MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Overview.Westfield Financial strives to remain a leader in meeting the financial service needs of the local community and to provide quality service to the individuals and businesses in the market areas that it has served since 1853. Historically, Westfield Bank has been a community-oriented provider of traditional banking products and services to business organizations and individuals, including products such as residential and commercial real estate loans, consumer loans and a variety of deposit products. Westfield Bank meets the needs of its local community through a community-based and service-oriented approach to banking.

On January 3, 2007, Westfield Financial completed its stock offering in connection with the second step conversion of Westfield Mutual Holding Company. As part of the conversion, New Westfield Financial, Inc. succeeded Westfield Financial as the stock holding company of Westfield Bank, and Westfield Mutual Holding Company was dissolved. In the stock offering, a total of 18,400,000 shares representing Westfield Mutual Holding Company's ownership interest in Westfield Financial were sold by New Westfield Financial in a subscription offering, community offering and syndicated offering. In addition, each outstanding share of Westfield Financial as of January 3, 2007 was exchanged for 3.28138 new shares of New Westfield Financial common stock. New Westfield Financial, Inc. changed its name to Westfield Financial, Inc. effective January 3, 2007. Proceeds, net of stock issuance costs, were approximately $171.7 million.

Westfield Financial has adopted a growth-oriented strategy that has focused on increased commercial lending. Westfield Financial's strategy also calls for increasing deposit relationships and broadening its product lines and services. Westfield Financial believes that this business strategy is best for its long term success and viability, and complements its existing commitment to high quality customer service. In connection with its overall growth strategy, Westfield Bank seeks to:

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continue to grow its commercial and industrial and commercial real estate loan portfolio by targeting businesses in its primary market area and in northern Connecticut as a means to increase the yield on and diversify its loan portfolio and build transactional deposit account relationships;

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focus on expanding its retail banking franchise and increase the number of households served within its market area; and

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depending on market conditions, refer substantially all of the fixed-rate residential real estate loans to a third party mortgage company which underwrites, originates and services these loans in order to diversify its loan portfolio, increase fee income and reduce interest rate risk.

You should read our financial results for the year ended December 31, 2008 in the context of this strategy.

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Net income was $6.7 million, or $0.23 per diluted share, for the year ended December 31, 2008 compared to $8.7 million, or $0.29 per diluted share for the same period in 2007. The results for the year ended December 31, 2008 showed increases in net interest income and a lower provision for income taxes; however this was offset by an increase in the provision for loan losses and noninterest expenses and a decrease in noninterest income.

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Westfield Bank provided $3.5 million for loan losses for the year ended December 31, 2008, compared to $400,000 for the same period in 2007. This was the result of an increase in nonperforming loans, an increase in commercial and industrial loans and commercial real estate loans, and an increase in charged-off loans. The allowance was $8.8 million, or 1.83% of total loans, at December 31, 2008 and $5.7 million, or 1.36% of total loans, at December 31, 2007.

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Net interest income increased $1.6 million to $31.8 million for the year ended December 31, 2008, compared to $30.2 million for the same period in 2007. The net interest margin, on a tax equivalent basis, was 3.23% for the year ended December 31, 2008, compared to 3.25% for the same period in 2007. The increase in net interest income was primarily due to increases in average earning assets of $56.1 million for the year ended December 31, 2008. Also contributing to the increase in net interest income was a decrease in the cost of interest-bearing liabilities. The cost of interest-bearing liabilities decreased 48 basis points to 3.02% for the year ended December 31, 2008 compared to the same period in 2007.

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The year ended December 31, 2008 also includes a net loss of $205,000 on the sale and write-down of securities. Westfield Financial recorded write-downs of $1.3 million on securities deemed to be other than temporary impaired. This was primarily due to write-downs of $961,000 on preferred stock issued by Freddie Mac. Freddie Mac was placed into conservatorship by the United States Treasury in September 2008. Westfield Financial's book value remaining on preferred stock issued by Freddie Mac was $39,000 at December 31, 2008. The write-downs were partially offset by net gains of $1.1 million for the year ended December 31, 2008 on the sale of other investment securities.

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Net loans increased by $57.2 million, to $472.1 million at December 31, 2008 from $414.9 million at December 31, 2007. The increase in net loans was primarily the result of an increase in commercial and industrial loans and commercial real estate loans. Commercial and industrial loans increased $37.3 million to $153.9 million at December 31, 2008 from $116.5 million at December 31, 2007. Commercial real estate loans increased $33.9 million to $223.9 million at December 31, 2008 from $190.0 million at December 31, 2007.

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Nonperforming loans increased $7.6 million to $8.8 million at December 31, 2008 compared to $1.2 million at December 31, 2007. This represented 1.83% of total loans at December 31, 2008 and 0.29% of total loans at December 31, 2007. The increase was primarily the result of a manufacturing commercial loan relationship of $5.5 million and an agricultural commercial loan relationship of $1.7 million.

General.Westfield Financial's consolidated results of operations are comprised of earnings on investments and the net income recorded by its principal operating subsidiary, Westfield Bank. Westfield Bank's consolidated results of operations depend primarily on net interest and dividend income. Net interest and dividend income is the difference between the interest income earned on interest-earning assets and the interest paid on interest-bearing liabilities. Interest-earning assets consist primarily of commercial real estate loans, commercial and industrial loans, residential real estate loans, consumer loans, mortgage-backed securities and investment securities. Interest-bearing liabilities consist primarily of certificates of deposit and money market account, NOW account and savings account deposits and borrowings from the Federal Home Loan Bank of Boston. The consolidated results of operations also depend on provision for loan losses, noninterest income, and noninterest expense. Noninterest expense includes salaries and employee benefits, occupancy expenses and other general and administrative expenses. Noninterest income includes service fees and charges, income on bank-owned life insurance, and gains (losses) on securities.

Critical Accounting Policies. Westfield Financial's accounting policies are disclosed in Note 1 to the Consolidated Financial Statements. Given Westfield Financial's current business strategy and asset/liability structure, the more critical policies are accounting for nonperforming loans, the allowance for loan losses and provision for loan losses, the classification of securities as either held to maturity or available for sale, other than temporary impairment of securities, and the valuation of deferred taxes. In addition to the informational disclosure in the Notes to the Consolidated Financial Statements, Westfield Financial's policy on each of these accounting policies is described in detail in the applicable sections of "Management's Discussion and Analysis of Financial Condition and Results of Operations." Senior management has discussed the development and selection of these accounting estimates and the related disclosures with the Audit Committee of Westfield Financial's Board of Directors.

On a quarterly basis, Westfield Financial reviews investment securities with unrealized depreciation on a judgmental basis to assess whether the decline in fair value is temporary or other than temporary. 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 reflected 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 Westfield Financial to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value.

Securities, including mortgage-backed securities, which management has the positive intent and ability to hold until maturity are classified as held to maturity and are carried at amortized cost. Securities, including mortgage-backed securities, that have been identified as assets for which there is not a positive intent to hold to maturity are classified as available for sale and are carried at fair value with unrealized gains and losses, net of income taxes, reported as a separate component of equity. Accordingly, a misclassification would have a direct effect on stockholders' equity. Sales or reclassification as available for sale (except for certain permitted reasons) of held to maturity securities may result in the reclassification of all such securities to available for sale. Westfield Financial has never sold held to maturity securities or reclassified such securities to available for sale other than in specifically permitted circumstances. Westfield Financial does not acquire securities or mortgage-backed securities for purposes of engaging in trading activities.

Westfield Financial's general policy is to discontinue the accrual of interest when principal or interest payments are delinquent 90 days or more, or earlier if the loan is considered impaired. Any unpaid amounts previously accrued on these loans are reversed from income. Subsequent cash receipts are applied to the outstanding principal balance or to interest income if, in the judgment of management, collection of principal balance is not in question. Loans are returned to accrual status when they become current as to both principal and interest and when subsequent performance reduces the concern as to the collectability of principal and interest. Loan fees and certain direct loan origination costs are deferred, and the net fee or cost is recognized as an adjustment to interest income over the estimated average lives of the related loans.

The process of evaluating the loan portfolio, classifying loans and determining the allowance and provision is described in detail in "Business of Westfield Financial and Westfield Bank - Lending Activities - Allowance for Loan Losses." Westfield Financial's methodology for assessing the allocation of the allowance consists of two key components, which are a specific allowance for identified problems or impaired loans and a formula allowance for the remainder of the portfolio. Measurement of impairment can be based on present value of expected future cash flows discounted at the loan's effective interest rate, the loan's observable market price or the fair value of the collateral, if the loan is collateral dependent. This evaluation is inherently subjective as it requires material estimates that may be susceptible to significant change. The allocation of the allowance is also reviewed by management based upon its evaluation of then-existing economic and business conditions affecting Westfield Financial's key lending areas and other conditions, such as new loan products, credit quality trends (including trends in nonperforming loans expected to result from existing conditions), collateral values, loan volumes and concentrations, specific industry conditions within portfolio segments that existed as of the balance sheet date and the impact that such conditions were believed tohave had on the collectability of the loan portfolio. Although management believes it has established and maintained the allowance for loan losses at adequate levels, if management's assumptions and judgments prove to be incorrect due to continued deterioration in economic, real estate and other conditions, and the allowance for loan losses is not adequate to absorb inherent losses, the Company's earnings and capital could be significantly and adversely affected.

Westfield Financial must make certain estimates in determining income tax expense for financial statement purposes. These estimates occur in the calculation of the deferred tax assets and liabilities, which arise from the temporary differences between the tax basis and financial statement basis of the Company's assets and liabilities. The carrying value of our net deferred tax asset is based on the Company's historic taxable income for the two prior years as well as our belief that it is more likely than not that the Company will generate sufficient future taxable income to realize these deferred tax assets. Judgments regarding future taxable income may change due to changes in market conditions, changes in tax laws or other factors which could result in a change in the assessment of the realization of the net deferred tax asset.

Average Balance Sheet and Analysis of Net Interest and Dividend Income

The following table sets forth information relating to Westfield Financial's condition and net interest and dividend income for the years ended December 31, 2008, 2007 and 2006 and reflect the average yield on assets and average cost of liabilities for the years indicated. The yields and costs were derived by dividing income or expense by the average balance of interest-earning assets or interest-bearing liabilities, respectively, for the years shown. Average balances were derived from actual daily balances over the years indicated. Interest income includes fees earned from making changes in loan rates or terms, and fees earned when commercial real estate loans were prepaid or refinanced.

The interest earned on tax exempt assets is adjusted to a tax equivalent basis to recognize the income tax savings which facilitates comparison between taxable and tax exempt assets.

                                                                           For the Years Ended December 31,
                                                 2008                                     2007                                    2006
                                  Average                   Average        Average                   Average       Average                  Average
                                  Balance     Interest     Yield/Cost      Balance     Interest     Yield/Cost     Balance    Interest     Yield/Cost
                                                                                (Dollars in thousands)
ASSETS:
Interest-earning assets:
Short-term investments(1)       $    33,674   $    594         1.76 %    $    53,624   $  2,800         5.22 %    $  18,658   $    872         4.67 %
Securities(5)                       521,767     26,752         5.13          491,968     24,332         4.95        372,519     16,764         4.50
Loans(2)(5)                         444,492     27,280         6.14          398,281     26,993         6.78        386,039     25,586         6.63
    Total interest-earning
assets                              999,933     54,626         5.46          943,873     54,125         5.73        777,216     43,222         5.56
    Total noninterest-earning
assets                               68,831                                   65,194                                 50,535

    Total assets                $ 1,068,764                              $ 1,009,067                              $ 827,751

LIABILITIES AND EQUITY:
Interest-bearing liabilities:
NOW accounts                    $    85,558      1,205         1.41      $    80,613      1,340         1.66       $ 73,256        908         1.24
Savings accounts                     60,515        748         1.24           41,266        329         0.08         45,241        226         0.50
Money market deposit accounts        67,017        763         1.14           85,045      1,301         1.53        109,710      1,684         1.53
Time certificates of deposit        330,892     12,417         3.75          369,516     16,574         4.49        368,901     14,450         3.92
    Total interest-bearing
deposits                            543,982     15,133                       576,440     19,544                     597,108     17,268
Short-term borrowings and
long-tern debt                      194,750      7,171         3.68           92,750      3,864         4.17         65,062      2,283         3.51
Interest-bearing liabilities        738,732     22,304         3.02          669,190     23,408         3.50        662,170     19,551         2.95
Non-interest-bearing deposits        45,009                                   39,387                                 41,134
Other noninterest-bearing
liabilities                           9,828                                   10,495                                  7,927
    Total noninterest-bearing
liabilities                          54,837                                   49,882                                 49,061

    Total liabilities               793,569                                  719,072                                711,231
    Total equity                    275,195                                  289,995                                116,520
    Total liabilities and
equity                          $ 1,068,764                              $ 1,009,067                              $ 827,751
Less: Tax-equivalent
adjustment(5)                                     (570)                                    (541)                                  (787)
Net interest and dividend
income                                        $ 31,752                                 $ 30,176                               $ 22,884
Net interest rate spread(3)                                    2.44                                     2.23                                   2.61
Net interest margin(4)                                         3.23 %                                   3.25 %                                 3.05 %
Ratio of average
interest-earning
 assets to average
interest-bearing liabilities                                  135.4 x                                  141.0 x                                117.4 x

(1) Short-term investments include federal funds sold.

(2) Loans, including non-accrual loans, are net of deferred loan origination costs, and unadvanced funds.

(3) 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.

(4) Net interest margin represents tax equivalent net interest and dividend income as a percentage of average interest earning assets.

(5) Investment securities, loan 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 and dividend income to agree to the amount reported in the statements of income.

Rate/Volume Analysis. The following table shows how changes in interest rates and changes in the volume of interest-earning assets and interest-bearing liabilities have affected Westfield Financial's interest and dividend income and interest expense during the periods indicated. Information is provided in each category with respect to: (1) interest income changes attributable to changes in volume (changes in volume multiplied by prior rate); (2) interest income changes attributable to changes in rate (changes in rate multiplied by prior volume); and (3) the net change.

The changes attributable to the combined impact of volume and rate have been allocated proportionately to the changes due to volume and the changes due to rate.

                           Year Ended December 31, 2008                 Year Ended December 31, 2007
                        Compared to Year Ended December 31,          Compared to Year Ended December 31,
                                       2007                                         2006
                      Increase/(Decrease) Due to                  Increase/(Decrease) Due to
                        Volume           Rate           Net         Volume           Rate            Net
                                                         (In thousands)
Interest-Earning
Assets
Short-term
investments             $ (1,042)       $ (1,164)    $ (2,206)       $ 1,634         $   294        $ 1,928
Investment
securities(1)              1,474             946        2,420          5,375           2,193          7,568
Loans(1)                   3,132          (2,845)         287            811             596          1,407
Total
interest-earning
assets                     3,564          (3,063)         501          7,820           3,083         10,903

Interest-bearing
liabilities:
NOW accounts                  82            (217)        (135)            91             341            432
Savings accounts             153             266          419            (20)            123            103
Money market deposit
accounts                    (276)           (262)        (538)          (379)             (4)          (383)
Time certificates of
deposit                   (1,732)         (2,425)      (4,157)            24           2,100          2,124
Short-term
borrowings and long-
  term debt                4,249            (942)       3,307            972             609          1,581
Total
interest-bearing
  liabilities              2,476          (3,580)      (1,104)           688           3,169          3,857

Change in net
interest and
  dividend income       $  1,088         $   517     $  1,605        $ 7,132         $   (86)       $ 7,046

(1) Securities and loan 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 amount reported in the statements of income.

Comparison of Financial Condition at December 31, 2008 and December 31, 2007

Total assets increased $69.3 million to $1.1 billion at December 31, 2008 from $1.0 billion at December 31, 2007. Securities and mortgage-backed securities decreased $17.0 million to $505.8 million at December 31, 2008 from $522.8 million at December 31, 2007. Investment securities decreased as funds received from securities that matured, sold, or paid down were used to originate loans. The securities portfolio is primarily comprised of mortgage-backed securities, which totaled $402.1 million at December 31, 2008, the majority of which were issued by government-sponsored enterprises such as Fannie Mae. Privately issued mortgage-backed securities comprised 9.3% of the mortgage-backed securities portfolio at December 31, 2008 and are rated investment grade by Standard & Poors.

Debt securities issued by government-sponsored enterprises decreased $41.0 million to $61.2 million at December 31, 2008 from $102.2 million at December 31, 2007. Securities issued by government-sponsored enterprises consist entirely of bonds issued by the Federal National Mortgage Association, the Federal Home Loan Mortgage Corporation and the Federal Home Loan Bank. Westfield Financial also invests in municipal bonds issued by cities and towns in Massachusetts and are rated as investment grade by Moody's, Standard & Poor's, or Fitch, and the majority of which are also independently insured. Municipal bonds were $36.4 million at December 31, 2008 and $33.0 million at December 31, 2007. In addition, Westfield Financial has investments in Federal Home Loan Bank stock and mutual funds that invest only in securities allowed by the Office of Thrift Supervision.

Net loans increased by $57.2 million to $472.1 million at December 31, 2008 from $414.9 million at December 31, 2007. This was primarily the result of an increase in commercial and industrial loans and commercial real estate loans. Commercial and industrial loans increased $37.4 million to $153.9 million at December 31, 2008 from $116.5 million at December 31, 2007. Commercial real estate loans increased $33.9 million to $223.9 million at December 31, 2008 from $190.0 million at December 31, 2007. The increases in commercial and industrial and commercial real estate loans were due to increased loan originations in the Bank's market area.

Residential real estate loans decreased $9.7 million to $98.4 million at December 31, 2008 from $108.1 million at December 31, 2007. Since September 2001, Westfield Bank has referred substantially all of the originations of its residential real estate loans to a third party mortgage company. Residential real estate borrowers submit applications to Westfield Bank, but the loan is approved by and closed on the books of the mortgage company. The third party mortgage company owns the servicing rights and services the loans. Westfield Bank retains no residual ownership interest in these loans.

Asset growth was funded primarily through a $68.3 million increase in long-term debt, which totaled $173.3 million at December 31, 2008. Long-term debt consists of FHLB advances and securities sold under repurchase agreements with an original maturity of one year or more. At December 31, 2008, Westfield Bank had $115.0 million in long-term debt with the FHLB and $58.3 million in securities sold under repurchase agreements with a broker-dealer approved by the Company's management and Board of Directors. This compares to $105.0 million in FHLB advances and no securities sold under repurchase agreements at December 31, 2007. Securities sold under repurchase agreements were executed with a weighted average interest rate of 2.62% and final maturities of $9.8 million in the year 2013 and $48.5 million in the year 2018. The securities sold under repurchase agreements are callable at the issuer's option beginning in the years 2009 to 2012. Current interest rates permit Westfield Bank to earn a spread by borrowing funds and reinvesting in loans and securities.

Short-term borrowings increased $14.6 million to $49.8 million at December 31, 2008 from $35.2 million at December 31, 2007. Short-term borrowings are made up of FHLB advances with an original maturity of less than one year as well as customer repurchase agreements, which have an original maturity of one day. Short-term borrowings issued by the FHLB were $28.5 million and $18.4 million at December 31, 2008 and 2007, respectively. Customer repurchase agreements increased $4.5 million to $21.3 million at December 31, 2008 from $16.8 million at December 31, 2007. A customer repurchase agreement is an agreement by Westfield Bank to sell to and repurchase from the customer an interest in specific securities issued by or guaranteed by the United States government. This transaction settles immediately on a same day basis in immediately available funds. Interest paid is commensurate with other products of equal interest and credit risk. At December 31, 2008, all of Westfield Bank's customer repurchase agreements were held by commercial customers.

Total deposits decreased $14.7 million to $588.0 million at December 31, 2008 from $602.7 million at December 31, 2007. The decrease in deposits was due to a decrease in time deposit and money market accounts, partially offset by an increase in regular savings and checking accounts. Time deposits decreased $25.6 million to $327.6 million at December 31, 2008. Management placed less emphasis on gathering time deposits in favor of using other types of funding, such as securities sold under repurchase agreements. Management believes that doing so helped control funding costs.

Money market accounts decreased $16.9 million to $57.7 million at December 31, 2008. These decreases were partially offset by increases of $21.0 million in . . .