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.

Westfield Financial has adopted a growth-oriented strategy that has focused on increased emphasis on 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:

·

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;

·

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

·

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

Please review our financial results for the quarter and six months ended June 30, 2009 in the context of this strategy.

·

Net income was $1.1 million, or $0.04 per diluted share, for the quarter ended June 30, 2009 compared to $2.1 million, or $0.07 per diluted share for the same period in 2008. For the six months ended June 30, 2009, net income was $2.3 million, or $0.08 per diluted share compared to $4.0 million, or $0.13 per diluted share for the same period in 2008.

·

FDIC insurance expense increased $667,000 to $691,000 for the three months ended June 30, 2009 from $24,000 for the same period in 2008. The FDIC insurance expense increased $806,000 to $848,000 for the six months ended June 30, 2009 from $42,000 for the same period in 2008. Both the 2009 periods include the accrual for a special assessment that was imposed upon all banks at June 30, 2009, which for Westfield Bank, amounted to $453,000.

·

The provision for loans losses was $590,000 for the three months ended June 30, 2009 compared to $240,000 for the same period in 2008. For the six months ended June 30, 2009, the provision for loan losses was $1.7 million compared to $415,000 for the same period in 2008. The factors that influenced the increase in the provision for loan losses primarily include an increase in charge-offs, the continued weakening of the local and national economy, and an increase in the commercial loan portfolio.

CRITICAL ACCOUNTING POLICIES

Westfield Financial's critical accounting policies, given its current business strategy and asset/liability structure, are revenue recognition on loans, the accounting for 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.

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.

Westfield Financial's methodology for assessing the appropriateness of the allowance consists of two key components: a specific allowance for identified problem or impaired loans, and a general allowance for the remainder of the portfolio. Measurement of impairment can be based on the 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 appropriateness of the allowance is also reviewed by management based upon its evaluation of then-existing economic and business conditions affecting the key lending areas of Westfield Financial 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 to have 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, Westfield Financial's earnings and capital could be significantly and adversely affected.

Securities, including mortgage-backed securities, that 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.

On a quarterly basis, Westfield Financial reviews 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 amortized cost basis that are deemed to be other-than-temporarily impaired are recognized in earnings to the extent the impairment is related to credit losses. The amount of the other-than-temporary impairment related to other factors is recognized in other comprehensive income, net of applicable taxes. 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) its intent and ability to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value.

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 Westfield Financial's assets and liabilities. The carrying value of our net deferred tax asset is based on Westfield Financial's historic taxable income for the two prior years as well as our belief that it is more likely than not that Westfield Financial 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 assets.

COMPARISON OF FINANCIAL CONDITION AT JUNE 30, 2009 AND DECEMBER 31, 2008

Total assets increased $55.7 million to $1.2 billion at June 30, 2009. Securities increased $83.7 million to $597.9 million at June 30, 2009 from $514.2 million at December 31, 2008. The increase in securities was the result of reinvesting funds from deposits, short-term borrowings and long-term debt into securities. Cash and cash equivalents decreased $33.1 million to $23.4 million at June 30, 2009 from $56.5 million at December 31, 2008.

The composition of Westfield Financial's loan portfolio at June 30, 2009 and December 31, 2008 is summarized as follows:

                                                          June 30,    December 31,
                                                            2009          2008

 Commercial real estate                                  $ 232,620      $ 223,857
 Residential real estate                                    65,769         62,810
 Home equity                                                33,289         35,562
 Commercial and industrial                                 148,507        153,861
 Consumer                                                    3,809          4,248
 Total loans                                               483,994        480,338
 Unearned premiums and deferred loan fees and costs, net       342            593
 Allowance for loan losses                                  (7,337)        (8,796)
                                                         $ 476,999      $ 472,135

Net loans increased by $4.9 million to $477.0 million at June 30, 2009 from $472.1 million at December 31, 2008. Commercial real estate and commercial and industrial loans increased $3.4 million to $381.1 million at June 30, 2009 from $377.7 million at December 31, 2008. Owner occupied commercial real estate loans totaled $96.5 million at June 30, 2009 and $96.3 million at December 31, 2008, while non-owner occupied commercial real estate loans totaled $136.1 million at June 30, 2009 and $127.6 million at December 31, 2008.

Nonperforming loans decreased $2.3 million to $6.5 million at June 30, 2009 compared to $8.8 million at December 31, 2008. This represented 1.34% of total loans at June 30, 2009 and 1.83% of total loans at December 31, 2008. The decrease in nonperforming loans was related to a single commercial manufacturing relationship of $5.5 million. The business was sold in 2009 and resulted in a charge-off of $3.1 million.

The following table presents information regarding nonperforming mortgage, consumer and other loans. And foreclosed real estate as of the dates indicated. All loans where the interest payment is 90 days or more in arrears as of the closing date of each month are placed on nonaccrual status. At June 30, 2009, Westfield Bank had $6.4 million of nonaccrual loans and $258,000 in foreclosed real estate, respectively. At December 31, 2008, Westfield Bank had $8.8 million of nonaccrual loans and no foreclosed real estate, respectively. If all nonaccrual loans had been performing in accordance with their terms, Westfield Bank would have earned additional interest income of $92,000 and $200,000 for the six months ended June 30, 2009 and the year ended December 31, 2008, respectively.

                                          June 30, 2009   December 31, 2008
                                               (Dollars in thousands)
Nonaccrual real estate loans:
Residential                                     $ 1,159             $   905
Home equity                                         202                 239
Commercial real estate                            1,554               1,460
Total nonaccrual real estate loans                2,915               2,604
Other loans:
Commercial and industrial                         3,576               6,195
Consumer                                              4                   6
Total nonaccrual consumer and other loans         3,580               6,201
Total nonperforming loans                         6,495               8,805
Foreclosed real estate, net                         258                   -
Total nonperforming assets                      $ 6,753             $ 8,805
Nonperforming loans to total loans                1.34%               1.83%
Nonperforming assets to total assets               0.58                0.79

Asset growth was funded primarily through a $39.5 million increase in long-term debt. Long-term debt, which includes FHLB advances and securities sold under repurchase agreements with an original maturity of one year or more, was $212.8 million at June 30, 2009 and $173.3 million at December 31, 2008. As of June 30, 2009, FHLB advances comprised $126.5 million and securities sold under repurchase agreements comprised $86.3 million of the long-term debt. Current interest rates permit Westfield Financial to earn a more advantageous spread by borrowing funds and reinvesting in loans and securities.

Short-term borrowings were $51.3 million at June 30, 2009 and $49.8 million at December 31, 2008. 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 $32.9 million at June 30, 2009 and $28.5 million at December 31, 2008. Customer repurchase agreements were $18.4 million at June 30, 2009 and $21.3 million at December 31, 2008. 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. All of Westfield Bank's customer repurchase agreements at June 30, 2009 were held by commercial customers.

Total deposits increased $44.0 to $632.0 million at June 30, 2009 from $588.0 million at December 31, 2008. The increase in deposits was due to an increase in checking accounts and regular savings accounts. Checking accounts increased $22.4 million to $157.0 million at June 30, 2009 from $134.6 million for December 31, 2008. Regular savings accounts increased $18.5 million to $86.6 million at June 30, 2009. The increases in both checking and savings accounts were primarily due to accounts which pay a higher interest rate than comparable products. Time deposit accounts increased $8.0 million to $335.6 million at June 30, 2009.

Stockholders' equity at June 30, 2009 and December 31, 2008 was $257.4 million and $259.9 million, respectively, which represented 22.1% of total assets as of June 30, 2009 and 23.4% of total assets as of December 31, 2008. The change in stockholders' equity is comprised of the repurchase of 456,273 shares for $4.2 million related to the stock repurchase plan and dividends declared amounting to $7.4 million. This was partially offset by $4.8 million decrease in other comprehensive loss, net income of $2.3 million and share-based compensation expense of $1.7 million.

COMPARISON OF OPERATING RESULTS FOR THE THREE MONTHS ENDED JUNE 30, 2009 AND
JUNE 30, 2008

General

Net income was $1.1 million, or $0.04 per diluted share, for the quarter ended June 30, 2009 as compared to $2.1 million, or $0.07 per diluted share, for the same period in 2008. Net interest and dividend income was $7.8 million for the three months ended June 30, 2009 and $8.0 million for the same period in 2008.

Net Interest and Dividend Income

The following tables set forth the information relating to our average balance at, and net interest income for, the three months ended June 30, 2009 and 2008 and reflect the average yield on interest-earning assets and average cost of interest-bearing liabilities for the periods indicated. Yields and costs are derived by dividing interest income by the average balance of interest-earning assets and interest expense by the average balance of interest-bearing liabilities for the periods shown. The interest rate spread is the difference between the total average yield on interest-earning assets and the cost of interest-bearing liabilities. Net interest margin represents tax-equivalent net interest and dividend income as a percentage of average interest earning assets. Average balances are derived from actual daily balances over the periods indicated. Interest income includes fees earned from making changes in loan rates and terms and fees earned when the real estate loans are prepaid or refinanced. For analytical purposes, the interest earned on tax-exempt assets is adjusted to a tax-equivalent basis to recognize the income tax savings which facilities comparison between taxable and tax-exempt assets.

                                                   Three Months Ended June 30,
                                           2009                                   2008
                                                        Average                                Average
                              Average                   Yield /      Average                   Yield /
                              Balance      Interest      Cost        Balance      Interest      Cost
                                                      (Dollars in thousands)
ASSETS:
Interest-earning assets
Loans(1)(2)                 $   475,148    $  6,488      5.46 %    $   432,081    $  6,630      6.14 %
Securities(2)                   568,521       6,630      4.66          540,388       6,900      5.11
Short-term investments(3)        20,760           4      0.08           33,006         172      2.08
Total interest-earning                                   4.93                                   5.45
assets                        1,064,429      13,122                  1,005,475      13,702
Total noninterest-earning
assets                           72,380                                 67,313
Total assets                $ 1,136,809                            $ 1,072,788

LIABILITIES AND EQUITY:
Interest-bearing
liabilities
NOW accounts                $    64,771         326      2.01           88,754         316      1.42
Savings accounts                 80,531         235      1.17           58,266         182      1.25
Money market accounts            53,870         127      0.94           68,844         198      1.15
Time deposits                   335,403       2,602      3.10          329,790       3,098      3.76
Short-term borrowings and                                3.01                                   3.64
long-term debt                  249,351       1,879                    197,844       1,800
Total interest-bearing                                   2.64                                   3.01
liabilities                     783,926       5,169                    743,498       5,594
Noninterest-bearing
deposits                         80,865                                 42,842
Other noninterest-bearing
liabilities                      12,233                                  9,506
Total noninterest-bearing
liabilities                      93,098                                 52,348
Total liabilities               877,024                                795,846
Total equity                    259,785                                276,942
Total liabilities and
equity                      $ 1,136,809                            $ 1,072,788
Less: Tax-equivalent
adjustment(2)                                  (147)                                  (155)
Net interest and dividend
income                                     $  7,806                               $  7,953
Net interest rate spread(4)                              2.29 %                                 2.44 %
Net interest margin(5)                                   3.00 %                                 3.23 %

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

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.

Short-term investments include federal funds sold.

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.

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

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 income and interest expense during the periods indicated. Information is provided in each category with respect to:

·

Interest income changes attributable to changes in volume (changes in volume multiplied by prior rate);

·

Interest income changes attributable to changes in rate (changes in rate multiplied by current volume); and

·

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.

                                   Three Months Ended June 30, 2009 compared
                                      to Three Months Ended June 30, 2008
                                   Increase (Decrease) Due to
                                   Volume             Rate              Net
                                             (Dollars in thousands)
Interest-earning assets
Loans (1)                             $ 661            $   (803)         $ (142)
Securities (1)                          359                (629)           (270)
Short-term investments                  (64)               (104)           (168)
Total interest earning assets           956              (1,536)           (580)


Interest-bearing liabilities
NOW accounts                            (85)                 95              10
Savings accounts                         70                 (17)             53
Money market accounts                   (43)                (28)            (71)
Time deposits                            53                (549)           (496)
Short-term borrowing and
long-term debt                          469                (390)             79
Total interest-bearing
liabilities                             464                (889)           (425)
Change in net interest and
dividend income                       $ 492            $   (647)         $ (155)


____________________

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.

Net interest and dividend income decreased $147,000 to $7.8 million for the three months ended June 30, 2009 from $8.0 million for the same period in 2008. The net interest margin, on a tax-equivalent basis, was 3.00% for the three months ended June 30, 2009 as compared to 3.23% for the same period in 2008. Net interest and dividend income decreased primarily as a result of a decrease in the rates on interest-earning assets due to the declining rate environment. Interest and dividend income, on a tax-equivalent basis, decreased $580,000 to $13.1 million for the three months ended June 30, 2009 from $13.7 million for the same period in 2008. The average yield on interest-earning assets decreased 52 basis points to 4.93% for the three months ended June 30, 2009 from 5.45% for the same period in 2008.

The decrease in interest income was partially offset by a decrease in interest expense. Interest expense decreased $425,000 to $5.2 million for the three months ended June 30, 2009 from $5.6 million for the same period in 2008. The average cost of interest-bearing liabilities decreased 37 basis points to 2.64% for the three months ended June 30, 2009 from 3.01% for the same period in 2008, as a result of the declining rate environment.

Provision for Loan Losses

The amount that Westfield Bank provided for loan losses during the three months ended June 30, 2009 was based upon the changes that occurred in the loan portfolio during that same period. The changes in the loan portfolio, described in detail below, include an increase in charge-offs, the continued weakening of the local and national economy and an increase in commercial loans. After evaluating these factors, Westfield Bank provided $590,000 for loan losses for the three months ended June 30, 2009, compared to $240,000 for the same period in 2008. The allowance was $7.3 million at June 30, 2009 and March 31, 2009. The allowance for loan losses was 1.51% of total loans at June 30, 2009 and 1.54% at March 31, 2009.

Net charge-offs were $528,000 for the three months ended June 30, 2009. This was comprised of charge-offs of $540,000 for the three months ended June 30, 2009, partially offset by recoveries of $12,000 for the same period. Net charge-offs for the three months ended June 30, 2008 were $21,000. This was comprised of charge-offs of $45,000 for the three months ended June 30, 2008, partially offset by recoveries of $24,000 for the same period.

Commercial real estate and commercial and industrial loans increased $13.1 million to $381.1 million at June 30, 2009 from $368.0 million at March 31, 2009. Westfield Bank considers these loans to contain more credit risk and market risk than conventional residential real estate mortgages. At June 30, 2009, residential real estate loans decreased $1.4 million to $99.1 million compared to $100.5 million at March 31, 2009.

Although management believes it has established and maintained the allowance for loan losses at adequate levels, future adjustments may be necessary if economic, real estate and other conditions differ substantially from the current operating environment.

Noninterest Income

Noninterest income increased $127,000 to $1.1 million for the three months ended June 30, 2009 from $951,000 for the same period in 2008. This was primarily the result of an increase of $219,000 in fees received from the third-party mortgage program as Westfield Bank experienced an increased in mortgage referrals due to a decrease in interest rates. This was partially offset by a decrease in net checking account processing fee income of $68,000 for the three months ended June 30, 2009, primarily due to a decrease in overdraft fee income.

Net gains on the sales of securities were $122,000 for the three months ended June 30, 2009 compared to $19,000 for the same period in 2008. The net gain on sales of securities for the three months ended June 30, 2009 was offset by a loss on the prepayment of borrowings of $142,000. During the second quarter of 2009, Westfield Bank paid off higher cost funding early to take advantage of lower rate borrowing opportunities.

. . .