SI Financial Group, Inc. Reports Results for the Three and Nine Months Ended September 30, 2007

Business Wire, Oct 24, 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 $128,000, or $0.01 basic and diluted earnings per common share, for the quarter ended September 30, 2007 versus net income of $557,000, or $0.05 basic and diluted earnings per common share, for the quarter ended September 30, 2006. Net income for the nine months ended September 30, 2007 was $954,000, or $0.08 basic and diluted earnings per common share, compared to $2.1 million, or $0.18 basic and diluted earnings per common share, for the nine months ended September 30, 2006. Lower net income for the three and nine months ended September 30, 2007 resulted from an increase in noninterest expenses, a decline in net interest and dividend income (for the nine-month period) and an increase in the provision for loan losses, offset by an increase in noninterest income and a decrease in the provision for income taxes. During the quarter ended September 30, 2007, the Company provided $520,000 in the provision for loan losses to recognize the general slow down in the construction and housing markets and recognized a $215,000 loss on the sale of investment securities, in order to reinvest the proceeds into longer-term and higher-yielding securities.

Net interest and dividend income remained unchanged at $5.5 million for the three months ended September 30, 2007 and 2006 and decreased 6.0% to $16.1 million for the nine months ended September 30, 2007 from $17.2 million for the nine months ended September 30, 2006. Lower net interest and dividend income for the nine months ended September 30, 2007 resulted from a higher cost of funds principally due to interest rates paid on deposit accounts and greater volume of interest-bearing liabilities, offset by an increase in the average balance of loans.

The provision for loan losses increased $379,000 and $194,000 for the three and nine months ended September 30, 2007, respectively. The ratio of the allowance for loan losses to total loans increased from 0.73% at September 30, 2006 to 0.84% at September 30, 2007. At September 30, 2007, nonperforming loans totaled $3.4 million, consisting of $2.4 million in commercial construction loans and $721,000 in commercial business loans, compared to $903,000 at September 30, 2006. For the three months ended September 30, 2007, net loan recoveries were $1,000, compared to net loan charge-offs of $171,000 for the nine months ended September 30, 2007. Net loan charge-offs were $29,000 and $30,000 for the three and nine months ended September 30, 2006, respectively. While the Company has no direct exposure to sub-prime mortgages, the current real estate environment has negatively impacted the market for residential and condominium construction and development lending. As a result, the Company has increased its provision for loan losses on this portion of the loan portfolio during the third quarter of 2007.

Noninterest income was $2.2 million for the quarter ended September 30, 2007 compared to $2.0 million for the quarter ended September 30, 2006. Noninterest income was $6.9 million for the first nine months of 2007 compared to $6.1 million for the same period in 2006. Contributing to the increase in noninterest income for the three and nine months ended September 30, 2007, were increases in wealth management fees of $104,000 and $326,000, respectively, and service fees of $84,000 and $42,000, respectively. Wealth management fees were higher principally due to growth in the market value of assets under administration. Increases in service fees for the three and nine months ended September 30, 2007 relate to fees associated with a new deposit product and electronic banking usage. The quarter ended September 30, 2007 included a net loss of $215,000 on the sale of $17.2 million of government-sponsored enterprise securities, as a result of a repositioning of the Company's investment portfolio to benefit from the steeper yield curve. The proceeds were reinvested into longer-term and higher-yielding mortgage-backed securities. For the nine months ended September 30, 2007, the increase of $390,000 on the sale of available for sale securities included a gain of $321,000 from the sale of marketable equity securities during the first quarter.

Noninterest expenses increased for both the three and nine months ended September 30, 2007 compared to the same periods in 2006, primarily due to increased operating costs associated with the expansion of branch offices and other noninterest expenses. New branch offices resulted in higher occupancy and equipment expense relative to additional operating lease payments, depreciation expense and other occupancy-related expenses. Compensation costs were higher in 2007 due to increased staffing levels associated with new branch offices, offset by a reduction in performance-based compensation which included lower loan origination commissions resulting from a decline in new loan volume. An increase in the provision for credit losses for off-balance sheet commitments contributed to the increase in other noninterest expenses for 2007. Outside professional services expense was higher for the nine months ended September 30, 2007 due to the termination of the agreement to purchase a mortgage company during the first quarter, resulting in a charge to operations for purchase-related transaction costs associated with the termination, offset by a reduction in auditing expenditures.