Western New England Bancorp, Inc. (WNEB)

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

The
following discussion should be read in conjunction with the Company’s Consolidated Financial Statements and notes thereto,
each appearing elsewhere in this Annual Report on Form 10-K. Management’s discussion focuses on 2025 results compared to
2024. For a discussion of 2024 results compared to 2023, refer to Part II, Item 7 of our Annual Report filed on Form 10-K, which
was filed with the SEC on March 10, 2025.

Overview.

We
strive 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 we have served since 1853. Historically, we have 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. We meet the needs of our local community through
a community-based and service-oriented approach to banking.

We
have adopted a growth-oriented strategy that continues to focus on increasing commercial lending and residential lending. Our
strategy also calls for increasing deposit relationships, specifically core deposits, and broadening our product lines and services.
We believe that this business strategy is best for our long-term success and viability, and complements our existing commitment
to high quality customer service.

In
connection with our overall growth strategy, we seek to:

You
should read the following financial results for the year ended December 31, 2025 in the context of this strategy.

58

For
the twelve months ended December 31, 2025, the Company reported net income of $15.3 million, or $0.75 per diluted share, compared
to $11.7 million, or $0.56 per diluted share, for the twelve months ended December 31, 2024. Net interest income increased $10.3
million, or 17.2%, provision for credit losses increased $1.0 million, non-interest income decreased $387,000, or 3.0%, and non-interest
expense increased $4.1 million, or 6.9%, during the same period in 2024.

During
the twelve months ended December 31, 2025, net interest income increased $10.3 million, or 17.2%, to $70.1 million, compared to
$59.8 million for the twelve months ended December 31, 2024. The increase in net interest income was due to an increase in interest
income of $8.8 million, or 8.0%, and a decrease in interest expense of $1.5 million, or 3.0%.

During
the twelve months ended December 31, 2025, the Company recorded a provision for credit losses of $335,000, compared to a reversal
of credit losses of $665,000 during the twelve months ended December 31, 2024. The $1.0 million increase in the provision for
credit losses was primarily due to an increase in total loans of $113.2 million, or 5.5%.

General.

Our
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 and securities. Interest-bearing liabilities consist primarily of time deposits and money market accounts, demand deposits,
savings accounts and borrowings from the FHLB. The consolidated results of operations also depend on the provision for loan losses,
non-interest income, and non-interest expense. Non-interest income includes service fees and charges, income on bank-owned life
insurance, gains (losses) on sales of mortgages, gains (losses) on non-marketable equity investments and gains (losses) on securities.
Non-interest expense includes salaries and employee benefits, occupancy expenses, data processing, advertising expense, FDIC insurance
assessment, professional fees and other general and administrative expenses.

Critical
Accounting Policies.

Our
accounting policies are disclosed in Note 1 to our consolidated financial statements. Given our current business strategy and
asset/liability structure, the more critical policy is the allowance for credit losses and provision for credit losses. In addition
to the informational disclosure in the notes to the consolidated financial statements, our policy on this accounting policy 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 this accounting policy
and the related disclosures with the Audit Committee of the Board.

The
allowance for credit losses is an estimate of expected losses inherent within the Company’s existing loans held for investment
portfolio. The allowance for credit losses for loans held for investment, as reported in our consolidated balance sheet, is adjusted
by a credit loss expense, which is reported in earnings, and reduced by the charge-off of loan amounts, net of recoveries. Accrued
interest receivable on loans held for investment was $7.6 million at December 31, 2025 and is excluded from the estimate of credit
losses.

This
evaluation is inherently subjective as it requires material estimates that may be susceptible to significant change. The credit
loss estimation process involves procedures to appropriately consider the unique characteristics of loan portfolio segments, which
consist of commercial real estate loans, residential real estate loans, commercial and industrial loans, and consumer loans. These
segments are further disaggregated into loan classes, the level at which credit risk is monitored. For each of these pools, the
Company generates cash flow projections at the instrument level wherein payment expectations are adjusted for estimated prepayment
speed, curtailments, time to recovery, probability of default, and loss given default. The modeling of expected prepayment speeds,
curtailment rates, and time to recovery are based on historical internal data. The quantitative component of the ACL on loans
is model-based and utilizes a forward-looking macroeconomic forecast. For commercial real estate loans, residential real estate
loans, and commercial and industrial loans, the Company uses a discounted cash flow method, incorporating probability of default
and loss given default forecasted based on statistically derived economic variable loss drivers, to estimate expected credit losses.
This process includes estimates which involve modeling loss projections attributable to existing loan balances, and considering
historical experience, current conditions, and future expectations for pools of loans over a reasonable and supportable forecast
period. The historical information either experienced by the Company or by a selection of peer banks, when appropriate, is derived
from a combination of recessionary and non-recessionary performance periods for which data is available. The expected loss estimates
for the consumer loan segment are based on historical loss rates using the WARM method.

59

Although
management believes it has established and maintained the allowance for credit losses at adequate levels for the current economic
environment and supportable forecast period, if management’s assumptions and judgments prove to be incorrect due to changes
in the economic environment and related adjustments to the quantitative components of the CECL methodology, and the allowance
for credit losses is not adequate to absorb forecasted losses, our earnings and capital could be significantly and adversely affected.

Analysis
of Net Interest Income.

The
Company’s earnings are largely dependent on its net interest income, which is the difference between interest earned on
loans and investments and the cost of funding (primarily deposits and borrowings). Net interest income expressed as a percentage
of average interest-earning assets is referred to as net interest margin. For more information regarding the Company’s use
of Non-GAAP financial measures see “Explanation of Use of Non-GAAP Financial Measurements.”

Average
Balance Sheet.

The
following table sets forth information relating to the Company for the years ended December 31, 2025, 2024 and 2023. The average
yields and costs are derived by dividing interest income or interest expense by the average balance of interest-earning assets
or interest-bearing liabilities, respectively, for the periods shown. Average balances are derived from average daily balances.
The yields include fees which are considered adjustments to yields. Loan interest and yield data does not include any accrued
interest from non-accruing loans.

60

[Excerpt truncated for page length; the complete text is on the linked full-MD&A page.]