  |   |                  |   | 51,852  |  
|Unallocated common shares held by ESOP                                                                                                                                                   |  |              | (3,714  | ) |                  |   | (3,876  | )
|Unearned restricted shares                                                                                                                                                               |  |              | (933    | ) |                  |   | (1,181  | )
|Retained earnings                                                                                                                                                                        |  |              | 39,971  |   |                  |   | 39,933  |  
|Accumulated other comprehensive (loss) income                                                                                                                                            |  |              | (1,902  | ) |                  |   | 504     |  
|Treasury stock, at cost (750,305 shares at June 30, 2008 and 492,650 shares at December 31, 2007)                                                                                        |  |              | (7,792  | ) |                  |   | (5,271  | )
|                                                                                                                                                                                         |  |              |         |   |                  |   |         |  
|Total stockholders equity                                                                                                                                                               |  |              | 77,748  |   |                  |   | 82,087  |  
|                                                                                                                                                                                         |  |              |         |   |                  |   |         |  
|Total liabilities and stockholders equity                                                                                                                                               |  | $            | 860,861 |   |                  | $ | 790,198 |  
|                                                                                                                                                                                         |  |              |         |   |                  |   |         |  

See accompanying notes to unaudited interim consolidated financial statements.



1



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SI FINANCIAL GROUP, INC.

CONSOLIDATED STATEMENTS OF INCOME

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



|                                                              |      |                            |        |                          |      |        |      |   |        |  |   |       
|------------------------------------------------------------- | ---- | -------------------------- | ------ | ------------------------ | ---- | ------ | ---- | - | ------ |  | - | ------
|                                                              |      | Three Months EndedJune 30, |        | Six Months EndedJune 30,
|                                                              | 2008 |                            | 2007   |                          | 2008 |        | 2007
|Interest and dividend income:                                 |      |                            |        |                          |      |        |      |   |        |  |   |       
|Loans, including fees                                         |      | $                          | 9,318  |                          | $    | 9,136  |      | $ | 18,534 |  | $ | 18,050
|Securities:                                                   |      |                            |        |                          |      |        |      |   |        |  |   |       
|Taxable interest                                              |      |                            | 2,176  |                          |      | 1,366  |      |   | 4,158  |  |   | 2,721 
|Tax-exempt interest                                           |      |                            | 4      |                          |      | 4      |      |   | 7      |  |   | 8     
|Dividends                                                     |      |                            | 105    |                          |      | 131    |      |   | 263    |  |   | 257   
|Other                                                         |      |                            | 104    |                          |      | 87     |      |   | 184    |  |   | 162   
|                                                              |      |                            |        |                          |      |        |      |   |        |  |   |       
|Total interest and dividend income                            |      |                            | 11,707 |                          |      | 10,724 |      |   | 23,146 |  |   | 21,198
|                                                              |      |                            |        |                          |      |        |      |   |        |  |   |       
|Interest expense:                                             |      |                            |        |                          |      |        |      |   |        |  |   |       
|Deposits                                                      |      |                            | 4,034  |                          |      | 3,931  |      |   | 8,132  |  |   | 7,625 
|Federal Home Loan Bank advances                               |      |                            | 1,596  |                          |      | 1,240  |      |   | 3,188  |  |   | 2,468 
|Subordinated debt                                             |      |                            | 77     |                          |      | 180    |      |   | 216    |  |   | 480   
|                                                              |      |                            |        |                          |      |        |      |   |        |  |   |       
|Total interest expense                                        |      |                            | 5,707  |                          |      | 5,351  |      |   | 11,536 |  |   | 10,573
|                                                              |      |                            |        |                          |      |        |      |   |        |  |   |       
|Net interest income                                           |      |                            | 6,000  |                          |      | 5,373  |      |   | 11,610 |  |   | 10,625
|Provision for loan losses                                     |      |                            | 150    |                          |      | 55     |      |   | 285    |  |   | 220   
|                                                              |      |                            |        |                          |      |        |      |   |        |  |   |       
|Net interest income after provision for loan losses           |      |                            | 5,850  |                          |      | 5,318  |      |   | 11,325 |  |   | 10,405
|                                                              |      |                            |        |                          |      |        |      |   |        |  |   |       
|Noninterest income:                                           |      |                            |        |                          |      |        |      |   |        |  |   |       
|Service Fees                                                  |      |                            | 1,328  |                          |      | 1,156  |      |   | 2,613  |  |   | 2,282 
|Wealth management fees                                        |      |                            | 1,020  |                          |      | 970    |      |   | 1,991  |  |   | 1,892 
|Increase in cash surrender value of bank-owned life insurance |      |                            | 77     |                          |      | 72     |      |   | 152    |  |   | 144   
|Net gain on sale of securities                                |      |                            | 34     |                          |      |       |      |   | 144    |  |   | 321   
|Net gain on sale of loans                                     |      |                            | 22     |                          |      | 34     |      |   | 81     |  |   | 65    
|Other                                                         |      |                            | 142    |                          |      | 21     |      |   | 170    |  |   | 32    
|                                                              |      |                            |        |                          |      |        |      |   |        |  |   |       
|Total noninterest income                                      |      |                            | 2,623  |                          |      | 2,253  |      |   | 5,151  |  |   | 4,736 
|                                                              |      |                            |        |                          |      |        |      |   |        |  |   |       
|Noninterest expenses:                                         |      |                            |        |                          |      |        |      |   |        |  |   |       
|Salaries and employee benefits                                |      |                            | 4,305  |                          |      | 3,787  |      |   | 8,305  |  |   | 7,516 
|Occupancy and equipment                                       |      |                            | 1,464  |                          |      | 1,311  |      |   | 2,865  |  |   | 2,666 
|Computer and electronic banking services                      |      |                            | 761    |                          |      | 631    |      |   | 1,482  |  |   | 1,269 
|Outside professional services                                 |      |                            | 210    |                          |      | 228    |      |   | 413    |  |   | 592   
|Marketing and advertising                                     |      |                            | 194    |                          |      | 237    |      |   | 391    |  |   | 409   
|Supplies and printing                                         |      |                            | 145    |                          |      | 150    |      |   | 320    |  |   | 276   
|Other                                                         |      |                            | 727    |                          |      | 701    |      |   | 1,364  |  |   | 1,263 
|                                                              |      |                            |        |                          |      |        |      |   |        |  |   |       
|Total noninterest expenses                                    |      |                            | 7,806  |                          |      | 7,045  |      |   | 15,140 |  |   | 13,991
|                                                              |      |                            |        |                          |      |        |      |   |        |  |   |       
|Income before income tax provision                            |      |                            | 667    |                          |      | 526    |      |   | 1,336  |  |   | 1,150 
|Income tax provision                                          |      |                            | 204    |                          |      | 149    |      |   | 418    |  |   | 324   
|                                                              |      |                            |        |                          |      |        |      |   |        |  |   |       
|Net income                                                    |      | $                          | 463    |                          | $    | 377    |      | $ | 918    |  | $ | 826   
|                                                              |      |                            |        |                          |      |        |      |   |        |  |   |       
|Net income per common share:                                  |      |                            |        |                          |      |        |      |   |        |  |   |       
|Basic                                                         |      | $                          | 0.04   |                          | $    | 0.03   |      | $ | 0.08   |  | $ | 0.07  
|Diluted                                                       |      | $                          | 0.04   |                          | $    | 0.03   |      | $ | 0.08   |  | $ | 0.07  

See accompanying notes to unaudited interim consolidated financial statements.



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SI FINANCIAL GROUP, INC.

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS EQUITY

FOR THE SIX MONTHS ENDED JUNE 30, 2008

(Dollars in Thousands, Except Share Amounts / Unaudited)



|                                                                                                                     |        |              |         |                          |     |  |                                     |        |   |                          |   |        |                  |  |   |                                            |   |  |               |        |   |                          |   |        |   |  |   |        |   |  |   |        |  
|-------------------------------------------------------------------------------------------------------------------- | ------ | ------------ | ------- | ------------------------ | --- |  | ----------------------------------- | ------ | - | ------------------------ | - | ------ | ---------------- |  | - | ------------------------------------------ | - |  | ------------- | ------ | - | ------------------------ | - | ------ | - |  | - | ------ | - |  | - | ------ | -
|                                                                                                                     |        | Common Stock |         | AdditionalPaid-inCapital |     |  | UnallocatedCommonShares Heldby ESOP |        |   | UnearnedRestrictedShares |   |        | RetainedEarnings |  |   | AccumulatedOtherComprehensive(Loss)
Income |   |  | TreasuryStock |        |   | TotalStockholdersEquity |  
|                                                                                                                     | Shares |              | Dollars |                          |     |  |                                     |        |   |                         
|Balance at December 31, 2007                                                                                         |        | 12,563,750   |         | $                        | 126 |  | $                                   | 51,852 |   |                          | $ | (3,876 | )                |  | $ | (1,181                                     | ) |  | $             | 39,933 |   |                          | $ | 504    |   |  | $ | (5,271 | ) |  | $ | 82,087 |  
|Cash dividends declared ($0.08 per share)                                                                            |        |             |         |                          |    |  |                                     |       |   |                          |   |       |                  |  |   |                                           |   |  |               | (333   | ) |                          |   |       |   |  |   |       |   |  |   | (333   | )
|Equity incentive plan shares earned                                                                                  |        |             |         |                          |    |  |                                     | 150    |   |                          |   |       |                  |  |   | 248                                        |   |  |               |       |   |                          |   |       |   |  |   |       |   |  |   | 398    |  
|Committed to release 8,074 ESOP shares                                                                               |        |             |         |                          |    |  |                                     | (4     | ) |                          |   | 162    |                  |  |   |                                           |   |  |               |       |   |                          |   |       |   |  |   |       |   |  |   | 158    |  
|Vesting of restricted stock                                                                                          |        |             |         |                          |    |  |                                     | (6     | ) |                          |   |       |                  |  |   |                                           |   |  |               |       |   |                          |   |       |   |  |   |       |   |  |   | (6     | )
|Cumulative effect adjustment of a change in accounting principle  adoption of EITF 06-4                             |        |             |         |                          |    |  |                                     |       |   |                          |   |       |                  |  |   |                                           |   |  |               | (547   | ) |                          |   |       |   |  |   |       |   |  |   | (547   | )
|Treasury shares purchased (257,655 shares)                                                                           |        |             |         |                          |    |  |                                     |       |   |                          |   |       |                  |  |   |                                           |   |  |               |       |   |                          |   |       |   |  |   | (2,521 | ) |  |   | (2,521 | )
|Comprehensive loss:                                                                                                  |        |              |         |                          |     |  |                                     |        |   |                          |   |        |                  |  |   |                                            |   |  |               |        |   |                          |   |        |   |  |   |        |   |  |   |        |  
|Net income                                                                                                           |        |             |         |                          |    |  |                                     |       |   |                          |   |       |                  |  |   |                                           |   |  |               | 918    |   |                          |   |       |   |  |   |       |   |  |   | 918    |  
|Change in net unrealized losses on available for sale securities, net of reclassification adjustment and tax effects |        |             |         |                          |    |  |                                     |       |   |                          |   |       |                  |  |   |                                           |   |  |               |       |   |                          |   | (2,406 | ) |  |   |       |   |  |   | (2,406 | )
|                                                                                                                     |        |              |         |                          |     |  |                                     |        |   |                          |   |        |                  |  |   |                                            |   |  |               |        |   |                          |   |        |   |  |   |        |   |  |   |        |  
|Total comprehensive loss                                                                                             |        |              |         |                          |     |  |                                     |        |   |                          |   |        |                  |  |   |                                            |   |  |               |        |   |                          |   |        |   |  |   |        |   |  |   | (1,488 | )
|                                                                                                                     |        |              |         |                          |     |  |                                     |        |   |                          |   |        |                  |  |   |                                            |   |  |               |        |   |                          |   |        |   |  |   |        |   |  |   |        |  
|Balance at June 30, 2008                                                                                             |        | 12,563,750   |         | $                        | 126 |  | $                                   | 51,992 |   |                          | $ | (3,714 | )                |  | $ | (933                                       | ) |  | $             | 39,971 |   |                          | $ | (1,902 | ) |  | $ | (7,792 | ) |  | $ | 77,748 |  
|                                                                                                                     |        |              |         |                          |     |  |                                     |        |   |                          |   |        |                  |  |   |                                            |   |  |               |        |   |                          |   |        |   |  |   |        |   |  |   |        |  

See accompanying notes to unaudited interim consolidated financial statements.



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SI FINANCIAL GROUP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in Thousands / Unaudited)



|                                                                                      |      |                          |         |      |  |   |         |  
|------------------------------------------------------------------------------------- | ---- | ------------------------ | ------- | ---- |  | - | ------- | -
|                                                                                      |      | Six Months EndedJune 30, |        
|                                                                                      | 2008 |                          |         | 2007 | 
|Cash flows from operating activities:                                                 |      |                          |         |      |  |   |         |  
|Net income                                                                            |      | $                        | 918     |      |  | $ | 826     |  
|Adjustments to reconcile net income to net cash provided by operating activities:     |      |                          |         |      |  |   |         |  
|Provision for loan losses                                                             |      |                          | 285     |      |  |   | 220     |  
|Employee stock ownership plan expense                                                 |      |                          | 158     |      |  |   | 202     |  
|Equity incentive plan expense                                                         |      |                          | 398     |      |  |   | 385     |  
|Excess tax benefit from share-based payment arrangements                              |      |                          |        |      |  |   | (36     | )
|Accretion of investment premiums and discounts, net                                   |      |                          | (115    | )    |  |   | (124    | )
|Amortization of loan premiums and discounts, net                                      |      |                          | 110     |      |  |   | 294     |  
|Depreciation and amortization of premises and equipment                               |      |                          | 1,045   |      |  |   | 1,058   |  
|Amortization of core deposit intangible                                               |      |                          | 27      |      |  |   | 49      |  
|Amortization of deferred debt issuance costs                                          |      |                          |        |      |  |   | 35      |  
|Amortization of mortgage servicing rights                                             |      |                          | 56      |      |  |   | 45      |  
|Net gain on sale of securities                                                        |      |                          | (144    | )    |  |   | (321    | )
|Deferred income taxes                                                                 |      |                          | 59      |      |  |   | 58      |  
|Loans originated for sale                                                             |      |                          | (6,235  | )    |  |   | (6,290  | )
|Proceeds from sale of loans held for sale                                             |      |                          | 6,726   |      |  |   | 5,716   |  
|Net gain on sale of loans                                                             |      |                          | (81     | )    |  |   | (65     | )
|Net gain on sale of other real estate owned                                           |      |                          | (10     | )    |  |   |        |  
|Increase in cash surrender value of bank-owned life insurance                         |      |                          | (152    | )    |  |   | (144    | )
|Change in operating assets and liabilities:                                           |      |                          |         |      |  |   |         |  
|Accrued interest receivable                                                           |      |                          | (26     | )    |  |   | 284     |  
|Other assets                                                                          |      |                          | 271     |      |  |   | 916     |  
|Accrued expenses and other liabilities                                                |      |                          | 3,569   |      |  |   | (322    | )
|                                                                                      |      |                          |         |      |  |   |         |  
|Net cash provided by operating activities                                             |      |                          | 6,859   |      |  |   | 2,786   |  
|                                                                                      |      |                          |         |      |  |   |         |  
|Cash flows from investing activities:                                                 |      |                          |         |      |  |   |         |  
|Purchases of available for sale securities                                            |      |                          | (74,627 | )    |  |   | (15,718 | )
|Proceeds from sales of available for sale securities                                  |      |                          | 9,953   |      |  |   | 321     |  
|Proceeds from maturities of and principal repayments on available for sale securities |      |                          | 24,323  |      |  |   | 14,242  |  
|Net increase in loans                                                                 |      |                          | (14,966 | )    |  |   | (1,570  | )
|Purchases of Federal Home Loan Bank stock                                             |      |                          | (497    | )    |  |   |        |  
|Proceeds from sale of other real estate owned                                         |      |                          | 923     |      |  |   |        |  
|Purchases of premises and equipment                                                   |      |                          | (1,362  | )    |  |   | (1,280  | )
|Branch Acquisitions                                                                   |      |                          | 15,857  |      |  |   |        |  
|                                                                                      |      |                          |         |      |  |   |         |  
|Net cash used in investing activities                                                 |      |                          | (40,396 | )    |  |   | (4,005  | )
|                                                                                      |      |                          |         |      |  |   |         |  
|Cash flows from financing activities:                                                 |      |                          |         |      |  |   |         |  
|Net increase in deposits                                                              |      |                          | 45,270  |      |  |   | 13,967  |  
|Net (decrease) increase in mortgagors and investors escrow accounts                 |      |                          | (82     | )    |  |   | 16      |  
|Proceeds from Federal Home Loan Bank advances                                         |      |                          | 30,436  |      |  |   | 24,198  |  
|Repayments of Federal Home Loan Bank advances                                         |      |                          | (32,419 | )    |  |   | (27,361 | )
|Repayments of other borrowings                                                        |      |                          |        |      |  |   | (7,217  | )
|Cash dividends on common stock                                                        |      |                          | (333    | )    |  |   | (410    | )
|Excess tax benefit from share-based payment arrangements                              |      |                          |        |      |  |   | 36      |  
|Treasury stock purchased                                                              |      |                          | (2,521  | )    |  |   | (207    | )
|                                                                                      |      |                          |         |      |  |   |         |  
|Net cash provided by financing activities                                             |      |                          | 40,351  |      |  |   | 3,022   |  
|                                                                                      |      |                          |         |      |  |   |         |  

(continued on next page)



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##### Table of Contents

SI FINANCIAL GROUP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)

(Dollars in Thousands /
Unaudited)



|                                                                                                                                   |  |                          |         |   |      |   |       
|---------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------ | ------- | - | ---- | - | ------
|                                                                                                                                   |  | Six Months EndedJune 30,
|                                                                                                                                   |  | 2008                     |         |   | 2007
|Net change in cash and cash equivalents                                                                                            |  |                          | 6,814   |   |      |   | 1,803 
|Cash and cash equivalents at beginning of period                                                                                   |  |                          | 20,669  |   |      |   | 26,108
|                                                                                                                                   |  |                          |         |   |      |   |       
|Cash and cash equivalents at end of period                                                                                         |  | $                        | 27,483  |   |      | $ | 27,911
|                                                                                                                                   |  |                          |         |   |      |   |       
|Supplemental cash flow information:                                                                                                |  |                          |         |   |      |   |       
|Interest paid                                                                                                                      |  | $                        | 11,541  |   |      | $ | 10,724
|Income taxes paid, net                                                                                                             |  |                          | 693     |   |      |   | 777   
|Transfer of loans to other real estate owned                                                                                       |  |                          |        |   |      |   | 953   
|Asset Purchases:                                                                                                                   |  |                          |         |   |      |   |       
|The net liabilities assumed
in the purchase of a branch office located in Colchester, Connecticut in January 2008 were as follows:
|Assets:                                                                                                                            |  |                          |         |   |      |   |       
|Loans receivable                                                                                                                   |  | $                        | 231     |   |      | $ |      
|Accrued interest - loans                                                                                                           |  |                          | 1       |   |      |   |      
|Core deposit intangible                                                                                                            |  |                          | 159     |   |      |   |      
|Fixed assets, net                                                                                                                  |  |                          | 69      |   |      |   |      
|Goodwill                                                                                                                           |  |                          | 2,578   |   |      |   |      
|                                                                                                                                   |  |                          |         |   |      |   |       
|Total assets acquired                                                                                                              |  |                          | 3,038   |   |      |   |      
|                                                                                                                                   |  |                          |         |   |      |   |       
|Liabilities:                                                                                                                       |  |                          |         |   |      |   |       
|Deposits                                                                                                                           |  |                          | 18,410  |   |      |   |      
|Accrued interest - deposits                                                                                                        |  |                          | 1       |   |      |   |      
|                                                                                                                                   |  |                          |         |   |      |   |       
|Total liabilities assumed                                                                                                          |  |                          | 18,411  |   |      |   |      
|                                                                                                                                   |  |                          |         |   |      |   |       
|Net liabilities assumed                                                                                                            |  | $                        | (15,373 | ) |      | $ |      
|                                                                                                                                   |  |                          |         |   |      |   |       
|The net liabilities
assumed in the purchase of a branch office located in New London, Connecticut in March 2008 were as follows:  
|Assets:                                                                                                                            |  |                          |         |   |      |   |       
|Loans receivable                                                                                                                   |  | $                        | 7,210   |   |      | $ |      
|Accrued interest - loans                                                                                                           |  |                          | 39      |   |      |   |      
|Fixed assets, net                                                                                                                  |  |                          | 616     |   |      |   |      
|Goodwill                                                                                                                           |  |                          | 915     |   |      |   |      
|                                                                                                                                   |  |                          |         |   |      |   |       
|Total assets acquired                                                                                                              |  |                          | 8,780   |   |      |   |      
|                                                                                                                                   |  |                          |         |   |      |   |       
|Liabilities:                                                                                                                       |  |                          |         |   |      |   |       
|Deposits                                                                                                                           |  |                          | 9,258   |   |      |   |      
|Accrued interest - deposits                                                                                                        |  |                          | 6       |   |      |   |      
|                                                                                                                                   |  |                          |         |   |      |   |       
|Total liabilities assumed                                                                                                          |  |                          | 9,264   |   |      |   |      
|                                                                                                                                   |  |                          |         |   |      |   |       
|Net liabilities assumed                                                                                                            |  | $                        | (484    | ) |      | $ |      
|                                                                                                                                   |  |                          |         |   |      |   |       

See accompanying notes to unaudited interim consolidated financial statements.



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##### Table of Contents

SI FINANCIAL GROUP, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2008 AND 2007 AND DECEMBER 31, 2007

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-two offices in eastern Connecticut. The 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 business other than owning all of the stock of the Bank.

SI Trust
Servicing, the third-party provider of trust outsourcing services for community banks, expands the wealth management products offered by the Bank, and offers trust services to other community banks.

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 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 and general practices within the banking industry. Accordingly, certain information and footnote
disclosures required by accounting principles generally accepted in the United States of America (GAAP) for complete financial statements have been omitted. Information in the accompanying interim consolidated financial statements and
notes to the financial statements of the Company as of June 30, 2008 and for the three and six months ended June 30, 2008 and 2007 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, 2007 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, 2008. In the opinion of management, the accompanying unaudited
interim consolidated financial statements reflect all of the adjustments, consisting only of normal and recurring adjustments in nature, necessary for a fair presentation of the financial condition, results of operations and cash flows as of and for
the period covered herein. The results of operations for the three and six months ended June 30, 2008 are not necessarily indicative of the operating results for the twelve months ending December 31, 2008.

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



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##### Table of Contents

SI FINANCIAL GROUP, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2008 AND 2007
AND DECEMBER 31, 2007



Recent Accounting Pronouncements

In December 2007, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 141 (Revised 2007), Business Combinations (FASB
141(R)), which requires an acquiring entity to recognize all assets acquired and liabilities assumed in a transaction at their fair value as of the acquisition date, with limited exception, changes the accounting treatment for certain specific
items and expands disclosure requirements. FASB 141(R) applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008, with
early adoption prohibited.

Effective January 2008, the Company adopted FASBs Financial Accounting Standards No. 157, Fair Value
Measurements (SFAS 157), which defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands the disclosures about fair value measurement. This Statement was
developed to provide guidance for consistency and comparability in fair value measurements and disclosures and applies under other accounting pronouncements that require or permit fair value measurements. In February 2008, FASB issued Staff Position
(FSP) FAS 157-1 to exclude FASB Statement No. 13, Accounting for Leases, and its related interpretive accounting pronouncements that address leasing transactions, from the scope of SFAS 157. Additionally, in
February 2008, the FASB issued FSP FAS 157-2 to allow entities to electively defer the effective date of SFAS 157 for nonfinancial assets and liabilities, except for those items recognized or disclosed at fair value on an annual or more frequently
recurring basis until January 1, 2009. The Company will apply the fair value measurement provisions of SFAS 157 to its nonfinancial assets and liabilities effective January 1, 2009. The adoption of SFAS 157 did not have a material impact
on the Companys consolidated financial statements. See Note 9 for more details.

Effective January 2008, the Company adopted FASBs Emerging
Task Force (EITF) consensus on Issue No. 06-4, Accounting for Deferred Compensation and Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance Arrangements (EITF 06-4). This issue
addresses accounting for split-dollar life insurance arrangements whereby the employer purchases a policy to insure the life of an employee, and separately enters into an agreement to split the policy benefits between the employer and the employee.
This EITF states that an obligation arises as a result of a substantive agreement with an employee to provide future postretirement benefits. Under EITF 06-4, the obligation is not settled upon entering into an insurance arrangement. Since the
obligation is not settled, a liability should be recognized in accordance with applicable authoritative guidance. On January 1, 2008, as a result of the adoption of EITF 06-4, the Company recorded a cumulative effect adjustment for a change in
accounting principle as a reduction to retained earnings of $547,000 and an increase in accrued liabilities related to the postretirement obligation of the Company.

Effective January 2008, the Company adopted FASB Financial Accounting Standards No. 159, The Fair Value Option for Financial Assets and Financial Liabilities (SFAS 159).This
Statement provides companies with an option to report selected financial assets and liabilities at fair value. The Standards objective is to reduce both the complexity in accounting for financial instruments and the volatility in earnings
caused by measuring related assets and liabilities differently. SFAS 159 also establishes presentation and disclosure requirements designed to facilitate comparisons between companies that choose different measurement attributes for similar types of
assets and liabilities. The Company adopted SFAS 159 effective January 1, 2008, but has not elected to measure any permissible items at fair value. As a result, the adoption of this Statement did not have an impact on the Companys
consolidated financial statements.

On March 19, 2008, the FASB issued Statement of Financial Accounting Standards No. 161,Disclosures
about Derivative Instruments and Hedging Activities  an amendment of FASB Statement No. 133(SFAS 161), which requires enhanced disclosures about an entitys derivative and hedging activities intended to improve
the transparency of financial reporting. Under SFAS 161, entities will be required to provide enhanced disclosures about (a) how and why an entity uses derivative instruments, (b) how derivative instruments and related hedged items are
accounted for under Statement 133 and its related interpretations and (c) how derivative instruments and related hedged items affect an entitys financial position, financial performance and cash flows. SFAS 161 is effective for financial
statements issued for fiscal years and interim periods beginning after



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##### Table of Contents

SI FINANCIAL GROUP, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2008 AND 2007
AND DECEMBER 31, 2007



November 15, 2008, with early application encouraged. The Company does not expect the adoption of SFAS 161 to have a material impact on the
Companys consolidated financial statements.

On April 25, 2008, the FASB issued Staff Position No. FAS 142-3, Determination of the
Useful Life of Intangible Assets (FAS 142-3), which amends the factors that should be considered in developing renewal extension assumptions used to determine the useful life of a recognized intangible asset under FASB
Statement No. 142, Goodwill and Other Intangible Assets. The intent of this FSP is to improve the consistency between the useful life of a recognized intangible asset under Statement 142 and the period of expected cash flows
used to measure the fair value of the asset under FASB Statement No. 141 (revised 2007), Business Combinations, and other U.S. generally accepted accounting principles. FAS 142-3 is effective for financial statements issued
for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. Early adoption is prohibited. The Company does not expect the adoption of FAS 142-3 to have a material impact on the Companys consolidated
financial statements.

In May 2008, the FASB issued SFAS No. 162, The Hierarchy of Generally Accepted Accounting Principles
(SFAS 162). SFAS 162 identifies the sources of accounting principles and the framework for selecting the principles to be used in the preparation of financial statements of nongovernmental entities that are presented in conformity with
generally accepted accounting principles in the United States. This Statement is effective 60 days following the SECs approval of the Public Company Accounting Oversight Boards amendments to AU Section 411, The Meaning of
Present Fairly in Conformity With Generally Accepted Accounting Principles. The Company does not anticipate the adoption of SFAS 162 to have a material impact on the Companys consolidated financial statements.

On June 16, 2008, the FASB issued Staff Position No. EITF 03-6-1, Determining Whether Instruments Granted in Share-Based Payment Transactions
Are Participating Securities (EITF 03-6-1), which addresses whether instruments granted in share-based payment transactions are participating securities prior to vesting and, therefore, need to be included in the earnings
allocation in computing earnings per share under the two-class method described in paragraphs 60 and 61 of FASB Statement No. 128, Earnings Per Share. EITF 03-6-1 is effective for financial statements issued for fiscal years
beginning after December 15, 2008, and interim periods within those years. All prior-period earnings per share data presented shall be adjusted retrospectively (including interim financial statements, summaries of earnings and selected
financial data) to conform with the provisions of EITF 03-6-1. Early application is not permitted. The Company is currently evaluating the impact of EITF 03-6-1, but does not expect the adoption of this pronouncement to have a material impact on the
Companys consolidated financial statements.

NOTE 2. EARNINGS PER SHARE

Basic net income per common share is calculated by dividing the net income available to common stockholders by the weighted-average number of common shares outstanding during the period. Diluted net income per common
share is computed in a manner similar to basic net income per common share except that the weighted-average number of common shares outstanding is increased to include the incremental common shares (as computed using the treasury stock method) that
would have been outstanding if all potentially dilutive common stock equivalents were issued during the period. The Companys common stock equivalents relate solely to stock option and restricted stock awards. Anti-dilutive shares are common
stock equivalents with weighted-average exercise prices in excess of the weighted-average market value for the periods presented. The Company had anti-dilutive common shares outstanding of approximately 501,250 and 502,235 for the three and six
months ended June 30, 2008, respectively, and 17,753 and 13,898 for the three and six months ended June 30, 2007, respectively. Treasury shares and unallocated common shares held by the Employee Stock Ownership Plan (ESOP) are
not included in the weighted-average number of common shares outstanding for purposes of calculating both basic and diluted net income per common share. ESOP shares are included in weighted-average shares outstanding for basic net income per common
share as they are committed to be released. Unvested restricted shares are only included in dilutive net income per common share computations.



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##### Table of Contents

SI FINANCIAL GROUP, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2008 AND 2007
AND DECEMBER 31, 2007



|                                                            |      |                            |            |                          |      |            |      |   |            |  |   |           
|----------------------------------------------------------- | ---- | -------------------------- | ---------- | ------------------------ | ---- | ---------- | ---- | - | ---------- |  | - | ----------
|(Dollars in Thousands, Except Per Share Amounts)            |      | Three Months EndedJune 30, |            | Six Months EndedJune 30,
|                                                            | 2008 |                            | 2007       |                          | 2008 |            | 2007
|Net income                                                  |      | $                          | 463        |                          | $    | 377        |      | $ | 918        |  | $ | 826       
|                                                            |      |                            |            |                          |      |            |      |   |            |  |   |           
|Weighted-average common shares outstanding:                 |      |                            |            |                          |      |            |      |   |            |  |   |           
|Basic                                                       |      |                            | 11,333,100 |                          |      | 11,830,072 |      |   | 11,382,278 |  |   | 11,817,690
|Effect of dilutive stock option and restricted stock awards |      |                            | 21,966     |                          |      | 56,101     |      |   | 27,284     |  |   | 69,241    
|                                                            |      |                            |            |                          |      |            |      |   |            |  |   |           
|Diluted                                                     |      |                            | 11,355,066 |                          |      | 11,886,173 |      |   | 11,409,562 |  |   | 11,886,931
|                                                            |      |                            |            |                          |      |            |      |   |            |  |   |           
|Net income per common share:                                |      |                            |            |                          |      |            |      |   |            |  |   |           
|Basic                                                       |      | $                          | 0.04       |                          | $    | 0.03       |      | $ | 0.08       |  | $ | 0.07      
|Diluted                                                     |      | $                          | 0.04       |                          | $    | 0.03       |      | $ | 0.08       |  | $ | 0.07      

NOTE 3. SECURITIES

The amortized cost and approximate fair values of investment securities at June 30, 2008 and December 31, 2007 are as follows:



|                                                |  |               |         |                      |   |                       |  |   |           |   |  |   |        
|----------------------------------------------- |  | ------------- | ------- | -------------------- | - | --------------------- |  | - | --------- | - |  | - | -------
|June 30, 2008 (Dollars in Thousands)            |  | AmortizedCost |         | GrossUnrealizedGains |   | GrossUnrealizedLosses |  |   | FairValue
|Debt securities:                                |  |               |         |                      |   |                       |  |   |           |   |  |   |        
|U.S. Government and agency obligations          |  | $             | 2,796   |                      | $ | 17                    |  | $ | (19       | ) |  | $ | 2,794  
|Government-sponsored enterprises                |  |               | 30,716  |                      |   | 188                   |  |   | (85       | ) |  |   | 30,819 
|Mortgage-backed securities                      |  |               | 128,547 |                      |   | 730                   |  |   | (2,194    | ) |  |   | 127,083
|Corporate debt securities                       |  |               | 11,007  |                      |   | 3                     |  |   | (1,304    | ) |  |   | 9,706  
|Obligations of state and political subdivisions |  |               | 5,000   |                      |   | 19                    |  |   | (37       | ) |  |   | 4,982  
|Tax-exempt securities                           |  |               | 350     |                      |   | 2                     |  |   | (1        | ) |  |   | 351    
|Foreign government securities                   |  |               | 125     |                      |   |                      |  |   |          |   |  |   | 125    
|                                                |  |               |         |                      |   |                       |  |   |           |   |  |   |        
|Total debt securities                           |  |               | 178,541 |                      |   | 959                   |  |   | (3,640    | ) |  |   | 175,860
|Equity securities:                              |  |               |         |                      |   |                       |  |   |           |   |  |   |        
|Marketable equity securities                    |  |               | 2,644   |                      |   |                      |  |   | (201      | ) |  |   | 2,443  
|                                                |  |               |         |                      |   |                       |  |   |           |   |  |   |        
|Total available for sale securities             |  | $             | 181,185 |                      | $ | 959                   |  | $ | (3,841    | ) |  | $ | 178,303
|                                                |  |               |         |                      |   |                       |  |   |           |   |  |   |        
|                                                |  |               |         |                     
|December 31, 2007 (Dollars in Thousands)        |  | AmortizedCost |         | GrossUnrealizedGains |   | GrossUnrealizedLosses |  |   | FairValue
|Debt securities:                                |  |               |         |                      |   |                       |  |   |           |   |  |   |        
|U.S. Government and agency obligations          |  | $             | 1,156   |                      | $ | 2                     |  | $ | (26       | ) |  | $ | 1,132  
|Government-sponsored enterprises                |  |               | 32,551  |                      |   | 261                   |  |   | (50       | ) |  |   | 32,762 
|Mortgage-backed securities                      |  |               | 92,184  |                      |   | 1,112                 |  |   | (432      | ) |  |   | 92,864 
|Corporate debt securities                       |  |               | 10,075  |                      |   | 208                   |  |   | (245      | ) |  |   | 10,038 
|Obligations of state and political subdivisions |  |               | 2,000   |                      |   | 18                    |  |   |          |   |  |   | 2,018  
|Tax-exempt securities                           |  |               | 350     |                      |   |                      |  |   |          |   |  |   | 350    
|Foreign government securities                   |  |               | 100     |                      |   |                      |  |   |          |   |  |   | 100    
|                                                |  |               |         |                      |   |                       |  |   |           |   |  |   |        
|Total debt securities                           |  |               | 138,416 |                      |   | 1,601                 |  |   | (753      | ) |  |   | 139,264
|Equity securities:                              |  |               |         |                      |   |                       |  |   |           |   |  |   |        
|Marketable equity securities                    |  |               | 2,734   |                      |   | 33                    |  |   | (117      | ) |  |   | 2,650  
|                                                |  |               |         |                      |   |                       |  |   |           |   |  |   |        
|Total available for sale securities             |  | $             | 141,150 |                      | $ | 1,634                 |  | $ | (870      | ) |  | $ | 141,914
|                                                |  |               |         |                      |   |                       |  |   |           |   |  |   |        



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##### Table of Contents

SI FINANCIAL GROUP, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2008 AND 2007
AND DECEMBER 31, 2007



NOTE 4. LOANS RECEIVABLE

The following table summarizes the composition of the loan portfolio in dollar amounts and as a percentage of the respective portfolio at the dates indicated.



|                                             |  |              |         |   |                  |   |         |  
|-------------------------------------------- |  | ------------ | ------- | - | ---------------- | - | ------- | -
|(Dollars in Thousands)                       |  | June 30,2008 |         |   | December 31,2007 |  
|Real estate loans:                           |  |              |         |   |                  |   |         |  
|Residential  1 to 4 family                  |  | $            | 334,734 |   |                  | $ | 330,389 |  
|Multi-family and commercial                  |  |              | 154,396 |   |                  |   | 132,819 |  
|Construction                                 |  |              | 29,202  |   |                  |   | 37,231  |  
|                                             |  |              |         |   |                  |   |         |  
|Total real estate loans                      |  |              | 518,332 |   |                  |   | 500,439 |  
|Consumer loans:                              |  |              |         |   |                  |   |         |  
|Home equity                                  |  |              | 17,560  |   |                  |   | 17,774  |  
|Other                                        |  |              | 3,531   |   |                  |   | 3,330   |  
|                                             |  |              |         |   |                  |   |         |  
|Total consumer loans                         |  |              | 21,091  |   |                  |   | 21,104  |  
|Commercial business loans                    |  |              | 74,068  |   |                  |   | 69,850  |  
|                                             |  |              |         |   |                  |   |         |  
|Total loans                                  |  |              | 613,491 |   |                  |   | 591,393 |  
|Deferred loan origination costs, net of fees |  |              | 1,486   |   |                  |   | 1,390   |  
|Allowance for loan losses                    |  |              | (5,427  | ) |                  |   | (5,245  | )
|                                             |  |              |         |   |                  |   |         |  
|Loans receivable, net                        |  | $            | 609,550 |   |                  | $ | 587,538 |  
|                                             |  |              |         |   |                  |   |         |  

NOTE 5. GOODWILL AND OTHER INTANGIBLES

Goodwill

In January 2008, the Bank completed its acquisition of a branch office located in Colchester,
Connecticut. The Bank received $15.4 million for the acquisition of $460,000 in net assets and the assumption of $18.4 million in net liabilities, resulting in goodwill of $2.6 million.

In March 2008, the Bank completed its acquisition of a branch office located in New London, Connecticut. The Bank received $484,000 for the acquisition of $7.9 million in net assets and the assumption of $9.3 million
in net liabilities, resulting in goodwill of $915,000.



|                               |  |              |       |                  |   |    
|------------------------------ |  | ------------ | ----- | ---------------- | - | ---
|(Dollars in Thousands)         |  | June 30,2008 |       | December 31,2007
|Balance at beginning of period |  | $            | 643   |                  | $ | 643
|Additions                      |  |              | 3,493 |                  |   |   
|Accumulated amortization       |  |              |      |                  |   |   
|                               |  |              |       |                  |   |    
|Balance at end of period, net  |  | $            | 4,136 |                  | $ | 643
|                               |  |              |       |                  |   |    

In accordance with Statement of Financial Accounting Standards No. 142, Goodwill and Other
Intangible Assets, goodwill is not amortized for financial reporting purposes but rather evaluated for impairment. No impairment charges relating to goodwill were recognized during the three and six months ended June 30, 2008.



10



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SI FINANCIAL GROUP, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2008 AND 2007
AND DECEMBER 31, 2007



Core Deposit Intangible

In consideration for the assumption of $18.4 million of deposit liabilities from the Colchester, Connecticut branch office acquisition in January 2008, the Bank recorded a core deposit premium intangible of $159,000.
The resulting core deposit premium intangible is amortized over five years using the sum-of-the-years-digits. The net book value of this asset at June 30, 2008 is as follows:



|                               |  |              |     |   |                  |   |      |  
|------------------------------ |  | ------------ | --- | - | ---------------- | - | ---- | -
|(Dollars in Thousands)         |  | June 30,2008 |     |   | December 31,2007 |  
|Balance at beginning of period |  | $            |    |   |                  | $ | 973  |  
|Additions                      |  |              | 159 |   |                  |   |     |  
|Accumulated amortization       |  |              | (27 | ) |                  |   | (973 | )
|                               |  |              |     |   |                  |   |      |  
|Balance at end of period, net  |  | $            | 132 |   |                  | $ |     |  
|                               |  |              |     |   |                  |   |      |  

NOTE 6. OTHER COMPREHENSIVE LOSS

Other comprehensive loss, which is comprised solely of the change in unrealized gains and losses on available for sale securities, net of taxes, for the six months ended June 30, 2008 and 2007 is as follows:



|                                                                         |  |                  |        |   |            |   |                  |  |   |        |  
|------------------------------------------------------------------------ |  | ---------------- | ------ | - | ---------- | - | ---------------- |  | - | ------ | -
|Six Months Ended June 30, 2008 (Dollars in Thousands)                    |  | Before TaxAmount |        |   | TaxEffects |   | Net of TaxAmount | 
|Unrealized holding losses on available for sale securities               |  | $                | (3,502 | ) |            | $ | 1,191            |  | $ | (2,311 | )
|Reclassification adjustment for gains recognized in net income           |  |                  | (144   | ) |            |   | 49               |  |   | (95    | )
|                                                                         |  |                  |        |   |            |   |                  |  |   |        |  
|Unrealized holding losses on available for sale securities, net of taxes |  | $                | (3,646 | ) |            | $ | 1,240            |  | $ | (2,406 | )
|                                                                         |  |                  |        |   |            |   |                  |  |   |        |  
|                                                                         |  |                  |       
|Six Months Ended June 30, 2007(Dollars in Thousands)                     |  | Before TaxAmount |        |   | TaxEffects |   | Net of TaxAmount | 
|Unrealized holding losses on available for sale securities               |  | $                | (47    | ) |            | $ | 16               |  | $ | (31    | )
|Reclassification adjustment for gains recognized in net income           |  |                  | (321   | ) |            |   | 109              |  |   | (212   | )
|                                                                         |  |                  |        |   |            |   |                  |  |   |        |  
|Unrealized holding losses on available for sale securities, net of taxes |  | $                | (368   | ) |            | $ | 125              |  | $ | (243   | )
|                                                                         |  |                  |        |   |            |   |                  |  |   |        |  

NOTE 7. REGULATORY CAPITAL

The Bank is subject to various regulatory capital requirements administered by the Office of Thrift Supervision, 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 Office of Thrift Supervision, the Company is
not subject to any separate regulatory capital requirements.

At June 30, 2008 and December 31, 2007, the Bank met all capital adequacy
requirements to which it was subject and the Bank is considered well capitalized under regulatory guidelines.



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SI FINANCIAL GROUP, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2008 AND 2007
AND DECEMBER 31, 2007



The following is a summary of the Banks regulatory capital amounts and ratios as of June 30, 2008 and
December 31, 2007.



|                                     |  |        |        |       |                             |   |        |                                                               |        |  |      |        |  |       |        |  |       |  
|------------------------------------ |  | ------ | ------ | ----- | --------------------------- | - | ------ | ------------------------------------------------------------- | ------ |  | ---- | ------ |  | ----- | ------ |  | ----- | -
|June 30, 2008 (Dollars in Thousands) |  | Actual |        |       | For CapitalAdequacyPurposes |   |        | To Be WellCapitalized UnderPrompt CorrectiveAction Provisions |       
|                                     |  | Amount |        | Ratio |                             |   | Amount |                                                               | Ratio  |  |      | Amount |  | Ratio |       
|Total Risk-based Capital Ratio       |  | $      | 68,895 |       | 13.37                       | % |        | $                                                             | 41,224 |  | 8.00 | %      |  | $     | 51,530 |  | 10.00 | %
|Tier I Risk-based Capital Ratio      |  |        | 64,389 |       | 12.49                       |   |        |                                                               | 20,621 |  | 4.00 |        |  |       | 30,931 |  | 6.00  |  
|Tier I Capital Ratio                 |  |        | 64,389 |       | 7.63                        |   |        |                                                               | 33,756 |  | 4.00 |        |  |       | 42,195 |  | 5.00  |  
|Tangible Equity Ratio                |  |        | 64,389 |       | 7.63                        |   |        |                                                               | 12,658 |  | 1.50 |        |  |       | n/a    |  | n/a   |  



|                                         |  |        |        |       |                             |   |        |                                                               |        |  |      |        |  |       |        |  |       |  
|---------------------------------------- |  | ------ | ------ | ----- | --------------------------- | - | ------ | ------------------------------------------------------------- | ------ |  | ---- | ------ |  | ----- | ------ |  | ----- | -
|December 31, 2007 (Dollars in Thousands) |  | Actual |        |       | For CapitalAdequacyPurposes |   |        | To Be WellCapitalized UnderPrompt CorrectiveAction Provisions |       
|                                         |  | Amount |        | Ratio |                             |   | Amount |                                                               | Ratio  |  |      | Amount |  | Ratio |       
|Total Risk-based Capital Ratio           |  | $      | 71,444 |       | 15.21                       | % |        | $                                                             | 37,577 |  | 8.00 | %      |  | $     | 46,972 |  | 10.00 | %
|Tier I Risk-based Capital Ratio          |  |        | 67,483 |       | 14.37                       |   |        |                                                               | 18,784 |  | 4.00 |        |  |       | 28,177 |  | 6.00  |  
|Tier I Capital Ratio                     |  |        | 67,483 |       | 8.75                        |   |        |                                                               | 30,849 |  | 4.00 |        |  |       | 38,562 |  | 5.00  |  
|Tangible Equity Ratio                    |  |        | 67,483 |       | 8.75                        |   |        |                                                               | 11,569 |  | 1.50 |        |  |       | n/a    |  | n/a   |  

NOTE 8. INCOME TAXES

Effective January 2007, the Company adopted FASB Interpretation No. 48,Accounting for Uncertainty in Income Taxes (FIN 48). FIN 48 provides guidance on financial statement recognition, measurement and
disclosure of tax positions taken, or expected to be taken in the future, in the Companys tax returns. The initial adoption of FIN 48 had no impact on the Companys financial statements. The Company has no material uncertain tax positions
as of June 30, 2008.

In accordance with the provisions of FIN 48, 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 2004.

NOTE 9. FAIR VALUE OF FINANCIAL ASSETS AND LIABILITIES

SFAS 157 defines fair value as 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. SFAS 157 establishes a fair value hierarchy that prioritizes the use of inputs used in valuation methodologies
into the following three levels:



|         |  |                                                                                                                                                                                                                                                                        
|-------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Level 1: |  | Inputs to the valuation methodology are quoted prices, unadjusted, for identical assets or liabilities in active markets A quotedprice in an active market provides the most
reliable evidence of fair value and shall be used to measure fair value wheneveravailable.



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##### Table of Contents

SI FINANCIAL GROUP, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2008 AND 2007
AND DECEMBER 31, 2007



|         |  |                                                                                                                                                                                                                                                                                                                                                                                                                 
|-------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Level 2: |  | Inputs to the valuation methodology include quoted prices for similar assets or liabilities in active markets; inputs to the valuation methodology include quoted prices for identical or
similar assets or liabilities in markets that are not active; or inputs to the valuation methodology that are derived principally from or can be corroborated by observable market data by correlation or other means.
|         | 
|Level 3: |  | Inputs to the valuation methodology are unobservable and significant to the fair value measurement. Level 3 assets and liabilities include financial instruments whose value is determined
using discounted cash flow methodologies, as well as instruments for which the determination of fair value requires significant management judgment or estimation.                                                   

The following table presents the balances of assets measured at fair value on a recurring basis as of
June 30, 2008:



|                              |  |                                                           |       |                                           |   |                                        |  |       |   |  |   |        
|----------------------------- |  | --------------------------------------------------------- | ----- | ----------------------------------------- | - | -------------------------------------- |  | ----- | - |  | - | -------
|(Dollars in Thousands)        |  | Quoted Pricesin ActiveMarkets forIdenticalAssets(Level 1) |       | SignificantOtherObservableInputs(Level 2) |   | SignificantUnobservableInputs(Level 3) |  | Total
|Available for sale securities |  | $                                                         | 1,713 |                                           | $ | 176,590                                |  | $     |  |  | $ | 178,303
|                              |  |                                                           |       |                                           |   |                                        |  |       |   |  |   |        
|Total assets at fair value    |  | $                                                         | 1,713 |                                           | $ | 176,590                                |  | $     |  |  | $ | 178 303
|                              |  |                                                           |       |                                           |   |                                        |  |       |   |  |   |        

The securities measured at fair value utilizing Level 1 and 2 inputs are obligations of the U.S. government and
agencies, government-sponsored enterprises, mortgage-backed securities, obligations of state and political subdivisions, common stocks, corporate debt securities, tax-exempt and foreign government securities. The fair values used by the Company are
obtained from an independent pricing service, which represents either quoted market prices for identical securities (Level 1 inputs), quoted market prices for comparable securities or fair values determined by pricing models that consider observable
market data, such as interest rate volatilities, credit spreads and prices from market makers and live trading systems and other market indicators, industry and economic events.

Certain assets were measured at fair value on a non-recurring basis at June 30, 2008. In accordance with the provisions of FASB Statement No. 114, the Company measures the impairment of loans that are
collateral dependent based on the fair value of the collateral (Level 2). The carrying value of impaired loans (net of specific reserves of $1.2 million) for which the fair value of collateral was used to measure impairment totaled $7.5 million at
June 30, 2008. Specific reserves for impaired loans decreased $49,000 and $74,000 for the three and six months ended June 30, 2008, respectively.

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.



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##### Table of Contents

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

Managements discussion and analysis of financial condition and results of operations is intended to assist in understanding changes in the Companys financial condition as of June 30, 2008 and
December 31, 2007 and the results of operations for the three and six months ended June 30, 2008 and 2007. 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 2007 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 critical accounting policies. The Company considers the
allowance for loan losses, 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 2007 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 detailed discussion
of new accounting pronouncements.

Recent Developments and Initiatives



| |  |  | In April 2008, Rene G. Pete Ledoux joined the Banks Wealth Management Division as Senior Vice President and Senior Trust Officer, with
responsibilities for SI Financial Advisors, Investment Services, and SI Trust Servicing.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | On May 7, 2008, the Company held its Annual Meeting of Stockholders. Shareholders voted to re-elect three directors to a three-year term and ratified the
appointment of Wolf & Company, P.C. as the Companys independent registered public accounting firm for the year ending December 31, 2008. See Item 4. Submission of Matters to a Vote of Security Holders for additional
details.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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##### Table of Contents

| |  |  | On June 18, 2008, the Companys Board of Directors declared a quarterly cash dividend of $0.04 per share, paid on July 25, 2008 to stockholders of
record as of the close of business on July 7, 2008. SI Bancorp, MHC, the Companys mutual holding company parent, waived receipt of its dividend.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | In July 2008, the Bank completed the relocation of its Brooklyn, Connecticut branch. The new location features greater customer convenience and visibility, as well
as the Banks Life Style Lobby .
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | In July 2008, SI Financial Group Foundation, Inc. announced that it awarded more than $55,000 to seventeen local charitable organizations that provide essential
community programs and services to the areas they serve.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | In July 2008, the Company earned a 5Star Superior rating for the 15thconsecutive quarter from Bauer Financial, Inc., the nations leading independent bank rating and research firm.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Comparison of Financial Condition at June 30, 2008 and December 31, 2007

Assets:

Summary.Assets increased $70.7 million, or 8.9%, to $860.9 million at
June 30, 2008, as compared to $790.2 million at December 31, 2007, primarily due to increases of $36.4 million in available for sale securities, $22.0 million in net loans receivable, $6.8 million in cash and cash equivalents, $3.6 million
in intangible assets, $1.2 million in deferred tax assets (net) and $1.0 million in premises and equipment, offset by a decrease of $913,000 in other real estate owned. Available for sale securities increased as a result of the purchases of
predominantly longer-term mortgage-backed securities with funds received from the Banks Colchester and New London, Connecticut branch acquisitions (the Branch Acquisitions) during the first quarter of 2008. The increase in net
loans receivable included increases in commercial and residential mortgage loans and commercial business loans, offset by a decrease in construction loans. Of the $22.0 million increase in net loans receivable, $7.4 million represented primarily
commercial loans acquired in connection with the Branch Acquisitions. Cash and cash equivalents increased as a result of the $15.9 million of cash received from the assumption of net liabilities from the Branch Acquisitions. The increase in
intangible assets, consisting of core deposit intangibles and goodwill, resulted from the Branch Acquisitions. Deferred tax asset increased as a result of the deferred taxes associated with the increase in the unrealized holding losses on available
for sale securities. The increase in premises and equipment primarily relates to leasehold improvements and related equipment in connection with the relocation of the Banks Brooklyn, Connecticut branch office. The decrease in other real estate
owned reflects the sale of a commercial real estate property and a residential real estate property during the first half of 2008. The Company recorded a net gain of $10,000 on the sale of the two properties held in other real estate owned.

Loans Receivable, Net.The Companys net loan portfolio increased $22.0 million. Loan originations increased $14.0 million during the
first half of 2008 compared to the same period of the prior year. For the six months ended June 30, 2008, the Company sold $6.7 million of longer-term fixed-rate residential mortgage loans. Changes in the loan portfolio consisted of the
following:



| |  |  | Residential Mortgage Loans. Despite mortgage loan sales, residential mortgage loans increased $4.3 million. Loan originations for residential mortgage loans
decreased $276,000 for the first half of 2008 compared to the same period in 2007.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Commercial Loans. Multi-family and commercial real estate loans increased $21.6 million, or 16.3%. Commercial business loans increased $4.2 million, or 6.0%,
for 2008, with an increase in commercial real estate and commercial business loan originations of $12.8 million and $3.9 million, respectively, as a result of the Banks continued emphasis on the commercial lending portfolio. Of the $7.4
million of net loans receivable acquired in the Branch Acquisitions, $3.7 million and $3.5 million represented commercial real estate and commercial business loans, respectively.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Consumer Loans. Consumer loans decreased $13,000 during the first half of 2008, primarily the result of a decrease in home equity lines of credit due to
principal payments and pay-offs. Loan originations for consumer loans were down $2.4 million for the six months ended June 30, 2008 compared to the same period in 2007.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The allowance for loan losses totaled $5.4 million at June 30, 2008 compared to $5.2 million at December 31, 2007. The ratio of the allowance for loan losses
to total loans decreased from 0.89% at December 31, 2007 to 0.88% at June 30, 2008. At June 30, 2008, nonperforming loans totaled $7.9 million compared to $7.6 million at



15



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##### Table of Contents

December 31, 2007. Specific reserves relating to nonperforming loans decreased to $1.2 million at June 30, 2008 from $1.3 million at
December 31, 2007. At June 30, 2008, two commercial construction relationships accounted for $5.1 million of nonperforming loans and $1.0 million in specific reserves.

Significant disruption and volatility in the financial and capital markets occurred during the second half of 2007 and continued through the first half of 2008. Turmoil in the mortgage market adversely impacted both
domestic and global markets, and led to a significant credit and liquidity crisis. These market conditions were attributable to a variety of factors, in particular the fallout associated with sub prime mortgage loans, of which the Bank has no direct
exposure. Continued value declines in the real estate and housing markets have exacerbated the situation. The Bank is not immune to some negative consequences arising from overall economic weakness and, in particular, a sharp downturn in the housing
market, both locally and nationally. Decreases in real estate values could adversely affect the value of property used as collateral for loans held in portfolio. Adverse changes in the economy may have a negative effect on the ability of borrowers
to make timely loan payments, which could have an adverse impact on the Companys earnings. A further increase in loan delinquencies would decrease the Companys net income and adversely impact the Banks loan loss experience, causing
potential increases in the provision for loan losses and the allowance for credit losses.

The following table summarizes the activity in the allowance for
loan losses at and for the three and six months ended June 30, 2008 and 2007.



|                                           |      |                            |       |      |                          |   |       |   |  |      |       |   |  |   |       |  
|------------------------------------------ | ---- | -------------------------- | ----- | ---- | ------------------------ | - | ----- | - |  | ---- | ----- | - |  | - | ----- | -
|(Dollars in Thousands)                     |      | Three Months EndedJune 30, |       |      | Six Months EndedJune 30, |  
|                                           | 2008 |                            |       | 2007 |                          |   | 2008  |   |  | 2007 |      
|Balance at beginning of period             |      | $                          | 5,298 |      |                          | $ | 4,468 |   |  | $    | 5,245 |   |  | $ | 4,365 |  
|Provision for loan losses                  |      |                            | 150   |      |                          |   | 55    |   |  |      | 285   |   |  |   | 220   |  
|Loans charged-off                          |      |                            | (27   | )    |                          |   | (210  | ) |  |      | (123  | ) |  |   | (294  | )
|Recoveries of loans previously charged-off |      |                            | 6     |      |                          |   | 100   |   |  |      | 20    |   |  |   | 122   |  
|                                           |      |                            |       |      |                          |   |       |   |  |      |       |   |  |   |       |  
|Balance at end of period                   |      | $                          | 5,427 |      |                          | $ | 4,413 |   |  | $    | 5,427 |   |  | $ | 4,413 |  
|                                           |      |                            |       |      |                          |   |       |   |  |      |       |   |  |   |       |  

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



|                                                                            |  |              |       |   |                  |   |       |  
|--------------------------------------------------------------------------- |  | ------------ | ----- | - | ---------------- | - | ----- | -
|(Dollars in Thousands)                                                      |  | June 30,2008 |       |   | December 31,2007 |  
|Nonaccrual loans:                                                           |  |              |       |   |                  |   |       |  
|Real estate loans                                                           |  | $            | 7,229 |   |                  | $ | 6,879 |  
|Commercial business loans                                                   |  |              | 672   |   |                  |   | 733   |  
|Consumer loans                                                              |  |              | 12    |   |                  |   | 20    |  
|                                                                            |  |              |       |   |                  |   |       |  
|Total nonaccrual loans                                                      |  |              | 7,913 |   |                  |   | 7,632 |  
|Real estate owned, net                                                      |  |              |      |   |                  |   | 913   |  
|                                                                            |  |              |       |   |                  |   |       |  
|Total nonperforming assets                                                  |  |              | 7,913 |   |                  |   | 8,545 |  
|Troubled debt restructurings                                                |  |              | 70    |   |                  |   | 71    |  
|                                                                            |  |              |       |   |                  |   |       |  
|Total nonperforming assets and troubled debt restructurings                 |  | $            | 7,983 |   |                  | $ | 8,616 |  
|                                                                            |  |              |       |   |                  |   |       |  
|Total nonperforming loans to total loans                                    |  |              | 1.29  | % |                  |   | 1.29  | %
|Total nonperforming loans to total assets                                   |  |              | 0.92  | % |                  |   | 0.97  | %
|Total nonperforming assets and troubled debt restructurings to total assets |  |              | 0.93  | % |                  |   | 1.09  | %



16



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##### Table of Contents

Liabilities:

Summary. Total liabilities increased $75.0 million, or 10.6%, from December 31, 2007 to June 30, 2008 primarily as a result of increases in deposits of $72.9 million and accrued expenses and other liabilities of $4.1
million, offset by a decrease in Federal Home Loan Bank advances of $2.0 million.

Deposits.Deposits increased $72.9 million, or 13.3%, to
$621.3 million at June 30, 2008. Interest-bearing deposits increased $68.4 million, or 13.9%, primarily due to increases in certificates of deposits and NOW and money market accounts of $36.8 million and $32.0 million, respectively.
Contributing to the increase in deposits was $27.7 million in deposits from the Branch Acquisitions, marketing and competitively priced deposit products.

Borrowings. Borrowings decreased $2.0 million from $149.9 million at December 31, 2007 to $147.9 million at June 30, 2008, resulting from the net repayment of Federal Home Loan Bank advances during the first
half of 2008.

Accrued Expenses and Other Liabilities. Accrued expenses and other liabilities increased $4.1 million primarily as a
result of $3.0 million of available for sale securities purchased during the second quarter of 2008 with settlement dates subsequent to June 30, 2008.

Equity:

Summary. Total stockholders equity decreased $4.3 million from $82.1 million at December 31,
2007 to $77.7 million at June 30, 2008. The decrease in equity was due to stock repurchases of 257,655 shares at a cost of $2.5 million, an increase in other comprehensive loss representing the change in unrealized holding losses on available
for sale securities aggregating $2.4 million (net of taxes), a cumulative effect adjustment for a change in accounting principle of $547,000 resulting from the adoption of EITF 06-4 and dividends of $0.08 per share aggregating $333,000, offset by
earnings of $918,000.

Accumulated Other Comprehensive (Loss) Income. Accumulated other comprehensive (loss) income is comprised solely of
the unrealized holding gains and losses on available for sale securities, net of taxes. Unrealized holding losses on available for sale securities, net of taxes, totaled $1.9 million at June 30, 2008 compared to unrealized holding gains on
available for sale securities, net of taxes, of $504,000 at December 31, 2007. 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 sheet and a component of comprehensive loss on the consolidated statement of changes in stockholders equity. Management believes that none of the unrealized losses
on these securities are other than temporary because a majority of the unrealized losses relate to mortgage-backed securities issued by the U.S. Treasury, government-sponsored enterprises or private issuers that maintain investment grade ratings,
all of which the Company has both the intent and the ability to hold until maturity or until the fair value fully recovers. In addition, management considers the issuers of the securities to be financially sound and believes the Company will receive
all contractual principal and interest related to these investments.

Over the first half of 2008, there has been a significant contraction of liquidity in
the fixed income markets. This has resulted in a lack of an orderly market for trading and pricing of fixed income securities, with the exception of U.S. Treasuries. Mortgage-backed paper from private issuers and preferred securities of financial
institutions have been negatively impacted.

At June 30, 2008, the book value of the Companys holdings of Fannie Mae and Freddie Mac preferred
securities were $1.5 million, with unrealized holding losses of $61,000. The fair value of $1.4 million of Fannie Mae and Freddie Mac preferred stock represented less than 1.0% of total available for sale securities. In July 2008, ratings for both
Fannie Mae and Freddie Mac preferred stock were downgraded due to fears that the agencies would not be able to survive the current weaknesses in the housing and credit markets. Defaults on mortgages and the value of bonds backed by troubled loans
have declined and as a result, preferred shareholders are expected to have greater exposure to potential losses during the second half of 2008. To date, both agencies have made all expected preferred stock payments.



17



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##### Table of Contents

Management evaluated these securities to determine whether they should be considered other-than-temporarily impaired at
June 30, 2008. When evaluating the likelihood that the carrying value of the securities would fully recover in future periods, management considered, among other things, the severity and the continuous duration of the declines in the fair value
of these securities, the Companys ability and intent to hold these securities into the foreseeable future, the issuers high credit rating, the securities investment-grade rating and recent actions by the United States Congress in
response to the national credit crisis and the financial condition of Fannie Mae and Freddie Mac. Management determined from this evaluation process that the decline in value at June 30, 2008 was not other-than-temporary. Management will
continue to evaluate the likelihood of whether any future decline in value is other-than-temporary. If, in future periods, management determines that it is not probable that the market value of these securities will recover to the Companys
original cost, the Company will record a charge to earnings to reflect the other-than-temporary impairment of the securities.

Results of Operations
for the Three and Six Months Ended June 30, 2008 and 2007

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 gains on securities and loan sales, fees from deposit and trust and investment management services, insurance commissions, increases in cash surrender value of bank-owned life
insurance and other fees. The Companys noninterest expenses consist of employee compensation and benefits, occupancy and equipment, computer and electronic banking services, outside professional services, marketing and other general and
administrative expenses. The Companys results of operations are also significantly affected by general economic and competitive conditions, particularly changes in market interest rates, governmental policies and actions of regulatory
agencies.

Summary.The Company recorded net income of $463,000 for the three months ended June 30, 2008, an increase of $86,000
compared to $377,000 for the three months ended June 30, 2007. The increase was primarily attributable to increases of $627,000 in net interest income and $370,000 in noninterest income, offset by increases of $761,000 in noninterest expenses,
$95,000 in the provision for loan losses and $55,000 in the provision for income taxes.

Net income increased $92,000 to $918,000 for the six months ended
June 30, 2008 due to increases of $985,000 in net interest income and $415,000 in noninterest income, offset by increases of $1.1 million in noninterest expenses, $94,000 in the provision for income taxes and $65,000 in the provision for loan
losses.

For both the three and six months ended June 30, 2008, net interest income increased due to a higher average balance of interest-earning
assets and higher yields on securities, offset by an increase in the average balance of deposits and Federal Home Loan Bank borrowings. The Companys net interest income was impacted by the volatile interest rate environment. During the first
six months of 2008, the Federal Open Market Committee of the Federal Reserve Board of Governors decreased the federal funds rate by 225 basis points from 4.25% to 2.00%.

Interest and Dividend Income. Total interest and dividend income increased $983,000, or 9.2%, for the second quarter of 2008. Average interest-earning assets increased $90.7 million to $809.5 million,
due to a higher average balance of securities and loans and, to a lesser extent, federal funds and other interest-earning assets. Average securities increased $58.6 million, with an increase in yield from 4.82% to 5.01%. Average loans increased
$26.0 million. The rate earned on loans decreased 14 basis points to 6.15% for the second quarter of 2008 from 6.29% for the same period in 2007. The average balance of federal funds and other interest-bearing assets increased $6.1 million, while
the yield decreased 76 basis points from 3.24% to 2.48%.

For the six months ended June 30, 2008, interest and dividend income increased $1.9 million
to $23.1 million due to a higher average balance of securities and loans and, to a lesser extent, federal funds and other interest-earning assets. Average yields on securities increased 30 basis points from 4.78% to 5.08% for the first half of 2008
compared to the same period in 2007. The average yield on loans declined 7 basis points. For the three and the six months ended June 30, 2008, the decrease in the average yield on loans was due to an increase in nonaccrual loans and the
declining interest rate environment.



18



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##### Table of Contents

Interest Expense. Interest expense increased $356,000, or 6.7%, to $5.7 million for the second quarter of
2008 compared to $5.4 million for the second quarter of 2007, primarily as a result of an increase in the average balance and cost of NOW and money market accounts and the average balances of certificates of deposit and Federal Home Loan Bank
borrowings, offset by decreases in the cost on savings accounts, certificates of deposit and subordinated debt. Average deposits rose $61.1 million and the average yield decreased 27 basis points. The increase in average deposits includes $47.7
million in NOW and money market accounts and $24.3 million in certificates of deposit accounts, offset by a decrease of $10.8 million in savings accounts. Average Federal Home Loan Bank advances increased $37.8 million and the yield on Federal Home
Loan Bank borrowings decreased 20 basis points to 4.39%. The average balance of subordinated debt declined $1.7 million, and the rate paid on these borrowings decreased 347 basis points from 7.22% to 3.75%, due to the redemption of $7.2 million of
higher-cost debentures during the second quarter of 2007.

For the six months ended June 30, 2008, interest expense increased $963,000 as a result of
increases in the average balance of interest-bearing liabilities from $612.1 million to $691.3 million. Higher interest expense for the first half of 2008 was primarily attributable to increases in the average balance of deposits and borrowings of
$49.6 million and $29.6 million, respectively, offset by a decrease in the yields on deposits and Federal Home Loan Bank advances and subordinated debt of 11 basis points, 8 basis points and 234 basis points, respectively. The average cost of
certificates of deposit and savings accounts declined 27 basis points and 39 basis points, respectively, offset by an increase in the average cost of NOW and money market accounts of 68 basis points as a result of promotional rates.

The following table sets 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 June 30, |                    
|(Dollars in Thousands)                                                            |                | 2008                                      |                     |  | 2007 |                  
|                                                                                  | AverageBalance |                                           | Interest &Dividends |  |      | AverageYield/Rate |   |  | AverageBalance |   | Interest &Dividends |   |         | AverageYield/Rate |  
|Interest-earning assets:                                                          |                |                                           |                     |  |      |                   |   |  |                |   |                     |   |         |                   |   |        |   |  |        |  
|Loans(1)(2)                                                                       |                | $                                         | 608,971             |  | $    | 9,318             |   |  | 6.15           | % |                     | $ | 582,976 |                   | $ | 9,136  |   |  | 6.29   | %
|Securities(3)                                                                     |                |                                           | 183,592             |  |      | 2,287             |   |  | 5.01           |   |                     |   | 124,973 |                   |   | 1,503  |   |  | 4.82   |  
|Other interest-earning assets                                                     |                |                                           | 16,890              |  |      | 104               |   |  | 2.48           |   |                     |   | 10,782  |                   |   | 87     |   |  | 3.24   |  
|                                                                                  |                |                                           |                     |  |      |                   |   |  |                |   |                     |   |         |                   |   |        |   |  |        |  
|Total interest-earning assets                                                     |                |                                           | 809,453             |  |      | 11,709            |   |  | 5.82           |   |                     |   | 718,731 |                   |   | 10,726 |   |  | 5.99   |  
|                                                                                  |                |                                           |                     |  |      |                   |   |  |                |   |                     |   |         |                   |   |        |   |  |        |  
|Noninterest-earning assets                                                        |                |                                           | 44,036              |  |      |                   |   |  |                |   |                     |   | 38,489  |                   |   |        |   |  |        |  
|                                                                                  |                |                                           |                     |  |      |                   |   |  |                |   |                     |   |         |                   |   |        |   |  |        |  
|Total assets                                                                      |                | $                                         | 853,489             |  |      |                   |   |  |                |   |                     | $ | 757,220 |                   |   |        |   |  |        |  
|                                                                                  |                |                                           |                     |  |      |                   |   |  |                |   |                     |   |         |                   |   |        |   |  |        |  
|Interest-bearing liabilities:                                                     |                |                                           |                     |  |      |                   |   |  |                |   |                     |   |         |                   |   |        |   |  |        |  
|Deposits:                                                                         |                |                                           |                     |  |      |                   |   |  |                |   |                     |   |         |                   |   |        |   |  |        |  
|NOW and money market                                                              |                | $                                         | 180,803             |  |      | 836               |   |  | 1.86           |   |                     | $ | 133,134 |                   |   | 467    |   |  | 1.41   |  
|Savings(4)                                                                        |                |                                           | 69,213              |  |      | 164               |   |  | 0.95           |   |                     |   | 80,026  |                   |   | 271    |   |  | 1.36   |  
|Certificates of deposit(5)                                                        |                |                                           | 305,859             |  |      | 3,034             |   |  | 3.99           |   |                     |   | 281,580 |                   |   | 3,193  |   |  | 4.55   |  
|                                                                                  |                |                                           |                     |  |      |                   |   |  |                |   |                     |   |         |                   |   |        |   |  |        |  
|Total interest-bearing deposits                                                   |                |                                           | 555,875             |  |      | 4,034             |   |  | 2.92           |   |                     |   | 494,740 |                   |   | 3,931  |   |  | 3.19   |  
|FHLB advances                                                                     |                |                                           | 146,130             |  |      | 1,596             |   |  | 4.39           |   |                     |   | 108,289 |                   |   | 1,240  |   |  | 4.59   |  
|Subordinated debt                                                                 |                |                                           | 8,248               |  |      | 77                |   |  | 3.75           |   |                     |   | 9,993   |                   |   | 180    |   |  | 7.22   |  
|                                                                                  |                |                                           |                     |  |      |                   |   |  |                |   |                     |   |         |                   |   |        |   |  |        |  
|Total interest-bearing liabilities                                                |                |                                           | 710,253             |  |      | 5,707             |   |  | 3.23           |   |                     |   | 613,022 |                   |   | 5,351  |   |  | 3.50   |  
|                                                                                  |                |                                           |                     |  |      |                   |   |  |                |   |                     |   |         |                   |   |        |   |  |        |  
|Noninterest-bearing liabilities                                                   |                |                                           | 64,676              |  |      |                   |   |  |                |   |                     |   | 60,756  |                   |   |        |   |  |        |  
|                                                                                  |                |                                           |                     |  |      |                   |   |  |                |   |                     |   |         |                   |   |        |   |  |        |  
|Total liabilities                                                                 |                |                                           | 774,929             |  |      |                   |   |  |                |   |                     |   | 673,778 |                   |   |        |   |  |        |  
|                                                                                  |                |                                           |                     |  |      |                   |   |  |                |   |                     |   |         |                   |   |        |   |  |        |  
|Total stockholders equity                                                        |                |                                           | 78,560              |  |      |                   |   |  |                |   |                     |   | 83,442  |                   |   |        |   |  |        |  
|                                                                                  |                |                                           |                     |  |      |                   |   |  |                |   |                     |   |         |                   |   |        |   |  |        |  
|Total liabilities and stockholders equity                                        |                | $                                         | 853,489             |  |      |                   |   |  |                |   |                     | $ | 757,220 |                   |   |        |   |  |        |  
|                                                                                  |                |                                           |                     |  |      |                   |   |  |                |   |                     |   |         |                   |   |        |   |  |        |  
|Net interest-earning assets                                                       |                | $                                         | 99,200              |  |      |                   |   |  |                |   |                     | $ | 105,709 |                   |   |        |   |  |        |  
|                                                                                  |                |                                           |                     |  |      |                   |   |  |                |   |                     |   |         |                   |   |        |   |  |        |  
|Tax equivalent net interest income (3)                                            |                |                                           |                     |  |      | 6,002             |   |  |                |   |                     |   |         |                   |   | 5,375  |   |  |        |  
|Tax equivalent interest rate spread (6)                                           |                |                                           |                     |  |      |                   |   |  | 2.59           | % |                     |   |         |                   |   |        |   |  | 2.49   | %
|                                                                                  |                |                                           |                     |  |      |                   |   |  |                |   |                     |   |         |                   |   |        |   |  |        |  
|Tax equivalent net interest margin as a percentage of interest-earning assets (7) |                |                                           |                     |  |      |                   |   |  | 2.98           | % |                     |   |         |                   |   |        |   |  | 3.00   | %
|                                                                                  |                |                                           |                     |  |      |                   |   |  |                |   |                     |   |         |                   |   |        |   |  |        |  
|Average of interest-earning assets to average interest-bearing liabilities        |                |                                           |                     |  |      |                   |   |  | 113.97         | % |                     |   |         |                   |   |        |   |  | 117.24 | %
|                                                                                  |                |                                           |                     |  |      |                   |   |  |                |   |                     |   |         |                   |   |        |   |  |        |  
|Less tax equivalent adjustment (3)                                                |                |                                           |                     |  |      | (2                | ) |  |                |   |                     |   |         |                   |   | (2     | ) |  |        |  
|                                                                                  |                |                                           |                     |  |      |                   |   |  |                |   |                     |   |         |                   |   |        |   |  |        |  
|Net interest income                                                               |                |                                           |                     |  | $    | 6,000             |   |  |                |   |                     |   |         |                   | $ | 5,373  |   |  |        |  
|                                                                                  |                |                                           |                     |  |      |                   |   |  |                |   |                     |   |         |                   |   |        |   |  |        |  



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



19



---

##### Table of Contents

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



|(3) | 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.
|--- | ----------------------------------------------------------------------------------------------------------------------------



|                                                                                  |                |                                         |                     |  |      |                   |   |  |                |   |                     |   |         |                   |   |        |   |  |       |  
|--------------------------------------------------------------------------------- | -------------- | --------------------------------------- | ------------------- |  | ---- | ----------------- | - |  | -------------- | - | ------------------- | - | ------- | ----------------- | - | ------ | - |  | ----- | -
|                                                                                  |                | At or For the Six Months Ended June 30, |                    
|(Dollars in Thousands)                                                            |                | 2008                                    |                     |  | 2007 |                  
|                                                                                  | AverageBalance |                                         | Interest &Dividends |  |      | AverageYield/Rate |   |  | AverageBalance |   | Interest &Dividends |   |         | AverageYield/Rate |  
|Interest-earning assets:                                                          |                |                                         |                     |  |      |                   |   |  |                |   |                     |   |         |                   |   |        |   |  |       |  
|Loans(1)(2)                                                                       |                | $                                       | 601,438             |  | $    | 18,534            |   |  | 6.20           | % |                     | $ | 580,826 |                   | $ | 18,050 |   |  | 6.27  | %
|Securities(3)                                                                     |                |                                         | 175,528             |  |      | 4,431             |   |  | 5.08           |   |                     |   | 126,153 |                   |   | 2,989  |   |  | 4.78  |  
|Other interest-earning assets                                                     |                |                                         | 14,922              |  |      | 184               |   |  | 2.48           |   |                     |   | 9,709   |                   |   | 162    |   |  | 3.36  |  
|                                                                                  |                |                                         |                     |  |      |                   |   |  |                |   |                     |   |         |                   |   |        |   |  |       |  
|Total interest-earning assets                                                     |                |                                         | 791,888             |  |      | 23,149            |   |  | 5.88           |   |                     |   | 716,688 |                   |   | 21,201 |   |  | 5.97  |  
|                                                                                  |                |                                         |                     |  |      |                   |   |  |                |   |                     |   |         |                   |   |        |   |  |       |  
|Noninterest-earning assets                                                        |                |                                         | 42,860              |  |      |                   |   |  |                |   |                     |   | 38,048  |                   |   |        |   |  |       |  
|                                                                                  |                |                                         |                     |  |      |                   |   |  |                |   |                     |   |         |                   |   |        |   |  |       |  
|Total assets                                                                      |                | $                                       | 834,748             |  |      |                   |   |  |                |   |                     | $ | 754,736 |                   |   |        |   |  |       |  
|                                                                                  |                |                                         |                     |  |      |                   |   |  |                |   |                     |   |         |                   |   |        |   |  |       |  
|Interest-bearing liabilities:                                                     |                |                                         |                     |  |      |                   |   |  |                |   |                     |   |         |                   |   |        |   |  |       |  
|Deposits:                                                                         |                |                                         |                     |  |      |                   |   |  |                |   |                     |   |         |                   |   |        |   |  |       |  
|NOW and money market                                                              |                | $                                       | 173,843             |  |      | 1,639             |   |  | 1.90           |   |                     | $ | 130,004 |                   |   | 788    |   |  | 1.22  |  
|Savings(4)                                                                        |                |                                         | 68,721              |  |      | 362               |   |  | 1.06           |   |                     |   | 79,436  |                   |   | 524    |   |  | 1.33  |  
|Certificates of deposit(5)                                                        |                |                                         | 297,078             |  |      | 6,131             |   |  | 4.15           |   |                     |   | 280,627 |                   |   | 6,313  |   |  | 4.54  |  
|                                                                                  |                |                                         |                     |  |      |                   |   |  |                |   |                     |   |         |                   |   |        |   |  |       |  
|Total interest-bearing deposits                                                   |                |                                         | 539,642             |  |      | 8,132             |   |  | 3.03           |   |                     |   | 490,067 |                   |   | 7,625  |   |  | 3.14  |  
|FHLB advances                                                                     |                |                                         | 143,405             |  |      | 3,188             |   |  | 4.47           |   |                     |   | 109,343 |                   |   | 2,468  |   |  | 4.55  |  
|Subordinated debt                                                                 |                |                                         | 8,248               |  |      | 216               |   |  | 5.27           |   |                     |   | 12,714  |                   |   | 480    |   |  | 7.61  |  
|                                                                                  |                |                                         |                     |  |      |                   |   |  |                |   |                     |   |         |                   |   |        |   |  |       |  
|Total interest-bearing liabilities                                                |                |                                         | 691,295             |  |      | 11,536            |   |  | 3.36           |   |                     |   | 612,124 |                   |   | 10,573 |   |  | 3.48  |  
|                                                                                  |                |                                         |                     |  |      |                   |   |  |                |   |                     |   |         |                   |   |        |   |  |       |  
|Noninterest-bearing liabilities                                                   |                |                                         | 63,279              |  |      |                   |   |  |                |   |                     |   | 59,469  |                   |   |        |   |  |       |  
|                                                                                  |                |                                         |                     |  |      |                   |   |  |                |   |                     |   |         |                   |   |        |   |  |       |  
|Total liabilities                                                                 |                |                                         | 754,574             |  |      |                   |   |  |                |   |                     |   | 671,593 |                   |   |        |   |  |       |  
|                                                                                  |                |                                         |                     |  |      |                   |   |  |                |   |                     |   |         |                   |   |        |   |  |       |  
|Total stockholders equity                                                        |                |                                         | 80,174              |  |      |                   |   |  |                |   |                     |   | 83,143  |                   |   |        |   |  |       |  
|                                                                                  |                |                                         |                     |  |      |                   |   |  |                |   |                     |   |         |                   |   |        |   |  |       |  
|Total liabilities and stockholders equity                                        |                | $                                       | 834,748             |  |      |                   |   |  |                |   |                     | $ | 754,736 |                   |   |        |   |  |       |  
|                                                                                  |                |                                         |                     |  |      |                   |   |  |                |   |                     |   |         |                   |   |        |   |  |       |  
|Net interest-earning assets                                                       |                | $                                       | 100,593             |  |      |                   |   |  |                |   |                     | $ | 104,564 |                   |   |        |   |  |       |  
|                                                                                  |                |                                         |                     |  |      |                   |   |  |                |   |                     |   |         |                   |   |        |   |  |       |  
|Tax equivalent net interest income (3)                                            |                |                                         |                     |  |      | 11,613            |   |  |                |   |                     |   |         |                   |   | 10,628 |   |  |       |  
|Tax equivalent interest rate spread (6)                                           |                |                                         |                     |  |      |                   |   |  | 2.52           | % |                     |   |         |                   |   |        |   |  | 2.49  | %
|                                                                                  |                |                                         |                     |  |      |                   |   |  |                |   |                     |   |         |                   |   |        |   |  |       |  
|Tax equivalent net interest margin as a percentage of interest-earning assets (7) |                |                                         |                     |  |      |                   |   |  | 2.95           | % |                     |   |         |                   |   |        |   |  | 2.99  | %
|                                                                                  |                |                                         |                     |  |      |                   |   |  |                |   |                     |   |         |                   |   |        |   |  |       |  
|Average of interest-earning assets to average interest-bearing liabilities        |                |                                         |                     |  |      |                   |   |  | 114.55         | % |                     |   |         |                   |   |        |   |  | 17.08 | %
|                                                                                  |                |                                         |                     |  |      |                   |   |  |                |   |                     |   |         |                   |   |        |   |  |       |  
|Less tax equivalent adjustment (3)                                                |                |                                         |                     |  |      | (3                | ) |  |                |   |                     |   |         |                   |   | (3     | ) |  |       |  
|                                                                                  |                |                                         |                     |  |      |                   |   |  |                |   |                     |   |         |                   |   |        |   |  |       |  
|Net interest income                                                               |                |                                         |                     |  | $    | 11,610            |   |  |                |   |                     |   |         |                   | $ | 10,625 |   |  |       |  
|                                                                                  |                |                                         |                     |  |      |                   |   |  |                |   |                     |   |         |                   |   |        |   |  |       |  



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



20



---

##### Table of Contents

|(2) | 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.
|--- | ----------------------------------------------------------------------------------------------------------------------------

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



|                                   |  |                                           |        |   |                                         |   |       |     |  |   |      |   |  |        |      |   |     |   |       |   |  |   |       |  
|---------------------------------- |  | ----------------------------------------- | ------ | - | --------------------------------------- | - | ----- | --- |  | - | ---- | - |  | ------ | ---- | - | --- | - | ----- | - |  | - | ----- | -
|                                   |  | Three Months Ended June 30, 2008 and 2007 |        |   | Six Months Ended June 30, 2008 and 2007 |  
|(Dollars in Thousands)             |  | Increase (Decrease) Due To                |        |   | Increase (Decrease) Due To              |  
|                                   |  | Rate                                      |        |   | Volume                                  |   |       | Net |  |   | Rate |   |  | Volume |      |   | Net |  
|Interest-earning assets:           |  |                                           |        |   |                                         |   |       |     |  |   |      |   |  |        |      |   |     |   |       |   |  |   |       |  
|Interest and dividend income:      |  |                                           |        |   |                                         |   |       |     |  |   |      |   |  |        |      |   |     |   |       |   |  |   |       |  
|Loans(1)(2)                        |  | $                                         | (986   | ) |                                         | $ | 1,168 |     |  | $ | 182  |   |  | $      | (501 | ) |     | $ | 985   |   |  | $ | 484   |  
|Securities(3)                      |  |                                           | 60     |   |                                         |   | 724   |     |  |   | 784  |   |  |        | 199  |   |     |   | 1,243 |   |  |   | 1,442 |  
|Other interest-earning assets      |  |                                           | (111   | ) |                                         |   | 128   |     |  |   | 17   |   |  |        | (108 | ) |     |   | 130   |   |  |   | 22    |  
|                                   |  |                                           |        |   |                                         |   |       |     |  |   |      |   |  |        |      |   |     |   |       |   |  |   |       |  
|Total interest-earning assets      |  |                                           | (1,037 | ) |                                         |   | 2,020 |     |  |   | 983  |   |  |        | (410 | ) |     |   | 2,358 |   |  |   | 1,948 |  
|                                   |  |                                           |        |   |                                         |   |       |     |  |   |      |   |  |        |      |   |     |   |       |   |  |   |       |  
|Interest-bearing liabilities       |  |                                           |        |   |                                         |   |       |     |  |   |      |   |  |        |      |   |     |   |       |   |  |   |       |  
|Interest expense:                  |  |                                           |        |   |                                         |   |       |     |  |   |      |   |  |        |      |   |     |   |       |   |  |   |       |  
|Deposits(4)                        |  |                                           | (1,034 | ) |                                         |   | 1,137 |     |  |   | 103  |   |  |        | (433 | ) |     |   | 940   |   |  |   | 507   |  
|Federal Home Loan Bank advances    |  |                                           | (346   | ) |                                         |   | 702   |     |  |   | 356  |   |  |        | (129 | ) |     |   | 849   |   |  |   | 720   |  
|Subordinated debt                  |  |                                           | (76    | ) |                                         |   | (27   | )   |  |   | (103 | ) |  |        | (123 | ) |     |   | (141  | ) |  |   | (264  | )
|                                   |  |                                           |        |   |                                         |   |       |     |  |   |      |   |  |        |      |   |     |   |       |   |  |   |       |  
|Total interest-bearing liabilities |  |                                           | (1,456 | ) |                                         |   | 1,812 |     |  |   | 356  |   |  |        | (685 | ) |     |   | 1,648 |   |  |   | 963   |  
|                                   |  |                                           |        |   |                                         |   |       |     |  |   |      |   |  |        |      |   |     |   |       |   |  |   |       |  
|Change in net interest income (3)  |  | $                                         | 419    |   |                                         | $ | 208   |     |  | $ | 627  |   |  | $      | 275  |   |     | $ | 710   |   |  | $ | 985   |  
|                                   |  |                                           |        |   |                                         |   |       |     |  |   |      |   |  |        |      |   |     |   |       |   |  |   |       |  



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



21



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Provision for Loan Losses. The Companys provision for loan losses increased $95,000 and $65,000 for
the three and six months ended June 30, 2008, respectively, primarily due to an increase in nonperforming loans and loan growth, offset by a decrease in loan charge-offs. While the Company has no direct exposure to sub-prime mortgages,
declining economic conditions have negatively impacted the residential and commercial construction markets and contributed to the decrease in credit quality for commercial loans. At June 30, 2008, two commercial construction relationships
accounted for $5.1 million of nonperforming loans and $1.0 million in specific reserves. Net loan charge-offs were $21,000 and $103,000 for the three and six months ended June 30, 2008, respectively, compared to net loan charge-offs of $110,000
and $172,000, for the three and six months ended June 30, 2007, respectively. Higher loan charge-offs for 2007 related to the write-down of a commercial real estate property subsequently transferred to other real estate owned and charge-offs
associated with the indirect automobile portfolio, which was sold in June 2007.

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 June 30, |       |  | Six Months Ended June 30, |      
|                                                              | 2008 |                             | 2007  |  | DollarChange              |       |  | PercentChange |     |   | 2008 |       | 2007 |  | DollarChange |       |  | PercentChange |      
|Service fees                                                  |      | $                           | 1,328 |  | $                         | 1,156 |  | $             | 172 |   |      | 14.9  | %    |  | $            | 2,613 |  | $             | 2,282 |  | $ | 331  |   |  | 14.5  | %
|Wealth management fees                                        |      |                             | 1,020 |  |                           | 970   |  |               | 50  |   |      | 5.2   |      |  |              | 1,991 |  |               | 1,892 |  |   | 99   |   |  | 5.2   |  
|Increase in cash surrender value of bank-owned life insurance |      |                             | 77    |  |                           | 72    |  |               | 5   |   |      | 6.9   |      |  |              | 152   |  |               | 144   |  |   | 8    |   |  | 5.6   |  
|Net gain on sale of securities                                |      |                             | 34    |  |                           |      |  |               | 34  |   |      |      |      |  |              | 144   |  |               | 321   |  |   | (177 | ) |  | (55.1 | )
|Net gain on sale of loans                                     |      |                             | 22    |  |                           | 34    |  |               | (12 | ) |      | (35.3 | )    |  |              | 81    |  |               | 65    |  |   | 16   |   |  | 24.6  |  
|Other                                                         |      |                             | 142   |  |                           | 21    |  |               | 121 |   |      | 576.2 |      |  |              | 170   |  |               | 32    |  |   | 138  |   |  | 431.3 |  
|                                                              |      |                             |       |  |                           |       |  |               |     |   |      |       |      |  |              |       |  |               |       |  |   |      |   |  |       |  
|Total noninterest income                                      |      | $                           | 2,623 |  | $                         | 2,253 |  | $             | 370 |   |      | 16.4  | %    |  | $            | 5,151 |  | $             | 4,736 |  | $ | 415  |   |  | 8.8   | %
|                                                              |      |                             |       |  |                           |       |  |               |     |   |      |       |      |  |              |       |  |               |       |  |   |      |   |  |       |  

During 2008, service fees rose as a result of an increase in overdraft charges on certain deposit products and
higher electronic banking usage. The increase in other noninterest income for 2008 represents the recovery of administrative fees and expenses related to the Banks acquisition of certain assets and operations of the former Circle Trust
Company, which were previously deemed uncollectible. Wealth management fees were higher principally due to growth in the assets under management. The increases in noninterest income in 2008 were offset by a decrease of $177,000 in the net gain on
sale of available for sale securities for the first half of 2008 as a result of a gain of $321,000 from the sale of marketable equity securities during the first half of 2007.

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 June 30, |       |  | Six Months Ended June 30, |      
|                                         | 2008 |                             | 2007  |  | DollarChange              |       |  | PercentChange |     |   | 2008 |       | 2007 |  | DollarChange |        |  | PercentChange |       
|Salaries and employee benefits           |      | $                           | 4,305 |  | $                         | 3,787 |  | $             | 518 |   |      | 13.7  | %    |  | $            | 8,305  |  | $             | 7,516  |  | $ | 789   |   |  | 10.5  | %
|Occupancy and equipment                  |      |                             | 1,464 |  |                           | 1,311 |  |               | 153 |   |      | 11.7  |      |  |              | 2,865  |  |               | 2,666  |  |   | 199   |   |  | 7.5   |  
|Computer and electronic banking services |      |                             | 761   |  |                           | 631   |  |               | 130 |   |      | 20.6  |      |  |              | 1,482  |  |               | 1,269  |  |   | 213   |   |  | 16.8  |  
|Outside professional services            |      |                             | 210   |  |                           | 228   |  |               | (18 | ) |      | (7.9  | )    |  |              | 413    |  |               | 592    |  |   | (179  | ) |  | (30.2 | )
|Marketing and advertising                |      |                             | 194   |  |                           | 237   |  |               | (43 | ) |      | (18.1 | )    |  |              | 391    |  |               | 409    |  |   | (18   | ) |  | (4.4  | )
|Supplies and printing                    |      |                             | 145   |  |                           | 150   |  |               | (5  | ) |      | (3.3  | )    |  |              | 320    |  |               | 276    |  |   | 44    |   |  | 15.9  |  
|Other                                    |      |                             | 727   |  |                           | 701   |  |               | 26  |   |      | 3.7   |      |  |              | 1,364  |  |               | 1,263  |  |   | 101   |   |  | 7.4   |  
|                                         |      |                             |       |  |                           |       |  |               |     |   |      |       |      |  |              |        |  |               |        |  |   |       |   |  |       |  
|Total noninterest expenses               |      | $                           | 7,806 |  | $                         | 7,045 |  | $             | 761 |   |      | 10.8  | %    |  | $            | 15,140 |  | $             | 13,991 |  | $ | 1,149 |   |  | 8.2   | %
|                                         |      |                             |       |  |                           |       |  |               |     |   |      |       |      |  |              |        |  |               |        |  |   |       |   |  |       |  

Higher noninterest expenses were primarily attributable to increased operating costs associated with three
additional branch offices, which resulted in higher compensation costs due to increased staffing levels and additional occupancy expense related to facility leases and other occupancy-related expenses. Computer and electronic banking services
expense rose due to increased telecommunication costs and transaction activity. During the first half of 2008, an impairment charge of $63,000 was recorded in other noninterest expenses to reduce the carrying value of the Banks investment in a
small business investment company limited



22



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partnership. The increase in noninterest expenses was offset by a decrease in outside professional services in 2008 due to charges associated with the
termination of the agreement to purchase a mortgage company during the first half of 2007.

Income Tax Provision. For the three and six
months ended June 30, 2008, the Companys income tax expense increased $55,000 and $94,000, respectively, due to higher pre-tax income. The effective tax rate for the three months ended June 30, 2008 and 2007 was 30.6% and 28.3%,
respectively. The effective tax rate for the six months ended June 30, 2008 and 2007 was 31.3% and 28.2%, respectively.

Liquidity and Capital
Resources

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

The Companys most liquid assets are cash and cash equivalents. The levels of these assets depend on the Companys operating, financing, lending and investing activities during any given period. At
June 30, 2008, cash and cash equivalents totaled $27.5 million, which included interest-bearing deposits and federal funds sold of $12.8 million.

Securities classified as available for sale, which provide additional sources of liquidity, totaled $178.3 million at June 30, 2008. In addition, at June 30, 2008, the Company had a potential borrowing capacity of $238.5 million
from the Federal Home Loan Bank, which included overnight lines of credit of $10.0 million. On that date, the Company had advances outstanding of $139.6 million and no overnight advances outstanding. The Company believes that its most liquid assets
combined with the available line from the Federal Home Loan Bank provide adequate liquidity to meet its current financial obligations.

The Companys
primary investing activities are the origination of loans and the purchase of securities and loans. For the six months ended June 30, 2008, the Company originated $80.3 million of loans, acquired $7.4 million in loans from the Branch
Acquisitions and purchased $74.6 million of securities, excluding Federal Home Loan Bank stock. For the twelve months ended December 31, 2007, the Company originated $136.1 million of loans and purchased $66.0 million of securities.

Financing activities consist primarily of activity in deposit accounts and in Federal Home Loan Bank advances. The Company utilizes Federal Home Loan Bank borrowings
and capital received through the issuance of trust preferred securities and branch acquisitions to fund asset growth. The Company experienced a net increase in total deposits, including mortgagors and investors escrow accounts, of $72.8
million and $9.9 million for the six months ended June 30, 2008 and for the year ended December 31, 2007, respectively. Certificates of deposit due within one year of June 30, 2008 totaled $213.0 million, or 34.3%, 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 Federal Home Loan Bank
advances for the six months ended June 30, 2008. The Company had net increases of $29.7 million in Federal Home Loan Bank advances for the year ended December 31, 2007. For the six months ended June 30, 2008, the Company repurchased
257,655 shares of common stock at a cost of $2.5 million. Additional discussion about the Companys liquidity and capital resources is contained in Item 7 in the Companys 2007 Annual Report on Form 10-K.



23



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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, 2007. There were no material changes in the Companys payments
due under contractual obligations between December 31, 2007 and June 30, 2008.

Off-Balance Sheet Arrangements

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

The contractual amount of commitments to extend credit represent the
amounts of potential accounting loss should the contract be fully drawn upon, the customer defaults and the value of any existing collateral becomes worthless. The Company uses the same credit policies in making commitments and conditional
obligations as it does for on-balance sheet instruments. Financial instruments whose contract amounts represent credit risk at June 30, 2008 and December 31, 2007 are as follows:



|                                        |  |              |        |                  |   |       
|--------------------------------------- |  | ------------ | ------ | ---------------- | - | ------
|(Dollars in Thousands)                  |  | June 30,2008 |        | December 31,2007
|Commitments to extend credit:(1)        |  |              |        |                  |   |       
|Future loan commitments                 |  | $            | 17,919 |                  | $ | 16,288
|Undisbursed construction loans          |  |              | 21,003 |                  |   | 21,961
|Undisbursed home equity lines of credit |  |              | 19,271 |                  |   | 20,203
|Undisbursed commercial lines of credit  |  |              | 13,699 |                  |   | 11,496
|Overdraft protection lines              |  |              | 1,478  |                  |   | 1,464 
|Standby letters of credit(2)            |  |              | 616    |                  |   | 605   
|                                        |  |              |        |                  |   |       
|Total commitments                       |  | $            | 73,986 |                  | $ | 72,017
|                                        |  |              |        |                  |   |       



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

For the six months ended June 30, 2008, 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 2007 Annual Report on Form 10-K.



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

Not applicable as the Company is a smaller reporting company.



|Item 4. | 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



24



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##### Table of Contents

officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure. No changes in the Companys internal
control over financial reporting occurred during the quarter ended June 30, 2008 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, 2007, which could materially and adversely affect the Companys business, financial
condition or future results. The risks described in the Companys Annual Report on Form 10-K are not the only risks that the Company faces. Additional risks and uncertainties not currently known to the Company or that the Company currently
deems to be immaterial also may materially adversely affect the Companys business, financial condition and/or operating results.



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

The Companys repurchases of equity securities for the second quarter of 2008 were as follows:



|                    |  |                                   |  |                           |      |                                                                             |        |                                                                           |        
|------------------- |  | --------------------------------- |  | ------------------------- | ---- | --------------------------------------------------------------------------- | ------ | ------------------------------------------------------------------------- | -------
|Period              |  | TotalNumber ofSharesPurchased (1) |  | AveragePricePaidPer Share |      | Total Numberof SharesPurchased asPart of PubliclyAnnounced Plansor
Programs |        | MaximumNumber of Sharesthat May Yet bePurchased Underthe Plans orPrograms
|April 1 - 30, 2008  |  | 15,000                            |  | $                         | 9.97 |                                                                             | 15,000 |                                                                           | 514,350
|May 1 - 31, 2008(2) |  | 40,655                            |  |                           | 9.83 |                                                                             | 40,655 |                                                                           | 473,695
|June 1 - 30, 2008   |  |                                  |  |                           |     |                                                                             |       |                                                                           | 473,695
|                    |  |                                   |  |                           |      |                                                                             |        |                                                                           |        
|Total               |  | 55,655                            |  | $                         | 9.87 |                                                                             | 55,655 |                                                                           |        
|                    |  |                                   |  |                           |      |                                                                             |        |                                                                           |        



|(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 13,155 shares withheld from employees to satisfy tax withholding requirements upon the vesting of
restricted stock awards.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------



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

None.



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##### Table of Contents

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

The
Annual Meeting of Stockholders was held on May 7, 2008.

The items voted upon at the Annual Meeting and the votes for each proposal were as follows:



| | 1. | Election of directors for a three-year term.
| | -- | --------------------------------------------



|                  |  |            |  |         
|----------------- |  | ---------- |  | --------
|Nominees          |  | For        |  | Withheld
|Mark D. Alliod    |  | 10,734,782 |  | 86,622  
|Michael R. Garvey |  | 10,727,523 |  | 93,881  
|Robert O. Gillard |  | 10,734,962 |  | 86,442  



| | 2. | Ratification of the appointment of Wolf and Company, P.C. as the Companys independent registered public accounting firm for the fiscal year ending December 31, 2008.
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |            |  |         |  |        
| |  | ---------- |  | ------- |  | -------
| |  | For        |  | Against |  | Abstain
| |  | 10,768,877 |  | 35,653  |  | 16,874 



|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)                            
|     | 
|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 Exhibits filed with the Companys Form 8-K, filed with the
Securities and Exchange Commission on May 7, 2008.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------



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SIGNATURES

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



|                      |  |  |  |                                             
|--------------------- |  |  |  | --------------------------------------------
|                      |  |  |  | SI FINANCIAL GROUP, INC.                    
|                      |  | 
|Date: August 13, 2008 |  |  |  | /s/ Rheo A. Brouillard                      
|                      |  |  |  | Rheo A. Brouillard                          
|                      |  |  |  | President and Chief Executive Officer       
|                      |  |  |  | (principal executive officer)               
|                      |  | 
|Date: August 13, 2008 |  |  |  | /s/ Brian J. Hull                           
|                      |  |  |  | Brian J. Hull                               
|                      |  |  |  | Executive Vice President, Treasurer and     
|                      |  |  |  | Chief Financial Officer                     
|                      |  |  |  | (principal financial and accounting officer)



27