10-K

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

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

For the Fiscal Year Ended December 31, 2009

¨ 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)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class	Name of Exchange on which registered
Common stock, par value $0.01 per share	The Nasdaq Stock Market LLC

Securities registered pursuant to Section 12(g) of the Act:

None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  ¨     No  x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes  ¨    No  x

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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.    x

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ¨    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 definitions 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	¨	Smaller Reporting Company Filer	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

The aggregate market value of the voting and non-voting common equity held by non-affiliates was $17.8 million, which was computed by reference to the closing price of $4.25, at which the common equity was sold as of June 30, 2009. Solely for the purposes of this calculation, the shares held by SI Bancorp, MHC and the directors and officers of the registrant are deemed to be affiliates.

As of March 15, 2010, there were 11,789,202 shares of the registrant’s common stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Company’s Annual Report to Stockholders and the Proxy Statement for the 2010 Annual Meeting of Stockholders are incorporated by reference into Parts II and III of this Form 10-K.

SI FINANCIAL GROUP, INC.

TABLE OF CONTENTS

		Page No.
PART I.
Item 1.	Business	1
Item 1A.	Risk Factors	33
Item 1B.	Unresolved Staff Comments	39
Item 2.	Properties	39
Item 3.	Legal Proceedings	39
Item 4.	[Reserved]	39
PART II.
Item 5.	Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	39
Item 6.	Selected Financial Data	40
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	41
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk	41
Item 8.	Financial Statements and Supplementary Data	42
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	42
Item 9A(T).	Controls and Procedures	42
Item 9B.	Other Information	43
PART III.
Item 10.	Directors, Executive Officers and Corporate Governance	43
Item 11.	Executive Compensation	44
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	44
Item 13.	Certain Relationships and Related Transactions and Director Independence	44
Item 14.	Principal Accountant Fees and Services	44
PART IV.
Item 15.	Exhibits and Financial Statement Schedules	45
	Signatures	47

Forward-Looking Statements

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 our 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 of the effect of future plans or strategies is inherently uncertain. Factors that could have a material adverse effect on the operations of SI Financial Group, Inc. (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.

PART I.

Item 1. Business.

General

In certain instances where appropriate, the terms “we,” “us” and “our” refer to SI Financial Group, Inc. and Savings Institute Bank and Trust Company or both.

SI Financial Group, Inc. was established on August 6, 2004 to become the parent holding company for Savings Institute Bank and Trust Company (the “Bank” or “Savings Institute”) upon the conversion of the Bank’s former parent, SI Bancorp, Inc., from a state-chartered to a federally-chartered mutual holding company. At the same time, the Bank also converted from a state-chartered to a federally-chartered savings bank. On September 30, 2004, the Company completed its minority stock offering with the sale of 5,025,500 shares of its common stock to the public, 251,275 shares contributed to SI Financial Group Foundation and 7,286,975 issued to SI Bancorp, MHC. The Bank is a wholly-owned subsidiary of the Company and management of the Company and the Bank are substantially similar. The Company neither owns nor leases any property, but instead uses the premises, equipment and other property of the Bank. Thus, the financial information and discussion contained herein primarily relates to the activities of the Bank.

The Bank operates as a community-oriented financial institution offering a full range of financial services to consumers and businesses in its market area, including insurance, trust and investment services. The Bank attracts deposits from the general public and uses those funds to originate one- to four-family residential, multi-family and commercial real estate, commercial business and consumer loans, which it holds primarily for investment.

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Availability of Information

The Company’s annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and any amendments to such reports filed or furnished pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, are made available free of charge on the Company’s website, www.mysifi.com, as soon as reasonably practicable after the Company electronically files such material with, or furnishes it to, the Securities and Exchange Commission (the “SEC”). The information on the Company’s website shall not be considered as incorporated by reference into this Form 10-K.

Market Area

The Company is headquartered in Willimantic, Connecticut, which is located in eastern Connecticut approximately 30 miles east of Hartford. The Bank operates offices in Windham, New London, Tolland, Hartford and Middlesex Counties, which the Bank considers its primary market area. The economy in its market area is primarily oriented to the educational, service, entertainment, manufacturing and retail industries.

The major employers in the area include several institutions of higher education, the Mohegan Sun and Foxwoods casinos, General Dynamics Defense Systems and Pfizer, Inc. According to published statistics, Windham County’s population in 2009 was 117,328 and consisted of 43,216 households. The population increased 7.6% from 2000. Median household income in Windham County is $56,000, compared to $68,000 for Connecticut as a whole and $51,000 nationally. The surrounding counties of Hartford, New London, Tolland and Middlesex Counties have median household incomes of $64,000, $63,000, $75,000 and $75,000, respectively.

Competition

The Bank faces significant competition for the attraction of deposits and origination of loans. The most direct competition for deposits has historically come from the several financial institutions operating in the Bank’s market area and, to a lesser extent, from other financial service companies, such as brokerage firms, credit unions and insurance companies. The Bank also faces competition for investors’ funds from money market funds and other corporate and government securities. At June 30, 2009, which is the most recent date for which data is available from the Federal Deposit Insurance Corporation (the “FDIC”), the Bank held approximately 20.17% of the deposits in Windham County, which is the largest market share out of 10 financial institutions with offices in this county. Also, at June 30, 2009, the Bank held approximately 1.06% of the deposits in Hartford, New London and Tolland Counties, which is the 16^th market share out of 34 financial institutions with offices in these counties. Bank of America Corp., Webster Bank Financial Corporation, TD Banknorth Group, Inc., People’s United Bank and Sovereign Bank, all of which are large national or regional bank holding companies, also operate in the Bank’s market area. These institutions are significantly larger and, therefore, have significantly greater resources than the Bank does and may offer products and services that the Bank does not provide.

The Bank’s competition for loans comes primarily from financial institutions in its market area, and to a lesser extent from other financial service providers, such as mortgage companies and mortgage brokers. Competition for loans also comes from the increasing number of non-depository financial service companies entering the mortgage market, such as insurance companies, securities companies and specialty finance companies.

The Bank expects competition to increase in the future as a result of legislative, regulatory and technological changes and the continuing trend of consolidation in the financial services industry. Technological advances, for example, have lowered barriers to entry, allowed banks to expand their

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geographic reach by providing services over the Internet and made it possible for non-depository institutions to offer products and services that traditionally have been provided by banks. Changes in federal law permit affiliation among banks, securities firms and insurance companies, which promotes a competitive environment in the financial services industry. Competition for deposits and the origination of loans could limit the Company’s growth in the future.

Lending Activities

General. The Bank’s loan portfolio consists primarily of one- to four-family residential mortgage loans, multi-family and commercial real estate loans and commercial business loans. To a much lesser extent, the loan portfolio includes construction and consumer loans. The Bank historically and currently originates loans primarily for investment purposes. At December 31, 2009, the Bank had loans held for sale totaling $396,000. The following table summarizes the composition of the Bank’s loan portfolio in dollar amounts and as a percentage of the respective portfolio at the dates indicated.

	At December 31,
(Dollars in Thousands)	2009					2008					2007					2006					2005
	Amount			Percent of Total		Amount			Percent of Total		Amount			Percent of Total		Amount			Percent of Total		Amount			Percent of Total
Real estate loans:
Residential – 1 to 4 family	$	306,244		50.12	%	$	332,399		53.46	%	$	330,389		55.87	%	$	309,695		53.65	%	$	266,739		51.66	%
Multi-family and commercial		159,781		26.15			158,693		25.52			132,819		22.46			118,600		20.55			100,926		19.54
Construction		11,400		1.87			27,892		4.49			37,231		6.29			44,647		7.73			47,325		9.16
Total real estate loans		477,425		78.14			518,984		83.47			500,439		84.62			472,942		81.93			414,990		80.36
Consumer loans:
Home Equity		22,573		3.69			18,762		3.02			17,774		3.01			18,489		3.20			20,562		3.98
Other		3,513		0.57			3,345		0.54			3,330		0.56			10,616		1.84			3,294		0.64
Total consumer loans		26,086		4.26			22,107		3.56			21,104		3.57			29,105		5.04			23,856		4.62
Commercial business loans:
SBA and USDA guaranteed		77,310		12.65			45,704		7.35			42,267		7.15			51,358		8.90			57,570		11.15
Other		30,239		4.95			34,945		5.62			27,583		4.66			23,813		4.13			19,982		3.87
Total commercial business loans		107,549		17.60			80,649		12.97			69,850		11.81			75,171		13.03			77,552		15.02
Total loans		611,060		100.00	%		621,740		100.00	%		591,393		100.00	%		577,218		100.00	%		516,398		100.00	%
Deferred loan origination costs, net of deferred fees		1,523					1,570					1,390					1,258					1,048
Allowance for loan losses		(4,891	)				(6,047	)				(5,245	)				(4,365	)				(3,671	)
Loans receivable, net	$	607,692				$	617,263				$	587,538				$	574,111				$	513,775

One- to Four-Family Residential Loans. The Bank’s primary lending activity is the origination of mortgage loans to enable borrowers to purchase or refinance existing homes or to construct new residential dwellings in its market area. The Bank offers fixed-rate and adjustable-rate mortgage loans with terms up to 40 years. Borrower demand for adjustable-rate loans versus fixed-rate loans is a function of the level of current and anticipated future interest rates, the difference between the interest rates and loan fees offered for fixed-rate mortgage loans and the initial period interest rates and loan fees for adjustable-rate loans. The relative amount of fixed-rate mortgage loans and adjustable-rate mortgage loans that can be originated at any time is largely determined by the demand for each in a competitive environment and the effect each has on the Bank’s interest rate risk. The loan fees charged, interest rates and other provisions of mortgage loans are determined on the basis of the Bank’s own pricing criteria and competitive market conditions. Additionally, the Bank offers reverse mortgages to its customers, through a correspondent relationship with another institution, in response to increasing demand for this type of product.

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The Bank offers fixed-rate loans with terms of 10, 15, 20, 30 or 40 years. The Bank’s adjustable-rate mortgage loans are based primarily on 30-year amortization schedules. Interest rates and payments on adjustable-rate mortgage loans adjust annually after a one, three, five, seven or ten-year initial fixed period. Interest rates and payments on adjustable-rate loans are adjusted to a rate typically equal to 2.75% (2.875% for jumbo loans) above the one-year constant maturity Treasury index. The maximum amount by which the interest rate may be increased or decreased is generally 2% per adjustment period and the lifetime interest rate cap is generally 6% over the initial interest rate of the loan.

While the Bank anticipates that adjustable-rate loans will better offset the adverse effects of an increase in interest rates as compared to fixed-rate mortgages, the increased mortgage payments required of adjustable-rate loan borrowers in a rising interest rate environment could cause an increase in delinquencies and defaults. The marketability of the underlying property also may be adversely affected in a high interest rate environment. In addition, although adjustable-rate mortgage loans help make the Bank’s asset base more responsive to changes in interest rates, the extent of this interest sensitivity is limited by the annual and lifetime interest rate adjustment limits.

Generally, the Bank does not originate conventional loans with loan-to-value ratios exceeding 95% and generally originates loans with a loan-to-value ratio in excess of 80% only when secured by first liens on owner-occupied one- to four-family residences. Loans with loan-to-value ratios in excess of 80% generally require private mortgage insurance or additional collateral. The Bank requires all properties securing mortgage loans to be appraised by a board approved independent licensed appraiser and requires title insurance on all first mortgage loans. Borrowers must obtain hazard insurance and flood insurance for loans on property located in a flood zone before closing the loan.

In an effort to provide financing for moderate income and first-time buyers, the Bank offers loans insured by the Federal Housing Administration and the Veterans Administration and participates in the Connecticut Housing Finance Authority Program. The Bank offers fixed-rate residential mortgage loans through these programs to qualified individuals and originates the loans using modified underwriting guidelines.

Multi-Family and Commercial Real Estate Loans. The Bank makes multi-family and commercial real estate loans throughout its market area for the purpose of acquiring, developing, improving or refinancing multi-family and commercial real estate where the property is the primary collateral securing the loan, and the income generated from the property is the primary repayment source. The Bank offers fixed-rate and adjustable-rate mortgage loans secured by multi-family and commercial real estate. The Bank’s multi-family and commercial real estate loans are generally secured by condominiums, apartment buildings, retail facilities, single-family subdivisions as well as owner-occupied properties located in its market area and used for businesses. The Bank intends to continue to emphasize this segment of its loan portfolio, as market conditions permit, as such loans produce yields that are generally higher than one- to four-family residential loans and are more sensitive to changes in market interest rates.

The Bank originates adjustable-rate multi-family and commercial real estate loans for terms up to 25 years. Interest rates and payments on these loans typically adjust every five years after a five-year initial fixed-rate period. Interest rates and payments on adjustable-rate loans are adjusted to a rate typically 2.5-3.0% above the classic advance rates offered by the Federal Home Loan Bank of Boston (the “FHLB”). There are no adjustment period or lifetime interest rate caps. Loans are secured by first mortgages that generally do not exceed 75% of the property’s appraised value. At December 31, 2009, the largest outstanding multi-family or commercial real estate loan was $7.1 million. This loan is secured by a nursing home and rehabilitation facility and was performing according to its terms at December 31, 2009.

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Loans secured by multi-family and commercial real estate generally have larger balances and involve a greater degree of risk than one- to four-family residential mortgage loans. Of primary concern in multi-family and commercial real estate lending is the borrower’s creditworthiness and the feasibility and cash flow potential of the project. Payments on loans secured by income-producing properties often depend on the successful operation and management of the properties. As a result, repayment of such loans may be subject, to a greater extent than residential real estate loans, to adverse conditions in the real estate market or the economy. To monitor cash flows on income-producing properties, the Bank requires borrowers and loan guarantors, if any, to provide annual financial statements on multi-family and commercial real estate loans. In reaching a decision on whether to make a multi-family or commercial real estate loan, consideration is given to the net operating income of the property, the borrower’s expertise, credit history and the profitability and value of the underlying property. In addition, with respect to commercial real estate rental properties, the Bank will also consider the term of the lease and the quality of the tenants. The Bank generally requires that the properties securing these real estate loans have debt service coverage ratios of at least 1.20. The debt service coverage ratio is equal to cash flows before interest, depreciation and required principal payments. Appropriate environmental assessments are generally required for commercial real estate loans over $100,000, based upon the environmental risk factors for the subject collateral property.

Construction and Land Loans. The Bank originates loans to individuals, and to a lesser extent, builders, to finance the construction of residential dwellings. The Bank also originates construction loans for commercial development projects, including condominiums, apartment buildings, single-family subdivisions as well as owner-occupied properties used for businesses. Residential construction loans generally provide for the payment of interest only during the construction phase, which is usually twelve months. At the end of the construction phase, the loan generally converts to a permanent mortgage loan. Commercial construction loans generally provide for the payment of interest only during the construction phase which may range from three to twenty-four months. Loans generally can be made with a maximum loan-to-value ratio of 80% on residential construction, 75% on construction for nonresidential properties and 80% of the lesser of the appraised value or cost of the project on multi-family construction. At December 31, 2009, the largest outstanding construction loan commitment for the construction of a church was $2.8 million, of which $751,000 was outstanding. This loan was performing according to its terms at December 31, 2009. Primarily all commitments to fund construction loans require an appraisal of the property by a board approved independent licensed appraiser. Also, inspections of the property are required before the disbursement of funds during the term of the construction loan.

Construction financing is generally considered to involve a higher degree of risk of loss than long-term financing on improved, occupied real estate. Risk of loss on a construction loan depends largely upon the accuracy of the initial estimate of the property’s value at completion of construction or development and the estimated cost, including interest, of construction. During the construction phase, a number of factors could result in delays and cost overruns. If the estimate of construction costs proves to be inaccurate, the Bank may be required to advance funds beyond the amount originally committed to permit completion of the development. If the estimate of value proves to be inaccurate, the Bank may be confronted, at or before the maturity of the loan, with a project having a value which is insufficient to assure full repayment. As a result of the foregoing, construction lending often involves the disbursement of substantial funds with repayment dependent, in part, on the success of the ultimate project rather than the ability of the borrower or guarantor to repay principal and interest. If the Bank is forced to foreclose on a project before or at completion due to a default, there can be no assurance that the Bank will be able to recover all of the unpaid balance of, and accrued interest on, the loan as well as related foreclosure and holding costs.

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The Bank also originates land loans to individuals, local contractors and developers only for making improvements on approved building lots, subdivisions and condominium projects within two years of the date of the loan. Such loans to individuals generally are written with a maximum loan-to-value ratio based upon the appraised value or purchase price of the land. Maximum loan-to-value ratio on raw land is 50%, while the maximum loan-to-value ratio for land development loans involving approved projects is 65%. The Bank offers fixed-rate land loans and variable-rate land loans that adjust annually. Interest rates and payments on adjustable-rate land loans are adjusted to a rate typically equal to the then current The Wall Street Journal prime rate plus a 1.0–2.0% margin. The maximum amount by which the interest rate may be increased or decreased is generally 2% annually and the lifetime interest rate cap is generally 6% over the initial rate of the loan. Land loans totaled $574,000 at December 31, 2009.

Commercial Business Loans. The Bank originates commercial business loans to a variety of professionals, sole proprietorships and small businesses primarily in its market area. The Bank offers a variety of commercial lending products, the maximum amount of which is limited by the Bank’s in-house loans to one borrower limit. At December 31, 2009, the largest commercial loan was a $1.3 million loan, which is secured by a business asset consisting of a waste processing system. This loan was performing according to its terms at December 31, 2009.

The Bank offers loans secured by business assets other than real estate, such as business equipment and inventory. These loans are originated with maximum loan-to-value ratios of 75% of the value of the personal property. The Bank originates lines of credit to finance the working capital needs of businesses to be repaid by seasonal cash flows or to provide a period of time during which the business can borrow funds for planned equipment purchases. These loans convert to a term loan at the expiration of a draw period, which is not to exceed twelve months, and will be paid over a pre-defined amortization period. Additional products such as time notes, letters of credit and equipment lease financing are offered. Additionally, the Bank purchases the portion of commercial business loans that are fully guaranteed by the Small Business Administration (“SBA”) and the United States Department of Agriculture (“USDA”). At December 31, 2009, SBA and USDA loans totaled $77.3 million.

When originating commercial business loans, the Bank considers the financial statements of the borrower, the borrower’s payment history of both corporate and personal debt, the debt service capabilities of the borrower, the projected cash flows of the business, viability of the industry in which the customer operates and the value of the collateral.

Unlike residential mortgage loans, which generally are made on the basis of the borrower’s ability to make repayment from his or her employment or other income, and which are secured by real property whose value tends to be more easily ascertainable, commercial loans are of higher risk and typically are made on the basis of the borrower’s ability to make repayment from the cash flow of the borrower’s business. As a result, the availability of funds for the repayment of commercial loans may depend substantially on the success of the business itself. Further, any collateral securing such loans may depreciate over time, may be difficult to appraise and may fluctuate in value.

Consumer Loans. The Bank offers a variety of consumer loans, primarily home equity lines of credit, and, to a lesser extent, loans secured by marketable securities, passbook or certificate accounts, motorcycles, automobiles and recreational vehicles, as well as unsecured loans. Generally, the Bank offers automobile loans with a maximum loan-to-value ratio of 100% of the purchase price for new vehicles. Unsecured loans generally have a maximum borrowing limit of $10,000 and a maximum term of five years.

The procedures for underwriting consumer loans include an assessment of the applicant’s payment history on other debts and their ability to meet existing obligations and payments on the proposed loans. Although the applicant’s creditworthiness is a primary consideration, the underwriting process also includes a comparison of the value of the collateral, if any, to the proposed loan amount. Home equity

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lines of credit have adjustable rates of interest that are indexed to the prime rate as reported in The Wall Street Journal. The Bank will offer home equity loans with a maximum combined loan-to-value ratio of 80%. A home equity line of credit may be drawn down by the borrower for an initial period of five years from the date of the loan agreement. During this period, the borrower has the option of paying, on a monthly basis, either principal and interest or only interest. If the draw period is not extended for an additional 4 years and 10 months, the borrower has to pay back the amount outstanding under the line of credit over a term not to exceed ten years, beginning at the end of the five-year period.

Consumer loans may entail greater risk than do residential mortgage loans, particularly in the case of consumer loans that are unsecured or secured by assets that depreciate rapidly. In such cases, repossessed collateral for a defaulted consumer loan may not provide an adequate source of repayment for the outstanding loan and the remaining deficiency often does not warrant significant collection efforts against the borrower. In addition, consumer loan collections depend on the borrower’s continuing financial stability, and therefore, are more likely to be adversely affected by job loss, divorce, illness or personal bankruptcy. Furthermore, the application of various federal and state laws, including federal and state bankruptcy and insolvency laws, may limit the amount which can be recovered on such loans.

Loan Originations, Purchases, Sales and Servicing. Loan originations come from a number of sources. The primary source of loan originations are the Bank’s in-house loan originators, and to a lesser extent, local mortgage brokers, advertising and referrals from customers.

From time to time, the Bank will purchase whole participations in loans fully guaranteed by the SBA and the USDA. The loans are primarily for commercial and agricultural properties located throughout the United States. The Bank purchased $40.9 million and $12.3 million in loans during 2009 and 2008, respectively.

The Bank generally originates loans for portfolio but from time to time will sell loans in the secondary market, primarily fixed-rate one- to four-family residential mortgage loans with servicing retained. During 2009, the Bank sold a larger portion of its fixed-rate one- to four-family residential mortgage loans due to the low interest rate environment as compared to prior years. The decision to sell loans in the secondary market is based on prevailing market interest rate conditions, an analysis of the composition and risk of the loan portfolio, liquidity needs and interest rate risk management. Generally, loans are sold without recourse. The Bank utilizes the proceeds from these sales primarily to meet liquidity needs. In 2008, the Bank began selling loans to the FHLB under the Mortgage Partnership Finance Program (“MPF”). Proceeds from the sale of loans totaled $56.9 million and $14.4 million for the years ended December 31, 2009 and 2008, respectively.

At December 31, 2009, the Bank retained the servicing rights on $121.1 million of loans for others, consisting primarily of fixed-rate mortgage loans sold with or without recourse to third parties. Loan repurchase commitments are agreements to repurchase loans previously sold upon the occurrence of conditions established in the contract, including default by the underlying borrower. At December 31, 2009, the balance of loans sold with recourse totaled $32,000. Loan servicing includes collecting and remitting loan payments, accounting for principal and interest, contacting delinquent mortgagors, processing insurance and tax payments on behalf of borrowers, assisting in foreclosures and property dispositions when necessary and general administration of loans.

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The following table sets forth the Bank’s loan originations, loan purchases, loan sales, principal repayments, charge-offs and other reductions on loans for the years indicated.

	Years Ended December 31,
(Dollars in Thousands)	2009			2008
Loans at beginning of year	$	621,740		$	591,393
Originations:
Real estate loans		129,948			118,113
Commercial business loans		4,386			15,778
Consumer loans		11,990			7,697
Total loan originations		146,324			141,588
Purchases		40,876			12,281
Deductions:
Principal loan repayments, prepayments and other, net		131,940			108,693
Loan sales		56,336			14,232
Loan charge-offs		4,075			597
Transfers to other real estate owned		5,529			—
Total deductions		197,880			123,522
Net (decrease) increase in loans		(10,680	)		30,347
Loans at end of year	$	611,060		$	621,740

Loan Maturity. The following table shows the contractual maturity of the Bank’s loan portfolio at December 31, 2009. The table does not reflect any estimate of prepayments, which significantly shortens the average life of all loans, and may cause actual repayment experience to differ from that shown below. Demand loans having no stated schedule of repayment and no stated maturity are reported as due in one year or less.

	Amounts Due In
(Dollars in Thousands)	One Year or Less		More Than One Year to Five Years		More Than Five Years		Total Amount Due
Real estate loans:
Residential – 1 to 4 family	$	86	$	8,611	$	297,547	$	306,244
Multi-family and commercial		204		4,234		155,343		159,781
Construction		5,933		80		5,387		11,400
Total real estate loans		6,223		12,925		458,277		477,425
Commercial business loans		9,893		9,110		88,546		107,549
Consumer loans		149		1,655		24,282		26,086
Total loans	$	16,265	$	23,690	$	571,105	$	611,060

While one- to four-family residential real estate loans are normally originated with terms of up to 40 years, such loans typically remain outstanding for substantially shorter periods because borrowers often prepay their loans in full upon the sale of the property pledged as security or upon refinancing the original loan. Therefore, average loan maturity is a function of, among other factors, the level of purchase, sale and refinancing activity in the real estate market, prevailing interest rates and the interest rates payable on outstanding loans.

8

The following table sets forth, at December 31, 2009, the dollar amount of gross loans receivable contractually due after December 31, 2010, and whether such loans have either fixed interest rates or floating or adjustable interest rates.

	Due After December 31, 2010
(Dollars in Thousands)	Fixed Rates		Floating or Adjustable Rates		Total
Real estate loans:
Residential – 1 to 4 family	$	207,468	$	98,690	$	306,158
Multi-family and commercial		12,622		146,955		159,577
Construction		4,362		1,105		5,467
Total real estate loans		224,452		246,750		471,202
Commercial business loans		38,264		59,392		97,656
Consumer loans		7,503		18,434		25,937
Total loans	$	270,219	$	324,576	$	594,795

Loan Approval Procedures and Authority. The Bank’s lending activities follow written, nondiscriminatory, underwriting standards and loan origination procedures established by the Board of Directors and management. All residential mortgages and home equity lines of credit in excess of $6.0 million or all commercial loans and other consumer loans in excess of $2.0 million require the approval of the Board of Directors. The Loan Committee of the Board of Directors has the authority to approve: (1) residential mortgage loans and consumer home equity lines of credit up to $6.0 million and (2) commercial and other consumer loans up to $2.0 million. The President and the Senior Credit Officer have approval for: (1) residential mortgage loans that conform to Fannie Mae and Freddie Mac standards up to $2.0 million or $417,000 for those that are non-conforming and (2) consumer and commercial loans up to $250,000 individually or $2.0 million jointly for home equity lines of credit or $1.0 million jointly for commercial and other consumer loans.

Loans to One Borrower. The maximum amount that the Bank may lend to one borrower and the borrower’s related entities is limited, by regulation, to generally 15% of the Bank’s stated capital and reserves. At December 31, 2009, the Bank’s regulatory limit on loans to one borrower was $11.1 million. At that date, the Bank’s largest lending relationship was $8.3 million, representing a commercial business loan, two loans for the construction of a nursing home and rehabilitation facility and a loan to purchase an adjacent property. These loans were performing according to the original repayment terms at December 31, 2009.

Loan Commitments. The Bank issues commitments for fixed-rate and adjustable-rate mortgage loans conditioned upon the occurrence of certain events. Commitments to originate mortgage loans are legally binding agreements to lend to customers and generally expire in 90 days or less from the date of the application.

Delinquencies. When a borrower fails to make a required loan payment, the Bank takes a number of steps to have the borrower cure the delinquency and restore the loan to current status. The Bank makes initial contact with the borrower when the loan becomes 15 days past due. If payment is not then received by the 30th day of delinquency, additional letters and phone calls generally are made. When the loan becomes 90 days past due, a letter is sent notifying the borrower that foreclosure proceedings will commence if the loan is not brought current within 30 days. Generally, when the loan becomes 120 days past due, the Bank will commence foreclosure proceedings against any real property that secures the loan or attempt to repossess any personal property that secures a consumer or commercial loan. If a

9

foreclosure action is instituted and the loan is not brought current, paid in full or refinanced before the foreclosure sale, the real property securing the loan is typically sold at foreclosure. The Bank may consider loan repayment arrangements with certain borrowers under certain circumstances.

On a monthly basis, management informs the Board of Directors of the amount of loans delinquent 30 days or more, all loans in foreclosure and other real estate owned.

The following table sets forth the delinquencies in the Bank’s loan portfolio as of the dates indicated.

	December 31, 2009						December 31, 2008
(Dollars in Thousands)	60 – 89 Days			90 Days or More			60 – 89 Days			90 Days or More
	Number of Loans	Principal Balance of Loans		Number of Loans	Principal Balance of Loans		Number of Loans	Principal Balance of Loans		Number of Loans	Principal Balance of Loans
Real estate loans:
Residential – 1 to 4 family	2	$	484	14	$	2,393	5	$	750	9	$	1,774
Multi-family and commercial	—		—	1		375	3		1,421	2		716
Construction	—		—	—		—	1		179	4		5,484
Total real estate loans	2		484	15		2,768	9		2,350	15		7,974
Consumer loans:
Home equity	—		—	—		—	—		—	—		—
Other	—		—	—		—	2		7	—		—
Total consumer loans	—		—	—		—	2		7	—		—
Commercial business loans:
SBA and USDA guaranteed	—		—	—		—	1		515	2		1,240
Other	1		8	1		27	1		328	3		217
Total commercial business loans	1		8	1		27	2		843	5		1,457
Total delinquent loans	3	$	492	16	$	2,795	13	$	3,200	20	$	9,431

Classified Assets. Management of the Bank, including the Managed Asset Committee, consisting of a number of the Bank’s officers, review and classify the assets of the Bank on a monthly basis and the Board of Directors reviews the results of the reports on a quarterly basis. Federal regulations and the Bank’s internal policies require that management utilize an internal asset classification system to monitor and evaluate the credit risk inherent in its loan portfolio. The Bank currently classifies problem and potential problem assets as “substandard,” “doubtful,” “loss” or “special mention.” An asset is considered “substandard” if it is inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. “Substandard” assets include those assets that are characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected. Assets characterized as “doubtful” have all the weaknesses inherent in those classified as “substandard” with the additional characteristic that the weaknesses present make collection or liquidation in full, on the basis of currently existing facts, conditions and values, questionable, and there is a high probability of loss. Assets classified as “loss” are those assets considered uncollectible and of such little value that their continuance as assets, without the establishment of a specific loss reserve, is not warranted. In addition, assets that do not currently expose the Bank to sufficient risk to warrant classification in one of the aforementioned categories but possess credit deficiencies or potential weaknesses are required to be designated “special mention.” When an asset is classified as “substandard” or “doubtful,” a specific allowance for loan losses may be established. If an asset is classified as a “loss,” the Bank charges-off an amount equal to the portion of the asset classified as “loss.” All the loans mentioned above are included in the Bank’s Managed Asset Report. This report serves as an integral part in the evaluation of the adequacy of the Bank’s allowance for loan losses.

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The following table sets forth the principal balance of the Bank’s classified loans as of December 31, 2009.

(Dollars in Thousands)	Loss		Doubtful		Substandard		Special Mention
Real estate loans:
Residential – 1 to 4 family	$	—	$	33	$	2,728	$	1,173
Multi-family and commercial		—		—		9,265		22,450
Construction		—		—		424		5,437
Total real estate loans		—		33		12,417		29,060
Consumer loans:
Home equity		—		—		—		—
Other		—		—		—		—
Total consumer loans		—		—		—		—
Commercial business loans:
USDA and SBA guaranteed		—		—		—		—
Other		—		—		3,589		4,814
Total commercial business loans		—		—		3,589		4,814
Total classified loans	$	—	$	33	$	16,006	$	33,874

Of the $16.0 million of substandard loans at December 31, 2009, $3.0 million were nonperforming loans. The largest substandard loan, a commercial construction loan totaling $2.4 million, was not 90 days or more past due at December 31, 2009. Of the $33.9 million of special mention loans, only one loan totaling $270,000 was 60 days or more past due at December 31, 2009.

At December 31, 2009, total classified loans related to forty-eight commercial mortgage loans totaling $31.7 million, twenty-eight commercial business loans totaling $8.4 million, six commercial construction loans totaling $5.9 million and twenty-four residential mortgage loans totaling $3.9 million. Declining economic conditions have negatively impacted the residential and commercial construction markets and contributed to the decrease in credit quality for commercial loans. The continued weakening of both the local and national real estate markets has contributed to the inability of commercial developers to sell completed units, which resulted in declining collateral values and an increased risk of default.

Nonperforming Assets and Restructured Loans. When a loan becomes 90 days delinquent or there is reasonable doubt that principal and interest will be received, the loan is placed on nonaccrual status at which time the accrual of interest ceases and the allowance for any uncollectible accrued interest is established and charged against operations. Typically, payments received on nonaccrual loans are applied to the outstanding principal and interest balance as determined at the time of collection of the loan.

The Bank considers repossessed assets and loans that are 90 days or more past due to be nonperforming assets. Real estate acquired as a result of foreclosure or by deed-in-lieu of foreclosure is classified as other real estate owned until it is sold. When property is acquired it is recorded at the lower of its cost, which is the unpaid balance of the loan plus foreclosure costs or fair value at the date of the foreclosure. Holding costs and declines in fair value after acquisition of the property are charged against income as incurred. At December 31, 2009, other real estate owned totaled $3.7 million.

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Troubled debt restructurings occur when debtors are granted concessions that the Bank would not otherwise consider because of economic or legal reasons pertaining to the debtor’s financial difficulties. Such concessions would include, but are not limited to, the transfer of assets or the issuance of equity interest by the debtor to satisfy all or part of the debt, modification of the terms of debt or the substitution or addition of debtor(s).

The following table provides information with respect to the Bank’s nonperforming assets and troubled debt restructurings as of the dates indicated. The Company had no accruing loans past due 90 days or more at each of the dates indicated.

	December 31,
(Dollars in Thousands)	2009			2008			2007			2006			2005
Nonaccrual loans:
Real estate loans	$	2,972		$	9,110		$	6,879		$	392		$	224
Commercial business loans		35			217			733			71			—
Consumer loans (1)		—			1			20			929			16
Total nonaccrual loans		3,007			9,328			7,632			1,392			240
Other real estate owned, net (2)		3,680			—			913			—			325
Total nonperforming assets		6,687			9,328			8,545			1,392			565
Troubled debt restructurings		67			69			71			72			74
Total nonperforming assets and troubled debt restructurings	$	6,754		$	9,397		$	8,616		$	1,464		$	639
Ratios:
Total nonperforming loans to total loans		0.49	%		1.50	%		1.29	%		0.24	%		0.05	%
Total nonperforming loans to total assets		0.34			1.09			0.97			0.18			0.03
Total nonperforming assets and troubled debt restructurings to total assets		0.77			1.10			1.09			0.19			0.09

⁽¹⁾ Includes indirect automobile loans totaling $925,000 at December 31, 2006.

⁽²⁾ Other real estate owned balances are shown net of related loss allowance.

In addition to the nonperforming assets disclosed above, management is monitoring four commercial loans totaling $1.2 million at December 31, 2009 in which the borrowers had weakening credit conditions that caused management to have doubts about the ability of the borrowers to comply with the present loan repayment terms and that may result in the future inclusion of such loans in the table above.

The decrease in nonaccrual loans at December 31, 2009 resulted, in part, to the transfer of $5.5 million in loans to other real estate owned during 2009. Management is proactive in its approach to identifying and resolving problem loans and is focused on working with the borrowers and guarantors of these loans to provide loan modification when warranted. The level of nonperforming assets is expected to fluctuate in response to changing economic and market conditions, the relative size and composition of the loan portfolio, as well as management’s degree of success in resolving problem assets.

Interest income that would have been recorded for the year ended December 31, 2009 had nonaccruing loans and troubled debt restructurings been current in accordance with their original terms and had been outstanding throughout the period amounted to $554,000. The amount of interest related to nonaccrual loans and troubled debt restructurings included in interest income was $65,000 for the year ended December 31, 2009.

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Allowance for Loan Losses. The allowance for loan losses, a material estimate which could change significantly in the near-term, is established through a provision for loan losses charged to earnings to account for losses that are inherent in the loan portfolio and estimated to occur, and is maintained at a level that management considers adequate to absorb losses in the loan portfolio. Loan losses are charged against the allowance for loan losses when management believes that the uncollectibility of the principal loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance for loan losses when received.

Management’s judgment in determining the adequacy of the allowance is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available. The allowance for loan losses is evaluated on a monthly basis by management and is based on the evaluation of the known and inherent risk characteristics and size and composition of the loan portfolio, the assessment of current economic and real estate market conditions, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral, historical loan loss experience and evaluations of loans and other relevant factors.

The allowance for loan losses consists of the following key elements:

• Specific allowance for identified impaired loans. For such loans that are identified as impaired, an allowance is established when the discounted cash flows (or collateral value if the loan is collateral dependent or observable market price) of the impaired loan are lower than the carrying value of that loan.

• General valuation allowance, which represents a valuation allowance on the remainder of the loan portfolio, after excluding impaired loans. For this portion of the allowance, loans are segregated by category and are assigned allowance percentage based on historical loan loss experience adjusted for qualitative factors. Qualitative factors that, in management’s judgment, affect the collectibility of the portfolio as of the evaluation date, may include changes in lending policies and procedures, changes in existing general economic and business conditions affecting the Bank’s primary lending areas, credit quality trends, collateral value, loan volumes and concentrations, seasoning of the loan portfolio, specific industry conditions within portfolio segments, recent loss experience in particular segments of the portfolio, duration of the current business cycle and the Bank’s regulatory examination results. The applied loss factors are re-evaluated quarterly to ensure their relevance in the current economic environment.

The majority of the Company’s loans are collateralized by real estate located in eastern Connecticut. Accordingly, the collateral value of a substantial portion of the Company’s loan portfolio and real estate acquired through foreclosure is susceptible to changes in market conditions.

Although management believes that it uses the best information available to establish the allowance for loan losses, future adjustments to the allowance for loan losses may be necessary and the Company’s results of operations could be adversely affected if circumstances differ substantially from the assumptions used in making the determinations. In addition, because future events affecting borrowers and collateral cannot be predicted with certainty, there can be no assurance that the existing allowance for loan losses is adequate or that increases will not be necessary should the quality of any loans deteriorate as a result of the factors discussed above. Any material increase in the allowance for loan losses would adversely affect the Company’s financial condition and results of operations.

13

The following table sets forth an analysis of the allowance for loan losses for the years indicated.

	Years Ended December 31,
(Dollars in Thousands)	2009			2008			2007			2006			2005
Allowance at beginning of year	$	6,047		$	5,245		$	4,365		$	3,671		$	3,200
Provision for loan losses		2,830			1,369			1,062			881			410
Charge-offs:
Real estate loans		(3,333	)		(163	)		(246	)		—			(17	)
Commercial business loans		(645	)		(359	)		—			—			(1	)
Consumer loans		(97	)		(75	)		(188	)		(199	)		(11	)
Total charge-offs		(4,075	)		(597	)		(434	)		(199	)		(29	)
Recoveries:
Real estate loans		43			4			135			4			70
Commercial business loans		37			21			—			2			3
Consumer loans		9			5			117			6			17
Total recoveries		89			30			252			12			90
Net (charge-offs) recoveries		(3,986	)		(567	)		(182	)		(187	)		61
Allowance at end of year	$	4,891		$	6,047		$	5,245		$	4,365		$	3,671
Ratios:
Allowance to total loans outstanding at end of year		0.80	%		0.97	%		0.89	%		0.76	%		0.71	%
Allowance to nonperforming loans		162.65			64.83			68.72			313.58			1529.58
Net (charge-offs) recoveries to average loans outstanding during the year		(0.64	)		(0.09	)		(0.03	)		(0.03	)		0.01

The higher provision for 2009 related to an increase in loan charge-offs due to the impact of adverse economic and real estate market conditions. While the Company has no direct exposure to sub-prime mortgages in its loan portfolio, current economic conditions have negatively impacted the residential and commercial construction markets and contributed to the decrease in credit quality for commercial loans. As a result, the Company has increased its provision for loan losses on this portion of the loan portfolio to reflect the increased risk of loss associated with this type of lending. Specific reserves relating to impaired loans decreased to $267,000 at December 31, 2009 compared to $1.2 million at December 31, 2008. At December 31, 2009, nonperforming loans totaled $3.0 million, compared to $9.3 million at December 31, 2008. The increase in loan charge-offs for the year ended December 31, 2009 primarily resulted from the charge-off of two commercial construction loan relationships aggregating $2.9 million.

The allowance as a percentage of total loans declined to 0.80% at December 31, 2009 compared to 0.97% at December 31, 2008 primarily as a result of a decrease of $968,000 in specific reserves and an increase of $31.6 million in SBA and USDA loans that are fully guaranteed by the U.S. Government and therefore, require no allowance for loan losses.

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The following table sets forth the breakdown of the allowance for loan losses by loan category at the dates indicated.

	December 31,
	2009						2008						2007
(Dollars in Thousands)	Amount		% of Allowance in each Category to Total Allowance		% of Loans in each Category to Total Loans		Amount		% of Allowance in each Category to Total Allowance		% of Loans in each Category to Total Loans		Amount		% of Allowance in each Category to Total Allowance		% of Loans in each Category to Total Loans
Real estate loans	$	3,692	75.48	%	78.14	%	$	4,797	79.33	%	83.47	%	$	4,155	79.22	%	84.62	%
Commercial business		906	18.53		17.60			1,097	18.13		12.97			922	17.57		11.81
Consumer loans		293	5.99		4.26			153	2.54		3.56			168	3.21		3.57
Total allowance for loan losses	$	4,891	100.00	%	100.00	%	$	6,047	100.00	%	100.00	%	$	5,245	100.00	%	100.00	%

	December 31,
	2006						2005
(Dollars in Thousands)	Amount		% of Allowance in each Category to Total Allowance		% of Loans in each Category to Total Loans		Amount		% of Allowance in each Category to Total Allowance		% of Loans in each Category to Total Loans
Real estate loans	$	3,244	74.32	%	81.93	%	$	2,639	71.89	%	80.36	%
Commercial business		783	17.94		13.03			892	24.29		15.02
Consumer loans		338	7.74		5.04			140	3.82		4.62
Total allowance for loan losses	$	4,365	100.00	%	100.00	%	$	3,671	100.00	%	100.00	%

Investment Activities

The Company has legal authority to invest in various types of liquid assets, including U.S. Treasury obligations, securities of various federal agencies, government-sponsored enterprises, state and municipal governments, mortgage-backed securities and certificates of deposit of federally-insured institutions. Within certain regulatory limits, the Company also may invest a portion of its assets in corporate securities and mutual funds. The Company is also required to maintain an investment in FHLB stock. While the Company has the authority under applicable law and its investment policies to invest in derivative securities, the Company had no such investments at December 31, 2009.

The Company’s primary source of income continues to be derived from its loan portfolio. The investment portfolio is mainly used to meet the cash flow needs of the Company, provide adequate liquidity for the protection of customer deposits and yield a favorable return on investments. The type of securities and the maturity periods are dependent on the composition of the loan portfolio, interest rate risk, liquidity position and tax strategies of the Company. The Company’s investment objectives are to provide and maintain liquidity, to maintain a balance of high quality, diversified investments to minimize risk, to provide collateral for pledging requirements, to establish an acceptable level of interest rate and credit risk, to provide an alternate source of low-risk investments when demand for loans is weak, to generate a favorable return and to assist in the financing needs of various local public entities, subject to credit quality review and liquidity concerns. The Company’s Board of Directors has the overall responsibility for the investment portfolio, including approval of the Company’s Investment Policy and appointment of the Investment Committee. The Investment Committee is responsible for the approval of investment strategies and monitoring investment performance. The execution of specific investment initiatives and the day-to-day oversight of the Company’s investment portfolio is the responsibility of the

15

Chief Executive Officer and the Chief Financial Officer. These officers, and others designated by the Board, are authorized to execute investment transactions up to specified limits based on the type of security without prior approval of the Investment Committee. Transactions exceeding these limitations require the approval of two of these officers, one of whom must be either the Chief Executive Officer or the Chief Financial Officer. Individual investment transactions are reviewed and approved by the Board of Directors on a monthly basis, while portfolio composition and performance are reviewed at least quarterly by the Investment Committee.

Management determines the appropriate classification of securities at the date individual securities are acquired, and the appropriateness of such classification is reassessed at each balance sheet date.

Debt securities that management has the positive intent and ability to hold to maturity are classified as “held to maturity” and recorded at amortized cost. Securities purchased and held principally for the purpose of trading in the near term are classified as “trading securities.” These securities are carried at fair value, with unrealized gains and losses recognized in earnings. Securities not classified as held to maturity or trading, including equity securities with readily determinable fair values, are classified as “available for sale” and recorded at fair value, with unrealized gains and losses excluded from earnings and reported in other comprehensive income (loss), net of taxes.

At December 31, 2009, the Company’s investment portfolio, which consisted solely of available for sale securities, totaled $183.6 million and represented 21.0% of assets. The Company’s securities consisted primarily of “agency” mortgage-backed securities issued by Fannie Mae, Freddie Mac and Ginnie Mae with stated final maturities of 30 years or less, U.S. Government and agency obligations, “private-label” mortgage-backed securities with maturities of 30 years or less and government-sponsored enterprises securities with maturities of 20 years or less and corporate debt securities.

The following table sets forth the amortized costs and fair values of the Company’s securities portfolio at the dates indicated.

	December 31,
(Dollars in Thousands)	2009				2008				2007
	Amortized Cost		Fair Value		Amortized Cost		Fair Value		Amortized Cost		Fair Value
U.S. Government and agency obligations	$	35,945	$	36,229	$	2,453	$	2,415	$	1,156	$	1,132
Government-sponsored enterprises		13,980		14,035		25,985		26,587		32,551		32,762
Mortgage-backed securities: (1)
Agency - residential		89,751		93,099		81,383		83,651		74,026		74,758
Non-agency - residential		18,690		16,219		36,347		30,463		18,158		18,106
Non-agency - HELOC		4,328		2,196		3,089		2,816		—		—
Corporate debt securities		6,979		7,321		5,901		5,958		500		500
Collateralized debt obligations		8,153		5,038		6,625		5,392		9,575		9,538
Obligations of state and political subdivisions		5,003		5,131		4,000		4,037		2,000		2,018
Tax-exempt securities		3,210		3,219		280		280		350		350
Foreign government securities		100		100		100		100		100		100
Total debt securities		186,139		182,587		166,163		161,699		138,416		139,264
Equity securities - financial services		1,043		975		1,060		1,000		2,734		2,650
Total available for sale securities	$	187,182	$	183,562	$	167,223	$	162,699	$	141,150	$	141,914

(1) Agency securities refer to debt obligations issued or guaranteed by government corporations or government-sponsored enterprises (“GSEs”). Non-agency securities, or private-label securities, are the sole obligation of their issuer and are not guaranteed by one of the GSEs or the U.S. Government.

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The Company had no individual investments that had an aggregate book value in excess of 10% of its stockholders’ equity at December 31, 2009.

The following table sets forth the amortized cost, weighted-average yields and contractual maturities of securities at December 31, 2009. Weighted-average yields on tax-exempt securities are not presented on a tax equivalent basis because the impact would be insignificant. Certain mortgage-backed securities and collateralized debt obligations have adjustable interest rates and will reprice periodically within the various maturity ranges. These repricing schedules are not reflected in the table below. At December 31, 2009, the amortized cost of mortgage-backed securities with adjustable rates totaled $31.2 million.

	One Year or Less				More than One Year to Five Years				More than Five Years to Ten Years				More than Ten Years				Total
(Dollars in Thousands)	Amortized Cost		Weighted Average Yield		Amortized Cost		Weighted Average Yield		Amortized Cost		Weighted Average Yield		Amortized Cost		Weighted Average Yield		Amortized Cost		Weighted Average Yield
U.S. Government and agency obligations	$	5	3.71	%	$	2,163	2.38	%	$	15,671	3.03	%	$	18,106	3.37	%	$	35,945	3.16	%
Government-sponsored enterprises		—	—			10,000	2.41			1,989	3.06			1,991	4.54			13,980	2.81
Mortgage-backed securities
Agency - residential		—	—			1,954	4.04			25,107	4.32			62,690	4.90			89,751	4.72
Non-agency - residential		—	—			—	—			—	—			18,690	5.23			18,690	5.23
Non-agency - HELOC		—	—			—	—			—	—			4,328	0.95			4,328	0.95
Corporate debt securities		—	—			5,471	4.38			508	3.18			1,000	5.34			6,979	4.43
Collateralized debt obligations		—	—			—	—			—	—			8,153	1.34			8,153	1.34
Obligations of state and political subdivisions		—	—			4,003	5.01			500	4.79			500	5.00			5,003	4.99
Tax-exempt securities		3,070	1.97			140	3.87			—	—			—	—			3,210	2.05
Foreign government securities		50	3.65			50	3.61			—	—			—	—			100	3.63
Total debt securities		3,125				23,781				43,775				115,458				186,139
Equity securities - financial services		—				—	—			—	—			1,043	2.15			1,043	2.15
Total available for sale securities	$	3,125	2.00	%	$	23,781	3.45	%	$	43,775	3.79	%	$	116,501	4.29	%	$	187,182	4.03	%

During 2009, the Company adopted new guidance regarding recognition and presentation of other-than-temporary impairments (“OTTI”) which makes the guidance more operational and improves the presentation and disclosure of OTTI on debt and equity securities in the financial statements. This guidance does not amend existing recognition and measurement guidance related to OTTI of equity securities.

Marketable equity securities are evaluated for OTTI based on the severity and duration of the impairment and, if deemed to be other-than-temporary, the declines in fair value are reflected in earnings as realized losses. For debt securities, OTTI is required to be recognized (1) if the Company intends to sell the security; (2) if it is “more likely than not” that the Company will be required to sell the security before recovery of its amortized cost basis; or (3) the present value of expected cash flows is not sufficient to recover the entire amortized cost basis. For all impaired debt securities that the Company intends to sell, or more likely than not will be required to sell, the full amount of the depreciation is recognized as OTTI through earnings. Credit-related OTTI for all other impaired debt securities is recognized through earnings. Non-credit related OTTI for such debt securities is recognized in other comprehensive income (loss), net of applicable taxes. The adoption of this new guidance resulted in a cumulative effect adjustment of $2.7 million (net of taxes) to retained earnings with a corresponding adjustment to

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accumulated other comprehensive loss on January 1, 2009. During 2009, the Company recognized additional OTTI for credit losses on debt securities of $228,000. See Notes 3 and 15 in the Company’s Consolidated Financial Statements included in the Company’s Annual Report to Stockholders, attached hereto as Exhibit 13, for more details.

Deposit Activities and Other Sources of Funds

General. Deposits and loan repayments are the major sources of the Company’s funds for lending and other investment purposes. Loan repayments are a relatively stable source of funds, while deposit inflows and outflows and loan prepayments are significantly influenced by general interest rates, competition and money market conditions.

Deposit Accounts. Substantially all of the Bank’s depositors are residents of the State of Connecticut. Deposits are attracted from within the Bank’s market area through the offering of a broad selection of deposit instruments, including NOW, money market accounts, regular savings accounts and certificates of deposit. The Bank also utilizes brokered deposits, which were $1.5 million at December 31, 2009. Deposit account terms vary according to the minimum balance required, the time periods the funds must remain on deposit and the interest rates offered, among other factors. In determining the terms of the Bank’s deposit accounts, the Bank considers the rates offered by its competition, liquidity needs, profitability, matching deposit and loan products and customer preferences and concerns. The Bank generally reviews its deposit mix and pricing weekly. The Bank’s current strategy is to offer competitive rates, and even higher rates on longer-term deposits, but not be the market leader in every account type and maturity.

The Bank also offers a variety of deposit accounts designed for the businesses operating in its market area. Business banking deposit products include a commercial checking account that provides an earnings credit to offset monthly service charges and a checking account specifically designed for small business and nonprofit organizations. Additionally, sweep accounts and money market accounts are available for businesses. The Bank has sought to increase its commercial deposits through the offering of these products, particularly to its commercial borrowers and to local municipalities.

The following table sets forth the distribution of the Bank’s deposit accounts for the dates indicated.

	December 31,
	2009				2008				2007
(Dollars in Thousands)	Balance		% of Total		Balance		% of Total		Balance		% of Total
Noninterest-bearing demand deposits	$	65,407	9.87	%	$	57,647	9.23	%	$	56,762	10.29	%
NOW and money market accounts		220,759	33.33			187,699	30.07			151,237	27.41
Savings accounts (1)		64,903	9.80			64,119	10.27			69,876	12.66
Certificates of deposit (2)		311,309	47.00			314,811	50.43			273,897	49.64
Total deposits	$	662,378	100.00	%	$	624,276	100.00	%	$	551,772	100.00	%

⁽¹⁾ Includes mortgagors’ and investors’ escrow accounts in the amount of $3.6 million, $3.6 million and $3.4 million

at December 31, 2009, 2008 and 2007, respectively.

⁽²⁾ Includes brokered deposits of $1.5 million, $4.5 million and $2.1 million at December 31, 2009, 2008 and 2007, respectively.

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The Bank had $101.8 million of certificates of deposit of $100,000 or more outstanding as of December 31, 2009, maturing as follows:

(Dollars in Thousands)	Amount		Weighted Average Rate
Maturity Period:
Three months or less	$	14,305	2.75	%
Over three through six months		18,577	3.20
Over six through twelve months		34,146	2.64
Over twelve months		34,736	2.99
Total	$	101,764	2.88	%

The following table presents the amount of certificates of deposit accounts outstanding by the various rate categories, years to maturity and percent of total certificate accounts at December 31, 2009.

	Amount Due
(Dollars in Thousands)	Less Than One Year		One to Two Years		Two to Three Years		Three to Four Years		More Than Four Years		Total		Percent of Total Certificate Accounts
0.08 – 1.00%	$	22,807	$	7,045	$	—	$	—	$	—	$	29,852	9.59	%
1.01 – 2.00%		29,134		22,450		101		27		10		51,722	16.61
2.01 – 3.00%		58,968		8,346		16,991		458		2,639		87,402	28.08
3.01 – 4.00%		55,937		19,842		379		1,308		9,166		86,632	27.83
4.01 – 5.00%		29,841		11,077		3,403		5,589		472		50,382	16.18
5.01 – 5.38%		3,588		1,219		250		262		—		5,319	1.71
Total	$	200,275	$	69,979	$	21,124	$	7,644	$	12,287	$	311,309	100.00	%

FHLB Borrowings. The Bank utilizes advances from the FHLB to supplement its supply of lendable funds and to meet deposit withdrawal requirements. The FHLB functions as a central reserve bank providing credit for member financial institutions. As a member, the Bank is required to own capital stock in the FHLB and is authorized to apply for advances on the security of such stock and certain mortgage loans and other assets (principally securities which are obligations of, or guaranteed by, the U.S. Government), provided certain standards related to creditworthiness have been met. Advances are made under several different programs, each having its own interest rate and range of maturities. Depending on the program, limitations on the amount of advances are based either on a fixed percentage of an institution’s net worth or on the FHLB’s assessment of the institution’s creditworthiness. The FHLB determines specific lines of credit for each member institution.

Advances from the FHLB decreased $23.5 million, or 16.8%, for the year ended December 31, 2009 to $116.1 million as the Bank repaid borrowings with excess cash from the increase of deposits In addition to repayments and maturities of borrowings, the Bank restructured FHLB borrowings and extended the maturities of certain advances during 2009 as a result of the low interest rate environment. These borrowings were used to fund asset growth and increase liquidity.

Junior Subordinated Debt Owed to Unconsolidated Trusts. In 2006, SI Capital Trust II (the “Trust”), a business trust, issued $8.0 million of trust preferred securities in a private placement and issued approximately 248 shares of common stock at $1,000 par value to the Company. The Trust has no independent assets or operations and was formed to issue trust preferred securities and invest the proceeds in an equivalent amount of junior subordinated debentures issued by the Company. The trust preferred securities mature in 30 years and bear interest at three-month LIBOR plus 1.70%. The interest rate on these securities at December 31, 2009 was 1.95%. The Company may redeem the trust preferred securities, in whole or in part, on or after September 15, 2011, or earlier under certain conditions.

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The debentures are the sole assets of the Trust and are subordinate to all of the Company’s existing and future obligations for borrowed money, its obligations under letters of credit and certain derivative contracts and any guarantees by the Company of any such obligations. The trust preferred securities generally rank equal to the trust common securities in priority of payment, but rank before the trust common securities if and so long as the Company fails to make principal or interest payments on the debentures. Concurrently with the issuance of the debentures and the trust preferred and common securities, the Company issued a guarantee related to the trust securities for the benefit of the holders. The Company’s obligations under the guarantee and the Company’s obligations under the debentures, the related indentures and the trust agreement relating to the trust securities, constitute a full and unconditional guarantee by the Company of the obligations of the Trust under the trust preferred securities. If the Company defers interest payments on the junior subordinated debt, or otherwise is in default of the obligations, the Company would be prohibited from making dividend payments to its shareholders.

The debentures are also subject to redemption before September 15, 2011, at a specified price after the occurrence of certain events that would either have a negative tax effect on the Trust or the Company or would result in the Trust being treated as an investment company that is required to be registered under the Investment Company Act of 1940. Upon repayment of the debentures at their stated maturity or following their redemption, the Trust will use the proceeds of such repayment to redeem an equivalent amount of outstanding trust preferred securities and trust common securities.

Other Borrowings. The Company occasionally utilizes collateralized borrowings, which represent loans sold that do not meet the criteria for derecognition, due primarily to recourse and other provisions that could not be measured at the date of transfer. Such borrowings are derecognized when all recourse and other provisions that could not be measured at the time of transfer either expire or become measurable. The Company had no collateralized borrowings at December 31, 2009.

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The following table sets forth information regarding the Company’s borrowings at the dates or for the years indicated.

	At or For the Years Ended December 31,
(Dollars in Thousands)	2009			2008			2007
Maximum amount of advances outstanding at any month-end during the year:
FHLB advances	$	143,600		$	147,664		$	141,619
Subordinated debt		8,248			8,248			15,465
Average balance outstanding during the year:
FHLB advances	$	131,460		$	143,697		$	114,960
Subordinated debt		8,248			8,248			10,463
Weighted-average interest rate during the year:
FHLB advances		4.15	%		4.40	%		4.59	%
Subordinated debt		2.63			4.81			7.42
Balance outstanding at end of year:
FHLB advances	$	116,100		$	139,600		$	141,619
Subordinated debt		8,248			8,248			8,248
Weighted-average interest rate at end of year:
FHLB advances		3.61	%		4.24	%		4.53	%
Subordinated debt		1.95			3.70			6.69

Trust Services

The Bank’s trust department provides fiduciary services, investment management and retirement services, to individuals, partnerships, corporations and institutions. Additionally, the Bank acts as guardian, conservator, executor or trustee under various trusts, wills and other agreements. The Bank has implemented comprehensive policies governing the practices and procedures of the trust department, including policies relating to investment of trust property, maintaining confidentiality of trust records, avoiding conflicts of interest and maintaining impartiality. Consistent with its operating strategy, the Bank will continue to emphasize the growth of its trust business in order to accumulate assets and increase fee-based income. At December 31, 2009, trust assets under administration were $152.4 million, consisting of 348 accounts, the largest of which totaled $11.5 million, or 7.5%, of the trust department’s total assets. As of December 31, 2009, SI Trust Servicing provided trust outsourcing services to 15 clients, consisting of 7,250 accounts totaling $7.0 billion in assets. For the years ended December 31, 2009 and 2008, total trust services revenue was $3.7 million and $3.6 million, respectively.

Subsidiary Activities

The Company’s subsidiaries include Savings Institute Bank and Trust Company and SI Capital Trust II.

The following are descriptions of the Bank’s wholly-owned subsidiaries.

803 Financial Corp. 803 Financial Corp. was established in 1995 as a Connecticut corporation to maintain an ownership interest in a third-party registered broker-dealer, Infinex Investments, Inc. Infinex operates offices at the Bank and offers customers a complete range of nondeposit investment products, including mutual funds, debt, equity and government securities, retirement accounts, insurance products and fixed and variable annuities. The Bank receives a portion of the commissions generated by Infinex from sales to customers. Due to a regulatory restriction on federally-chartered thrifts, on December 31, 2004, 803 Financial Corp. sold its interest in Infinex to the Company. As a result, 803 Financial Corp. has no other holdings or business activities.

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SI Realty Company, Inc. SI Realty Company, Inc., established in 1999 as a Connecticut corporation, holds real estate owned by the Bank, including foreclosure properties. At December 31, 2009, SI Realty Company, Inc. had $5.4 million in assets.

SI Mortgage Company. In January 1999, the Bank formed SI Mortgage Company to manage and hold loans secured by real property. SI Mortgage Company qualifies as a “passive investment company,” which exempts it from Connecticut income tax under current law. Income tax savings to the Bank from the use of a passive investment company was $2,000 and $219,000 for the years ended December 31, 2009 and 2008, respectively.

Personnel

At December 31, 2009, the Company had 240 full-time employees and 34 part-time employees. None of the Company’s employees are represented by a collective bargaining unit. The Company believes its relationship with its employees is good.

REGULATION AND SUPERVISION

General

The Bank is subject to extensive regulation, examination and supervision by the Office of Thrift Supervision (“OTS”), as its primary federal regulator, and the FDIC, as the insurer of its deposits. The Bank is a member of the Federal Home Loan Bank System and its deposit accounts are insured up to applicable limits by the Deposit Insurance Fund managed by the FDIC. The Bank must file reports with the OTS and the FDIC concerning its activities and financial condition in addition to obtaining regulatory approvals before entering into certain transactions such as mergers with, or acquisitions of, other financial institutions. There are periodic examinations by the OTS and, under certain circumstances, the FDIC, to evaluate the Bank’s safety and soundness and compliance with various regulatory requirements. This regulatory structure is intended primarily for the protection of the insurance fund and depositors. The regulatory structure also gives the regulatory authorities extensive discretion in connection with their supervisory and enforcement activities and examination policies, including policies with respect to the classification of assets and the establishment of adequate loan loss reserves for regulatory purposes. Any change in such policies, whether by the OTS, the FDIC or Congress, could have a material adverse impact on the Company, SI Bancorp, MHC and the Bank and their operations. The Company and SI Bancorp, MHC, as savings and loan holding companies, are required to file certain reports with, are subject to examination by, and otherwise must comply with the rules and regulations of the OTS. The Company is also subject to the rules and regulations of the Securities and Exchange Commission under the federal securities laws.

Certain of the regulatory requirements that are applicable to the Bank, the Company and SI Bancorp, MHC are described below. This description of statutes and regulations is not intended to be a complete explanation of such statutes and regulations and their effects on the Bank, the Company and SI Bancorp, MHC are qualified in their entirety by reference to the actual statutes and regulations.

Regulation of Federal Savings Associations

Business Activities. Federal law and regulations, primarily the Home Owners’ Loan Act and the regulations of the OTS, govern the activities of federal savings banks, such as the Bank. These laws and regulations delineate the nature and extent of the activities in which federal savings banks may engage.

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In particular, certain lending authority for federal savings banks, e.g., commercial, non-residential real property loans and consumer loans, is limited to a specified percentage of the institution’s capital or assets.

Capital Requirements. The OTS’s capital regulations require federal savings institutions to meet three minimum capital standards:

• a tangible capital ratio requirement of 1.5% of adjusted total assets;

• a leverage ratio of 4% of Tier 1 (core) capital to adjusted total assets (3% for institutions receiving the highest rating on the CAMELS examination rating system); and

• a risk-based capital ratio requirement of 8% of total capital (core and supplementary capital) to total risk-weighted assets of which at least half must be core capital

In addition, the prompt corrective action standards discussed below also established, in effect, a minimum 2% tangible capital standard, a 4% leverage ratio standard (3% for institutions receiving the highest rating on the CAMELS examination rating system) and, together with the risk-based capital standard itself, a 4% Tier 1 risk-based capital standard. The OTS regulations also require that, in meeting the tangible, leverage and risk-based capital standards, institutions must generally deduct investments in and loans to subsidiaries engaged in activities as principal that are not permissible for a national bank.

In determining compliance with the risk-based capital requirement, savings institutions must compute its risk-weighted assets by multiplying its assets, including certain off-balance sheet assets, recourse obligations, residual interests and direct credit substitutes, by risk-weight factors ranging from 0% for cash and obligations of the United States Government or its agencies to 100% for consumer and commercial loans, as assigned by the OTS capital regulation based on the risks believed inherent in the type of asset.

Core (Tier 1) capital is defined as common stockholders’ equity (including retained earnings), certain noncumulative perpetual preferred stock and related surplus and minority interests in equity accounts of consolidated subsidiaries, less intangibles (other than certain mortgage servicing rights) and credit card relationships. The components of supplementary capital currently include cumulative preferred stock, long-term perpetual preferred stock, mandatory convertible securities, subordinated debt, intermediate preferred stock and the allowance for loan and lease losses, which is limited to a maximum of 1.25% of risk-weighted assets and up to 45% of unrealized gains on available for sale equity securities with readily determinable fair market values. Overall, the amount of supplementary capital included as part of total capital cannot exceed 100% of core capital.

The OTS also has authority to establish individual minimum capital requirements in appropriate cases upon a determination that an institution’s capital level is or may become inadequate in light of the particular circumstances. At December 31, 2009, the Bank exceeded each of these capital requirements.

Prompt Corrective Regulatory Action. The OTS is required to take certain supervisory actions against undercapitalized institutions, the severity of which depends upon the institution’s degree of undercapitalization. Generally, a savings institution that has a ratio of total capital to risk-weighted assets of less than 8%, a ratio of Tier 1 (core) capital to risk-weighted assets of less than 4% or a ratio of core capital to total assets of less than 4% (3% or less for institutions with the highest examination rating) is considered to be “undercapitalized.” A savings institution that has a total risk-based capital ratio less than 6%, a Tier 1 capital ratio of less than 3% or a leverage ratio that is less than 3% is considered to be “significantly undercapitalized” and a savings institution that has a tangible capital to assets ratio equal to or less than 2% is deemed to be “critically undercapitalized.” Subject to a narrow exception, the OTS is required to appoint a receiver or conservator within specified time frames for an institution that is “critically undercapitalized.” An institution must file a capital restoration plan with the OTS within 45

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days of the date it receives notice that it is “undercapitalized,” “significantly undercapitalized” or “critically undercapitalized.” Compliance with the plan must be guaranteed by any parent holding company up to the lesser of the amount necessary for the institution to meet all regulatory capital requirements or 5% of the institution’s total assets. In addition, numerous mandatory supervisory actions become immediately applicable to an undercapitalized institution, including, but not limited to, increased monitoring by regulators and restrictions on growth, capital distributions and expansion. “Significantly undercapitalized” and “critically undercapitalized” institutions are subject to more extensive mandatory regulatory actions. The OTS could also take any one of a number of discretionary supervisory actions, including the issuance of a capital directive and the replacement of senior executive officers and directors.

Loans to One Borrower. Federal law provides that savings institutions are generally subject to the limits on loans to one borrower applicable to national banks. Generally, a savings institution may not make a loan or extend credit to a single or related group of borrowers in excess of 15% of its unimpaired capital and surplus. An additional amount may be lent, equal to 10% of unimpaired capital and surplus, if secured by specified readily-marketable collateral. See Item 1. Business. “Lending Activities – Loans to One Borrower.”

Standards for Safety and Soundness. The federal banking agencies have adopted Interagency Guidelines, which set forth the safety and soundness standards that the federal banking agencies use to identify and address problems at insured depository institutions before capital becomes impaired. If the OTS determines that a savings institution fails to meet any standard prescribed by the guidelines, the OTS may require the institution to submit an acceptable plan to achieve compliance with the standard. The Bank has not received any notice from the OTS that it has failed to meet any standard prescribed by the guidelines.

Limitation on Capital Distributions. OTS regulations impose limitations upon all capital distributions by a savings institution, including cash dividends, payments to repurchase its shares and payments to shareholders of another institution in a cash-out merger. Under the regulations, an application to and the prior approval of the OTS is required before any capital distribution if the institution does not meet the criteria for “expedited treatment” of applications under OTS regulations (i.e., generally, examination and Community Reinvestment Act ratings in the two top categories), the total capital distributions for the calendar year exceed net income for that year plus the amount of retained net income for the preceding two years, the institution would be undercapitalized following the distribution or the distribution would otherwise be contrary to a statute, regulation or agreement with the OTS. If an application is not required, the institution must still provide prior notice to the OTS of the capital distribution if, like the Bank, it is a subsidiary of a holding company. If the Bank’s capital were ever to fall below its regulatory requirements or the OTS notified it that it was in need of increased supervision, its ability to make capital distributions could be restricted. In addition, the OTS could prohibit a proposed capital distribution that would otherwise be permitted by the regulation, if the agency determines that such distribution would constitute an unsafe or unsound practice.

Qualified Thrift Lender Test. Federal law requires savings institutions to meet a qualified thrift lender test. Under the test, a savings association is required to either qualify as a “domestic building and loan association” under the Internal Revenue Code or maintain at least 65% of its “portfolio assets” in certain “qualified thrift investments” (primarily residential mortgages and related investments, including certain mortgage-backed securities) in at least nine months out of each twelve-month period. “Portfolio assets” represent, in general, total assets less the sum of:

• specified liquid assets up to 20% of total assets;

• goodwill and other intangible assets; and

• the value of property used to conduct business.

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A savings institution that fails the qualified thrift lender test is subject to certain operating restrictions and may be required to convert to a bank charter. Recent legislation has expanded the extent to which education loans, credit card loans and small business loans may be considered “qualified thrift investments.” As of December 31, 2009, the Bank maintained 74.41% of its portfolio assets in qualified thrift investments and, therefore, met the qualified thrift lender test.

Transactions with Related Parties. Federal law limits the Bank’s authority to lend to, and engage in, certain other transactions with (collectively, “covered transactions”) “affiliates” (e.g., any company that controls or is under common control with an institution, including the Company, SI Bancorp, MHC and their non-savings institution subsidiaries). The aggregate amount of covered transactions with any individual affiliate is limited to 10% of the capital and surplus of the savings institution. The aggregate amount of covered transactions with all affiliates is limited to 20% of the savings institution’s capital and surplus. Loans and other specified transactions with affiliates are required to be secured by collateral in an amount and of a type described in federal law. The purchase of low quality assets from affiliates is generally prohibited. Transactions with affiliates must be on terms and under circumstances that are at least as favorable to the institution as those prevailing at the time for comparable transactions with non-affiliated companies. In addition, savings institutions are prohibited from lending to any affiliate that is engaged in activities that are not permissible for bank holding companies and no savings institution may purchase the securities of any affiliate other than a subsidiary.

The Sarbanes-Oxley Act of 2002 generally prohibits a company from making loans to its executive officers and directors. However, that act contains a specific exception for loans by a depository institution to its executive officers and directors in compliance with federal banking laws. Under such laws, the Bank’s authority to extend credit to executive officers, directors and 10% shareholders (“insiders”), as well as entities in which such persons control, is limited. The law restricts both the individual and aggregate amount of loans the Bank may make to insiders based, in part, on the Bank’s capital position and requires certain board approval procedures to be followed. Such loans must be made on terms substantially the same as those offered to unaffiliated individuals and not involve more than the normal risk of repayment. There is an exception for loans made pursuant to a benefit or compensation program that is widely available to all employees of the institution and does not give preference to insiders over other employees. In addition, loans made to a director or executive officer in an amount that, when aggregated with the amount of all other loans to the person and his or her related interest, are in excess of the greater of $25,000, or 5% of the Bank’s capital and surplus, and in any event any loans totaling $500,000 or more, must be approved in advance by a majority of the disinterested members of the Board of Directors. Loans to executive officers are subject to additional restrictions as to type and amount.

Enforcement. The OTS has primary enforcement responsibility over federal savings institutions and has the authority to bring actions against the institution and all institution-affiliated parties, including stockholders, and any attorneys, appraisers and accountants who knowingly or recklessly participate in wrongful action likely to have an adverse effect on an insured institution. Formal enforcement action may range from the issuance of a capital directive or cease and desist order for removal of officers and/or directors to institution of receivership, conservatorship or termination of deposit insurance. Civil penalties cover a wide range of violations and can amount to $25,000 per day, or even $1.0 million per day in especially egregious cases. The FDIC has authority to recommend to the Director of the OTS that enforcement action be taken with respect to a particular savings institution. If action is not taken by the Director, the FDIC has authority to take such action under certain circumstances. Federal law also establishes criminal penalties for certain violations.

Assessments. Federal savings banks are required to pay assessments to the OTS to fund its operations. The general assessments, paid on a semi-annual basis, are based upon the savings institution’s total assets, including consolidated subsidiaries, as reported in the institution’s latest quarterly thrift financial report, financial condition and complexity of portfolio. The OTS assessments paid by the Bank for 2009 were $223,000.

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Insurance of Deposit Accounts. The Bank’s deposits are insured up to applicable limits by the Deposit Insurance Fund of the FDIC. The Deposit Insurance Fund is the successor to the Bank Insurance Fund and the Savings Association Insurance Fund, which were merged in 2006. Under the FDIC’s risk-based assessment system, insured institutions are assigned to one of four risk categories based on supervisory evaluations, regulatory capital levels and certain other factors. An institution’s assessment rate depends upon the category to which it is assigned, with less risky institutions paying lower assessments.

Due to losses incurred by the Deposit Insurance Fund from failed institutions in 2008, and anticipated future losses, the FDIC adopted, pursuant to a Restoration Plan to replenish the fund, an across the board seven basis point increase in the assessment range for the first quarter of 2009. The FDIC adopted further refinements to its risk-based assessment system, effective April 1, 2009, that effectively made the range seven to seventy-seven and one-half basis points. The FDIC also imposed an industry-wide emergency special assessment of five basis points of assessable deposits as of June 30, 2009 in order to cover losses to the Deposit Insurance Fund. On September 29, 2009, the FDIC adopted an Amended Restoration Plan to allow the Deposit Insurance Fund to return to a reserve ratio of 1.15 percent within eight years, as mandated by statute. At the same time, the FDIC adopted higher annual risk-based assessment rates effective January 1, 2011. Under this plan, the FDIC required insured institutions to prepay their quarterly risk-based assessments for the fourth quarter of 2009 and for all of 2010, 2011 and 2012. The prepaid estimated assessment for these periods was collected on December 30, 2009, along with each institution’s regular quarterly risk-based deposit insurance assessment for the third quarter of 2009. Additionally, on September 29, 2009, the FDIC increased annual assessment rates uniformly by 3 basis points beginning in 2011. The FDIC may adjust the scale uniformly from one quarter to the next, except that no adjustment can deviate more than three basis points from the base scale without notice and comment rulemaking. No institution may pay a dividend if in default of the federal deposit insurance assessment.

Due to the recent difficult economic conditions, deposit insurance per account owner increased to $250,000 for all types of accounts until December 31, 2013. In addition, the FDIC adopted an optional Temporary Liquidity Guarantee Program by which, for a fee, noninterest-bearing transaction accounts would receive unlimited insurance coverage until June 30, 2010 and certain senior unsecured debt issued by institutions and their holding companies between October 13, 2008 and June 30, 2009 would be guaranteed by the FDIC through June 30, 2012. The Bank made the business decision to participate in the unlimited noninterest bearing transaction account coverage and the Bank, the Company and SI Bancorp, MHC opted to participate in the unsecured debt guarantee program.

The Federal Deposit Insurance Reform Act of 2005 (“Reform Act”) also provided for a one-time credit for eligible institutions based on their assessment base as of December 31, 1996. Subject to certain limitations with respect to institutions that are exhibiting weaknesses, credits can be used to offset assessments until exhausted. The Bank has exhausted all credits. The Reform Act also provided for the possibility that the FDIC may pay dividends to insured institutions once the Deposit Insurance fund reserve ratio equals or exceeds 1.35% of estimated insured deposits.

In addition to the assessment for deposit insurance, institutions are required to make payments on bonds issued in the late 1980s by the Financing Corporation to recapitalize a predecessor deposit insurance fund. This payment is established quarterly and during the calendar year ending December 31, 2009 averaged 1.06 basis points of assessable deposits.

Insurance of deposits may be terminated by the FDIC upon a finding that the institution has engaged in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations or has violated

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any applicable law, regulation, rule, order or condition imposed by the FDIC or the OTS. The management of the Bank does not know of any practice, condition or violation that might lead to termination of deposit insurance.

Federal Home Loan Bank System. The Bank is a member of the Federal Home Loan Bank System, which consists of twelve regional Federal Home Loan Banks. The Federal Home Loan Banks provide a central credit facility primarily for member institutions. The Bank, as a member of the FHLB, is required to acquire and hold shares of capital stock in the FHLB of Boston. The Bank was in compliance with this requirement with an investment in the FHLB at December 31, 2009 of $8.4 million.

The regional banks within the Federal Home Loan Bank System have experienced higher levels of OTTI in their private label mortgage-backed securities and home equity loans, which has raised concerns about whether their capital levels could be reduced below regulatory requirements. In response to unprecedented market conditions and potential future losses, the FHLB has implemented an initiative to preserve capital by the adoption of a revised retained earnings target, declaration of a moratorium on excess stock repurchases and the suspension of cash dividend payments. The Company experienced a decline in the dividend yield on its holdings in FHLB stock since the FHLB suspended dividend payments in 2009. The Company anticipates it will not receive dividends on its holdings in FHLB stock for the foreseeable future. There can be no assurance that the impact of recent market conditions on the financial condition of the Federal Home Loan Banks or future legislation on the Federal Home Loan Banks will not cause a decrease in the value of FHLB stock held by the Bank.

Community Reinvestment Act. Under the Community Reinvestment Act, as implemented by OTS regulations, a savings association has a continuing and affirmative obligation consistent with its safe and sound operation to help meet the credit needs of its entire community, including low and moderate income neighborhoods. The Community Reinvestment Act does not establish specific lending requirements or programs for financial institutions nor does it limit an institution’s discretion to develop the types of products and services that it believes are best suited to its particular community, consistent with the Community Reinvestment Act. The Community Reinvestment Act requires the OTS, in connection with its examination of a savings association, to assess the institution’s record of meeting the credit needs of its community and to take such record into account in its evaluation of certain applications by such institution.

The Community Reinvestment Act requires public disclosure of an institution’s rating and requires the OTS to provide a written evaluation of an association’s Community Reinvestment Act performance utilizing a four-tiered descriptive rating system. The Bank received an “outstanding” rating, which is the highest possible rating, as a result of its most recent Community Reinvestment Act assessment.

Federal Reserve System. The Federal Reserve Board regulations require savings institutions to maintain noninterest earning reserves against their transaction accounts (primarily Negotiable Order of Withdrawal “NOW” and regular checking accounts). In 2009, the regulations generally provided that reserves be maintained against aggregate transaction accounts as follows: a 3% reserve ratio, assessed on net transaction accounts up to and including $44.4 million; a 10% reserve ratio applied above $44.4 million. The first $10.3 million of otherwise reservable balances (subject to adjustments by the Federal Reserve Board) were exempted from the reserve requirements. The amounts are adjusted annually and, for 2010, will require a 3% ratio for up to $55.2 million and an exemption of $10.7 million. The Bank complies with the foregoing requirements.

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Holding Company Regulation

General. The Company and SI Bancorp, MHC are savings and loan holding companies within the meaning of federal law. As such, they are registered with the OTS and are subject to OTS regulations, examinations, supervision, reporting requirements and regulations concerning corporate governance and activities. In addition, the OTS has enforcement authority over the Company, SI Bancorp, MHC and their non-savings institution subsidiaries. Among other things, this authority permits the OTS to restrict or prohibit activities that are determined to be a serious risk to the Bank.

Restrictions Applicable to Mutual Holding Companies. According to federal law and OTS regulations, a mutual holding company, such as SI Bancorp, MHC, may generally engage in the following activities: (1) investing in the stock of a bank; (2) acquiring a mutual association through the merger of such association into a bank subsidiary of such holding company or an interim bank subsidiary of such holding company; (3) merging with or acquiring another holding company, one of whose subsidiaries is a bank; (4) investing in a corporation, the capital stock of which is available for purchase by a savings association under federal law or under the law of any state where the subsidiary savings association or associations share their home offices; (5) furnishing or performing management services for a savings association subsidiary of such company; (6) holding, managing or liquidating assets owned or acquired from a savings subsidiary of such company; (7) holding or managing properties used or occupied by a savings association subsidiary of such company properties used or occupied by a savings association subsidiary of such company; (8) acting as trustee under deeds of trust; (9) any other activity (A) that the Federal Reserve Board, by regulation, has determined to be permissible for bank holding companies under Section 4(c) of the Bank Holding Company Act, unless the OTS, by regulation, prohibits or limits any such activity for savings and loan holding companies; or (B) in which multiple savings and loan holding companies were authorized (by regulation) to directly engage on March 5, 1987; and (10) purchasing, holding or disposing of stock acquired in connection with a qualified stock issuance if the purchase of such stock by such savings and loan holding company is approved by the OTS.

The Gramm-Leach Bliley Act of 1999 was designed to modernize the regulation of the financial services industry by expanding the ability of bank holding companies to affiliate with other types of financial services companies such as insurance companies and investment banking companies. The legislation also expanded the activities permitted for mutual savings and loan holding companies to include any activity permitted a “financial holding company” under the legislation, including a broad array of insurance and securities activities.

Federal law prohibits a savings and loan holding company, including a federal mutual holding company, from directly or indirectly, or through one or more subsidiaries, acquiring more than 5% of the voting stock of another savings institution, or its holding company, without prior written approval of the OTS. Federal law also prohibits a savings and loan holding company from acquiring more than 5% of a company engaged in activities other than those authorized for savings and loan holding companies by federal law; or acquiring or retaining control of a depository institution that is not insured by the FDIC. In evaluating applications by holding companies to acquire savings institutions, the OTS must consider the financial and managerial resources and future prospects of the company and institution involved, the effect of the acquisition on the risk to the insurance funds, the convenience and needs of the community and competitive factors.

The OTS is prohibited from approving any acquisition that would result in a multiple savings and loan holding company controlling savings institutions in more than one state, except: (1) the approval of interstate supervisory acquisitions by savings and loan holding companies, and (2) the acquisition of a savings institution in another state if the laws of the state of the target savings institution specifically permits such acquisitions. The states vary in the extent to which they permit interstate savings and loan holding company acquisitions.

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If the savings institution subsidiary of a savings and loan holding company fails to meet the qualified thrift lender test, the holding company must register with the Federal Reserve Board as a bank holding company within one year of the savings institution’s failure to so qualify.

Although savings and loan holding companies are not currently subject to regulatory capital requirements or specific restrictions on the payment of dividends or other capital distributions, federal regulations do prescribe such restrictions on subsidiary savings institutions as described below. The Bank must notify the OTS 30 days before declaring any dividend. In addition, the financial impact of a holding company on its subsidiary institution is a matter that is evaluated by the OTS and the agency has authority to order cessation of activities or divestiture of subsidiaries deemed to pose a threat to the safety and soundness of the institution.

Stock Holding Company Subsidiary Regulation. The OTS has adopted regulations governing the two-tier mutual holding company form of organization and subsidiary stock holding companies that are controlled by mutual holding companies. The Company has adopted this form of organization. The Company is the stock holding company subsidiary of SI Bancorp, MHC. The Company is permitted to engage in activities that are permitted for SI Bancorp, MHC subject to the same restrictions and conditions.

Waivers of Dividends by SI Bancorp, MHC. OTS regulations require SI Bancorp, MHC to notify the OTS if it proposes to waive receipt of dividends from the Company. The OTS reviews dividend waiver notices on a case-by-case basis, and, in general, does not object to any such waiver if: (i) the waiver would not be detrimental to the safe and sound operating of the savings association subsidiary; and (ii) the mutual holding company’s Board of Directors determines that such waiver is consistent with such directors’ fiduciary duties to the mutual holding company’s members.

Conversion to Stock Form. OTS regulations permit the Company to convert from the mutual form of organization to the capital stock form of organization. In a conversion transaction, a new holding company would be formed as the successor to the MHC and the Company, the MHC’s and the Company’s corporate existence would end and certain depositors in the Bank would receive a right to subscribe for shares of a new holding company. In a conversion transaction, each share of common stock of the Company held by stockholders other than the MHC would be automatically converted into a number of shares of common stock of the new holding company based on an exchange ratio designed to ensure that stockholders other than the Company own the same percentage of common stock in the new holding company as they owned in the Company immediately before conversion.

Acquisition of Control. Under the federal Change in Bank Control Act, a notice must be submitted to the OTS if any person (including a company), or group acting in concert, seeks to acquire “control” of a savings and loan holding company or savings association. An acquisition of “control” can occur upon the acquisition of 10% or more of the voting stock of a savings and loan holding company or savings institution or as otherwise defined by the OTS. Under the Change in Bank Control Act, the OTS has 60 days from the filing of a complete notice to act, taking into consideration certain factors, including the financial and managerial resources of the acquirer and the anti-trust effects of the acquisition. Any company that so acquires control would then be subject to regulation as a savings and loan holding company.

Other Regulations

Interest and other charges collected or contracted for by the Bank are subject to state usury laws and federal laws concerning interest rates. The Bank’s loan operations are also subject to federal laws applicable to credit transactions, such as the:

• Truth-In-Lending Act, governing disclosures of credit terms to consumer borrowers;

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• Home Mortgage Disclosure Act of 1975, requiring financial institutions to provide information to enable the public and public officials to determine whether a financial institution is fulfilling its obligation to help meet the housing needs of the community it serves;

• Equal Credit Opportunity Act, prohibiting discrimination on the basis of race, creed or other prohibited factors in extending credit;

• Fair Credit Reporting Act of 1978, governing the use and provision of information to credit reporting agencies;

• Fair Debt Collection Act, governing the manner in which consumer debts may be collected by collection agencies; and

• Rules and regulations of the various federal agencies charged with the responsibility of implementing such federal laws.

The deposit operations of the Bank also are subject to the:

• Right to Financial Privacy Act, which imposes a duty to maintain confidentiality of consumers’ financial records and prescribes procedures for complying with administrative subpoenas of financial records;

• Electronic Funds Transfer Act and Regulation E promulgated thereunder, which governs automatic deposits to and withdrawals from deposit accounts and customers’ rights and liabilities arising from the use of automated teller machines and other electronic banking services; and

• Check Clearing for the 21st Century Act (also known as “Check 21”), which gives “substitute checks,” such as digital check images and copies made from that image, the same legal standing as the original paper check.

Regulatory Restructuring Legislation. The Obama Administration has proposed, and the House of Representatives and Senate are currently considering, legislation that would restructure the regulation of depository institutions. Proposals range from the merger of the OTS with the Office of the Comptroller of the Currency, which regulates national banks, to the creation of an independent federal agency that would assume the regulatory responsibilities of the OTS, FDIC, Office of the Comptroller of the Currency and Federal Reserve Board. The federal savings association charter would be eliminated and federal associations required to become banks under some proposals, although others would grandfather existing charters such as that of the Association or maintain the charter. Savings and loan holding companies would become regulated as bank holding companies under certain proposals. Also proposed is the creation of a new federal agency to administer and enforce consumer and fair lending laws, a function that is now performed by the depository institution regulators. The federal preemption of state laws currently accorded federally chartered depository institutions would be reduced under certain proposals as well.

Enactment of any of these proposals would revise the regulatory structure imposed on the Association, which could result in more stringent regulation. At this time, management has no way of predicting the contents of any final legislation, or whether any legislation will be enacted at all.

Federal Income Taxation

General. The Company reports its income on a calendar year basis using the accrual method of accounting. The federal income tax laws apply to the Company in the same manner as to other corporations with some exceptions, including particularly the Bank’s reserve for bad debts discussed below. The following discussion of tax matters is intended only as a summary and does not purport to be a comprehensive description of the tax rules applicable to the Company and its subsidiaries. The Company’s federal income tax returns have been either audited or closed under the statute of limitations through tax year 2005. The Company’s maximum federal income tax rate was 34.0% for 2009.

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Bad Debt Reserves. For fiscal years beginning before June 30, 1996, thrift institutions that qualified under certain definitional tests and other conditions of the Internal Revenue Code were permitted to use certain favorable provisions to calculate their deductions from taxable income for annual additions to their bad debt reserve. A reserve could be established for bad debts on qualifying real property loans, generally secured by interests in real property improved or to be improved, under the percentage of taxable income method or the experience method. The reserve for nonqualifying loans was computed using the experience method. Federal legislation enacted in 1996 repealed the reserve method of accounting for bad debts for institutions with assets in excess of $500.0 million and the percentage of taxable income method for all institutions for tax years beginning after 1995 and required savings institutions to recapture or take into income certain portions of their accumulated bad debt reserves. However, those tax-based bad debt reserves accumulated prior to 1988 (“Base Year Reserves”) were not required to be recaptured unless the institution failed certain tests. Approximately $3.7 million of the Bank’s accumulated tax-based bad debt reserves would not be recaptured into taxable income unless it makes a “non-dividend distribution” to the Company as described below.

Distributions. If the Bank makes “non-dividend distributions” to the Company, the distributions will be considered to have been made from the Bank’s unrecaptured tax-based bad debt reserves, including the balance of its Base Year Reserves as of December 31, 1987, to the extent of the “non-dividend distributions,” and then from the Bank’s supplemental reserve for losses on loans, to the extent of those reserves, and an amount based on the amount distributed, but not more than the amount of those reserves, will be included in the Bank’s taxable income. Non-dividend distributions include distributions in excess of the Bank’s current and accumulated earnings and profits as calculated for federal income tax purposes, distributions in redemption of stock and distributions in partial or complete liquidation. Dividends paid out of the Bank’s current or accumulated earnings and profits will not be so included in the Bank’s taxable income.

The amount of additional taxable income triggered by a non-dividend is an amount that, when reduced by the tax attributable to the income, is equal to the amount of the distribution. Therefore, if the Bank makes a non-dividend distribution to the Company, approximately one and one-half times the amount of the distribution not in excess of the amount of the reserves would be includable in income for federal income tax purposes, assuming a 34% federal corporate income tax rate. The Bank does not intend to pay non-dividend distributions that would result in a recapture of any portion of its bad debt reserves.

State Income Taxation

The Company and its subsidiaries are subject to the Connecticut corporation business tax. The Company and its subsidiaries are eligible to file a combined Connecticut income tax return and pay the regular corporation business tax. The Connecticut corporation business tax is based on the federal taxable income before net operating loss and special deductions of the Company and its subsidiaries and makes certain modifications to federal taxable income to arrive at Connecticut taxable income. Connecticut taxable income is multiplied by the state tax rate (7.5% for fiscal year 2009) to arrive at Connecticut income tax.

In May 1998, the State of Connecticut enacted legislation permitting the formation of passive investment company subsidiaries by financial institutions. This legislation exempts qualifying passive investment companies from the Connecticut corporation business tax and excludes dividends paid from a passive investment company from the taxable income of the parent financial institution. The Bank’s formation of a passive investment company in January 1999 substantially eliminates the state income tax expense of the Company and its subsidiaries under current law. See Item 1. Business. “Subsidiary Activities – SI Mortgage Company” for a discussion of the Bank’s passive investment company.

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Executive Officers of the Registrant

Certain executive officers of the Bank also serve as executive officers of the Company. The day-to-day management duties of the executive officers of the Company and the Bank relate primarily to their duties as to the Bank. The executive officers of the Company currently are as follows:

Name	Age (1)	Position
Rheo A. Brouillard	55	President and Chief Executive Officer of Savings Institute Bank and Trust Company, SI Financial Group and SI Bancorp, MHC
Brian J. Hull	49	Executive Vice President, Chief Financial Officer and Treasurer of Savings Institute Bank and Trust Company, SI Financial Group and SI Bancorp, MHC
David T. Weston	47	Senior Vice President and Senior Trust Officer of Savings Institute Bank and Trust Company
William E. Anderson, Jr.	40	Senior Vice President and Retail Banking Officer of Savings Institute Bank and Trust Company
Laurie L. Gervais	45	Senior Vice President and Director of Human Resources of Savings Institute Bank and Trust Company
Michael J. Moran	61	Senior Vice President and Senior Credit Officer of Savings Institute Bank and Trust Company

⁽¹⁾ Ages presented are as of December 31, 2009.

Biographical Information:

Rheo A. Brouillard has been the President and Chief Executive Officer of Savings Institute Bank and Trust Company, SI Bancorp, MHC and SI Financial Group since 1995, 2000 and 2004, respectively. Mr. Brouillard has been a director of the Company since 1995.

Brian J. Hull has been Executive Vice President since 2002 and Chief Financial Officer and Treasurer since he joined Savings Institute Bank and Trust Company in 1997. Mr. Hull has served as Chief Financial Officer and Treasurer of Savings Institute Bank and Trust Company, SI Bancorp, MHC and SI Financial Group since 2000 and 2004, respectively.

David T. Weston has been Senior Vice President and Senior Trust Officer since 2008. Mr. Weston oversees wealth management services, which includes trust, investment and insurance operations. Mr. Weston served as a Vice President within Savings Institute Bank and Trust Company’s Trust Department since 2004.

William E. Anderson, Jr. was named Senior Vice President in 2009 after having served as Vice President since 2002. Mr. Anderson joined Savings Institute Bank and Trust Company in 1995.

Laurie L. Gervais was named Senior Vice President in 2009 after having served as Vice President since 2003. Ms. Gervais joined Savings Institute Bank and Trust Company in 1983.

Michael J. Moran has been Senior Vice President and Senior Credit Officer since 2008 and previously held this position from 2001 through 2006. Mr. Moran served as Vice President and Senior Commercial Real Estate Officer during 2007. Mr. Moran joined Savings Institute Bank and Trust Company in 1995.

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Item 1A. Risk Factors.

Prospective investors in the Company’s common stock should carefully consider the following factors.

• The Company’s investment portfolio may suffer reduced returns, material losses or other-than-temporary impairment losses. During an economic downturn, the Company’s investment portfolio could be subject to higher risk. The value of the Company’s investment portfolio is subject to the risk that certain investments may default or become impaired due to a deterioration in the financial condition of one or more issuers of the securities held in the Company’s portfolio, or due to a deterioration in the financial condition of an issuer that guarantees an issuer’s payments of such investments. Such defaults and impairments could reduce the Company’s net investment income and result in realized investment losses.

The Company’s investment portfolio is also subject to increased risk as the valuation of investments is more subjective when markets are illiquid, thereby increasing the risk that the estimated fair value (i.e. the carrying amount) of the portion of the investment portfolio that is carried at fair value as reflected in the Company’s financial statements is not reflective of prices at which actual transactions would occur.

Because of the risks set forth above, the value of the Company’s investment portfolio could decrease, the Company could experience reduced net investment income, and the Company could incur realized investment losses, which could materially and adversely affect the Company’s results of operations, financial position and liquidity.

Additionally, the Company reviews its securities portfolio at each quarter-end reporting period to determine whether the fair value is below the current carrying value. When the fair value of any of the Company’s securities has declined below its carrying value, the Company is required to assess whether the decline is other-than-temporary. The Company is required to write-down the value of that security through a charge to earnings if it concludes that the decline is other-than-temporary. As of December 31, 2009, the amortized cost and the fair value of the Company’s securities portfolio totaled $187.2 million and $183.6 million, respectively. Changes in the expected cash flows of these securities and/or prolonged price declines may result in the Company concluding in future periods that the impairment of these securities is other-than-temporary, which would require a charge to earnings to write-down these securities to their fair value. Any charges for other-than-temporary impairment would not impact cash flow, tangible capital or liquidity. For the year ended December 31, 2009, the Company recognized OTTI losses for credit-related factors of $228,000 on certain debt securities.

• The current economic environment poses significant challenges for the Company and could adversely affect the Company’s financial condition and results of operations. The Company is currently operating in a challenging and uncertain economic environment, both nationally and in the local markets. Financial institutions continue to be affected by sharp declines in financial and real estate values. Continued declines in real estate values and home sales, and an increase in the financial stress on borrowers stemming from an uncertain economic environment, including rising unemployment, could have an adverse effect on the Bank’s borrowers or their customers, which could adversely impact the repayment of its loan portfolio. The overall deterioration in economic conditions also could subject the Company to increased regulatory scrutiny. In addition, a prolonged recession, or further deterioration in local economic conditions, could result in increases in loan delinquencies and problem assets and foreclosures and a decline in the value of the collateral securing loans in the Bank’s portfolio. Furthermore, a prolonged recession or further deterioration in local economic conditions could drive the level of loan losses beyond the level the Company has provided for loan loss allowance, which could necessitate an increase

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in the Company’s provision for loan losses, which would reduce earnings. Additionally, the demand for the Company’s products and services could be reduced, which would adversely impact the Company’s liquidity and revenues.

• The Company’s level of nonperforming loans and classified assets expose it to increased lending risks. Further, the Company’s allowance for loan losses may prove to be insufficient to absorb losses in its loan portfolio. At December 31, 2009, loans that were classified as either special mention, substandard, doubtful or loss totaled $49.9 million, representing 8.2% of total loans, including nonperforming loans of $3.0 million, representing 0.49% of total loans. If these loans do not perform according to their terms and the value of the collateral is insufficient to pay the remaining loan balance or if the economy and/or the real estate market continues to weaken, we could experience loan losses or be required to add further reserves to our allowance for loan losses, either of which could have a material adverse effect on our operating results. Like all financial institutions, we maintain an allowance for loan losses at a level representing management’s best estimate of known losses in the portfolio based upon management’s evaluation of the portfolio’s collectibility as of the corresponding balance sheet date. However, the Company’s allowance for loan losses may be insufficient to cover actual loan losses, and future provisions for loan losses could materially adversely affect the Company’s operating results.

At December 31, 2009, the Company’s allowance for loan losses totaled $4.9 million, which represented 0.80% of total loans and 162.65% of nonperforming loans. The Company’s regulators, as an integral part of their examination process, periodically review the allowance for loan losses and may require us to increase the allowance for loan losses by recognizing additional provisions for loan losses charged to income, or to charge-off loans, which, net of any recoveries, would decrease the allowance for loan losses. Any such additional provisions for loan losses or charge-offs, as required by these regulatory agencies, could have a material adverse effect on the Company’s operating results.

• The Company’s commercial lending may expose it to increased lending risks. At December 31, 2009, $267.3 million, or 43.8%, of the Company’s loan portfolio consisted of commercial real estate and commercial business loans. The Company intends to continue to emphasize these types of lending. Commercial loans generally expose a lender to greater risk of non-payment and loss than one- to four-family residential mortgage loans because repayment of the loans often depends on the successful operation of the business and the income stream of the borrowers. Such loans typically involve larger loan balances to single borrowers or groups of related borrowers compared to one- to four-family residential mortgage loans. Also, many of the Company’s commercial borrowers have more than one loan outstanding with the Company. Consequently, an adverse development with respect to one loan or one credit relationship can expose the Company to a significantly greater risk of loss compared to an adverse development with respect to a one- to four-family residential mortgage loan.

• The Company’s construction lending may expose it to increased lending risks. Construction loans totaled $11.4 million and represented 1.9% of the Company’s total loan portfolio at December 31, 2009. Construction loans present greater risk as it relates to the accuracy of the estimate of the property’s value at completion of the project, the estimated cost of construction and the ability, for speculative projects, to sell the property upon completion. Moreover, declining economic conditions have negatively impacted the construction markets.

• Our emphasis on residential mortgage loans and home equity loans exposes us to a risk of loss. At December 31, 2009, $306.2 million, or 50.1%, of our loan portfolio consisted of one- to four-family residential mortgage loans and $22.6 million, or 3.7%, of our loan portfolio consisted of

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home equity lines of credit. Recent declines in the housing market have resulted in declines in real estate values in our market areas. These declines in real estate values could cause some of our mortgage and home equity loans to be inadequately collateralized, which would expose us to a greater risk of loss if we seek to recover on defaulted loans by selling the real estate collateral.

• The Company’s inability to achieve profitability on new branches may negatively impact its earnings. The Company considers its primary market area to consist of Hartford, New London, Tolland and Windham counties. However, the majority of the Company’s facilities are located in and a substantial portion of the Company’s business is derived from Windham county, which has a lower median household income and a higher unemployment rate than other counties in the Company’s market area and the rest of Connecticut. To address this, in recent years, the Company has expanded its presence throughout its market area and intends to pursue further expansion through the establishment of additional branches in Hartford, New London, Tolland and Middlesex counties, each of which has more favorable economic conditions than Windham County. The profitability of the Company’s expansion policy will depend on whether the income that it generates from the additional branches it establishes or purchases will offset the increased expenses resulting from operating new branches. The Company expects that it may take a period of time before new branches can become profitable, especially in areas in which it does not have an established presence. During this period, operating these new branches may negatively impact the Company’s operating results.

• Fluctuations in interest rates could reduce the Company’s profitability and affect the value of its assets. Like other financial institutions, the Company is subject to interest rate risk. The Company’s primary source of income is net interest income, which is the difference between interest earned on loans and investments and the interest paid on deposits and borrowings. Changes in the general level of interest rates can affect the Company’s net interest income by affecting the difference between the weighted-average yield earned on the Company’s interest-earning assets and the weighted-average rate paid on the Company’s interest-bearing liabilities, or interest rate spread and the average life of the Company’s interest-earning assets and interest-bearing liabilities. Changes in interest rates also can affect: (1) the ability to originate loans; (2) the value of the Company’s interest-earning assets and the Company’s ability to realize gains from the sale of such assets; (3) the ability to obtain and retain deposits in competition with other available investment alternatives; and (4) the ability of the Company’s borrowers to repay adjustable or variable rate loans. Interest rates are highly sensitive to many factors, including government monetary policies, domestic and international economic and political conditions and other factors beyond the Company’s control. Although the Company believes that the estimated maturities of its interest-earning assets currently are well balanced in relation to the estimated maturities of its interest-bearing liabilities, there can be no assurance that the Company’s profitability would not be adversely affected during any period of changes in interest rates.

• We are subject to liquidity risks. Market conditions could negatively affect the level or cost of liquidity available to us, which would affect our ongoing ability to accommodate liability maturities and deposit withdrawals, meet contractual obligations and fund asset growth and new business transactions at a reasonable cost, in a timely manner, and without adverse consequences. Core deposits and Federal Home Loan Bank advances are our primary source of funding. A significant decrease in our core deposits, an ability to renew Federal Home Loan Bank advances, an inability to obtain alternative funding to core deposits or Federal Home Loan Bank advances, or a substantial, unexpected, or prolonged change in the level or cost of liquidity could have a negative effect on our business and financial condition.

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• Proposed regulatory reform may have a material impact on our operations. The Obama Administration has published a comprehensive regulatory reform plan that is intended to modernize and protect the integrity of the United States financial system and has offered proposed legislation to accomplish these reforms. The U.S. House of Representatives has passed financial regulatory reform legislation and the Senate is considering its own version. These various plans contain several elements that would have a direct effect on SI Financial Group and the Bank. Under the proposed legislation, the federal thrift charter and the Office of Thrift Supervision would be eliminated and all companies that control an insured depository institution must register as a bank holding company. Existing federal thrifts, such as the Bank, would become a national bank or could choose to adopt a state charter. Registration as a bank holding company would represent a significant change, as there currently exist significant differences between savings and loan holding company and bank holding company supervision and regulation. For example, the Federal Reserve imposes leverage and risk-based capital requirements on bank holding companies whereas the Office of Thrift Supervision does not impose any capital requirements on savings and loan holding companies. The Administration has also proposed the creation of a new federal agency, the Consumer Financial Protection Agency, that would be dedicated to protecting consumers in the financial products and services market. The creation of this agency could result in new regulatory requirements and raise the cost of regulatory compliance. In addition, legislation stemming from the reform plan could require changes in regulatory capital requirements, loan loss provisioning practices and compensation practices. If implemented, the foregoing regulatory reforms may have a material impact on our operations. However, because the final legislation may differ significantly from the reform plan proposed by the President or passed by the House of Representatives, we cannot determine the specific impact of regulatory reform at this time.

• Increased and/or special FDIC assessments will hurt our earnings. The recent economic recession has caused a high level of bank failures, which has dramatically increased FDIC resolution costs and led to a significant reduction in the balance of the Deposit Insurance Fund. As a result, the FDIC has significantly increased the initial base assessment rates paid by financial institutions for deposit insurance. Increases in the base assessment rate have increased our deposit insurance costs and negatively impacted our earnings. In addition, in May 2009, the FDIC imposed a special assessment on all insured institutions. Our special assessment, which was reflected in earnings for the quarter ended June 30, 2009, was $393,000. In lieu of imposing an additional special assessment, the FDIC required all institutions to prepay their assessments for all of 2010, 2011 and 2012, which for us totaled $3.5 million. Additional increases in the base assessment rate or additional special assessments would negatively impact our earnings.

• Strong competition within the Company’s market area could hurt the Company’s profits and slow growth. The Company faces intense competition both in making loans and attracting deposits. This competition has made it more difficult for the Company to make new loans and at times has forced the Company to offer higher deposit rates. Price competition for loans and deposits might result in the Company earning less on its loans and paying more on its deposits, which reduces net interest income. As of June 30, 2009, the Company held approximately 1.78% of the deposits in Hartford, New London, Tolland and Windham counties in Connecticut, which represented the 12^th market share of deposits out of 35 financial institutions in these counties. Some of the institutions with which the Company competes have substantially greater resources and lending limits than the Company has and may offer services that the Company does not provide. The Company expects competition to increase in the future as a result of legislative, regulatory and technological changes and the continuing trend of consolidation in the financial services industry. The Company’s profitability depends upon its continued ability to compete successfully in its market area.

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• The trading history of the Company’s common stock is characterized by low trading volume. The Company’s common stock may be subject to sudden decreases due to the volatility of the price of the Company’s common stock. The Company’s common stock trades on the NASDAQ Global Market. Over the past 50 days, the average daily trading volume of its common stock was approximately 2,500 shares. The Company cannot predict whether a more active trading market in its common stock will occur or how liquid that market might become. A public trading market having the desired characteristics of depth, liquidity and orderliness depends upon the presence in the marketplace of willing buyers and sellers of its common stock at any given time, which presence is dependent upon the individual decisions of investors, over which we have no control.

The market price of the Company’s common stock may be highly volatile and subject to wide fluctuations in response to numerous factors, including, but not limited to, the factors discussed in other risk factors and the following:

• changes in economic conditions in the Company’s marketplace, general conditions in the U.S. economy, financial markets or the banking industry;

• actual or anticipated fluctuations in the Company’s operating results;

• changes in interest rates;

• changes in the legal or regulatory environment in which the Company operates;

• press releases, announcements or publicity relating to the Company or the Company’s competitors or relating to trends in the Company’s industry;

• changes in expectations as to the Company’s future financial performance, including financial estimates or recommendations by securities analysts and investors;

• future sales of the Company’s common stock; and

• other developments affecting the Company’s competitors or the Company.

These factors may adversely affect the trading price of the Company’s common stock, regardless of its actual operating performance, and could prevent you from selling your common stock at or above the price you desire. In addition, the stock markets, from time to time, experience extreme price and volume fluctuations that may be unrelated or disproportionate to the operating performance of companies. These broad fluctuations may adversely affect the market price of the Company’s common stock, regardless of its trading performance.

• The Bank owns stock in the Federal Home Loan Bank of Boston, which, as a result of its financial difficulties, has suspended its dividend and will negatively affect the Company’s net interest income. As a member bank, the Bank is required to purchase capital stock in the FHLB in an amount commensurate with the amount of the Bank’s advances and unused borrowing capacity. This stock is carried at cost and was $8.4 million at December 31, 2009. In response to unprecedented market conditions and potential future losses, the FHLB has implemented an initiative to preserve capital by the adoption of a revised retained earnings target, declaration of a moratorium on excess stock repurchases and the suspension of cash dividend payments. If the FHLB is unable to meet minimum regulatory capital requirements or is required to aid the remaining Federal Home Loan Banks, our holding of FHLB stock may be determined to be other-than-temporarily impaired and may require a charge to earnings. Additionally, during 2009, the Company did not recognize any dividend income from its investment in FHLB stock. The failure to recognize dividend income from the FHLB will negatively impact our net interest income.

• If the Company’s goodwill recorded in connection with its acquisitions becomes impaired, it could have a negative impact on the Company’s profitability. Applicable accounting standards require that the acquisition method of accounting be used for all business combinations. Under this method, if the purchase price of an acquired entity exceeds the fair value of its net assets, the excess is carried on the acquirer’s balance sheet as goodwill. At December 31, 2009, the Company had $4.1 million of goodwill on its balance sheet. Companies evaluate goodwill for impairment at least annually. Write-downs of the amount of impairment, if necessary, are to be charged to

37

the results of operations in the period in which the impairment occurs. For the year ended December 31, 2009, the Company recorded goodwill impairment of $57,000 related to the Company’s New London branch acquisition. There can be no assurance that future evaluations of goodwill will not result in findings of impairment and related write-downs, which may have a material adverse effect on the Company’s financial condition and results of operations.

• SI Bancorp, MHC’s majority control of the Company’s common stock enables it to exercise voting control over most matters put to a vote of shareholders, including preventing a sale, a merger or a second-step conversion transaction. SI Bancorp, MHC owns a majority of the Company’s common stock and, through its Board of Directors, is able to exercise voting control over most matters put to a vote of shareholders. The same directors and officers who manage the Company and the Bank also manage SI Bancorp, MHC. As a federally-chartered mutual holding company, the Board of Directors of SI Bancorp, MHC must ensure that the interests of depositors of the Bank are represented and considered in matters put to a vote of shareholders of the Company. Therefore, the votes cast by SI Bancorp, MHC may not be in the best interests of its shareholders. For example, SI Bancorp, MHC may exercise its voting control to prevent a sale or merger transaction in which shareholders could receive a premium for their shares or to defeat a shareholder nominee for election to the Board of Directors of the Company. In addition, SI Bancorp, MHC may exercise its voting control to prevent a second-step conversion transaction. Preventing a second-step conversion transaction may result in a lower value of the Company’s stock price than otherwise could be achieved as, historically, fully-converted institutions trade at higher multiples than mutual holding companies. The matters as to which shareholders, other than SI Bancorp, MHC, will be able to exercise voting control are limited.

• The Company operates in a highly regulated environment and it may be adversely affected by changes in laws and regulations. The Company is subject to extensive regulation, supervision and examination by the OTS, the Company’s chartering authority and the FDIC, as insurer of the Bank’s deposits. SI Bancorp, MHC, the Company and the Bank are all subject to regulation and supervision by the OTS. Such regulation and supervision governs the activities in which an institution and its holding company may engage, and are intended primarily for the protection of the insurance fund and depositors. Regulatory authorities have extensive discretion in their supervisory and enforcement activities, including the imposition of restrictions on the Company’s operations, the classification of its assets and determination of the level of the Bank’s allowance for loan losses. Any change in such regulation and oversight, whether in the form of regulatory policy, regulations, legislation or supervisory action, may have a material impact on the Company’s operations.

• The Company is subject to security and operational risks relating to use of its technology that could damage its reputation and business. Security breaches in the Company’s internet banking activities could expose it to possible liability and damage its reputation. Any compromise of the Company’s security also could deter customers from using its internet banking services that involve the transmission of confidential information. The Company relies on standard internet security systems to provide the security and authentication necessary to effect secure transmission of data. These precautions may not protect its systems from compromises or breaches of its security measures that could result in damage to its reputation and business. Additionally, the Company outsources its data processing to a third party. If the Company’s third party provider encounters difficulties or if the Company has difficulty in communicating with such third party, it will significantly affect the Company’s ability to adequately process and account for customer transactions, which would significantly affect its business operations.

38

Item 1B. Unresolved Staff Comments.

None.

Item 2. Properties.

The Company conducts its business through its executive office at 803 Main Street, Willimantic, Connecticut, its 21 branch offices located in Connecticut and its trust servicing office located in Rutland, Vermont. Of the 22 offices, 4 are owned and 18 are leased. Lease expiration dates range from 2010 to 2027 with renewal options of 5 to 20 years.

Office Locations	Number of Offices
Connecticut:
New London County	8
Windham County	7
Tolland County	3
Hartford County	2
Middlesex County	1
Vermont:
Rutland County	1
Total:	22

Additionally, the Bank owns or leases 3 other properties used, in part, for banking operations and an employee training center. The total net book value of the properties at December 31, 2009 was $9.9 million. See Notes 6 and 12 in the Company’s Consolidated Financial Statements included in the Company’s Annual Report to Stockholders, attached hereto as Exhibit 13, for more information.

Item 3. Legal Proceedings.

Periodically, there have been various claims and lawsuits against us, such as claims to enforce liens, condemnation proceedings on properties in which we hold a security interest, claims involving the making and servicing of real property loans and other issues incident to our business. At December 31, 2009, neither the Company nor the Bank was involved in any pending legal proceedings believed by management to be material to the Company’s financial condition, results of operations or cash flows.

Item 4. [Reserved]

PART II.

Item 5. Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

The market for the registrant’s common equity and related stockholder matters required by this item is incorporated herein by reference to the section captioned “Common Stock Information” in the Company’s Annual Report to Stockholders.

For a description of restrictions on the Bank’s ability to pay dividends to the Company and the Company’s ability to pay cash dividends, see Item 1. Business. “Regulation and Supervision – Regulation of Federal Savings Associations—Limitation on Capital Distributions” in this annual report on Form 10-K and Note 17 in the Company’s Consolidated Financial Statements included in the Company’s Annual Report to Stockholders, attached hereto as Exhibit 13, for more information.

39

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 the Company’s common stock. The repurchase program will continue until it is completed or terminated by the Board of Directors. Currently, 449,452 shares remain available for repurchase under the plan. The Company did not repurchase any shares of its common stock in the fourth quarter of 2009.

Item 6. Selected Financial Data.

The Company has derived the following selected consolidated financial and other data in part from its consolidated financial statements and notes appearing elsewhere in this annual report.

Selected Financial Condition Data:	At December 31,
(Dollars in Thousands)	2009		2008			2007		2006		2005
Total assets	$	872,354	$	853,122		$	790,198	$	757,037	$	691,868
Cash and cash equivalents		24,204		23,203			20,669		26,108		25,946
Securities available for sale		183,562		162,699			141,914		119,508		120,019
Loans receivable, net		607,692		617,263			587,538		574,111		513,775
Deposits (1)		662,378		624,276			551,772		541,922		512,282
Federal Home Loan Bank advances		116,100		139,600			141,619		111,956		87,929
Junior subordinated debt owed to unconsolidated trust		8,248		8,248			8,248		15,465		7,217
Total stockholders’ equity		77,462		72,927			82,087		82,386		80,043
Selected Operating Data:	Years Ended December 31,
(Dollars in Thousands, Except Per Share Data)	2009		2008			2007		2006		2005
Interest and dividend income	$	43,588	$	46,499		$	43,347	$	40,777	$	33,905
Interest expense		18,861		22,459			21,783		18,261		12,131
Net interest income		24,727		24,040			21,564		22,516		21,774
Provision for loan losses		2,830		1,369			1,062		881		410
Net interest income after provision for loan losses		21,897		22,671			20,502		21,635		21,364
Noninterest income		9,978		3,136			9,378		8,258		6,310
Noninterest expenses		31,405		30,040			27,928		25,959		22,588
Income (loss) before income tax provision (benefit)		470		(4,233	)		1,952		3,934		5,086
Income tax provision (benefit)		35		(1,360	)		540		1,156		1,689
Net income (loss)	$	435	$	(2,873	)	$	1,412	$	2,778	$	3,397
Basic income (loss) per share	$	0.04	$	(0.25	)	$	0.12	$	0.24	$	0.28
Diluted income (loss) per share	$	0.04	$	(0.25	)	$	0.12	$	0.23	$	0.28

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Selected Operating Ratios:	At or For the Years Ended December 31,
	2009		2008		2007		2006		2005
Performance Ratios:
Return (loss) on average assets	0.05	%	(0.34	)%	0.18	%	0.38	%	0.52	%
Return (loss) on average equity	0.58		(3.71	)	1.71		3.44		4.19
Interest rate spread (2)	2.70		2.61		2.47		2.81		3.19
Net interest margin (3)	3.01		3.00		2.98		3.26		3.56
Noninterest expenses to average assets	3.61		3.56		3.66		3.56		3.47
Dividend payout ratio (4)	N/A		N/A		133.33		66.67		42.86
Efficiency ratio (5)	90.64		88.74		90.57		83.58		80.60
Average interest-earning assets to average interest-bearing liabilities	113.28		113.83		117.02		117.07		118.38
Average equity to average assets	8.68		9.16		10.88		11.07		12.45
Regulatory Capital Ratios:
Total risk-based capital ratio	14.30		13.32		15.21		15.84		16.79
Tier 1 risk-based capital ratio	13.36		12.33		14.37		14.86		15.87
Tier 1 capital ratio	8.02		7.59		8.75		8.97		9.31
Asset Quality Ratios:
Allowance for loan losses as a percent of total loans	0.80		0.97		0.89		0.76		0.71
Allowance for loan losses as a percent of nonperforming loans	162.65		64.83		68.72		313.58		1529.58
Net (charge-offs) recoveries to average outstanding loans during the year	(0.64	)	(0.09	)	(0.03	)	(0.03	)	0.01

⁽¹⁾ Includes mortgagors’ and investors’ escrow accounts.

⁽²⁾ Represents the difference between the weighted-average yield on average interest-earning assets and the weighted-average cost of interest-bearing liabilities.

⁽³⁾ Represents net interest income as a percent of average interest-earning assets.

⁽⁴⁾ Dividends declared per share divided by basic net income per common share. Dividends paid on shares held by SI Bancorp, MHC are waived and are excluded from this ratio.

⁽⁵⁾ Represents noninterest expenses divided by the sum of net interest income and noninterest income, less any realized gains or losses on the sale of securities.

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The information required by this item is incorporated herein by reference to the section captioned “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the Company’s Annual Report to Stockholders attached hereto as Exhibit 13.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk.

Not applicable as the Company is a smaller reporting company.

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Item 8. Financial Statements and Supplementary Data.

The financial statements and supplementary data required by this item are incorporated herein by reference to the audited consolidated financial statements and notes thereto included in the Company’s Annual Report to Stockholders attached hereto as Exhibit 13.

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.

None.

Item 9A(T). Controls and Procedures.

Disclosure 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 the purpose of 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 officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.

Management’s Annual Report on Internal Control Over Financial Reporting

The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting. Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of our financial reporting and of the preparation of our consolidated financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America.

A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of consolidated financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company’s assets that could have a material effect on the consolidated financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

The Company’s management assessed the effectiveness of its internal control over financial reporting as of December 31, 2009, using the criteria established in Internal Control-Integrated Framework, issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). Based on this assessment, management has concluded that, as of December 31, 2009, the Company’s internal control over financial reporting was effective based on the criteria.

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This annual report does not include an attestation report of the Company’s independent registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s independent registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit the Company to provide only management’s report in this annual report.

Changes in Internal Control Over Financial Reporting

In addition, based on that evaluation, no changes in the Company’s internal control over financial reporting occurred during the quarter ended December 31, 2009 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

Item 9B. Other Information.

None.

PART III.

Item 10. Directors, Executive Officers and Corporate Governance.

Directors

Information relating to the directors of the Company required by this item is incorporated herein by reference to the section captioned “Items to be Voted on by Stockholders – Item 1 – Election of Directors” in the Company’s Proxy Statement for the 2010 Annual Meeting of Stockholders.

Executive Officers

Information relating to officers of the Company required by this item is incorporated herein by reference to Part I, Item 1, “Business — Executive Officers of the Registrant” to this annual report on Form 10-K.

Compliance with Section 16(a) of the Exchange Act

Information regarding compliance with Section 16(a) of the Exchange Act required by this item is incorporated herein by reference to the cover page to this annual report on Form 10-K and the section captioned “Other Information Relating to Directors and Executive Officers—Section 16(a) Beneficial Ownership Reporting Compliance” in the Company’s Proxy Statement for the 2010 Annual Meeting of Stockholders.

Code of Ethics

Information concerning the Company’s code of ethics required by this item is incorporated herein by reference to the information contained under the section captioned “Corporate Governance and Board Matters – Code of Ethics and Business Conduct” in the Company’s Proxy Statement for the 2010 Annual Meeting of Stockholders. A copy of the code of ethics and business conduct is available to stockholders on the “Governance Documents” portion of the Investor Relations’ section on the Company’s website at www.mysifi.com.

Corporate Governance

Information regarding the audit committee and its composition and the audit committee’s financial expert required by this item is incorporated herein by reference to the section captioned “Corporate Governance and Board Matters – Committees of the Board of Directors – Audit Committee” in the Company’s Proxy Statement for the 2010 Annual Meeting of Stockholders.

43

Item 11. Executive Compensation.

Information regarding executive compensation required by this item is incorporated herein by reference to the sections captioned “Executive Compensation” and “Corporate Governance and Board Matters—Directors’ Compensation” in the Company’s Proxy Statement for the 2010 Annual Meeting of Stockholders.

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.

The information relating to the security ownership of certain beneficial owners and management required by this item is incorporated herein by reference to the section captioned “Stock Ownership” in the Company’s Proxy Statement for the 2010 Annual Meeting of Stockholders.

The following table sets forth information about the Company’s common stock that may be issued upon the exercise of stock options, warrants and rights under all of the Company’s equity compensation plans as of December 31, 2009.

Plan category	Number of securities to be issued upon exercise of outstanding options, warrants and rights (a)	Weighted-average exercise price of outstanding options, warrants and rights (b)		Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) (c)
Equity compensation plans approved by security holders	447,750	$	10.34	167,873
Equity compensation plans not approved by security holders	—		—	—
Total	447,750	$	10.34	167,873

Item 13. Certain Relationships and Related Transactions and Director Independence.

Certain Relationships and Related Transactions

Information regarding certain relationships and related transactions required by this item is incorporated herein by reference to the section captioned “Other Information Relating to Directors and Executive Officers—Transactions with Related Persons” in the Company’s Proxy Statement for the 2010 Annual Meeting of Stockholders.

Corporate Governance

Information regarding director independence required by this item is incorporated herein by reference to the section captioned “Corporate Governance and Board Matters– Director Independence” in the Company’s Proxy Statement for the 2010 Annual Meeting of Stockholders.

Item 14. Principal Accountant Fees and Services.

Information relating to the principal accountant fees and expenses required by this item is incorporated herein by reference to the section captioned “Audit-Related Matters – Audit Fees” and “Audit-Related Matters – Policy on Audit Committee Pre-Approval of Audit and Permissible Non-Audit Services by the Independent Registered Public Accounting Firm” in the Company’s Proxy Statement for the 2010 Annual Meeting of Stockholders.

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PART IV.

Item 15. Exhibits and Financial Statement Schedules.

(1) Financial Statements

The following consolidated financial statements of the Company and its subsidiaries are filed as part of this report:

• Report of Independent Registered Public Accounting Firm

• Consolidated Balance Sheets as of December 31, 2009 and 2008

• Consolidated Statements of Operations for the Years Ended December 31, 2009 and 2008

• Consolidated Statements of Changes in Stockholders’ Equity for the Years Ended December 31, 2009 and 2008

• Consolidated Statements of Cash Flows for the Years Ended December 31, 2009 and 2008

• Notes to Consolidated Financial Statements

Such financial statements are incorporated by reference to the Company’s consolidated financial statements and notes thereto included in the Company’s Annual Report to Stockholders.

(2) Financial Statement Schedules

All financial statement schedules have been omitted because they are either not applicable or the required information is included in the consolidated financial statements or notes thereto included in the Company’s Annual Report to Stockholders.

(3) Exhibits

The exhibits listed below are filed as part of this report or are incorporated by reference herein.

3.1	Charter of SI Financial Group, Inc. (1)
3.2	Bylaws of SI Financial Group, Inc. (2)
3.3	Amendment to Bylaws of SI Financial Group, Inc. (3)
3.4	Amendment to Bylaws of SI Financial Group, Inc. (4)
4.0	Specimen Stock Certificate of SI Financial Group, Inc. (1)
10.1	* Employment Agreement by and among SI Financial Group, Inc. and Savings Institute Bank and Trust Company and Rheo A. Brouillard, as amended and restated (5)
10.2	* Employment Agreement by and among SI Financial Group, Inc. and Savings Institute Bank and Trust Company and Brian J. Hull, as amended and restated (5)
10.3	* Amended and Restated Savings Institute Bank and Trust Company Employee Severance Compensation Plan (6)
10.4	* Savings Institute Directors Retirement Plan (1)
10.5	*Amended and Restated Savings Institute Bank and Trust Company Supplemental Executive Retirement Plan (6)
10.6	* Savings Institute Group Term Replacement Plan (1)

45

10.7	* Form of Savings Institute Executive Supplemental Retirement Plan – Defined Benefit (6)
10.8	* Form of Savings Institute Director Deferred Fee Agreement (6)
10.9	* Form of Savings Institute Director Consultation Plan (1)
10.11	* SI Financial Group, Inc. 2005 Equity Incentive Plan (7)
10.12	* Change in Control Agreement, and related amendments, by and among SI Financial Group, Inc., Savings Institute Bank and Trust Company and David T. Weston (6)
13.0	Annual Report to Stockholders
21.0	List of Subsidiaries
23.1	Consent of Wolf & Company, P.C.
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	Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

^* Management contract or compensatory plan, contract or arrangement.

⁽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 Exhibit filed with the Company’s Form 8-K, filed with the Securities and Exchange Commission on May 5, 2008.

⁽³⁾ Incorporated by reference into this document from the Exhibit filed with the Company’s Form 8-K, filed with the Securities and Exchange Commission on November 19, 2009.

⁽⁴⁾ Incorporated by reference into this document from the Exhibit filed with the Company’s Form 8-K, filed with the Securities and Exchange Commission on January 28, 2010.

⁽⁵⁾ Incorporated herein by reference into this document from the Exhibits filed with the Company’s Form 10-K/A, filed with the Securities and Exchange Commission on April 17, 2009.

⁽⁶⁾ Incorporated herein by reference into this document from the Exhibits filed with the Company’s Form 10-K, filed with the Securities and Exchange Commission on March 27, 2009.

⁽⁷⁾ Incorporated by reference into this document from the Appendix to the Proxy Statement for the 2005 Annual Meeting of Stockholders filed with the Securities and Exchange Commission on April 6, 2005.

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) 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.
By:	/S/    RHEO A. BROUILLARD
	Rheo A. Brouillard
	President and Chief Executive Officer
	March 24, 2010

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant in the capacities and on the dates indicated.

Name	Title	Date
/S/    RHEO A. BROUILLARD	President and Chief Executive Officer (principal executive officer)	March 24, 2010
Rheo A. Brouillard
/S/    BRIAN J. HULL         Brian J. Hull	Executive Vice President, Treasurer and Chief Financial Officer (principal accounting and financial officer)	March 24, 2010
/S/    HENRY P. HINCKLEY	Chairman of the Board	March 24, 2010
Henry P. Hinckley
/S/    DONNA M. EVAN	Director	March 24, 2010
Donna M. Evan
/S/    ROGER ENGLE	Director	March 24, 2010
Roger Engle
/S/    ROBERT O. GILLARD	Director	March 24, 2010
Robert O. Gillard
/S/    MARK D. ALLIOD	Director	March 24, 2010
Mark D. Alliod
/S/    MICHAEL R. GARVEY	Director	March 24, 2010
Michael R. Garvey

47

EX-13.0

Exhibit 13.0

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS

General

Management’s discussion and analysis of financial condition and results of operations is intended to assist in understanding changes in SI Financial Group’s (the “Company”) financial condition as of December 31, 2009 and 2008 and the results of operations for the years ended December 31, 2009 and 2008. The information contained in this section should be read in conjunction with the consolidated financial statements and notes contained elsewhere in this annual report.

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 our 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 of 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.

Management Strategies

The Company’s mission is to operate and grow a profitable community-oriented financial institution. The Company plans to achieve this by continuing its strategies of:

• offering a full range of financial services;

• expanding the branch network into new market areas;

• pursuing opportunities to increase commercial lending in our market area;

• applying conservative underwriting practices to maintain the high quality loan portfolio;

• managing net interest margin and net interest spread by seeking to increase lending levels;

• managing investment and borrowing portfolios to provide liquidity, enhance income and manage interest rate risk; and

• increasing deposits by continuing to offer exceptional customer service and emphasizing commercial deposit offerings.

Offer a full range of financial services. Savings Institute Bank & Trust Company (the “Bank”) has a long tradition of focusing on the needs of consumers and small and medium-sized businesses in the community and being an active corporate citizen. The Bank delivers personalized service and responds with flexibility to customers’ needs. The Bank believes its community orientation, quicker decision-making

- 1 -

process and ability to customize products for customers is attractive to its customers and distinguishes it from the large regional banks that operate in its market area and it intends to maintain this focus as it grows. In this context, the Bank is striving to become a true financial services company offering its customers one-stop shopping for all of their financial needs through banking, investments, insurance and trust products and services. The Bank hopes that its broad array of product offerings will deepen its relationships with its current customers and entice new customers to begin banking with them, ultimately increasing fee income and profitability.

SI Trust Servicing, which was acquired by the Bank in November 2005, expands the products offered by the Bank by offering trust services to community banks, while presenting significant growth opportunities for the Company’s wealth management business.

Expand branch network into new market areas. Since 2000, the Bank has opened a new branch office in each of North Windham, Lisbon, Mansfield Center, Tolland, South Windsor and East Hampton, Connecticut. During 2008, the Bank acquired branch offices in Colchester and New London, Connecticut. The Bank intends to continue to pursue expansion in Hartford, New London, Tolland and Windham Counties in future years, whether through de novo branching or acquisitions.

Pursue opportunities to increase commercial lending. Multi-family and commercial real estate and commercial business loans increased $28.0 million and $36.7 million for the years ended December 31, 2009 and 2008, respectively, and comprised 43.8% of total loans at December 31, 2009. There are many multi-family and commercial properties and businesses located in the Bank’s market area and the larger lending relationships associated with these commercial opportunities may be pursued.

Apply conservative underwriting practices and maintain high quality loan portfolio. The Bank believes that strong asset quality is a key to long-term financial success. The Bank has sought to maintain a high level of asset quality and moderate credit risk by using conservative underwriting standards and by diligent monitoring and collection efforts. Nonperforming loans decreased from $9.3 million at December 31, 2008 to $3.0 million at December 31, 2009. At December 31, 2009, nonperforming loans were 0.49% of the total loan portfolio and 0.34% of total assets. Although the Bank intends to increase its multi-family and commercial real estate and commercial business lending, it intends to continue its philosophy of managing large loan exposures through a conservative approach to lending.

Manage net interest margin and net interest spread. The Company intends to continue to manage its net interest margin and net interest spread by seeking to increase lending levels, especially commercial loans. Multi-family and commercial real estate loans and commercial business loans typically have higher yields, which increase the Company’s net interest margin and net interest spread. However, loans secured by multi-family and commercial real estate and commercial business loans are generally larger and involve a greater degree of risk than one- to four-family residential mortgage loans.

Manage investment and borrowing portfolios. The Company’s liquidity, income and interest rate risk are affected by the management of its investment and borrowing portfolios. When necessary, the Company leverages its balance sheet by borrowing funds from the Federal Home Loan Bank of Boston (the “FHLB”) and investing the funds in loans and investment securities in a manner consistent with its current portfolio. This leverage strategy provides additional liquidity, enhances earnings and helps to manage interest rate risk.

Increase deposits. The Company’s primary source of funds is retail deposit accounts. Deposits have continued to increase primarily due to competitive interest rates, the movement of customer funds out of riskier investments, including the stock market, and the addition of new branch offices and new product offerings. The Company intends to continue to increase its deposits by continuing to offer exceptional customer service and by focusing on increasing its commercial deposits from small and medium-sized businesses through additional business banking products.

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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 its critical accounting policies. The Company considers the allowance for loan losses, other-than-temporary impairment of securities, deferred income taxes and the impairment of long-lived assets to be its critical accounting policies.

Allowance for Loan Losses. Determining the amount of allowance for loan losses necessarily involves a high degree of judgment. Management reviews the level of the allowance on a monthly basis and establishes the provision for loan losses based on the size and the composition of the loan portfolio, delinquency levels, loss experience, economic conditions and other factors related to the collectability of the loan portfolio. The level of the allowance for loan losses fluctuates primarily due to changes in the size and composition of the loan portfolio and in the level of nonperforming loans, classified assets and charge-offs. A portion of the allowance is established by segregating the loans by loan category and assigning allocation percentages based on our historical loss experience, delinquency trends, economic conditions and other qualitative factors. The applied loss factors are re-evaluated quarterly to ensure their relevance in the current economic environment. Accordingly, increases in the size of the loan portfolio and the increased emphasis on commercial real estate and commercial business loans, which carry a higher degree of risk of default and, thus, a higher allocation percentage, increases the allowance. Additionally, a portion of the allowance is established based on the level of specific nonperforming loans and classified assets.

Although management believes that it uses the best information available to establish the allowance for loan losses, which is based on estimates that are susceptible to change, future additions to the allowance may be necessary as a result of changes in economic conditions and other factors. Additionally, the Bank’s regulators, as a part of their examination process, periodically review our allowance for loan losses and may require us to increase our allowance for loan losses by recognizing additional provisions for loan losses charged to expense, or to decrease our allowance for loan losses by recognizing loan charge-offs. See Notes 1 and 4 in the Company’s Consolidated Financial Statements for additional information.

Other-Than-Temporary Impairment of Securities. One of the significant estimates related to securities is the evaluation of investments for other-than-temporary impairment (“OTTI”). Marketable equity securities are evaluated for OTTI based on the severity and duration of the impairment and, if deemed to be other-than-temporary, the declines in fair value are reflected in earnings as realized losses. For those debt securities for which the fair value is less than its amortized cost and the Company does not intend to sell such security and it is not more likely than not that it will be required to sell such security prior to the recovery of its amortized cost basis (which may be maturity) less any credit losses, the credit-related OTTI loss is recognized as a charge to earnings. Noncredit-related OTTI losses for debt securities are recognized in other comprehensive income (loss), net of applicable taxes.

The evaluation of securities for impairment is a quantitative and qualitative process, which is subject to risks and uncertainties and is intended to determine whether declines in the fair value of investments should be recognized in current period earnings. The risks and uncertainties include changes in general economic conditions, the issuer’s financial condition or future prospects, the effects of changes in interest rates or credit spreads and the expected recovery period. Management evaluates securities for OTTI at least on a quarterly basis and more frequently when economic or market conditions warrant such evaluation. See Notes 1 and 3 in the Company’s Consolidated Financial Statements for additional information.

Deferred Income Taxes. The Company uses the asset and liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and

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liabilities and their respective tax bases. If current available information raises doubt as to the realization of the deferred tax assets, a valuation allowance is established. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The Company exercises significant judgment in evaluating the amount and timing of recognition of the resulting tax assets and liabilities. These judgments require us to make projections of future taxable income. These judgments and estimates, which are inherently subjective, are reviewed periodically as regulatory and business factors change. A reduction in estimated future taxable income may require the Company to record a valuation allowance against its deferred tax assets. A valuation allowance would result in additional income tax expense in the period, which would negatively affect earnings. See Notes 1 and 10 in the Company’s Consolidated Financial Statements.

Impairment of Long-Lived Assets. The Company is required to record certain assets it has acquired, including identifiable intangible assets such as core deposit intangibles, goodwill and certain liabilities that it acquired at fair value, which may involve making estimates based on third-party valuations, such as appraisals or internal valuations based on discounted cash flow analyses or other valuation techniques. Further, long-lived assets, including intangible assets and premises and equipment, that are held and used by us, are presumed to have a useful life. The determination of the useful lives of intangible assets is subjective, as is the appropriate amortization period for such intangible and long-lived assets. Additionally, long-lived assets are reviewed for impairment at least annually or whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. If impairment is indicated by that review, the asset is written down to its estimated fair value through a charge to noninterest expenses. Testing for impairment is a subjective process, the application of which could result in different evaluations of impairment. See Notes 1, 6 and 7 in the Company’s Consolidated Financial Statements for additional information.

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Analysis of Net Interest Income

Average Balance Sheet. The following 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.

	Years Ended December 31,
			2009							2008							2007
(Dollars in Thousands)	Average Balance		Interest & Dividends			Average Yield/ Rate		Average Balance		Interest & Dividends			Average Yield/ Rate		Average Balance		Interest & Dividends			Average Yield/ Rate
Interest-earning assets:
Loans (1)(2)	$	624,647	$	35,643		5.71	%	$	608,838	$	37,192		6.11	%	$	584,237	$	36,703		6.28	%
Securities (3)		177,609		7,849		4.42			178,146		8,946		5.02			131,100		6,363		4.85
Other interest-earning assets		20,709		112		0.54			14,160		366		2.58			8,339		286		3.43
Total interest-earning assets		822,965		43,604		5.30			801,144		46,504		5.80			723,676		43,352		5.99
Noninterest-earning assets		47,377							44,518							38,609
Total assets	$	870,342						$	845,662						$	762,285
Interest-bearing liabilities:
Deposits:
NOW and money market	$	206,012		2,189		1.06		$	180,699		3,149		1.74		$	135,568		1,960		1.45
Savings (4)		62,717		408		0.65			66,796		668		1.00			76,517		1,053		1.38
Certificates of deposit		318,029		10,586		3.33			304,361		11,921		3.92			280,924		12,718		4.53
Total interest-bearing deposits		586,758		13,183		2.25			551,856		15,738		2.85			493,009		15,731		3.19
FHLB advances		131,460		5,461		4.15			143,697		6,324		4.40			114,960		5,276		4.59
Subordinated debt		8,248		217		2.63			8,248		397		4.81			10,463		776		7.42
Total interest-bearing liabilities		726,466		18,861		2.60			703,801		22,459		3.19			618,432		21,783		3.52
Noninterest-bearing liabilities		68,350							64,436							60,952
Total liabilities		794,816							768,237							679,384
Total stockholders’ equity		75,526							77,425							82,901
Total liabilities and stockholders’ equity	$	870,342						$	845,662						$	762,285
Net interest-earning assets	$	96,499						$	97,343						$	105,244
Tax equivalent net interest income (3)				24,743							24,045							21,569
Tax equivalent interest rate spread (5)						2.70	%						2.61	%						2.47	%
Tax equivalent net interest margin as a percentage of interest-earning assets (6)						3.01	%						3.00	%						2.98	%
Average interest-earning assets to average interest-bearing liabilities						113.28	%						113.83	%						117.02	%
Less: Tax equivalent adjustment(3)				(16	)						(5	)						(5	)
Net interest income			$	24,727						$	24,040						$	21,564

⁽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 immaterial.

⁽³⁾ Municipal 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 operations.

⁽⁴⁾ Includes mortgagors’ and investors’ escrow accounts.

⁽⁵⁾ 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.

⁽⁶⁾ Tax equivalent net interest margin represents tax equivalent net interest income divided by average interest-earning assets.

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Rate/Volume Analysis. 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.

	2009 Compared to 2008
	Increase (Decrease) Due To
(Dollars in Thousands)	Rate			Volume			Net
Interest-earning assets:
Interest and dividend income:
Loans (1)(2)	$	(2,497	)	$	948		$	(1,549	)
Securities (3)		(1,070	)		(27	)		(1,097	)
Other interest-earning assets		(374	)		120			(254	)
Total interest-earning assets		(3,941	)		1,041			(2,900	)
Interest-bearing liabilities:
Interest expense:
Deposits (4)		(3,429	)		874			(2,555	)
FHLB advances		(343	)		(520	)		(863	)
Subordinated debt		(180	)		—			(180	)
Total interest-bearing liabilities		(3,952	)		354			(3,598	)
Change in net interest income (5)	$	11		$	687		$	698

⁽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 immaterial.

⁽³⁾ Municipal 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 operations.

⁽⁴⁾ Includes mortgagors’ and investors’ escrow accounts.

⁽⁵⁾ Presented on a tax equivalent basis.

Comparison of Financial Condition at December 31, 2009 and December 31, 2008

Assets:

Summary. Total assets increased $19.2 million, or 2.3%, to $872.4 million at December 31, 2009, as compared to $853.1 million at December 31, 2008, primarily due to increases in available for sale securities, prepaid FDIC deposit insurance assessment and other real estate owned, offset by decreases in net loans receivable and net deferred tax assets. Available for sale securities increased $20.9 million, or 12.8%, from $162.7 million at December 31, 2008 to $183.6 million at December 31, 2009 as a result of purchases of predominately U.S. government and agency obligations. The prepaid FDIC deposit insurance assessment of $3.5 million represents the estimated FDIC assessment for the years of 2010 through 2012. As assessments are incurred, a charge will be made to earnings with an offsetting credit to the prepaid asset. Other real estate owned increased $3.7 million, and consists of four residential and four commercial real estate properties. Cash and cash equivalents increased $1.0 million to $24.2 million at December 31, 2009.

Loans Receivable, Net. Despite increases in residential mortgage loan originations, net loans receivable decreased $9.6 million from the sale of $56.3 million in longer-term fixed-rate residential mortgage loans and lower commercial mortgage and business loans originations. Overall loan originations increased $4.7 million, or 3.3%, during the year ended December 31, 2009 compared to the same period in 2008 due

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primarily to a decrease in market interest rates for residential mortgage loans. The conversion of construction loans to permanent mortgage loans and principal pay-offs contributed to the decrease in construction loans. Changes in the loan portfolio consisted of the following:

• Residential Mortgage Loans. Residential mortgage loans continue to represent the largest segment of the Company’s loan portfolio at December 31, 2009, comprising 50.1% of total loans. Due to residential mortgage loan sales, residential mortgage loans decreased $26.2 million, despite an increase of $55.7 million in residential mortgage loan originations over 2008. The increase in residential mortgage loan originations was partially offset by the sale of $56.3 million in residential mortgage loans from current production during 2009.

• Commercial Loans. At December 31, 2009, the commercial loan portfolio represented 43.8% of the Company’s total loan portfolio. Multi-family and commercial mortgage loans increased $1.1 million, or 0.7%. Commercial business loans increased $26.9 million for 2009 as a result of the purchase of $40.9 million in United States Department of Agriculture (“USDA”) and Small Business Administration (“SBA”) loans that are fully guaranteed by the U.S. government. The Company’s continued strategy is to increase the percentage of the Company’s assets in commercial loans, including commercial mortgage and commercial business loans. To accomplish this goal, the Company is offering additional banking services to its customers and promoting stronger business development to obtain new business banking relationships, while maintaining strong credit quality.

• Consumer Loans. Consumer loans represent 4.3% of the Company’s total loan portfolio. Consumer loans increased $4.0 million, or 18.0%, resulting from an increase in home equity lines of credit.

The allowance for loan losses totaled $4.9 million at December 31, 2009 compared to $6.0 million at December 31, 2008. The ratio of the allowance for loan losses to total loans decreased from 0.97% at December 31, 2008 to 0.80% at December 31, 2009, primarily as a result of a decrease of $969,000 in specific reserves and an increase of $31.6 million in SBA and USDA loans that are fully guaranteed by the U.S. Government and therefore, require no allowance for loan losses.

Liabilities. Total liabilities increased $14.7 million, or 1.9%, from December 31, 2008 to December 31, 2009 primarily as a result of an increase in deposits. Deposits increased $38.1 million, or 6.1%, which included increases in NOW and money market accounts of $33.1 million, noninterest-bearing demand deposits of $7.8 million and savings accounts of $818,000, offset by a decrease in certificates of deposit of $3.5 million. The increase in deposits was the result of branch expansion, marketing initiatives and competitively-priced deposit products, such as the Bank’s e.SI checking product, which increased $12.7 million during 2009. Certificates of deposit decreased as customers transferred their deposits to certain higher-yielding NOW and money market products. Borrowings decreased $23.5 million from $147.8 million at December 31, 2008 to $124.3 million at December 31, 2009, resulting from net repayments of FHLB advances with excess funds from deposit inflows. In addition to repayments and maturities of borrowings, the Bank restructured FHLB borrowings and extended the maturities of certain advances during 2009 as a result of the low interest rate environment. These borrowings were used to fund asset growth and increase liquidity.

Equity:

Summary. Total stockholders’ equity increased $4.5 million from $72.9 million at December 31, 2008 to $77.5 million at December 31, 2009. The increase in equity related to a decrease in net unrealized holding losses on available for sale securities aggregating $3.3 million (net of taxes), amortization of equity incentive plans totaling $854,000 and earnings of $435,000, offset by stock repurchases of 11,243 shares at a cost of $68,000.

The adoption of new accounting guidance regarding the recognition and presentation of OTTI of securities during the quarter ended March 31, 2009 required management to separately identify whether

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OTTI charges totaling $7.1 million that were previously recognized in earnings during the third and fourth quarters of 2008 were related to credit losses or other noncredit factors at the measurement date of impairment. Management determined, based on the present value of expected cash flows in accordance with applicable guidance, that $4.0 million of the $7.1 million in OTTI charges were related to noncredit factors and therefore, recorded a cumulative effect adjustment of $2.7 million (net of taxes) to retained earnings with a corresponding adjustment to accumulated other comprehensive loss. The Company does not intend to sell these impaired securities and it is more likely than not that the Company will not be required to sell these securities before recovery of the amortized cost basis of each of these securities.

Accumulated Other Comprehensive Loss. Accumulated other comprehensive loss is comprised solely of the unrealized holding gains and losses on available for sale securities, net of taxes. Net unrealized holding losses on available for sale securities, net of taxes, totaled $2.4 million at December 31, 2009 compared to net unrealized holding losses on available for sale securities, net of taxes, of $3.0 million at December 31, 2008. 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 income (loss) on the consolidated statement of changes in stockholders’ equity. A majority of the unrealized losses relate to non-agency mortgage-backed securities and collateralized debt obligations. The Company does not intend to sell such securities and it is more likely than not that it will not be required to sell such securities prior to the recovery of its amortized cost basis, which may be at maturity, less any credit losses.

There continues to be a significant contraction of liquidity in the fixed income markets, resulting in a lack of an orderly market for trading and pricing of fixed income securities, with the exception of U.S. Treasuries and agencies and top-rated corporate securities. Mortgage-backed securities from private issuers and preferred securities of financial institutions have been negatively impacted. During 2009, management identified credit losses for certain securities and recognized OTTI losses of $228,000. See Notes 3 and 15 in the Company’s Consolidated Financial Statements for additional details.

Comparison of Operating Results for the Years Ended December 31, 2009 and 2008

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 and other fees. The Company’s noninterest expenses primarily consist of employee compensation and benefits, occupancy, computer services, furniture and equipment, outside professional services, electronic banking fees, 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.

The Company recorded net income of $435,000 for the year ended December 31, 2009, an increase of $3.3 million, compared to a net loss of $2.9 million for the year ended December 31, 2008. The net loss for the year ended December 31, 2008 was primarily attributable to a $7.1 million OTTI charge on certain securities to reduce their carrying value to fair value.

Interest and Dividend Income. Total interest and dividend income decreased $2.9 million, or 6.3%, for 2009, primarily due to a lower yield on interest-earning assets, offset by an increase in interest-earning assets. Lower market interest rates contributed to decreases in the yield of 60 basis points and 40 basis points on securities and loans, respectively, during 2009. Additionally, the yield on loans was negatively impacted by the increase in unrecognized interest related to nonaccrual loans. Average interest-earning assets increased $21.8 million to $823.0 million in 2009, mainly due to a higher average balance of loans

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and, to a lesser extent, a higher average balance on federal funds and other interest-earning assets. The average balance of loans increased $15.8 million while the rate earned on loans decreased to 5.71% for 2009 from 6.11% for 2008.

Interest Expense. Interest expense decreased $3.6 million, or 16.0%, to $18.9 million for 2009 compared to $22.5 million in 2008, primarily due to lower rates paid on interest-bearing liabilities, offset by a higher average balance of deposits. Overall, average rates declined as a result of the lower interest rate environment during 2009. Average deposits rose $34.9 million and the average yield decreased 60 basis points. An increase in NOW and money market accounts totaling $25.3 million contributed the largest increase to the average balance for deposit accounts, as customers shifted from savings accounts to NOW and money market accounts. The average yield on these deposits decreased 68 basis points. The average balance of certificates of deposit increased $13.7 million and the average rate paid decreased 59 basis points to 3.33%. The average balance of FHLB advances decreased $12.2 million and the average yield decreased 25 basis points to 4.15% for 2009. Rates on subordinated borrowings decreased 218 basis points due to a reduction in the three-month LIBOR rate.

Provision for Loan Losses. The Company’s provision for loan losses increased $1.5 million to $2.8 million in 2009. The higher provision relates to an increase in charge-offs due to the impact of continued adverse economic and real estate market conditions. For the year ended December 31, 2009, net loan charge-offs totaled $4.0 million, compared to $567,000 for the year ended December 31, 2008. Specific reserves relating to impaired loans decreased to $267,000 at December 31, 2009 compared to $1.2 million at December 31, 2008. The ratio of the allowance for loan losses to total loans decreased from 0.97% at December 31, 2008 to 0.80% at December 31, 2009. At December 31, 2009, nonperforming loans totaled $3.0 million, as compared to $9.3 million at December 31, 2008. The increase in loan charge-offs and the decrease in nonperforming loans and specific reserves for the year ended December 31, 2009 primarily resulted from the charge-off of two commercial construction loan relationships aggregating $2.9 million that were previously identified as impaired with established specific reserves and the transfer of loans totaling $5.5 million into other real estate owned. While the Company has no direct exposure to sub-prime mortgages in its loan portfolio, economic conditions have negatively impacted the residential and commercial construction markets and contributed to the decrease in credit quality for commercial loans.

Noninterest Income. Total noninterest income increased $6.8 million to $10.0 million in 2009. The following table shows the components of noninterest income and the dollar and percentage changes from 2008 to 2009.

	Years Ended December 31,						Change
(Dollars in Thousands)	2009			2008			Dollars			Percent
Service fees	$	5,033		$	5,251		$	(218	)	(4.2	)%
Wealth management fees		3,912			3,923			(11	)	(0.3	)
Increase in cash surrender value of BOLI		294			304			(10	)	(3.3	)
Net gain on sales of securities		285			463			(178	)	(38.4	)
Net impairment losses recognized in earnings		(228	)		(7,148	)		6,920		(96.8	)
Net gain on sale of loans		577			202			375		185.6
Net gain on sale of equipment		99			—			99		n/a
Other		6			141			(135	)	(95.7	)
Total noninterest income	$	9,978		$	3,136		$	6,842		218.2	%

An increase in noninterest income for the year ended December 31, 2009 primarily resulted from lower OTTI charges and an increase in the net gain on the sale of loans, offset by decreases in service fees and the net gain on the sale of available for sale securities. For 2009, the Company reported a net gain on the sale of loans of $577,000 resulting from the sale of $56.3 million of fixed-rate longer-term residential mortgage loans, compared to a net gain on the sale of loans of $202,000 resulting from the sale of $14.2 million of fixed-rate longer-term residential mortgage loans in 2008. Service fees declined for the year ended December 31, 2009 due to lower overdraft charges on certain deposit products. The Company

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realized net gains on the sale of bonds and stocks totaling $215,000 and $70,000, respectively, during 2009 compared to a net gain on the sale of bonds totaling $463,000 for 2008. Other noninterest income included a net gain of $291,000 in death benefit proceeds received from a bank-owned life insurance policy during 2009, offset by impairment charges of $383,000 and $63,000, which were recorded to reduce the Bank’s carrying value in two small business investment company limited partnerships during the years ended December 31, 2009 and 2008, respectively.

Noninterest Expenses. Noninterest expenses increased $1.4 million for 2009 as compared to 2008. The following table shows the components of noninterest expenses and the dollar and percentage changes from 2008 to 2009.

	Years Ended December 31,				Change
(Dollars in Thousands)	2009		2008		Dollars			Percent
Salaries and employee benefits	$	15,767	$	16,211	$	(444	)	(2.7	)%
Occupancy and equipment		5,559		5,733		(174	)	(3.0	)
Computer and electronic banking services		3,477		3,084		393		12.7
Outside professional services		975		842		133		15.8
Marketing and advertising		791		800		(9	)	(1.1	)
FDIC deposit insurance and regulatory assessments		1,756		567		1,189		209.7
Supplies		524		569		(45	)	(7.9	)
Other		2,556		2,234		322		14.4
Total noninterest expenses	$	31,405	$	30,040	$	1,365		4.5	%

Noninterest expenses increased in 2009 primarily due to increases in the FDIC assessment, computer and electronic banking services, other noninterest expenses and outside professional services. The increase in the FDIC assessment of $1.2 million for the year ended December 31, 2009 was attributable to the expiration of credits during 2008, an increase in the assessment rate for 2009 and an FDIC-imposed industry-wide 5 basis point special assessment totaling $393,000. Computer and electronic banking services expense increased due to higher telecommunication costs and transaction activity. Other noninterest expenses increased as a result of higher custodian fees for trust operations of $167,000, prepayment penalties for the early extinguishment of FHLB borrowings of $111,000 and an increase in mortgage appraisal fees of $122,000, offset by a decrease in the provision for credit losses of $124,000. Additionally, the Company recorded an impairment charge of $57,000 during the fourth quarter of 2009 on the goodwill from its New London branch acquisition in 2008. The decrease in salaries and employee benefits primarily related to higher deferred costs associated with the increase in residential mortgage originations in 2009. Occupancy and equipment expense was impacted by the Company’s purchase of the Norwich, Connecticut branch office and the training facility, resulting in lower lease expense for 2009.

Income Tax Provision. For 2009, the Company had an income tax provision of $35,000 compared to an income tax benefit of $1.4 million for 2008. The income tax provision for 2009 resulted from an increase in taxable income, offset by a nontaxable gain on bank-owned life insurance proceeds. The effective tax rate was 7.4% and 32.1% for 2009 and 2008, respectively. For the year ended December 31, 2009, the effective tax rate was impacted by an increase in the valuation allowance to $139,000 from $118,000 at December 31, 2008 due to the uncertainty of realization of the Company’s charitable contribution deduction. For the year ended December 31, 2008, the valuation allowance of $118,000 was established due to the uncertainty of realization of federal capital loss carry-forwards and OTTI losses on equity securities. As a result of the Emergency Economic Stabilization Act of 2008 (“EESA”), which was enacted into law in October 2008, the Company recorded a deferred tax benefit during the year ended December 31, 2008 associated with the OTTI losses recognized for the Company’s preferred stock holdings of Fannie Mae and Freddie Mac. Prior to the enactment of EESA, such losses were treated as capital losses for both tax and financial reporting purposes. Under EESA, ordinary loss treatment is available to financial institutions for such securities.

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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 securities and FHLB 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 regularly adjusts its investment in liquid assets based upon its assessment of (1) expected loan demand, (2) expected deposit flows, (3) yields available on interest-earning deposits and securities and (4) the objectives of the Company’s asset/liability management, funds management and liquidity policies. The Company’s policy is to maintain liquid assets less short-term liabilities within a range of 10.0% to 20.0% of total assets. Liquid assets were 15.8% of total assets at December 31, 2009. Excess liquid assets are generally invested in interest-earning deposits and short- and intermediate-term securities.

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 December 31, 2009, cash and cash equivalents totaled $24.2 million. Interest-bearing deposits and federal funds sold totaled $11.3 million, which included a $1.5 million certificate of deposit pledged to support a letter of credit for MasterCard’s settlement guarantee program. Securities classified as available for sale, which provide additional sources of liquidity, totaled $183.6 million at December 31, 2009. In addition, at December 31, 2009, the Company had the ability to borrow an additional $63.4 million from the FHLB, which includes overnight lines of credit of $10.0 million. On that date, the Company had FHLB advances outstanding of $116.1 million and no overnight advances outstanding. Additionally, the Company has the ability to access the Federal Reserve Bank’s Discount Window on a collateralized basis. The Company believes that its liquid assets combined with the available line from the FHLB provide adequate liquidity to meet its current financial obligations.

At December 31, 2009, the Bank had $51.8 million in loan commitments outstanding, which included $9.8 million in undisbursed construction loans, $18.7 million in unused home equity lines of credit, $12.4 million in commercial lines of credit, $8.6 million in commitments to grant loans, $1.4 million in overdraft protection lines and $784,000 in standby letters of credit. Certificates of deposit due within one year of December 31, 2009 totaled $200.3 million, or 30.4% of total deposits. Management believes that the amount of deposits in shorter-term certificates of deposit reflects customers’ hesitancy to invest their funds in longer-term certificates of deposit due to the uncertain interest rate environment. To compensate, the Bank has increased the duration of its borrowings with the FHLB and offered attractive rates on certain certificates of deposit in an effort to extend the maturity of its deposits. The Bank will be required to seek other sources of funds, including other certificates of deposit and lines of credit, if maturing certificates of deposit are not retained. Depending on market conditions, the Bank may be required to pay higher rates on such deposits or other borrowings than are currently paid on certificates of deposit. Additionally, a shorter duration in the securities portfolio may be necessary to provide liquidity to compensate for any deposit outflows. The Bank believes, however, based on past experience, a significant portion of its certificates of deposit will be retained. The Bank has the ability, if necessary, to adjust the interest rates offered to its customers in an effort to attract and retain deposits.

The Company’s primary investing activities are the origination of loans and the purchase of securities and loans. For the year ended December 31, 2009, the Bank originated $146.3 million of loans and purchased $95.1 million of securities and $40.9 million of loans. In fiscal 2008, the Bank originated $141.6 million of loans and purchased $100.8 million of securities and $12.3 million of loans.

- 11 -

Financing activities consist primarily of activity in deposit accounts and in FHLB advances. The increased liquidity needed to fund asset growth has been provided through increased deposits. The net increase in total deposits, including mortgagors’ and investors’ escrow accounts, was $38.1 million and $72.5 million for the years ended December 31, 2009 and 2008, respectively. Deposit flows are affected by the overall level of interest rates, the interest rates and products offered by us and our local competitors and other factors. The Bank generally manages the pricing of its deposits to be competitive and to increase core deposits and commercial banking relationships. Occasionally, the Bank offers promotional rates on certain deposit products to attract deposits. The Bank decreased FHLB advances by $23.5 million and $2.0 million for the years ended December 31, 2009 and 2008, respectively, with excess funds from the increase in deposits.

In February 2008, the Company’s Board of Directors approved the repurchase of up to 596,000 shares of the Company’s outstanding common stock. During 2009, the Company repurchased 11,243 shares at a cost of $68,000. At December 31, 2009, the remaining shares that may be repurchased under this plan totaled 449,452.

SI Financial Group is a separate legal entity from the Bank and must provide for its own liquidity. In addition to its operating expenses, SI Financial Group is responsible for paying any dividends declared to its shareholders and payment on its subordinated debentures. SI Financial Group also has repurchased shares of its common stock. SI Financial Group’s primary source of income is dividends received from the Bank. The amount of dividends that the Bank may declare and pay to SI Financial Group in any calendar year, without the receipt of prior approval from the Office of Thrift Supervision (“OTS”), but with prior notice to OTS, cannot exceed net income for that year to date plus retained net income (as defined) for the preceding two calendar years. At December 31, 2009, SI Financial Group had cash and cash equivalents of $3.6 million.

The Bank is subject to various regulatory capital requirements administered by the OTS, 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. At December 31, 2009, the Bank exceeded all of its regulatory capital requirements and is considered “well capitalized” under regulatory guidelines. As a savings and loan holding company regulated by the OTS, the Company is not subject to any separate regulatory capital requirements. See Note 14 in the Company’s Consolidated Financial Statements for additional information relating to the Bank’s regulatory capital requirements.

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.

- 12 -

The contractual amounts 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 December 31, 2009 and 2008 are as follows:

	December 31,
(Dollars in Thousands)	2009		2008
Commitments to extend credit: (1)
Future loan commitments	$	8,648	$	5,386
Undisbursed construction loans		9,843		19,840
Undisbursed home equity lines of credit		18,733		18,327
Undisbursed commercial lines of credit		12,390		13,507
Overdraft protection lines		1,425		1,434
Standby letters of credit (2)		784		710
Total commitments	$	51,823	$	59,204

⁽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.

The Bank is a limited partner in two Small Business Investment Corporations. At December 31, 2009, the Bank’s remaining off-balance sheet commitment for the capital investments was $757,000. See Note 12 in the Company’s Consolidated Financial Statements.

In 2004, the Bank established an Employee Stock Ownership Plan (“ESOP”) for the benefit of its eligible employees. At December 31, 2009, the Bank had repaid principal payments on the loan to the ESOP of $1.3 million and allocated shares and shares held in suspense and committed to be released to participants totaled 133,485 and 32,295, respectively. As of December 31, 2009, the amount of unallocated common shares held in suspense totaled 322,955, with a fair value of $1.7 million, which represents a commitment of the Bank to the ESOP. See Note 11 in the Company’s Consolidated Financial Statements.

As of December 31, 2009, the Company did not engage in any off-balance sheet transactions reasonably likely to have a material effect on its financial condition, results of operations or cash flows. See Note 12 in the Company’s Consolidated Financial Statements.

Impact of Inflation and Changes in Prices

The financial statements and financial data presented within this document have been prepared in accordance with accounting principles generally accepted in the United States of America, which require the measurement of financial position and operating results in terms of historical dollars without considering the change in the relative purchasing power of money over time due to inflation. The primary impact of inflation on our operations is reflected in increased operating costs. Unlike most industrial companies, virtually all the assets and liabilities of a financial institution are monetary in nature. As a result, interest rates generally have a more significant impact on a financial institution’s performance than do the effects of general levels of inflation. Interest rates do not necessarily move in the same direction or to the same extent as the prices of goods and services.

Impact of Recent Accounting Standards

For information relating to new accounting pronouncements, reference Note 1 – “Nature of Business and Summary of Significant Accounting Policies – Recent Accounting Pronouncements” in the Company’s Consolidated Financial Statements.

- 13 -

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Stockholders of

SI Financial Group, Inc.

We have audited the accompanying consolidated balance sheets of SI Financial Group, Inc. and subsidiaries (the “Company”) as of December 31, 2009 and 2008, and the related consolidated statements of operations, changes in stockholders’ equity and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of SI Financial Group, Inc. and subsidiaries as of December 31, 2009 and 2008, and the results of their operations and their cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.

Boston, Massachusetts

March 11, 2010

SI FINANCIAL GROUP, INC.

CONSOLIDATED BALANCE SHEETS

(Dollars in Thousands, Except Share Amounts)

	December 31,
	2009			2008
ASSETS:
Cash and due from banks:
Noninterest-bearing	$	12,889		$	14,008
Interest-bearing		2,350			465
Federal funds sold		8,965			8,730
Total cash and cash equivalents		24,204			23,203
Available for sale securities, at fair value		183,562			162,699
Loans held for sale		396			—
Loans receivable (net of allowance for loan losses of $4,891 and $6,047 at December 31, 2009 and 2008, respectively)		607,692			617,263
Federal Home Loan Bank stock, at cost		8,388			8,388
Bank-owned life insurance		8,734			8,714
Premises and equipment, net		12,966			12,225
Goodwill and other intangibles		4,195			4,294
Accrued interest receivable		3,341			3,721
Deferred tax asset, net		6,078			7,938
Other real estate owned, net		3,680			—
Prepaid FDIC deposit insurance assessment		3,549			—
Other assets		5,569			4,677
Total assets	$	872,354		$	853,122
LIABILITIES AND STOCKHOLDERS’ EQUITY:
Liabilities:
Deposits:
Noninterest-bearing	$	65,407		$	57,647
Interest-bearing		593,380			563,004
Total deposits		658,787			620,651
Mortgagors’ and investors’ escrow accounts		3,591			3,625
Federal Home Loan Bank advances		116,100			139,600
Junior subordinated debt owed to unconsolidated trust		8,248			8,248
Accrued expenses and other liabilities		8,166			8,071
Total liabilities		794,892			780,195
Commitments and contingencies (Notes 6, 11 and 12)
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; 11,789,202 and 11,800,445 shares outstanding at December 31, 2009 and 2008, respectively)		126			126
Additional paid-in capital		52,230			52,103
Unallocated common shares held by ESOP		(3,230	)		(3,553	)
Unearned restricted shares		(193	)		(714	)
Retained earnings		38,883			35,848
Accumulated other comprehensive loss		(2,389	)		(2,986	)
Treasury stock, at cost (774,548 and 763,305 shares at December 31, 2009 and 2008, respectively)		(7,965	)		(7,897	)
Total stockholders’ equity		77,462			72,927
Total liabilities and stockholders’ equity	$	872,354		$	853,122

See accompanying notes to consolidated financial statements.

- 15 -

SI FINANCIAL GROUP, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(Dollars in Thousands, Except Share Amounts)

	Years Ended December 31,
	2009			2008
Interest and dividend income:
Loans, including fees	$	35,643		$	37,192
Securities:
Taxable interest		7,744			8,516
Tax-exempt interest		47			13
Dividends		42			412
Other		112			366
Total interest and dividend income		43,588			46,499
Interest expense:
Deposits		13,183			15,738
Federal Home Loan Bank advances		5,461			6,324
Subordinated debt		217			397
Total interest expense		18,861			22,459
Net interest income		24,727			24,040
Provision for loan losses		2,830			1,369
Net interest income after provision for loan losses		21,897			22,671
Noninterest income:
Total other-than-temporary impairment losses on securities		(894	)		(7,148	)
Portion of losses recognized in other comprehensive income		666			—
Net impairment losses recognized in earnings		(228	)		(7,148	)
Service fees		5,033			5,251
Wealth management fees		3,912			3,923
Increase in cash surrender value of bank-owned life insurance		294			304
Net gain on sales of securities		285			463
Net gain on sale of loans		577			202
Net gain on sale of equipment		99			—
Other		6			141
Total noninterest income		9,978			3,136
Noninterest expenses:
Salaries and employee benefits		15,767			16,211
Occupancy and equipment		5,559			5,733
Computer and electronic banking services		3,477			3,084
Outside professional services		975			842
Marketing and advertising		791			800
FDIC deposit insurance and regulatory assessments		1,756			567
Supplies		524			569
Other		2,556			2,234
Total noninterest expenses		31,405			30,040
Income (loss) before income taxes		470			(4,233	)
Income tax provision (benefit)		35			(1,360	)
Net income (loss)	$	435		$	(2,873	)
Net income (loss) per share:
Basic	$	0.04		$	(0.25	)
Diluted	$	0.04		$	(0.25	)

See accompanying notes to consolidated financial statements.

- 16 -

SI FINANCIAL GROUP, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

YEARS ENDED DECEMBER 31, 2009 AND 2008

(Dollars in Thousands, Except Share Amounts)

	Common Stock			Additional Paid-in Capital			Unallocated Common Shares Held by ESOP			Unearned Restricted Shares			Retained Earnings			Accumulated Other Comprehensive (Loss) Income			Treasury Stock			Total Stockholders’ 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
Cumulative effect adjustment of a change in accounting principle for split-dollar life insurance	—		—		—			—			—			(547	)		—			—			(547	)
Comprehensive loss:
Net loss	—		—		—			—			—			(2,873	)		—			—			(2,873	)
Net unrealized loss on available for sale securities, net of reclassification adjustment and tax effects	—		—		—			—			—			—			(3,490	)		—			(3,490	)
Total comprehensive loss																							(6,363	)
Cash dividends declared ($0.16 per share)	—		—		—			—			—			(665	)		—			—			(665	)
Equity incentive plan shares earned	—		—		301			—			467			—			—			—			768
Allocation of 32,295 ESOP shares	—		—		(44	)		323			—			—			—			—			279
Tax deficiency from share-based stock compensation	—		—		(6	)		—			—			—			—			—			(6	)
Treasury stock purchased (270,655 shares)	—		—		—			—			—			—			—			(2,626	)		(2,626	)
BALANCE AT DECEMBER 31, 2008	12,563,750		126		52,103			(3,553	)		(714	)		35,848			(2,986	)		(7,897	)		72,927
Cumulative effect adjustment of a change in accounting principle for impairment of securities	—		—		—			—			—			2,717			(2,717	)		—			—
Comprehensive income:
Net income	—		—		—			—			—			435			—			—			435
Net unrealized gain on available for sale securities, net of reclassification adjustment and tax effects	—		—		—			—			—			—			3,314			—			3,314
Total comprehensive income	—																						3,749
Treasury stock purchased (11,243 shares)	—		—		—			—			—			—			—			(68	)		(68	)
Restricted shares activity	—		—		37			—			80			(117	)		—			—			—
Equity incentive plan shares earned	—		—		301			—			441			—			—			—			742
Allocation of 32,295 ESOP shares	—		—		(168	)		323			—			—			—			—			155
Tax deficiency from share-based stock compensation	—		—		(43	)		—			—			—			—			—			(43	)
BALANCE AT DECEMBER 31, 2009	12,563,750	$	126	$	52,230		$	(3,230	)	$	(193	)	$	38,883		$	(2,389	)	$	(7,965	)	$	77,462

See accompanying notes to consolidated financial statements.

- 17 -

SI FINANCIAL GROUP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in Thousands)

	Years Ended December 31,
	2009			2008
Cash flows from operating activities:
Net income (loss)	$	435		$	(2,873	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Provision for loan losses		2,830			1,369
Employee stock ownership plan expense		155			279
Equity incentive plan expense		742			768
Accretion of investment premiums and discounts, net		(101	)		(224	)
Amortization of loan premiums and discounts, net		282			274
Depreciation and amortization of premises and equipment		1,926			2,074
Amortization of core deposit intangible		42			53
Net gain on sales of securities		(285	)		(463	)
Deferred income tax provision (benefit)		275			(2,870	)
Loans originated for sale		(56,732	)		(13,822	)
Proceeds from sale of loans held for sale		56,913			14,434
Net gain on sale of loans		(577	)		(202	)
Net gain on sale of equipment		(99	)		—
Net gain on sale of other real estate owned		(16	)		(10	)
Increase in cash surrender value of bank-owned life insurance		(294	)		(304	)
Gain on bank-owned life insurance proceeds		(291	)		—
Impairment losses on securities		228			7,148
Change in operating assets and liabilities:
Accrued interest receivable		380			(153	)
Other assets		(4,480	)		(807	)
Accrued expenses and other liabilities		52			1,039
Net cash provided by operating activities		1,385			5,710
Cash flows from investing activities:
Purchases of available for sale securities		(95,071	)		(100,810	)
Proceeds from sale of available for sale securities		24,483			19,981
Proceeds from maturities of and principal repayments on available for sale securities		54,782			47,720
Net decrease (increase) in loans		41,803			(11,646	)
Purchase of Federal Home Loan Bank stock		—			(586	)
Purchase of loans receivable		(40,876	)		(12,281	)
Proceeds from bank-owned life insurance		565			—
Proceeds from sale of other real estate owned		1,865			923
Purchases of premises and equipment		(3,518	)		(1,808	)
Net cash (paid) received from branch (sale) acquisitions		(619	)		15,805
Net cash used in investing activities		(16,586	)		(42,702	)
Cash flows from financing activities:
Net increase in deposits		39,804			44,648
Net (decrease) increase in mortgagors’ and investors’ escrow accounts		(34	)		188
Proceeds from Federal Home Loan Bank advances		37,300			53,507
Repayments of Federal Home Loan Bank advances		(60,800	)		(55,526	)
Cash dividends on common stock		—			(665	)
Treasury stock purchased		(68	)		(2,626	)
Net cash provided by financing activities		16,202			39,526

(continued on next page)

- 18 -

SI FINANCIAL GROUP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS - Concluded

(Dollars in Thousands)

	Years Ended December 31,
	2009		2008
Net change in cash and cash equivalents		1,001		2,534
Cash and cash equivalents at beginning of year		23,203		20,669
Cash and cash equivalents at end of year	$	24,204	$	23,203
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid on deposits and borrowed funds	$	19,050	$	22,488
Income taxes paid, net		731		1,356
Transfer of loans to other real estate owned		5,529		—
Branch sale: Cash paid for the disposition of net liabilities related to the sale of the branch office located in Gales Ferry, Connecticut in January 2009 were as follows:
Assets:
Loans receivable	$	3
Fixed assets, net		950
Other assets		96
Total assets		1,049
Liabilities:
Deposits		1,668
Total liabilities		1,668
Net liabilities	$	619
Branch acquisitions: Cash received for the assumption of net liabilities related to the purchase of branch offices located in Colchester and New London, Connecticut in January 2008 and March 2008, respectively, were as follows:
Assets:
Loans receivable			$	7,441
Accrued interest - loans				40
Core deposit intangible				159
Fixed assets, net				685
Goodwill				3,545
Total assets				11,870
Liabilities:
Deposits				27,668
Accrued interest - deposits				7
Total liabilities				27,675
Net liabilities			$	15,805

See accompanying notes to consolidated financial statements.

- 19 -

SI FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2009 AND 2008

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-one offices in eastern Connecticut. Its 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. 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. The Company does not conduct any significant business other than owning all of the stock of the Bank.

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 consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and general practices within the banking industry. 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 balance sheet and reported amounts of revenues and expenses for the years 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, other-than-temporary impairment (“OTTI”) of securities, deferred income taxes and the impairment of long-lived assets.

Reclassifications

Certain amounts in the Company’s 2008 consolidated financial statements have been reclassified to conform to the 2009 presentation. Such reclassifications had no effect on net income.

Significant Group Concentrations of Credit Risk

Most of the Company’s activities are with customers located within eastern Connecticut. The Company does not have any significant concentrations in any one industry or customer. See Notes 3 and 4 in the Notes to the Company’s Consolidated Financial Statements for details relating to the Company’s investment and lending activities.

Cash and Cash Equivalents and Statements of Cash Flows

Cash and due from banks, federal funds sold and short-term investments with original maturities of less than 90 days are recognized as cash equivalents in the statements of cash flows. Federal funds sold generally mature in one day. For purposes of reporting cash flows, the Company considers all highly liquid debt instruments purchased with a maturity of three months or less to be cash equivalents. Cash flows from loans and deposits are reported on a net basis. The Company maintains amounts due from banks and federal funds sold that, at times, may exceed federally insured limits. The Company has not experienced any losses from such concentrations.

- 20 -

SI FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2009 AND 2008

Fair Value Hierarchy

The Company groups its financial assets and financial liabilities in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value.

Level 1 – Valuation is based on quoted prices in active markets for identical assets or liabilities. Level 1 assets and liabilities generally include debt and equity securities that are traded in an active exchange market. Valuations are obtained from readily available pricing sources for market transactions involving identical assets or liabilities.

Level 2 – Valuation is based on observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. For example, Level 2 assets and liabilities may include debt securities with quoted prices that are traded less frequently than exchange-traded instruments or mortgage loans held for sale, for which the fair value is based on what the securitization market is currently offering for mortgage loans with similar characteristics.

Level 3 – Valuation is based on unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Level 3 assets and liabilities include financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation. This category generally includes certain asset-backed securities, certain private equity investments, residential mortgage servicing rights and long-term derivative contracts.

Securities

Management determines the appropriate classification of securities at the date individual securities are acquired, and the appropriateness of such classification is reassessed at each balance sheet date.

Debt securities that management has the positive intent and ability to hold to maturity are classified as “held to maturity” and recorded at amortized cost. Securities purchased and held principally for the purpose of trading in the near term are classified as “trading securities.” These securities are carried at fair value, with unrealized gains and losses recognized in earnings. Securities not classified as held to maturity or trading, including equity securities with readily determinable fair values, are classified as “available for sale” and recorded at fair value, with unrealized gains and losses excluded from earnings and reported in other comprehensive income (loss), net of taxes.

Purchase premiums and discounts are recognized in interest income using the interest method over the terms of the securities. Gains and losses on the sale of securities are recorded on the trade date and are determined using the specific identification method.

At each reporting period, the Company evaluates all securities classified as available for sale or held to maturity with a decline in fair value below the amortized cost of the investment to determine whether or not the impairment is deemed to have OTTI.

In April 2009, the Company adopted new authoritative guidance regarding recognition and presentation of other-than-temporary impairments which amends the OTTI guidance for debt securities to make the guidance more operational and to improve the presentation and disclosure of OTTI on debt and equity securities in the financial statements. This guidance does not amend existing recognition and measurement guidance related to OTTI of equity securities.

- 21 -

SI FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2009 AND 2008

Marketable equity securities are evaluated for OTTI based on the severity and duration of the impairment and, if deemed to be other-than-temporary, the declines in fair value are reflected in earnings as realized losses. For debt securities, OTTI is required to be recognized (1) if the Company intends to sell the security; (2) if it is “more likely than not” that the Company will be required to sell the security before recovery of its amortized cost basis; or (3) the present value of expected cash flows is not sufficient to recover the entire amortized cost basis. For all impaired debt securities that the Company intends to sell, or more likely than not will be required to sell, the full amount of the depreciation is recognized as OTTI through earnings. Credit-related OTTI for all other impaired debt securities is recognized through earnings. Noncredit-related OTTI for such debt securities is recognized in other comprehensive income (loss), net of applicable taxes. The adoption of this new authoritative guidance resulted in a cumulative effect adjustment of $2.7 million (net of taxes) to retained earnings with a corresponding adjustment to accumulated other comprehensive loss. See Notes 3 and 15 for more details.

Federal Home Loan Bank Stock

The Bank, as a member of the Federal Home Loan Bank of Boston (“FHLB”), is required to maintain an investment in capital stock of the FHLB. Based on redemption provisions of the FHLB, the stock has no quoted market value and is carried at cost. At its discretion, the FHLB may declare dividends on its stock. The stock is redeemable at par by the FHLB and the Company’s ability to redeem the shares owned is dependent on the redemption practices of the FHLB. The Company reviews its investment in FHLB stock for impairment based on the ultimate recoverability of the cost basis in the FHLB stock.

At December 31, 2009, the Bank owned $8.4 million of FHLB stock. Regional banks within the Federal Home Loan Bank System have experienced higher levels of OTTI in their private label mortgage-backed securities and home equity loans, which has raised concerns about whether their capital levels could be reduced below regulatory requirements. In response to unprecedented market conditions and potential future losses, the FHLB has implemented an initiative to preserve capital by the adoption of a revised retained earnings target, declaration of a moratorium on excess stock repurchases and the suspension of cash dividend payments. The Bank anticipates it will not receive dividends on its holdings in FHLB stock for the foreseeable future. There can be no assurance that the impact of recent market conditions on the financial condition of the Federal Home Loan Banks or future legislation on the Federal Home Loan Banks will not cause a decrease in the value of FHLB stock held by the Bank. Based on the Company’s evaluation of the underlying investment, including the long-term nature of the investment, the liquidity position of the FHLB, the actions taken by the FHLB to address its regulatory capital situation and the Bank’s intent and ability to hold the investment for a period of time sufficient to recover its cost, the Bank did not recognize an OTTI loss for the years ended December 31, 2009 and 2008 on its investment of FHLB stock. Moody’s Investor Service has affirmed the FHLB’s credit rating of Aaa in July 2009. Although OTTI losses have not been recognized on the Bank’s FHLB stock, continued deterioration in FHLB’s financial position may result in future impairment losses.

Loans Held for Sale

Loans originated and intended for sale in the secondary market are carried at the lower of amortized cost or fair value, as determined by aggregate outstanding commitments from investors or current investor yield requirements. Net unrealized losses, if any, are recognized through a valuation allowance by charges to noninterest income. Gains or losses on sales of mortgage loans are recognized based on the difference between the selling price and the carrying value of the related mortgage loans sold on the trade date.

- 22 -

SI FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2009 AND 2008

Transfers of Financial Assets

Transfers of financial assets are accounted for as sales, when control over the assets has been surrendered. Control over transferred assets is deemed to be surrendered when (1) the assets have been isolated from the Company, (2) the transferee obtains the right to pledge or exchange the transferred assets and no condition both constrains the transferee from taking advantage of that right and provides more than a trivial benefit for the transferor and (3) the transferor does not maintain effective control over the transferred assets through either (a) an agreement that both entitles and obligates the transferor to repurchase or redeem the assets before maturity or (b) the ability to unilaterally cause the holder to return specific assets.

Loans Receivable

Loans receivable are stated at current unpaid principal balances, net of the allowance for loan losses and deferred loan origination fees and costs. Management has the ability and intent to hold its loans receivable for the foreseeable future or until maturity or pay-off.

A loan is impaired when it is probable the Company will be unable to collect all contractual principal and interest payments due in accordance with the terms of the loan agreement. Impairment is measured on a loan by loan basis for residential and commercial mortgage loans and commercial business loans by either the present value of expected future cash flows discounted at the loan’s effective interest rate or, as a practical expedient, at the loan’s observable market price or the fair value of the collateral if the loan is collateral dependent. Large groups of smaller balance homogeneous loans are collectively evaluated for impairment. Accordingly, the Company does not separately identify individual consumer loans for impairment disclosures, unless such loans are subject to a troubled debt restructuring agreement.

The Company periodically may agree to modify the contractual terms of loans. When a loan is modified and concessions have been made to the original contractual terms, such as reductions of interest rates or deferral of interest or principal payments, due to the borrower’s financial condition, the modification is considered a troubled debt restructuring (“TDR”). All TDRs are initially classified as impaired.

Management considers all nonaccrual loans and restructured loans to be impaired. In most cases, loan payments less than 90 days past due are considered minor collection delays and the related loans are generally not considered impaired.

Allowance for Loan Losses

The allowance for loan losses, a material estimate which could change significantly in the near-term, is established through a provision for loan losses charged to earnings to account for losses that are inherent in the loan portfolio and estimated to occur, and is maintained at a level that management considers adequate to absorb losses in the loan portfolio. Loan losses are charged against the allowance for loan losses when management believes that the uncollectibility of the principal loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance for loan losses when received. In the determination of the allowance for loan losses, management may obtain independent appraisals for significant properties, if necessary.

Management’s judgment in determining the adequacy of the allowance is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available. The allowance for loan losses is evaluated on a monthly basis by management and is based on the evaluation of the known and inherent risk characteristics and size and composition of the loan portfolio, the assessment of current economic and real estate market conditions, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral, historical loan loss experience and evaluations of loans and other relevant factors.

- 23 -

SI FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2009 AND 2008

The allowance for loan losses consists of the following key elements:

• Specific allowance for identified impaired loans. For such loans that are identified as impaired, an allowance is established when the discounted cash flows (or collateral value or observable market price if the loan is collateral dependent) of the impaired loan are lower than the carrying value of that loan.

• General valuation allowance, which represents a valuation allowance on the remainder of the loan portfolio, after excluding impaired loans. For this portion of the allowance, loans are segregated by category and assigned allowance percentage based on historical loan loss experience adjusted for qualitative factors.

The majority of the Company’s loans are collateralized by real estate located in eastern Connecticut. Accordingly, the collateral value of a substantial portion of the Company’s loan portfolio and real estate acquired through foreclosure is susceptible to changes in market conditions.

Although management believes that it uses the best information available to establish the allowance for loan losses, future additions to the allowance may be necessary as a result of changes in economic conditions and other factors.

Interest and Fees on Loans

Interest on loans is accrued and included in net interest income based on contractual rates applied to principal amounts outstanding. Accrual of interest is discontinued when loan payments are 90 days or more past due, based on contractual terms, or when, in the judgment of management, collectibility of the loan or loan interest becomes uncertain. Subsequent recognition of income occurs only to the extent payment is received subject to management’s assessment of the collectibility of the remaining interest and principal. A nonaccrual loan is restored to accrual status when it is no longer delinquent and collectibility of interest and principal is no longer in doubt. Interest collected on nonaccrual loans and impaired loans is recognized only to the extent cash payments are received, and may be recorded as a reduction to principal if the collectibility of the principal balance of the loan is unlikely.

Loan origination fees and direct loan origination costs are deferred, and the net amount is recognized as an adjustment of the related loan’s yield utilizing the interest method over the contractual life of the loan.

Other Real Estate Owned

Other real estate owned consists of properties acquired through, or in lieu of, loan foreclosure or other proceedings and is initially recorded at the lower of the related loan balances less any specific allowance for loss or fair value at the date of foreclosure, establishing a new cost basis. Subsequent to foreclosure, the properties are held for sale and are carried at the lower of cost or fair value less estimated costs of disposal. Any write-down to fair value at the time of acquisition is charged to the allowance for loan losses. Properties are evaluated regularly to ensure the recorded amounts are supported by current fair values, and a charge to operations is recorded as necessary to reduce the carrying amount to fair value less estimated costs to dispose. Revenue and expense from the operation of other real estate owned and the provision to establish and adjust valuation allowances are included in noninterest expenses. Costs relating to the development and improvement of the property are capitalized, subject to the limit of fair value of the collateral. Gains or losses are included in noninterest expenses upon disposal. See Note 5 for additional details related to other real estate owned.

Income Taxes

Deferred income tax assets and liabilities are determined using the liability (or balance sheet) method. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences

- 24 -

SI FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2009 AND 2008

attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The Company exercises significant judgment in evaluating the amount and timing of recognition of the resulting tax assets and liabilities. These judgments require us to make projections of future taxable income. These judgments and estimates, which are inherently subjective, are reviewed periodically as regulatory and business factors change. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that all or some portion of the deferred tax assets will not be realized. The Company does not have any uncertain tax positions at December 31, 2009 which require accrual or disclosure. Future interest and penalties related to unrecognized tax benefits, if any, will be reported as income tax expense in the Company’s consolidated statements of operations.

Income tax benefits related to stock compensation in excess of grant date fair value less any proceeds on exercise are recognized as an increase to additional paid-in capital upon vesting or exercising and delivery of the stock. Any income tax effects related to stock compensation that are less than grant date fair value less any proceeds on exercise would be recognized as a reduction of additional paid-in capital to the extent of previously recognized income tax benefits and then through income tax expense for the remaining amount.

Premises and Equipment

Land is carried at cost. Premises and equipment are stated at cost, net of accumulated depreciation and amortization. Depreciation is charged to operations using the straight-line method over the estimated useful lives of the related assets. Leasehold improvements are amortized over the shorter of the estimated economic lives of the improvements or the expected lease terms. Expected terms include lease option periods to the extent that the exercise of such options is reasonably assured. The estimated useful lives of the assets are as follows:

Classification	Estimated Useful Lives
Buildings	5 to 40 years
Furniture and equipment	3 to 10 years
Leasehold improvements	3 to 20 years

Gains and losses on dispositions are recognized upon realization. Maintenance and repairs are expensed as incurred and improvements are capitalized.

Impairment of Long-lived Assets

Long-lived assets, including premises and equipment and certain identifiable intangible assets that are held and used by the Company, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If impairment is indicated by that review, the asset is written down to its estimated fair value through a charge to noninterest expenses.

Goodwill and other intangibles are evaluated for impairment annually, or more frequently if events or changes in circumstances warrant such evaluation. Financial information for the Colchester and New London, Connecticut branch locations and SI Trust Servicing, which represent the reporting units, is used for evaluating goodwill for impairment. In performing the goodwill impairment testing and measurement process to assess potential impairment in accordance with applicable guidance, the Company utilized an income approach to determine the fair value of each of the reporting units. The income approach was based on discounted cash flows derived from assumptions of balance sheet and

- 25 -

SI FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2009 AND 2008

income statement activity, using observable market data to the extent available. The Bank’s management developed a financial forecast considering several long-term key business drivers such as anticipated loan and deposit growth. Significant assumptions used in deriving the discounted cash flow analyses for the branch impairment evaluations included estimates of deposit and loan growth and weighted-average rates of interest for deposits and loans. Growth estimates for deposits and loans were based on a combination of historical trends and anticipated growth projections. Weighted-average interest rates were utilized to calculate interest income and interest expense based on an analysis of the (1) average rate of interest for major product types and (2) anticipated run-off of existing accounts and projected interest rates at the time of maturity for certificates of deposit accounts. Significant assumptions used in the preparation of the discounted cash flow analysis for SI Trust Servicing included estimates of revenue and operating costs utilizing the current and projected revenue and cost structure. The implied fair values based on the discounted cash flows were compared to the carrying balances of goodwill for each of the reporting units to determine impairment. As a result of the goodwill impairment analyses, the Company reduced the carrying value of goodwill related to its New London, Connecticut branch acquisition by $57,000 through a charge to fourth quarter earnings. This charge had no effect on the Company’s cash balances or liquidity. In addition, as goodwill and other intangible assets are not included in the calculation of regulatory capital, the regulatory ratios of the Bank were not affected by this impairment charge.

Other Investments

The Company is a limited partner in two Small Business Investment Companies (“SBICs”), which are licensed by the Small Business Administration. They provide mezzanine financing and private equity investments to small companies which may not otherwise qualify for standard bank financing. The Company records its investment in the SBICs at cost and evaluates its investment for impairment on an annual basis. Impairment that is considered by management to be other-than-temporary, results in a write-down of the investment which is recognized as a realized loss in earnings. See Note 12 regarding outstanding capital commitments to the limited partnerships.

Trust Assets

Trust assets held in a fiduciary or agency capacity, other than trust cash on deposit at the Bank, are not included in these consolidated financial statements because they are not assets of the Company. Trust fees are recognized on the accrual basis of accounting.

Related Party Transactions

Directors, officers and affiliates of the Company and the Bank have been customers of and have had transactions with the Bank, and it is expected that such persons will continue to have such transactions in the future. Management believes that all deposit accounts, loans, services and commitments comprising such transactions were made in the ordinary course of business, on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with other customers who were not directors, officers or affiliates. In the opinion of management, the transactions with related parties did not involve more than the normal risk of collectibility, favored treatment or terms or present other unfavorable features. See Note 13 for details regarding related party transactions.

Comprehensive Income (Loss)

Accounting principles generally require that recognized revenue, expenses, gains and losses be included in net income (loss). Although certain changes in assets and liabilities, such as unrealized gains and losses on available for sale securities, are reported as a separate component of stockholders’ equity, such items, along with net income (loss), are components of comprehensive income (loss). See Note 15 for components of other comprehensive income (loss) and the related tax effects.

- 26 -

SI FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2009 AND 2008

Treasury Stock

Common stock shares repurchased are recorded as treasury stock at cost.

Earnings Per Share

Basic net income (loss) per share is calculated by dividing the net income (loss) available to common stockholders by the weighted-average number of common shares outstanding during the period. Unvested restricted shares are considered outstanding in the computation of basic earnings per share since the shares participate in dividends and the rights to the dividends are non-forfeitable. Diluted net income (loss) per share is computed in a manner similar to basic net income (loss) per 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 options. Treasury shares and unallocated common shares held by the ESOP are not deemed outstanding for earnings per share calculations.

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 467,877 and 499,341 for the years ended December 31, 2009 and 2008, respectively. For the years ended December 31, 2009 and 2008, all common stock equivalents were anti-dilutive and were not included in the computation of diluted earnings per share. The computation of earnings per share is as follows:

	Years Ended December 31,
(Dollars in Thousands, Except Share Amounts)	2009		2008
Net income (loss)	$	435	$	(2,873	)
Weighted-average common shares outstanding:
Basic		11,450,541		11,476,571
Effect of dilutive stock options		—		—
Diluted		11,450,541		11,476,571
Net income (loss) per share:
Basic	$	0.04	$	(0.25	)
Diluted	$	0.04	$	(0.25	)

Bank-owned Life Insurance

Bank-owned life insurance policies are presented on the consolidated balance sheets at cash surrender value. Changes in cash surrender value, as well as insurance proceeds received, are reflected in noninterest income on the consolidated statements of operations and are not subject to income taxes. See Note 11 for additional discussion.

Employee Stock Ownership Plan

The Company accounts for the Employee Stock Ownership Plan (“ESOP”) in accordance with applicable guidance. The loan to the ESOP is repaid from the Bank’s contributions to the ESOP and dividends payable on common stock held by the ESOP over a period of 15 years. Unearned compensation applicable to the ESOP is reflected as a reduction of stockholders’ equity in the consolidated balance sheets. The difference between the average fair value and the cost of the shares allocated by the ESOP is recorded as an adjustment to additional paid-in capital. Compensation expense is recognized as ESOP shares are committed to be released. Unallocated ESOP shares, not yet committed to be released, are not considered outstanding for calculating earnings per share. Dividends paid on allocated ESOP shares are charged to retained earnings and dividends paid on unallocated ESOP shares are used to satisfy debt service. See Note 11 for additional discussion.

- 27 -

SI FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2009 AND 2008

Equity Incentive Plan

The Company measures and recognizes compensation cost relating to share-based payment transactions based on the grant date fair value of the equity instruments issued over the vesting period of such awards on a straight-line basis. The fair value of each restricted stock allocation, equal to the market price at the date of grant, was recorded as unearned restricted shares. Unearned restricted shares are amortized to salaries and employee benefits expense over the vesting period of the restricted stock awards. The fair value of each stock option award was estimated on the date of grant using the Black-Scholes option pricing model, which includes several assumptions such as expected volatility, dividends, term and risk-free rate for each stock option award. See Note 11 for additional discussion.

Business Segment Reporting

Public companies are required to report (i) certain financial and descriptive information about “reportable operating segments,” as defined, and (ii) certain enterprise-wide financial information about products and services, geographic areas and major customers. An operating segment is a component of a business for which separate financial information is available and evaluated regularly by the chief operating decision-maker in deciding how to allocate resources and evaluate performance. The Company’s operations are limited to financial services provided within the framework of a community bank, and decisions are generally based on specific market areas and or product offerings. Accordingly, based on the financial information presently evaluated by the Company’s chief operating decision-maker, the Company’s operations are aggregated in one reportable operating segment.

Advertising Costs

Advertising costs are expensed as incurred.

Recent Accounting Pronouncements

In January 2009, new authoritative guidance became applicable for business combinations closing on or after January 1, 2009. This guidance applies to all transactions and other events in which one entity obtains control over one or more other businesses. This guidance requires an acquirer, upon initially obtaining control of another entity, to recognize the assets, liabilities and any non-controlling interest in the acquiree at fair value as of the acquisition date. In April 2009, additional guidance to account for assets acquired and liabilities assumed in a business combination that arise from contingencies was issued, which amends the previous guidance to require contingent assets acquired and liabilities assumed in a business combination to be recognized at fair value on the acquisition date if fair value can be reasonably estimated during the measurement period. If fair value cannot be reasonably estimated during the measurement period, the contingent asset or liability would be recognized in accordance with accounting guidance related to contingencies. The adoption of this guidance would apply prospectively to any future business combinations and may have a material impact on the Company’s consolidated financial statements when any business combination occurs.

In June 2009, accounting guidance was issued to improve the relevance, representational faithfulness and comparability of the information that a reporting entity provides in its financial reports about a transfer of financial assets; the effects of a transfer on its financial position, financial performance and cash flows; and a transferor’s continuing involvement in transferred financial assets. The Company will adopt this new guidance on January 1, 2010. The recognition and measurement provisions of the Statement shall be applied to transfers that occur on or after the effective date. This Statement is not expected to have a material impact on the Company’s consolidated financial statements.

- 28 -

SI FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2009 AND 2008

NOTE 2. RESTRICTIONS ON CASH AND AMOUNTS DUE FROM BANKS

The Bank is required to maintain cash reserve balances against its respective transaction accounts and non-personal time deposits. At December 31, 2009 and 2008, the Bank was required to maintain cash and liquid asset reserves of $684,000 and $688,000, respectively, and to maintain $3.0 million in the Federal Reserve Bank for clearing purposes to satisfy such reserve requirements at December 31, 2009 and 2008.

NOTE 3. SECURITIES AVAILABLE FOR SALE

The amortized cost, gross unrealized gains and losses and approximate fair values of available for sale securities at December 31, 2009 and 2008 are as follows:

	December 31, 2009
(Dollars in Thousands)	Amortized Cost (1)		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
Debt securities:
U.S. Government and agency obligations	$	35,945	$	393	$	(109	)	$	36,229
Government-sponsored enterprises		13,980		137		(82	)		14,035
Mortgage-backed securities: (2)
Agency – residential		89,751		3,467		(119	)		93,099
Non-agency – residential		18,690		—		(2,471	)		16,219
Non-agency – HELOC		4,328		—		(2,132	)		2,196
Corporate debt securities		6,979		355		(13	)		7,321
Collateralized debt obligations		8,153		1		(3,116	)		5,038
Obligations of state and political subdivisions		5,003		145		(17	)		5,131
Tax-exempt securities		3,210		9		—			3,219
Foreign government securities		100		—		—			100
Total debt securities		186,139		4,507		(8,059	)		182,587
Equity securities:
Equity securities – financial services		1,043		19		(87	)		975
Total available for sale securities	$	187,182	$	4,526	$	(8,146	)	$	183,562

⁽¹⁾ Net of OTTI write-downs recognized in earnings, other than such noncredit-related amounts reclassified on January 1, 2009 as a cumulative effect adjustment for a change in accounting principle.

⁽²⁾ Agency securities refer to debt obligations issued or guaranteed by government corporations or government-sponsored enterprises (“GSEs”). Non-agency securities, or private-label securities, are the sole obligation of their issuer and are not guaranteed by one of the GSEs or the U.S. Government.

- 29 -

SI FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2009 AND 2008

	December 31, 2008
(Dollars in Thousands)	Amortized Cost (1)		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
Debt securities:
U.S. Government and agency obligations	$	2,453	$	—	$	(38	)	$	2,415
Government-sponsored enterprises		25,985		615		(13	)		26,587
Mortgage-backed securities: (2)
Agency – residential		81,383		2,380		(112	)		83,651
Non-agency – residential		36,347		9		(5,893	)		30,463
Non-agency – HELOC		3,089		—		(273	)		2,816
Corporate debt securities		5,901		154		(97	)		5,958
Collateralized debt obligations		6,625		501		(1,734	)		5,392
Obligations of state and political subdivisions		4,000		63		(26	)		4,037
Tax-exempt securities		280		1		(1	)		280
Foreign government securities		100		—		—			100
Total debt securities		166,163		3,723		(8,187	)		161,699
Equity securities:
Equity securities – financial services		1,060		—		(60	)		1,000
Total available for sale securities	$	167,223	$	3,723	$	(8,247	)	$	162,699

⁽¹⁾ Net of OTTI write-downs recognized in earnings.

⁽²⁾ Agency securities refer to debt obligations issued or guaranteed by government corporations or government-sponsored enterprises (“GSEs”). Non-agency securities, or private-label securities, are the sole obligation of their issuer and are not guaranteed by one of the GSEs or the U.S. Government.

At December 31, 2009 and 2008, government-sponsored enterprise securities with an amortized cost of $4.0 million and $6.0 million, respectively, and a fair value of $4.1 million and $6.2 million, respectively, were pledged to secure public deposits and for other purposes required or permitted by law.

The amortized cost and fair value of debt securities by contractual maturities at December 31, 2009 are presented below. Actual maturities of mortgage-backed securities may differ from contractual maturities because the mortgages underlying the securities may be called or repaid without any penalties. Because mortgage-backed securities are not due at a single maturity date, they are not included in the maturity categories in the following maturity summary.

(Dollars in Thousands)	Amortized Cost		Fair Value
Within 1 year	$	3,125	$	3,128
After 1 but within 5 years		21,827		22,398
After 5 but within 10 years		18,668		18,626
After 10 years		29,750		26,921
		73,370		71,073
Mortgage-backed securities		112,769		111,514
Total debt securities	$	186,139	$	182,587

- 30 -

SI FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2009 AND 2008

The following is a summary of realized gains and losses on the sale of securities for the years ended December 31, 2009 and 2008:

	December 31,
(Dollars in Thousands)	2009			2008
Gross gains on sales	$	942		$	463
Gross losses on sales		(657	)		—
Net gain on sales of securities	$	285		$	463

The tax provision applicable to the above net realized gains amounted to $97,000 and $157,000, respectively. For the years ended December 31, 2009 and 2008, proceeds from the sale of available for sale securities totaled $24.5 million and $20.0 million, respectively.

The following tables present information pertaining to securities with gross unrealized losses at December 31, 2009 and 2008, aggregated by investment category and length of time the individual securities have been in a continuous unrealized loss position.

December 31, 2009:	Less Than 12 Months				12 Months Or More				Total
(Dollars in Thousands)	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
U.S. Government and agency obligations	$	17,114	$	90	$	1,631	$	19	$	18,745	$	109
Government-sponsored enterprises		5,899		82		—		—		5,899		82
Mortgage-backed securities:
Agency - residential		11,126		119		—		—		11,126		119
Non-agency - residential		5,094		80		11,125		2,391		16,219		2,471
Non-agency - HELOC		—		—		2,196		2,132		2,196		2,132
Corporate debt		995		13		—		—		995		13
Collateralized debt obligations		1,337		826		3,613		2,290		4,950		3,116
Obligations of state and political subdivisions		483		17		—		—		483		17
Equity securities – financial services		201		62		734		25		935		87
Total	$	42,249	$	1,289	$	19,299	$	6,857	$	61,548	$	8,146
December 31, 2008:	Less Than 12 Months				12 Months Or More				Total
(Dollars in Thousands)	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
U.S. Government and agency obligations	$	1,812	$	14	$	540	$	24	$	2,352	$	38
Government-sponsored enterprises		1,978		13		—		—		1,978		13
Mortgage-backed securities:
Agency - residential		3,523		110		1,029		2		4,552		112
Non-agency - residential		27,476		5,589		1,502		304		28,978		5,893
Non-agency - HELOC		2,817		273		—		—		2,817		273
Corporate debt		1,887		97		—		—		1,887		97
Collateralized debt obligations		3,660		1,734		—		—		3,660		1,734
Obligations of state and political subdivisions		475		26		—		—		475		26
Tax-exempt securities		139		1		—		—		139		1
Equity securities – financial services		962		60		—		—		962		60
Total	$	44,729	$	7,917	$	3,071	$	330	$	47,800	$	8,247

- 31 -

SI FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2009 AND 2008

At December 31, 2009, fifty debt securities with gross unrealized losses have aggregate depreciation of approximately 11.73% of the Company’s amortized cost basis. The following summarizes, by security type, the basis for management’s determination during the preparation of the financial statements for the year ended December 31, 2009 of whether the applicable investments within the Company’s available for sale portfolio were other-than-temporarily impaired at December 31, 2009, and if so, the amount of the OTTI that represents credit losses versus all other factors.

For the years ended December 31, 2009 and 2008, the Company recognized $228,000 and $7.1 million of impairment charges on investments deemed other-than-temporarily impaired, respectively.

U.S. Government and Agency Obligations and Government–Sponsored Enterprises. The unrealized losses on the Company’s U.S. Government and agency obligations and government-sponsored enterprises related primarily to a widening of the rate spread to comparable treasury securities. The contractual terms of these investments do not permit the issuer to settle the securities at a price less than the amortized cost basis of the investments. Because the decline in fair value is attributable to changes in interest rates and illiquidity and not credit quality, and because the Company does not intend to sell these securities and it is not more likely than not that the Company will be required to sell the securities before their anticipated recovery, which may be at maturity, the Company does not consider these securities to be other-than-temporarily impaired at December 31, 2009.

Mortgage-backed Securities - Agency - Residential. The unrealized losses on the Company’s agency–residential mortgage-backed securities were caused by increases in the rate spread to comparable treasury securities. The Company does not expect these securities to settle at a price less than the amortized cost basis of the investments. Because the Company does not intend to sell the investments and it is not more likely than not that the Company will be required to sell the investments before the recovery of their amortized cost basis, which may be at maturity, the Company does not consider these investments to be other-than-temporarily impaired at December 31, 2009.

Mortgage-backed Securities - Non-agency - Residential. The unrealized losses on the Company’s non-agency-residential mortgage-backed securities are primarily due to the fact that these securities continue to trade well below historic levels, particularly those backed by jumbo or hybrid loan collateral. In particular, five non-agency residential mortgage-backed securities displayed market pricing significantly below book value and were rated below investment grade. At December 31, 2009, management evaluated credit rating details for the tranche, as well as credit information on subordinate tranches, potential future credit losses and loss analyses. Additionally, management reviewed reports prepared by an independent third party for certain non-agency mortgage-backed securities. The Bank previously recorded OTTI losses related to credit on one of these non-agency mortgage-backed securities totaling $489,000. An additional OTTI loss of $78,000 was recorded during the fourth quarter of 2009. Based on the existing credit profile, management does not believe that these investments will suffer from any further credit-related losses. Because the Company does not intend to sell the investments and it is not more likely than not that the Company will be required to sell the investments before recovery of their amortized cost basis, which may be at maturity, the Company did not record any additional impairment losses at December 31, 2009.

Mortgage-backed Securities - Non-agency - HELOC. The unrealized loss on the Company’s non-agency - HELOC mortgage-backed security is related to one security whose market is now illiquid. This security is collateralized by home equity lines of credit secured by first and second liens and insured by Financial Security Assurance. At December 31, 2009, management evaluated credit rating details, collateral support and loss analyses. All of the unrealized losses on this security relate to factors

- 32 -

SI FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2009 AND 2008

other than credit. Because the Company does not intend to sell this investment and it is not more likely than not that the Company will be required to sell this investment before the recovery of its amortized cost basis, which may be at maturity, the Company did not record any impairment loss at December 31, 2009.

Collateralized Debt Obligations. The unrealized losses on the Company’s collateralized debt obligations related to investments in pooled trust preferred securities (“PTPS”). The PTPS market continues to experience significant declines in market value since the end of last year. Transactions for these securities have been primarily related to distressed or forced liquidation sales.

The unrealized losses on the Company’s PTPS investments were caused by a lack of liquidity, credit downgrades and decreasing credit support. The increased number of bank and insurance company failures has decreased the level of credit support for these investments. A number of lower tranche income issues have forgone payments or have received payment in kind through increased principal allocations. No loss of principal or break in yield is projected. Management evaluated current credit ratings, credit support and stress testing for future defaults related to the Company’s PTPS. Management also reviewed analytics provided by the trustee, reports from third-party sources and internal documents. Additionally, independent OTTI and associated cash flow analysis was performed by an independent third party. The Bank previously recorded OTTI losses on five PTPS investments related to credit factors of $150,000 and $1.1 million during 2009 and 2008, respectively. Based on the existing credit profile, management does not believe that these investments will suffer from any further credit related losses. Because the Company does not intend to sell the investments and it is not more likely than not that the Company will be required to sell the investments before recovery of their amortized cost basis, which may be at maturity, the Company did not record additional impairment losses at December 31, 2009.

Equity Securities. The Company’s investments in marketable equity securities consist of common and preferred stock of companies in the financial services sector. Management evaluated the near-term prospects of the issuers and the Company’s ability and intent to hold the investments for a reasonable period of time sufficient for an anticipated recovery of fair value. In analyzing the issuer’s financial condition, management considers industry analysts’ reports and financial performance. Although the issuers have shown declines in earnings as a result of the weakened economy, no credit issues have been identified that cause management to believe that the declines in market value are other-than-temporary at December 31, 2009.

The Company adopted the provisions of new authoritative accounting guidance related to OTTI on debt securities for the interim period ended March 31, 2009, which was applied to existing and new debt securities held by the Company as of January 1, 2009. For those debt securities for which the fair value of the security is less than its amortized cost and the Company does not intend to sell such security and it is not more likely than not that it will be required to sell such security prior to the recovery of its amortized cost basis (which may be at maturity) less any credit losses, the authoritative accounting guidance requires that the credit component of the OTTI losses be recognized in earnings while the noncredit component is recognized in other comprehensive income (loss), net of related taxes. As a result, the Company reclassified the noncredit component of the OTTI losses previously recognized in earnings during the year ended December 31, 2008. The reclassification was reflected as a cumulative effect adjustment of $2.7 million, net of taxes, which increased retained earnings and accumulated other comprehensive loss. The amortized cost basis of these debt securities for which OTTI losses were recognized during 2008 were adjusted by the amount of the cumulative effect adjustment before taxes.

- 33 -

SI FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2009 AND 2008

As of December 31, 2009, for debt securities with OTTI losses, the Company estimated the portion of loss attributable to credit using a discounted cash flow model in accordance with applicable guidance. Significant inputs for the non-agency mortgage-backed securities included the estimated cash flows of the underlying collateral based on key assumptions, such as default rate, loss severity and prepayment rate. Assumptions used can vary widely from loan to loan, and are influenced by such factors as loan interest rate, geographical location of the borrower, borrower characteristics and collateral type. Significant inputs for collateralized debt obligations included estimated cash flows and prospective deferrals, defaults and recoveries based on the underlying seniority status and subordination structure of the pooled trust preferred debt tranche at the time of measurement. Prospective deferral, default and recovery estimates affecting projected cash flows were based on an analysis of the underlying financial condition of the individual issuers, with consideration of the account’s capital adequacy, credit quality, lending concentrations and other factors. All cash flow estimates were based on the securities’ tranche structure and contractual rate and maturity terms. The Company utilized the services of a third-party valuation firm to obtain information about the structure in order to determine how the underlying collateral cash flows will be distributed to each security issued from the structure. The present value of the expected cash flows were compared to the Company’s holdings to determine the credit-related impairment loss, if any. To the extent that continued changes in interest rates, credit movements and other factors that influence the fair value of investments occur, the Company may be required to record additional impairment charges for OTTI in future periods.

The following table presents in more detail the Company’s non-agency mortgage-backed securities that are currently rated below investment grade as of December 31, 2009 (dollars in thousands).

Security	Class (1)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value		Lowest Credit Rating (2)	Total Credit – Related OTTI (3)		Credit Support Coverage Ratios (4)
MBS 1	PT,AS	$	2,010	$	—	$	105	$	1,905	CC	$	—	3.5
MBS 2	SSNR,AS		3,453		—		1,160		2,293	B+		—	1.5
MBS 3	SSUP,AS		1,069		—		596		473	CC		567	0.9
MBS 4	PT,AS		580		—		32		548	B-		—	1.1
MBS 5	SEQ,AS		728		—		58		670	CCC		—	1.7
		$	7,840	$	—	$	1,951	$	5,889		$	567

⁽¹⁾ Class definitions: PT - Pass Through, AS - Accelerated, SSNR - Super Senior, SSUP - Senior Support and SEQ – Sequential.

⁽²⁾ The Company utilized credit ratings provided by Moody’s, S&P and Fitch in its evaluation of issuers.

⁽³⁾ The OTTI amounts provided in the table represent cumulative credit loss amounts through December 31, 2009.

⁽⁴⁾ The credit support coverage ratio, which is the ratio that determines the multiple of credit support, is based on assumptions for the performance of the loans within the delinquency pipeline. The assumptions used are: current collateral support/((60 day delinquencies x .60)+(90 day delinquencies x .70)+(foreclosures x 1.00)+(other real estate x 1.00)) x .40 for loss severity.

- 34 -

SI FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2009 AND 2008

The following table presents in more detail the Company’s collateralized debt obligations that are currently rated below investment grade as of December 31, 2009 (dollars in thousands).

Security	Class	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value		Lowest Credit Rating (1)	Total Credit – Related OTTI (2)		% of Current Defaults and Deferrals to Current Collateral
CDO 1	B1	$	1,000	$	—	$	379	$	621	B+	$	—	9.0
CDO 2	B3		1,000		—		375		625	B+		—	9.0
CDO 3	MEZ		87		1		—		88	Ca		35	26.0
CDO 4	B		1,488		—		840		648	Caa1		376	16.0
CDO 5	C		163		—		72		91	CC		809	19.8
CDO 6	A2		2,623		—		846		1,777	B+		—	24.4
CDO 7	A1		1,792		—		604		1,188	BB		—	24.9
		$	8,153	$	1	$	3,116	$	5,038		$	1,220

⁽¹⁾ The Company utilized credit ratings provided by Moody’s, S&P and Fitch in its evaluation of issuers.

⁽²⁾ The OTTI amounts provided in the table represent cumulative credit loss amounts through December 31, 2009.

The following table summarizes OTTI losses on available for sale securities for the year ended December 31, 2009.

(Dollars in Thousands)	Collateralized Debt Obligations			Non-agency Mortgage-backed Securities			Total
Total OTTI losses on securities	$	(221	)	$	(673	)	$	(894	)
OTTI related to noncredit losses recognized in other comprehensive income		71			595			666
OTTI related to credit losses recognized in net income	$	(150	)	$	(78	)	$	(228	)

The following table presents a roll-forward of the balance of credit losses on the Company’s debt securities for which a portion of OTTI was recognized in other comprehensive income for the year ended December 31, 2009.

(Dollars in Thousands)
Balance at beginning of year	$	1,559
Amounts related to credit for which OTTI losses were not previously recognized		—
Additional credit losses for which OTTI losses were previously recognized		228
Balance at end of year	$	1,787

- 35 -

SI FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2009 AND 2008

NOTE 4. LOANS RECEIVABLE AND ALLOWANCE FOR LOAN LOSSES

Loan Portfolio

The composition of the Company’s loan portfolio at December 31, 2009 and 2008 is as follows:

	December 31,
(Dollars in Thousands)	2009			2008
Real estate loans:
Residential – 1 to 4 family	$	306,244		$	332,399
Multi-family and commercial		159,781			158,693
Construction		11,400			27,892
Total real estate loans		477,425			518,984
Commercial business loans:
SBA & USDA guaranteed		77,310			45,704
Other		30,239			34,945
Total commercial business loans		107,549			80,649
Consumer loans		26,086			22,107
Total loans		611,060			621,740
Deferred loan origination costs, net of deferred fees		1,523			1,570
Allowance for loan losses		(4,891	)		(6,047	)
Loans receivable, net	$	607,692		$	617,263

Impaired and Nonaccrual Loans

The following is a summary of information pertaining to impaired loans and nonaccrual loans.

	December 31,
(Dollars in Thousands)	2009		2008
Impaired loans without valuation allowance	$	2,107	$	6,934
Impaired loans with valuation allowance		967		3,960
Total impaired loans	$	3,074	$	10,894
Valuation allowance related to impaired loans	$	267	$	1,235
Nonaccrual loans	$	3,007	$	9,328
Total loans past due 90 days or more and still accruing	$	—	$	—

Additional information related to impaired loans is as follows:

	Years Ended December 31,
(Dollars in Thousands)	2009		2008
Average recorded investment in impaired loans	$	7,808	$	9,407
Interest income recognized on impaired loans	$	65	$	27
Cash interest received on impaired loans	$	99	$	74

No additional funds are committed to be advanced to those borrowers whose loans are impaired.

- 36 -

SI FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2009 AND 2008

Interest income that would have been recorded had nonaccrual loans been performing in accordance with their original terms totaled $554,000 and $609,000 for the years ended December 31, 2009 and 2008, respectively.

Allowance for Loan Losses

Changes in the allowance for loan losses for the years ended December 31, 2009 and 2008 are as follows:

	Years Ended December 31,
(Dollars in Thousands)	2009			2008
Balance at beginning of year	$	6,047		$	5,245
Provision for loan losses		2,830			1,369
Loans charged-off		(4,075	)		(597	)
Recoveries of loans previously charged-off		89			30
Balance at end of year	$	4,891		$	6,047

Related Party Loans

Related party transactions, including loans with related parties, are discussed in further detail in Note 13.

Loans Held for Sale

Total loans held for sale amounted to $396,000, consisting of fixed-rate residential mortgage loans, at December 31, 2009. There were no loans held for sale at December 31, 2008.

Loans Serviced for Others

The Company services certain loans that it has sold with and without recourse to third parties and other loans for which the Company acquired the servicing rights. Loans serviced for others are not included in the Company’s consolidated balance sheets. The aggregate of loans serviced for others amounted to $121.1 million and $81.5 million at December 31, 2009 and 2008, respectively.

NOTE 5. OTHER REAL ESTATE OWNED

Other real estate owned consisted of four residential and four commercial real estate properties which were held for sale at December 31, 2009. A summary of expenses applicable to other real estate operations for the years ended December 31, 2009 and 2008, is as follows:

	Years Ended December 31,
(Dollars in Thousands)	2009			2008
Net gain from sales or write-downs of other real estate owned, net	$	(16	)	$	(10	)
Other real estate expense, net of rental income		145			113
Expense from other real estate operations, net	$	129		$	103

- 37 -

SI FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2009 AND 2008

NOTE 6. PREMISES AND EQUIPMENT

Premises and equipment at December 31, 2009 and 2008 are summarized as follows:

	December 31,
(Dollars in Thousands)	2009			2008
Land	$	2,098		$	145
Buildings		6,043			5,282
Leasehold improvements		7,736			8,526
Furniture and equipment		10,711			10,608
Construction in process		—			51
		26,588			24,612
Accumulated depreciation and amortization		(13,622	)		(12,387	)
Premises and equipment, net	$	12,966		$	12,225

At December 31, 2008, construction in process primarily related to incidental branch improvements. There were no outstanding commitments for the construction of new branches at December 31, 2009 and 2008.

Depreciation and amortization expense was $1.9 million and $2.1 million for the years ended December 31, 2009 and 2008, respectively.

See Note 12 for a schedule of future minimum rental commitments pursuant to the terms of noncancelable lease agreements in effect at December 31, 2009 relating to premises and equipment.

NOTE 7. GOODWILL AND OTHER INTANGIBLES

Goodwill

Goodwill for the years ended December 31, 2009 and 2008 is summarized as follows:

	Years Ended December 31,
(Dollars in Thousands)	2009			2008
Balance at beginning of year	$	4,188		$	643
Additions		—			3,545
Impairment		(57	)		—
Balance at end of year	$	4,131		$	4,188

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

In March 2008, the Company completed its acquisition of a branch office located in New London, Connecticut. The Company received cash of $432,000 for the acquisition of $7.9 million in assets and the assumption of $9.3 million in liabilities, resulting in goodwill of $967,000. As a result of the Company’s goodwill impairment evaluation, the Company recorded goodwill impairment of $57,000 during the year ended December 31, 2009.

- 38 -

SI FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2009 AND 2008

Based on the continued disruption in the financial markets and market capitalization deterioration, the Company will continue to perform testing for impairment between annual assessments. To the extent that additional testing results in the identification of impairment, the Company may be required to record impairment charges related to its goodwill.

Core Deposit Intangibles

In connection with 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 method. Core deposit intangibles for the years ended December 31, 2009 and 2008 are as follows:

	Years Ended December 31,
(Dollars in Thousands)	2009			2008
Balance at beginning of year	$	106		$	—
Additions		—			159
Amortization		(42	)		(53	)
Balance at end of year	$	64		$	106

Amortization expense, relating solely to the core deposit intangible was $42,000 and $53,000 for the years ended December 31, 2009 and 2008, respectively.

NOTE 8. DEPOSITS

A summary of deposit balances, by type, at December 31, 2009 and 2008 is as follows:

	December 31,
(Dollars in Thousands)	2009		2008
Noninterest-bearing demand deposits	$	65,407	$	57,647
Interest-bearing accounts:
NOW and money market accounts		220,759		187,699
Savings accounts		61,312		60,494
Certificates of deposit (1)		311,309		314,811
Total interest-bearing accounts		593,380		563,004
Total deposits	$	658,787	$	620,651

⁽¹⁾ Includes brokered deposits of $1.5 million and $4.5 million at December 31, 2009 and 2008, respectively.

Certificates of deposit in denominations of $100,000 or more were $101.8 million and $97.8 million at December 31, 2009 and 2008, respectively. In October 2008, FDIC deposit insurance temporarily increased from $100,000 to $250,000 per depositor through December 31, 2009. In December 2009, the FDIC announced that the standard insurance amount of $250,000 per depositor is in effect through December 31, 2013. Prior to the temporary increase, deposits in excess of $100,000, with the exception of self-directed retirement accounts which are insured up to $250,000, were not federally insured.

- 39 -

SI FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2009 AND 2008

Contractual maturities of certificates of deposit as of December 31, 2009 are summarized below.

(Dollars in Thousands)
2010	$	200,275
2011		69,979
2012		21,124
2013		7,644
2014		11,468
Thereafter		819
Total certificates of deposit	$	311,309

A summary of interest expense by account type for the years ended December 31, 2009 and 2008 is as follows:

	Years Ended December 31,
(Dollars in Thousands)	2009		2008
NOW and money market accounts	$	2,189	$	3,149
Savings accounts (1)		408		668
Certificates of deposit (2)		10,586		11,921
Total	$	13,183	$	15,738

⁽¹⁾ Includes interest expense on mortgagors’ and investors’ escrow accounts.

⁽²⁾ Includes interest expense on brokered deposits.

Related Party Deposits

Reference Note 13 for a discussion of related party transactions, including deposits from related parties.

NOTE 9. BORROWINGS

Federal Home Loan Bank Advances

The Bank is a member of the FHLB. At December 31, 2009 and 2008, the Bank had access to a pre-approved secured line of credit with the FHLB of $10.0 million and the capacity to obtain additional advances up to a certain percentage of the value of its qualified collateral, as defined in the FHLB Statement of Credit Policy. In accordance with an agreement with the FHLB, the qualified collateral must be free and clear of liens, pledges and encumbrances. At December 31, 2009 and 2008, there were no advances outstanding under the line of credit. Other outstanding advances from the FHLB aggregated $116.1 million and $139.6 million at December 31, 2009 and 2008, respectively, at interest rates ranging from 2.39% to 5.02% and 2.39% to 5.84%, respectively.

FHLB advances are secured by the Company’s investment in FHLB stock and other qualified collateral, which is based on a percentage of its outstanding residential first mortgage loans. The carrying value of Federal Home Loan Bank stock is based on the redemption provisions of the FHLB.

Junior Subordinated Debt Owed to Unconsolidated Trusts

SI Capital Trust II (the “Trust”), a wholly-owned subsidiary of the Company, was formed on August 31, 2006. The Trust had no independent assets or operations, and was formed to issue $8.0 million of trust securities and invest the proceeds thereof in an equivalent amount of junior subordinated debentures issued by the Company. The trust preferred securities mature in 30 years and bear interest at three-month LIBOR plus 1.70%. The Company may redeem the trust preferred securities, in whole or in part, on or after September 15, 2011, or earlier under certain conditions.

- 40 -

SI FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2009 AND 2008

The subordinated debt securities are unsecured obligations of the Company and are subordinate and junior in right of payment to all present and future senior indebtedness of the Company. The Company has entered into a guarantee, which together with its obligations under the subordinated debt securities and the declaration of trust governing the Trust, including its obligations to pay costs, expenses, debts and liabilities, other than trust securities, provides a full and unconditional guarantee of amounts on the capital securities. If the Company defers interest payments on the junior subordinated debt securities, or otherwise is in default of the obligations, the Company would be prohibited from making dividend payments to its shareholders.

The contractual maturities of borrowings, by year, at December 31, 2009 are as follows:

(Dollars in Thousands)	FHLB Advances			Subordinated Debt			Total
2010	$	8,000		$	—		$	8,000
2011 (1)		27,000			—			27,000
2012		26,100			—			26,100
2013 (2)		19,000			—			19,000
2014 (3)		24,000			—			24,000
Thereafter (4)		12,000			8,248			20,248
Total	$	116,100		$	8,248		$	124,348
Weighted-average rate		3.61	%		1.95	%		3.50	%

⁽¹⁾ Includes FHLB advance of $1.0 million that is callable during 2010.

⁽²⁾ Includes FHLB advance of $2.0 million that is callable during 2010.

⁽³⁾ Includes FHLB advance of $4.0 million that is puttable during 2012.

⁽⁴⁾ Includes FHLB advances of $3.0 million and $2.0 million that are callable during 2010 and 2013, respectively.

- 41 -

SI FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2009 AND 2008

NOTE 10. INCOME TAXES

The components of the income tax provision (benefit) for the years ended December 31, 2009 and 2008 are as follows:

	Years Ended December 31,
(Dollars in Thousands)	2009			2008
Current income tax (benefit) provision:
Federal	$	(252	)	$	1,509
State		12			1
Total current income tax (benefit) provision		(240	)		1,510
Deferred income tax provision (benefit):
Federal		275			(2,870	)
Total deferred income tax provision (benefit)		275			(2,870	)
Total income tax provision (benefit)	$	35		$	(1,360	)

A reconciliation of the anticipated income tax provision (benefit), based on the statutory tax rate of 34.0%, to the income tax provision (benefit) as reported in the statements of operations is as follows:

	Years Ended December 31,
(Dollars in Thousands)	2009			2008
Income tax provision (benefit) at statutory rate	$	160		$	(1,439	)
Increase (decrease) resulting from:
Dividends received deduction		(10	)		(33	)
Bank-owned life insurance		(199	)		(103	)
Tax-exempt income		(15	)		(7	)
Compensation and employee benefit plans		72			72
Nondeductible expenses		6			7
Valuation allowance		21			118
Other		—			25
Total income tax provision (benefit)	$	35		$	(1,360	)
Effective tax rate		7.4	%		32.1	%

- 42 -

SI FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2009 AND 2008

The tax effects of temporary differences that give rise to significant components of the deferred tax assets and deferred tax liabilities at December 31, 2009 and 2008 are presented below:

	December 31,
(Dollars in Thousands)	2009			2008
Deferred tax assets:
Allowance for loan losses	$	1,764		$	2,178
Unrealized losses on available for sale securities		2,770			2,804
Depreciation of premises and equipment		756			709
Other-than-temporary impairment		1,150			2,430
Investment write-downs		219			89
Charitable contribution carry-forward		93			80
Deferred compensation		1,524			1,222
Employee benefit plans		391			343
Capital loss carry-forward		5			68
Interest receivable on nonaccrual loans		160			297
Other		166			169
Total deferred tax assets		8,998			10,389
Less valuation allowance		(139	)		(118	)
Total deferred tax assets, net of valuation allowance		8,859			10,271
Deferred tax liabilities:
Unrealized gains on available for sale securities		1,539			1,266
Goodwill and other intangibles		100			12
Deferred loan costs		890			911
Mortgage servicing asset		252			144
Total deferred tax liabilities		2,781			2,333
Deferred tax asset, net	$	6,078		$	7,938

At December 31, 2009, the charitable contribution carry-forward, primarily related to the contribution of the Company’s common stock to SI Financial Group Foundation, Inc. in 2004, was approximately $274,000. The utilization of charitable contributions for any tax year is limited to 10% of taxable income without regard to charitable contributions, net operating losses and dividend received deductions. An organization is permitted to carry over contributions that exceed the annual 10% limitation as a deduction to the five succeeding tax years provided the organization has sufficient earnings. The Company anticipates that a portion of this contribution carry-forward will not be realized prior to its expiration in 2009 and therefore, a valuation allowance has been established.

A valuation allowance totaling $139,000 was established for contribution carry-forwards, federal capital loss carry-forwards and other-than-temporary impairment losses on equity securities aggregating $409,000 due to uncertainties of realization.

Retained earnings at December 31, 2009 and 2008 includes a contingency reserve for loan losses of $3.7 million, which represents the tax reserve balance existing at December 31, 1987, and is maintained in accordance with provisions of the Internal Revenue Code applicable to savings banks. Amounts transferred to the reserve have been claimed as deductions from taxable income, and, if the reserve is used for purposes other than to absorb losses on loans, a federal income tax liability could be incurred. It

- 43 -

SI FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2009 AND 2008

is not anticipated that the Company will incur a federal income tax liability relating to this reserve balance, and accordingly, deferred income taxes of approximately $1.3 million at December 31, 2009 and 2008, respectively, have not been recognized.

Financial services companies doing business in Connecticut are permitted to establish a “passive investment company” (“PIC”) to hold and manage loans secured by real property. PICs are exempt from Connecticut corporation business tax, and dividends received by the financial services companies from PICs are not taxable. In January 1999, the Bank established a PIC, as a wholly-owned subsidiary, and in June 2000, began to transfer a portion of its residential and commercial mortgage loan portfolios from the Bank to the PIC. A substantial portion of the Company’s interest income is now derived from the PIC, an entity whose net income is exempt from State of Connecticut taxes, and accordingly, state income taxes are minimal. The Bank’s ability to continue to realize the tax benefits of the PIC is subject to the PIC continuing to comply with all statutory requirements related to the operations of the PIC.

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 2006.

NOTE 11. BENEFIT PLANS

Profit Sharing and 401(k) Savings Plan

The Bank’s Profit Sharing and 401(k) Savings Plan (the “Plan”) is a tax-qualified defined contribution plan for the benefit of its eligible employees. The Bank’s profit sharing contribution to the Plan is a discretionary amount authorized by the Board of Directors, based on the financial results of the Bank. An employee’s share of the profit sharing contribution represents the ratio of the employee’s salary to the total salary expense of the Bank. Participants vest in the Bank’s discretionary profit sharing contributions based on years of service, with 100% vesting attained upon five years of service. There were no profit sharing contributions for the years ended December 31, 2009 and 2008.

The Plan also includes a 401(k) feature. Eligible participants may make salary deferral contributions of up to 100% of earnings subject to Internal Revenue Services limitations. The Bank makes matching contributions equal to 50% of the participants’ contributions up to 6% of the participants’ earnings. Participants are immediately vested in their salary deferral contributions, employer matching contributions and earnings thereon. Bank contributions were $255,000 and $236,000 for the years ended December 31, 2009 and 2008, respectively.

Group Term Replacement Plan

The Bank maintains the Group Term Replacement Plan to provide a death benefit to executives designated by the Compensation Committee of the Board of Directors. The death benefits are funded through certain insurance policies that are owned by the Bank on the lives of the participating executives. The Bank pays the life insurance premiums, which fund the death benefits from its general assets, and is the beneficiary of any death benefits exceeding any executive’s maximum dollar amount specified in his or her split-dollar endorsement policy. The maximum dollar amount of each executive’s split-dollar death benefit equals three times the executive’s annual compensation less $50,000 pre-retirement and three times final annual compensation post-retirement not to exceed a specified dollar amount. For purposes of the plan, annual compensation includes an executive’s base compensation, commissions and cash bonuses earned under the Bank’s bonus plan. Participation in the plan ceases if an executive is terminated for cause or the executive terminates employment for reasons other than death, disability or retirement. If the Bank wishes to maintain the insurance after a participant’s termination in the plan, the Bank will be the direct beneficiary of the entire death proceeds of the insurance policies.

- 44 -

SI FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2009 AND 2008

In January 2008, the Company recorded a cumulative effect adjustment for a change in accounting principle as a reduction to retained earnings and an increase in accrued liabilities of $547,000 related to the postretirement obligation of the Company. Total expense recognized under this plan was $125,000 and $76,000 for the years ended December 31, 2009 and 2008, respectively.

Executive Supplemental Retirement Agreements – Defined Benefit

The Bank maintains unfunded supplemental defined benefit retirement agreements with its directors and members of senior management. These agreements provide for supplemental retirement benefits to certain executives based upon average annual compensation and years of service. Entitlement of benefits commence upon the earlier of the executive’s termination of employment (other than for cause), at or after attaining age 65 or, depending on the executive, on the date when the executive’s years of service and age total 80 or 78. Total expense incurred under these agreements for the years ended December 31, 2009 and 2008 was $826,000 and $828,000, respectively.

Performance-Based Incentive Plan

The Bank has an incentive plan whereby all employees are eligible to receive a bonus tied to both the Company and individual performance. Non-discretionary contributions to the plan require the approval of the Board of Directors’ Compensation Committee. Total expense recognized was $194,000 and $266,000 for the years ended December 31, 2009 and 2008, respectively.

Supplemental Executive Retirement Plan

The Bank maintains the Supplemental Executive Retirement Plan to provide restorative payments to executives, designated by the Board of Directors, who are prevented from receiving the full benefits of the Bank’s Profit Sharing and 401(k) Savings Plan and Employee Stock Ownership Plan. The supplemental executive retirement plan also provides supplemental benefits to participants upon a change in control prior to the complete scheduled repayment of the ESOP loan. For the years ended December 31, 2009 and 2008, the President and Chief Executive Officer was designated by the Board of Directors to participate in the plan. Total expense incurred under this plan was $5,000 for each of the years ended December 31, 2009 and 2008.

Employee Stock Ownership Plan

In September 2004, the Bank established an Employee Stock Ownership Plan for the benefit of its eligible employees. The Company provided a loan to the Savings Institute Bank and Trust Company Employee Stock Ownership Plan of $4.9 million which was used to purchase 492,499 shares of the Company’s outstanding stock. The loan bears interest equal to 4.75% and provides for annual payments of interest and principal over the 15-year term of the loan.

At December 31, 2009, the remaining principal balance on the ESOP debt is payable as follows:

(Dollars in Thousands)
2010	$	290
2011		304
2012		318
2013		333
2014		349
Thereafter		2,011
Total	$	3,605

- 45 -

SI FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2009 AND 2008

The Bank has committed to make contributions to the ESOP sufficient to support the debt service of the loan. The loan is secured by the shares purchased, which are held in a suspense account for allocation among participants as the loan is repaid. Shares held by the ESOP include the following at December 31, 2009 and 2008:

	December 31,
(Dollars in Thousands)	2009		2008
Allocated	$	133,485	$	99,080
Committed to be allocated		32,295		32,295
Unallocated		322,955		360,950
Total shares		488,735		492,325
Fair value of unallocated shares	$	1,696	$	2,166

Total compensation expense recognized in connection with the ESOP was $155,000 and $279,000 for the years ended December 31, 2009 and 2008, respectively.

Equity Incentive Plan

The 2005 Equity Incentive Plan (the “Incentive Plan”) allows the Company to grant up to 615,623 stock options and 246,249 shares of restricted stock to its employees, officers, directors and directors emeritus. Both incentive stock options and non-statutory stock options may be granted under the plan. All options have a contractual life of ten years and vest equally over a period of five years beginning on the first anniversary of the date of grant. At December 31, 2009, a total of 167,873 stock options were available for future grants. For the years ended December 31, 2009 and 2008, the Company recognized share-based compensation expense related to the stock option and restricted stock awards of $742,000 and $768,000, respectively.

There were no options granted during the years ended December 31, 2009 and 2008, respectively. The fair value of each option grant in 2007 was determined at the grant date using the Black-Scholes option pricing model with the following weighted-average assumptions:

Expected term (years)		10.00
Expected dividend yield		1.50	%
Expected volatility		19.24
Risk-free interest rate		4.38
Fair value of options granted	$	3.84

The expected term was based on the estimated life of the stock options. The dividend yield assumption was based on the Company’s historical and expected dividend pay-outs. The expected volatility was based on the Company’s historical volatility. The risk-free interest rate was based on the implied yields of U.S. Treasury zero-coupon issues for periods within the contractual life of the awards in effect at the time of the stock option grants.

- 46 -

SI FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2009 AND 2008

The following is a summary of activity for the Company’s stock options for the year ended December 31, 2009:

Outstanding Stock Options	Shares		Weighted- Average Exercise Price		Weighted- Average Remaining Contractual Term (in years)
Balance at beginning of year	488,950		$	10.33
Options forfeited	(41,200	)		10.23
Balance at end of year	447,750		$	10.34	5.58
Options exercisable at end of year	343,600		$	10.24	5.49

There were no stock options granted or exercised for each of the years ended December 31, 2009 and 2008. The intrinsic value of all stock options outstanding and exercisable at December 31, 2009 was zero. At December 31, 2009, there was $184,000 of total unrecognized compensation costs related to outstanding stock options, which is expected to be recognized over a weighted-average period of 0.6 years.

The following table presents the status of the unvested restricted shares under the Incentive Plan as of December 31, 2009 and changes during the year then ended:

Unvested Restricted Shares	Shares		Weighted- Average Grant Date Fair Value
Balance at beginning of year	88,899		$	10.10
Restricted shares granted	9,000			4.17
Restricted shares vested	(44,450	)		10.10
Restricted shares forfeited	(2,000	)		10.10
Balance at end of year	51,449		$	9.06

At December 31, 2009, a total of 2,600 shares were available for future grants. The aggregate fair value of restricted stock awards that vested during the years ended December 31, 2009 and 2008 was $267,000 and $480,000, respectively. At December 31, 2009, there was $193,000 of total unrecognized compensation costs related to unvested restricted stock awards granted under the Incentive Plan, which is expected to be recognized over a weighted-average period of 0.7 years.

Bank-Owned Life Insurance

The Company has an investment in, and is the beneficiary of, life insurance policies on the lives of certain officers. The purpose of these life insurance investments is to provide income through the appreciation in cash surrender value of the policies, which is used to offset the costs of various benefit and retirement plans. These policies had aggregate cash surrender values of $8.7 million at December 31, 2009 and 2008. Income earned on these life insurance policies aggregated $294,000 and $304,000 for the years ended December 31, 2009 and 2008, respectively. The Company recognized a gain of $291,000 on death benefit proceeds received from a bank-owned life insurance policy during the year ended December 31, 2009.

- 47 -

SI FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2009 AND 2008

NOTE 12. OTHER COMMITMENTS AND CONTINGENCIES

In the normal course of business, there are outstanding commitments and contingencies that are not reflected in the accompanying consolidated financial statements. The Company is a party to financial instruments with off-balance sheet risk to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit and involve, to varying degrees, elements of credit and interest rate risk in excess of the amounts recognized on the balance sheets. The contractual amounts of those instruments reflect the extent of involvement the Company has in particular classes of financial instruments.

Loan Commitments and Letters of Credit

The contractual amounts of commitments to extend credit represent the amount of potential loss should the contract be fully drawn upon, the customer defaults and the value of any existing collateral be determined as 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 December 31, 2009 and 2008 were as follows:

	December 31,
(Dollars in Thousands)	2009		2008
Commitments to extend credit:
Future loan commitments	$	8,648	$	5,386
Undisbursed construction loans		9,843		19,840
Undisbursed home equity lines of credit		18,733		18,327
Undisbursed commercial lines of credit		12,390		13,507
Overdraft protection lines		1,425		1,434
Standby letters of credit		784		710
Total	$	51,823	$	59,204

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 generally have fixed expiration dates or other termination clauses and may require payment of a fee. The Company evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Company upon extension of credit, is based on management’s credit evaluation of the counterparty. Collateral held varies but may include residential and commercial property, accounts receivable, inventory, property, plant and equipment, deposits and securities.

Undisbursed commitments under construction, home equity or commercial lines of credit are commitments for future extensions of credit to existing customers. Total undisbursed amounts on lines of credit may expire without being fully drawn upon and therefore, do not necessarily represent future cash requirements.

Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. Letters of credit are primarily issued to support public or private borrowing arrangements. Essentially all letters of credit issued have expiration dates within one year.

- 48 -

SI FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2009 AND 2008

Loans Sold with Recourse

At December 31, 2009 and 2008, the outstanding balance of loans sold with recourse was $32,000 and $43,000, respectively. Loan repurchase commitments are agreements to repurchase loans previously sold upon the occurrence of conditions established in the contract, including default by the underlying borrower. The Company determined that losses relating to loans sold with recourse were not probable and therefore, a liability was not recorded on the consolidated balance sheets at December 31, 2009 and 2008.

Operating Lease Commitments

The Company leases certain of its branch offices and equipment under operating lease agreements that expire at various dates through 2028. At December 31, 2009, future minimum rental commitments pursuant to the terms of noncancelable lease agreements, by year and in the aggregate, are as follows:

(Dollars in Thousands)
2010	$	1,307
2011		1,314
2012		1,054
2013		930
2014		865
Thereafter		6,577
Total	$	12,047

Certain leases contain options to extend for periods of 5 to 20 years. The cost of such extensions is not included in the above amounts. Rental expense charged to operations for cancelable and noncancelable operating leases was $1.4 million and $1.5 million for the years ended December 31, 2009 and 2008, respectively.

Rental Income Under Subleases

The Company subleases excess office space under noncancelable operating lease agreements that expire at various dates through 2013. At December 31, 2009, future minimum lease payments receivable for the noncancelable lease agreements is as follows:

(Dollars in Thousands)
2010	$	52
2011		44
2012		19
2013		10
Total	$	125

Rental income under the noncancelable lease agreements was $45,000 and $14,000 for the years ended December 31, 2009 and 2008, respectively.

Legal Matters

Various legal claims arise from time to time in the normal course of business. Management believes that the resolution of these matters will not have a material effect on the Company’s financial condition or results of operations.

- 49 -

SI FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2009 AND 2008

Investment Commitments

The Bank is a limited partner in two SBICs. In 1998, the Bank became a limited partner in an SBIC and committed to contribute capital of $1.0 million to the limited partnership. In 2007, the Bank became a limited partner in a second SBIC and committed to contribute capital of $1.0 million to the limited partnership. The Bank recognized write-downs totaling $383,000 on its investment in the two SBICs during the year ended December 31, 2009. The SBICs, with a combined net book value of $513,000 and $776,000 at December 31, 2009 and 2008, respectively, are included in other assets. At December 31, 2009, the Bank’s remaining off-balance sheet commitment for capital investment in the SBICs was $757,000.

NOTE 13. RELATED PARTY TRANSACTIONS

Loans Receivable

In the normal course of business, the Bank grants loans to related parties. Related parties include directors and certain officers of the Company and its subsidiaries and their immediate family members and respective affiliates in which they have a controlling interest. These loans were made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with customers, and did not involve more than the normal risk of collectibility. At December 31, 2009 and 2008, all related party loans were performing in accordance with their terms.

Changes in loans outstanding to such related parties during the years ended December 31, 2009 and 2008 are as follows:

	Years Ended December 31,
(Dollars in Thousands)	2009			2008
Balance at beginning of year	$	1,983		$	2,073
Additions		613			137
Repayments		(448	)		(204	)
Other		—			(23	)
Balance at end of year	$	2,148		$	1,983

Related party loan transactions labeled as “other” represent the net amount of loans for individuals who ceased being related parties during the period.

Deposits

Deposit accounts of directors, certain officers and other related parties aggregated $1.1 million and $1.9 million at December 31, 2009 and 2008, respectively.

Operating Expenses

During the years ended December 31, 2009 and 2008, the Company paid $21,000 and $77,000, respectively, for leases, supplies and advertising to companies related to directors of the Company.

SI Bancorp, MHC – Mutual Holding Company Parent

SI Bancorp, MHC (the “MHC”) owns a majority of the Company’s common stock and, through its Board of Directors and officers who manage the Company and the Bank also manage the MHC. As a federally-chartered mutual holding company, the Board of Directors of the MHC must ensure that the interests of depositors of the Bank are represented and considered in matters put to a vote of shareholders of the Company. Therefore, the votes cast by the MHC may not be in the best interest of all shareholders.

- 50 -

SI FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2009 AND 2008

NOTE 14. REGULATORY CAPITAL

The Bank is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory, and possibly additional discretionary, actions by regulators that, if undertaken, could have a direct material effect on the Company’s consolidated financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank’s assets, liabilities and certain off-balance sheet items, as calculated under regulatory accounting practices. The Bank’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors.

Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios (set forth in the table below) of total and Tier I capital (as defined in the regulations) to risk-weighted assets (as defined) and of Tier I capital (as defined) to total assets (as defined). As of December 31, 2009 and 2008, the Bank met the conditions to be classified as “well capitalized” under the regulatory framework for prompt corrective action. 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.

The Bank’s actual capital amounts and ratios at December 31, 2009 and 2008 were:

December 31, 2009:	Actual				For Capital Adequacy Purposes				To Be Well Capitalized Under Prompt Corrective Action Provisions
(Dollars in Thousands)	Amount		Ratio		Amount		Ratio		Amount		Ratio
Total Risk-based Capital Ratio	$	74,095	14.30	%	$	41,452	8.00	%	$	51,815	10.00	%
Tier I Risk-based Capital Ratio		69,201	13.36			20,719	4.00			31,078	6.00
Tier I Capital Ratio		69,201	8.02			34,514	4.00			43,143	5.00
Tangible Equity Ratio		69,201	8.02			12,943	1.50			n/a	n/a

December 31, 2008:	Actual				For Capital Adequacy Purposes				To Be Well Capitalized Under Prompt Corrective Action Provisions
(Dollars in Thousands)	Amount		Ratio		Amount		Ratio		Amount		Ratio
Total Risk-based Capital Ratio	$	69,273	13.32	%	$	41,605	8.00	%	$	52,007	10.00	%
Tier I Risk-based Capital Ratio		64,130	12.33			20,805	4.00			31,207	6.00
Tier I Capital Ratio		64,130	7.59			33,797	4.00			42,246	5.00
Tangible Equity Ratio		64,130	7.59			12,674	1.50			n/a	n/a

- 51 -

SI FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2009 AND 2008

A reconciliation of the Company’s total capital to the Bank’s regulatory capital is as follows:

	December 31,
(Dollars in Thousands)	2009			2008
Total capital per consolidated financial statements	$	77,462		$	72,927
Holding company equity not available for regulatory capital		(5,468	)		(7,892	)
Accumulated losses on available for sale securities		2,295			3,017
Intangible assets		(3,997	)		(3,922	)
Disallowed deferred tax asset		(1,091	)		—
Total tier 1 capital		69,201			64,130
Adjustments for total capital:
Allowance for loan losses		4,894			5,143
Total capital per regulatory reporting	$	74,095		$	69,273

NOTE 15. COMPREHENSIVE INCOME (LOSS)

Accounting principles generally require that recognized revenue, expenses, gains and losses be included in net income (loss). Although certain changes in assets and liabilities are reported as a separate component of the equity section of the balance sheet, such items along with net income (loss) are components of comprehensive income (loss).

Other comprehensive income (loss), which is comprised solely of the change in unrealized gains and losses on available for sale securities, for the years ended December 31, 2009 and 2008 is as follows:

	December 31, 2009
(Dollars in Thousands)	Before Tax Amount			Tax Effect			Net of Tax Amount
Unrealized holding gains on available for sale securities	$	5,622		$	(1,831	)	$	3,791
Credit portion of OTTI losses recognized in net income		228			(77	)		151
Noncredit portion of OTTI losses on available for sale securities		(666	)		226			(440	)
Reclassification adjustment for gains recognized in net income		(285	)		97			(188	)
Unrealized holding gains on available for sale securities, net of taxes	$	4,899		$	(1,585	)	$	3,314

	December 31, 2008
(Dollars in Thousands)	Before Tax Amount			Tax Effect			Net of Tax Amount
Unrealized holding losses on available for sale securities	$	(11,973	)	$	4,071		$	(7,902	)
Reclassification adjustment for losses recognized in net loss		6,685			(2,273	)		4,412
Unrealized holding losses on available for sale securities, net of taxes	$	(5,288	)	$	1,798		$	(3,490	)

- 52 -

SI FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2009 AND 2008

The components of accumulated other comprehensive loss included in stockholders’ equity are as follows:

	December 31,
(Dollars in Thousands)	2009			2008
Securities:
Net unrealized gain (loss) on securities	$	4,932		$	(4,524	)
Tax effect		(1,677	)		1,538
Net of tax amount		3,255			(2,986	)
Noncredit portion of OTTI losses on available for sale securities		(4,435	)		—
Tax effect		1,508			—
Net of tax amount		328			(2,986	)
Cumulative effect of adoption of securities impairment guidance		(2,717	)		—
Accumulated other comprehensive loss	$	(2,389	)	$	(2,986	)

NOTE 16. FAIR VALUE OF ASSETS AND LIABILITIES

Determination of Fair Value

The Company uses fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. The fair value of a financial instrument is 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. Fair value is best determined based upon quoted market prices. However, in many instances, there are no quoted market prices for the Company’s various financial instruments. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. Accordingly, the fair value estimates may not be realized in an immediate settlement of the instrument.

The following methods and assumptions were used by the Company in estimating fair value disclosures of its financial instruments:

• Cash and cash equivalents. The carrying amounts of cash and short-term instruments approximate the fair values based on the short-term nature of the assets.

• Securities available for sale. The securities measured at fair value in Level 1 are based on quoted market prices in an active exchange market. Securities measured at fair value in Level 2 are based on pricing models that consider standard input factors such as observable market data, benchmark yields, interest rate volatilities, broker/dealer quotes, credit spreads and new issue data. Securities measured at fair value in Level 3 include collateralized debt obligations that are backed by trust preferred securities issued by banks, thrifts and insurance companies. Management determined that an orderly and active market for these securities and similar securities did not exist based on a significant reduction in trading volume and widening spreads relative to historical levels. The Company estimates future cash flows discounted using a rate management believes is representative of current market conditions. Factors in determining the discount rate include the current level of deferrals and/or defaults, changes in credit rating and the financial condition of the debtors within the underlying securities, broker quotes for securities with similar structure and credit risk, interest rate movements and pricing for new issuances.

- 53 -

SI FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2009 AND 2008

• Federal Home Loan Bank stock. The carrying value of FHLB stock approximates fair value based on the redemption provisions of the Federal Home Loan Bank.

• Loans held for sale. The fair value of loans held for sale is estimated using quoted market prices.

• Loans receivable. For variable rate loans that reprice frequently and have no significant change in credit risk, fair values are based on carrying values. The fair value of fixed-rate loans are estimated by discounting the future cash flows using the year-end rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities.

• Accrued interest receivable. The carrying amount of accrued interest approximates fair value.

• Deposits. The fair value of demand deposits, negotiable orders of withdrawal, regular savings, certain money market deposits and mortgagors’ and investors’ escrow accounts is the amount payable on demand at the reporting date. The fair value of certificates of deposit and other time deposits is estimated using a discounted cash flow calculation that applies interest rates currently being offered for deposits of similar remaining maturities to a schedule of aggregated expected maturities on such deposits.

• Federal Home Loan Bank advances. The fair value of the advances is estimated using a discounted cash flow calculation that applies current FHLB interest rates for advances of similar maturity to a schedule of maturities of such advances.

• Junior subordinated debt owed to unconsolidated trust. Rates currently available for debt with similar terms and remaining maturities are used to estimate fair value of existing debt.

• Off-balance sheet instruments. Fair values for off-balance sheet lending commitments are based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the counterparties’ credit standings.

- 54 -

SI FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2009 AND 2008

Assets and Liabilities Measured at Fair Value on a Recurring Basis

The following table presents available for sale securities, representing the balances of assets, measured at fair value on a recurring basis as of December 31, 2009 and 2008. There were no liabilities measured at fair value on a recurring basis as of December 31, 2009 and 2008.

	December 31, 2009
(Dollars in Thousands)	Level 1		Level 2		Level 3		Total
U.S. Government and agency obligations	$	1,939	$	34,290	$	—	$	36,229
Government-sponsored enterprises		—		14,035		—		14,035
Mortgage-backed securities		—		111,514		—		111,514
Corporate debt securities		—		7,321		—		7,321
Collateralized debt obligations		—		—		5,038		5,038
Obligations of state and political subdivisions		—		5,131		—		5,131
Tax-exempt securities		—		3,219		—		3,219
Foreign government securities		—		100		—		100
Equity securities		247		728		—		975
Total assets at fair value	$	2,186	$	176,338	$	5,038	$	183,562

	December 31, 2008
(Dollars in Thousands)	Level 1		Level 2		Level 3		Total
U.S. Government and agency obligations	$	—	$	2,415	$	—	$	2,415
Government-sponsored enterprises		—		26,587		—		26,587
Mortgage-backed securities		—		116,930		—		116,930
Corporate debt securities		—		5,958		—		5,958
Collateralized debt obligations		—		—		5,392		5,392
Obligations of state and political subdivisions		—		4,037		—		4,037
Tax-exempt securities		—		280		—		280
Foreign government securities		—		100		—		100
Equity securities		300		700		—		1,000
Total assets at fair value	$	300	$	157,007	$	5,392	$	162,699

The following table shows a reconciliation of the beginning and ending balances for Level 3 assets:

(Dollars in Thousands)	Available for Sale Securities
Balance at January 1, 2008	$	—
Transfers to/from Level 3		6,641
Impairment charges included in net loss		(16	)
Decrease in fair value of securities included in other comprehensive loss		(1,233	)
Balance at December 31, 2008		5,392
Transfers to/from Level 3		—
Impairment charges included in net income		(228	)
Decrease in fair value of securities included in other comprehensive income		(126	)
Balance at December 31, 2009	$	5,038

- 55 -

SI FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2009 AND 2008

Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis

The Company may also be required, from time to time, to measure certain other financial assets on a nonrecurring basis in accordance with generally accepted accounting principles. These adjustments to fair value usually result from the application of lower-of-cost-or-market accounting or write-downs of individual assets. The following table summarizes the fair value hierarchy used to determine each adjustment and the carrying value of the related individual assets as of December 31, 2009 and 2008. The losses represent the amount of write-down recorded during 2009 and 2008 on the assets held at December 31, 2009 and 2008, respectively. There were no liabilities measured at fair value on a nonrecurring basis as of December 31, 2009 and 2008.

	At December 31, 2009						Year Ended December 31, 2009
(Dollars in Thousands)	Level 1		Level 2		Level 3		Total Losses
Impaired loans	$	—	$	—	$	700	$	267
Other real estate owned		—		—		3,680		—
Total assets	$	—	$	—	$	4,380	$	267

	At December 31, 2008						Year Ended December 31, 2008
(Dollars in Thousands)	Level 1		Level 2		Level 3		Total Losses
Impaired loans	$	—	$	—	$	2,725	$	1,235
Total assets	$	—	$	—	$	2,725	$	1,235

The Company measures the impairment of loans that are collateral dependent based on the fair value of the collateral (Level 3). 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. Losses applicable to write-downs of impaired loans are based on the appraised market value of the underlying collateral, assuming foreclosure of these loans is imminent.

The amount of other real estate owned represents the carrying value of the collateral based on the appraised value of the underlying collateral less selling costs. There were no recognized losses on other real estate owned for the year ended December 31, 2009.

Summary of Fair Values of Financial Instruments

The estimated fair values, and related carrying or notional amounts, of the Company’s financial instruments are as follows. Certain financial instruments and all nonfinancial instruments are exempt from disclosure requirements. Accordingly, the aggregate fair value amounts presented do not represent the underlying value of the Company.

Management uses its best judgment in estimating the fair value of the Company’s financial instruments; however, there are inherent weaknesses in any estimation technique. Therefore, for substantially all financial instruments, the fair value estimates presented herein are not necessarily indicative of the amounts the Company could have realized in a sales transaction at December 31, 2009 or 2008. The estimated fair value amounts for 2009 and 2008 have been measured as of their respective year-ends, and have not been re-evaluated or updated for purposes of these consolidated financial statements subsequent to those respective dates. As such, the estimated fair values of these financial instruments

- 56 -

SI FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2009 AND 2008

subsequent to the respective reporting dates may be different than the amounts reported at each year-end. The information presented should not be interpreted as an estimate of the fair value of the entire Company since a fair value calculation is only required for a limited portion of the Company’s assets. Due to the wide range of valuation techniques and the degree of subjectivity used in making the estimate, comparisons between the Company’s disclosures and those of other banks may not be meaningful.

As of December 31, 2009 and 2008, the recorded carrying amounts and estimated fair values of the Company’s financial instruments are as follows:

	2009				2008
(Dollars in Thousands)	Carrying Amount		Fair Value		Carrying Amount		Fair Value
Financial Assets:
Noninterest-bearing deposits	$	12,889	$	12,889	$	14,008	$	14,008
Interest-bearing deposits		2,350		2,350		465		465
Federal funds sold		8,965		8,965		8,730		8,730
Available for sale securities		183,562		183,562		162,699		162,699
Loans held for sale		396		396		—		—
Loans receivable, net		607,692		609,155		617,263		620,419
Federal Home Loan Bank stock		8,388		8,388		8,388		8,388
Accrued interest receivable		3,341		3,341		3,721		3,721
Financial Liabilities:
Savings deposits		61,312		61,312		60,494		60,494
Demand deposits, negotiable orders of withdrawal and money market accounts		286,166		286,166		245,346		245,346
Certificates of deposit		311,309		315,777		314,811		318,812
Mortgagors’ and investors’ escrow accounts		3,591		3,591		3,625		3,625
Federal Home Loan Bank advances		116,100		118,693		139,600		144,520
Junior subordinated debt owed to unconsolidated trust		8,248		5,734		8,248		8,248

Off-Balance Sheet Instruments

Loan commitments on which the committed interest rate is less than the current market rate are insignificant at December 31, 2009 and 2008.

The Company assumes interest rate risk, which represents the risk that general interest rate levels will change, as a result of its normal operations. As a result, the fair values of the Company’s financial instruments will change when interest rate levels change and that change may be either favorable or unfavorable to the Company. Management attempts to match maturities of assets and liabilities to the extent believed necessary to minimize interest rate risk. However, borrowers with fixed-rate obligations are less likely to prepay in a rising rate environment and more likely to prepay in a falling rate environment. Conversely, depositors who are receiving fixed rates are more likely to withdraw funds before maturity in a rising rate environment and less likely to do so in a falling rate environment. Management monitors rates and maturities of assets and liabilities and attempts to minimize interest rate risk by adjusting terms of new loans and deposits and by investing in securities with terms that mitigate the Company’s overall interest rate risk.

- 57 -

SI FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2009 AND 2008

NOTE 17. RESTRICTIONS ON DIVIDENDS, LOANS AND ADVANCES

Federal regulations place certain restrictions on dividends paid and loans or advances made by the Bank to the Company. The total amount of dividends which may be declared in a given calendar year is generally limited to the net income of the Bank for that year plus retained net income for the preceding two years.

At December 31, 2009, there were no retained earnings available for payment of dividends. At December 31, 2008, the Bank’s retained earnings available for payment of dividends was $1.1 million. Accordingly, $73.2 million and $63.9 million of the Company’s equity in the net assets of the Bank were restricted at December 31, 2009 and 2008, respectively.

In addition, the Company is further restricted, under its junior subordinated debt obligation, from paying dividends to its shareholders if the Company has deferred interest payments or has otherwise defaulted on its junior subordinated debt obligation.

Under federal regulation, the Bank is also limited to the amount it may loan to the Company, unless such loans are collateralized by specific obligations. Loans or advances to the Company by the Bank are limited to 10% of the Bank’s capital stock and surplus on a secured basis. In addition, dividends paid by the Bank to the Company would be prohibited if the effect thereof, would cause the Bank’s capital to be reduced below applicable minimum capital requirements.

At December 31, 2009, SI Bancorp, MHC owned 7.3 million shares of the Company’s common stock. Upon regulatory approval, SI Bancorp, MHC may seek to waive receipt of future dividends declared by the Company. For the years ended December 31, 2009 and 2008, SI Bancorp, MHC waived receipt of all dividends declared by the Company.

NOTE 18. COMMON STOCK REPURCHASE PROGRAM

In November 2005, the Board of Directors approved a plan to repurchase up to 5%, or approximately 628,000 shares, of the Company’s common stock through open market purchases or privately negotiated transactions. Stock repurchases under the program are accounted for as treasury stock, carried at cost, and reflected as a reduction in stockholders’ equity. During the first quarter of 2008, the Company completed its repurchase of all 628,000 shares under this plan. In February 2008, the Company’s Board of Directors approved the repurchase of up to 5% of the Company’s outstanding common stock, or approximately 596,000 shares. As of December 31, 2009, the Company repurchased a total of 774,548 shares at a cost of approximately $8.0 million under these plans.

- 58 -

SI FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2009 AND 2008

NOTE 19. CONDENSED FINANCIAL STATEMENTS OF PARENT COMPANY

Condensed financial information pertaining only to the parent company, SI Financial Group, Inc., is as follows:

Condensed Balance Sheets	December 31,
(Dollars in Thousands)	2009		2008
Assets:
Cash and cash equivalents	$	3,583	$	3,377
Available for sale securities		5,378		6,806
Investment in Savings Institute Bank and Trust Company		71,994		65,035
Other assets		4,768		6,388
Total assets	$	85,723	$	81,606
Liabilities and Stockholders’ Equity:
Liabilities	$	8,261	$	8,679
Stockholders’ equity		77,462		72,927
Total liabilities and stockholders’ equity	$	85,723	$	81,606

Condensed Statements of Operations	Years Ended December 31,
(Dollars in Thousands)	2009		2008
Interest and dividends on investments	$	203	$	432
Other income		365		188
Total income		568		620
Operating expenses		532		728
Income (loss) before income taxes and equity in undistributed income of subsidiary net income (loss)		36		(108	)
Income tax provision (benefit)		10		(35	)
Income (loss) before equity in undistributed net income (loss) of subsidiary		26		(73	)
Equity in undistributed net income (loss) of subsidiary		409		(2,800	)
Net income (loss)	$	435	$	(2,873	)

- 59 -

SI FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2009 AND 2008

Condensed Statements of Cash Flows	Years Ended December 31,
(Dollars in Thousands)	2009			2008
Cash flows from operating activities:
Net income (loss)	$	435		$	(2,873	)
Adjustments to reconcile net income (loss) to net cash (used in) provided by operating activities:
Equity in undistributed (income) loss of subsidiary		(409	)		2,800
Deferred income taxes		624			1,685
Other, net		(692	)		(707	)
Cash (used in) provided by operating activities		(42	)		905
Cash flows from investing activities:
Purchase of available for sale securities		(3,013	)		(5,995	)
Proceeds from maturities of available for sale securities		2,388			6,700
Proceeds from sale of available for sale securities		2,000			2,036
Other, net		(937	)		(1,985	)
Cash provided by investing activities		438			756
Cash flows from financing activities:
Treasury stock purchased		(68	)		(2,626	)
Cash dividends on common stock		—			(665	)
Other, net		(122	)		(6	)
Cash used in financing activities		(190	)		(3,297	)
Net change in cash and cash equivalents		206			(1,636	)
Cash and cash equivalents at beginning of year		3,377			5,013
Cash and cash equivalents at end of year	$	3,583		$	3,377

- 60 -

COMMON STOCK INFORMATION

The common stock of the Company is listed on the NASDAQ Global Market (“NASDAQ”) under the trading symbol “SIFI.” As of March 15, 2010, there were 11,789,202 shares of common stock outstanding, which were held by approximately 867 stockholders of record, including SI Bancorp, MHC.

The following table sets forth the market price and dividend information for the Company’s common stock for the periods indicated, as reported by NASDAQ.

	Price Range				Dividends Declared
Year Ended December 31, 2009:	High		Low
First Quarter	$	7.95	$	2.99	$	0.00
Second Quarter		6.58		3.52		0.00
Third Quarter		5.00		3.80		0.00
Fourth Quarter		5.35		4.15		0.00

	Price Range				Dividends Declared
Year Ended December 31, 2008:	High		Low
First Quarter	$	10.00	$	9.42	$	0.04
Second Quarter		10.49		8.09		0.04
Third Quarter		10.00		7.01		0.04
Fourth Quarter		8.00		4.90		0.04

EX-21.0

Exhibit 21.0

LIST OF SUBSIDIARIES

Registrant: SI Financial Group, Inc.

Subsidiaries	Percentage Ownership		Jurisdiction or State of Incorporation
Savings Institute Bank and Trust Company	100	%	United States
SI Capital Trust II(1)	100	%	Delaware
803 Financial Corp.(2)	100	%	Connecticut
SI Realty Company, Inc.(2)	100	%	Connecticut
SI Mortgage Company(2)	100	%	Connecticut

(1) In accordance with authoritative guidance on the consolidation of variable interest entities, SI Capital Trust II is not included in the Company’s consolidated financial statements.

(2) Wholly-owned subsidiary of Savings Institute Bank and Trust Company.

EX-23.1

Exhibit 23.1

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We consent to the incorporation by reference in SI Financial Group, Inc. Registration Statement Nos. 333-119685 and 333-125659 on Forms S-8 of our report dated March 11, 2010 relating to our audit of the consolidated financial statements of SI Financial Group, Inc. and subsidiaries as of December 31, 2009 appearing in this Annual Report on Form 10-K.

/s/ Wolf & Company, P.C.

Boston, Massachusetts

March 22, 2010

EX-31.1

Exhibit 31.1

CERTIFICATION

I, Rheo A. Brouillard, certify that:

1. I have reviewed this report on Form 10-K of SI Financial Group, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

/s/ Rheo A. Brouillard

Rheo A. Brouillard

President and Chief Executive Officer

March 24, 2010

EX-31.2

Exhibit 31.2

CERTIFICATION

I, Brian J. Hull, certify that:

1. I have reviewed this annual report on Form 10-K of SI Financial Group, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f))for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

/s/ Brian J. Hull

Brian J. Hull

Executive Vice President, Treasurer and Chief Financial Officer

March 24, 2010

EX-32.0

Exhibit 32.0

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADDED BY

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Annual Report of SI Financial Group, Inc. (the “Company”) on Form 10-K for the fiscal year ended December 31, 2009, as filed with the Securities and Exchange Commission (the “Report”), the undersigned hereby certify pursuant to 18 U.S.C. Section 1350, as added by Section 906 of the Sarbanes-Oxley Act of 2002, that:

1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

2. The information contained in this Report fairly presents, in all material respects, the consolidated financial condition and results of operations of the Company as of and for the period covered by this Report.

By:	/s/ Rheo A. Brouillard
	Rheo A. Brouillard
	President and Chief Executive Officer
	March 24, 2010
By:	/s/ Brian J. Hull
	Brian J. Hull
	Executive Vice President, Treasurer and Chief Financial Officer
	March 24, 2010