SI Financial Group, Inc.
Business    1
Risk Factors    35
Unresolved Staff Comments    38
Properties    39
Legal Proceedings    41
Submission of Matters to a Vote of Security Holders    41      PART II.
Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities    41
Selected Financial Data    42
Management’s Discussion and Analysis of Financial Condition and Results of Operations    44      Item 7A.     Quantitative and Qualitative Disclosures About Market Risk     58
Financial Statements and Supplementary Data    60
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure    60
Controls and Procedures    60      Item 9B.     Other Information    60      PART III.
Directors and Executive Officers of the Registrant    61      Item 11.     Executive Compensation    61
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters    61
Certain Relationships and Related Transactions    61
Principal Accountant Fees and Services    61      PART IV.
Exhibits and Financial Statement Schedules    62           Signatures    64    Table of Contents Forward-Looking Statements  This report contains forward-looking statements that are based on assumptions and may describe future plans, strategies and expectations of SI Financial Group, Inc. (the “Company”). These forward-looking statements are generally identified by the use of the words “believe,” “expect,” “intend,” “anticipate,” “estimate,” “project” or similar expressions. The Company’s ability to predict results or the actual 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. 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. 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 was incorporated by an act of the Connecticut legislature in 1842 under the name Willimantic Savings Institute. It was shortened to Savings Institute in 1991 to reflect the Bank’s expanded geographic territory. In 2000, the Bank converted to stock form and became the wholly-owned subsidiary of SI Bancorp, Inc., a Connecticut-chartered mutual holding company. On August 6, 2004, Savings Institute converted to a federal charter and now operates under the name Savings Institute Bank and Trust Company. At that time, SI Bancorp, Inc. converted to a federal charter operating under the name SI Bancorp, MHC and transferred all of the common stock of the Bank to SI Financial Group, Inc. 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 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.    1    Table of Contents Asset Purchase  On November 15, 2005, the Company acquired certain assets of two trust services businesses, Private Trust Services and Bank Trust Services (“SI Trust Servicing”), from the former Circle Trust Company headquartered in Darien, Connecticut. SI Trust Servicing, located in Rutland, Vermont, is a third-party provider of trust outsourcing services for community banks. The acquisition presents significant growth opportunities in the Bank’s wealth management business and is expected to increase noninterest income and be accretive to earnings.  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(a) 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 seventeen offices in Windham, New London, Tolland and Hartford 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 2005 was approximately 115,000 and consisted of 43,000 households. The population increased approximately 5.6% from 2000. Median household income in Windham County is $49,000, compared to $59,000 for Connecticut as a whole and $44,000 nationally. The surrounding counties of Hartford, New London and Tolland Counties have median household incomes of $56,000, $55,000 and $65,000, 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, 2005, which is the most recent date for which data is available from the Federal Deposit Insurance Corporation (“FDIC”), the Bank held approximately 18.28% of the deposits in Windham County, which is the largest market share out of 11 financial institutions with offices in this county. Also, at June 30, 2005, the Bank held approximately 0.82% of the deposits in Hartford, New London and Tolland Counties, which is the 15th market share out of 35 financial institutions with offices in these counties. Banks owned by Bank of America Corp., Webster Bank Financial Corporation, TD Banknorth Group, Inc., Sovereign Bancorp., Inc. and Citizens Financial Group, Inc., all of which are large 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.    2    Table of Contents 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 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, 2005, the Bank had $107,000 in loans that were held for sale.  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,         2005     2004     2003     2002     2001    (Dollars in Thousands)    Amount     Percentof Total     Amount     Percentof Total     Amount     Percentof Total     Amount     Percentof Total     Amount     Percentof Total     Real estate loans:                                                 Residential – 1 to 4 family    $ 266,739     51.66 %   $ 252,180     55.99 %   $ 226,881     58.29 %   $ 213,831     63.29 %   $ 193,672     65.36 %   Multi-family and commercial      100,926     19.54       82,213     18.25       73,428     18.87       61,214     18.12       56,376     19.02     Construction      47,325     9.16       35,773     7.94       20,652     5.30       21,104     6.25       10,155     3.43                                                                              Total real estate loans      414,990     80.36       370,166     82.18       320,961     82.46       296,149     87.66       260,203     87.81                 Consumer loans:                                                 Home equity      20,562     3.98       18,335     4.07       14,411     3.70       10,786     3.19       7,752     2.62     Other      3,294     0.64       2,790     0.62       3,107     0.80       3,936     1.16       7,174     2.42                                                                              Total consumer loans      23,856     4.62       21,125     4.69       17,518     4.50       14,722     4.35       14,926     5.04     Commercial business loans      77,552     15.02       59,123     13.13       50,746     13.04       27,003     7.99       21,192     7.15                                                                              Total loans      516,398     100.00 %     450,414     100.00 %     389,225     100.00 %     337,874     100.00 %     296,321     100.00 %                                                             Deferred loan origination costs, net of fees      1,048           743           387           (209 )         (349 )       Allowance for loan losses      (3,671 )         (3,200 )         (2,688 )         (3,067 )         (2,861 )                                                                      Loans, net    $ 513,775         $ 447,957         $ 386,924         $ 334,598         $ 293,111                                                                         3    Table of Contents 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 30 years. Borrower demand for adjustable-rate loans versus fixed-rate loans is a function of the level of interest rates, the expectations of changes in the level of 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.  The Bank offers fixed-rate loans with terms of 15, 20 or 30 years. The Bank’s adjustable-rate mortgage loans are based on 15, 20 or 30 year amortization schedules. Interest rates and payments on adjustable-rate mortgage loans adjust annually after a one, three, five, seven or 10-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 Federal Housing Authority, Veterans Administration and Connecticut Housing Finance Agency loans and a first-time home buyers 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 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, 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.  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    4    Table of Contents 2.5-3.5% 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, 2005, the largest outstanding multi-family or commercial real estate loan commitment was $3.0 million, of which $2.9 million was outstanding. This loan is secured by the assets of a healthcare facility and was performing according to its terms at December 31, 2005.  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 properties often depend on 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 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 profitability and the 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 divided by amounts paid for interest and required principal payments. Environmental surveys are generally required for commercial real estate loans over $250,000.  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. 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. Loans generally can be made with a maximum loan to value ratio of 85% on residential construction and 75% on commercial construction of the lower of appraised value or cost of the project, whichever is less. At December 31, 2005, the largest outstanding residential construction loan commitment was for $1.3 million, all of which was outstanding. At December 31, 2005, the largest outstanding commercial construction loan commitment was $7.3 million, of which $2.8 million was outstanding. These loans were performing according to their terms at December 31, 2005. 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, we 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     5    Table of Contents  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.  The Bank also originates land loans to individuals and local contractors and developers only for the purpose of 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 of 75% for a 10-year loan and 60% for a 15-year loan, whichever is less. 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 2.75% above the one-year constant maturity Treasury index. 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. If applicable, title insurance and a hazardous waste survey reporting that the land is free of hazardous or toxic waste is required.  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, which was $6.0 million at December 31, 2005. The largest commercial loan was a $1.0 million loan secured by business assets, real estate and Small Business Administration guarantee, of which $983,000 was outstanding as of December 31, 2005. This loan was performing according to its terms at December 31, 2005.  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 Small Business Administration guaranteed loans are offered.  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.  The Bank offers equipment lease financing to its commercial customers. Financing is available up to 100% of the leased equipment and amortized over a period of one to three years. All commercial leasing loans, totaling $1.4 million, were performing according to terms at December 31, 2005.    6    Table of Contents 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. Unsecured loans generally have a maximum borrowing limit of $15,000 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 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 maximum combined loan-to-value ratios of 100%, provided that loans in excess of 80% will be charged a higher rate of interest. 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 not renewed, 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 further substantial 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 United States Department of Agriculture and the Small Business Administration. The loans are primarily for commercial and agricultural properties located throughout the United States. The Bank purchased $22.2 million and $12.2 million of these loans in fiscal 2005 and 2004, 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, 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 and manage interest rate risk. The Bank sold $35.5 million, $15.5 million and $23.0 million of loans in the years ended December 31, 2005, 2004 and 2003, respectively.  At December 31, 2005, the Bank retained the servicing rights on $71.7 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. Loans sold with recourse totaled $66,000 at December 31, 2005. Loan servicing includes collecting and remitting loan     7    Table of Contents  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. The gross servicing fee income from loans sold with servicing rights retained is typically 25 or 37.5 basis points of the total balance of serviced loans. The servicing rights, included in other assets, related to these loans was $373,000 and $165,000 at December 31, 2005 and 2004, respectively. Amortization of mortgage servicing rights totaled $64,000, $24,000 and $0 for the years ended December 31, 2005, 2004 and 2003, respectively.  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)    2005    2004    2003   Loans at beginning of year    $ 450,414    $ 389,225    $ 337,874        Originations:                  Real estate loans      154,166      147,899      180,962   Commercial business loans      12,635      14,465      10,034   Consumer loans      17,011      16,063      16,682                          Total loan originations      183,812      178,427      207,678        Purchases      22,211      12,152      26,448        Deductions:                  Principal loan repayments, prepayments and other, net      104,126      113,766      156,963   Loan sales      35,534      15,549      22,996   Loan charge-offs      29      75      2,113   Transfers to other real estate owned      350      —        703                          Total deductions      140,039      129,390      182,775                          Net increase in loans      65,984      61,189      51,351                          Loans at end of year    $ 516,398    $ 450,414    $ 389,225                           8    Table of Contents Loan Maturity. The following table shows the contractual maturity of the Bank’s loan portfolio at December 31, 2005. 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 ThanOne Year toFive Years    More ThanFive Years    TotalAmountDue   Real estate loans:                       Residential – 1 to 4 family    $ 31    $ 4,653    $ 262,055    $ 266,739   Multi-family and commercial      287      2,504      98,135      100,926   Construction      10,469      1,999      34,857      47,325                                 Total real estate loans      10,787      9,156      395,047      414,990         Commercial business loans      7,379      8,262      61,911      77,552         Consumer loans      1,542      14,860      7,454      23,856                                 Total loans    $ 19,708    $ 32,278    $ 464,412    $ 516,398                                While one- to four-family residential real estate loans are normally originated with up to 30-year terms; 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.  The following table sets forth, at December 31, 2005, the dollar amount of gross loans receivable contractually due after December 31, 2006, and whether such loans have either fixed interest rates, floating or adjustable interest rates. The amounts shown below exclude deferred loan fees and costs and the allowance for loan losses and include $240,000 of nonperforming loans.                      Due After December 31, 2006  (Dollars in Thousands)     Fixed Rates    Floating orAdjustableRates    Total   Real estate loans:                  Residential – 1 to 4 family    $ 200,451    $ 66,257    $ 266,708   Multi-family and commercial      9,787      90,852      100,639   Construction      28,382      8,474      36,856                          Total real estate loans      238,620      165,583      404,203        Commercial business loans      38,133      32,040      70,173        Consumer loans      8,397      13,917      22,314                          Total loans    $ 285,150    $ 211,540    $ 496,690                           9    Table of Contents 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 consumer 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 of up to $6.0 million and (2) commercial and other consumer loans of 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 $359,650 for those that are non-conforming, (2) consumer and commercial loans up to $250,000 individually or $2.0 million jointly for consumer home equity lines of credit or $1.0 million jointly for commercial and other consumer loans. The Senior Commercial Officer may approve home equity lines of credit and commercial loans of up to $200,000 individually or $500,000 with the additional approval of the President or Senior Credit Officer. Various bank personnel have been delegated authority to approve loans up to $359,650.  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, 2005, the Bank’s regulatory limit on loans to one borrower was $9.9 million. At that date, the Bank’s largest lending relationship was $8.6 million representing two commercial business loans and a commercial construction loan for the construction of convalescent homes, of which $2.9 million was outstanding and performing according to the original repayment terms at December 31, 2005.  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 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 attempts to repossess any personal property that secures a consumer or commercial loan. If a 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 more than 30 days, all loans in foreclosure and all foreclosed and repossessed property.    10    Table of Contents The following table sets forth the delinquencies in the Bank’s loan portfolio as of the dates indicated.                                 December 31, 2005    December 31, 2004       60 – 89 Days    90 Days or More    60 – 89 Days    90 Days or More  (Dollars in Thousands)    Numberof Loans    PrincipalBalanceof Loans    Numberof Loans    PrincipalBalanceof Loans    Numberof Loans    PrincipalBalanceof Loans    Numberof Loans    PrincipalBalanceof Loans   Real estate loans:                                       Residential – 1 to 4 family    —      $ —      1    $ 80    5    $ 547    2    $ 522   Multi-family and commercial    —        —      1      74    —        —      3      421   Construction    —        —      —        —      —        —      —        —                                                       Total real estate loans    —        —      2      154    5      547    5      943             Consumer loans:                                       Home equity    —        —      —        —      1      20    —        —     Other    —        —      2      5    —        —      1      1                                                     Total consumer loans    —        —      2      5    1      20    1      1             Commercial business loans    —        —      —        —      —        —      —        —                                                       Total delinquent loans (1)    —      $ —      4    $ 159    6    $ 567    6    $ 944                                                      (1) Represents delinquent loans 60 days or more past due.  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.    11    Table of Contents The following table sets forth the principal balance of the Bank’s classified loans as of December 31, 2005.                    (Dollars in Thousands)    Loss    Doubtful    Substandard    SpecialMention   Real estate loans:                       Residential – 1 to 4 family    $ —      $ —      $ 643    $ 217   Multi-family and commercial      —        —        74      1,078   Construction      —        —        —        —                                   Total real estate loans      —        —        717      1,295         Consumer loans:                       Home equity      —        —        —        —     Other      —        15      5      —                                   Total consumer loans      —        15      5      —           Commercial business loans      —        —        266      110                                 Total classified loans    $ —      $ 15    $ 988    $ 1,405                                At December 31, 2005, the Bank had no loss rated loans and two loans rated as doubtful. Of the $988,000 of substandard loans at December 31, 2005, $224,000 are considered nonperforming loans. The largest substandard loan is $204,000, which is no more than 30 days past due. Of the $1.4 million of special mention loans, no loan was more than 30 days past due at December 31, 2005.  Nonperforming Assets and Restructured Loans. When a loan becomes 90 days delinquent, 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 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.    12    Table of Contents The following table provides information with respect to the Bank’s nonperforming assets and troubled debt restructurings as of the dates indicated.                                 December 31,    (Dollars in Thousands)    2005     2004     2003     2002     2001     Nonaccrual loans:                             Real estate loans    $ 224     $ 943     $ 1,295     $ 1,347     $ 1,597     Commercial business loans      —         —         —         418       517     Consumer loans      16       1       —         72       29                                                Total nonaccrual loans      240       944       1,295       1,837       2,143            Accruing loans past due 90 days or more:                             Real estate loans      —         —         —         5       46     Commercial business loans      —         —         —         —         1     Consumer loans      —         —         —         —         —                                                  Total accruing loans past due 90 days or more      —         —         —         5       47                                                Total nonperforming loans      240       944       1,295       1,842       2,190            Real estate owned, net (1)      325       —         328       43       43                                                Total nonperforming assets      565       944       1,623       1,885       2,233            Troubled debt restructurings      74       76       77       78       78                                                Total nonperforming assets and troubled debt restructurings    $ 639     $ 1,020     $ 1,700     $ 1,963     $ 2,311                                                Ratios:                             Total nonperforming loans to total loans      0.05 %     0.21 %     0.33 %     0.55 %     0.74 %   Total nonperforming loans to total assets      0.03       0.15       0.25       0.38       0.51     Total nonperforming assets and troubled debt restructurings to total assets      0.09       0.16       0.33       0.40       0.54      (1) Real estate owned balances are shown net of related loss allowance.  In addition to the loans disclosed in the above table, at December 31, 2005, the Bank identified eight loans totaling $764,000 in which the borrowers had possible credit problems 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 aforementioned loans have been classified as substandard and are contained in the classified loan table on the previous page.    13    Table of Contents Interest income that would have been recorded for the year ended December 31, 2005 had nonaccruing loans and troubled debt restructurings been current in accordance with their original terms and had been outstanding throughout the period amounted to $15,000. The amount of interest related to nonaccrual loans and troubled debt restructurings included in interest income was $5,000 for the year ended December 31, 2005.  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. Loans are charged against the allowance for loan losses when management believes that the uncollectibility of principal is confirmed. Subsequent recoveries, if any, are credited to the allowance for loan losses when received. The Bank evaluates the allowance for loan losses on a monthly basis.  The methodology for assessing the appropriateness of the allowance for loan losses consists of the following key elements:        •   Specific allowances for identified problem loans, including certain impaired or collateral-dependent loans;        •   General valuation allowance on certain identified problem loans;        •   General valuation allowance on the remainder of the loan portfolio; and        •   Unallocated component  Specific Allowance on Identified Problem Loans. The loan portfolio is segregated first between loans that are on the Bank’s “Managed Asset Report” and loans that are not. The Managed Asset Report includes: (1) loans that are 60 or more days delinquent, (2) loans with anticipated losses, (3) loans referred to attorneys for collection or in the process of foreclosure, (4) nonaccrual loans, (5) loans classified as “substandard,” “doubtful,” “loss” or “special mention” by either the Bank’s internal classification system or by regulators during the course of their examination of the Bank and (6) troubled debt restructurings and other nonperforming loans.  The Managed Asset Committee, consisting of Bank officers, reviews each loan on the Managed Asset Report and may establish an individual reserve allocation on certain loans based on such factors as (1) the strength of the customer’s personal or business cash flow; (2) the availability of other sources of repayment; (3) the amount due or past due; (4) the type and value of collateral; (5) the strength of the borrower’s collateral position; (6) the estimated cost to sell the collateral; and (7) the borrower’s effort to cure the delinquency.  The Bank also reviews and establishes, as needed, a specific allowance for certain identified non-homogeneous problem loans. In accordance with the Statement of Financial Accounting Standards No. 114, “Accounting by Creditors for Impairment of a Loan” as amended by Statement of Financial Accounting Standards No. 118, “Accounting by Creditors for Impairment of a Loan-–an amendment of FASB Statement No. 114,” a loan is impaired when, based on current information and events, it is probable that a creditor will be unable to collect all amounts due under the contractual terms of the loan agreement. Measurement of the impairment is based on the present value of expected future cash flows or the fair value of the collateral, if the loan is collateral dependent. A specific allowance on impaired loans is established if the present value of the expected future cash flows, or fair value of the collateral for collateral dependent loans, is lower than the carrying value of the loan.  General Valuation Allowance on Certain Identified Problem Loans. The Bank establishes a general allowance for loans on the Managed Asset Report that do not have an individual allowance. The Bank segregates     14    Table of Contents  these loans by loan category and assigns allowance percentages to each category based on inherent losses associated with each type of lending and consideration that these loans, in the aggregate, represent an above-average credit risk and that more of these loans will prove to be uncollectible compared to loans in the general portfolio.  General Valuation Allowance on the Remainder of the Loan Portfolio. The Bank establishes another general allowance for loans that are not on the Managed Asset Report to recognize the probable losses associated with lending activities, but which, unlike specific allowances, has not been allocated to particular problem assets. This general valuation allowance is determined by segregating the loans by loan category and assigning allowance percentages based on the Bank’s historical loss experience and delinquency trends. The allowance may be adjusted for significant factors that, in management’s judgment, affect the collectibility of the portfolio as of the evaluation date. These significant factors 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 bank regulatory examination results. The applied loss factors are re-evaluated annually to ensure their relevance in the current economic environment.  Unallocated Component. An unallocated component is maintained to cover uncertainties that could affect management’s estimate of probable losses. The unallocated component of the allowance reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating specific and general losses in the portfolio.  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. Furthermore, while management believes it has established its allowance for loan losses in conformity with generally accepted accounting principles, there can be no assurance that regulators, in reviewing the Bank’s loan portfolio, will not request the Bank to increase its allowance for loan losses. 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.  The following table sets forth an analysis of the allowance for loan losses for the years indicated.                                 Years Ended December 31,    (Dollars in Thousands)    2005     2004     2003     2002     2001     Allowance at beginning of year    $  3,200     $  2,688     $  3,067     $  2,861     $  2,605            Provision for loan losses      410       550       1,602       537       440            Charge-offs:                             Real estate loans      (17 )     —         (1,523 )     (77 )     (40 )   Commercial business loans      (1 )     (13 )     (374 )     (111 )     (218 )   Consumer loans      (11 )     (62 )     (216 )     (218 )     (146 )                                              Total charge-offs      (29 )     (75 )     (2,113 )     (406 )     (404 )          Recoveries:                             Real estate loans      70       19       89       35       40     Commercial business loans      3       6       24       32       161     Consumer loans      17       12       19       8       19                                                Total recoveries      90       37       132       75       220                                                Net recoveries (charge-offs)      61       (38 )     (1,981 )     (331 )     (184 )                                              Allowance at end of year    $ 3,671     $ 3,200     $ 2,688     $ 3,067     $ 2,861                                                Ratios:                             Allowance to total loans outstanding at end of year      0.71 %     0.71 %     0.69 %     0.91 %     0.97 %          Allowance to nonperforming loans      1529.58       338.98       207.57       166.50       130.64            Net recoveries (charge-offs) to average loans outstanding during the year      0.01       (0.01 )     (0.55 )     (0.11 )     (0.07 )          Recoveries to charge-offs      310.34       49.30       6.25       18.47       54.46      15    Table of Contents The Bank recorded net recoveries of $61,000 in 2005, as compared to net charge-offs for the prior years presented in the above table. The strong level of recoveries of previously charged-off loans and low charge-offs for 2005 were attributable to the quality loan portfolio with conservative underwriting practices and strong collection efforts. Charge-offs for 2003 included the charge-off of two commercial business loans and two commercial real estate loans that aggregated $1.8 million. The larger of the two commercial real estate loans, which at the time of charge-off had a principal balance of $1.6 million, was charged-off after the loan was nonperforming and the Bank determined that the value of the real estate underlying the loan was insufficient to cover the outstanding principal balance. Additionally, because we held a junior collateral position, the Bank determined that the likelihood of any recovery was remote. During the year ended December 31, 2003, charge-offs exceeded the provision for loan losses as specific allowances of $237,000 were established in prior periods for a portion of the charged-off loans once it had been determined that collection or liquidation in full was unlikely.  The following table sets forth the breakdown of the allowance for loan losses by loan category at the dates indicated.                                        December 31,         2005     2004     2003    (Dollars in Thousands)    Amount    % ofAllowancein eachCategoryto TotalAllowance      % ofLoans in eachCategoryto TotalLoans     Amount    % ofAllowancein eachCategoryto TotalAllowance      % ofLoans in eachCategoryto TotalLoans     Amount    % ofAllowancein eachCategoryto TotalAllowance      % ofLoans in eachCategoryto TotalLoans     Real estate loans    $ 2,639    71.89 %   80.36 %   $ 2,403    75.08 %   82.18 %   $ 2,093    77.86 %   82.46 %   Commercial business      892    24.29     15.02       641    20.02     13.13       461    17.15     13.04     Consumer loans      140    3.82     4.62       152    4.74     4.69       80    2.98     4.50     Unallocated      —      —       —         4    0.16     —         54    2.01     —                                                                   Total allowance for loan losses    $ 3,671    100.00 %   100.00 %   $ 3,200    100.00 %   100.00 %   $ 2,688    100.00 %   100.00 %                                                                16    Table of Contents                            December 31,         2002     2001    (Dollars in Thousands)    Amount    % ofAllowancein eachCategoryto TotalAllowance      % of Loans in eachCategory to TotalLoans     Amount    % ofAllowancein eachCategoryto TotalAllowance      % of Loans in eachCategory to TotalLoans     Real estate loans    $ 2,237    72.94 %   87.66 %   $ 1,866    65.22 %   87.81 %   Commercial business      488    15.91     7.99       647    22.62     7.15     Consumer loans      318    10.37     4.35       277    9.68     5.04     Unallocated      24    0.78     —         71    2.48     —                                                Total allowance for loan losses    $ 3,067    100.00 %   100.00 %   $ 2,861    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, 2005.  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 investment policy and appointment of the Investment Committee. The Investment Committee is responsible for 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 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 President and 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.  Statement of Financial Accounting Standards No. 115, “Accounting for Certain Investments in Debt and Equity Securities” (“SFAS No. 115”), requires that securities be categorized as either “held to maturity,” “trading securities” or “available for sale” based on management’s intent as to the ultimate disposition of each security. Debt securities may be classified as “held to maturity,” and reported in the financial     17    Table of Contents  statements at amortized cost, only if the Company has the positive intent and ability to hold those securities until maturity. Securities purchased and held principally for the purpose of trading in the near term are classified as “trading securities.” These securities are reported at fair value in the financial statements, with unrealized gains and losses recognized in earnings. Debt and equity securities not classified as either “held to maturity” or “trading securities” are classified as “available for sale securities.” These securities are reported at fair value with unrealized gains and losses excluded from earnings and reported in other comprehensive income, net of taxes.  At December 31, 2005, the Company’s investment portfolio, which consisted solely of available for sale securities, totaled $120.0 million and represented 17.3% of assets. The Company’s available for sale securities consisted primarily of government-sponsored enterprises with maturities of six years or less, U.S. government and agency securities with maturities of 15 years or less, mortgage-backed securities issued by Fannie Mae, Freddie Mac and Ginnie Mae with stated final maturities of 25 years or less, and corporate debt securities and securities of state and municipal governments.  The following table sets forth the amortized costs and fair values of the Company’s securities portfolio at the dates indicated.                               December 31,       2005    2004    2003  (Dollars in Thousands)    AmortizedCost     Fair Value    AmortizedCost     Fair Value    AmortizedCost     Fair Value   Available for sale securities:                                 U.S. Government and agency securities    $ 4,820    $ 4,813    $ 6,039    $ 6,066    $ 7,139    $ 7,239   Government-sponsored enterprises      73,135      71,490      67,911      67,610      31,444      31,760   Mortgage-backed securities      37,346      36,538      40,926      40,594      19,050      18,364   Corporate debt securities      4,537      4,528      3,498      3,563      15,540      16,451   Obligations of state and political subdivisions      1,499      1,546      1,499      1,584      3,129      3,217   Tax-exempt      490      490      560      560      —        —     Other debt securities      75      74      75      75      75      75                                               Total debt securities      121,902      119,479      120,508      120,052      76,377      77,106           Marketable equity securities      555      540      488      505      531      587                                               Total available for sale securities      122,457      120,019      120,996      120,557      76,908      77,693           Held to maturity securities:                                 Mortgage-backed securities      —        —        —        —        1,728      1,344                                               Total securities    $ 122,457    $ 120,019    $ 120,996    $ 120,557    $ 78,636    $ 79,037                                              The Company had no investments that had an aggregate book value in excess of 10% of its stockholders’ equity at December 31, 2005.  The following table sets forth the amortized cost, weighted average yields and contractual maturities of securities at December 31, 2005. 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 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, 2005, mortgage-backed securities with adjustable rates totaled $10.4 million.    18    Table of Contents                                        One Year or Less     More than One Yearto Five Years     More than Five Yearsto Ten Years     More than Ten Years     Total    (Dollars in Thousands)     Amortized Cost    WeightedAverageYield      Amortized Cost    WeightedAverageYield      Amortized Cost    WeightedAverageYield      Amortized Cost    WeightedAverageYield      Amortized Cost    WeightedAverageYield     U.S. government and agency securities    $ 2,017    2.48 %   $ 215    5.10 %   $ 1,220    5.82 %   $ 1,368    5.63 %   $ 4,820    4.34 %   Government-sponsored enterprises      6,499    2.66       64,885    3.67       1,751    3.96       —      —         73,135    3.59     Mortgage-backed securities      1    8.41       1,978    5.32       6,774    4.01       28,593    4.53       37,346    4.48     Corporate debt securities      —      —         —      —         —      —         4,537    5.22       4,537    5.22     Obligations of state and political subdivisions      —      —         999    6.80       —      —         500    5.67       1,499    6.42     Tax-exempt securities      70    3.88       280    3.88       140    3.88       —      —         490    3.88     Other debt securities      25    5.50       50    5.63       —      —         —      —         75    5.58                                                               Total debt securities      8,612    2.64       68,407    3.77       9,885    4.22       34,998    4.68       121,902    3.99                 Marketable equity securities      —      —         —      —         —      —         555    3.30       555    3.30                                                               Total available for sale securities    $ 8,612    2.64     $ 68,407    3.77     $ 9,885    4.22     $ 35,553    4.66     $ 122,457    3.99                                                              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 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 certificates of deposits, which at December 31, 2005 amounted to $5.0 million, as an alternate source of funds. 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 long-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.    19    Table of Contents The following table sets forth the deposit activity for the years indicated, including mortgagors’ and investors’ escrow accounts and brokered deposits.                      Years Ended December 31,  (Dollars in Thousands)    2005    2004    2003   Beginning balance    $ 460,480    $ 417,311    $ 398,315        Increase before interest credited      43,265      36,833      12,389   Interest credited      8,537      6,336      6,607                          Net increase in deposits      51,802      43,169      18,996                          Ending balance (1)    $ 512,282    $ 460,480    $ 417,311                           (1) Includes mortgagors’ and investors’ escrow accounts in the amount of $3.0 million, $2.7 million and $2.2 million at December 31, 2005, 2004 and 2003, respectively. Includes brokered deposits of $5.0 million at December 31, 2005, 2004 and 2003.  The following table sets forth the distribution of the Bank’s deposit accounts for the dates indicated.                               December 31,         2005     2004     2003    (Dollars in Thousands)    Balance     % of Total     Balance     % of Total     Balance     % of Total     Noninterest-bearing demand deposits    $ 51,996    10.15 %   $ 46,049    10.00 %   $ 40,371    9.67 %   NOW and money market accounts      125,156    24.43       110,564    24.01       101,852    24.41     Savings accounts (1)      90,879    17.74       95,310    20.70       89,846    21.53     Certificates of deposit (2)      244,251    47.68       208,557    45.29       185,242    44.39                                               Total deposits    $ 512,282    100.00 %   $ 460,480    100.00 %   $ 417,311    100.00 %                                              (1) Includes mortgagors’ and investors’ escrow accounts in the amount of $3.0 million, $2.7 million and $2.2 million at December 31, 2005, 2004 and 2003, respectively.    (2) Includes brokered deposits of $5.0 million at December 31, 2005, 2004 and 2003.  The Bank had $65.0 million of certificates of deposit of $100,000 or more outstanding as of December 31, 2005, maturing as follows:              (Dollars in Thousands)    Amount     WeightedAverage Rate     Maturity Period:             Three months or less    $ 8,923    3.58 %   Over three through six months      5,685    2.73     Over six through twelve months      16,606    3.91     Over twelve months      33,766    4.09                   Total    $ 64,980    3.85 %                  20    Table of Contents 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, 2005.                                  Amount Due    Percent ofTotalCertificateAccounts    (Dollars in Thousands)    Less ThanOne Year    One toTwo Years    Two toThree Years    Three toFour Years    More ThanFour Years    Total      1.24 – 2.00%    $ 36,303    $ 2,394    $ 18    $ —      $ —      $ 38,715    15.85 %   2.01 – 3.00%      25,632      12,581      321      304      —        38,838    15.90     3.01 – 4.00%      16,603      15,462      8,575      5,723      250      46,613    19.09     4.01 – 5.00%      49,088      31,628      18,377      1,674      8,492      109,259    44.73     5.01 – 6.00%      2,094      8,195      4      302      —        10,595    4.34     6.01 – 6.78%      149      82      —        —        —        231    0.09                                                        Total    $ 129,869    $ 70,342    $ 27,295    $ 8,003    $ 8,742    $ 244,251    100.00 %                                                     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 United States), 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. Under its current credit policies, the FHLB generally limits advances to 25% of a member’s assets, and short-term borrowings of less than one year may not exceed 10% of the institution’s assets. The FHLB determines specific lines of credit for each member institution.  Advances from the FHLB increased $15.3 million, or 21.0%, for the year ended December 31, 2005 to $87.9 million. The new advances, which have longer durations, were obtained to mitigate interest rate risk by matching the durations of the longer-term mortgage loans in the loan portfolio. The increased borrowings were used as a supplement to deposits to fund asset growth.  Junior Subordinated Debt Owed to Unconsolidated Trust. To a lesser extent, the Company has utilized the proceeds raised from the issuance of trust preferred securities. In 2002, SI Capital Trust I (the “Trust”), a business trust formed by SI Bancorp, MHC (formerly SI Bancorp, Inc.), issued $7.0 million of preferred securities in a private placement and issued approximately 217 shares of common stock at $1,000 par value to SI Bancorp, MHC. The Trust used the proceeds of these issuances to purchase $7.2 million of SI Bancorp, MHC’s floating rate junior subordinated deferrable interest debentures. The interest rate on the debentures and the trust preferred securities is variable and adjustable quarterly at 3.70% over the six-month LIBOR. The interest rate on these securities at December 31, 2005 was 8.15%. A rate cap of 11.00% is effective through April 22, 2007. On September 24, 2004, all of the common stock of SI Capital Trust I was contributed to the Company from SI Bancorp, MHC, at which point, SI Capital Trust I became an unconsolidated subsidiary of the Company.  The debentures are the sole assets of SI Capital Trust I and are subordinate to all of the Company’s existing and future obligations for borrowed money, its obligations under letters of credit and certain     21    Table of Contents  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. SI Bancorp, MHC’s obligations under the guarantee and the Company’s obligations under the debentures, the related indenture and the trust agreement relating to the trust securities, constitute a full and unconditional guarantee by the Company of the obligations of SI Capital Trust I under the trust preferred securities.  The stated maturity of the debentures is April 22, 2032. In addition, the debentures are subject to redemption at par at the option of the Company, subject to prior regulatory approval, in whole or in part on any interest payment date after April 22, 2007. The debentures are also subject to redemption before April 22, 2007 at a specified price after the occurrence of certain events that would either have a negative tax effect on SI Capital Trust I or the Company or would result in SI Capital Trust I 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.  Additionally, 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, 2005.  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)    2005     2004     2003     Maximum amount of advances outstanding at any month-end during the year:                   FHLB advances    $ 93,190     $ 72,674     $ 57,168     Subordinated debt      7,217       7,217       7,217     Other borrowings      —         —         1,951          Average balance outstanding during the year:                   FHLB advances    $ 79,596     $ 65,154     $ 46,693     Subordinated debt      7,217       7,217       7,217     Other borrowings      —         —         1,233          Weighted average interest rate during the year:                   FHLB advances      3.90 %     4.12 %     4.66 %   Subordinated debt      6.86       5.14       4.99     Other borrowings      —         —         6.00          Balance outstanding at end of year:                   FHLB advances    $ 87,929     $ 72,674     $ 57,168     Subordinated debt      7,217       7,217       7,217     Other borrowings      —         —         —            Weighted average interest rate at end of year:                   FHLB advances      3.97 %     3.80 %     4.29 %   Subordinated debt      8.15       5.92       4.85     Other borrowings      —         —         —        22    Table of Contents Trust Services  The Bank’s trust department provides fiduciary services, investment management and retirement services, to individuals, partnerships, corporations and institutions. Additionally, conservatorships and executorships are provided under various trust, 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, 2005, trust assets under administration were $147.3 million, consisting of 364 accounts, the largest of which totaled $8.0 million, or 5.4% of the trust department’s total assets. The acquisition of SI Trust Servicing, in Rutland, Vermont, in November 2005 represented an opportunity for significant growth of the Bank’s wealth management business. SI Trust Servicing offers third-party trust outsourcing services to other community banks located throughout the country. As of December 31, 2005, SI Trust Servicing provided trust outsourcing services to thirteen clients, consisting of 4,767 accounts totaling $4.59 billion in assets. For the years ended December 31, 2005, 2004 and 2003, total trust services revenue was $1.0 million, $631,000 and $596,000, respectively.  Subsidiary Activities  The Company has one subsidiary other than the Savings Institute Bank and Trust Company. In 2002, SI Capital Trust I was established as a statutory trust under Delaware law as a wholly-owned subsidiary of SI Bancorp, MHC for the purpose of issuing trust preferred securities. SI Capital Trust I issued trust preferred securities on April 10, 2002. All of the common stock of SI Capital Trust I was contributed to the Company from SI Bancorp, MHC on September 24, 2004. At that point, SI Capital Trust I became a wholly-owned subsidiary of the Company. In accordance with Financial Accounting Standards Board Interpretation No. 46R, “Consolidation of Variable Interest Entities,” SI Capital Trust I is not consolidated for financial reporting purposes.  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. For the years ended December 31, 2004 and 2003, the Bank received fees of $184,000 and $121,000, respectively, through its relationship with Infinex. Due to a regulatory restriction on federally-chartered thrifts, on December 31, 2004, 803 Financial Corp. sold its interest in Infinex which was subsequently purchased by SI Financial Group, Inc. As of December 31, 2005 and 2004, 803 Financial Corp. had no other holdings or business activities.    23    Table of Contents SI Realty Company, Inc. SI Realty, established in 1999 as a Connecticut corporation, holds real estate owned by the Bank, including foreclosure properties. At December 31, 2005, SI Realty had $539,000 in assets.  SI Mortgage Company. In January 1999, the Bank formed SI Mortgage to manage and hold loans secured by real property. SI Mortgage 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 approximately $245,000 and $92,000 for the years ended December 31, 2005 and 2004, respectively.  Personnel  At December 31, 2005, the Company had 206 full-time employees and 40 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 its deposits insurer. The Bank is a member of the Federal Home Loan Bank System and its deposit accounts are insured up to applicable limits by the Bank 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.    24    Table of Contents 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. 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 and intermediate preferred stock, the allowance for loan and lease losses 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, 2005, 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     25    Table of Contents  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 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. 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;    26    Table of Contents     •   goodwill and other intangible assets; and        •   the value of property used to conduct business  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, 2005, the Bank maintained 76.03% 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.  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.    27    Table of Contents 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. The OTS assessments paid by the Bank for 2005 were $137,000.  Insurance of Deposit Accounts. The Bank is a member of the Bank Insurance Fund. The FDIC maintains a risk-based assessment system by which institutions are assigned to one of three categories based on their capitalization and one of three subcategories based on examination ratings and other supervisory information. An institution’s assessment rate depends upon the categories to which it is assigned. Assessment rates for Bank Insurance Fund member institutions are determined semi-annually by the FDIC and currently range from zero basis points of assessable deposits for the healthiest institutions to 27 basis points of assessable deposits for the riskiest.  The Bank’s assessment paid for fiscal 2005 was $63,000. The FDIC has authority to increase insurance assessments. A material increase in Bank Insurance Fund insurance premiums would likely have an adverse effect on the operating expenses and results of operation of the Bank. Management cannot predict what insurance assessment rates will be in the future.  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 the predecessor to the Savings Association Insurance Fund. During the year ended December 31, 2005, Financing Corporation payments for Bank Insurance Fund members averaged 1.39 basis points of assessable deposits. At December 31, 2005, the Bank had paid all fees and assessments for deposit insurance.  The FDIC may terminate an institution’s insurance of deposits 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 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 Deposit Insurance Reform Act of 2005. The Federal Deposit Insurance Reform Act of 2005 (the “Act”), signed by the President on February 8, 2006, revised the laws governing the federal deposit insurance system. The Act provides for the consolidation of the Bank and Savings Association Insurance Funds into a combined “Deposit Insurance Fund.”  Under the Act, insurance premiums are to be determined by the FDIC based on a number of factors, primarily the risk of loss that insured institutions pose to the Deposit Insurance Fund. The legislation eliminates the current minimum 1.25% reserve ratio for the insurance funds, the mandatory assessments when the ratio fall below 1.25% and the prohibition on assessing the highest quality banks when the ratio is above 1.25%. The Act provides the FDIC with flexibility to adjust the new insurance fund’s reserve ratio between 1.15% and 1.5%, depending on projected losses, economic changes and assessment rates at the end of a calendar year.  The Act increased deposit insurance coverage limits from $100,000 to $250,000 for certain types of Individual Retirement Accounts, 401(k) plans and other retirement savings accounts. While it preserved the $100,000 coverage limit for individual accounts and municipal deposits, the FDIC was furnished with the discretion to adjust all coverage levels to keep pace with inflation beginning in 2010. Also, institutions that become undercapitalized will be prohibited from accepting certain employee benefit plan deposits.    28    Table of Contents The consolidation of the Bank Insurance Fund and Savings Association Insurance Fund must occur no later than the first day of the calendar quarter that begins 90 days after the date of the Act’s enactment, i.e., July 1, 2006. The Act also states that the FDIC must promulgate final regulations implementing the remainder of its provisions not later than 270 days after its enactment. At this time, management cannot predict the effect, if any, that the Act will have on insurance premiums paid by the Bank.  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 FHLB provides 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 FHLB. The Bank was in compliance with this requirement with an investment in FHLB at December 31, 2005 of $5.6 million.  The Federal Home Loan Banks are required to provide funds for the resolution of insolvent thrifts in the late 1980s and to contribute funds for affordable housing programs. These requirements could reduce the amount of dividends that the Federal Home Loan Banks pay to their members and could also result in the Federal Home Loan Banks imposing a higher rate of interest on advances to their members. If dividends were reduced, or interest on future FHLB advances increased, the Company’s net interest income would be negatively impacted.  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). The regulations generally provide that reserves be maintained against aggregate transaction accounts as follows: a 3% reserve ratio is assessed on net transaction accounts up to and including $48.3 million; a 10% reserve ratio is applied above $48.3 million. The first $7.8 million of otherwise reservable balances (subject to adjustments by the Federal Reserve Board) are exempted from the reserve requirements. The amounts are adjusted annually. The Bank complies with the foregoing requirements.    29    Table of Contents 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 also 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 permit such acquisitions. The states vary in the extent to which they permit interstate savings and loan holding company acquisitions.    30    Table of Contents 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.  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.  Sarbanes-Oxley Act of 2002  The Sarbanes-Oxley Act of 2002 implemented legislative reforms intended to address corporate and accounting fraud. The Sarbanes-Oxley Act restricts the scope of services that may be provided by accounting firms to their public company audit clients and any non-audit services being provided to a public company audit client will require pre-approval by the company’s audit committee. In addition, the Sarbanes-Oxley Act requires chief executive officers and chief financial officers, or their equivalents, to certify to the accuracy of periodic reports filed with the Securities and Exchange Commission, subject to civil and criminal penalties if they knowingly or willingly violate this certification requirement.    31    Table of Contents Under the Sarbanes-Oxley Act, bonuses issued to top executives before restatement of a company’s financial statements are now subject to disgorgement if such restatement was due to corporate misconduct. Executives are also prohibited from insider trading during retirement plan “blackout” periods and loans to company executives (other than loans by financial institutions permitted by federal rules and regulations) are restricted. The legislation accelerates the time frame for disclosures by public companies of changes in ownership in a company’s securities by directors and executive officers.  The Sarbanes-Oxley Act also increases the oversight of, and codifies certain requirements relating to audit committees of public companies and how they interact with the company’s “registered public accounting firm.” Among other requirements, companies must disclose whether at least one member of the audit committee is a “financial expert” (as such term is defined by the Securities and Exchange Commission) and if not, why not. Although the Company anticipates that it will incur additional expense in complying with the provisions of the Sarbanes-Oxley Act and the resulting regulations, management does not expect that such compliance will have a material impact on the Company’s results of operations or financial condition.  Privacy Requirements of the Gramm-Leach Bliley Act of 1999  The Gramm-Leach-Bliley Act of 1999 (the “GLBA”) provided for sweeping financial modernization for commercial banks, savings banks, securities firms, insurance companies and other financial institutions operating in the United States. Among other provisions, the GLBA places limitations on the sharing of consumer financial information with unaffiliated third parties. Specifically, the GLBA requires all financial institutions offering financial products or services to retail customers to provide such customers with the financial institution’s privacy policy and provide such customers the opportunity to “opt out” of the sharing of personal financial information with unaffiliated third parties.  Anti-Money Laundering and the USA Patriot Act  The Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (referred to as the “USA PATRIOT Act”) significantly expands the responsibilities of financial institutions, including savings and loan associations, in preventing the use of the U.S. financial system to fund terrorist activities. Title III of the USA PATRIOT Act provides for a significant overhaul of the U.S. anti-money laundering regime. Among other provisions, it requires financial institutions operating in the United States to develop new anti-money laundering compliance programs, due diligence policies and controls to ensure the detection and reporting of money laundering. Such required compliance programs are intended to supplement existing compliance requirements, also applicable to financial institutions, under the Bank Secrecy Act and the Office of Foreign Assets Control Regulations.  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;        •   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;    32    Table of Contents     •   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 consumer 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.  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 2001. For its 2005 year, the Company’s maximum federal income tax rate was 34%.  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 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 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,     33    Table of Contents  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 (7.50% for fiscal year 2005) 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 discussion of the Bank’s passive investment company.  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    51    President and Chief Executive Officer of SI Financial Group, SI Bancorp, MHC and Savings Institute Bank and Trust Company       Brian J. Hull    45    Executive Vice President, Chief Financial Officer and Treasurer of SI Financial Group, SI Bancorp, MHC and Savings Institute Bank and Trust Company       Sonia M. Dudas    55    Senior Vice President and Senior Trust Officer of Savings Institute Bank and Trust Company       Michael J. Moran    57    Senior Vice President and Senior Credit Officer of Savings Institute Bank and Trust Company       William E. Anderson, Jr.    36    Vice President and Retail Banking Officer of Savings Institute Bank and Trust Company       Laurie L. Gervais    41    Vice President and Director of Human Resources of Savings Institute Bank and Trust Company    (1) Ages presented are as of December 31, 2005.    34    Table of Contents 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. He 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 SI Bancorp, MHC and SI Financial Group since 2000 and 2004, respectively.  Sonia M. Dudas has been Senior Vice President and Senior Trust Officer since 1999. Ms. Dudas oversees wealth management services, which includes trust, investment and insurance operations since she joined Savings Institute Bank and Trust Company in 1992.  Michael J. Moran has been Senior Vice President and Senior Credit Officer since 2001. Mr. Moran joined Savings Institute Bank and Trust Company in 1995.  William E. Anderson, Jr. has been Vice President and Retail Banking Officer since 2002 and 2004, respectively. Mr. Anderson joined Savings Institute Bank and Trust Company in 1995.  Laurie L. Gervais has been Vice President and Director of Human Resources since 2003 and 2001, respectively. Ms. Gervais joined Savings Institute Bank and Trust Company in 1983.   Item 1A. Risk Factors.  Prospective investors in the Company’s common stock should carefully consider the following factors.        •   The Company’s increased emphasis on commercial lending may expose it to increased lending risks. At December 31, 2005, $178.5 million, or 34.6%, 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. These types of 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 property 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 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     35    Table of Contents       that it generates from the additional branches it establishes 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 net income.        •   Rising interest rates may hurt the Company’s profits. Interest rates were recently at historically low levels. However, since June 30, 2004, the U.S. Federal Reserve has increased its target for the federal funds rate fourteen times, from 1.00% to 4.50%. While those short-term market interest rates (which the Bank uses as a guide to price its deposits) have increased, longer-term market interest rates (which the Bank uses as a guide to price its longer-term loans) have not. This “flattening” of the market yield curve has had a negative impact on the Company’s interest rate spread and net interest margin. If interest rates continue to rise, the Company’s net interest income and the value of its assets likely would be reduced if interest paid on interest-bearing liabilities, such as deposits and borrowings, increased more quickly than interest received on interest-earning assets, such as loans and investments, which would have a negative effect on the Company’s profitability.        •   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, 2005, the Company held approximately 0.82% of the deposits in Hartford, New London, Tolland and Windham counties in Connecticut, which represented the 15th 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.        •   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 National Market. Over the past 50 days, the average daily trading volume of its common stock was approximately 4,200 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:        •   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;    36    Table of Contents     •   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;        •   changes in economic conditions in the Company’s marketplace, general conditions in the U.S. economy, financial markets or the banking industry; 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.        •   Due to the time it will take to deploy the offering proceeds into higher-yielding assets, the Company expects that its return on equity initially will lag behind other, more mature publicly-held mutual holding companies. Return on equity, which equals net income divided by average equity, is a ratio used by many investors to compare the performance of a particular company with other companies. Over time, the Company intends to deploy the net proceeds from the offering, which were initially invested into investment securities, into higher-yielding assets with the goal of increasing earnings per share and book value per share, without assuming undue risk, and achieving a return on equity that is competitive with other publicly held subsidiaries of mutual holding companies. This goal could take a number of years to achieve, and the Company cannot assure you that it will be attained. Consequently, you should not expect a competitive return on equity in the near future. Failure to achieve a competitive return on equity might make an investment in the Company’s common stock unattractive to some investors and might cause the Company’s common stock to trade at lower prices than comparable companies with higher returns on equity.        •   Office of Thrift Supervision policy on remutualization transactions could prohibit acquisition of the Company, which may adversely affect its stock price. Current Office of Thrift Supervision regulations permit a mutual holding company to be acquired by a mutual institution in a remutualization transaction. The possibility of a remutualization transaction has recently resulted in a degree of takeover speculation for mutual holding companies that is reflected in the per share price of mutual holding companies’ common stock. However, the Office of Thrift Supervision has issued a policy statement indicating that it views remutualization transactions as raising significant issues concerning disparate treatment of minority stockholders and mutual members of the target entity and raising issues concerning the effect on the mutual members of the acquiring entity. Under certain circumstances, the Office of Thrift Supervision intends to give these issues special scrutiny and reject applications providing for the remutualization of a mutual holding company unless the applicant can clearly demonstrate that the Office of Thrift Supervision’s concerns are not warranted in the particular case. Should the Office of Thrift Supervision prohibit or otherwise restrict these transactions in the future, the Company’s per share stock price may be adversely affected.        •    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     37    Table of Contents       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 your personal best interests as a shareholder. 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 Office of Thrift Supervision, the Company’s chartering authority and the Federal Deposit Insurance Corporation, as insurer of the Bank’s deposits. SI Bancorp, MHC, the Company and the Bank are all subject to regulation and supervision by the Office of Thrift Supervision. 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.   Item 1B. Unresolved Staff Comments.  None.    38    Table of Contents  Item 2. Properties.  The Bank conducts its business through its main office and branch offices. The following table sets forth certain information relating to these facilities as of December 31, 2005.                      Location    YearOpened    SquareFootage    Date ofLeaseExpiration      Own/ Lease      Net BookValue as of December 31,2005                             (Dollars inthousands)   Main Office:                        803 Main Street Willimantic, Connecticut 06226    1870    26,210    —       Own     $ 1,951          Branch Offices:                        115 Main Street Hebron, Connecticut 06248    1974    2,400    —       Own       499   554 Exeter Road, Route 207 Lebanon, Connecticut 06249    1978    2,128    —       Own       245   9 Proulx Street Brooklyn, Connecticut 06234    1990    1,538    2010     Lease       200   85 Freshwater Boulevard Enfield, Connecticut 06082    1992    4,365    2007 (1)   Lease       15   Bell Park Plaza, 563 Hartford Pike Dayville, Connecticut 06241    1996    2,460    2006 (1)   Lease       5   971 Poquonnock Road Groton, Connecticut 06340    1997    3,373    2007 (2)   Lease       10   Big Y, 224 Salem Turnpike Norwich, Connecticut 06360    1998    575    2008 (2)   Lease       —     344 Prospect Street Moosup, Connecticut 06354    1998    2,160    2008 (2)   Lease       261   Shaw’s, 60 Cantor Drive Willimantic, Connecticut 06226    1998    421    2010 (1)   Lease       —     180 Westminster Road, Route 14 Canterbury, Connecticut 06331    1998    1,781    2008 (2)   Lease       27   Walmart, 474 Boston Post Road North Windham, Connecticut 06256    2000    540    2010 (1)   Lease       62   Walmart, Lisbon Landing, 180 River Road Lisbon, Connecticut 06351    2001    656    2006 (2)   Lease       105   East Brook Mall, 95 Storrs Road Mansfield Center, Connecticut 06250    2002    2,325    2022 (3)   Lease       509   1000 Sullivan Avenue South Windsor, Connecticut 06074    2005    2,955    2025 (2)   Lease       21   Mystic Plaza, 80 Stonington Road Stonington, Connecticut 06378    2005    3,436    2014 (3)   Lease       395   Meetinghouse Commons 200 Merrow Road, Route 195 Tolland, Connecticut 06084    2005    2,870    2015 (2)   Lease       283          Other Properties:                        66 Routes 32 and 87 Franklin, Connecticut 06254    1983    2,380    —       Own       244   530 Stonington Road, Route 1 Stonington, Connecticut 06378    1987    1,960    2006 (1)   Lease (4)     —     7 Ledgebrook Drive Mansfield, Connecticut 06250    1990    4,554    2007     Lease (6)     9   779 Main Street Willimantic, Connecticut 06226    1999    8,182    —       Own (7)     213   579 North Windham Road North Windham, CT 06256    2005    10,000    2010 (5)   Lease (8)     421   80 West Street Rutland, Vermont 05701    2005    7,496    2011 (1)   Lease (6)     —                              Total:                    $ 5,475                             (1) The Company has an option to renew this lease for one additional five-year period.    39    Table of Contents   (2) The Company has an option to renew this lease for two additional five-year periods.    (3) The Company has an option to renew this lease for four additional five-year periods.    (4) Premises vacated in May 2005 and branch office relocated to 80 Stonington Road location. The lease terminates in  July 2006.    (5) The Company has an option to renew this lease for three additional five-year periods.    (6) This facility houses trust operations.    (7) A portion of this property includes a parking lot for the main office. The remainder of this property has been leased to a subtenant under a lease that expires in December 2007. The subtenant has an option to renew this lease for three additional five-year periods.    (8) A portion of this facility is used for an employee training center.    40    Table of Contents  Item 3. Legal Proceedings.  At December 31, 2005, 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 or results of operations. Periodically, there have been various claims and lawsuits against us, such as claims to enforce liens, condemnation proceedings on properties in which we hold security interest, claims involving the making and servicing of real property loans and other issues incident to our business. However, neither the Company nor the Bank is a party to any pending legal proceedings that management believes would have a material adverse effect on the Company’s financial condition, results of operations or cash flows.   Item 4. Submission of Matters to a Vote of Security Holders.  None.   PART II.   Item 5. Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.  The Company’s common stock is listed on the Nasdaq National Market (“NASDAQ”) under the trading symbol “SIFI.” The Company completed its initial public offering on September 30, 2004 and commenced trading on October 1, 2004. The following table sets forth the high and low sales prices of the common stock and the dividends declared per share of common stock for the periods indicated, as reported by NASDAQ. These high and low sales prices reflect inter-dealer prices, without retail mark-up, mark-downs or commissions, and may not represent actual transactions.                      Price Range     Dividends Declared   Year Ended December 31, 2005:    High    Low      First Quarter    $ 12.27    $ 10.75    $ 0.03   Second Quarter      11.76      9.74      0.03   Third Quarter      12.49      11.22      0.03   Fourth Quarter      12.26      10.81      0.03           Price Range     Dividends Declared   Year Ended December 31, 2004:    High    Low      First Quarter      N/A      N/A      N/A   Second Quarter      N/A      N/A      N/A   Third Quarter      N/A      N/A      N/A   Fourth Quarter    $ 12.40    $ 10.70      N/A  The continued payment of dividends is dependent upon the Company’s debt and equity structure, earnings, financial condition, need for capital in connection with possible future acquisitions and other factors, including economic conditions, regulatory restrictions and tax considerations. The Company cannot guarantee that it will pay dividends or that, if paid, that it will not reduce or eliminate dividends in the future. See Item 1. Business. “Regulation and Supervision – Limitation on Capital Distributions” and Note 17 in the Notes to the Consolidated Financial Statements for more information relating to restrictions on dividends.  As of December 31, 2005, there were 12,551,186 shares of common stock outstanding, of which 7,286,975 were held by SI Bancorp, MHC, and were held by approximately 1,005 holders of record, including SI Bancorp, MHC.    41    Table of Contents The following table provides certain information with regard to shares repurchased by the Company in the fourth quarter of 2005.                  Period     Total Number of Shares Purchased (1)     Average Price Paid Per Share     Total Number of Shares Purchased as Part of Publicly Announced Plansor Programs     Maximum Number ofShares that May Yet be Purchased Under the Plans orPrograms   October 1, 2005 through October 31, 2005    —      $ —      —      —     November 1, 2005 through November 30, 2005    —        —      —      628,000   December 1, 2005 through December 31, 2005    12,564      11.74    12,564    615,436                          Total    12,564    $ 11.74    12,564    615,436                           (1) On November 23, 2005, the Company announced that the Board of Directors had approved a stock repurchase program authorizing the Company to repurchase up to 628,000 shares of the Company’s common stock. The repurchase program will continue until it is completed or terminated by the Board of Directors.   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 Form 10-K.                        Selected Financial Condition Data:    At December 31,  (Dollars in Thousands)    2005    2004    2003    2002    2001   Total assets    $ 691,868    $ 624,649    $ 518,141    $ 484,944    $ 427,522   Cash and cash equivalents      25,946      30,775      29,577      37,517      30,077   Securities held to maturity      —        —        1,728      9,463      13,197   Securities available for sale      120,019      120,557      77,693      87,914      78,697   Loans receivable, net      513,775      447,957      386,924      334,598      293,111   Deposits (1)      512,282      460,480      417,311      398,315      363,029   Federal Home Loan Bank advances      87,929      72,674      57,168      43,918      35,183   Junior subordinated debt owed to unconsolidated trust      7,217      7,217      7,217      7,217      —     Other borrowings      —        —        —        1,951      —     Total stockholders’ equity      80,043      80,809      34,099      31,408      27,816    42    Table of Contents                     Selected Operating Data:    Years Ended December 31,   (Dollars in Thousands,  Except Per Share Data)    2005    2004    2003    2002    2001   Interest and dividend income    $ 33,905    $ 28,603    $ 27,930    $ 28,330    $ 27,607   Interest expense      12,131      9,400      9,346      11,014      13,154                                        Net interest and dividend income      21,774      19,203      18,584      17,316      14,453   Provision for loan losses      410      550      1,602      537      440                                        Net interest and dividend income after provision for loan losses      21,364      18,653      16,982      16,779      14,013   Noninterest income      6,310      4,185      4,722      3,284      3,362   Noninterest expenses      22,588      21,031      16,606      15,394      14,470                                        Income before income tax provision      5,086      1,807      5,098      4,669      2,905   Income tax provision      1,689      519      1,713      1,587      989                                        Net income    $ 3,397    $ 1,288    $ 3,385    $ 3,082    $ 1,916                                        Basic earnings per share    $ 0.28      N/A      N/A      N/A      N/A   Diluted earnings per share    $ 0.28      N/A      N/A      N/A      N/A                        Selected Operating Ratios:    At or For the Years Ended December 31,         2005     2004     2003     2002     2001     Performance Ratios:                        Return on average assets    0.52 %   0.23 %   0.67 %   0.68 %   0.48 %   Return on average equity    4.19     2.77     10.34     10.46     7.19     Interest rate spread (2)    3.19     3.41     3.81     3.79     3.48     Net interest margin (3)    3.56     3.64     3.98     4.04     3.86     Noninterest expense to average assets (4)    3.47     3.71     3.30     3.39     3.64     Dividend payout ratio (5)    42.86     N/A     N/A     N/A     N/A     Efficiency ratio (6)    80.60     89.29     71.62     73.80     81.91     Average interest-earning assets to average interest-bearing liabilities    118.38     112.93     108.70     110.03     110.76     Average equity to average assets    12.45     8.21     6.51     6.49     6.71            Regulatory Capital Ratios:                        Total risk-based capital ratio    16.79     18.03     12.45     12.12     11.51     Tier 1 risk-based capital ratio    15.87     17.12     11.50     11.00     10.38     Tier 1 capital ratio (7)    9.31     9.99     6.81     6.46     6.29     Tangible equity ratio    9.31     9.99     N/A     N/A     N/A            Asset Quality Ratios:                        Allowance for loan losses as a percent of total loans    0.71     0.71     0.69     0.91     0.97     Allowance for loan losses as a percent of nonperforming loans    1529.58     338.98     207.57     166.50     130.64     Net recoveries (charge-offs) to average outstanding loans during the year    0.01     0.01     0.55     0.11     0.07      (1) Includes mortgagors’ and investors’ escrow accounts.    43    Table of Contents   (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) The noninterest expense to average assets ratio, excluding the effect of the contribution expense to SI Financial Group Foundation, was 3.27% for the year ended December 31, 2004.    (5) 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. Comparable figures for 2004, 2003, 2002 and 2001 are not available.    (6) Represents noninterest expense divided by the sum of net interest income and noninterest income, excluding gains or losses on the sale of securities. The efficiency ratio, excluding the effect of the contribution to SI Financial Group Foundation, was 78.62% for the year ended December 31, 2004.    (7) Represents tier 1 capital to total assets as required by OTS regulations at December 31, 2005 and 2004 and tier 1 capital to total average assets at December 31, 2003, 2002 and 2001 as required by FDIC regulations.   Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.  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 following analysis discusses changes in the financial condition as of December 31, 2005 and 2004 and the results of operations for the years ended December 31, 2005, 2004 and 2003 and should be read in conjunction with the Company’s Consolidated Financial Statements and the Notes thereto, appearing in Part IV, Item 15 of this document.  Management Strategy  The Company’s mission is to operate and grow a profitable community-oriented financial institution. The Company plans to achieve this by continuing its strategy of:        •   offering a full range of financial services;        •   expanding the branch network into new market areas;        •   pursuing opportunities to increase commercial lending in the Bank’s market area;        •   applying conservative underwriting practices to maintain the high quality of the Bank’s loan portfolio;        •   managing net interest margin and net interest spread by seeking to increase lending levels;    44    Table of Contents     •   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 the Bank’s commercial deposit offerings.  Offering a full range of financial services. 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 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.  The Company’s purchase of the net assets of SI Trust Servicing in November 2005, a third-party provider of trust outsourcing services for community banks, expands the products offered by the Bank, and offers a trust service to other community banks, while presenting significant growth opportunities for the Company’s wealth management business and earnings.  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 and South Windsor, 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 acquisition, and may consider exploring expansion opportunities in Middlesex County. The Bank anticipates the opening of its 18th office in East Lyme and its 19th office in Gales Ferry during the first and third quarters of 2006, respectively.  Pursue opportunities to increase commercial lending. Commercial real estate and commercial business loans increased $37.1 million and $17.2 million for the years ended December 31, 2005 and 2004, respectively, and at December 31, 2005 comprised approximately 34.6% of total loans. 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, while continuing to originate any such loans in accordance with what the Bank believes are conservative underwriting guidelines. Toward this end, the Bank has hired additional seasoned commercial lenders and offered new products to increase the Bank’s ability to serve the market.  Apply conservative underwriting practices and maintain high quality loan portfolio. The Bank believes that high 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 underwriting standards which it believes are conservative, and by diligent monitoring and collection efforts. Evidence of the Bank’s quality loan portfolio is the decrease in nonperforming loans from $944,000 at December 31, 2004 to $240,000 at December 31, 2005. At December 31, 2005, nonperforming loans were only 0.05% of total loan portfolio and 0.08% 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. Loans secured by multi-family and commercial real estate are generally larger and involve a greater degree of risk than one-to four-family residential mortgage loans. Consequently, multi-family and commercial real estate loans typically have higher yields, which increase the Company’s net interest margin and net interest spread.    45    Table of Contents 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. The Company has and may continue to leverage the additional capital from the offering by borrowing funds from the Federal Home Loan Bank and investing the funds in loans and investment securities in a manner consistent with its current portfolio. This leverage strategy, if implemented and assuming favorable market conditions, will provide additional liquidity, enhance earnings and help to manage interest rate risk.  Increase deposits. The Company’s primary source of funds is retail deposit accounts. Annually, deposits have continued to increase primarily due to competitive interest rates and the movement of customer funds out of riskier investments, including the stock market. 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.  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 critical accounting policies. The Company considers the allowance for loan losses 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 collectibility 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 and delinquency trends. The applied loss factors are re-evaluated annually to ensure their relevance in the current real estate 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, classified assets or charged-off loans.  Although the Bank believes that it uses the best information available to establish the allowance for loan losses, future additions to the allowance may be necessary based on estimates that are susceptible to change as a result of changes in economic conditions and other factors. In addition, the OTS, as an integral part of its examination process, periodically reviews the allowance for loan losses. Such agency may require the Bank to recognize adjustments to the allowance based on its judgments about information available to it at the time of its examination. See Part I. Item 1. Business. “Lending Activities – Allowance for Loan Losses” and Notes 1 and 4 in the Notes to the Consolidated Financial Statements for additional information.  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 assumed 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     46    Table of Contents  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 annually at a minimum 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 expense. Testing for impairment is a subjective process, the application of which could result in different evaluations of impairment. See Notes 1, 4, 6 and 7 in the Notes to the Consolidated Financial Statements for additional information.  Analysis of Net Interest Income  Average Balance Sheet. The following table presents information regarding average balances of assets and liabilities, the total dollar amounts of interest and dividend income from average interest-earning assets, the total dollar amounts of interest expense on average interest-bearing liabilities and the resulting average yields and costs. The yields and costs for the periods indicated are derived by dividing income or expense by the average balances of assets or liabilities, respectively, for the periods presented. For purposes of this table, average balances have been calculated using average daily balances.                                           For the Years Ended December 31,         2005     2004     2003    (Dollars in Thousands)    AverageBalance     Interest & Dividends      Average Yield/ Rate     AverageBalance     Interest & Dividends      Average Yield/ Rate     AverageBalance    Interest &Dividends      Average Yield/ Rate     ASSETS:                                              INTEREST-EARNING ASSETS:                                              Loans (1)(2)    $ 472,010    $ 28,586     6.06 %   $ 412,415    $ 24,545     5.95 %   $ 360,655    $ 23,840     6.61 %   Investment securities (3)      127,736      5,018     3.93       97,021      3,826     3.94       92,353      3,944     4.27     Other interest-earning assets      12,020      308     2.56       18,309      240     1.31       14,166      155     1.09                                                                 TOTAL INTEREST-EARNING ASSETS      611,766      33,912     5.54       527,745      28,611     5.42       467,174      27,939     5.98                                                                 Noninterest-earning assets      39,242               38,478               35,926                                                                TOTAL ASSETS    $ 651,008             $ 566,223             $ 503,100                                                                LIABILITIES AND EQUITY:                                              INTEREST-BEARING LIABILITIES:                                              Deposits:                                              NOW and money market    $ 118,858      653     0.55     $ 108,678      384     0.35     $ 98,543      424     0.43     Savings (4)      92,999      854     0.92       91,721      625     0.68       87,904      666     0.76     Certificates of deposit      218,102      7,021     3.22       194,569      5,337     2.74       185,181      5,507     2.97                                                                 Total interest-bearing deposits      429,959      8,528     1.98       394,968      6,346     1.61       371,628      6,597     1.78                FHLB advances      79,596      3,108     3.90       65,154      2,683     4.12       49,693      2,315     4.66     Subordinated debt      7,217      495     6.86       7,217      371     5.14       7,217      360     4.99     Other borrowings      —        —       —         —        —       —         1,233      74     6.00                                                                 TOTAL INTEREST-BEARING LIABILITIES      516,772      12,131     2.35       467,339      9,400     2.01       429,771      9,346     2.17     Noninterest-bearing liabilities      53,192               52,392               40,601                                                                TOTAL LIABILITIES      569,964               519,731               470,372             TOTAL STOCKHOLDERS’ EQUITY      81,044               46,492               32,728                                                                TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY    $ 651,008             $ 566,223             $ 503,100                                                                NET INTEREST-EARNING ASSETS    $ 94,994             $ 60,406             $ 37,403                                                                TAX EQUIVALENT NET INTEREST INCOME (3)            21,781                19,211                18,593                                                      TAX EQUIVALENT INTEREST RATE SPREAD (5)              3.19 %             3.41 %             3.81 %   TAX EQUIVALENT NET INTEREST MARGIN AS A PERCENTAGE OF INTEREST-EARNING ASSETS (6)              3.56 %             3.64 %             3.98 %   AVERAGE INTEREST-EARNING ASSETS TO AVERAGE INTEREST-BEARING LIABILITIES              118.38 %             112.93 %             108.70 %   LESS: TAX EQUIVALENT ADJUSTMENT (3)           (7 )              (8 )              (9 )                                                             NET INTEREST INCOME         $ 21,774              $ 19,203              $ 18,584                                                                (1) Amount is net of deferred loan origination fees and costs. Average balances include nonaccrual loans and loans held for sale.    47    Table of Contents   (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 income.    (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.  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.    48    Table of Contents                                 2005 Compared to 2004    2004 Compared to 2003    (Dollars in Thousands)     Increase (Decrease) Due To           Increase (Decrease) Due To             Rate     Volume     Net    Rate     Volume     Net     INTEREST-EARNING ASSETS:                                  Interest and Dividend Income:                                  Loans (1)(2)    $ 549     $ 3,492     $ 4,041    $ (2,515 )   $ 3,220     $ 705     Investment securities (3)      (15 )     1,207       1,192      (311 )     193       (118 )   Other interest-earning assets      129       (61 )     68      45       40       85                                                       TOTAL INTEREST-EARNING ASSETS      663       4,638       5,301      (2,781 )     3,453       672             INTEREST-BEARING LIABILITIES:                                  Interest Expense:                                  Deposits (4)      1,540       642       2,182      (591 )     340       (251 )   FHLB advances      (145 )     570       425      (292 )     660       368     Subordinated debt      124       —         124      11       —         11     Other borrowings      —         —         —        (37 )     (37 )     (74 )                                                     TOTAL INTEREST-BEARING LIABILITIES      1,519       1,212       2,731      (909 )     963       54                                                       CHANGE IN NET INTEREST AND DIVIDEND INCOME (5)    $ (856 )   $ 3,426     $ 2,570    $ (1,872 )   $ 2,490     $ 618                                                        (1) Amount is net of deferred loan origination fees and costs. Average balances include nonaccrual loans and loans held for sale.    (2) Loans 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 income.    (4) Includes mortgagors’ and investors’ escrow accounts.    (5) Presented on a tax equivalent basis.  Comparison of Financial Condition at December 31, 2005 and December 31, 2004  Assets. The Company’s total assets increased $67.2 million, or 10.8%, to $691.9 million at December 31, 2005, as compared to $624.6 million at December 31, 2004, primarily due to increases loans receivable, and to a lesser extent, premises and equipment and FHLB stock. Net loans receivable increased $65.8 million, or 14.7%, to $513.8 million at December 31, 2005. All categories of the loan portfolio contributed to the increase in net loans receivable with commercial real estate, consumer and one- to four-family residential loans yielding the largest increases. In 2005, loan originations for commercial real estate and business loans increased 4.1% which reflects the Company’s emphasis on the commercial loan market in order to enhance earnings with higher yields on loans and to diversify the loan portfolio. Consumer and residential real estate loan originations increased 5.9% and 1.8%, respectively. The increase in net loans receivable was offset by loan sales of $35.5 million. Premises and equipment, net, increased $2.3 million, or 34.2%, to $8.8 million as a result of branch expansion and property acquired from the acquisition of SI Trust Services in 2005. FHLB stock increased $1.3 million to $5.6 million at December 31, 2005, resulting from the implementation of FHLB’s new capital plan and to support a higher level of FHLB borrowings.    49    Table of Contents Liabilities. Total liabilities increased $68.0 million, or 12.5%, from December 31, 2004 to December 31, 2005 primarily as a result of increases in deposits and FHLB advances. Deposits, including mortgagors’ and investors’ escrow accounts, increased $51.8 million, or 11.3%, to $512.3 million at December 31, 2005. The Company experienced increases in interest-bearing accounts, such as certificates of deposit and NOW and money market accounts due to greater deposit volume resulting from branch expansion, competitive pricing and marketing efforts. In addition, noninterest-bearing deposits increased primarily as a result of business checking deposit volume. FHLB advances increased $15.3 million, or 21.0%, to $87.9 million at December 31, 2005. The FHLB borrowing increases were primarily fixed-rate advances with terms of two to seven years used to fund loan growth and to manage interest rate risk.  Equity. Total stockholders’ equity decreased $766,000 to $80.0 million at December 31, 2005. The decrease in equity was primarily attributable to the implementation of the Company’s equity incentive plan at a cost of $2.5 million, an increase in net unrealized holding losses on available for sale securities aggregating $1.3 million (net of taxes), dividends declared of $590,000 and treasury share purchases of $148,000, offset by earnings of $3.4 million.  Comparison of Operating Results for the Years Ended December 31, 2005 and 2004  General. The Company recorded net income of $3.4 million for the year ended December 31, 2005, an increase of $2.1 million, compared to $1.3 million for the year ended December 31, 2004. The increase was primarily attributable to a $2.6 million increase in net interest and dividend income, a $2.1 million increase in noninterest income and a $140,000 decrease in the provision for loan losses, offset by increases of $1.6 million in noninterest expenses and $1.2 million in the provision for income taxes. The increase in net interest and dividend income in 2005 resulted primarily from an increase in average earning assets, offset by increases in the rate paid on deposit accounts and the average balance of FHLB advances. For the year ended December 31, 2004, noninterest expenses included a $2.5 million contribution of common stock to SI Financial Group Foundation, resulting in a charge to earnings of approximately $1.7 million after taxes.  Interest and Dividend Income. Total interest and dividend income increased $5.3 million, or 18.5%, for 2005. Average interest-earning assets increased $84.0 million, or 15.9%, to $611.8 million in 2005, mainly due to higher loan volume. Average loans increased $59.6 million and the rate earned on loans increased 11 basis points to 6.06% for 2005 from 5.95% for 2004. Increased volume on higher yielding commercial loans contributed to the rise in interest earned on loans for 2005. Average securities rose $30.7 million, while the yield nominally declined to 3.93% in 2005 from 3.94% in 2004.  Interest Expense. Interest expense increased $2.7 million, or 29.1%, to $12.1 million for 2005 compared to $9.4 million in 2004, primarily as a result of the rate paid on deposits. The yield on deposit accounts increased 37 basis points due to rising market interest rates and average deposits rose $35.0 million in 2005. Although the average balance remained constant, the rate paid on subordinated debt borrowings increased 172 basis points from 5.14% to 6.86%. Average FHLB advances increased $14.4 million, while the yield on FHLB borrowings declined 22 basis points to 3.90% for 2005.  Provision for Loan Losses. The Company’s provision for loan losses decreased $140,000 to $410,000 in 2005 from $550,000 in 2004. The Company’s conservative underwriting standards as well as a favorable real estate market have contributed to the quality of the loan portfolio. The quality of the loan portfolio is evidenced by a reduction in nonperforming loans to $240,000 from $944,000, respectively, and net recoveries from loan losses of $61,000 compared to net charge-offs of $38,000 for the years ended December 31, 2005 and 2004, respectively. Despite improved asset quality, the Company continues to monitor the impact that the rise in short-term interest rates will have on variable-rate borrowers and their ability to repay higher monthly interest payments.    50    Table of Contents Noninterest Income. Total noninterest income increased $2.1 million, or 50.8%, to $6.3 million in 2005. The following table shows the components of noninterest income and the dollar and percentage changes from 2004 to 2005.                           Years Ended December 31,     Change    (Dollars in Thousands)    2005    2004     Dollars     Percent     Service fees    $ 4,262    $ 2,941     $ 1,321     44.9 %   Wealth management fees      1,301      942       359     38.1     Increase in cash surrender value of BOLI      276      303       (27 )   (8.9 )   Net gain (loss) on sale of securities      59      (166 )     225     135.5     Net gain on sale of loans      190      55       135     245.5     Other      222      110       112     101.8                                   TOTAL NONINTEREST INCOME    $ 6,310    $ 4,185     $ 2,125     50.8                                  Service fees increased primarily as a result of the Bank’s courtesy overdraft protection program offered to its deposit customers, which commenced in the first quarter of 2005 and as a result of customers’ escalating usage of the Bank’s electronic banking products. Wealth management fees, which include trust and investment services fees, rose in part due to the acquisition of SI Trust Servicing in November 2005 and a larger balance of assets under management. The Company realized net gains on the sale of securities sold in 2005 compared to realized net losses in 2004. The volume of securities sold was greater in 2005 versus 2004. Net gains on the sale of loans reflect the sale of $35.5 million of loans in 2005 compared to $15.5 million in 2004. Increases in other noninterest income include a net gain of $40,000 on the sale of former branch locations and training center and a distribution of $107,000 in a small business investment corporation carried at cost.  Noninterest Expenses. Noninterest expenses increased by $1.6 million, or 7.4%, for 2005 as compared to 2004. The following table shows the components of noninterest expenses and the dollar and percentage changes from 2004 to 2005.                          Years Ended December 31,    Change    (Dollars in Thousands)    2005    2004    Dollar     Percent     Salaries and employee benefits    $ 12,102    $ 9,835    $ 2,267     23.1 %   Occupancy and equipment      3,830      3,465      365     10.5     Computer and electronic banking services      1,823      1,678      145     8.6     Outside professional services      1,087      815      272     33.4     Marketing and advertising      794      513      281     54.8     Supplies      449      293      156     53.2     Contribution to SI Financial Group Foundation      —        2,513      (2,513 )   (100.0 )   Other      2,503      1,919      584     30.4                                  TOTAL NONINTEREST EXPENSES    $ 22,588    $ 21,031    $ 1,557     7.4                                   51    Table of Contents Increases in salaries, benefits and taxes reflects higher staffing levels related to branch expansion as well as the amortization of share-based compensation awards granted in 2005. The adoption of SFAS 123R during the second quarter of 2005 resulted in share-based compensation expense of $476,000, which represents the amortization of stock option and restricted stock awards over their requisite service period. In addition, the Company recorded compensation expense in connection with the employee stock ownership plan of $366,000 in 2005 compared to $93,000 in 2004. Additional facility leases, depreciation expense and other occupancy-related expenses associated with branch expansion resulted in the increase in occupancy and equipment expenses. In 2004, occupancy expense included a $337,000 impairment charge to reduce the carrying value of a former branch facility to its estimated net market value, which was ultimately sold in 2005. Electronic banking fees continue to rise as a result of greater electronic banking transactions. Increases in outside professional services, which primarily include legal and auditing services, were attributable to higher costs associated with the Company’s public reporting requirements and consulting costs for assistance with Sarbanes Oxley compliance. Marketing and advertising expenses increased as a result of aggressive marketing campaigns for the Bank’s products and services and promotions related to new branch openings. Other expenses were higher in 2005 mainly due to the implementation of the Bank’s remote branch capture system and the greater than anticipated losses on uncollectible items. In 2004, noninterest expenses included a $2.5 million contribution of the Company’s common stock to SI Financial Group Foundation in connection with the Company’s initial public offering during the third quarter of 2004 and a $51,000 impairment charge which was recorded to reduce the carrying value of the Company’s investment in a Small Business Investment Company (“SBIC”) limited partnership.  Income Tax Provision. The Company’s income tax provision increased $1.2 million to $1.7 million for 2005 compared to $519,000 in 2004 resulting from an increase in taxable income. The effective tax rate was 33.2% and 28.7% for 2005 and 2004, respectively. The lower 2004 effective tax rate reflects the Company’s contribution of stock to SI Financial Group Foundation.  Comparison of Operating Results for the Years Ended December 31, 2004 and 2003  General. The Company recorded net income of $1.3 million, a decrease of $2.1 million, or 61.9%, for the year ended December 31, 2004 compared to $3.4 million for the year ended December 31, 2003. The decrease was primarily attributable to a $4.4 million increase in noninterest expense and a $537,000 decrease in noninterest income, offset by an increase of $619,000 in net interest income and decreases of $1.1 million for the provision for loan losses and $1.2 million for the provision for income taxes. An increase in net interest income in 2004 resulted from an increase in average assets and a decrease in the average cost of deposits and borrowings, offset by declining yields on interest-earning assets and an increase in average liabilities. For the year ended December 31, 2004, noninterest expenses included a $2.5 million contribution of common stock to SI Financial Group Foundation, resulting in a charge to earnings of $1.7 million after taxes. The Company established SI Financial Group Foundation, a charitable foundation, dedicated to community activities and the promotion of charitable causes in the areas in which the Bank operates. In connection with the offering, the Foundation was funded with 2%, or 251,275 shares, of the Company’s common stock.  Interest and Dividend Income. Total interest and dividend income increased $672,000 (on a tax equivalent basis), or 2.4%, for 2004, despite a decrease in the average yield on interest-earning assets from 5.98% to 5.42%, as a result of an increase in the average balance of interest-earning assets from $467.2 million to $527.7 million. Interest on investment securities decreased in 2004 due to a 33 basis point decrease in the average yield to 3.94%, as a result of the unfavorable interest rate environment, offset by an increase in the average balance of investment securities. Although the average yield declined in 2004, interest on loans increased due to an increase in the average amount of loans outstanding.    52    Table of Contents Interest Expense. Interest expense increased $54,000, or 0.6%, to $9.4 million for 2004 compared to $9.3 million in 2003 as a result of an increase in the average FHLB debt outstanding during the period, offset by a decrease in interest expense on interest-bearing deposit accounts. Although average interest-bearing liabilities increased $37.6 million, the cost of funds decreased as the average rate paid declined 16 basis points to 2.01% due to the prevailing lower interest rate environment.  Provision for Loan Losses. The Company’s provision for loan losses decreased $1.1 million to $550,000 in 2004 from $1.6 million in 2003. Continued improvements in the real estate market has favorably impacted both our customers and the quality of our loan portfolio and improved asset quality. A lower interest rate market, resulting in lower payments on loans, has positively affected our variable rate borrowers. The decreased provision also reflected that the Company experienced lower charge-offs for the year ended December 31, 2004 and nonperforming loans were lower at December 31, 2004 as compared to December 31, 2003. In addition, the higher provision in 2003 was the result of a $1.6 million write-off of a large commercial real estate loan.  Noninterest Income. Total noninterest income decreased $537,000, or 11.4%, to $4.2 million in 2004. The following table shows the components of noninterest income and the dollar and percentage changes from 2003 to 2004.                           Years Ended December 31,    Change    (Dollars in Thousands)    2004     2003    Dollars     Percent     Service fees    $ 2,941     $ 2,858    $ 83     2.9 %   Wealth management fees      942       849      93     11.0     Increase in cash surrender value of BOLI      303       258      45     17.4     Net gain (loss) on sale of securities      (166 )     121      (287 )   (237.2 )   Net gain on sale of loans      55       393      (338 )   (86.0 )   Other      110       243      (133 )   (54.7 )                                 TOTAL NONINTEREST INCOME    $ 4,185     $ 4,722    $ (537 )   (11.4 )%                                Increases in electronic banking fees contributed to higher service fees in 2004 as more customers utilize the Bank’s electronic banking products. Wealth management fees increased as a result of greater assets under management and more favorable portfolio performance than in 2003. The net decrease in gains on the sales of loans, which was impacted by lower loan sales in 2004 as compared to 2003, was the primary cause for the decrease in noninterest income. Noninterest income also decreased due to a loss on the sale of securities recorded in 2004 compared to a gain on the sale of securities in 2003.  Noninterest Expenses. Noninterest expenses increased by $4.4 million, or 26.6%, for 2004 as compared to 2003. The following table shows the components of noninterest expenses and the dollar and percentage changes from 2003 to 2004.                          Years Ended December 31,    Change    (Dollars in Thousands)    2004    2003    Dollar     Percent     Salaries and employee benefits    $ 9,835    $ 9,090    $ 745     8.2 %   Occupancy and equipment      3,465      2,973      492     16.5     Computer and electronic banking services      1,678      1,420      258     18.2     Outside professional services      815      500      315     63.0     Marketing and advertising      513      387      126     32.6     Supplies      293      266      27     10.2     Contribution to SI Financial Group Foundation      2,513      —        2,513     —       Other      1,919      1,970      (51 )   (2.6 )                                TOTAL NONINTEREST EXPENSES    $ 21,031    $ 16,606    $ 4,425     26.6 %                                 53    Table of Contents The primary reason for the increase in noninterest expenses resulted from the $2.5 million contribution of the Company’s common stock to SI Financial Group Foundation in connection with the Company’s initial public offering during the third quarter of 2004. Salaries and related benefits and taxes increased $745,000, or 8.2%, in 2004 over the prior year as the Company increased staffing levels in preparation for the public offering, expansion of branch facilities and the commercial lending division as well as normal wage increases. The expansion initiatives and technological improvements increased occupancy, furniture and equipment and computer services expenses in 2004. Of the $435,000 increase in occupancy expense for 2004 over 2003, $337,000 was related to an impairment charge to reduce the carrying value of a former branch facility to its estimated net market value. Outside professional services, which primarily includes legal and auditing services, reflects an increase of $315,000 in 2004 compared to 2003 attributable to the Bank’s conversion from a state to federal charter and the additional costs associated with the increased reporting requirements and regulations of a publicly-held company. Electronic banking fees continue to rise as a result of greater electronic banking transactions.  Income Tax Provision. The Company’s income tax expense decreased $1.2 million to $519,000 for 2004 compared to $1.7 million in 2003. The decrease in tax expense was due to a decrease in taxable income which was unfavorably impacted by the $2.5 million contribution of the Company’s common shares to SI Financial Group Foundation. The effective tax rate was 28.7% and 33.6% for 2004 and 2003, respectively.  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 investment securities and borrowings from the FHLB. While maturities and scheduled amortization of loans and securities are predictable sources of funds, deposit flows and mortgage prepayments 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 12.5% to 20.0% of total assets. Excess liquid assets are generally invested in interest-earning deposits and short- and intermediate-term government-sponsored enterprises and mortgage-backed 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, 2005, cash and cash equivalents totaled $25.9 million, including interest-bearing deposits and federal funds sold of $9.6 million. Securities classified as available for sale, which provide additional sources of liquidity, totaled $120.0 million at December 31, 2005. In addition, at December 31, 2005, the Company had the ability to borrow a total of approximately $210.3 million from the FHLB, which includes overnight lines of credit of $6.2 million. On that date, the Company had FHLB advances outstanding of $87.9 million and no overnight advances outstanding.    54    Table of Contents The Company believes that its most liquid assets combined with the available line from the FHLB provides adequate liquidity to meet its current financial obligations.  At December 31, 2005, the Bank had $91.1 million in loan commitments outstanding, which included $31.2 million in commitments to grant loans, $25.6 million in undisbursed construction loans, $21.5 million in unused home equity lines of credit, $10.8 million in commercial lines of credit, $1.3 million in overdraft protection lines and $812,000 in standby letters of credit. Certificates of deposit due within one year of December 31, 2005 totaled $129.9 million, or 25.4%, of total deposits (including mortgagors’ and investors’ escrow accounts). 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 in a rising interest rate environment. To compensate, the Bank has increased the duration of its borrowings with the FHLB. 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. For the year ended December 31, 2005, the Bank originated $183.8 million of loans and purchased $27.0 million of securities. In fiscal 2004, the Bank originated $178.4 million of loans and purchased $90.7 million of securities.  Financing activities consist primarily of activity in deposit accounts and in FHLB advances. Asset growth has outpaced deposit growth during the last three years. The increased liquidity needed to fund asset growth has been provided through increased FHLB borrowings, raising capital through the issuance of trust preferred securities and proceeds from the initial public offering. The net increase in total deposits, including mortgagors’ and investors’ escrow accounts was $51.8 million, $43.2 million and $19.0 million for the years ended December 31, 2005, 2004 and 2003, 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 deposit and commercial banking relationships. Occasionally, the Bank offers promotional rates on certain deposit products to attract deposits. The Bank experienced increases in FHLB advances of $15.3 million, $15.5 million and $13.3 million for the years ended December 31, 2005, 2004 and 2003, respectively.  During 2005, the Company’s shareholders approved an equity compensation plan (the “Equity Plan”). The Company utilized $2.9 million for the purchase of 246,249 common shares to fund all restricted stock award grants during the twelve months ended December 31, 2005. Additionally, the Company’s Board of Directors approved a plan to repurchase approximately 628,000 shares of the Company’s common stock. In 2005, the Company repurchased 12,564 shares, at a cost of $148,000, under this plan.  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, 2005, 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     55    Table of Contents requirements. See Item 1. Business. “Regulation and Supervision – Regulation of Federal Savings Associations – Capital Requirements” and Note 14 in the Notes to the Consolidated Financial Statements for additional information relating to the Bank’s regulatory capital requirements.  Payments Due Under Contractual Obligations  The following table presents information relating to the Company’s payments due under contractual obligations as of December 31, 2005.                            Payments Due by Period  (Dollars in Thousands)    Less ThanOne Year    One toThree Years    Three toFive Years    More ThanFive Years    Total   Long-term debt obligations    $ 13,161    $ 34,768    $ 23,000    $ 17,000    $ 87,929   Operating lease obligations      1,163      2,208      2,000      7,753      13,124   Other long-term liabilities reflected on the balance sheet      —        —        —        7,217      7,217                                        TOTAL CONTRACTUAL OBLIGATIONS    $ 14,324    $ 36,976    $ 25,000    $ 31,970    $ 108,270                                       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.  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, 2005 and 2004 are as follows:                   December 31,  (Dollars in Thousands)    2005    2004   Commitments to extend credit: (1)             Future loan commitments (2)    $ 31,192    $ 27,073   Undisbursed construction loans      25,572      27,527   Undisbursed home equity lines of credit      21,481      19,351   Undisbursed commercial lines of credit      10,796      8,433   Overdraft protection lines      1,277      1,060   Standby letters of credit (3)      812      997                   TOTAL COMMITMENTS    $ 91,130    $ 84,441                    (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.    56    Table of Contents   (2) Includes fixed rate loan commitments of $5.5 million at interest rates ranging from 4.875% to 8.000% and $10.2 million at interest rates ranging from 4.875% to 7.125% at December 31, 2005 and 2004, respectively.    (3) Standby letters of credit are conditional commitments issued to guarantee the performance of a customer to a third party.  In 1998, the Bank became a limited partner in a Small Business Investment Corporation (“SBIC”) and committed to a capital investment of $1.0 million in the limited partnership. At December 31, 2005 and 2004, the Bank’s remaining off-balance sheet commitment for capital investment was approximately $194,000. See Note 12 in the Notes to the Consolidated Financial Statements.  In 2004, the Bank established an Employee Stock Ownership Plan for the benefit of its eligible employees. At December 31, 2005, the Bank had repaid principal payments on the loan to the ESOP of $286,000 and allocated 7,675 shares and committed to release 32,295 shares held in suspense for allocation to participants in 2006. As of December 31, 2005, the amount of unallocated common shares held in suspense totaled 452,135, with a fair value of $5.0 million, which represents a potential commitment of the Bank to the ESOP. See Note 11 in the Notes to the Consolidated Financial Statements.  Outstanding commitments for the construction of new branch facilities in the aggregate totaled approximately $870,000 at December 31, 2005. See Note 6 in the Notes to the Consolidated Financial Statements.  As of December 31, 2005, 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 Notes to the 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  Please refer to Note 1 - Nature of Business and Summary of Significant Accounting Policies – Recent Accounting Pronouncements in the Notes to the Company’s Consolidated Financial Statements for a detailed discussion of new accounting pronouncements and the impact on the Company’s Consolidated Financial Statements.    57    Table of Contents  Item 7A. Quantitative and Qualitative Disclosures About Market Risk.  Qualitative Aspects of Market Risk  The primary market risk factor affecting the financial condition and operating results of the Company is interest rate risk. Interest rate risk is the exposure of current and future earnings and capital arising from movements in interest rates. This risk is managed by periodic evaluation of the interest rate risk inherent in interest-earning assets and interest-bearing liabilities in an effort to minimize the adverse effects of changes in the interest rate environment. Deposit accounts typically react more quickly to changes in market interest rates than mortgage loans because of the shorter maturities of deposits. As a result, sharp increases in interest rates may adversely affect earnings while decreases in interest rates may beneficially affect earnings. To reduce the potential volatility of earnings, the Company has sought to improve the match between asset and liability maturities and rates, while maintaining an acceptable interest rate spread. Pursuant to this strategy, the Company originates adjustable-rate mortgage loans for retention in its loan portfolio. However, the ability to originate adjustable-rate loans depends, to a great extent, on market interest rates and borrowers’ preferences. As an alternative to adjustable-rate mortgage loans, the Company offers fixed-rate mortgage loans with maturities of fifteen years. This product enables the Company to compete in the fixed-rate mortgage market while maintaining a shorter maturity. Fixed-rate mortgage loans typically have an adverse effect on interest rate sensitivity compared to adjustable-rate loans. Accordingly, the Company has sold more long-term fixed-rate mortgage loans in the secondary market in recent periods to manage interest rate risk. In recent years, the Company also has used investment securities with terms of three years or less, longer-term borrowings from the FHLB and a four-year $5.0 million brokered deposit to help manage interest rate risk. The Company currently does not participate in hedging programs, interest rate swaps or other activities involving the use of derivative financial instruments.  The Company has an Asset/Liability Committee to communicate, coordinate and control all aspects involving asset/liability management. The committee establishes and monitors the volume, maturities, pricing and mix of assets and funding sources with the objective of managing assets and funding sources to provide results that are consistent with liquidity, growth, risk limits and profitability goals.  Quantitative Aspects of Market Risk  The Company analyzes its interest rate sensitivity position to manage the risk associated with interest rate movements through the use of interest income simulation. The matching of assets and liabilities may be analyzed by examining the extent to which such assets and liabilities are “interest rate sensitive.” An asset or liability is said to be interest rate sensitive within a specific time period if it will mature or reprice within that time period. The Company’s goal is to manage asset and liability positions to moderate the effect of interest rate fluctuations on net interest and dividend income.  Income Simulation Analysis. Interest income simulations are completed quarterly and presented to the Company’s Asset/Liability Committee. The simulations provide an estimate of the impact of changes in interest rates on net interest and dividend income under a range of assumptions. The numerous assumptions used in the simulation process are reviewed by the Asset/Liability Committee on a quarterly basis. Changes to these assumptions can significantly affect the results of the simulation. The simulation incorporates assumptions regarding the potential timing in the repricing of certain assets and liabilities when market rates change and the changes in spreads between different market rates. The simulation analysis incorporates management’s current assessment of the risk that pricing margins will change adversely over time due to competition or other factors.  Simulation analysis is only an estimate of the Company’s interest rate risk exposure at a particular point in time. The Company continually reviews the potential effect that changes in interest rates could have on the repayment of rate sensitive assets and funding requirements of rate sensitive liabilities.    58    Table of Contents The tables below set forth an approximation of the Company’s exposure as a percentage of estimated net interest and dividend income for the next twelve and twenty-four-month periods using interest income simulation. The simulation uses projected repricing of assets and liabilities at December 31, 2005 and at December 31, 2004 on the basis of contractual maturities, anticipated repayments and scheduled rate adjustments. Prepayment rates can have a significant impact on interest income simulation. Because of the Company’s large percentage of loans and mortgage-backed securities, rising or falling interest rates have a significant impact on the prepayment speeds of its earning assets that in turn affect the rate sensitivity position. The prepayment rates on investment securities are assumed to fluctuate between 8% and 18% in a flat interest rate environment, between 6% and 12% in an increasing interest rate environment and between 18% and 60% in a decreasing interest rate environment, depending on the type of security. Loan prepayment rates are assumed to fluctuate between 6% and 24% in a flat interest rate environment, between 6% and 18% in a rising rate environment and between 6% and 65% in a falling rate environment, depending on the type of loan. As evidenced by these assumptions, when interest rates rise, prepayments tend to slow and when interest rates fall, prepayments tend to increase. The Company’s asset sensitivity would be reduced if prepayments slow and vice versa. Because prospective effects of hypothetical interest rate changes are based on a number of assumptions, these computations should not be relied upon as indicative of actual results. While the Company believes such assumptions to be reasonable, there can be no assurance that assumed prepayment rates will approximate actual future mortgage-backed securities, collateralized mortgage obligations and loan repayment activity. Further, the computations do not reflect any actions that management may undertake in response to changes in interest rates. Management periodically reviews its rate assumptions based on existing and projected economic conditions.  The Company’s management generally simulates changes to net interest and dividend income using three different interest rate scenarios. The first scenario anticipates the maximum foreseeable increase in rates over the next twelve months; management currently assumes this to be 300 basis points. The second scenario anticipates management’s view of the most likely change in interest rates over the next twelve months; management’s current assumption is a 100 basis point increase in rates. The third scenario anticipates the maximum foreseeable decrease in rates over the next twelve months; management’s assumption was 200 basis points at December 31, 2005 and 100 basis points at December 31, 2004. The basis point change in each of the three scenarios is assumed to occur evenly over both the twelve and twenty-four months presented. As of December 31, 2005 and December 31, 2004, the Company’s estimated exposure as a percentage of estimated net interest and dividend income for the twelve-month and twenty-four-month periods are as follows:               As of December 31, 2005:    Percent Change inEstimated Net Interest andDividend Income Over       12 Months     24 Months     300 basis point increase in rates    (3.36 )%   (5.56 )%   100 basis point increase in rates    0.44     1.54     200 basis point decrease in rates    (4.28 )   (7.55 )      As of December 31, 2004:    Percent Change inEstimated Net Interest andDividend Income Over       12 Months     24 Months     300 basis point increase in rates    (9.95 )%   (12.57 )%   100 basis point increase in rates    (3.20 )%   (4.25 )%   100 basis point decrease in rates    (3.70 )%   (6.35 )%    59    Table of Contents As of December 31, 2005, based on the scenarios above, net interest and dividend income would be adversely affected in both the twelve and twenty-four-month periods if interest rates rose by 300 basis points or if interest rates decreased 200 basis points and favorably impacted by a 100 basis point increase in rates. Using net interest and dividend income for the quarter ended December 31, 2005, for each percentage point change in net interest and dividend income, the effect on the Company’s annual net income would be $148,000, assuming a 34% income tax rate.  As of December 31, 2004, based on the scenarios above, net interest and dividend income would be adversely affected in both the twelve and twenty-four-month periods if interest rates rose by 100 or 300 basis points or if interest rates decreased 100 basis points. Using net interest and dividend income for the quarter ended December 31, 2004, for each percentage point change in net interest and dividend income, the effect on the Company’s annual net income would be $140,000, assuming a 34% income tax rate.  For both the twelve and twenty-four-month periods, the effect on net interest and dividend income has improved, in the event of a sudden and sustained increase in prevailing market interest rates of 100 and 300 basis points at December 31, 2005 compared to December 31, 2004, as a result of the Company’s strategy to better position the balance sheet for the continual rise in market interest rates primarily through the sale of fixed-rate residential mortgages.   Item 8. Financial Statements and Supplementary Data.  For the Company’s Consolidated Financial Statements, see index on page 62.   Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.  None.   Item 9A. 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.   Item 9B. Other Information.  None.    60    Table of Contents  PART III.   Item 10. Directors and Executive Officers of the Registrant.  The information concerning the directors and officers of the Company and information regarding compliance with Section 16(a) of the Exchange Act is incorporated herein by reference to the cover page of this Form 10-K, the Company’s Proxy Statement for the 2006 Annual Meeting of Stockholders and to Part I, Item 1, “Business - Executive Officers of the Registrant” in this report.   Item 11. Executive Compensation.  The information regarding executive compensation is incorporated herein by reference to the Company’s Proxy Statement for the 2006 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 is incorporated herein by reference to the Company’s Proxy Statement for the 2006 Annual Meeting of Stockholders.  The following table sets forth information about the Company 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, 2005.                Plan category     Number of securities to be issued uponexercise of outstandingoptions, warrants and rights (a)     Weighted-average exercise price of outstandingoptions, warrants and rights (b)     Number of securities remaining available for future issuance under equity compensation plans (excludingsecurities reflected incolumn (a)) (c)   Equity compensation plans approved by security holders    463,500    $ 10.10    152,123   Equity compensation plans not approved by security holders    —        —      —     Total    463,500    $ 10.10    152,123   Item 13. Certain Relationships and Related Transactions.  The information relating to certain relationships and related transactions is incorporated herein by reference to the Company’s Proxy Statement for the 2006 Annual Meeting of Stockholders.   Item 14. Principal Accountant Fees and Services.  The information relating to the principal accountant fees and expenses is incorporated herein by reference to the Company’s Proxy Statement for the 2006 Annual Meeting of Stockholders.    61    Table of Contents  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 (Wolf & Company, P.C.)        •   Report of Independent Registered Public Accounting Firm (McGladrey & Pullen, LLP)        •   Consolidated Statements of Financial Condition as of December 31, 2005 and 2004        •   Consolidated Statements of Income for the Years Ended December 31, 2005, 2004 and 2003        •   Consolidated Statements of Changes in Stockholders’ Equity for the Years Ended December 31, 2005, 2004 and 2003        •   Consolidated Statements of Cash Flows for the Years Ended December 31, 2005, 2004 and 2003        •   Notes to Consolidated Financial Statements  (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 hereto.  (3) Exhibits          3.1    Charter of SI Financial Group, Inc. (1)     3.2    Bylaws of SI Financial Group, Inc. (1)     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 (2)     10.2    Employment Agreement by and among SI Financial Group, Inc. and Savings Institute Bank and Trust Company and Brian J. Hull (2)     10.3    Change in Control Agreement by and among SI Financial Group, Inc. and Savings Institute Bank and Trust Company and Michael J. Moran (2)     10.4    Form of Savings Institute Bank and Trust Company Employee Severance Compensation Plan (1)     10.5    Savings Institute Directors Retirement Plan (1)    62    Table of Contents       10.6    Form of Savings Institute Bank and Trust Company Supplemental Executive Retirement Plan (1)     10.7    Savings Institute Group Term Replacement Plan (1)     10.8    Form of Savings Institute Executive Supplemental Retirement Plan – Defined Benefit (1)     10.9    Form of Savings Institute Director Deferred Fee Agreement (1)     10.10    Form of Savings Institute Director Consultation Plan (1)     10.11    Change in Control Agreement by and among SI Financial Group, Inc., Savings Institute Bank and Trust Company and Sonia M. Dudas (2)     10.12    SI Financial Group, Inc. 2005 Equity Incentive Plan (3)     10.13    Change in Control Agreement by and among SI Financial Group, Inc., Savings Institute Bank and Trust Company and Laurie L. Gervais     14.0    Code of Ethics and Business Conduct     21.0    List of Subsidiaries     23.0    Consent of McGladrey & Pullen, LLP     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    (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 Exhibits filed with the Company’s Form 10-Q for the quarter ended September 30, 2004, filed with the Securities and Exchange Commission on November 15, 2004.    (3) 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.    63    Table of Contents  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 30, 2006  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 Rheo A. Brouillard       President and Chief Executive Officer (principal executive officer)   March 30, 2006        /s/ Brian J. Hull Brian J. Hull       Executive Vice President, Treasurer and Chief Financial Officer (principal accounting and financial officer)   March 30, 2006        /s/ Henry P. Hinckley Henry P. Hinckley       Chairman of the Board   March 30, 2006        /s/ Robert C. Cushman, Sr. Robert C. Cushman, Sr.       Director   March 30, 2006        /s/ Donna M. Evan Donna M. Evan       Director   March 30, 2006        /s/ Roger Engle Roger Engle       Director   March 30, 2006        /s/ Robert O. Gillard Robert O. Gillard       Director   March 30, 2006        /s/ Steven H. Townsend Steven H. Townsend       Director   March 30, 2006        /s/ Mark D. Alliod Mark D. Alliod       Director   March 30, 2006    64    Table of Contents  SI FINANCIAL GROUP, INC.  INDEX TO CONSOLIDATED FINANCIAL STATEMENTS               Page    Report of Independent Registered Public Accounting Firm (Wolf & Company, P.C.)    F-1       Report of Independent Registered Public Accounting Firm (McGladrey & Pullen, LLP)    F-2       Consolidated Statements of Financial Condition as of December 31, 2005 and 2004    F-3       Consolidated Statements of Income for the Years Ended December 31, 2005, 2004 and 2003    F-4       Consolidated Statements of Changes in Stockholders’ Equity for the Years Ended December 31, 2005, 2004 and 2003    F-6       Consolidated Statements of Cash Flows for the Years Ended December 31, 2005, 2004 and 2003    F-8       Notes to Consolidated Financial Statements    F-10    Table of Contents     REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM  The Board of Directors and Stockholders of SI Financial Group, Inc.  We have audited the accompanying consolidated statement of financial condition of SI Financial Group, Inc. and subsidiaries as of December 31, 2005, and the related consolidated statements of income, changes in stockholders’ equity and cash flows for the year 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 audit.  We conducted our audit 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 audit provides a reasonable basis for our opinion.  In our opinion, the 2005 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, 2005, and the results of their operations and their cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America.  /s/ Wolf & Company, P.C.  Boston, Massachusetts  February 23, 2006  99 High Street Ÿ Boston, Massachusetts Ÿ 02110-2320 Ÿ Phone 617-439-9700 Ÿ Fax 617-542-0400  1500 Main Street Ÿ Suite 1500 Ÿ Springfield, Massachusetts Ÿ 01115 Ÿ Phone 413-747-9042 Ÿ Fax 413-739-5149  www.wolfandco.com    F - 1    Table of Contents     REPORT OF INDEPENDENT REGISTERED  PUBLIC ACCOUNTING FIRM  To the Board of Directors  SI Financial Group, Inc. and Subsidiary  Willimantic, Connecticut  We have audited the accompanying consolidated statement of financial condition of SI Financial Group, Inc. and Subsidiary (the “Company”) as of December 31, 2004, and the related consolidated statements of income, changes in stockholders’ equity and cash flows for each of the two years in the period ended December 31, 2004. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these 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 audits 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 Subsidiary as of December 31, 2004, and the results of their operations and their cash flows for each of the two years in the period ended December 31, 2004, in conformity with U.S. generally accepted accounting principles.  /s/ McGladrey & Pullen, LLP  New Haven, Connecticut  February 18, 2005    F - 2    Table of Contents  SI FINANCIAL GROUP, INC. AND SUBSIDIARIES  CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION  (Dollars in Thousands, Except Share Amounts)                     December 31,         2005     2004     ASSETS:              Cash and due from banks:              Noninterest-bearing    $ 16,317     $ 21,647     Interest-bearing      6,829       8,728     Federal funds sold      2,800       400                        Total cash and cash equivalents      25,946       30,775         Available for sale securities, at fair value      120,019       120,557     Loans held for sale      107       200     Loans receivable (net of allowance for loan losses of $3.7 million at December 31, 2005 and $3.2 million at December 31, 2004)      513,775       447,957     Accrued interest receivable      3,299       2,638     Federal Home Loan Bank Stock, at cost      5,638       4,313     Cash surrender value of bank-owned life insurance      7,837       7,561     Other real estate owned      325       —       Premises and equipment, net      8,838       6,586     Goodwill and other intangibles      817       292     Deferred tax asset, net      2,804       2,044     Other assets      2,463       1,726                        TOTAL ASSETS    $ 691,868     $ 624,649                        LIABILITIES AND STOCKHOLDERS’ EQUITY:              Liabilities:              Deposits:              Noninterest-bearing    $ 51,996     $ 46,049     Interest-bearing      457,301       411,709                        Total deposits      509,297       457,758         Mortgagors’ and investors’ escrow accounts      2,985       2,722     Federal Home Loan Bank advances      87,929       72,674     Junior subordinated debt owed to unconsolidated trust      7,217       7,217     Accrued expenses and other liabilities      4,397       3,469                        TOTAL LIABILITIES      611,825       543,840                        Commitments and contingencies (notes 6, 11 and 12)                  Stockholders’ Equity:              Preferred stock ($.01 par value; 1,000,000 shares authorized; none issued or outstanding)      —         —       Common stock ($.01 par value; 75,000,000 shares authorized; 12,563,750 shares issued and 12,551,186 shares outstanding at December 31, 2005; 12,563,750 shares issued and outstanding at December 31, 2004)      126       126     Additional paid-in capital      51,155       50,947     Unallocated common shares held by ESOP      (4,521 )     (4,844 )   Unearned restricted shares      (2,176 )     —       Retained earnings      37,216       34,870     Accumulated other comprehensive loss      (1,609 )     (290 )   Treasury stock, at cost (12,564 shares)      (148 )     —                          TOTAL STOCKHOLDERS’ EQUITY      80,043       80,809                        TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY    $ 691,868     $ 624,649                       See accompanying notes to consolidated financial statements.    F - 3    Table of Contents  SI FINANCIAL GROUP, INC. AND SUBSIDIARIES  CONSOLIDATED STATEMENTS OF INCOME  (Dollars in Thousands, Except Share Amounts)                       Years Ended December 31,       2005    2004     2003   Interest and dividend income:                  Loans, including fees    $ 28,586    $ 24,545     $ 23,840   Investment securities:                  Taxable interest      4,744      3,658       3,787   Tax-exempt interest      21      24       27   Dividends      246      136       121   Other      308      240       155                           TOTAL INTEREST AND DIVIDEND INCOME      33,905      28,603       27,930                           Interest expense:                  Deposits      8,528      6,346       6,597   Federal Home Loan advances      3,108      2,683       2,315   Subordinated debt      495      371       360   Other borrowings      —        —         74                           TOTAL INTEREST EXPENSE      12,131      9,400       9,346                           NET INTEREST INCOME      21,774      19,203       18,584   Provision for loan losses      410      550       1,602                           NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES      21,364      18,653       16,982                           Noninterest income:                  Service fees      4,262      2,941       2,858   Wealth management fees      1,301      942       849   Increase in cash surrender value of BOLI      276      303       258   Net gain (loss) on sale of securities      59      (166 )     121   Net gain on sale of loans      190      55       393   Other      222      110       243                           TOTAL NONINTEREST INCOME      6,310      4,185       4,722                           Noninterest expenses:                  Salaries and employee benefits      12,102      9,835       9,090   Occupancy and equipment      3,830      3,465       2,973   Computer and electronic banking services      1,823      1,678       1,420   Outside professional services      1,087      815       500   Marketing and advertising      794      513       387   Supplies      449      293       266   Contribution to SI Financial Group Foundation      —        2,513       —     Other      2,503      1,919       1,970                           TOTAL NONINTEREST EXPENSES      22,588      21,031       16,606                           INCOME BEFORE INCOME TAXES      5,086      1,807       5,098        Income tax provision      1,689      519       1,713                           NET INCOME    $ 3,397    $ 1,288     $ 3,385                          See accompanying notes to consolidated financial statements.    F - 4    Table of Contents SI FINANCIAL GROUP, INC. AND SUBSIDIARIES  CONSOLIDATED STATEMENTS OF INCOME - Concluded  (Dollars in Thousands, Except Share Amounts)                    Years Ended December 31,       2005    2004    2003   Net income per common share:                Basic    $ 0.28    N/A    N/A   Diluted    $ 0.28    N/A    N/A   Weighted-average common shares outstanding:                Basic      12,016,800    N/A    N/A   Diluted      12,041,316    N/A    N/A  See accompanying notes to consolidated financial statements.    F - 5    Table of Contents  SI FINANCIAL GROUP, INC. AND SUBSIDIARIES  CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY  YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003  (Dollars in Thousands, Except Share Amounts)                                           Common Stock    AdditionalPaid-inCapital     UnallocatedCommonSharesHeld byESOP     UnearnedRestrictedShares    RetainedEarnings    AccumulatedOtherComprehensiveIncome (Loss)     TreasuryStock     TotalStockholders Equity         Shares    Dollars                     BALANCE AT DECEMBER 31, 2002    —      $ —      $ —       $ —       $ —      $ 30,197    $ 1,211     $ —      $ 31,408                                                       Comprehensive income:                                                Net income    —        —        —         —         —        3,385      —         —        3,385     Change in net unrealized loss on available for sale securities, net of reclassification adjustment and tax effects    —        —        —         —         —        —        (694 )     —        (694 )                                                     Total comprehensive income                                             2,691                                                       BALANCE AT DECEMBER 31, 2003    —        —        —         —         —        33,582      517       —        34,099     Issuance of common stock for initial public offering, net of expenses of $1.8 million    5,025,500      50      48,430       —         —        —        —         —        48,480     Issuance of common stock to SI Bancorp, MHC    7,286,975      73      (73 )     —         —        —        —         —        —       Issuance of common stock to SI Financial Group Foundation including additional tax benefit of $68 due to higher basis for tax purposes    251,275      3      2,578       —         —        —        —         —        2,581     Shares purchased for ESOP    —        —        —         (4,925 )     —        —        —         —        (4,925 )   Allocation of ESOP shares    —        —        12       81       —        —        —         —        93                                                       Comprehensive income:                                                Net income    —        —        —         —         —        1,288      —         —        1,288     Change in net unrealized loss on available for sale securities, net of reclassification adjustment and tax effects    —        —        —         —         —        —        (807 )     —        (807 )                                                     Total comprehensive income                                             481                                                      See accompanying notes to consolidated financial statements.    F - 6    Table of Contents SI FINANCIAL GROUP, INC. AND SUBSIDIARIES  CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY - Concluded  YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003  (Dollars in Thousands, Except Share Amounts)                                             Common Stock    AdditionalPaid-inCapital    UnallocatedCommonSharesHeld byESOP     UnearnedRestrictedShares     RetainedEarnings     AccumulatedOtherComprehensiveIncome (Loss)     TreasuryStock      TotalStockholders Equity       Shares    Dollars                   BALANCE AT DECEMBER 31, 2004    12,563,750      126      50,947      (4,844 )     —         34,870       (290 )     —         80,809     Cash dividends declared ($0.12 per share)    —        —        —        —         —         (590 )     —         —         (590 )   Restricted share grants and purchases    —        —        —        —         (2,487 )     (461 )     —         —         (2,948 )   Equity incentive plan shares earned    —        —        165      —         311       —         —         —         476     Allocation of ESOP shares    —        —        43      323       —         —         —         —         366     Treasury stock purchased (12,564 shares)    —        —        —        —         —         —         —         (148 )     (148 )                                                     Comprehensive income:                                                Net income    —        —        —        —         —         3,397       —         —         3,397     Change in net unrealized loss on available for sale securities, net of reclassification adjustment and tax effects    —        —        —        —         —         —         (1,319 )     —         (1,319 )                                                     Total comprehensive income                                             2,078                                                                           BALANCE AT DECEMBER 31, 2005    12,563,750    $ 126    $ 51,155    $ (4,521 )   $ (2,176 )   $ 37,216     $ (1,609 )   $ (148 )   $ 80,043                                                                          See accompanying notes to consolidated financial statements.    F - 7    Table of Contents  SI FINANCIAL GROUP, INC. AND SUBSIDIARIES  CONSOLIDATED STATEMENTS OF CASH FLOWS  (Dollars in Thousands)                         Years Ended December 31,         2005     2004     2003     Cash flows from operating activities:                   Net income    $ 3,397     $ 1,288     $ 3,385     Adjustments to reconcile net income to net cash provided by operating activities:                   Provision for loan losses      410       550       1,602     Contribution of common stock to charitable foundation      —         2,513       —       Employee stock ownership plan expense      366       93       —       Equity incentive plan expense      476       —         —       Amortization and accretion of investment premiums and discounts, net      53       111       466     Amortization and accretion of loan premiums and discounts, net      246       285       192     Depreciation and amortization of premises and equipment      1,359       1,074       1,039     Amortization of core deposit intangible      97       97       97     Amortization of deferred debt issuance costs      35       35       35     Amortization of mortgage servicing rights      64       24       —       Deferred income tax provision (benefit)      (80 )     (959 )     166     Net loss (gain) on sales of securities      (59 )     166       (121 )   Loans originated for sale      (7,760 )     (15,694 )     (21,000 )   Proceeds from sale of loans held for sale      7,874       15,549       22,996     Net decrease in loans held for sale      —         —         320     Net gain on sale of loans      (190 )     (55 )     (393 )   Net gain on the sale of premises and equipment      (40 )     —         —       Net gain on sale of other real estate owned      —         —         (15 )   Write-down of other real estate owned      25       60       —       Increase in cash surrender value of bank-owned life insurance      (276 )     (303 )     (258 )   Impairment charge – long-lived assets      —         337       —       Impairment charge – other assets      —         51       36     Change in operating assets and liabilities:                   Accrued interest receivable      (661 )     (400 )     55     Other assets      (820 )     36       (144 )   Accrued expenses and other liabilities      723       1,123       212                                NET CASH PROVIDED BY OPERATING ACTIVITIES      5,239       5,981       8,670                                Cash flows from investing activities:                   Purchases of available for sale securities      (26,964 )     (90,693 )     (45,102 )   Proceeds from sales of available for sale securities      159       22,845       11,650     Proceeds from maturities of and principal repayments on available for sale securities      25,350       23,836       42,323     Purchases of held to maturity securities      —         —         —       Proceeds from sales of held to maturity securities      —         1,253       —       Proceeds from maturities of and principal repayments on held to maturity securities      —         123       7,689     Net increase in loans      (94,315 )     (61,868 )     (55,907 )   Purchases of Federal Home Loan Bank stock      (1,325 )     (1,455 )     (472 )   Purchase of bank-owned life insurance policies      —         —         (7,000 )   Purchase of trust subsidiary      (680 )     —         —       Proceeds from sale of portfolio loans      27,660       —         —       Proceeds from sale of premises and equipment      571       —         —       Proceeds from sales of other real estate owned      —         268       433     Purchases of bank premises and equipment      (4,053 )     (1,322 )     (1,619 )                              NET CASH USED IN INVESTING ACTIVITIES      (73,597 )     (107,013 )     (48,005 )                               F - 8    Table of Contents SI FINANCIAL GROUP, INC. AND SUBSIDIARIES  CONSOLIDATED STATEMENTS OF CASH FLOWS - Concluded  (Dollars in Thousands)                         Years Ended December 31,         2005     2004     2003     Cash flows from financing activities:                   Net increase in deposits      51,539       42,668       18,740     Net increase in mortgagors’ and investors’ escrow accounts      263       501       256     Net decrease in collateralized borrowings      —         —         (851 )   Proceeds from Federal Home Loan Bank advances      42,827       36,370       18,695     Repayments of Federal Home Loan Bank advances      (27,572 )     (20,864 )     (5,445 )   Net proceeds from common stock offering      —         48,480       —       Cash dividends paid on common stock      (432 )     —         —       Purchase of common stock for equity incentive plan      (2,948 )     —         —       Treasury stock purchased      (148 )     —         —       Acquisition of common stock by ESOP      —         (4,925 )     —                                  NET CASH PROVIDED BY FINANCING ACTIVITIES      63,529       102,230       31,395                                NET CHANGE IN CASH AND CASH EQUIVALENTS      (4,829 )     1,198       (7,940 )   CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR      30,775       29,577       37,517                                CASH AND CASH EQUIVALENTS AT END OF YEAR    $ 25,946     $ 30,775     $ 29,577                                SUPPLEMENTAL CASH FLOW INFORMATION:                   Interest and Income Taxes Paid:                   Interest paid on deposits and borrowed funds    $ 12,016     $ 9,367     $ 9,367     Income taxes paid      1,752       1,296       1,848          Noncash Activities:                   Unrealized losses on securities arising during the year      (1,999 )     (1,224 )     (1,050 )   Transfer of loans to other real estate owned      350       —         703     Derecognition of loans and collateralized borrowings      —         —         1,100     Declared dividends      158       —         —            Asset Purchase:                   In conjunction with the asset purchase of SI Trust Servicing, the following net assets were acquired for a purchase price of $680,000:           Assets                   Fixed assets    $ 89     $ —       $ —       Goodwill      622       —         —       Other assets      16       —         —                                  Total assets acquired      727       —         —                                  Liabilities                   Accrued expenses      2       —         —       Transaction costs      45       —         —                                  Total liabilities assumed      47       —         —                                  Net assets acquired    $ 680     $ —       $ —                                 See accompanying notes to consolidated financial statements.    F - 9    Table of Contents  SI FINANCIAL GROUP, INC. AND SUBSIDIARIES  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  DECEMBER 31, 2005, 2004 AND 2003  NOTE 1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES  Nature of Business  On August 6, 2004, SI Financial Group, Inc. (the “Company”), a federally-chartered mid-tier stock holding company, was formed. On that date, SI Bancorp, Inc., a Connecticut mutual holding company organized in 2000, converted from a state-chartered mutual holding company to a federally-chartered mutual holding company operating under the name SI Bancorp, MHC. In addition, Savings Institute Bank and Trust Company (the “Bank”), formerly operating under the name Savings Institute, completed its conversion from a state-chartered stock savings bank to a federally-chartered stock savings bank. SI Bancorp, Inc. transferred its ownership in all of the stock of Savings Institute Bank and Trust Company to SI Financial Group, Inc. in exchange for 7,286,975 shares, or 58% of the outstanding common shares, of SI Financial Group, Inc. In addition, SI Financial Group, Inc. received all other assets and liabilities held by SI Bancorp, Inc., including $7.2 million of subordinated debt, which is held by SI Capital Trust I, an unconsolidated subsidiary of the Company.  On September 30, 2004, the Company sold 5,025,500 shares of its common stock, representing 40% of the 12,563,750 shares outstanding, at $10.00 per share to eligible account holders and the Employee Stock Ownership Plan (“ESOP”) of the Bank in a subscription offering pursuant to a Plan of Reorganization and Minority Stock Issuance. SI Bancorp, MHC was issued 58% of the Company’s common stock. SI Bancorp, MHC does not conduct any business other than owning a majority of the common stock of SI Financial Group, Inc.  In connection with the offering, SI Financial Group, Inc. established SI Financial Group Foundation (the “Foundation”), a charitable foundation dedicated to community activities and the promotion of charitable causes in areas in which the Bank operates. The Foundation was funded on September 30, 2004 with a contribution of 2%, or 251,275 shares, of the Company’s common stock. This contribution resulted in the recognition of a $2.5 million expense, equal to the value of the common shares contributed by the Company (net of taxes), for the period ended December 31, 2004. The Company recognized an additional tax benefit of $68,000 as an increase to stockholders’ equity resulting from the higher tax basis of the contribution.  The Bank established the ESOP for the benefit of its eligible employees. The Bank borrowed the necessary funds from the Company to purchase 3.92%, or 492,499 shares, of the common shares issued and outstanding. The Bank intends to make annual contributions adequate to fund the payment of regular debt service requirements under the ESOP.  On November 15, 2005, the Company acquired certain assets of two trust services businesses, Private Trust Services and Bank Trust Services (“SI Trust Servicing”), from the former Circle Trust Company headquartered in Darien, Connecticut. SI Trust Servicing, located in Rutland, Vermont, is a third-party provider of trust outsourcing services for community banks. The acquisition presents significant growth opportunities in the Bank’s wealth management business and is expected to increase noninterest income and be accretive to earnings. The acquisition was accounted for as an asset purchase transaction with total cash consideration funded through internal sources. The purchase price was allocated to the net assets acquired with the excess purchase price resulting in goodwill. The operating results since the acquisition are included in the Company’s results of operations.  The Bank, a community-oriented financial institution, headquartered in Willimantic, Connecticut, provides a variety of financial services to individuals, municipalities and businesses through its seventeen offices in eastern Connecticut. The primary products include savings, checking and certificates of deposit accounts, residential and business mortgage loans, commercial business loans and consumer     F - 10    Table of Contents SI FINANCIAL GROUP, INC. AND SUBSIDIARIES  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  DECEMBER 31, 2005, 2004 AND 2003     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. Trust operations in Vermont provide trust outsourcing services for other financial institutions.  Principles of Consolidation  The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary, Savings Institute Bank and Trust Company, 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 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 statement of financial condition 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, impairment of long-lived assets and the valuation of deferred tax assets.  Reclassifications  Certain amounts in the Company’s 2004 and 2003 Consolidated Financial Statements have been reclassified to conform to the 2005 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. Refer to Notes 3 and 4, respectively, in the Notes to the Consolidated Financial Statements for details of the Company’s investment securities and types of 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 net. 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.  Investment in Debt and Marketable Equity Securities  Management determines the appropriate classification of securities at the date individual investment securities are acquired, and the appropriateness of such classification is reassessed at each statement of financial condition 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.    F - 11    Table of Contents SI FINANCIAL GROUP, INC. AND SUBSIDIARIES  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  DECEMBER 31, 2005, 2004 AND 2003    Purchase premiums and discounts are recognized in interest income using the interest method over the terms of the securities. Declines in the fair value of held to maturity and available for sale securities below their cost that are deemed to be other-than-temporary are reported in earnings as realized losses. In estimating other-than-temporary impairment losses, management considers (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer and (3) the intent and ability of the Company to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value. Gains and losses on the sale of securities are recorded on the trade date and are determined using the specific identification method.  The sale of a held to maturity security within three months of its maturity date or after collection of at least 85% of the principal outstanding at the time the security was acquired is considered a maturity for purposes of classification and disclosure.  Transfers of debt securities into the held to maturity classification from the available for sale classification are made at fair value on the date of transfer. The unrealized holding gain or loss on the date of transfer is retained in accumulated other comprehensive income (loss) and in the carrying value of the held to maturity securities. Such amounts are amortized over the remaining contractual lives of the securities by the interest method.  Federal Home Loan Bank stock (“FHLB”) is recorded at cost.  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.  Mortgage loans held for sale are generally sold with the mortgage servicing rights retained by the Company. The carrying value of mortgage loans sold is reduced by the value allocated to the associated mortgage servicing rights. 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.  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, other than through a cleanup call.    F - 12    Table of Contents SI FINANCIAL GROUP, INC. AND SUBSIDIARIES  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  DECEMBER 31, 2005, 2004 AND 2003    Servicing  Servicing assets are recognized as separate assets when rights are acquired through purchase or retained through sale of financial assets. Generally, purchased servicing rights are capitalized at the cost to acquire the rights. For sales of mortgage loans, a portion of the cost of originating the loan is allocated to the servicing right based on relative fair value. Fair value is based on market prices for comparable mortgage servicing contracts, when available, or alternatively, is based on a valuation model that calculates the present value of estimated future net servicing income. The valuation model incorporates assumptions that market participants would use in estimating future net servicing income, such as the cost to service, the discount rate, the custodial earnings rate, an inflation rate, ancillary income, prepayment speeds and default rates and losses. Capitalized servicing rights are reported in other assets and are amortized into noninterest income in proportion to, and over the period of, the estimated future net servicing income of the underlying financial assets.  Servicing assets are evaluated for impairment based upon the fair value of the rights as compared to amortized cost. Impairment is determined by stratifying rights by predominant risk characteristics, such as interest rate, loan type and investor type. Impairment is recognized through a valuation allowance for an individual stratum, to the extent that fair value is less than the capitalized amount for the stratum. If the Company later determines that all or a portion of the impairment no longer exists for a particular stratum, a reduction of the allowance may be recorded as an increase to income.  Servicing fee income is recorded for fees earned for servicing loans. The fees are based on a contractual percentage of the outstanding principal; or a fixed amount per loan and are recorded as income when earned. The amortization of mortgage servicing rights is netted against loan servicing fee income.  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.  An impaired loan is measured based on 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. 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.  A loan is classified as a restructured loan when certain 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 borrowers’ financial condition.  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. Loans are charged against the allowance for loan losses when management believes that the uncollectibility of principal 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.    F - 13    Table of Contents SI FINANCIAL GROUP, INC. AND SUBSIDIARIES  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  DECEMBER 31, 2005, 2004 AND 2003    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, regulatory examination and evaluations of loans and other relevant factors.  The allowance for loan losses consists of the following key elements:        •   Specific allowance for identified problem loans, including loans that are classified as doubtful, substandard or special mention. For such loans that are also classified as impaired, an allowance is established when the discounted cash flows (or collateral value or observable market price) of the impaired loan is lower than the carrying value of that loan.        •   General valuation allowance on certain identified problem loans which include loans on the Managed Asset Report that do not have an individual allowance. The Bank segregates these loans by loan category and assigns allowance percentages to each category based on inherent losses associated with each type of lending and consideration that these loans, in the aggregate, represent an above-average credit risk and that more of these loans will prove to be uncollectible compared to loans in the general portfolio.        •   General valuation allowance on the remainder of the loan portfolio covers non-classified loans and is based on historical loss experience adjusted for qualitative factors.        •   Unallocated component is maintained to cover uncertainties that could affect management’s estimate of probable losses. The unallocated component of the allowance reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating specific and general losses in the portfolio.  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.  Management believes that the allowance for loan losses is adequate. While management uses available information to recognize losses on loans, future additions to the allowance or write-downs may be necessary based on changes in economic conditions, particularly in eastern Connecticut. In addition, the Office of Thrift Supervision, as an integral part of its examination process, periodically reviews the Company’s allowance for loan losses. Such agency has the authority to require the Company to recognize additions to the allowance or write-downs based on the agency’s judgments about information available to it at the time of its examination.  Derivative Financial Instruments  Derivative Loan Commitments. Mortgage loan commitments are referred to as derivative loan commitments if the loan that will result from exercise of the commitment will be held for sale upon funding. Loan commitments that are derivatives are recognized at fair value on the consolidated balance sheet in other assets and other liabilities with changes in their fair values recorded in other noninterest income, if material.  The Company records a zero value for the loan commitment at inception (at the time the commitment is issued to a borrower (“the time of rate lock”)) and does not recognize the value of the expected normal     F - 14    Table of Contents SI FINANCIAL GROUP, INC. AND SUBSIDIARIES  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  DECEMBER 31, 2005, 2004 AND 2003     servicing rights until the underlying loan is sold. Subsequent to inception, changes in the fair value of the loan commitment are recognized based on changes in the fair value of the underlying mortgage loan due to interest rate changes, changes in the probability the derivative loan commitment will be exercised, and the passage of time. In estimating fair value, the Company assigns a probability to a loan commitment based on an expectation that it will be exercised and the loan will be funded.  Forward Loan Sale Commitments. To protect against the price risk inherent in derivative loan commitments, the Company utilizes both “mandatory delivery” and “best efforts” forward loan sale commitments to mitigate the risk of potential decreases in the values of loans that would result from the exercise of the derivative loan commitments. Mandatory delivery contracts are accounted for as derivative instruments. Generally, the Company’s best efforts contracts meet the definition of derivative instruments when the loans to the underlying borrowers close, and are accounted for as derivative instruments at that time. Accordingly, forward loan sale commitments are recognized at fair value on the consolidated balance sheet in other assets and other liabilities with changes in their fair value recorded in other noninterest income, if material.  The Company estimates the fair value of its forward loan sales commitments using methodology similar to that used for derivative loan commitments.  Interest and Fees on Loans  Interest on loans is accrued and included in operating 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, which establishes 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 operations. 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 operations upon disposal.  Income Taxes  The Company recognizes income taxes under the asset and liability method. 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 liabilities and their     F - 15    Table of Contents SI FINANCIAL GROUP, INC. AND SUBSIDIARIES  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  DECEMBER 31, 2005, 2004 AND 2003     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 realized or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. 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 had transactions in which the related tax effect was recorded directly to stockholders’ equity instead of operations. Transactions in which the tax effect was recorded directly to stockholders’ equity included the tax effects of unrealized gains and losses on available for sale securities and the tax benefit for the difference between the book and tax basis of the contribution to SI Financial Group Foundation. At December 31, 2005, the Company had a net deferred tax asset of $829,000 for unrealized gains and losses on available for sale securities and a deferred tax asset of $68,000 related to the difference between the book and tax basis of the SI Financial Group Foundation contribution.  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 improvements’ estimated economic lives 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 expense.  Goodwill and Other Intangibles  Goodwill and other intangibles are evaluated for impairment on an annual basis. The Company records as goodwill the excess purchase price over the fair value of net identifiable assets acquired. The Company follows the guidance provided in the Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets” (“SFAS 142”), which prescribes a two-step process to test and measure impairment of goodwill.  In connection with branch acquisitions that do not represent business combinations, the excess of deposit liabilities assumed from other banks over assets acquired is recorded as a core deposit intangible and amortized over the expected life of the asset.    F - 16    Table of Contents SI FINANCIAL GROUP, INC. AND SUBSIDIARIES  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  DECEMBER 31, 2005, 2004 AND 2003    Other Investment  The Company’s investment in a Small Business Investment Company (“SBIC”) is recorded at cost and is evaluated for impairment annually. Impairment 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. The Company recognized write-downs on this investment of $0, $51,000 and $36,000 during the years ended December 31, 2005, 2004 and 2003, respectively. This investment, with a net book value of $585,000 and $608,000 at December 31, 2005 and 2004, respectively, is included in other assets. The SBIC is licensed by the Small Business Administration. It provides mezzanine financing and private equity investments to small companies which may not otherwise qualify for standard bank financing.  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 are not directors, officers or affiliates. In the opinion of management, the transactions with related parties did not involve more than normal risk of collectibility, favored treatment or terms or present other unfavorable features. See Note 13 for details regarding related party transactions.  Collateralized Borrowings  Collateralized borrowings represent loans sold which do not meet the criteria for derecognition, due primarily to recourse and other provisions which could not be measured at the date of transfer. Transferred loans and any related collateralized borrowings are derecognized when all recourse and other provisions that could not be measured at the date of transfer either expire or become measurable.  Comprehensive Income  Accounting principles generally require that recognized revenue, expenses, gains and losses be included in net income. 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 the capital section in the statement of financial condition, such items, along with net income, are components of comprehensive income. See Note 15 for components of other comprehensive losses and related tax effects.  Earnings Per Share  Basic net income per common share is calculated by dividing the net income available to common stockholders by the weighted-average number of common shares outstanding during the period. Diluted net income per common share is computed in a manner similar to basic net income per common 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 option and restricted stock awards. 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 approximately 292,000 for the year ended December 31, 2005. Treasury shares and unallocated common shares held by the ESOP are not included in the weighted-average number of     F - 17    Table of Contents SI FINANCIAL GROUP, INC. AND SUBSIDIARIES  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  DECEMBER 31, 2005, 2004 AND 2003     common shares outstanding for purposes of calculating both basic and diluted net income per common share. Unvested restricted shares are only included in dilutive net income per common share computations.                      Years Ended December 31,  (Dollars in Thousands, Except Share Amounts)    2005    2004    2003   Net income    $ 3,397    $ 1,288    $ 3,385        Weighted-average common shares outstanding:                  Basic      12,016,800      N/A      N/A   Effect of dilutive stock option and restricted stock awards      24,516      N/A      N/A                          Diluted      12,041,316      N/A      N/A                          Net income per common share:                  Basic    $ 0.28      N/A      N/A   Diluted    $ 0.28      N/A      N/A  Per common share data is not considered meaningful and, is therefore, not presented for the years ended December 31, 2004 and 2003 as the Company had no shares outstanding prior to the Company’s initial public offering on September 30, 2004.  Employee Stock Ownership Plan  The Company accounts for its ESOP in accordance with Statement of Position 93-6, “Employers’ Accounting for Employee Stock Ownership Plans” (“SOP 93-6”). The value of unearned shares to be allocated to ESOP participants for future services not yet performed is recognized as a reduction to stockholders’ equity in the Company’s statement of financial condition. Unallocated ESOP shares are not considered outstanding for the purpose of calculating net income per common 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. The loan to the ESOP is repaid principally from the Bank’s contributions to the ESOP and dividends payable on common stock held by the ESOP over a period of 15 years. Compensation expense is recognized as ESOP shares are committed to be released.  Equity Incentive Plan  Statement of Financial Accounting Standards No. 123R, “Accounting for Stock-Based Compensation” (“SFAS 123R”) requires all entities to follow the same accounting standard and recognize the cost of share-based payment transactions in their financial statements. The Company elected early adoption of SFAS 123R in 2005. In accordance with SFAS 123R, the Company has recorded share-based compensation expense related to outstanding stock option and restricted stock awards based upon the fair value at the date of grant 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 to 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.   Advertising Costs  Advertising costs are expensed as incurred.    F - 18    Table of Contents SI FINANCIAL GROUP, INC. AND SUBSIDIARIES  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  DECEMBER 31, 2005, 2004 AND 2003    Recent Accounting Pronouncements  In March 2006, the Financial Accounting Standards Board issued Financial Accounting Standards No. 156, “Accounting for Servicing of Financial Assets,” which amends Financial Accounting Standards No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities,” with respect to the accounting for servicing of financial assets. This Statement requires that all separately recognized servicing rights be initially measured at fair value, if practicable. For each class of separately recognized servicing assets and liabilities, this Statement permits an entity to choose either of the following subsequent measurement methods (1) amortize servicing assets or liabilities in proportion to and over the period of estimated net servicing income or net servicing loss, or (2) report servicing assets or liabilities at fair value at each reporting date and report changes in fair value in earnings in the period in which the changes occur. This Statement also requires additional disclosures for all separately recognized servicing rights and is effective for new transactions occurring and for subsequent measurement at the beginning of an entity’s first fiscal year that begins after September 15, 2006. This Statement is not expected to have a material impact on the Company’s consolidated financial statements.  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, 2005 and 2004, the Bank maintained cash and liquid asset reserves of approximately $753,000 and $6.2 million, respectively, and maintained $3.0 million and $6.0 million, respectively, in the Federal Reserve Bank for clearing purposes to satisfy such reserve requirements.  NOTE 3. SECURITIES  The amortized cost and approximate fair values of investment securities at December 31, 2005 and 2004 are as follows:                          December 31, 2005  (Dollars in Thousands)    AmortizedCost    GrossUnrealizedGains    GrossUnrealizedLosses      Fair Value   AVAILABLE FOR SALE SECURITIES:                       Debt securities:                       U.S. Government and agency obligations    $ 4,820    $ 58    $ (65 )   $ 4,813   Government-sponsored enterprises      73,135      —        (1,645 )     71,490   Mortgage-backed securities      37,346      28      (836 )     36,538   Corporate debt securities      4,537      3      (12 )     4,528   Obligations of state and political subdivisions      1,499      47      —         1,546   Tax-exempt securities      490      —        —         490   Foreign government securities      75      —        (1 )     74                                  TOTAL DEBT SECURITIES      121,902      136      (2,559 )     119,479         Equity securities:                       Marketable equity securities      555      —        (15 )     540                                  TOTAL AVAILABLE FOR SALE SECURITIES    $ 122,457    $ 136    $ (2,574 )   $ 120,019                                   F - 19    Table of Contents SI FINANCIAL GROUP, INC. AND SUBSIDIARIES  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  DECEMBER 31, 2005, 2004 AND 2003                          December 31, 2004  (Dollars in Thousands)    AmortizedCost    GrossUnrealizedGains    GrossUnrealizedLosses      Fair Value   AVAILABLE FOR SALE SECURITIES:                       Debt securities:                       U.S. Government and agency obligations    $ 6,039    $ 80    $ (53 )   $ 6,066   Government-sponsored enterprises      67,911      121      (422 )     67,610   Mortgage-backed securities      40,926      86      (418 )     40,594   Corporate debt securities      3,498      65      —         3,563   Obligations of state and political subdivisions      1,499      85      —         1,584   Tax-exempt securities      560      —        —         560   Foreign government securities      75      —        —         75                                  TOTAL DEBT SECURITIES      120,508      437      (893 )     120,052         Equity securities:                       Marketable equity securities      488      17      —         505                                  TOTAL AVAILABLE FOR SALE SECURITIES    $ 120,996    $ 454    $ (893 )   $ 120,557                                 The following tables present information pertaining to securities with gross unrealized losses at December 31, 2005 and 2004, aggregated by investment category and length of time the individual securities have been in a continuous unrealized loss position.                           December 31, 2005:    Less Than 12 Months    12 Months Or More    Total  (Dollars in Thousands)     Fair Value    UnrealizedLoss     Fair Value    UnrealizedLoss     Fair Value    UnrealizedLoss   U.S. Government and agency obligations    $ —      $ —      $ 3,270    $ 65    $ 3,270    $ 65   Government-sponsored enterprises      23,998      314      47,492      1,331      71,490      1,645   Mortgage-backed securities      6,163      152      22,787      684      28,950      836   Corporate debt securities      1,003      12      —        —        1,003      12   Foreign government securities      —        —        24      1      24      1   Marketable equity securities      85      15      —        —        85      15                                               TOTAL    $ 31,249    $ 493    $ 73,573    $ 2,081    $ 104,822    $ 2,574                                                F - 20    Table of Contents SI FINANCIAL GROUP, INC. AND SUBSIDIARIES  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  DECEMBER 31, 2005, 2004 AND 2003                           December 31, 2004:    Less Than 12 Months    12 Months Or More    Total  (Dollars in Thousands)     Fair Value    UnrealizedLoss     Fair Value    UnrealizedLoss     Fair Value    UnrealizedLoss   U.S. Government and agency obligations    $ 3,553    $ 32    $ 490    $ 21    $ 4,043    $ 53   Government-sponsored enterprises      47,782      422      —        —        47,782      422   Mortgage-backed securities      23,716      259      4,530      159      28,246      418                                               TOTAL    $ 75,051    $ 713    $ 5,020    $ 180    $ 80,071    $ 893                                              Management evaluates securities for other-than-temporary impairment at least on a quarterly basis and more frequently when economic or market concerns warrant such evaluation.  At December 31, 2005 and 2004, unrealized losses on securities that have existed for a period of twelve months or more totaled $2.1 million and $180,000, respectively. At December 31, 2005, 86 debt securities with gross unrealized losses have aggregate depreciation of approximately 2% of the Company’s amortized cost basis. Management believes that none of the unrealized losses on these securities are other-than-temporary because primarily all of the unrealized losses relate to debt and mortgage-backed securities issued by government agencies or government-sponsored enterprises and private issuers that maintain investment grade ratings, which the Company has both the intent and the ability to hold until maturity or until the fair value fully recovers. In addition, management considers the issuers of the securities to be financially sound and believes the Company will receive all contractual principal and interest related to these investments.  At December 31, 2005, 14 marketable equity securities have unrealized losses with aggregate depreciation of 15% of the Company’s amortized cost basis. These unrealized losses have existed for less than three months and relate solely to holdings in the financial industry. In analyzing the issuer’s financial performance and current market value, management believes that the declines in market value are temporary.  During 2004, a held to maturity security, with an amortized cost of $1.7 million, was sold after being downgraded by various credit agencies to below investment grade.  The amortized cost and fair value of debt securities at December 31, 2005 by contractual maturities 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.    F - 21    Table of Contents SI FINANCIAL GROUP, INC. AND SUBSIDIARIES  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  DECEMBER 31, 2005, 2004 AND 2003                   Available for Sale Securities  (Dollars in Thousands)    AmortizedCost     Fair Value   Maturity:             Within 1 year    $ 8,611    $ 8,504   After 1 but within 5 years      66,429      64,912   After 5 but within 10 years      3,111      3,135   After 10 years      6,405      6,390                        84,556      82,941   Mortgage-backed securities      37,346      36,538                      $ 121,902    $ 119,479                  At December 31, 2005 and 2004, government-sponsored enterprise securities with a carrying value of $4.0 million and a fair value of $3.9 million and $4.0 million, respectively, were pledged to secure U.S. Treasury tax and loan payments and public deposits.  Proceeds from the sales of available for sale securities during the years ended December 31, 2005, 2004 and 2003 amounted to $159,000, $22.8 million and $11.7 million, respectively.  The following is a summary of realized gains and losses on the sale or write-down of securities for the years ended December 31, 2005, 2004 and 2003:                        Years Ended December 31,    (Dollars in Thousands)    2005    2004     2003     Gross gains on sales    $ 59    $ 689     $ 410     Gross losses on sales      —        (855 )     (215 )   Impairment charges      —        —         (74 )                             NET GAIN (LOSS) ON SALE OF SECURITIES    $ 59    $ (166 )   $ 121                                F - 22    Table of Contents SI FINANCIAL GROUP, INC. AND SUBSIDIARIES  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  DECEMBER 31, 2005, 2004 AND 2003    NOTE 4. LOANS RECEIVABLE AND ALLOWANCE FOR LOAN LOSSES  Loan Portfolio  The composition of the Company’s loan portfolio at December 31, 2005 and 2004 is as follows:                     December 31,    (Dollars in Thousands)    2005     2004     Real estate loans:              Residential – 1 to 4 family    $ 266,739     $ 252,180     Multi-family and commercial      100,926       82,213     Construction      47,325       35,773                        Total real estate loans      414,990       370,166                        Commercial business loans      77,552       59,123         Consumer loans      23,856       21,125                        TOTAL LOANS      516,398       450,414     Deferred loan origination costs, net of deferred fees      1,048       743     Allowance for loan losses      (3,671 )     (3,200 )                      LOANS, NET    $ 513,775     $ 447,957                       Impaired and Nonaccrual Loans  The following is a summary of information pertaining to impaired loans, which include all nonaccrual and restructured loans.                       December 31,      (Dollars in Thousands)        2005            2004       Impaired loans without valuation allowance    $ 298    $ 1,026   Impaired loans with valuation allowance      16      —                     Total impaired loans    $ 314    $ 1,026                   Valuation allowance related to impaired loans    $ 9    $ —                     Nonaccrual loans    $ 240    $ 944                   Total loans past due 90 days or more and still accruing    $ —      $ —                      F - 23    Table of Contents SI FINANCIAL GROUP, INC. AND SUBSIDIARIES  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  DECEMBER 31, 2005, 2004 AND 2003    Additional information related to impaired loans is as follows:                      Years Ended December 31,  (Dollars in Thousands)        2005            2004            2003       Average recorded investment in impaired loans    $ 663    $ 1,487    $ 1,918                          Interest income recognized on impaired loans    $ 5    $ 9    $ —                            Cash interest received on impaired loans    $ 9    $ 12    $ 41                         No additional funds are committed to be advanced to those borrowers whose loans are impaired.  Interest income that would have been recorded had nonaccrual loans been performing in accordance with their original terms totaled approximately $15,000, $56,000 and $67,000 for the years ended December 31, 2005, 2004 and 2003, respectively.  Allowance for Loan Losses  Changes in the allowance for loan losses for the years ended December 31, 2005, 2004 and 2003 are as follows:                         Years Ended December 31,    (Dollars in Thousands)    2005     2004     2003     BALANCE AT BEGINNING OF YEAR    $ 3,200     $ 2,688     $ 3,067          Provision for loan losses      410       550       1,602     Loans charged-off      (29 )     (75 )     (2,113 )   Recoveries of loans previously charged-off      90       37       132                                BALANCE AT END OF YEAR    $ 3,671     $ 3,200     $ 2,688                               Related Party Loans  Reference Note 13 for a discussion of related party transactions, including loans with related parties.  Loans Held for Sale  At December 31, 2005 and 2004, total loans held for sale were $107,000 and $200,000, respectively, consisting of fixed-rate residential mortgage loans.  Mortgage Servicing Rights  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 statements of financial condition. The aggregate of loans serviced for others approximated $71.7 million and $50.5 million at December 31, 2005 and 2004, respectively. As of December 31, 2005 and 2004, the Company was liable under recourse provisions for loans sold by the Company of approximately $66,000 and $138,000, respectively.    F - 24    Table of Contents SI FINANCIAL GROUP, INC. AND SUBSIDIARIES  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  DECEMBER 31, 2005, 2004 AND 2003    At December 31, 2005 and 2004, the balance of capitalized servicing rights included in other assets was $373,000 and $165,000, respectively. The fair value of the capitalized mortgage servicing rights approximated its carrying value for the periods presented. No impairment charges related to servicing rights were recognized during the years ended December 31, 2005, 2004 and 2003.  A summary of the activity in the balances of capitalized mortgage servicing rights is as follows:                     Years Ended December 31,    (Dollars in Thousands)    2005     2004     BALANCE AT BEGINNING OF YEAR    $ 165     $ 124         Additions      272       65     Amortization      (64 )     (24 )                      BALANCE AT END OF YEAR    $ 373     $ 165                       NOTE 5. OTHER REAL ESTATE OWNED  Other real estate owned is presented at net realizable value. A summary of expenses applicable to other real estate operations for the years ended December 31, 2005, 2004 and 2003, is as follows:                        Years Ended December 31,    (Dollars in Thousands)    2005    2004     2003     Net loss (gain) from sales or write-downs of other real estate owned, net    $ 25    $ 60     $ (15 )   Rental expense (income) of holding other real estate, net      55      (49 )     30                               EXPENSE FROM OTHER REAL ESTATE OPERATIONS, NET    $ 80    $ 11     $ 15                                F - 25    Table of Contents SI FINANCIAL GROUP, INC. AND SUBSIDIARIES  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  DECEMBER 31, 2005, 2004 AND 2003    NOTE 6. PREMISES AND EQUIPMENT  Premises and equipment at December 31, 2005 and 2004 are summarized as follows:                     December 31,    (Dollars in Thousands)    2005     2004     Land    $ 198     $ 207     Buildings      5,785       6,604     Leasehold improvements      3,666       2,512     Furniture and equipment      7,674       5,786     Construction in process      546       160                             17,869       15,269     Accumulated depreciation and amortization      (9,031 )     (8,683 )                      PREMISES AND EQUIPMENT, NET    $ 8,838     $ 6,586                       Construction in process in 2005 consisted primarily of construction costs related to the development of two branches. Targeted completion for these branch locations is expected during the first and the third quarters of 2006. Outstanding commitments relative to the construction of new branches in the aggregate total approximately $870,000.  Depreciation and amortization expense was $1.4 million, $1.1 million and $1.0 million, respectively, for the years ended December 31, 2005, 2004 and 2003.  During 2004, the Company reduced the carrying value on a former branch facility to its estimated fair value and, as a result, recognized an impairment charge of $337,000 which is included in occupancy and equipment expense for the year ended December 31, 2004.  Note 12 includes a schedule of future minimum rent commitments pursuant to the terms of noncancelable lease agreements in effect at December 31, 2005 that pertains to premises and equipment.  NOTE 7. GOODWILL AND OTHER INTANGIBLES  Goodwill  In November 2005, the Bank acquired net assets of SI Trust Servicing, with a fair value of $58,000, for a purchase price of $680,000, resulting in goodwill of $622,000. In accordance with Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets,” goodwill is not amortized for financial reporting purposes but rather evaluated for impairment. For the year ended December 31, 2005, there has been no recorded impairment of goodwill.  Core Deposit Intangible  In 1998, the Bank acquired certain assets and assumed certain deposit liabilities of a bank located in Canterbury, Connecticut. In consideration of the assumption of approximately $8.1 million of deposit liabilities, the Bank received approximately $7.1 million in cash and other assets. The resulting core deposit premium intangible is being amortized over 10 years using the straight-line method. The net book value of this asset at December 31, 2005 and 2004 is as follows:    F - 26    Table of Contents SI FINANCIAL GROUP, INC. AND SUBSIDIARIES  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  DECEMBER 31, 2005, 2004 AND 2003                     December 31,    (Dollars in Thousands)    2005     2004     Core deposit intangible    $ 973     $ 973     Accumulated amortization      (778 )     (681 )                      CORE DEPOSIT INTANGIBLE, NET    $ 195     $ 292                       Amortization expense, relating solely to the core deposit intangible, was $97,000 for each of the years ended December 31, 2005, 2004 and 2003. Expected future amortization expense as of December 31, 2005 is as follows:                 (Dollars in Thousands)   2006    $ 97   2007      98               $ 195           NOTE 8. DEPOSITS  A summary of deposit balances, by type, at December 31, 2005 and 2004 is as follows:                   December 31,  (Dollars in Thousands)    2005    2004   Noninterest-bearing demand deposits    $ 51,996    $ 46,049                   Interest-bearing accounts:             NOW and money market accounts      125,156      110,564   Savings accounts      87,894      92,588   Certificates of deposit (1)      244,251      208,557                   Total interest-bearing accounts      457,301      411,709                   TOTAL DEPOSITS    $ 509,297    $ 457,758                    (1) Includes brokered deposits of $5.0 million at December 31, 2005 and 2004 with a maturity date of December 24, 2007.  Certificates of deposit in denominations of $100,000 or more were approximately $65.0 million and $51.3 million at December 31, 2005 and 2004, respectively. Deposits in excess of $100,000 are not federally insured.    F - 27    Table of Contents SI FINANCIAL GROUP, INC. AND SUBSIDIARIES  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  DECEMBER 31, 2005, 2004 AND 2003    Contractual maturities of certificates of deposit as of December 31, 2005 and 2004 are summarized below.                   December 31,  (Dollars in Thousands)    2005    2004   Within one year    $ 129,869    $ 94,537   After one year to two years      70,342      45,648   After two years to three years      27,295      53,543   After three years to four years      8,003      7,074   Over four years      8,742      7,755                   TOTAL CERTIFICATES OF DEPOSIT    $ 244,251    $ 208,557                  A summary of interest expense by account type for the years ended December 31, 2005, 2004 and 2003 is as follows:                      Years Ended December 31,  (Dollars in Thousands)    2005    2004    2003   NOW and money market accounts    $ 653    $ 384    $ 424   Savings accounts (1)      854      625      666   Certificates of deposit (2)      7,021      5,337      5,507                          TOTAL    $ 8,528    $ 6,346    $ 6,597                           (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 Federal Home Loan Bank of Boston. At December 31, 2005 and 2004, the Bank had access to a pre-approved secured line of credit with the FHLB of $6.2 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, 2005 and 2004, there were no advances outstanding under the line of credit. Other outstanding advances from the FHLB aggregated $87.9 million and $72.7 million at interest rates ranging from 1.87% to 5.84% at December 31, 2005 and 2004.  FHLB advances are secured by the Company’s investment in FHLB stock, in an amount equal to a percentage of its outstanding residential first mortgage loans. The carrying value of Federal Home Loan Bank stock approximates fair value based on the redemption provisions of the FHLB.    F - 28    Table of Contents SI FINANCIAL GROUP, INC. AND SUBSIDIARIES  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  DECEMBER 31, 2005, 2004 AND 2003    Junior Subordinated Debt Owed to Unconsolidated Trust  On March 25, 2002, SI Bancorp, MHC (formerly SI Bancorp, Inc.), formed SI Capital Trust I, which became its wholly-owned subsidiary when it purchased all of the Trust’s common securities. The Trust has no independent assets or operations, and was formed for the sole purpose of issuing trust securities and investing the proceeds thereof in an equivalent amount of junior subordinated debentures issued by SI Bancorp, MHC.  The Trust issued $7.0 million of trust preferred securities in 2002. Pursuant to FASB Interpretation No. 46R, “Consolidation of Variable Interest Entities” issued in December 2003, SI Bancorp, MHC deconsolidated the Trust at December 31, 2003. As a result, the statement of financial condition at December 31, 2005 and 2004 includes $7.2 million of junior subordinated debt, which was previously presented in the statement of financial condition as $7.0 million in trust preferred securities after a consolidation elimination entry of $217,000. The Company’s investment in the Trust of $217,000 is included in other assets. The overall effect on the financial position and operating results of the Company as a result of the deconsolidation was not material. On September 24, 2004, all of the common stock of SI Capital Trust I was contributed to the Company from SI Bancorp, MHC. At that point, SI Capital Trust I became a wholly-owned subsidiary of the Company.  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 junior subordinated debentures, which bear interest at six-month LIBOR plus 3.70% mature on April 22, 2032 and can be redeemed at the Company’s option in 2007, subject to regulatory approval.  The trust securities also bear interest at six-month LIBOR plus 3.70%. The duration of the trust is 30 years; however, the trust securities are redeemable at par at the Trust’s option in 2007.  The contractual maturities of borrowings, by year, at December 31, 2005 are as follows:                    (Dollars in Thousands)     FHLB Advances (1)(2)     SubordinatedDebt     Total     2006 (3)    $ 13,161     $ —       $ 13,161     2007 (3)      15,337       —         15,337     2008 (2)(3)      19,431       —         19,431     2009      4,000       —         4,000     2010 (2)      19,000       —         19,000     Thereafter (2)      17,000       7,217       24,217                                TOTAL LONG-TERM DEBT    $ 87,929     $ 7,217     $ 95,146                                WEIGHTED-AVERAGE RATE      3.97 %     8.15 %     4.29 %    (1) Interest rates on the FHLB advances are primarily fixed. A variable rate advance of $2.0 million matures in 2008.    F - 29    Table of Contents SI FINANCIAL GROUP, INC. AND SUBSIDIARIES  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  DECEMBER 31, 2005, 2004 AND 2003      (2) Includes FHLB advances that are callable in the aggregate of $6.0 million during 2006. These advances are reported based on their scheduled maturity in the summary table presented above.    (3) Includes amortizing advances requiring monthly principal and interest payments.  NOTE 10. INCOME TAXES  The components of the income tax provision for the years ended December 31, 2005, 2004 and 2003 are as follows:                        Years Ended December 31,  (Dollars in Thousands)    2005     2004     2003   Current tax provision:                  Federal    $ 1,767     $ 1,477     $ 1,546   State      2       1       1                            TOTAL CURRENT TAX PROVISION      1,769       1,478       1,547                            Deferred tax provision (benefit):                  Federal      (80 )     (959 )     166                            TOTAL DEFERRED TAX PROVISION (BENEFIT)      (80 )     (959 )     166                            TOTAL PROVISION FOR INCOME TAXES    $ 1,689     $ 519     $ 1,713                           A reconciliation of the anticipated income tax provision, based on the statutory tax rate, to the provision for income taxes as reported in the statements of income is as follows:                         Years Ended December 31,    (Dollars in Thousands)    2005     2004     2003     Statutory tax rate      34.0 %     34.0 %     34.0 %   Provision for income tax at statutory rate    $ 1,729     $ 614     $ 1,733     Increase (decrease) resulting from:                   Dividends received deduction      (6 )     (7 )     (11 )   Bank-owned life insurance earnings credit      (94 )     (103 )     (88 )   Tax-exempt income      (10 )     (6 )     (11 )   Employee benefit plans      58       —         —       Nondeductible expenses      6       6       6     Other      6       15       84                                TOTAL PROVISION FOR INCOME TAXES    $ 1,689     $ 519     $ 1,713                                EFFECTIVE TAX RATE      33.2 %     28.7 %     33.6 %    F - 30    Table of Contents SI FINANCIAL GROUP, INC. AND SUBSIDIARIES  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  DECEMBER 31, 2005, 2004 AND 2003    The tax effects of temporary differences that give rise to significant components of the deferred tax assets and deferred tax liabilities at December 31, 2005 and 2004 are presented below:                   December 31,  (Dollars in Thousands)    2005    2004   Deferred tax assets:             Allowance for loan losses    $ 1,259    $ 1,088   Goodwill and other intangibles      112      108   Unrealized losses on available for sale securities      875      149   Depreciation of premises and equipment      47      178   Investment write-downs      67      84   Charitable contribution carry-forward      569      759   Deferred compensation      388      204   Employee benefit plans      162      —     Other      161      241                   TOTAL DEFERRED TAX ASSETS      3,640      2,811                   Deferred tax liabilities:             Unrealized gains on available for sale securities      46      —     Deferred loan costs      786      759   Other      4      8                   TOTAL DEFERRED TAX LIABILITIES      836      767                   DEFERRED TAX ASSET, NET    $ 2,804    $ 2,044                  At December 31, 2005, 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 $1.7 million. 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 estimates that the deferred tax asset related to this contribution carry-forward will be realized prior to its expiration in 2009 and therefore, no valuation allowance has been established.  Retained earnings at December 31, 2005 and 2004 includes a contingency reserve for loan losses of approximately $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 mutual 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 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, 2005 and 2004 have not been recognized.  Effective for taxable years commencing after December 31, 1998, 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     F - 31    Table of Contents SI FINANCIAL GROUP, INC. AND SUBSIDIARIES  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  DECEMBER 31, 2005, 2004 AND 2003     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 represent minimum state tax amounts.  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.  NOTE 11. BENEFIT PLANS  Profit Sharing/401(k) 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. Contributions to the profit sharing plan were approximately $0, $227,000 and $303,000 for the years ended December 31, 2005, 2004 and 2003, respectively.  The Bank’s 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 first 6% of the participant’s contributions to the Plan. Participants are immediately vested in the Bank’s matching contributions. Bank contributions were approximately $200,000, $169,000 and $146,000 for the years ended December 31, 2005, 2004 and 2003, 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, plus 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.  Executive Supplemental Retirement Plan – Defined Benefit  During the year ended December 31, 2003, the Company adopted unfunded supplemental defined-benefit retirement plans with its directors and members of senior management. This plan provides for supplemental retirement benefits to certain executives based upon average annual compensation and years of service. Entitlement of benefits commence upon the earlier of 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 expenses incurred under this plan for the years ended December 31, 2005, 2004 and 2003 were $541,000, $282,000 and $215,000, respectively.    F - 32    Table of Contents SI FINANCIAL GROUP, INC. AND SUBSIDIARIES  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  DECEMBER 31, 2005, 2004 AND 2003    Performance-based Incentive Plan  The Company has an incentive plan whereby all management and staff members are eligible to receive a bonus tied to both Company and individual performance. Discretionary contributions to the plan require the approval of the Board of Directors’ Compensation Committee. Total expense recognized was $369,000, $400,000 and $438,000 for the years ended December 31, 2005, 2004 and 2003.  Supplemental Executive Retirement Plan  Effective January 2004, the Company adopted 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, 2005 and 2004, President and Chief Executive Officer Rheo A. Brouillard was designated by the Board of Directors to participate in the plan. Total expense incurred under this plan was $0 and $3,000 for the years ended December 31, 2005 and 2004.  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, 2005, the remaining principal balance on the ESOP debt is payable as follows:                (Dollars inThousands)   2006    $ 241   2007      252   2008      264   2009      277   2010      290   Thereafter      3,315               $ 4,639           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. Cash dividends paid on allocated shares are distributed to participants and cash dividends paid on unallocated shares are used to repay the outstanding debt of the ESOP.    F - 33    Table of Contents SI FINANCIAL GROUP, INC. AND SUBSIDIARIES  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  DECEMBER 31, 2005, 2004 AND 2003    Shares held by the ESOP include the following at December 31, 2005 and 2004:                   December 31,  (Dollars in Thousands)    2005    2004   Allocated      7,675      —     Committed to be Allocated      32,295      8,069   Unallocated      452,135      484,430                        492,105      492,499                   Fair value of unallocated shares    $ 4,951    $ 5,934                  The Company accounts for these ESOP shares in accordance with Statement of Position 93-6, “Employers’ Accounting for Employee Stock Ownership Plans.” Under SOP 93-6, unearned ESOP shares are not considered outstanding for calculating net income per common share and are presented as unallocated common shares held by ESOP, as a reduction in shareholders’ equity, in the statement of financial condition. As ESOP shares are earned by participants, the Company recognizes compensation expense equal to the fair value of the earned ESOP shares. Total compensation expense recognized in connection with the ESOP was approximately $366,000 and $93,000 for the years ended December 31, 2005 and 2004, respectively.  Equity Incentive Plan  At the annual meeting of stockholders on May 11, 2005, stockholders of the Company approved the SI Financial Group, Inc. 2005 Equity Incentive Plan (the “Incentive Plan”). Under the Incentive Plan, the Company may grant 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.  On May 17, 2005, 467,000 options to purchase the Company’s common stock and 246,249 shares of restricted stock were awarded. Stock option awards were granted with an exercise price equal to the market price of the Company’s stock at the date of grant with maximum terms of ten years. Both stock option and restricted stock awards vest at 20% per year beginning on the first anniversary of the date of grant.  Stock options and unvested restricted shares are considered common stock equivalents for the purpose of computing net income per common share on a diluted basis.  The Company has elected to comply with FAS 123R for the year ended December 31, 2005. In accordance with FAS 123R, the Company has recorded share-based compensation expense related to outstanding stock option and restricted stock awards based upon the fair value at the date of grant over the vesting period of such awards on a straight-line basis. The fair value of each restricted stock allocation, based on the market price at the date of grant, is recorded to 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 is estimated on the date of grant using the Black-Scholes option pricing model which includes several assumptions such as volatility, expected dividends, expected term and risk-free rate for each stock option award. The Company recorded share-based compensation expense of approximately $476,000 related to the stock option and restricted stock awards for the year ended December 31, 2005.    F - 34    Table of Contents SI FINANCIAL GROUP, INC. AND SUBSIDIARIES  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  DECEMBER 31, 2005, 2004 AND 2003    The weighted-average fair value of stock options granted on May 17, 2005, using the Black-Scholes option pricing model, was $2.89 per share. Assumptions used to determine the weighted-average fair value of stock options granted, were as follows:           Expected dividend yield:    1.50%   Expected volatility:    17.00%   Risk-free rate:    4.32%   Expected life in years:    10 years  Information pertaining to stock options outstanding at or for the year ended December 31, 2005 is as follows:                    Shares      Weighted-Average Exercise Price   OUTSTANDING AT BEGINNING OF YEAR      —       $ —     Granted      467,000       10.10   Forfeited      (3,500 )     10.10                  OUTSTANDING AT END OF YEAR      463,500       10.10                  Options exercisable at year-end      —       $ —                      Weighted-average fair value of option granted during the year    $ 2.89                        Weighted-average remaining contractual life in years      9.38                       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 approximately $7.8 million and $7.6 million at December 31, 2005 and 2004, respectively. Income earned on these life insurance policies aggregated $276,000, $303,000 and $258,000 for the years ended December 31, 2005, 2004 and 2003, respectively.  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 in the statements of financial condition. The contractual amounts of those instruments reflect the extent of involvement the Company has in particular classes of financial instruments.    F - 35    Table of Contents SI FINANCIAL GROUP, INC. AND SUBSIDIARIES  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  DECEMBER 31, 2005, 2004 AND 2003    Loan Commitments and Letters of Credit  The contractual amounts of commitments to extend credit represent the amounts of potential accounting loss should the contract be fully drawn upon, customer default 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 are as follows at December 31, 2005 and 2004 were as follows:                   December 31,  (Dollars in Thousands)    2005    2004   Commitments to extend credit:             Future loan commitments (1)    $ 31,192    $ 27,073   Undisbursed construction loans      25,572      27,527   Undisbursed home equity lines of credit      21,481      19,351   Undisbursed commercial lines of credit      10,796      8,433   Overdraft protection lines      1,277      1,060   Standby letters of credit      812      997                   TOTAL    $ 91,130    $ 84,441                    (1) Includes fixed rate loan commitments of $5.5 million at interest rates ranging from 4.875% to 8.000% and $10.2 million at interest rates ranging from 4.875% to 7.125% at December 31, 2005 and 2004, respectively.  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 necessary 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.  The Company adopted the provisions of Statement of Financial Accounting Standards No. 149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities,” effective July 1, 2003, which includes the Company’s commitments to fund loans held for sale. Newly issued or modified guarantees that are not derivative contracts, are required to be recorded on the Company’s consolidated statement of financial condition at their fair value at the date of inception. There was no liability related to such guarantees at December 31, 2005 and 2004. As per Staff Accounting Bulletin No. 105, “Application of Accounting Principles to Loan Commitments,” the interest rate lock commitment was valued at zero at inception. The rate locks will continue to be adjusted for changes in value resulting from changes in market interest rates.    F - 36    Table of Contents SI FINANCIAL GROUP, INC. AND SUBSIDIARIES  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  DECEMBER 31, 2005, 2004 AND 2003    Loans Sold with Recourse  At December 31, 2005 and 2004, the outstanding balance of loans sold with recourse was approximately $66,000 and $138,000, 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. At December 31, 2005 and 2004, the Company determined that a reserve in connection with the recourse provisions was not necessary.  Operating Lease Commitments  The Company leases certain of its branch offices and equipment under operating lease agreements that expire at various dates through 2027. In addition to rental payments, the branch leases require payments for property taxes in excess of base year taxes.  Future minimum rental commitments pursuant to the terms of noncancelable lease agreements, by year and in the aggregate, at December 31, 2005, are as follows:                 (Dollars in Thousands)   2006    $ 1,163   2007      1,145   2008      1,063   2009      1,043   2010      957   Thereafter      7,753               $ 13,124           Rental expense charged to operations for cancelable and noncancelable operating leases approximated $842,000, $589,000 and $576,000 for the years ended December 31, 2005, 2004 and 2003, respectively.  Rental Income Under Subleases  The Company subleases excess office space to one tenant under a noncancelable operating lease with a remaining term of 2 years. Future minimum lease payments receivable for the noncancelable lease, by year and in the aggregate, at December 31, 2005, are as follows:                 (Dollars in Thousands)   2006    $ 13   2007      13               $ 26           Rental income under noncancelable leases approximated $47,000, $51,000 and $39,000 for the years ended December 31, 2005, 2004 and 2003, respectively.    F - 37    Table of Contents SI FINANCIAL GROUP, INC. AND SUBSIDIARIES  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  DECEMBER 31, 2005, 2004 AND 2003    Legal Matters  The Company is involved in various legal proceedings that have arisen in the normal course of business. Management believes that resolution of these matters will not have a material effect on the Company’s financial condition or results of operations.  Investment Commitments  In 1998, the Bank became a limited partner in a Small Business Investment Corporation and made a commitment to make a capital investment of $1.0 million in the limited partnership. At December 31, 2005 and 2004, the Bank’s remaining off-balance-sheet commitment for the capital investment was approximately $194,000.  Other  Also, the Bank has entered into agreements with certain customers whereby the Bank, on a nightly basis, transfers to a third party a portion of the customers’ demand deposit account balance above a certain level. The balance of the amounts so transferred of approximately $17.0 million and $17.7 million at December 31, 2005 and 2004, respectively, has been derecognized and is not reflected in the accompanying statements of financial condition.  NOTE 13. RELATED PARTY TRANSACTIONS  Loans Receivable  In the normal course of business, the Company grants loans to related parties. Related parties include officers, directors 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. For the years ended December 31, 2005 and 2004, all related party loans were performing.  Changes in loans outstanding to such related parties during the years ended December 31, 2005 and 2004 are as follows:                     Years Ended December 31,    (Dollars in Thousands)    2005     2004     BALANCE AT BEGINNING OF YEAR    $ 1,743     $ 1,814     Additions      1,604       353     Repayments      (1,604 )     (424 )                      BALANCE AT END OF YEAR    $ 1,743     $ 1,743                       Deposits  Deposit accounts of officers, directors and other related parties aggregated approximately $621,000 and $326,000 at December 31, 2005 and 2004, respectively.  Operating Expenses  During the years ended December 31, 2005, 2004 and 2003, the Company paid approximately $22,000, $27,000 and $187,000, respectively, for insurance, supplies and advertising, to companies related to directors of the Company.    F - 38    Table of Contents SI FINANCIAL GROUP, INC. AND SUBSIDIARIES  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  DECEMBER 31, 2005, 2004 AND 2003    Other Income  The Company entered into an agreement to sublease real property to a company affiliated with one of the Company’s directors. The sublease agreement terminated in 2005 upon the sale of the property to an unrelated party. For the year ended December 31, 2005 and 2004, the Company received rental income of approximately $15,000 and $6,000, respectively.  SI Bancorp, MHC – Mutual Holding Company Parent  SI Bancorp, MHC owns a majority of the Company’s common stock and, through its Board of Directors, will be 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 interest of all shareholders. For example, SI Bancorp, MHC may exercise its voting control to prevent a sale or merger transaction, a second-step conversion transaction or defeat a shareholder nominee for election to the Board of Directors of the Company. The matters as to which shareholders, other than SI Bancorp, MHC, will be able to exercise voting control are limited and include any proposal to implement a stock-based incentive plan.  NOTE 14. REGULATORY CAPITAL  The Bank is subject to various regulatory capital requirements administered by the federal and state 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, 2005 and 2004, 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, 2005 and 2004 were:                           December 3 1, 2005:    Actual     For CapitalAdequacyPurposes     To Be WellCapitalized UnderPrompt CorrectiveAction Provisions    (Dollars in Thousands)    Amount    Ratio     Amount    Ratio     Amount    Ratio     Total Risk-based Capital Ratio    $ 66,274    16.79 %   $ 31,578    8.00 %   $ 39,472    10.00 %   Tier I Risk-based Capital Ratio      62,612    15.87       15,781    4.00       23,672    6.00     Tier I Capital Ratio      62,612    9.31       26,901    4.00       33,626    5.00      F - 39    Table of Contents SI FINANCIAL GROUP, INC. AND SUBSIDIARIES  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  DECEMBER 31, 2005, 2004 AND 2003                           December 3 1, 2005:    Actual     For CapitalAdequacyPurposes     To Be WellCapitalized UnderPrompt CorrectiveAction Provisions    (Dollars in Thousands)    Amount    Ratio     Amount    Ratio     Amount    Ratio     Total Risk-based Capital Ratio    $ 63,459    18.03 %   $ 28,157    8.00 %   $ 35,196    10.00 %   Tier I Risk-based Capital Ratio      60,253    17.12       14,078    4.00       21,117    6.00     Tier I Capital Ratio      60,253    9.99       24,125    4.00       30,157    5.00    A reconciliation of the Company’s total capital to the Bank’s regulatory capital is as follows:                     December 31,    (Dollars in Thousands)    2005     2004     TOTAL CAPITAL PER CONSOLIDATED FINANCIAL STATEMENTS    $ 80,043     $ 80,809     Holding company equity not available for regulatory capital      (18,097 )     (20,555 )   Accumulated losses on available for sale securities      1,482       291     Intangible assets      (816 )     (292 )                      TOTAL TIER 1 CAPITAL      62,612       60,253                        Adjustments for total capital:              Net unrealized gains on available for sale securities      —         6     Allowance for loan and credit losses      3,662       3,200                        TOTAL CAPITAL PER REGULATORY REPORTING    $ 66,274     $ 63,459                         F - 40    Table of Contents SI FINANCIAL GROUP, INC. AND SUBSIDIARIES  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  DECEMBER 31, 2005, 2004 AND 2003    NOTE 15. OTHER COMPREHENSIVE LOSSES  Other comprehensive losses, which is comprised solely of the change in unrealized gains and losses on available for sale securities, for the years ended December 31, 2005 and 2004 is as follows:                        December 31, 2005    (Dollars in Thousands)    BeforeTaxAmount      Tax Effects     Net ofTax Amount     Unrealized holding losses arising during the year    $ (1,940 )   $ 660    $ (1,280 )   Reclassification adjustment for gains recognized in net income      (59 )     20      (39 )                             UNREALIZED HOLDING LOSSES ON AVAILABLE FOR SALE SECURITIES, NET OF TAXES    $ (1,999 )   $ 680    $ (1,319 )                                                   December 31, 2004    (Dollars in Thousands)     BeforeTax Amount      Tax Effects      Net ofTax Amount     Unrealized holding losses arising during the year    $ (1,390 )   $ 473     $ (917 )   Reclassification adjustment for losses recognized in net income      166       (56 )     110                                UNREALIZED HOLDING LOSSES ON AVAILABLE FOR SALE SECURITIES, NET OF TAXES    $ (1,224 )   $ 417     $ (807 )                             NOTE 16. FAIR VALUE OF FINANCIAL INSTRUMENTS AND INTEREST RATE RISK  Financial Accounting Standards Board Statement No. 107, “Disclosures About Fair Value of Financial Instruments” (“FAS 107”), requires disclosure of fair value information about financial instruments, whether or not recognized in the statements of financial condition, for which it is practicable to estimate that value. 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 rates and estimates of future cash flows. In that regard, the derived fair value estimates cannot be substantiated by comparisons to independent markets and, in many cases, could not be realized in immediate settlement of the instrument. FAS 107 excludes certain financial instruments from its disclosure requirements. Accordingly, the aggregate fair value amounts presented do not represent the underlying value of the Company.    F - 41    Table of Contents SI FINANCIAL GROUP, INC. AND SUBSIDIARIES  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  DECEMBER 31, 2005, 2004 AND 2003    The following methods and assumptions were used by the Company in estimating fair value disclosures of its financial instruments:        •   Cash and due from banks, federal funds sold, accrued interest receivable and mortgagors’ and investors’ escrow accounts. The carrying amounts of these instruments approximate the fair values.        •   Securities. Fair values, excluding restricted Federal Home Loan Bank stock, are based on quoted market prices or dealer quotes, if available. If a quoted market price is not available, fair value is estimated using quoted market prices for similar securities. 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 which 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 and certain money market deposits 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. Based on the floating rate characteristic of these instruments, the carrying value is considered to approximate fair value.        •   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.  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, 2005 or 2004. The estimated fair value amounts for 2005 and 2004 have been measured as of their respective year-ends, and have not been reevaluated or updated for purposes of these consolidated financial statements subsequent to those respective dates. As such, the estimated fair values of these financial instruments subsequent to the respective reporting dates may be different than the amounts reported at each year-end.    F - 42    Table of Contents SI FINANCIAL GROUP, INC. AND SUBSIDIARIES  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  DECEMBER 31, 2005, 2004 AND 2003    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, 2005 and 2004, the recorded carrying amounts and estimated fair values of the Company’s financial instruments are as follows:                         2005    2004  (Dollars in Thousands)    CarryingAmount     Fair Value    CarryingAmount     Fair Value   Financial Assets:                       Noninterest-bearing deposits    $ 16,317    $ 16,317    $ 21,647    $ 21,647   Interest-bearing deposits      6,829      6,829      8,728      8,728   Federal funds sold      2,800      2,800      400      400   Available for sale securities      120,019      120,019      120,557      120,557   Loans held for sale      107      107      200      200   Loans receivable, net      513,775      508,820      447,957      446,026   Federal Home Loan Bank stock      5,638      5,638      4,313      4,313   Accrued interest receivable      3,299      3,299      2,638      2,638         Financial Liabilities:                       Savings deposits      87,894      87,894      92,588      92,588   Demand deposits, negotiable orders of withdrawal and money market accounts      177,152      177,152      156,613      156,613   Certificates of deposit      244,251      245,466      208,557      210,294   Mortgagors’ and investors’ escrow accounts      2,985      2,985      2,722      2,722   Advances from FHLB      87,929      85,890      72,674      72,602   Junior subordinated debt owed to unconsolidated trust      7,217      7,217      7,217      7,217  Off-Balance Sheet Instruments  Loan commitments on which the committed interest rate is less than the current market rate are insignificant at December 31, 2005 and 2004.  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.    F - 43    Table of Contents SI FINANCIAL GROUP, INC. AND SUBSIDIARIES  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  DECEMBER 31, 2005, 2004 AND 2003    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, 2005 and 2004, the Bank’s retained earnings available for payment of dividends was $8.8 million and $9.1 million, respectively. Accordingly, $53.2 million and $51.1 million of the Company’s equity in the net assets of the Bank was restricted at December 31, 2005 and 2004, 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 obligations.  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 there of would cause the Bank’s capital to be reduced below applicable minimum capital requirements.  At December 31, 2005, SI Bancorp, MHC owned $7.3 million shares of the Company’s common stock, representing 58% of the total number of the Company’s outstanding shares. Upon regulatory approval, SI Bancorp, MHC may seek to waive receipt of future dividends declared by the Company. For the year ended December 31, 2005, SI Bancorp, MHC waived receipt of all dividends declared by the Company.  NOTE 18. COMMON STOCK REPURCHASE PROGRAMS  In June 2005, the Board of Directors authorized an independent trustee to purchase up to 1.96%, or 246,249 shares, of the Company’s common stock in the open market to fund the 2005 Equity Incentive Plan. In fiscal 2005, the trustee purchased 246,249 shares at a cost of approximately $2.9 million under this 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. In fiscal 2005, the Company repurchased 12,564 shares at a cost of approximately $148,000 under this program.    F - 44    Table of Contents SI FINANCIAL GROUP, INC. AND SUBSIDIARIES  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  DECEMBER 31, 2005, 2004 AND 2003    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 Statements of Financial Condition    December 31,  (Dollars in Thousands)    2005    2004   Assets:             Cash and due from banks    $ 6,660    $ 10,878   Available for sale securities      12,050      10,499   Investment in Savings Institute Bank and Trust Company      61,946      60,161   Other assets      6,743      6,750                   TOTAL ASSETS    $ 87,399    $ 88,288                   Liabilities and Stockholders’ Equity:             Liabilities    $ 7,356    $ 7,572   Stockholders’ equity      80,043      80,716                   TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY    $ 87,399    $ 88,288                                    Condensed Statements of Income    Years Ended December 31,  (Dollars in Thousands)    2005     2004     2003   Dividends from subsidiary    $ —       $ —       $ 350   Interest and dividends on investments      462       141       94   Other income      444       139       47                            TOTAL INCOME      906       280       491        Operating expenses (1)      937       2,957       412                            INCOME (LOSS) BEFORE INCOME TAXES AND EQUITY IN UNDISTRIBUTED INCOME OF SUBSIDIARY      (31 )     (2,677 )     79   Income tax benefit      11       909       92                                 (20 )     (1,768 )     171   Equity in undistributed income of subsidiary      3,417       3,056       3,214                            NET INCOME    $ 3,397     $ 1,288     $ 3,385                             (1) Operating expenses for 2004 include a $2.5 million charitable contribution to SI Financial Group Foundation.    F - 45    Table of Contents SI FINANCIAL GROUP, INC. AND SUBSIDIARIES  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  DECEMBER 31, 2005, 2004 AND 2003                     Condensed Statements of Cash Flows    Years Ended December 31,    (Dollars in Thousands)    2005     2004     2003     Cash flows from operating activities:                   Net income    $ 3,397     $ 1,288     $ 3,385     Adjustments to reconcile net income to net cash provided by (used in) operating activities:                   Equity in undistributed income of subsidiary      (3,417 )     (3,056 )     (3,214 )   Other, net      (14 )     1,562       (69 )                              CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES      (34 )     (206 )     102                                Cash flows from investing activities:                   Purchase of available for sale securities      (4,847 )     (9,503 )     —       Proceeds from maturities of available for sale securities      3,000       1,000       —       Proceeds from sale of available for sale securities      111       —         —       Investment in subsidiary      1,080       (32,108 )     (1,000 )                              CASH USED IN INVESTING ACTIVITIES      (656 )     (40,611 )     (1,000 )                              Cash flows from financing activities:                   Treasury stock purchased      (148 )     —         —       Cash dividends paid on common stock      (432 )     —         —       Purchase of common stock for equity incentive plan      (2,948 )     —         —       Proceeds from common stock offering      —         48,480       —                                  CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES      (3,528 )     48,480       —                                  NET CHANGE IN CASH AND CASH EQUIVALENTS      (4,218 )     7,663       (898 )        CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR      10,878       3,215       4,113                                CASH AND CASH EQUIVALENTS AT END OF YEAR    $ 6,660     $ 10,878     $ 3,215                                SUPPLEMENTAL CASH FLOW INFORMATION:                   Declared dividends    $ 158     $ —       $ —        F - 46    Table of Contents SI FINANCIAL GROUP, INC. AND SUBSIDIARIES  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  DECEMBER 31, 2005, 2004 AND 2003    NOTE 20. QUARTERLY DATA (UNAUDITED)  Quarterly results of operations for the years ended December 31, 2005 and 2004 are as follows:                                      2005    2004  (Dollars in Thousands, Except Share Amounts)     Fourth Quarter(1)     Third Quarter(1)     Second Quarter(1)     First Quarter     Fourth Quarter     Third Quarter(2)      Second Quarter(3)     First Quarter                                             Interest and dividend income    $ 9,110    $ 8,711    $ 8,192    $ 7,892    $ 7,766    $ 7,151     $ 6,903    $ 6,783   Interest expense      3,509      3,206      2,824      2,592      2,469      2,374       2,307      2,250                                                              NET INTEREST AND DIVIDEND INCOME BEFORE PROVISION FOR LOAN LOSSES      5,601      5,505      5,368      5,300      5,297      4,777       4,596      4,533   Provision for loan losses      100      75      130      105      150      100       150      150                                                              NET INTEREST AND DIVIDEND INCOME AFTER PROVISION FOR LOAN LOSSES      5,501      5,430      5,238      5,195      5,147      4,677       4,446      4,383   Noninterest income (4)      1,929      1,425      1,629      1,327      1,127      754       1,069      1,235   Noninterest expenses      6,145      5,638      5,611      5,194      4,643      6,997       4,958      4,433                                                              INCOME (LOSS) BEFORE INCOME TAXES      1,285      1,217      1,256      1,328      1,631      (1,566 )     557      1,185   Provision (benefit) for income taxes      447      405      411      426      529      (556 )     165      381                                                              NET INCOME (LOSS)    $ 838    $ 812    $ 845    $ 902    $ 1,102    $ (1,010 )   $ 392    $ 804                                                              NET INCOME PER COMMON SHARE:                                           Basic    $ 0.07    $ 0.07    $ 0.07    $ 0.07    $ 0.09      N/A       N/A      N/A   Diluted    $ 0.07    $ 0.07    $ 0.07    $ 0.07    $ 0.09      N/A       N/A      N/A    (1) Noninterest expenses include approximately $190,000, $190,000 and $96,000 of stock-based compensation expense for the fourth, third and second quarters of 2005, respectively, related to the adoption of SFAS 123R.    (2) Noninterest expenses include a $2.5 million charitable contribution to SI Financial Group Foundation.    (3) Noninterest expenses include a $337,000 impairment charge for the reduction in carrying value of a former branch facility to its fair value.    (4) Noninterest income includes $285,000 of wealth management fees contributed from SI Trust Services subsequent to their acquisition in November 2005.    F - 47      EX-10.13 2 dex1013.htm EXHIBIT 10.13   EXHIBIT 10.13   Exhibit 10.13  SAVINGS INSTITUTE BANK AND TRUST COMPANY  CHANGE IN CONTROL AGREEMENT  This AGREEMENT (“Agreement”) is hereby entered into as of September 30, 2004, by and between Savings Institute Bank and Trust Company (the “Bank”), a federally-chartered savings bank with its principal offices at 803 Main Street, Willimantic, Connecticut 06226, Laurie L. Gervais (“Executive”) and SI Financial Group, Inc. (the “Company”), a federally-chartered corporation and the holding company of the Bank, as guarantor.  WHEREAS, the Bank recognizes the importance of Executive to the Bank’s operations and wishes to protect his position with the Bank in the event of a change in control of the Bank or the Company for the period provided for in this Agreement; and  WHEREAS, Executive and the Board of Directors of the Bank desire to enter into an agreement setting forth the terms and conditions of payments due to Executive in the event of a change in control and the related rights and obligations of each of the parties.  NOW, THEREFORE, in consideration of the promises and mutual covenants herein contained, it is hereby agreed as follows:  1. Term of Agreement.  (a) The term of this Agreement shall be (i) the initial term, consisting of the period commencing on the date of this Agreement (the “Effective Date”) and ending on the second anniversary of the Effective Date, plus (ii) any and all extensions of the initial term made pursuant to this Section 1.  (b) Commencing on the first anniversary of the Effective Date and continuing each anniversary date thereafter, the Board of Directors of the Bank (the “Board of Directors”) may extend the term of this Agreement for an additional one (1) year period beyond the then effective expiration date, provided that Executive shall not have given at least sixty (60) days’ written notice of his desire that the term not be extended.  (c) Notwithstanding anything in this Section to the contrary, this Agreement shall terminate if Executive or the Bank terminates Executive’s employment prior to a Change in Control.  2. Change in Control.  (a) Upon the occurrence of a Change in Control of the Bank or the Company followed at any time during the term of this Agreement by the termination of Executive’s employment in accordance with the terms of this Agreement, other than for Just Cause, as defined in Section 2(c) of this Agreement, the provisions of Section 3 of this Agreement shall apply. Upon the occurrence of a Change in Control, Executive shall have the right to elect to voluntarily terminate his employment at any time during the term of this Agreement following an event constituting “Good Reason.”    1    “Good Reason” means, unless Executive has consented in writing thereto, the occurrence following a Change in Control, of any of the following:        (i) the assignment to Executive of any duties materially inconsistent with Executive’s position, including any material change in status, title, authority, duties or responsibilities or any other action that results in a material diminution in such status, title, authority, duties or responsibilities, excluding for this purpose an isolated, insubstantial and inadvertent action not taken in bad faith and that is remedied by the Bank or Executive’s employer reasonably promptly after receipt of notice thereof given by the Executive;        (ii) a reduction by the Bank or Executive’s employer of the Executive’s base salary in effect immediately prior to the Change in Control;        (iii) the relocation of the Executive’s office to a location more than twenty-five (25) miles from its location as of the date of this Agreement;        (iv) the taking of any action by the Bank or any of its affiliates or successors that would materially adversely affect the Executive’s overall compensation and benefits package, unless such changes to the compensation and benefits package are made on a non-discriminatory basis to all employees; or        (v) the failure of the Bank or the affiliate of the Bank by which Executive is employed, or any affiliate that directly or indirectly owns or controls any affiliate by which Executive is employed, to obtain the assumption in writing of the Bank’s obligation to perform this Agreement by any successor to all or substantially all of the assets of the Bank or such affiliate within thirty (30) days after a reorganization, merger, consolidation, sale or other disposition of assets of the Bank or such affiliate.  (b) For purposes of this Agreement, a “Change in Control” shall be deemed to occur on the earliest of any of the following events:  (i) Merger: The Company merges into or consolidates with another corporation, or merges another corporation into the Company, and as a result less than a majority of the combined voting power of the resulting corporation immediately after the merger or consolidation is held by persons who were stockholders of the Company immediately before the merger or consolidation.  (ii) Acquisition of Significant Share Ownership: There is filed or required to be filed a report on Schedule 13D or another form or schedule (other than     2     Schedule 13G) required under Sections 13(d) or 14(d) of the Securities Exchange Act of 1934, if the schedule discloses that the filing person or persons acting in concert has or have become the beneficial owner of 25% or more of a class of the Company’s voting securities, but this clause (b) shall not apply to beneficial ownership of Company voting shares held in a fiduciary capacity by an entity of which the Company directly or indirectly beneficially owns 50% or more of its outstanding voting securities.  (iii) Change in Board Composition: During any period of two consecutive years, individuals who constitute the Company’s Board of Directors at the beginning of the two-year period cease for any reason to constitute at least a majority of the Company’s Board of Directors; provided, however, that for purposes of this clause (iii), each director who is first elected by the board (or first nominated by the board for election by the stockholders) by a vote of at least two-thirds (2/3) of the directors who were directors at the beginning of the two-year period shall be deemed to have also been a director at the beginning of such period; or  (iv) Sale of Assets: The Company sells to a third party all or substantially all of its assets.  Notwithstanding anything in this Agreement to the contrary, in no event shall the reorganization of the Bank from the mutual holding company form of organization to the full stock holding company form of organization (including the elimination of the mutual holding company) constitute a “Change in Control” for purposes of this Agreement.  (c) Executive shall not have the right to receive termination benefits pursuant to Section 3 hereof upon termination for Just Cause. The term “Just Cause” shall mean termination because of Executive’s personal dishonesty, incompetence, willful misconduct, any breach of fiduciary duty involving personal profit, intentional failure to perform stated duties, willful violation of any law, rule, regulation (other than traffic violations or similar offenses), final cease and desist order, or any material breach of any provision of this Agreement. Notwithstanding the foregoing, Executive shall not be deemed to have been terminated for Just Cause unless and until there shall have been delivered to him a copy of a resolution duly adopted by the affirmative vote of a majority of the entire membership of the Board of Directors at a meeting of the Board of Directors called and held for that purpose (after reasonable notice to Executive and an opportunity for him, together with counsel, to be heard before the Board of Directors), finding that in the good faith opinion of the Board of Directors, Executive was guilty of conduct justifying termination for Just Cause and specifying the particulars thereof in detail. Executive shall not have the right to receive compensation or other benefits for any period after termination for Just Cause. During the period beginning on the date of the Notice of Termination for Just Cause pursuant to Section 4 hereof through the Date of Termination, stock options granted to Executive under any stock option plan shall not be exercisable nor shall any unvested stock awards granted to Executive under any stock benefit plan of the Bank, the Company or any subsidiary or affiliate thereof, vest. At the Date of Termination, such stock options and any such unvested stock awards shall become null and void and shall not be exercisable by or delivered to Executive at any time subsequent to such termination for Just Cause.    3    3. Termination Benefits.  (a) If Executive’s employment is voluntarily (in accordance with Section 2(a) of this Agreement) or involuntarily terminated within two (2) years of a Change in Control, Executive shall receive:        (i) a lump sum cash payment equal to two (2) times the Executive’s “base amount,” within the meaning of Section 280G(b)(3) of the Internal Revenue Code of 1986, as amended (the “Code”). Such payment shall be made not later than five (5) days following Executive’s termination of employment under this Section 3.        (ii) Continued benefit coverage under all Bank health and welfare plans which Executive participated in as of the date of the Change in Control (collectively, the “Employee Benefit Plans”) for a period of twenty-four (24) months following Executive’s termination of employment. Said coverage shall be provided under the same terms and conditions in effect on the date of Executive’s termination of employment. Solely for purposes of benefits continuation under the Employee Benefit Plans, Executive shall be deemed to be an active employee. To the extent that benefits required under this Section 3(a) cannot be provided under the terms of any Employee Benefit Plan, the Bank shall enter into alternative arrangements that will provide Executive with comparable benefits.  (b) Notwithstanding the preceding provisions of this Section 3, in no event shall the aggregate payments or benefits to be made or afforded to Executive under said paragraphs (the “Termination Benefits”) constitute an “excess parachute payment” under Section 280G of the Code or any successor thereto, and to avoid such a result, Termination Benefits will be reduced, if necessary, to an amount (the “Non-Triggering Amount”), the value of which is one dollar ($1.00) less than an amount equal to three (3) times Executive’s “base amount,” as determined in accordance with said Section 280G. The allocation of the reduction required hereby among the Termination Benefits provided by this Section 3 shall be determined by Executive.  4. Notice of Termination.  (a) Any purported termination by the Bank or by Executive shall be communicated by Notice of Termination to the other party hereto. For purposes of this Agreement, a “Notice of Termination” shall mean a written notice which shall indicate the specific termination provision in this Agreement relied upon and shall set forth in detail the facts and circumstances claimed to provide a basis for termination of Executive’s employment under the provision so indicated.    4    (b) “Date of Termination” shall mean the date specified in the Notice of Termination (which, in the case of a termination for Just Cause, shall not be less than thirty (30) days from the date such Notice of Termination is given).  5. Source of Payments.  All payments provided in this Agreement shall be timely paid in cash or check from the general funds of the Bank. The Company, however, unconditionally guarantees payment and provision of all amounts and benefits due hereunder to Executive and, if such amounts and benefits due from the Bank are not timely paid or provided by the Bank, such amounts and benefits shall be paid or provided by the Company.   6. Effect on Prior Agreements and Existing Benefit Plans.  This Agreement contains the entire understanding between the parties hereto and supersedes any prior agreement between the Bank and Executive, except that this Agreement shall not affect or operate to reduce any benefit or compensation inuring to Executive of a kind elsewhere provided. No provision of this Agreement shall be interpreted to mean that Executive is subject to receiving fewer benefits than those available to him without reference to this Agreement. Nothing in this Agreement shall confer upon Executive the right to continue in the employ of the Bank or shall impose on the Bank any obligation to employ or retain Executive in its employ for any period.  7. No Attachment.  (a) Except as required by law, no right to receive payments under this Agreement shall be subject to anticipation, commutation, alienation, sale, assignment, encumbrance, charge, pledge, or hypothecation or to execution, attachment, levy or similar process or assignment by operation of law, and any attempt, voluntary or involuntary, to affect any such action shall be null, void and of no effect.  (b) This Agreement shall be binding upon, and inure to the benefit of, Executive, the Bank and their respective successors and assigns.  8. Modification and Waiver.  (a) This Agreement may not be modified or amended except by an instrument in writing signed by the parties hereto.  (b) No term or condition of this Agreement shall be deemed to have been waived, nor shall there be any estoppel against the enforcement of any provision of this Agreement, except by written instrument of the party charged with such waiver or estoppel. No such written waiver shall be deemed a continuing waiver unless specifically stated therein, and each such waiver shall operate only as to the specific term or condition waived and shall not constitute a waiver of such term or condition for the future or as to any act other than that specifically waived.    5    9. Severability.  If, for any reason, any provision of this Agreement, or any part of any provision, is held invalid, such invalidity shall not affect any other provision of this Agreement or any part of such provision not held so invalid, and each such other provision and part thereof shall to the full extent consistent with law continue in full force and effect.  10. Headings for Reference Only.  The headings of sections and paragraphs herein are included solely for convenience of reference and shall not control the meaning or interpretation of any of the provisions of this Agreement. In addition, references herein to the masculine shall apply to both the masculine and the feminine.  11. Governing Law.  Except to the extent preempted by federal law, the validity, interpretation, performance, and enforcement of this Agreement shall be governed by the laws of the State of Connecticut, without regard to principles of conflicts of law of that State.  12. Arbitration.  Any dispute or controversy arising under or in connection with this Agreement shall be settled exclusively by arbitration, conducted before a panel of three arbitrators sitting in a location selected by Executive within fifty (50) miles from the location of the Bank, in accordance with the rules of the American Arbitration Bank then in effect. Judgment may be entered on the arbitrator’s award in any court having jurisdiction; provided, however, that Executive shall be entitled to seek specific performance of his right to be paid until the Date of Termination during the pendency of any dispute or controversy arising under or in connection with this Agreement.  13. Payment of Legal Fees.  All reasonable legal fees paid or incurred by Executive pursuant to any dispute or question of interpretation relating to this Agreement shall be paid or reimbursed by the Bank, only if Executive is successful pursuant to a legal judgment, arbitration or settlement.  14. Indemnification.  The Company or the Bank shall provide Executive (including his heirs, executors and administrators) with coverage under a standard directors’ and officers’ liability insurance policy at its expense and shall indemnify Executive (and his heirs, executors and administrators) to the fullest extent permitted under applicable law against all expenses and liabilities reasonably incurred by him in connection with or arising out of any action, suit or proceeding in which he may be involved by reason of his having been a director or officer of the Company or the Bank     6     (whether or not he continues to be a director or officer at the time of incurring such expenses or liabilities), such expenses and liabilities to include, but not be limited to, judgments, court costs, attorneys’ fees and the cost of reasonable settlements.  15. Successors to the Bank and the Company.  The Bank and the Company shall require any successor or assignee, whether direct or indirect, by purchase, merger, consolidation or otherwise, to all or substantially all of the business or assets of the Bank or the Company, expressly and unconditionally to assume and agree to perform the Bank’s and the Company’s obligations under this Agreement, in the same manner and to the same extent that the Bank and the Company would be required to perform if no such succession or assignment had taken place.  16. Required Provisions.  In the event any of the foregoing provisions of this Section 16 are in conflict with the terms of this Agreement, this Section 16 shall prevail.        a. The Bank’s board of directors may terminate Executive’s employment at any time, but any termination by the Bank, other than Termination for Cause, shall not prejudice Executive’s right to compensation or other benefits under this Agreement. Executive shall not have the right to receive compensation or other benefits for any period after Termination for Cause.        b. If Executive is suspended from office and/or temporarily prohibited from participating in the conduct of the Bank’s affairs by a notice served under Section 8(e)(3) or 8(g)(1) of the Federal Deposit Insurance Act, 12 U.S.C. §1818(e)(3) or (g)(1); the Bank’s obligations under this contract shall be suspended as of the date of service, unless stayed by appropriate proceedings. If the charges in the notice are dismissed, the Bank may in its discretion: (i) pay Executive all or part of the compensation withheld while their contract obligations were suspended; and (ii) reinstate (in whole or in part) any of the obligations which were suspended.        c. If Executive is removed and/or permanently prohibited from participating in the conduct of the Bank’s affairs by an order issued under Section 8(e)(4) or 8(g)(1) of the Federal Deposit Insurance Act, 12 U.S.C. §1818(e)(4) or (g)(1), all obligations of the Bank under this contract shall terminate as of the effective date of the order, but vested rights of the contracting parties shall not be affected.        d. If the Bank is in default as defined in Section 3(x)(1) of the Federal Deposit Insurance Act, 12 U.S.C. §1813(x)(1) all obligations of the Bank under this contract shall terminate as of the date of default, but this paragraph shall not affect any vested rights of the contracting parties.        e.  All obligations under this contract shall be terminated, except to the extent determined that continuation of the contract is necessary for the continued     7          operation of the Bank: (i) by the Director of the OTS (or his designee), at the time the FDIC or the Resolution Trust Corporation, at the time the FDIC enters into an agreement to provide assistance to or on behalf of the Bank under the authority contained in Section 13(c) of the Federal Deposit Insurance Act, 12 U.S.C. §1823(c); or (ii) by the Director of the OTS (or his designee) at the time the Director (or his designee) approves a supervisory merger to resolve problems related to the operations of the Bank or when the Bank is determined by the Director to be in an unsafe or unsound condition. Any rights of the parties that have already vested, however, shall not be affected by such action.        f. Any payments made to employees Executive pursuant to this Agreement, or otherwise, are subject to and conditioned upon their compliance with 12 U.S.C. §1828(k) and FDIC regulation 12 C.F.R. Part 359, Golden Parachute and Indemnification Payments.    8    SIGNATURES  IN WITNESS WHEREOF, Savings Institute Bank and Trust Company and SI Financial Group, Inc. have caused this Agreement to be executed and their seals to be affixed hereunto by their duly authorized officers, and Executive has signed this Agreement, on the 30th day of September, 2004.              ATTEST:      SAVINGS INSTITUTE BANK AND TRUST COMPANY        /s/ Sandra M. Mitchell      By:    /s/ Rheo A. Brouillard  Corporate Secretary         For the Entire Board of Directors      ATTEST:      SI FINANCIAL GROUP, INC.                       (Guarantor)        /s/ Sandra M. Mitchell      By:    /s/ Rheo A. Brouillard  Corporate Secretary         For the Entire Board of Directors       [SEAL]               WITNESS:      EXECUTIVE       /s/ Sandra M. Mitchell       /s/ Laurie L. Gervais  Corporate Secretary      Laurie L. Gervais    9      EX-14.0 3 dex140.htm EXHIBIT 14.0   EXHIBIT 14.0   Exhibit 14.0  SI FINANCIAL GROUP, INC.  CODE OF ETHICS AND BUSINESS CONDUCT  This Code of Ethics and Business Conduct represents an overview of the corporate policies that should govern the actions of all employees, officers and directors of SI Financial Group, Inc. and its subsidiaries. It is not a replacement for policies and procedures that address the specifics of our business or which may impose stricter or more detailed requirements. No code of conduct can cover every potential situation. It is, therefore, your responsibility to apply the principles set forth in this Code in a responsible fashion and with the exercise of good business judgment.  Certain parts of this Code may apply specifically to “executive officers.” Executive officer means a member of the Company’s or its subsidiaries’ management so designated by resolution of the Board of Directors.  The policies and procedures contained in this Code of Business Conduct do not constitute a legal contract and may be changed, modified or discontinued from time to time without notice (except as required by law) and in the sole discretion of SI Financial Group, Inc. Failure to adhere to these policies and procedures may result in disciplinary action up to and including dismissal.  Except as otherwise provided by written agreement or applicable law, persons employed by the Company or its subsidiaries are employed at will, and the Company reserves the right to take employment action, including termination, at any time for any reason without notice.    TABLE OF CONTENTS           Financial Policies    3      Political Contributions and Activities    4      Conflicts of Interest    4      Accepting Gifts and Gratuities    5      Corporate Opportunities    5      Equal Employment Opportunity, Harassment and Sexual Harassment    6      Illegal and Impairing Substances    7      Workplace Violence    7      Marketing Practices and Antitrust    7      Computer Networks, Voice Mail, E-Mail and the Internet    8      Confidential Information    9      Examinations, Government Investigations and Litigation    11      Detailed Policies and Procedures    11      Administration of the Code of Business Conduct    11      Contacts    14  NOTE: Throughout the Code of Business Conduct, the term “Company” refers to SI Financial Group, Inc. and/or the affiliate or subsidiary in which an employee works, depending on context.    Financial Policies  Use of Company Assets  The Company’s assets are to be used exclusively in the pursuit of the Company’s business except for minimal personal use authorized by your supervisor in accordance with other Company policies. The Company’s assets include equipment, facilities, supplies, services such as telephones and computer networks, and the time and efforts of its employees. You should not use Company assets for personal gain or convenience, or make Company assets available for the gain or convenience of anyone else, or for any purpose other than conducting the Company’s business unless you have management authorization to do so.  Authority to Make Commitments  Only specific employees are authorized to make financial or other commitments on behalf of the Company. Commitments might be such things as approving a loan or other extension of credit, ordering equipment or materials, authorizing business travel, approving payment of an invoice or expense report, authorizing budgets or budget overruns, signing leases or other contracts, selling Company assets, settling litigation or other claims, borrowing money, setting compensation or employee benefits, making charitable contributions and other transactions. These authorizations are in writing and are governed by corporate policies. You should not make a Company commitment unless you have the authority to do so.  Bribes and Other Illegal Corporate Payments  The use of Company funds for payments to any individual, company or organization for the purpose of obtaining favorable treatment in securing business or other special considerations is prohibited. This policy does not prohibit normal and customary business expenses such as reasonable entertainment, trade organization dues or similar expenses that are allowed by applicable Company policies, which must be properly reported on an appropriate expense report form.  Relations with Government Employees  The U.S. government has various regulations prohibiting government personnel from accepting entertainment, gifts, gratuities or other business courtesies that may be acceptable in the private commercial sector. All Company employees who may have to make these sorts of judgments must understand and comply with the letter and intent of such regulations.  Integrity of Records and Reports  The Company’s accounting records are relied upon to produce reports to the Company’s management, shareholders, governmental agencies and other entities. All Company accounting records and reports produced from those records shall be kept and presented in accordance with the laws of each applicable jurisdiction and must accurately and fairly reflect in reasonable detail the Company’s assets, liabilities, revenues and expenses.  Responsibility for accurate and complete financial records does not rest solely with the Company’s accounting employees. All employees involved in approving transactions, supplying supporting information for transactions and determining account classifications have responsibility for complying with our policies.  Reports to Management  The same high standards required in the Company’s external reporting apply to financial reports to management. Accruals and estimates included in internal reports (such as business plans, budgets and forecasts) shall be supported by appropriate documentation and based on good-faith judgment.    3    Payments and Disbursements  All payments made by or on behalf of the Company must be documented in the accounting records with appropriate approval(s) and an adequate description of the business purpose of the disbursement.  Cash Deposits and Bank Accounts  All cash received by the Company shall be promptly recorded in the accounting records and deposited in a bank account properly authorized by the Company. All bank accounts and other cash accounts shall be clearly and accurately recorded in the accounting records. No unrecorded accounts, funds or assets shall be established for any purpose.  Cooperation with Inquiries  Employees shall provide complete and accurate information in response to inquiries from the Company’s internal and outside independent auditors as well as the Company’s legal counsel.  Political Contributions and Activities  No Company funds or assets, including the work time of any employee, may be contributed, loaned or made available, directly or indirectly, to any political party or to the campaign of any candidate for a local, state or federal office.  Conflicts of Interest  You must carry out your professional responsibilities with integrity and with a sense of loyalty to the Company. You must avoid any situation that involves a possible conflict or an appearance of a conflict of interest between your personal interests and the interests of the Company. Knowingly acting in a manner that presents a conflict between your personal interests and the best interests of the Company is a violation of this Code.  A conflict of interest cannot be defined precisely, only illustrated. The basic factor that exists in all conflict situations is a division of loyalty between the Company’s best interests and the personal interest of the individual. Many, but not all, conflict situations arise from personal loyalties or personal financial dealings. It is impossible to list every circumstance giving rise to a possible conflict of interest, but the following illustrates the types of situations that may cause conflicts.  Family Members  A conflict of interest may exist when the Company does business with or competes with an organization in which a family member has an ownership or employment interest. “Family members” include a spouse, parents, children, siblings and in-laws. You may not conduct business on behalf of the Company with family members or an organization with which you or a family member is associated unless you receive prior written approval under this Code.  Ownership in Other Businesses  You cannot own, directly or indirectly, a significant financial interest in any business entity that does business with or is in competition with the Company unless you receive prior written approval under this Code. As a guide, “a significant financial interest” is defined as ownership by an employee and/or family members of more than 1% of the outstanding securities/capital value of a corporation or that represents more than 5% of the total assets of the employee and/or family members.  Outside Employment  Employees must keep outside business activities, such as a second job or self-employment, completely separate from the employee’s activities with the Company. Employees may not use Company assets, facilities, materials or services of other     4     employees for outside activities unless specifically authorized by the Company, such as for certain volunteer work.  Disclosure Required - When in Doubt, Ask!  You should avoid any actual or apparent conflict of interest. Conflicts can arise unexpectedly and prompt disclosure is critically important. You must disclose existing or emerging conflicts of interest (including personal relationships that could reasonably be considered to create conflicts) to your manager and follow the guidance provided.  Accepting Gifts and Gratuities  Accepting Things of Value  Except as provided below, you may not solicit or accept for yourself or for a third party anything of value from anyone in return for any business, service or confidential information of the Company. Things of value include gifts, meals, favors, services and entertainment. The purpose of this policy is to ensure that the Company’s business is safeguarded from undue influence of bribery and personal favors.  The solicitation of and acceptance of things of value is generally prohibited by the Bank Bribery Act. Violations may be punished by fines and imprisonment.  Permitted Transactions  The following transactions are permitted and will be considered as exceptions to the general prohibition against accepting things of value:  Acceptance of gifts, gratuities, amenities or favors based on family or personal relationships when the circumstances make clear that it is those relationships, rather than the business of the Company, that are the motivating factors;  Acceptance of meals, refreshments, travel arrangements, accommodations or entertainment, all of a reasonable value, in the course of a meeting or other occasion, the purpose of which is to hold bona fide business discussions or to foster better business relations, provided that the expense would be paid for by the Company as a reasonable business expense if not paid for by another party;  Acceptance of advertising or promotional material of reasonable value, such as pens, pencils, note pads, key chains, calendars and similar items;  Acceptance of discounts or rebates on merchandise or services that do not exceed those available to other customers;  Acceptance of gifts of reasonable value related to commonly recognized events or occasions, such as a promotion, new job, wedding, retirement, birthday or holiday; or  Acceptance of civic, charitable, education or religious organizational awards for recognition of service and accomplishment.  Other Transactions  If you are offered or receive something of value beyond what is permitted in this Code, you must obtain prior approval before you may accept or keep it. Transactions other than those described above may be approved so long as approval is consistent with the Bank Bribery Act. If you are at all uncertain as to whether you may accept something of value, do not hesitate to ask.  Corporate Opportunities  Directors and officers of the Company stand in a fiduciary relationship to the Company. It is a breach of that relationship for any such person to take advantage of a business opportunity for his or her own personal profit or benefit when the opportunity is within the corporate powers of the Company and when     5     the opportunity is of present or potential practical advantage to the Company, unless the Board of Directors knowingly elects not to avail itself of such opportunity and the director’s or officer’s participation is approved in advance by the Board. It is the policy of the Company that no director or executive officer appropriate a corporate opportunity without the consent of the Board of Directors.  Equal Employment Opportunity, Harassment and Sexual Harassment  Equal Employment Opportunity  It is the policy of the Company to provide equal employment opportunity in full compliance with all federal, state and local equal employment opportunity laws and regulations.  Harassment Prohibited  The Company is committed to providing a work environment where all employees work free from harassment because of race, color, religion, age, gender, sexual orientation, national origin, disability or any characteristic protected by applicable law. The Company will not tolerate harassment by employees, supervisors, customers or others. Our policy is essentially based on common sense: all employees should treat each other with respect and courtesy. Harassment in any form - including verbal and physical conduct, visual displays, threats, demands and retaliation - is prohibited.  What Constitutes Sexual Harassment  The Equal Employment Opportunity Commission has guidelines that define sexual harassment as unwelcome sexual advances, requests for sexual favors and other verbal or physical conduct of a sexual nature when:        •   Submission to such conduct is made either explicitly or implicitly a term or condition of an individual’s employment, or used as the basis for employment decisions affecting such individual; or        •   Such conduct creates an intimidating, hostile or offensive working environment.  Sexual harassment can involve either a tangible employment action or a hostile work environment. Sexual harassment includes physical or verbal intimidation, however slight. Lewd or vulgar remarks, suggestive comments, posters, pictures and calendars, pressure for dates and sexual favors, and unacceptable physical contact are examples of what can constitute harassment.  It is important to realize that what may not be offensive to you may be offensive to others. You should consider carefully the effect of words and actions on others, and should not assume that another employee’s failure to object means that the employee welcomes the behavior at issue.  The Company as a general matter does not seek to regulate the private social behavior of employees. However, intimate relationships between supervisors and employees whom they directly supervise are discouraged. Because of the undesirable workplace repercussions that they may have, any such ongoing relationship should be disclosed to the supervisor’s department head. All employees should understand that no one at the Company has the authority to offer job benefits or threaten job disadvantages based on the provision of sexual favors.  Sexual harassment also can occur among co-workers or result from behavior by contractors or other non-employees who have reason to interact with Company employees. Our policy extends to these circumstances as well.    6    Obligation to Report  Any employee who has reason to believe that he/she is being harassed must promptly report the harassment. The official procedure for reporting violations or suspected violations of this policy is located under the Heading “How to Report a Violation.” Do not allow an inappropriate situation to continue by not reporting it, regardless of who is creating the situation.  Investigations  As set forth in “Administration of the Code of Business Conduct,” the Company will promptly investigate allegations of harassment and, to the extent possible, conduct such investigations confidentially. Any employee who is found to have violated this policy is subject to discipline or discharge.  No Retaliation  The Company will not tolerate retaliation in any form against an employee who has, in good faith, reported an incident of harassment, and employees should not fear that such a report will endanger his/her job.  Illegal and Impairing Substances  You may not possess, use, sell, distribute or be under the influence of illegal drugs while on Company property or while conducting Company business anywhere. Such behavior is a violation of Company policy in addition to being a violation of the law.  When reporting for work and throughout the work day, you must be fit for duty at all times and, in particular, not pose a safety hazard to yourself or others through your use of alcohol or other legal, but impairing, substances.  Workplace Violence  The Company expressly prohibits any acts of violence or threats of violence by any Company employee against any other person in or about Company facilities or in connection with the conduct of Company business elsewhere at any time.  You are prohibited from possessing firearms while on Company property or while conducting Company business anywhere at any time unless authorized by the Company.  Marketing Practices and Antitrust  Marketing Practices  The Company’s products and services must be sold fairly and honestly. You should not attempt to take advantage of anyone through manipulation, concealment, abuse of privileged information, misrepresentation of material facts, or any other unfair practice. Many of the products and services provided by the Company and its subsidiary are subject to laws and regulations that specify the information that must be provided to the Company’s customers. It is the policy of the Company to comply fully with these disclosure requirements.  Antitrust  The antitrust laws are intended to foster free and open competition and it is important that the Company comply with the letter and the spirit of such laws. Agreements that reduce business competition are a core concern of the antitrust laws and violations may result in severe civil and criminal penalties to the Company and to individuals. Antitrust laws pertain to dealings with customers and suppliers as well as competitors.  In some cases, depending on the circumstances, the antitrust laws prohibit discussions among competitors about competitively sensitive subjects. The most serious antitrust violations are agreements among competitors that directly restrict competition among them.  These include agreements:        •   To raise, lower or stabilize prices;    7        •   To divide the areas in which they will do business or the customers they will serve; or        •   To refuse to deal with certain customers or suppliers.  Conduct intended to drive a competitor out of business may also violate antitrust laws. It is the policy of the Company to fully comply with all applicable antitrust laws.  Antitrust is a complex area of the law and violations have serious consequences for the Company and for individuals personally. The Company’s legal counsel should be consulted with any questions.  Computer Networks, Voice Mail, E-mail and the Internet  Many Company employees depend on access to computer networks, voice mail, e-mail and/or the Internet to do their jobs. These tools come with risks and responsibilities that all employees must understand and accept.  You must use these resources only for the business activities of the Company (except as described under “Authorized Uses” and:        •   Properly identify yourself in electronic communication;        •   Use only your own password and user ID to gain access to systems or data;        •   Accept full personal responsibility for the activities undertaken with your password and user ID;        •   Delete e-mail, voice mail and other electronic files in accordance with applicable record retention policies; and        •   Comply with the computer security policies of the Company and conduct yourself in a manner that protects the Company from damage, theft, waste and violations of the law, including:        •   Protecting against exposure to potentially destructive elements, intentional (viruses, sabotage, etc.) or unintentional (bugs); and        •   Protecting against unauthorized access to Company information or resources (hacking).  Company Property and Privacy  Computer networks and electronic communications systems, and all messages and log files generated on or handled by them (including back-up copies), are considered to be the property of the Company.  There should be no expectation of privacy in these electronic interactions. The Company may monitor the content of your electronic communications or monitor the content of server log files to review what Web sites or other Internet locations you have visited and what files you may have sent or received. Computer networks, e-mail systems, voice mail systems and server logs are monitored regularly to support routine and non-routine activities such as operations, maintenance, auditing, security and investigations. You should also keep in mind that, as a matter of law, the Company may be called upon to turn over this information to law enforcement and private litigants.  You may not intercept or disclose, or assist in intercepting or disclosing, electronic communications or Internet activity except as specifically provided above and only then with appropriate authorization.  Authorized Uses  Company computer networks, e-mail and voice mail systems and Internet access generally must be used only for Company     8     business activities. Incidental personal use is permitted if it:  Does not preempt or interfere with any Company business activity or with employee productivity; and  Consumes only a trivial amount of Company resources.  Incidental personal use is subject to the same policies as business use.  Prohibited Uses  Under no circumstances should Company computer networks, e-mail and voice mail systems or Internet access be used:  For any illegal activity;  To communicate offensive sexual, racial or other remarks, jokes, slurs and obscenities;  For private business, commercial or solicitation activities;  For chain-letter communications of any kind;  For charitable endeavors that are not Company-sponsored or authorized, including any fundraising;  For gambling; or  For pornography.  Additional uses may be prohibited or limited by other provisions of this Code or by other Company policies.  Confidential Information  Many employees learn confidential Company information in the course of their jobs and use it to perform important functions. It is vitally important that all employees handle confidential information properly.  There are two major concerns:  Preventing the release of unauthorized or inappropriate information that might adversely affect the Company’s business; and  Avoiding violations of the law, particularly the securities laws relating to disclosure of material financial information before the information is made public.  What is Confidential Information?  What follows is not a complete list of what is considered to be confidential information, but it illustrates what is typically confidential unless it has been disclosed by the Company in a securities filing, press release, or other authorized formal or official public communication:  Financial results, budgets or forecasts;  Business plans, operating plans, strategy statements, memos, operating manuals, organizational charts and other internal communications;  Company investments, acquisitions or divestitures;  New products, processes or designs;  Whether a product or business is meeting financial or other expectations;  Business relationships or the terms of any business arrangement, including prices paid or received by the Company;  Customer data such as customer names and addresses or any confidential personal or business information of the customer;  Advertising and marketing plans and campaigns;  Wages and salaries, bonus or compensation plans, notices to employees or unannounced personnel changes; and  Personal information about any employee.    9    In general, if information about the Company has not been made public by the Company, it should be treated as confidential.  Non-Disclosure and Non-Use  You may not disclose to unauthorized persons or use for your own personal advantage or profit, or the advantage or profit of another, any confidential information that you obtain as a result of your position with the Company. This includes not only financial analysts and the press, but also business associates, family members and personal friends. It is a serious mistake to disclose such information to anyone simply because you are confident that that person will neither try to benefit from it nor disclose it to others.  Your obligations not to disclose the Company’s confidential information and not to use it for unauthorized purposes continue after your affiliation with the Company ends.  Privacy of Customer Information  The Company is entrusted with important information about individuals and businesses. It is essential that you respect the confidential nature of this information. The Company is legally obliged to protect the privacy of a consumer’s personal financial information. The Company’s privacy practices are set out in a privacy policy that is circulated to our customers and made available to the public. All employees are expected to adhere to the Company’s privacy policy.  Public Disclosures  You may be asked for information about the Company by the media, trade groups, consultants and others collecting information for various purposes. You should not make public statements on behalf of the Company or provide confidential information in response to external inquiries unless you have been authorized to do so.  Proper Disclosures  Some employees must disclose confidential Company information as a part of their job responsibilities. This policy on confidential information is not intended to prohibit such authorized disclosures.  A few examples of situations in which confidential information might properly be disclosed are:  Disclosure of operational data to vendors or consultants in connection with providing services to the Company;  Participation in legitimate and authorized industry surveys;  Providing data to governmental agencies as part of required filings; or  An authorized employee responding to media or financial analyst inquiries.  You should be certain that you understand what you have been authorized to disclose, and to whom, prior to disclosing any confidential information.  “Inside” Information and Insider Trading  You must not trade in the Company’s stock when you have material information about the Company that is not yet public. Material information is information that would reasonably be expected to either (1) affect the price of securities issued by the Company or (2) be important to an investor in deciding whether to buy, sell or hold securities issued by the Company. Furthermore, you must not communicate material non-public information to persons outside the Company so that they may profit from transactions in the Company’s securities.  The Company maintains a policy on insider trading that provides more complete guidance on this subject, including rules on trading in Company securities by executive officers, directors and employees who have access to certain financial information.    10    Engaging in insider trading, or providing confidential information that is used in insider trading, is illegal and can result in substantial fines and criminal penalties to you.  Examinations, Government Investigations and Litigation  Regulatory Examinations  The Company and its subsidiaries are subject to examination by federal banking regulators. It is Company policy to cooperate fully with the Company’s regulators.  Government Investigations  It is Company policy to cooperate with reasonable and valid requests by federal, state or local government investigators. At the same time, the Company is entitled to all the safeguards provided in the law for persons under investigation, including representation by counsel. Accordingly, if a government investigator requests an interview with you, seeks information or access to files, or poses written questions, he/she should be told that you must first consult with the Company’s legal counsel. You should immediately contact the Executive Vice President, Chief Financial Officer and Treasurer of Savings Institute Bank and Trust Company who will then provide advice as to further action.  Penalties  You should be aware that criminal sanctions could be imposed upon any person who submits false or misleading information to the government in connection with any regulatory examination or government investigation. Full cooperation and proper legal supervision of any response in connection with a regulatory examination or government investigation is essential from both corporate and individual viewpoints.  Litigation  In the event any litigation is begun or threatened against the Company, notify the Executive Vice President, Chief Financial Officer and Treasurer of Savings Institute Bank and Trust Company immediately, even if the action or threats appear to be without merit or insignificant.  Preservation of Records  All records relating to the business of the Company shall be retained as required by the Company’s record retention guidelines. Notwithstanding such guidelines, under no circumstances shall any records known to be the subject of or germane to any anticipated, threatened or pending lawsuit, governmental or regulatory investigation, or bankruptcy proceeding be removed, concealed or destroyed.  Detailed Policies and Procedures  This Code does not contain all of the policies of the Company or all of the details of the policies that are included. The Company has written policies and procedures that provide more information on some of the topics in this Code of Business Conduct.  Talk to your supervisor about the Company’s policies and procedures that you are responsible for following in your job and make sure that you have reviewed and understand them.  Administration of the Code of Ethics And Business Conduct  The Human Resources Director of Savings Institute Bank and Trust Company has the final responsibility for administration of this Code.  Every Employee Has an Obligation to:  Comply with this Code of Business Conduct, which prohibits violation of local, state,     11     federal or foreign laws and regulations applicable to our businesses, and requires compliance with all Company policies;  Be familiar with laws and Company policies applicable to his/her job and communicate them effectively to subordinates;  Ask questions if a policy or the action to take in a specific situation is unclear;  Be alert to indications and/or evidence of possible wrongdoing; and  Report violations and suspected violations of this Code of Ethics and Business Conduct to the appropriate person as described in “How to Report a Violation” and elsewhere in this Code.  The Company’s managers have a particular responsibility to notice and question incidents, circumstances and behaviors that point to a reasonable possibility that a violation of this Code has occurred. A manager’s failure to follow up on reasonable questions is, in itself, a violation of Company policy.  How to Ask a Question  Whenever possible, an employee should work with his/her immediate supervisor to get answers to routine questions.  If a supervisor’s answer does not resolve a question or if an employee has a question that he/she cannot comfortably address to his/her supervisor, he/she should go to the Human Resources Director.  Directors should bring any questions to the Chairman of the Audit Committee.  How to Report a Violation Involving Accounting, Internal Controls or Auditing Matters  Concerns regarding questionable accounting, internal control or auditing matters should be handled under the procedures for confidential, anonymous submissions established by the Audit Committee and set forth in Appendix A.  How to Report a Violation (other than Violations Involving Accounting, Internal Controls or Auditing Matters)  Any employee having information about a violation (or suspected violation) of this Code must promptly report the violation to Human Resources Director. If the violation involves the Human Resources Director, then the employee should report the violation by informing the Executive Vice President, Chief Financial Officer and Treasurer.  Follow-up to the Report of a Violation  The Human Resources Director may arrange a meeting with the employee to allow the employee to present a complete description of the situation. The Human Resources Director will take the matter under consideration, including undertaking any necessary investigation or evaluation of the facts related to the situation and, after consultation with the President, shall render a written decision, response or explanation as expeditiously as possible. Individuals who are alleged to be involved in a violation will not participate in its investigation.  Determining Whether a Violation Has Occurred  If the alleged violation of this Code concerns an executive officer or director, the determination of whether a violation has occurred shall be made by the Audit Committee of the Board of Directors, in consultation with the such external legal counsel as the Audit Committee deems appropriate.  If the alleged violation concerns any other employee, the determination of whether a violation has occurred shall be made by the President.    12    In determining whether a violation of this Code has occurred, the committee or person making such determination may take into account to what extent the violation was intentional, the materiality of the violation from the perspective of either the detriment to the Company or the benefit to the director, executive officer or employee, the policy behind the provision violated and such other facts and circumstances as they shall deem advisable.  Acts or omissions determined to be violations of this Code by other than the Audit Committee under the process set forth above shall be promptly reported by the President to the Audit Committee and by the Audit Committee to the Board.  Confidentiality  Reports of suspected violations will be kept confidential to the extent possible and consistent with the conduct of an appropriate investigation.  No Retaliation  Retaliation in any form against an employee who has, in good faith, reported a violation of this Code will not be tolerated.  Consequences of a Violation  Employees who violate this Code, or who fail to report violations of which they are aware or should be aware, will subject themselves to disciplinary action up to and including dismissal. Some violations may also result in civil liability and/or lead to criminal prosecution.  Prior Approvals  Whenever the requirement for prior approval appears in this Code, it means that a writing setting forth the pertinent facts of the situation under consideration shall be submitted according to the following process.  If a request for prior approval relates to an executive officer or director, the determination with respect to the approval shall be made by the Audit Committee of the Board of Directors, in consultation with such external legal counsel as the Audit Committee deems appropriate.  If a request for prior approval relates to any other employee, the determination shall be made by the President, unless the matter is quantitatively or qualitatively material or outside the ordinary course of business, in which case such determination shall be made by the Audit Committee.  All approvals (other than those approved by the Audit Committee) shall be promptly reported to the Audit Committee.  Waivers  You must request a waiver of a provision of this Code if there is a reasonable likelihood that your contemplated action will violate the Code.  If a waiver request relates to an executive officer or director, the determination with respect to the waiver shall be made by the Audit Committee of the Board of Directors, in consultation with such external legal counsel as the Audit Committee deems appropriate. Any waivers granted by such committee shall be submitted to the Board for ratification.  If a waiver request relates to any other employee, the determination shall be made by the President, unless the matter is quantitatively or qualitatively material or outside the ordinary course of business, in which case such determination shall be made by the Audit Committee.  All waivers of this Code (other than those approved by the Audit Committee) shall be promptly reported to the Audit Committee.  Waivers will not be granted except under extraordinary or special circumstances.    13    Any waivers of this Code for any executive officer or director of the Company must promptly be disclosed to stockholders.  Updates and Changes  This Code will be reissued from time to time to remind employees, officers and directors of its specifics and to make changes and clarifications based on experience and suggestions.  Contacts  To Ask Questions and/or to Report Violations  Key Contacts  Rheo A. Brouillard  President and Chief Executive Officer  (860) 456-6540  Brian J. Hull  Executive Vice President, Chief Financial Officer and Treasurer  (860) 456-6568  Laura L. Gervais  Vice President / Human Resources Director  (860) 456-6569    14    APPENDIX A  PROCEDURES FOR HANDLING COMPLAINTS REGARDING ACCOUNTING, INTERNAL CONTROLS AND AUDITING MATTERS  The Audit Committee of the Board of Directors of SI Financial Group, Inc. (the “Company”) hereby establishes the following procedures for:  The receipt, retention and treatment of complaints received by the Company regarding accounting, internal accounting controls or auditing matters; and  The confidential, anonymous submission by employees of the Company of concerns regarding questionable accounting or auditing matters.  Submission  Any employee, shareholder, officer, director or other interested party who has any complaint or concern regarding any accounting, internal accounting controls or auditing matter relating to the Company (a “Reporting Individual”) may report such complaint or concern directly to the Audit Committee of the Board of Directors as follows:  Steven Townsend  c/o SI Financial Group, Inc.  803 Main Street  Willimantic, Connecticut 06226  Phone: (860) 208-6839  E-mail: Stownsend53@yahoo.com  The submission may be made anonymously and will be kept in confidence, except that the Audit Committee may report the matter (without identifying the source) to other members of the Board of Directors, the Chief Executive Officer, Chief Financial Officer and others within the Company who are responsible for investigating, evaluating, addressing or resolving the complaint or concern.  Under certain circumstances, the matter that forms the basis for such complaint or concern may be required to be reported to a federal or state governmental or regulatory authority or disclosed to shareholders or the public. In such cases, unless required by law, the identity of the Reporting Individual will not be disclosed without his or her consent.  Matters Covered by These Procedures  These procedures relate to complaints and concerns about questionable accounting, internal accounting controls or auditing matters involving the Company, including, without limitation, the following:  any fraud or misstatement or omission in any financial statement of, or other financial information published by the Company, including any report or document filed by the Company with the Securities and Exchange Commission or other governmental or regulatory authority;  any intentional error or misconduct in the preparation, evaluation, review or audit of any of the Company’s financial statements;  any fraud or misstatement or omission in the recording and maintaining of the financial records of the Company;  any weakness or deficiency in or noncompliance with the Company’s internal accounting controls;  any misrepresentation or false statement made to or by a senior officer or accountant regarding a matter contained in, or required to be contained in, the financial records, financial statements, financial reports or audit reports of the Company;  any deviation from full and fair reporting of the Company’s financial condition, results of operations or cash flows;  any effort to mislead, deceive, coerce or fraudulently influence any internal or independent accountant or auditor in connection with the preparation,     15     examination, audit or review of any financial statement or records of the Company; or  any other error, deficiency or weakness in the Company’s financial statements, internal controls, auditing procedures or financial records or reports.  Handling of Complaints  Upon receipt of a complaint or notice of the nature indicated above, the Chairman of the Audit Committee (the “Committee Chairman”) will report the matter to and consult with a responsible officer to ensure that he or she is fully apprised of the matter and will notify legal counsel of receipt of such complaint or notice. For purposes of these procedures, the responsible officer will be the Chief Financial Officer or such other officer of the Company as the Audit Committee may designate, either generally or with respect to a particular matter. Under the oversight of the Audit Committee, the responsible officer will conduct an investigation of the matter, summarize his or her findings and conclusions in a written report to the Audit Committee and legal counsel and promptly take, or cause to be taken, any action that may be required to resolve properly the matter which is the basis for the complaint or concern.  If the complaint or notice relates to a weakness or deficiency in any of the Company’s internal controls or accounting systems, the Chief Financial Officer (or other person designated by the Audit Committee) will oversee any necessary strengthening and/or correction of such weakness or deficiency. If the complaint or concern relates to a misstatement, error or omission in any of the Company’s financial statements, or in any report or other document filed by the Company with the Securities and Exchange Commission or other federal or state governmental or regulatory authority, the Chief Financial Officer or other person designated by the Audit Committee will oversee the prompt correction or restatement of such financial statement, report or document and, if necessary, will cause any and all amendments to any previously filed reports or documents which may be necessary to correct any such misstatement, error or omission to be filed with the Securities and Exchange Commission, or other federal or state government agency or regulatory authority. Any other matters reported will be addressed and resolved in accordance with law and the applicable accounting or auditing standards. The responsible officer will keep the Committee Chairman and legal counsel informed of his or her findings and progress throughout this process.  Upon completion of the investigation and any necessary corrective action, the responsible officer will prepare and submit to the Audit Committee a final report on the matter. The report will describe in reasonable detail the complaint or concern reported, the results of the investigation, the conclusions reached and any corrective action taken. If no corrective action was taken, the report will include an appropriate explanation to support the decision to take no action. The responsible officer will respond in writing to the person reporting the matter, advising such individual of the results of the investigation and of any corrective action taken or, if no such action was taken, the reasons why no action was taken. A copy of the final report, including all related materials, and response to the reporting individual will be delivered to legal counsel.  Retention of Complaints and Reports of Resulting Action  The Audit Committee will maintain a file of all complaints and concerns reported pursuant to these procedures, tracking their receipt, investigation, evaluation and resolution, and of the related reports issued in connection therewith, which summarize the results of the related investigation and any corrective action taken. Copies of all such materials will be retained in accordance with the Company’s document retention policy, but in any event, for a period of at least five     16     (5) years from the date on which the related complaint or concern was initially reported hereunder.  Legal Counsel and Other Experts  In discharging their responsibilities, the Audit Committee and the responsible officer may request and obtain assistance from members of the Company’s Accounting or Audit Departments, and may retain an independent accountant, independent legal counsel or other experts to assist in the investigation of the complaint or reported concern, the evaluation of the matter under investigation or determining and implementing the appropriate remedial or corrective action. The cost of retaining any such expert or experts shall be borne by the Company.  Protection of Reporting Individual  The Company will not discharge, demote, suspend, threaten, harass or in any other manner discriminate or retaliate, and it shall be a violation of Company policy for any person to take any such action, against any person by reason of his or her having made any such complaint, or having reported any such concern, in good faith pursuant to and in accordance with these procedures.    17      EX-21.0 4 dex210.htm EXHIBIT 21.0   EXHIBIT 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 I (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 Financial Accounting Standards Board Interpretation No. 46R, “Consolidation of Variable Interest Entities,” SI Capital Trust I is not included in the Company’s consolidated financial statements.    (2) Wholly-owned subsidiary of Savings Institute Bank and Trust Company.      EX-23.0 5 dex230.htm EXHIBIT 23.0   EXHIBIT 23.0   Exhibit 23.0  Consent of Independent Registered Public Accounting Firm  We consent to the incorporation by reference in the Registration Statement Nos. 333-119685 and 333-125659 of SI Financial Group, Inc. on Form S-8 of our report dated February 18, 2005, which appears in the Annual Report on Form 10-K of SI Financial Group, Inc. for the year ended December 31, 2005.  /s/ McGladrey & Pullen, LLP  New Haven, Connecticut  March 27, 2006      EX-23.1 6 dex231.htm EXHIBIT 23.1   EXHIBIT 23.1   Exhibit 23.1      [Letterhead of Wolf & Company, P.C.]      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 February 23, 2006 relating to the consolidated financial statements of SI Financial Group, Inc. and subsidiaries as of December 31, 2005 and the year then ended appearing in this Annual Report on Form 10-K.  /s/ Wolf & Company, P.C.  Boston, Massachusetts  March 30, 2006      EX-31.1 7 dex311.htm EXHIBIT 31.1   EXHIBIT 31.1   Exhibit 31.1  CERTIFICATION  I, Rheo A. Brouillard, President and Chief Executive Officer of SI Financial Group, Inc., certify that:      1. I have reviewed this annual report on Form 10-K of SI Financial Group, Inc.      2. Based on my knowledge, this annual 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 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)) 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) 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 a date within 90 days prior to the filing of this annual report (the “evaluation date”), based on such evaluation; and  (c) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred as of the evaluation date 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 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 30, 2006      EX-31.2 8 dex312.htm EXHIBIT 31.2   EXHIBIT 31.2   Exhibit 31.2  CERTIFICATION  I, Brian J. Hull, Executive Vice President, Treasurer and Chief Financial Officer of SI Financial Group, Inc., certify that:      1. I have reviewed this annual report on Form 10-K of SI Financial Group, Inc.      2. Based on my knowledge, this annual 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 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)) 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) 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 a date within 90 days prior to the filing of this annual report (the “evaluation date”), based on such evaluation; and  (c) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred as of the evaluation date 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 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 30, 2006      EX-32.0 9 dex320.htm EXHIBIT 32.0   EXHIBIT 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 twelve month period ended December 31, 2005, as filed with the Securities and Exchange Commission (the “Report”), I 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 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 30, 2006     By:    /s/ Brian J. Hull     Brian J. Hull     Executive Vice President, Treasurer and     Chief Financial Officer     March 30, 2006      GRAPHIC 10 g32358image001.jpg GRAPHIC  begin 644 g32358image001.jpg M_]C_X``02D9)1@`!`@``9`!D``#_[``11'5C:WD``0`$````9```_^X`#D%D M;V)E`&3``````?_;`(0``0$!`0$!`0$!`0$!`0$!`0$!`0$!`0$!`0$!`0$! M`0$!`0$!`0$!`0$!`0("`@("`@("`@("`P,#`P,#`P,#`P$!`0$!`0$"`0$" M`@(!`@(#`P,#`P,#`P,#`P,#`P,#`P,#`P,#`P,#`P,#`P,#`P,#`P,#`P,# M`P,#`P,#`P,#_\``$0@`-`)V`P$1``(1`0,1`?_$`+P``0``!P$!`0$````` M```````%!@<("0H+!`$"`P$!```'`0$```````````````$"`P0%!@<("1`` M``8"`0(&`0,"!0,%`````@,$!08'``$(IPD1$A,4:2H*(146(A%"4G(S)#06\&*"LD-SLU2T=1B2PF-T-S;_V@`,`P$` M`A$#$0`_`*J?E;<+)M0[/!.?_&.=6W7C+,IZM@_)F-1"S;*31XZ7RP"AXA%H MD,Y4D-:(R%U5-ZQI<])2TB,U6OTD<;V/$%Q/Y>\4P6=S-#;B M2R?)##G$<=&R0%V0.DRU:]E2YP;O:G*UH&KZ];.B`NX"X`FC@"=IV'W>P_8J M<_B&V#6MTVYR0:+N?YW8O)^N6J)652[]/+&GLD2LU&E/4'L/4<8W%_/CR9R M1O$G;0+#SB#5!Y#B5HO80D#WF3^L?3=4T+2--ET*."VX5N7OAN610Q,+IN;+ M#G>&9R"(Y"T`@`L-:Y@I.'WLED>)23.VA%2=FP_I"R]_D1]M9)8O$*[.8O&= MXL*K>3=,)3K@FCA`;+L*/H;8K:.(0!L-G?HVW20$>&\,$63;=V]60D+5[$V" M2:%L"G?EXW].'F<_3>,K'@SBAEO=\+WKA;Q-EAA>8)GG]BYCRS/E>\[MS2[+ MSP_:W'(:O9!]NZXA);.W$T)Q'+^&/V46I+^/%:L$NSN3P*C>;$DLRY85;L(G M$5K-HF=T6<3$V:WT:`F3Q]>\M".5)$LAV[1]@=&E&F5B&1IP<$Y@0"."5L/L M'ZD-(O\`0O+*XU[@6.ULKRTFBDG=';0&1UN3D>UKBPEE'/9(YS:')&X5RDK` M:1(V6]$5R7.:X$"I-*[?;\1\2NHU(H'$9;!G:MI$RD.<(?8XHB+M'S3E92=9 M'%2#;8H:QJ$Z@E<`HU`+9>Q`-"9K7ZZ%X_KGRFMM0O+._9JEL\LOXY1(U]!4 M/!S!U""-N.RGN6\%C7-R$?ZDX M^MTLMNPIM"HI)H?%]#OESA+:^R+VTH5K9&[)V:)HCBE7MR772-.:>:(LT/L' MS(U#BW7>$N#_`"TMK>V=QMKEFVXNW1P0QR21R/\`[*)',96,-:US[AP+:NB+ MW!K:M6`LV013W%XXGY:)U&U)(!`YU/;[!\5A^>.ZGW+?R!>=4*X8<;[,D7#C MCI83N\A71JNG@U`^,E01XA2ZS"=VO-V; MJE=S6G_=1T?5&B#%LC$M994T15*XJEI0C]@+:M)_.:/Q+%H6_'RI<_5)YQRZ MD+VUOX+>T:>;;1VT&X:P5HSG1ND(`-*[S-0"A%%G!HFGAF5S27>TDU_33\%K M0[+I]'9'%_W,:2909E&O67L![>%6G6(5:A.8$\:77J#@GAORR^IS@:34=4TZWTWC:U=N9Y;- MHB>Q^6L+@RXDC-J;Z%^5\44@M(%:8>S\5S@>!\[N/D+S7 MXD418?(+D";`KCY'TQ6DU):;EL!O'N`]6XAT[3M/&HV>F7$\9=;Q%HDCA?(TD9:$9FBHY1 M@M.M7R2W4<3WOR.>`<3L)HNOM17'&E^-,970ZD821!X\YKB'1R1%O4D?CW!R M3MR1J+7K7.4O#XZJE@D*(H`S!GB&;L/G'L0]B%OXVZ_Q-KG%%TV]UVP0N?&X/#"&O$8<6N:15 MKBX`M!;2KLVKZ["RWC9+!5KBX@T)QPK[58U^.!PICG=+*Y<[Y0\A>86C*5,I M/4*%7'(Z91$/DGH;2W(-/`%07S;@+8HBC]#81%>EK1GCH?GUY=\^IKC:X\J3 MH_\`A73M'I>_-;S?6C'_`-5\ODRY2RG]8ZM:UPV4QM=&MA?;S?ODYN6E'4VU M_@6=KDS^,_6$KB[ZP\3^X)S(JF]6R,F/K`P6=R$=['A[N$PY%OJ>U2SNH[CBWA[1KO0'2Y7O@M!%(W M`%P8YQ?$YS6G-NW!I-1SV`U65GT5CFD02R-EIRNJ/MV'[?P5Z?XXC;:T=[9, M;ESZX2-];I-!+DD\8>&56ZN:I8J/TT.#880'7J;!K M0/Z?TS1_J3ETFY\T);[0V1LTFYT^SFBR-#&EDL#7M<&@`)%]\6)L!(%JN*O7F.- MKDM*,.)CV5PU[F@T+XSS98Z_P#R1.>SW9JJA=0-N;=\#MCA]QY#]AQ7)J[>')>P M^U)W-:UL>8(U<>6TG<#Y3_(6+'D>L?N"J7E77EQL9J39A03W)E0^Y6(?$>@A M]Z#^OUY\R.%].\W/*RYT^T+9&WMDVXM)!@-Z&B:W>#R-<[*'85W;G# ME6@V.),>YAM7!\F=V!CJ\-BS8%CG@X4JMWU"X$%FY[<7.&5O+4NV M?'VKEK\G>.5_]I#G:BKJ4.*`NY..TLJ>VH?*V<*@+"[JRTL;LB)/K3L1H5)K M>2X>"8[6Q`'H]*<6+01!WK7U=X5XEX>\X?+YU_:-<='U"&>WDC=3.!5\,C'8 M$`D5(V\UP(P(6C3PRZ?=Y'?UC""#^(73CY/]U:$1/LT/7!9:I>BD]R3:97ER4<$^@ECFMJ,;$S3"7(92N MTI"J=]-TXM\@M-ZI9NC"V!((0@"3E:%ZT\@]2M?,;SNXGX^<&/M;*&*ULP?] MG`YSV1NC;2C"YEL7.H10S/`!S%8'5&.M--AM?Y3B7.]YY:_:?P"_E^&'6S,] M\LN7UK+`)C7FOJ$B$/90FH_44D%67.Q.#JL2KO7#[70"JZ+)&7Z8_6T?K?F! MZ?@.I];FJ3P<)Z/I#*B"XOWR.QP_8Q$-!%,:[ZM:BF78:X.&V`SR2':&@?>? MXET3\^;BV]:6OYHL"9UW&+AC:!FBPR"+WS-X$C%I&F$::SSRO3)"Y!VX"U[P MDLA;7"3P)#OTC=F;$/\`J+!GM[Z(M1GCXKUK2A7Y:6PBE.)IFBE+&X#43.Q M.(I0;2M;XD8#!&_E#B/O'\2Q6_BHWO)VIU[D?&DQQX!PYX) MM7.]SY9WS$:8!-4]#+88CD2=_7.][\.M?5MY?\8\=S\/P\)V,MXZ)UV)"US&AAD^5#,Q>YH`.5V.P!I) M(5CH-U;VHE,[@VN6FW&FV+88[0/IHB2D MC0O+I&6>:W6_/DQ<67:I44RJY?*'M2<61K83@MQ","@.CRQA#YR\Y/+*[\J_ M*SAO0]3=&[6KF_O;FXR8M;(Z*V8V,.H"X1QL:*G#.7EO-(67T^];?7TTK*[L M,:!\*G'[3^%%L65[5L`JE'*$%>1E%%T4TGLQL^3)4!BL9+K/+`>#I!,I&8!6 MI4:(5R!Z4&*3P$^F3ZI@A!`'S;\?-VI:MJ.KOBDU*5TLD%O'`PFE6Q0M#(V8 M`5#&@-!-30"I679&R,$,%`22?B=I4_YCE.F$3")A$PB81,(F$3")A$PB81,( MF$3")A$PB81,(F$3")A$PB81,(F$3")A$PB81,(F$3")A$PB81,(F$3")A$P MB81,(F$3")A$PB81,(F$3")A$PB81,(F$3")A$PB81,(F$3"+F-?EC<'-\=. M?;;R8B;*>VBZ1Y-Z7Q'JNCRAN MO\9738HF-&5T%L&"2^<"-HFE>]KQ@`)8J8L5YIDDFH/A9(/V5NVI][MC?N'Z M"I\_,FX6^_CG''GS%FQ/I1'UAW'*W5"=/O2L]J=Q.TRJAZ5F%@T#:1J="7UO M-,,%Y_4<4A8?$.OZ;'Z*N.-U=:EY?W;SED`O+<$X9AEBG:/>X&)P`PHV0E3< M1VU6LNF\G-/Z1^O\%C4_'\?KDY_V/PT[=TN;T;MQ5X*W]8G<$F!JD2W6U>VM M`S-]7PA26$_:!8B273*UB[288`[/3O"T0MC"1Y=]-^HJUT3R\T[6O,>S-K0X?E=#&,"Y6>DNDNWQVCOZB)YD/ZA]Y_$K.A^ M8IQHE%F\*:%Y&1EH4NR7C/;KNWSDU*(\6V&"72V,[".0*DX#-$#0DSF*L*$9 M@@",*&O!L.P@V;X\&^C#BBTTKCF_X;NGACM3M&NBK3GRVQ>[(#M!W4DK_80P MUQHLGQ%`Y]LV9HKD=C\#_&!]ZQ0?ADVJP1WEYRQI]Q&42^V?0D8ET=&8:<$Q M3_:R;[2N[<02%*,@PPU'8@5&Q#.+$`"7>@@,\PME]=^MK2+FYX0TC6HZFWM; M]\;]F&_C):=M<##3`'%PJ13&PXV8C'(I1=4]LHLGWOE7IF6!P4$7/-_;M$"]5&M76.7KU]F`],:?RZ"/S MBV7[B^B+2YY.)M:UH!WRT-E%"<,"Z60O&-=H$.RAKFK44QUKB1X$,(/IHSRTSW*Y`S@L&<($)03=$J M=QMGCS()0,8!>GMS*T`6M[,UG1_JUXJM&W_#7!<4@-Z_58;N1G*UC'&*-Q/) MG=)(&T/^S=7D5IH4#LLUP1S0PM'Q.)^Z@^]:\7:=_P#T][>G_>;QM_W:BF>C MO-K_`/)^(/\`L=Y_TTBQ%A_?HO\`>M_U@NT%GQ(71U:WS,Y1QKASQZF=Z2%K M+DBIG6Q2*PJ%?O:./*9]9%B2MF@M?PI$[K251+>8_2F0)BSE.R3M(TFCE(@" M+)'FU\%<*W'&?$<&@P/W4;P]\LN4O$4,3'2RR%H(KE8TY6U&9Q:P&K@J%S.+ M>$RD5(H`/:2:`?>M7C\SO8M\-N(6QZT$6^3#QL0=;\V@B_M7)_'6A>&O-K6_ M\_#7CGJKZ):?XWU>FS]V-_XS5@^(_P"[1_T_U*Q;\/>BJ2O5D[B3!=E/5=;S M,63QO1D-MF0"*3E*E2NA5Y`DF":2(DM^4RDY'-K2II6M*FFTJUX>BBE$PE:UPYNT M`_SO:M@SMP]N>NNW;W3N?[)1<8512@K[X_<;K?KZ.@&H5,D+>Q3NZ8[/H(QK M52A4J_:FMZ;BG%(0:+7M$;J4F+\Q9&MYYR\R_,G4O,CRHX>N->F;-K^GZC>6 MTK\`^1HBMGQ2N``%7,=D<1^9T;G&AX,8"7DT`&)) M.P`]5H[:XF MCDFAC>^*(`O<&DA@)#07$"C07$`$T!)`VE0)`(!(J5%\HJ*EA#-H8YQDN:-L MNC#A#CBC3RI8A?VI7&32258T!QQ;\0K,:QE%+BA$B%HW>@FAV#?]6MZRZDL; MV*Z-C+#*V]!H8RQP?4BOY",VS'9LQV*4.:6Y@1E]O(HXA7H71&E<6Q8D<6]: M06I1+T*@E6C5IC@Z&4H2JDXS"%!!H-ZV$8!;"+7ZZWE"2.2)YCE:6R--"""" M#["#B"I@014;%+9U@P).S/W,:T M*)J=D3H@BV(.LC]2_F!'QYYFW`L)1+H M6FM%K`6FK'%N,\C:$M.:4N:'MP?''&<<%+HUJ;6R&<4E?SC^H?=^)*R6]P;B MA'N;_"_D7Q=D*1.IW:U:OC7%U"DS1`&>PVHL$@K:0:4>(=DZ89VTMZH?ZZ"8 M44(L7]`Q:WS#R[XMN>!>-M-XJMW$"TN6F0#:Z%W,G9_IQ.>T>PD$8@*]NX!< MVSX#_*;A\>3\5@E_%-[?#U0>D9OOGU:>8MKQAQE::'I$[)]&T MVU#L\;P^-\UPUDCB"W`Y(Q&W:2UQD::&H6*T*T=;V[I9`1(]W*,:##]-?P6S M79=;02XJ]FM4V?&&N:UW8L9>8=-8F]DB/:Y!&I`A.;79K6`+&4<`M4C4"#HP ML8#2A>`RQA&$(M>7M+U._P!%U]*E?!J5M*V2*1N#F/80YKAR8$;""#L(( MP6;>QLC#&\5810CW+0HM7L8]P[LZ\Y(USM[7D3'RJIJ!2A>[LE6:=!J[>;X) M)FY4TR^K9Q&`::UL\8U32XJ$21U8A+''PT2J-1%'$^87T`TKSZ\NO.?@*7@' MS4E_=6M3PAKIZ4MS*PATG70NK$9XP=G+ M3E!'+]GW+8R8^_M0>X0-PGW#[N0U];B`DM(]4*KX6VZ^3,J3:`D`>Q,TA;6@ M$&&DTS&A(S`U6++5\':00"`-=SIS6VRHU42%Z7.:_^/UHH"!_D5I2@Y4:K6K'`AJ90'&E M$%J324A81^D^'_,[RH^G7@1W#W#=['K_`!C/FEE=;$.A?<%K0,TPJQD#*!K6 MM=))1I<6`O)6'ELK[5[K>S-,5N,!7;3X;:_MHJRVOCOVO."#YQ%XY\?N0 MLU1LE#SULK2N*0H>X;ED4^E,L;GYK-<)98,/A#Q#D4QEDL6&*W-2[+T>R"C= MG`(+2!(*UY7TJ7B/S4X_CXPXEU'38'OU")TTUU=V]LR*.-S'4CAEE;(8XXP& ML$;79B*%Q>7%9QXAL;4V\+'FC#0-:34GVD"E2=M5S=N)O!ON:\8N4''?D;_Q MMF/T]CT+RB\/ M#?TQXNX\\K^*.$=0X8'$VBPNOK":WS_.6SLF]B='FIO17+FK2HK3:%IL%K>P MSLFW,ARN!IE/(:^Q=`,OONS79)8C>S%WCP*-E`V:47Q41&D@/V#6S"RSQ34H M9I03/'6A[+#L6OU\NO\`#/GD?(&RS8<;<%9?_OFM/ANSC]OVK;/WJ[_EKG_T M_P`:P>W#R1XQ<(:EY8U'9;[%['J^T"FE]W')2SKGN< M71.5D.9HZ26R1=(XIVE&220E2;<3@FGJ##0&E=SX:X=\I?*#R\X@U&TXDTS5 M..;S2;B%CX9[-5\=*)XD\2>:5RNU>6I)K%G,N:>)7(%BA[$F) MC*^(-S$F<)573(<_NKJJ7F&^E:#2>`-7U'B#B_6-# MLH;BU9#%&[4+-TCCGWCGD,F=D:T`"CB'$NP'-*J:X9+J-D5O'(XAQ).1U/9R MA4%_%_1WIVZIARPB_+OAMS;JUEO%HJASA\\WQ(O^41I.XUF98871@>R(C7CZ M]MZUV3S8DQ$=[82<6TQA8Q@&(OS;#]5,F@^9-GI-WP=K6A74U@^<21?O"S8\ MB<0T3-:0TQ',*UYP(!`-*6B"6S=(VXCE:'`4.1Q&%?8/>M\]&J*7)$JTC M1X2%B8A42%2F4HE(2E!03B]*$:PHA6D/T`>O.4:`!A8O$(@Z%K>L^?KV&-Y8 MZF9I(-"",/814$>\$@\BVH8XKTY*B81,(F$3")A$PB81,(F$3")A$PB81,(F M$3")A$PB81,(F$3")A$PB81,(F$3")A$PB81,(F$3")A$PB81,(F$3")A$PB M81,(F$3"*S+EC`9O-I)QT6E1MPL2C8;9KU([YJEF+9UCE.4?\#D376*AP8'U M0@;IA$H98Z]&[KVK:D(QJ$J16$E1[/96]VX0U&PL+74V&5MMKTUJUEI<.S`1 M'>L=.`]@)CDEA#HV24I1SV9FYZJVN&.XW'H!0:^53^U[:M6-\=;IN" MS44:D9M!TBJT*NIQ)PBH5OF*,^ MJ7:O4;)73!*N0W(:U8Q&U")3"$;C,IFW0*&JG*+@"M0'E*0H=$>QT+,O<:YI MFBZ)?V-^X6FK7IU2[=&1<-F+IGQV=G;R/!$I$<;KNY:R*F(GR2- M3EQF)BM_*9NK"T$ MT/[OMYX6-GD%RX3P23`332,8UG/AA9^SA:6DNN'N>_\`8-C%0F_W>:ASD'`4 MP(&`!/(3M/NV8U59K@XTOS=P#ICA+!(0^R%#*$U!4]8CN)MBCT1$H&BE$/=K MKGDU0/3P2W/2MR9&QU]0M*)8>I=%^C`^8.A&ZP>C<46\OF'?<=:A/'')$;NX MA;FD:9)3'(VUBB+6DM#7.CH790UC*&F`522`BT;;,!(.4'9@*C,3^/VJG;]4 MW,J@[NIRKN,@9R\\9U#O&I5=,L6:IO7N)=8_)ATN.[7EL:G'^/J6-(*#QA1& M"&EG1IFEL)GHQ$2%6B"<')V^L<$\0Z#>ZKQ3\O'Q2&/CMHQ\SA'#8MMK5KG M#.''>O$YDD!.44,(C\MJO$7!?[SGO+":`7-EIES!:2M$YWD8M8+"RC<'-(% MP&;^Z>[*UC7.:TN)!RTV0W&0->#E<\%PPP.8NT6 M57+"ZLRNZ)0OB;=1IQ+I<-DWS:$GL&O+?<$YZPTMBKZJD\=0MQK0A]T^FO*M M4I7&N",O9>M\37/!CXKFXTI]M'-%*FF7:7$D'X"FS;7;53AS#CM]VI(*MU"H3)S(%47*SC M1(W=A1E)RGF?M42M2`V#+[&0JRILS-VX1!HVU+4I:%>0H4N#EHP1:7S%HC16 M7!=SP]I-O=_/3Q#4+S2+UC7FN6)TEO+#'"1NG'>ROP@,90%]#(%-<-ED M+%;NH.,;_P"7N)I39LUI1I2+J&#@*,MA9)9R M,CTZ.:)\IN@Z6],<9EANLK3)F:<,"A,ZO:,U/1!RN71Z(\/9>_.K"T":5BAH1S"U^55@-;$F,-`4 MC:4<3TM\`!&<2IV^^;Y,1ZFYEF8GV,@+6D&[`C?)J,;&O=F`<8[>PADE<`2Z M1UQN\2&N;M_>)9SJAP_HXT8?Q+B![J54WMK%W&(X3+'YW37).'QW_M=`G<; M)(Z88'9?':5XAH90XR"MF1SUE]UII!$WMS.FS^E:&>(`?(:,BCB7J6/4"X33 MEWL-R?'A"N3MS.1<_+:5,30TI&L0`M9:RZOHE2+;-KZ1H&?@S,&J5V:9*ZZ0RA9R^U'XN_Q&9))1ZSH]R5>^3> M0.A)Z+S-;2T&1LH.MGH'`016<6M<#1ZC-KLL&GND?KT;HX=W,6#3L[V21EG- M8P-B8PAW[2203$\V2,$3&.Y+!$"^@B-345SX4->7&OL`I["LKEAV/!*FB3E. M[)E;+"XBTFMJ9:^ORPM&C"N>G1&QL6G\WB'Y\<4R%`C(":J7+5!2<@LP MXP`!]QY`UC&N>]QHUC6ESB&@E7[WLC; MG>0&KUPJQ2QHPV3*$/B*11IW]X%"Z(1&>F)0VKU32ZH%1!Y9*MO=69W0'HU MJ1064J1+"#2#RRS2Q@#)?6%YIETZROXW173*5:?8X!S2"*@MW,TU:H).[9KJM%#$@FDI0M+S*AN0(K&B2EKS+93ME3E+'L49B#&E< MI/(2F-&>`Y:-&D.`C)&$9VP!%K>Z^GZ/J6J-DDL87/@AR[QYHV./,:-SR/+6 M,S$$-#G#,11M2H/D8R@<<3L'*?@-JDIIY0\>GV"E66SV["G*$J)HJK9&])'4 M)VW"R4*T]L65RV-H0?N[G8*5T2G)#&1.G,=`*R#2-D:-*,`&^FX4XC@OSIOWJLT)3 M7`[$ M0:Q'QT8599H/-ZA0@^76][UK=I'H6LRZV.&X[:4Z\;GY?<93O-_GW9CR\C@_ MFD'8=JB98Q'OB1NJ5KR4VU5$C.?/$HEP3-1]N$IG%74R*^2TBJ&6(E-*I5>H M`D(M5;[B(EA;X`6I,"`]U4;*1IM[_P!88,SP\O>,'1F9MF3&+PVE1+"?[2!4 MVXI)C-3$1BKG?R053^;MZTS8YA!%O6]>.M6^E:G=ZF MW1K:WF?J[YMTV$,=O3+FR[O)3-GS89:5!P*JE[&LWA(W8%:\E/;506S;NJJF M28>LM*:-D(;9Y+6."1A[?"UQ$>62Z3K4[9&F-(BTAK&Q*Y$ZK"4:#:]0E+6 M+#BR"1#.&`&Z^EZ%J^MNF9I,#YY;>%TKVMH7B-@+GN#*YGAC07/R!Q:T%Q`: M"5!\L<=#(:`F@^)V*!V'R.IRJ9"KBL\E*UD?$%?2&U%B0J(39Y*(KZ)G)T\E MDXW!ACCHW;1,9RPD*D.CMG%;/+\0?Z@/-<:;PSK6KVS;O3X6R0.N60`[R)M9 MI`2QE'O:ZK@#EPH:''`J#YHXSE>:&E=AV#:=BEUMY><=GJ"4O9K/8Q3M`^1# MXVQRDY*V1F9KT%BN[RWN#NSD,ⅅ<.4C(=F9I5+DJ@TLI,H0IS%)9@B`",U< MR<'<217][IDML67^FQE]RQSX@86M+6N+ZOI5KG-:X`EPZ-F5V=X;1F5V52N>RACB$;1GH4A[S(7)*UH??.BPAM:6T@U487[IU>'-44E1I2O.H6*C2R2 M0#-&$&]>L;"]U.Y%GI\4DURX$AK&EQHT%SG&FQK6@N6"7Q1ME!KP1&7"01:1MS2_-*& M1&1]=[`X].`M7I(:(K8P@%O5]J7#^L:3;0WM_`YEE<.>V*0%KXY'1Y2\,D8Y MS'%F=F<`DMS"M*J5DLAO'66\D4^E30YM[ MJE%K6PJ6U:F7)Q:V(8-;T5I!&!"@"'"K2"%&,H**81,(L/W=A*LJS(]!>,+/%K?C=>6\PRV7I>3504 M[)[Q=:9Y-TM)JZL7BJB=HS"D3T_15C<[#:1NRA\&@,(V-C);]'H]K1*B>R^4 M3M,TNYGXHFELY=2LWQQFRN+F.U;T0`.#'`G,`74<""W`;,<:^ZG*HEVO9!82ELF;5;]4W[2%J&E-YDPHV3Q MZYOS$+#GMQ:1;NU;&YD3`(VNB#F.&58E]" M)&O)RM-RR*.C+>"DXFTU9$2TR\PD>D'J8ZSELM8\ MLF\.Z?+##KUMK$ES+%)(R+YJ&2"**%T;GN:Q[[5S)@8R M[UX)B=&&@@5RD$DUILS88^['D4MVK`7=/RBX?U$J%N[TC4(7<*:U MPK?7D/\`B"XAL=Q(Z2K'0VLDCI+`3?U8S9XIFU?N2ZW;&'9PP*61AW\<[6G= M`NJ*3T?BEA-5+*>WX3QW(:P5M)U4@Y#V^ID M,_E+$^1RN6MI6V&_H:P9I1^P)52QH+]XIDBPI+H29(:<.^T>XL[;0M$X5N)K M9^N#B+YPNWS`RSM@R&-[7S.<(6&=T>]\-$L@D$B4HP;:F)KCFC]%$J!!*W33=2[M&L=F:X[R62YRU+16V?%(VUFM@U MQA#7%F!Q#@ MW,?&7S3(/FXZOA;#(T3!L$PDDA+W-95A%0ZH<*5%1K7R7+`,S0;?+7*=M1AB M*`_%7IV1Q^@:RLJG[9M>0]231L9H/<9?T5@12SY+6SS4,/B154Q.L'>P&9:Q M(ETP6#<2WKTC'?2SP8M&C)$$W6]:/IG$6H,U6\\T=2F!UZ74,[##)`R9MQ)) M\Q).V%P>1&*&.HCR_M:`X*Y?"S(VR8/V093$$B@%`*^WEV\BM>HYV7V+VW*N MXVK_`(CW(BF-#7"K0W/&*9MAMC;-=C*[L*M8JWRK M4E\WH(59@Q&*BUB?0LVO7HH]-\S;OB?@NZM(+:ZLYM0MC'=VX-M)!K9H9Y'P;G:]H%&%CJ*A$2^R;#<-<2UP8:M.(!IFV;"!6JNQXRQ#D75-])Z M.MT4RMBNJGI:8%TWRK?CBUKA8L-EL[K[;/6]PG@&$7]]JO2Q8Q,J==`T1+&< M:5S\"EVG$D&H<4WO#6K\/'7M&W%GJ5Y?1_,V#!00RQQ39IK8?\K.9`YL>VWD MSQ5,>Z<:\#9HY=U)5S&M-'>T$C`_YPIMY1CMJJ4<"HBH@G*[G#3Z.*V4P4)3 MEF-C]Q%12R!3:/5\S,MV0Z-3'D>V5/(GZ/-4>>XNRWOIQ3MR9(>>!E2J5"9# ML*`[PWE_,&];J'".@ZR^:UDXAO;5S-1,V1UID+W.`W MKFM=)^T:I+1N2>6,!PB:[F5!IS@"ZGNS?=R8+)36=N1:US+#(C:*7-RJK[+D ME4RM%,89)84KU)HR0V+CUS(1)FUM'(XD\-;TD6-;RA]=M;PYAJ MFC7>D"V==.AQP(KG>7:B965,N(=YP^N+3F-3\1.:4X77]6!U;R5',7]L:JL MM6GX]P5Z:2G:UXY5EC3!OD;:>R$+#G-N*,<&C2H].2`>K<&MLM+L=9T"] MN;2'6-9T.(6DXF88V.=/![=6=FO8(]!6A`^RB-T[.5T\EK(QN M[PX-,+BD'TQ$V--CV)?(UZH)"1M-)(-6':`/9HC@@TV/1]3F?;:!+=6L>]N' M%D;[F(11N>UK72R2YS#$'AC&U<\$AK:B@:3/AO6_#>M_P#IFKJLON$3")A$PB81,(F$3")A$PB8 M1,(F$3")A$PB81,(F$3")A$PB81,(F$3")A$PB81,(F$3")A$PB81,(F$3") MA$PB81,(F$3")A$PB81,(L];Z7P7%P,S3WW/$>SHVFGG%PKN*65RYE*YD1-1BAV0BDMI4S MQ:CS>WJ#5(SF8Q=)P*1@7"9S`K]@N&>5#[/=6YC%[%0!Q=<@320:?&'%U&G) M!_!CI#YX.J:Y3\,`7G[R&_9CRTQAYE'WF;VS[/JZ6UA.7 M"_>8TPLF8XJ&M,42 M40,T.B:@U[0!YHVNJV=W;MX>T6&$VKOVL3)'6D(?&Q@(=(S?WE7.S5#!(\N+ M@,8;J7Y)S'-.]D)S;#3,:'W&C?T*2G:#]P.CN.$4:N,%:/S78\QM;F#84TCY M6Z6`B0,$I8Y[&>.?[E&E+RG@]QF?FC,[]2Q8MGGSIQ]_NWQ=]P[N:.ET#8AC, M"5SB67(M5QT_;B\/S>_OE9QHY*Z$J"E9(YL,A.E(-9BS$H$M7E)ZS4V+9?(*:R54R'MKHW/ZEF+36>LXAALXF!P76&O$.]NN;8@O<^#>4_9G]FQC9'![GBYJ=V832L[Y MD.H"Z@CI6C?SV2"(. M4JE\-*C#XXS>L"W-*BC<4FS$S6>N9MNZ0G2(,AC34M3!T>8JTF46VEZCP]IW M%.K2V#X8X3!<1Z=.62-CCDSM$4^4E\D3W0"3=N.;;>W0N!4 M>NN=O7ENZ&-TG&8@G6OST@8T:]X<3&=,VAV0:J/)5W^BWG"T[3_C6\??/M98 MFAI,S@;4F6:Z%L1E+[E\A;#$^5S(V"1TIS!C7,ED;./[LW+F!]GYL`VOL:!B M:8X44$CY_<6)MN[M;D_/ M^RFB7V'M()1M*0T."5H4#.4ZV$NO<-\M':/;Q6;8G:NTZ>)"^2X8'G)KI#UIB@^;N,N8EQ+0X$ M4:V0.OPYM0K M332W$EF^:2\OKAA,<[>;'NK?3;:1[69Q;LAWMP61@.ERLB)()P5V1;MI M<@A&.K"K2M.XM'ZC(C%>D&(MIUSF\*_W$!2?VIHU-/5!Y2M%]#8_+OFI>_+R M--VUE!#;P6?->"[>/N#/>$.JQD;=V2[.`V+/G^:75`YM1S:[27?92C?><56> M@8WS)CV^%T>F+A;9A"]@L6Q>7JV6NM;.I+?.[()56*UQDJ1@T]+W!HKF8E'1 M0AD9R4)&VQ\3JR5(0-0R-8/B*ZX)N?WY<\3F.;68.56)MR-T'9MA+ZTVG&GV'"@Y#[EE*SDZOEKG+O_*,]\M_ M;O\`BA_;_=J?8>Z_O9[GV7K#]K[CR?T>OZ'E\_A^GF\?#/2L?_BENV[S_%V\ MH*T^6I7EI[JK#G]^5P^7I_I+R_:8^)KK?D_I/\7]E4._>K])/M,?$UUOQZ3_ M`!?V5._>K])/M,?$UUOQZ3_%_94[]ZOTD^TQ\376_'I/\7]E3OWJ_23[3'Q- M=;\>D_Q?V5._>K])/M,?$UUOQZ3_`!?V5._>K])/M,?$UUOQZ3_%_94[]ZOT MD^TQ\376_'I/\7]E3OWJ_23[3'Q-=;\>D_Q?V5._>K])/M,?$UUOQZ3_`!?V M5._>K])2Q&/_`"9O3>_X9_P[>E_)7G^2?QK^[OD_F'K`_D'[W^V_I_(_<>7W M?K_^X\WAY_\`++J[_P#%RL?SW^-*[IN3/\O_`%=.9ES?R*?EIS?8H-_?6.7Y M?;C2NW^%3/\`:8^)KK?EKZ3_`!?V51[]ZOTD^TQ\376_'I/\7]E3OWJ_23[3 M'Q-=;\>D_P`7]E3OWJ_23[3'Q-=;\>D_Q?V5._>K])/M,?$UUOQZ3_%_94[] MZOTD^TQ\376_'I/\7]E3OWJ_23[3'Q-=;\>D_P`7]E3OWJ_23[3'Q-=;\>D_ MQ?V5._>K])/M,?$UUOQZ3_%_94[]ZOTD^TQ\376_'I/\7]E3OWJ_23[3'Q-= M;\>D_P`7]E3OWJ_23[3'Q-=;\>D_Q?V5._>K])/M,?$UUOQZ3_%_94[]ZOTD M^TQ\376_'I/\7]E3OWJ_23[3'Q-=;\>D_P`7]E3OWJ_23[3'Q-=;\>D_Q?V5 M._>K])/M,?$UUOQZ3_%_94[]ZOTD^TQ\376_'I/\7]E3OWJ_23[3'Q-=;\>D M_P`7]E3OWJ_23[3'Q-=;\>D_Q?V5._>K])/M,?$UUOQZ3_%_94[]ZOTD^TQ\ M376_'I/\7]E3OWJ_23[3'Q-=;\>D_P`7]E3OWJ_23[3'Q-=;\>D_Q?V5._>K M])/M,?$UUOQZ3_%_94[]ZOTD^TQ\376_'I/\7]E3OWJ_23[3'Q-=;\>D_P`7 M]E3OWJ_23[3'Q-=;\>D_Q?V5._>K])/M,?$UUOQZ3_%_94[]ZOTD^TQ\376_ M'I/\7]E3OWJ_23[3'Q-=;\>D_P`7]E3OWJ_23[3'Q-=;\>D_Q?V5._>K])/M M,?$UUOQZ3_%_94[]ZOTD^TQ\376_'I/\7]E3OWJ_23[3'Q-=;\>D_P`7]E3O MWJ_23[3'Q-=;\>D_Q?V5._>K])/M,?$UUOQZ3_%_94[]ZOTD^TQ\376_'I/\ M7]E3OWJ_23[3'Q-=;\>D_P`7]E3OWJ_23[3'Q-=;\>D_Q?V5._>K])/M,?$U MUOQZ3_%_94[]ZOTD^TQ\376_'I/\7]E3OWJ_23[3'Q-=;\>D_P`7]E3OWJ_2 M3[3'Q-=;\>D_Q?V5._>K])/M,?$UUOQZ3_%_94[]ZOTD^TQ\376_'I/\7]E3 MOWJ_23[3'Q-=;\>D_P`7]E3OWJ_23[3'Q-=;\>D_Q?V5._>K])/M,?$UUOQZ M3_%_94[]ZOTD^TQ\376_'I/\7]E3OWJ_23[3'Q-=;\>D_P`7]E3OWJ_23[3' MQ-=;\>D_Q?V5._>K])/M,?$UUOQZ3_%_94[]ZOTD^TQ\376_'I/\7]E3OWJ_ M23[3'Q-=;\>D_P`7]E3OWJ_23[3'Q-=;\>D_Q?V5._>K])/M,?$UUOQZ3_%_ M94[]ZOTD^TQ\376_'I/\7]E3OWJ_23[3'Q-=;\>D_P`7]E3OWJ_23[3'Q-=; M\>D_Q?V5._>K])/M,?$UUOQZ3_%_94[]ZOTD^TQ\376_'I/\7]E3OWJ_23[3 M'Q-=;\>D_P`7]E3OWJ_23[3'Q-=;\>D_Q?V5._>K])/M,?$UUOQZ3_%_94[] MZOTD^TQ\376_'I/\7]E3OWJ_27N1_P#E$^@Z^\_XG_7_`&X'[5Y/[X^7]Q_= M6OS^MX?IZ?[5[KP\?T\_E_S\,IO_`/%/,S)_B[+FYW]UV97?^[*HC]^   GRAPHIC 11 g32358image002.jpg GRAPHIC  begin 644 g32358image002.jpg M_]C_X``02D9)1@`!`@``9`!D``#_[``11'5C:WD``0`$````9```_^X`#D%D M;V)E`&3``````?_;`(0``0$!`0$!`0$!`0$!`0$!`0$!`0$!`0$!`0$!`0$! M`0$!`0$!`0$!`0$!`0("`@("`@("`@("`P,#`P,#`P,#`P$!`0$!`0$"`0$" M`@(!`@(#`P,#`P,#`P,#`P,#`P,#`P,#`P,#`P,#`P,#`P,#`P,#`P,#`P,# M`P,#`P,#`P,#_\``$0@`+@"S`P$1``(1`0,1`?_$`'T```$$`@,!`0`````` M``````@&!PD*``$"`P0%"P$!`````````````````````!````8"`@`%`@4" M`P4)`````@,$!08'`0@1"0`A$A,4,15!(A87"C(8<209\%%AT6*1P4)2(S,E M-AH1`0````````````````````#_V@`,`P$``A$#$0`_`#'ZI-K9=%OY&GG MK%,9+(5\$O.?V0XUBA>') M24I`:R0QT,)(/R(!H%8\^G/&>`L)[L=M&BG7U(XU"-E;@.9+!E;8;(FVO(3# MI=9DY2Q$@PTI3-'V.05G>UT=B:8PD80@5UVW9H/=O\`D,P"W->K3+L:K67JLL!M5I#2'UD= M*_F2:]6PR41Z4P>2(FU^A\P)2!(RJ3GI"3C"/;'C)A8@"\!(]'>_WJOG$\IZ MM*YV)5V9,;OEJ.$0]J@%969)!-TB%;<2P/[8NRH+"(:!4I]D8PA,](L\>`[&S:ZA'S9B M5Z>-$[(@#^XDM3*\.C]]K_32RD^9E6,L6 M!^UZ/S>`K+W_`*B5GVF=Y6WVIV^R[ MA:$[.8FS(94P2LTLD0C@J"BQ\`-"(LH(`!8=Z_==KKU6U9@=!WWL&OV=E]>J M9(S,UJ/+,-G?EE>@?5HJ]CT@4&K%BI_>8Q%B_J+WEWHT*V*V=L:UM'J)U0AF[M061(P\A9VUN6/YH'44C1^@H"41P?>QZ@XXSP$, MU@S-+,OY(&B[FR/"IUAKUU;79,8QC)JH+:85)I^C4IWM(WJ<%_$5N;-[`1CR M6`[)>`A%QQQX!']%-W02H=/^RN\KYL1KAD$@G:!NX_SNQIR\Y(;FMD:GR+)P M*W)S6C&<<622$I.G+#ZS3!X`24`0LA!D)*-,^X'0/?>>R"K=;KE4O]D,+/F4 M$P>80>:UK))1#,'^QB;0ENGK&P&RZ*Y%G`LJD7N^@L6!C"$.>?`,997\A/J< MJ\3HG=MF#)&Z1V8R^$S!@@596A-9!!7"!N^6.5.TW:&.(J5<8BK:Y!$6!T5! M`C58`,2<9H0"S@"L_P!4SKY^T??_`.ZJKOL?]K_]YWW;[BN^W_VT?KC]M/W1 M^5]O]G[?^X?_`,)\'G[K]T_R_P`;W?R^`J%3$DVE]S]L>P1E3^RX:=_R(XTP M6$Z`Q@HS-"[/5A%*6LA*J5%_G*;DRQQ;1YP/U`%DSGRSCGP'EO,0M@]J5&_: MM0->W7%_(NU+U/J!Q,SZR14MIVQ22%$K6L8@XR0V/X-"VMY M!HQZ M,J_NZ#-[T26Y)4-J6H*(1!UFJGH:,DG+@ZX:T9)&3S.3< MDE`#G.C`S1J7:7[U6+8%Y4/8[W/K M&BVFLVFT7GFPMD_J&1MUHM]E)0G?J(;9+5*$:)Y+%D91",OV\XP7C&`,O39U MM*GMO_X_VT]QLDHBTKW&Z^9SU]WGB7-KBQR8ZQ*<09G54G3!K=2$Z\E^??L? MI`-4`)QF`?CG/D$DW4`U9O#=3N(W[5@&N0V9MNGU-JAV4OVP,Y( M4K0SK9!!.7Y,#9&!-1"(8VYP@=.,3@;ZL*,8$C-6&+@"$$8``"R#H%V=1_L' MOW;Z)4O&&5XUOUS(H5'![[:7XQP#9\KMJNB[`DL>PTX3?#0&P0A02E4C`H,& M!0/T&`#D/F$(,^>NQME_D,=C)W7+"-99K,S]5]52;'(V;D,P8&1!&_LZ'+.J MBXX<,"M6XB=<#PH`=^3!(<$O)HR`?UF#..&!=]J(>/ MXO,S'CS$+1#4G`L\8\\>[1N,Y\L?CC/@$C#`K_`$RM)BB&B77$]8IK,*6MG^3=?G[\06OHXIFTNL:M:O=VR?+8"S1))D* MB2J)&Y$)LX1@S@1XD^.//P$JVR6]-7[@[\=0]D:FZ;[L5S:E$;=1J$36:V#J M-.:BC*36*UFLZ#SB-.4E`C,28CS:8K3'%)%&`)DQ?O##D/(LY`U_XY=45FMU MV["GE;!8FO>;![(=RHC-W=6QMRI?+8NUR@I"VQY]5GIS#7%D1I')2$M*9G)` M<*#.`\C%R%+_`/14<_MG^!]N#\7YW]N?L^\=Z/V9_P!6[]1_M[Q[G_U_[Q_F M/:_I]?X>`MI0;46:;#4]_)YI1\A4J8E5W;6VF^5(O>XT[-A,H?([4[!)8&_1 M!2O1IRGE*":QI+@E8C$:7@[&.!S;5Z^7!1]52*TFM-::Y@RT673\E;(P0<O\`NM"M4Y;26V>J.TL3W2HS7&0O M05UDRZMZSDSJ0A;%J9.A(4LY(])\-\FEJQV;"T MS':GVVUW!(?(FY#=?2,S4I6LQ5,KLCA+I/7 M1R=D+3%$TJ,3%L@W`:@9))Y`#QG$D#R,0/3SX`!)MV2H9]T.2KK4AVH>Y#ON MG6^G"'7"W:G:M>9LC8:L'7+:U1-^L!\FBIM+CZR.J$3/A6D2(!*G-::I`2`C M'YC<`4EEO$RZX]B^H_LXFU0VM*-<5/6;"M)-JE%=P=[E$RIQY_3L8FL(E$HA M*))E^"@P\A^&>`103"/AG`]/O#`68"]UMOQ_W3[[\[20S7/8RM->%'5[.:\K M2R[IJF1U^FLSX]K-[F*0LR!U1X4,K>XK%!Y#>F<1$N"TA-E2$@))@.0)CH#H M>1NW1K'M?K:BDIKUQL-9N'!7]BF4;=(Z_-K18EKVDUDN![(^I4"_!"EL>0J" M!Y+P`TL81!SD.<9\`%VBO:Q(NLG4N+=:&Q>H>V<[WLU=62.DZAK*L*BE,CB. MRD92R1P.JF;PNT$R57&&J'+V1U2DK59XA?")(R,)9G`BP`&CEY:S[J&0)0[H%[M$U\>>F]BL*#&2-K]]$IPE;9@I2*5!&!$F@3Y% MZWWO#D/CU'."`4Q M+2&"SYBRG\!7GHS;EMZE'OM;T,VRU.V-N"0;"[1WY=NL2*M:=D,_A>U<+V+; M0MC5"LR-N(.0-:LTPDE.N-4>X$@I0:#/)I`2C0*[^+_7MOZ>5[M'H'L9K:^4 M)<<)L9BV*1/OVAW7Q&P(!<\0C@VUN2V#E-F//T@K`QO+:5B8E2,Y/D7H&'UE M&Y\`6&K$)FC=_(?[.YVX1"4H(/(M0]4FJ/3);'G=)%'YS:BT07-N9I$H1EM# MHN;Q!S@\H@XPPKC/JQCCP!_]KE!3C:7KCW0U^K%&6YV+9M!39DA3289[/WB4 M)D6'AD9@&Y"/`#7AC20:`U1IWN;(]MX[KK3 ME/WW!O[?YZT,%'8IYP@".22R12A6TY2/"9U6Q,`&QN1!-7J,K>H1#2A,"N^)DLK(Q^G&0G^U>[KX5NW?U54QJWJ?M;* MF%V2/+EL7:MFUHYTU"=9R4+/E0W,S\JF9!.)M*W*0Y`A$A:QC]L&?>+&;CU8 M"#=?QYX5-(+K3N,W3B'2R&.#OV2;BR-I0RV./$;6.D>>)8VGM3ZW)7I&B4+F M=R*#G)"DL(BC<8SD(L^`IV_VY;"?V^_!_8>Y_F_O?\[X?[63KY7P?]3O]1?, M^/\`8?>^-^G_`//>KCCX?_K?^U^;P'ZB'MA_WY^GIQSQGC'X\P#G.>1^><9 MSC`LAQG..?,6`\>K.>?/.><\^?U\!RR4'/'GD.,"R+&`\8QSGGU>7'_BSGG_ M`'^`U@H(1"%ZA>H7'JSG.//`<<9$+.//.?//'@-^C&0\9R+/TS@7/GY9YQGRXQSC_#P''V@>6T#CRYY]/&!8XP+T\?TX'C'JQC.<\^6?` M14]PFI%[;R:I,FJ])'1AL8;1O6EP["N\ED:B/Y2:\1:8HY;82-A+2M3F)_?G M?+&D2%(1^P6<48/`C`XQQD)26AM;V=I;F=J3%HFIJ0)6MM1DAP`E(WH"`(T: M8D&.,`*(3$A"''X8QX#V>P#&,8QD6./5Z.D./^GRQQX#ED.,_7'^W. M,X_[,XY\!K(,9SG.,YQG/UXX\\^7&<^6>18#G( M>1<_7W,Y%_5]?`=F2PYXYQSD/'&<_7\O/&?\<9SX#/;#_U?U^OGG/// M/_+R_P`/`1!US?VWUKVE9>Q;%8=*QO2ZGMDK7I.8U3,(DJ;Y$*FJ/:7-BL?8 MI)<:9R5K"Y@AL=I4F)&`3'"64 MY'(+6"NC7=/:MIM^PJ:5'TE.:\AV7/!CU`K&'"G1.E7&FIAI%";(5I27G&<@ MP2+L:L65WQM%74G;;QUWB-:7UHQ$:]>Y#K[&GP_!%YM%8G2.G)(8*:+202RQ M)1,C2"UX,&89FX65`ECR2?=VT=RV=6<(7S;L&D1=,3+7&(L M3$15>K,N:HBW)XA.8Z[.$P..@[>K28/`I+7N,@DRY6C+]!:8G!@'&E[2*-4Q MA.=BJ=GD]KFVNCI\&KRFFCB=D?U*XP`RV$K@97YCW]NQ$3:L`-^RYX&1:QMGY%5>5 M*JN7!\8B"G]CAZ-.280H6%>VN+'D>>><>`>74'L"7/4QN;7'8F6QVQK@I62W MV)MM^H88>R5O;U84.RU`]RN4DM0)!)$,;G4:7W,E8W-H3KU)`G-O4Y+$#TB+ M""%J/MPA;_>UGMCBD]@J6OZVM&7*81<,,<8%.6235VE?4AL:D\8+%V9@\YF>U\\DUCT[-*0UQKQ3+YH\W%1[E* MD=O&1"&BO3C/3HB2PW:5&F M2/(WBPKF6U!)T--U&\K:K%=(8+;4K5E$N,$G""M?2O7)E:$*=M-.*2*SR59Q M9`@3E<=J&N%A.$?8548O:MI/+I91\;AL5M:J7&&R.7QS8YQ?6FG;684!K@J] M^L94XQI:0-<8(I6W'DY*6)2#!!"(/G6?VN:ZUN_NL31P/8NTY8P/FQ32]QJI M*C63)R;4>JKO%&6[9(K]QV;4A48=1NR15";EU,RZ6Z7I6>H=HZFOF.7SUUHY(Z[63Z]9>KL&L2VZ\TR9PI=NL ME.XHV6IOUHF4J&PW)B!:J$J,`I0HL$_G`V]D'%V#MINC'2H^K-8%78'TZ299 M8`5Z`$?;GU,MH5K)KIP:0JOU<9+'!"4%R)5)6X]APD-``]P)5X&GP`(;-,LPH(P8$KUX!X-<;0K,_;NB+/H+63;=NV0C=Q6#'[5UNVCL^6NFRMB1*3 M:G*@M,^8YCL=(FVM(\P5DC*%A&WG2E,J=V4T\\@O*D/PL`XSU^VBCI(T8/V$ M#"6ZKCMX:676R@G*I0LA"*.G[R3%5(F22+1-P$ZQ`A]P:8TXTLM&:87ZL&8+ MR$S(/??DFJ&#W7K5)M"ZV@-V5<OZ_>P>*1VN-;I'6D.B[''%\LHE>\6:0^O+ MM&ZW4,#-+F["!]2I5ZF486.&#R6U9[:G!81]T>^2TO7JUJSQ"##ZMF2_I=,L M;8Y(_,'Z%J!&UUQK$J]AR@ZE0GM>32"1&M:!,R_IV/NA'RG0H2X:$I,:9X#Y M==`4M3_K3)F$;5*)S#7#3655W6R8]6W+;?F3;OOO0`RL&60O3<WPZ*OS_&W) MT-:G!]6-S,%S;2BE2M*`XDX03B=BSW;%J==+Z&S(/(=7D$]M>GV&[1_J>,63 M,Z-U_!?,9S)I^9F!)IM'95*%,4;4WNM+2!]2IC'(0##%"8@\[P$9]1IK#HW> MY,X5DNGVZJJ*;4;OAB+`]CA-67!9[K8&O.NANT9C:LF;13E/L:^AKEC+&0H" M:>U%/+9)5!S7EP4HEI)8.PNDUAJZ([?:P>*Q.::CMB:;(RB^=DDDW;5\0U4E M$IU$AAEJUK*88!$"Z[9D]5R9O1DIED1B[DP/C*X%*$R\(R!I<@Q5USBT91L+ MJM9M@4HNK*W:XA?76UUIK?B:PF23/8-.EV*>%DQDL%G43>W>I(?'E2PPA'&" MIC((ZY*Q%G&."=L*R$605NLCB_R'9^YY#)HZ.OY(\1ON]7.L"<GA$_/$3<%= MVZQ9^S/+O'2G2).#HVDEA^6-N7K$N#3/20<I!@0\`/-;OUGL.N5UHX;!;5G4 M`;->NF:=W<Z4<^+F:526H&&I(2AL^DX]EG7M-JMDMFL'$H7!<4*(MD*:`GE+ MW9O&,80`K.NQPA4ANMQD%>QY_@$-=@]SJR)P.;NLG?)G%V50ITB`W-4E=))A MU5K%Z-.1[F<F.*TH!1P0)U"DL.1A#RT?8%?5UJELV&\*"-V%U\-T&ZL'BTLH MK"C%?IDAJ>LP,;7%F!3)':-V"?<*@2@A[A_V9+@"AR3ITN'!`XC(!X"POUJX MN_\`M0A)U[YL@+TL?)TNKI'=PPFWPTT6KEKH?2[->*@M.G`JM9K@@TI+L8+W 7%`Q@#E088H]T8@/KP&>`SP&>`SP'_]D_ ` end </TEXT> </DOCUMENT> </SEC-DOCUMENT> -----END PRIVACY-ENHANCED MESSAGE-----