SI Financial Group, Inc. Reports Results for the Quarter and Six Months Ended June 30, 2006

Business Wire, July 26, 2006

WILLIMANTIC, Conn. -- SI Financial Group, Inc. (the "Company") (NASDAQ Global Market: SIFI), the holding company of Savings Institute Bank and Trust Company (the "Bank"), reported net income of $757,000, or $0.06 basic and diluted earnings per common share, for the quarter ended June 30, 2006 versus net income of $845,000, or $0.07 basic and diluted earnings per common share, for the quarter ended June 30, 2005. Net income for the six months ended June 30, 2006 was $1.6 million, or $0.13 basic and diluted earnings per common share, compared to $1.7 million, or $0.14 basic and diluted earnings per common share, for the six months ended June 30, 2005. Lower net income in 2006 was the result of higher noninterest expenses, offset by increases in noninterest income and net interest and dividend income.

For the three months and the six months ended June 30, 2006, net interest and dividend income increased 12.1% to $6.0 million from $5.4 million and increased 9.2% to $11.7 million from $10.7 million, respectively, compared to the same periods in 2005. Net interest and dividend income rose principally due to an increase in the average balance of interest-earning assets and higher average yields, offset by an increase in the cost of funds.

The provision for loan losses decreased $10,000 to $120,000 for the second quarter of 2006, mainly due to lower commercial loan volume compared to the same quarter in 2005. Commercial loans tend to carry a higher risk of default than residential mortgage loans. The provision for loan losses increased $170,000 for the first half of 2006 compared to the same period in the prior year. The higher provision reflects greater loan volume, primarily attributable to commercial and residential mortgage loans which increased 10.4% and 9.2%, respectively, and an increase in the Bank's managed loans from the prior year-end. Additionally, the purchase of $10.3 million of indirect automobile loans contributed to the provision for loan losses due to the increased risk of loss associated with consumer lending. The quality of the loan portfolio remains high, as evidenced by the low volume of nonperforming loans and loan charge-offs. At June 30, 2006, nonperforming loans totaled $204,000 compared to $950,000 at June 30, 2005. For the six months ended June 30, 2006 and 2005, net recoveries from loan losses totaled $1,000 and $75,000, respectively.

Noninterest income was $2.0 million for the quarter ended June 30, 2006 compared to $1.6 million for the quarter ended June 30, 2005. Noninterest income was $4.1 million for the first half of 2006 compared to $3.0 million for the same period of 2005. Contributing to the rise in noninterest income were increases in wealth management fees and service fees. Wealth management fees increased as a result of fee income associated with SI Trust Servicing, the Bank's third-party trust outsourcing service that was acquired in November 2005. Branch expansion, deposit-related products and electronic banking usage resulted in higher service fees. For the first half of 2006, the net loss on the sale of securities of $112,000 reflects the sale of government-sponsored enterprise securities in the second quarter of 2006 compared to a net gain on the sale of securities of $35,000 for the first half of 2005. The net gain on the sale of loans of $35,000 for 2006 resulted from the sale of $4.7 million of fixed-rate residential mortgage loans versus a net gain of $147,000 on the sale of $31.6 million of predominately fixed-rate residential mortgage loans in the first half of 2005. The sale of loans reflects the Company's initiative to reduce its sensitivity to increases in interest rates.

Noninterest expenses increased for both the three months and the six months ended June 30, 2006 compared to the same periods in 2005, primarily due to increased operating costs associated with the expansion of branch offices and the acquisition of SI Trust Servicing. Compensation costs, occupancy and equipment and computer and electronic banking services contributed the largest increase in noninterest expenses, offset by a decrease in outside professional services. Compensation costs were higher in 2006 due to increased staffing levels and the amortization of share-based compensation arrangements. Share-based compensation expense totaled $382,000 and $96,000 for the six months ended June 30, 2006 and 2005, respectively. Occupancy and equipment expense increased primarily due to additional operating lease payments, depreciation expense and other occupancy-related expenses. To a lesser extent, marketing and advertising costs rose in response to various promotional initiatives. Outside professional services expense was lower in 2006 versus 2005 as a result of reduced legal and auditing expenditures.

Total assets grew $39.6 million, or 5.7%, to $731.4 million at June 30, 2006 from $691.9 million at December 31, 2005. Contributing to the increase in assets were increases of $38.6 million in net loans receivable, available for sale securities of $6.3 million, other assets of $586,000 and Federal Home Loan Bank stock of $569,000, offset by a decrease in cash and cash equivalents of $7.1 million and the sale of other real estate owned of $325,000. The increase in net loans receivable reflects strong loan originations, representing an increase of 8.7% over the same period of the prior year, with residential mortgage loans contributing the largest increase. Additionally, the Bank's purchase of $10.3 million of indirect automobile loans increased the consumer loan portfolio. Available for sale securities increased as a result of purchases of government-sponsored enterprises and mortgage-backed securities with maturities of five to ten years, offset by higher unrealized holding losses. Increases in other assets were primarily due to other investments and receivables. Federal Home Loan Bank stock rose in response to an increase in Federal Home Loan Bank borrowings.