SI Financial Group, Inc. Reports Results for the Three and Nine Months Ended September 30, 2006

Business Wire, Oct 25, 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 $557,000, or $0.05 basic and diluted earnings per common share, for the quarter ended September 30, 2006 versus net income of $812,000, or $0.07 basic and diluted earnings per common share, for the quarter ended September 30, 2005. Net income for the nine months ended September 30, 2006 was $2.1 million, or $0.18 basic and diluted earnings per common share, compared to $2.6 million, or $0.21 basic and diluted earnings per common share, for the nine months ended September 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.

Net interest and dividend income was $5.5 million for the three months ended September 30, 2006 and 2005. For the nine months ended September 30, 2006, net interest and dividend income increased 6.1% to $17.2 million from $16.2 million for the nine months ended September 30, 2005. Net interest and dividend income rose for the nine-month period principally due to an increase in the average balance of interest-earning assets, offset by an increase in the cost of funds.

The provision for loan losses increased $66,000 to $141,000 for the third quarter of 2006 and increased $236,000 to $546,000 for the nine months ended September 30, 2006. The higher provision reflects greater loan volume, primarily attributable to residential and commercial mortgage loans which increased 13.6% and 13.5%, respectively, and an increase in the Bank's classified loans from the prior year-end. Higher commercial loan volume contributed to the increase as commercial loans tend to carry a higher risk of default than residential mortgage loans. Additionally, the purchase of $10.3 million of indirect automobile loans during the first quarter of 2006 contributed to the provision for loan losses due to the increased risk of loss associated with consumer lending. At September 30, 2006, nonperforming loans totaled $903,000 compared to $246,000 at September 30, 2005. For the nine months ended September 30, 2006, net charge-offs of loan losses totaled $29,000, compared to net recoveries of loan losses of $59,000 for the nine months ended September 30, 2005.

Noninterest income was $2.0 million for the quarter ended September 30, 2006 compared to $1.4 million for the quarter ended September 30, 2005. Noninterest income was $6.1 million for the first nine months of 2006 compared to $4.4 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, additional deposit-related products and electronic banking usage resulted in higher service fees. The increase in noninterest income for the first nine months of 2006 was offset by the net loss on the sale of securities of $284,000, which reflects the sale of primarily government-sponsored enterprise securities in the second and third quarters of 2006 compared to a net gain on the sale of securities of $59,000 for the first nine months of 2005. The proceeds from the sale of securities during the second and third quarters of 2006 were reinvested into higher yielding mortgage-backed securities. Noninterest income in 2006 was also impacted by the net gain on the sale of loans of $72,000, which resulted from the sale of $7.6 million of fixed-rate residential mortgage loans versus a net gain of $173,000 on the sale of $33.9 million of predominately fixed-rate residential mortgage loans in the first nine months of 2005.

Noninterest expenses increased for both the three months and the nine months ended September 30, 2006 compared to the same periods in 2005, primarily due to increased operating costs associated with the opening 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. Compensation costs were higher in 2006 due to increased staffing levels and the amortization of share-based compensation arrangements. Share-based compensation expense totaled $574,000 and $285,000 for the nine months ended September 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 $52.1 million, or 7.5%, to $743.9 million at September 30, 2006 from $691.9 million at December 31, 2005. Contributing to the increase in assets were increases of $53.1 million in net loans receivable, available for sale securities of $2.4 million, premises and equipment, net, of $1.4 million, other assets of $1.0 million and Federal Home Loan Bank stock of $569,000, offset by a decrease in cash and cash equivalents of $6.2 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 $1.7 million 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 primarily mortgage-backed securities. 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.