SI Financial Group, Inc. Reports Results for the Quarter and the Year Ended December 31, 2006 and Announces Date of Annual Stockholders' Meeting

Business Wire, Feb 28, 2007

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 $669,000, or $0.06 basic and diluted earnings per common share, for the quarter ended December 31, 2006 versus net income of $838,000, or $0.07 basic and diluted earnings per common share, for the quarter ended December 31, 2005. Net income for the year ended December 31, 2006 was $2.8 million, or $0.24 basic and $0.23 diluted earnings per common share, compared to $3.4 million, or $0.28 basic and diluted earnings per common share for the year ended December 31, 2005. Lower net income for 2006 was primarily due to higher noninterest expenses as a result of branch expansion and an increase in the cost of funds.

Net interest and dividend income decreased 4.4% to $5.4 million for the quarter ended December 31, 2006 from $5.6 million for the quarter ended December 31, 2005 and increased 3.4% to $22.5 million for the year ended December 31, 2006 from $21.8 million for the year ended December 31, 2005. Net interest and dividend income decreased for the quarter due to a higher cost of funds resulting from increased market interest rates, higher promotional rates offered in connection with branch expansion and an increase in certificates of deposit. Net interest and dividend income increased for the year ended December 31, 2006 as a result of 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 $235,000 to $335,000 for the fourth quarter of 2006 and increased $471,000 to $881,000 for the year ended December 31, 2006 compared to the prior year. The higher provision reflects increases in the Bank's classified and nonperforming loans, charge-offs and loan growth from the prior year-end. At December 31, 2006, nonperforming loans totaled $1.4 million compared to $240,000 at December 31, 2005. Additionally, the purchase of $10.3 million of indirect automobile loans during the first quarter of 2006 contributed to the increase in the provision for loan losses due to the increased risk of loss associated with this type of consumer lending. For the year ended December 31, 2006, net loan charge-offs totaled $187,000, compared to net loan recoveries of $61,000 for the year ended December 31, 2005.

Noninterest income was $2.2 million for the quarter ended December 31, 2006 compared to $1.9 million for the quarter ended December 31, 2005. Noninterest income increased $1.9 million to $8.3 million for the year ended December 31, 2006 compared to $6.3 million for 2005. For the quarter and the year ended December 31, 2006, wealth management fees increased $331,000 and $2.1 million, respectively, due primarily to the November 2005 acquisition of SI Trust Servicing, the Bank's third-party trust services operation. The increase in noninterest income was offset by a decrease in the gain on the sale of loans. The net gain on the sale of loans of $104,000 for 2006 resulted from the sale of $11.0 million of fixed-rate residential mortgage loans, versus a net gain of $190,000 on the sale of $35.5 million of predominately fixed-rate residential mortgage loans in 2005. The increase in noninterest income for 2006 was also offset by the net loss on the sale of securities of $284,000, which primarily reflects the sale of 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 in 2005. The proceeds from the sale of securities during the second and third quarters of 2006 were reinvested into higher-yielding government-sponsored mortgage-backed securities.

Noninterest expenses were $6.3 million for the quarter ended December 31, 2006 compared to $6.1 million for the quarter ended December 31, 2005. Noninterest expenses increased by $3.4 million for 2006 compared to 2005. For the quarter and the year ended December 31, 2006, the increase in noninterest expenses reflected an increase in operating costs associated with the opening of branch offices and the acquisition of SI Trust Servicing. Compensation costs, occupancy and computer and electronic banking services contributed the largest increase to 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 $765,000 and $476,000 for the years ended December 31, 2006 and 2005, respectively. Occupancy and equipment expense increased primarily due to additional operating lease payments, depreciation expense and other occupancy-related expenses. Other noninterest expenses were lower in 2006 compared to the prior year mainly due to the implementation of the Bank's remote branch capture system and the greater than anticipated losses on uncollectible items in 2005. Outside professional services expense was lower in 2006 versus 2005 as a result of reduced legal and auditing expenditures.