Western New England Bancorp, Inc. (WNEB) FY 2024 MD&A

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 2024 results compared to
2023. For a discussion of 2023 results compared to 2022, refer to Part II, Item 7 of our Annual Report filed on Form 10-K, which
was filed with the SEC on March 8, 2024.

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, 2024 in the context of this strategy.

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For
the twelve months ended December 31, 2024, net income was $11.7 million, or $0.56 diluted earnings per share, compared to net
income of $15.1 million, or $0.70 diluted earnings per share, for the twelve months ended December 31, 2023. The results for the
twelve months ended December 31, 2024 showed decreases in net interest income and the provision for credit losses, as well as
increases in non-interest income and non-interest expense.

During
the twelve months ended December 31, 2024, net interest income decreased $8.1 million, or 11.9%, to $59.8 million, compared to
$67.9 million for the twelve months ended December 31, 2023. The decrease in net interest income was primarily due to an increase
in interest expense of $16.8 million, or 50.6%, partially offset by an increase in interest and dividend income of $8.7 million,
or 8.6%.

During
the twelve months ended December 31, 2024, the Company recorded a reversal of credit losses of $665,000, compared to a provision
for credit losses of $872,000 during the twelve months ended December 31, 2023. The decrease in reserves was primarily due to
changes in the economic environment and related adjustments to the quantitative components of the CECL methodology.

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 $7.4 million at December 31, 2024 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.

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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, 2024, 2023 and 2022. 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.

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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 our 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.

(1)
Securities and loan income and net interest income are presented on a tax-equivalent basis using a tax rate of 21% for 2024, 2023
and 2022. The tax-equivalent adjustment is deducted from tax-equivalent net interest income to agree to the amount reported in
the consolidated statements of net income. See “Explanation of Use of Non-GAAP Financial Measurements.”

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Explanation
of Use of Non-GAAP Financial Measurements.

We
believe that it is common practice in the banking industry to present interest income and related yield information on tax-exempt
loans and securities on a tax-equivalent basis and that such information is useful to investors because it facilitates comparisons
among financial institutions. However, the adjustment of interest income and yields on tax-exempt loans and securities to a tax-equivalent
amount is considered a non-GAAP financial measure. A reconciliation from GAAP to non-GAAP is provided below.

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Comparison
of Financial Condition at December 31, 2024 and December 31, 2023.

At
December 31, 2024, total assets were $2.7 billion, an increase of $88.5 million, or 3.5%, from December 31, 2023. The balance
sheet composition and changes since December 31, 2023 are discussed below.

Cash
and Cash Equivalents.

Cash
and cash equivalents is comprised of cash on hand and amounts due from banks, interest-earning deposits in other financial institutions
and federal funds sold. Cash and cash equivalents totaled $66.5 million, or 2.5% of total assets, at December 31, 2024 and $28.8
million, or 1.1% of total assets, at December 31, 2023. Balances in cash and cash equivalents will fluctuate due primarily to
the timing of net deposit flows, borrowing and loan inflows and outflows, investment purchases and maturities, calls and sales
proceeds, and the immediate liquidity needs of the Company.

Investments.

At
December 31, 2024, the investment securities portfolio totaled $366.1 million, or 13.8% of total assets, compared to $360.7 million,
or 14.1% of total assets, at December 31, 2023. At December 31, 2024, the Company’s available-for-sale securities portfolio,
recorded at fair market value, increased $23.6 million, or 17.2%, from $137.1 million at December 31, 2023 to $160.7 million.
The held-to-maturity securities portfolio, recorded at amortized cost, decreased $18.4 million, or 8.2%, from $223.4 million at
December 31, 2023 to $205.0 million at December 31, 2024.

At
December 31, 2024, the Company reported unrealized losses on the available-for-sale securities portfolio of $31.2 million, or
16.2% of the amortized cost basis of the available-for-sale securities portfolio, compared to unrealized losses of $29.2 million,
or 17.5% of the amortized cost basis of the available-for-sale securities at December 31, 2023. At December 31, 2024, the Company
reported unrealized losses on the held-to-maturity securities portfolio of $39.4 million, or 19.2% of the amortized cost basis
of the held-to-maturity securities portfolio, compared to $35.7 million, or 16.0% of the amortized cost basis of the held-to-maturity
securities portfolio at December 31, 2023.

The
Bank is required to purchase FHLB stock at par value in association with advances from the FHLB. The stock is classified as a
restricted investment and carried at cost which management believes approximates fair value. The Company’s investment in
FHLB capital stock amounted to $5.4 million and $3.2 million at December 31, 2024 and December 31, 2023, respectively.

At
December 31, 2024 and 2023, the Company held $423,000 of Atlantic Community Bankers Bank stock. The stock is restricted and carried
in other assets at cost. The stock is evaluated for impairment based on an estimate of the ultimate recovery to the par value.

Loans.

At
December 31, 2024, total loans increased by $42.9 million, or 2.1%, from December 31, 2023, to $2.1 billion. The increase in total
loans was due to an increase in residential real estate loans, including home equity loans, of $53.5 million, or 7.4%, partially
offset by a decrease in commercial real estate loans of $4.0 million, or 0.4%, a decrease in commercial and industrial loans of
$5.7 million, or 2.7% and a decrease in consumer loans of $1.1 million, or 19.8%.

Management
continues to closely monitor the loan portfolio for any signs of deterioration in borrowers’ financial condition and also
in light of speculation that commercial real estate values may deteriorate as the market continues to adjust to higher vacancies
and interest rates. We continue to proactively take steps to mitigate risk in our loan portfolio.

Total
delinquency was $5.0 million, or 0.24% of total loans, at December 31, 2024, compared to $6.0 million, or 0.30% of total loans
at December 31, 2023. At December 31, 2024, nonperforming loans totaled $5.4 million, or 0.26% of total loans, compared to $6.4
million, or 0.32% of total loans, at December 31, 2023. At December 31, 2024 and December 31, 2023, there were no loans 90 or
more days past due and still accruing interest. Total nonperforming assets totaled $5.4 million, or 0.20% of total assets, at
December 31, 2024, compared to $6.4 million, or 0.25% of total assets, at December 31, 2023. At December 31, 2024 and December
31, 2023, the Company did not have any other real estate owned. At December 31, 2024, the allowance for credit losses was $19.5
million, or 0.94% of total loans and 362.9% of nonperforming loans, compared to $20.3 million, or 1.00% of total loans and 315.6%
of nonperforming loans, at December 31, 2023. Total criticized loans, defined as special mention and substandard loans, decreased
$1.1 million, or 2.8%, from $39.5 million, or 1.9% of total loans, at December 31, 2023 to $38.4 million, or 1.9% of total loans,
at December 31, 2024. A summary of our past due and nonperforming loans by class is listed in Note 5 of the accompanying unaudited
consolidated financial statements.

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Our
commercial real estate portfolio is comprised of diversified property types and primarily within our geographic footprint. At
December 31, 2024, the commercial real estate portfolio totaled $1.1 billion, and represented 52.0% of total loans. Of the $1.1
billion, $880.8 million, or 81.9%, was categorized as non-owner occupied commercial real estate and represented 325.2% of the
bank’s total risk-based capital.

The
Company’s commercial real estate loans are considered to be relatively diversified by borrower, industry and concentrated
in the New England geographical area. A significant portion of the loan portfolio consists of commercial real estate loans, primarily
made in Massachusetts, and to a lesser degree, Connecticut, and secured by real estate or other collateral in the market. Although
these loans are made to a diversified pool of unrelated borrowers across numerous businesses, adverse developments in the local
real estate market could have an adverse impact on this portfolio of loans and the Company’s income and financial position.
While our basic market area is in Massachusetts, the Company has made loans outside that market area where the applicant is an
existing customer, and the nature and quality of such loans was consistent with the Company’s lending policies.

We
continuously monitor the asset quality of our loan portfolio. For the commercial portfolio, we monitor credit quality using a
risk rating scale, which assigns a risk-grade to each borrower based on a number of quantitative and qualitative factors associated
with a commercial loan transaction. Management utilizes a loan risk rating methodology based on an 8-point scale. Pass grades
are 0-4 and non-pass categories, which align with regulatory guidelines, include: special mention (5), substandard (6), doubtful
(7) and loss (8). Risk rating assignment is determined by analyzing key factors, which may include: industry and market conditions,
position within the industry, earnings trends, operating cash flow, debt capacity, guarantor strength, management, financial reporting,
collateral and other considerations.

CRE
Concentrations.

The
OCC, the FRB, and the FDIC (“Agencies”) issued
guidance in 2006 which addresses institutions with increased concentrations of commercial real estate (“CRE”) loans.
The guidance does not establish specific CRE lending limits; rather, it promotes sound risk management practices and appropriate
levels of capital that will enable institutions to continue to pursue CRE lending in a safe and sound manner. In developing this
guidance, the Agencies recognized that different types of CRE lending present different levels of risk, and that consideration
should be given to the lower risk profiles and historically superior performance of certain types of CRE, such as well-structured
multifamily housing finance, when compared to others, such as speculative office space construction.

Institutions
are encouraged to segment their CRE portfolios to acknowledge these distinctions for risk management purposes. The guidance focuses
on those CRE loans for which the cash flow from the real estate is the primary source of repayment rather than loans to a borrower
for which real estate collateral is taken as a secondary source of repayment or through an abundance of caution. Thus, for the
purposes of the guidance, CRE loans include those loans with risk profiles sensitive to the condition of the general CRE market
(for example, market demand, changes in capitalization rates, vacancy rates, or rents). CRE loans are land development and construction
loans (including 1- to 4-family residential and commercial construction loans) and other land loans. CRE loans also include loans
secured by multifamily property, and nonfarm nonresidential property where the primary source of repayment is derived from rental
income associated with the property (that is, loans for which 50 percent or more of the source of repayment comes from third party,
nonaffiliated, rental income) or the proceeds of the sale, refinancing, or permanent financing of the property. Excluded from
the scope of this Guidance are loans secured by nonfarm nonresidential properties where the primary source of repayment is the
cashflow from the ongoing operations and activities conducted by the party, or affiliate of the party, who owns the property.

As
part of their ongoing supervisory monitoring processes, the Agencies use certain criteria to identify institutions that are potentially
exposed to significant CRE concentration risk. An institution that has experienced rapid growth in CRE lending, has notable exposure
to a specific type of CRE, or is approaching or exceeds the following supervisory criteria may be identified for further supervisory
analysis of the level and nature of its CRE concentration risk:

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1.
Total reported loans for construction, land development, and other land represent 100 percent or more of the institution’s
total risk-based capital; or

2.
Total commercial real estate loans as defined in this guidance represent 300 percent or more of the institution’s total
risk-based capital, and the outstanding balance of the institution’s commercial real estate loan portfolio has increased
by 50 percent or more during the prior 36 months.

The
Agencies use the criteria as a preliminary step to identify institutions that may have CRE concentration risk. Because regulatory
reports capture a broad range of CRE loans with varying risk characteristics, the supervisory monitoring criteria do not constitute
limits on an institution’s lending activity but rather serve as high-level indicators to identify institutions potentially
exposed to CRE concentration risk.

The
Company holds a concentration in commercial real estate loans. As of December 31, 2024, construction, land development and other
land loans represented 37.9% of consolidated bank risk-based capital. During the prior 36 months, the Company has experienced
an increase in its commercial real estate portfolio of 16.1%.

The
management team has extensive experience in underwriting commercial real estate loans and has implemented and continues to maintain
heightened risk management procedures and strong underwriting criteria with respect to its commercial real estate portfolio. The
Board has established internal maximum limits on CRE as an asset class overall as well as sub limits within CRE by property class,
to better manage and control the exposure to property classes during periods of changing economic conditions. The Board also has
minimum targets for regulatory capital ratios that are in excess of well capitalized ratios.

Our
risk management process begins with a robust underwriting program. The underwriting and risk rating of all loans is completed
by the Company’s Credit Department that is independent of the originating lender(s).

At
December 31, 2024 and December 31, 2023, non-owner and owner occupied commercial real estate loans, totaled $1.1 billion, or 52.0%,
of total gross loans, and $1.1 billion, or 53.3%, of total gross loans, respectively.

The
table below breaks down the commercial real estate portfolio outstanding balance by non-owner and owner occupied and by concentration
as of December 31, 2024:

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The
table below breaks down the commercial real estate portfolio outstanding balance by non-owner and owner occupied and by
concentration as of December 31, 2023:

At
December 31, 2024, of the $1.1 billion in commercial real estate loans, $880.8 million, or 42.6% of total loans, were categorized
as non-owner occupied and represented 325.2% of total bank risk-based capital.

The
following table further breaks down the non-owner occupied commercial real estate portfolio balances by concentration, collateral
location and weighted average loan-to-value (“LTV”) as of December 31, 2024:

___________________

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At
December 31, 2023, of the $1.1 billion in commercial real estate loans, $881.7 million, or 43.5% of total loans, was categorized
as non-owner occupied and represented 324.8% of total risk-based capital.

The
following table further breaks down the non-owner occupied commercial real estate portfolio balances by concentration, collateral
location and weighted average LTV as of December 31, 2023.

The
Company also underwrites and originates owner occupied commercial real estate loans. These loans are typically term loans made
to support properties that rely upon the operations of the business occupying the property for repayment. The Agencies specifically
excluded owner occupied commercial real estate from their concentration guidance, as the primary source of repayment is the cash
flow from the ongoing operations and activities conducted by the party, or affiliate of the party, who owns the property.

The
table below depicts a well-diversified portfolio of owner occupied commercial real estate portfolio as of December 31,
2024:

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The
table below depicts a well-diversified portfolio of owner occupied commercial real estate as of December 31, 2023:

Commercial
Real Estate Office Exposure.

Our
total office-related commercial real estate loans (which is comprised of loans within our commercial real estate portfolio that
are secured by office space, medical office space, and mixed-use where rental income is primarily from office space) totaled $200.1
million, or 73.9% of total bank risk-based capital and $216.2 million, or 79.6% of total bank risk-based capital, as of December
31, 2024 and December 31, 2023, respectively.

The
table below breaks the office-related commercial real estate loans by collateral type for the periods noted:

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Office-related
CRE loans are primarily concentrated in Massachusetts, where approximately 41.5% at December 31, 2024 and 43.9%, at December 31,
2023, of the total balance of office-related CRE loans are located. The Company does not have office CRE loans secured by real
estate in greater Boston or New York.

The
following table sets forth the office-related CRE loans for non-owner occupied and owner occupied CRE and their credit quality
indicators as of the dates indicated:

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Given
prevailing market conditions such as recent sustained increases in interest rates, reduced occupancy as a result of the increase
in hybrid work arrangements post-COVID, and lower commercial real estate valuations, we carefully monitor these loans for signs
of deterioration in credit quality and other risks. Such heightened monitoring includes incremental risk management strategies
undertaken by management, including more frequent portfolio reviews, ongoing monitoring of market conditions, and additional portfolio
analysis, which may include monitoring concentration limitations, including concentrations by loan type, property type, geographic
area and with participants, where applicable, and risk diversification, tracking aggregated policy and underwriting exceptions
and stress testing the loan portfolios.

BOLI.

The
Company indirectly utilizes the earnings on BOLI to offset the cost of the Company’s benefit plans. The cash surrender value
of BOLI was $77.1 million and $75.1 million at December 31, 2024 and 2023, respectively, and was issued by eleven insurance companies
rated investment grade or better.

Deposits.

At
December 31, 2024, total deposits increased $118.9 million, or 5.6%, from $2.1 billion at December 31, 2023 to $2.3 billion. Core
deposits, which the Company defines as all deposits except time deposits, increased $26.7 million, or 1.7%, from $1.5 billion,
or 71.5% of total deposits, at December 31, 2023, to $1.6 billion, or 68.9% of total deposits, at December 31, 2024. Non-interest-bearing
deposits decreased $14.0 million, or 2.4%, to $565.6 million, and represent 25.0% of total deposits, money market accounts increased
$27.1 million, or 4.3%, to $661.5 million, savings accounts decreased $5.8 million, or 3.1%, to $181.6 million and interest-bearing
checking accounts increased $19.3 million, or 14.7%, to $150.3 million.

Time
deposits increased $92.2 million, or 15.1%, from $611.4 million at December 31, 2023 to $703.6 million at December 31, 2024. Brokered
time deposits, which are included in time deposits, totaled $1.7 million at December 31, 2024 and at December 31, 2023. The Company
has experienced growth and movement in both money market accounts and time deposits as a result of relationship pricing, the current
interest rate environment, and customer behaviors, as opposed to time deposit specials or interest rate adjustments. We continue
our disciplined and focused approach to core relationship management and customer outreach to meet funding requirements and liquidity
needs, with an emphasis on retaining a long-term customer relationship base by competing for and retaining deposits in our local
market. At December 31, 2024, the Bank’s uninsured deposits represented 28.4% of total deposits, compared to 26.8% at December
31, 2023.

Borrowed
Funds.

At
December 31, 2024, total borrowings decreased $33.4 million, or 21.3%, from $156.5 million at December 31, 2023 to $123.1 million.
At December 31, 2024, short-term borrowings decreased $10.7 million, or 66.5%, to $5.4 million, compared to $16.1 million at December
31, 2023. Long-term borrowings decreased $22.6 million, or 18.8%, from $120.6 million at December 31, 2023 to $98.0 million at
December 31, 2024. At December 31, 2024 and December 31, 2023, borrowings also consisted of $19.8 million and $19.7 million, respectively,
in fixed-to-floating rate subordinated notes.

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The
Company utilized the BTFP, which was created in March 2023 to enhance banking system liquidity by allowing institutions to pledge
certain securities at par value and borrow at a rate of ten basis points over the one-year overnight index swap rate. The BTFP
was available to federally insured depository institutions in the U.S., with advances having a term of up to one year with no
prepayment penalties. The BTFP ceased extending new advances in March 2024. At December 31, 2023, the Company’s outstanding
balance under the BTFP was $90.0 million. There was no outstanding balance under the BTFP at December 31, 2024.

As
of December 31, 2024, the Company had $464.1 million of additional borrowing capacity at the Federal Home Loan Bank, $382.9 million
of additional borrowing capacity under the Federal Reserve Bank Discount Window and $25.0 million of other unsecured lines of
credit with correspondent banks.

Shareholders’
Equity.

At
December 31, 2024, shareholders’ equity was $235.9 million, or 8.9% of total assets, compared to $237.4 million, or 9.3%
of total assets, at December 31, 2023. The change was primarily attributable to an increase in accumulated other comprehensive
loss of $1.5 million, cash dividends paid of $5.9 million, repurchase of shares at a cost of $7.8 million, partially offset by
net income of $11.7 million. At December 31, 2024, total shares outstanding were 20,875,713.

The
Company’s book value per share was $11.30 at December 31, 2024, compared to $10.96 at December 31, 2023, while tangible
book value per share, a non-GAAP financial measure, increased $0.33, or 3.2%, from $10.30 at December 31, 2023 to $10.63 at December
31, 2024. Tangible book value is a Non-GAAP measure. For more information regarding the Company’s use of Non-GAAP financial
measures see “Explanation of Use of Non-GAAP Financial Measurements.” As of December 31, 2024, the Company’s
and the Bank’s regulatory capital ratios continued to exceed the levels required to be considered “well-capitalized”
under federal banking regulations.

Assets
under Management.

Total
assets under management include loans serviced for others and investment assets under management. Loans serviced for others and
investment assets under management are not carried as assets on the Company’s consolidated balance sheet, and as such, total
assets under management is not a financial measurement recognized under GAAP, however, management believes its disclosure provides
information useful in understanding the trends in total assets under management.

The
Company provides a wide range of investment advisory and wealth management services through Westfield Investment Services through
LPL Financial, a third-party broker-dealer. Investment assets under management increased $27.2 million, or 15.8%, to $199.3 million
as of December 31, 2024, from $172.1 million as of December 31, 2023.

Comparison
of Operating Results for Years Ended December 31, 2024 and 2023.

General.

For
the twelve months ended December 31, 2024, the Company reported net income of $11.7 million, or $0.56 per diluted share, compared
to $15.1 million, or $0.70 per diluted share, for the twelve months ended December 31, 2023. Net interest income decreased $8.1
million, or 11.9%, provision for credit losses decreased $1.5 million, non-interest income increased $2.0 million, or 18.4%, and
non-interest expense increased $78,000, or 0.1%, during the same period in 2023. Return on average assets and return on average
equity were 0.45% and 4.93% for the twelve months ended December 31, 2024, respectively, compared to 0.59% and 6.47% for the twelve
months ended December 31, 2023, respectively.

Net
Interest Income and Net Interest Margin.

During
the twelve months ended December 31, 2024, net interest income decreased $8.1 million, or 11.9%, to $59.8 million, compared to
$67.9 million for the twelve months ended December 31, 2023. The decrease in net interest income was primarily due to an increase
in interest expense of $16.8 million, or 50.6%, partially offset by an increase in interest and dividend income of $8.7 million,
or 8.6%.

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The
net interest margin for the twelve months ended December 31, 2024 was 2.45%, compared to 2.82% for the twelve months ended December
31, 2023. The net interest margin, on a tax-equivalent basis, was 2.47% for the twelve months ended December 31, 2024, compared
to 2.84% for the twelve months ended December 31, 2023.

The
average yield on interest-earning assets, without the impact of tax-equivalent adjustments, increased 30 basis points from 4.20%
for the twelve months ended December 31, 2023 to 4.50% for the twelve months ended December 31, 2024. The average yield on loans,
without the impact of tax-equivalent adjustments, increased 32 basis points from 4.54% for the twelve months ended December 31,
2023 to 4.86% for the twelve months ended December 31, 2024. During the twelve months ended December 31, 2024, average interest-earning
assets increased $33.5 million, or 1.4%, to $2.4 billion, compared to the twelve months ended December 31, 2023, primarily due
to an increase in average loans of $29.0 million, or 1.4%, an increase in average short-term investments, consisting of cash and
cash equivalents, of $12.8 million, or 62.5%, and an increase in average other investments of $2.2 million, or 18.1%, partially
offset by a decrease in average securities of $10.6 million, or 2.9%.

During
the twelve months ended December 31, 2024, the average cost of funds, including non-interest-bearing demand accounts and borrowings,
increased 70 basis points from 1.44% for the twelve months ended December 31, 2023 to 2.14%. For the twelve months ended December
31, 2024, the average cost of core deposits, including non-interest-bearing demand deposits, increased 24 basis points from 0.65%
for the twelve months ended December 31, 2023, to 0.89%. The average cost of time deposits increased 129 basis points from 3.03%
for the twelve months ended December 31, 2023 to 4.32% for the twelve months ended December 31, 2024. The average cost of borrowings,
which include borrowings and subordinated debt, increased 16 basis points from 4.84% for the twelve months ended December 31,
2023 to 5.00% for the twelve months ended December 31, 2024.

For
the twelve months ended December 31, 2024, average demand deposits, an interest-free source of funds, decreased $41.4 million,
or 6.9%, from $602.7 million, or 27.8% of total average deposits, for the twelve months ended December 31, 2023, to $561.3 million,
or 25.8% of total average deposits.

Provision
for Credit Losses.

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. 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.

During
the twelve months ended December 31, 2024, the Company recorded a reversal of credit losses of $665,000, compared to a provision
for credit losses of $872,000 during the twelve months ended December 31, 2023. The decrease in reserves was primarily due to
changes in the economic environment and related adjustments to the quantitative components of the CECL methodology. During the
twelve months ended December 31, 2024, the Company recorded net recoveries of $87,000, compared to net charge-offs of $2.0 million
for the twelve months ended December 31, 2023. The charge-offs during the twelve months ended December 31, 2023 were related to
one commercial relationship acquired in October 2016 from Chicopee Bancorp, Inc. Specifically, the Company recorded a $1.9 million
charge-off on the acquired commercial relationship, which represented the non-accretable credit mark that was required to be grossed-up
to the loan’s amortized cost basis with a corresponding increase to the allowance for credit losses under the CECL implementation.

The
decrease in the provision for credit losses was primarily due to changes in the loan mix as well as economic environment and related
adjustments to the quantitative components of the CECL methodology. The provision for credit losses was determined by a number
of factors: the continued strong credit performance of the Company’s loan portfolio, changes in the loan portfolio mix and
Management’s consideration of existing economic conditions and the economic outlook from the Federal Reserve’s actions
to control inflation. Management continues to monitor macroeconomic variables related to increasing interest rates, inflation
and the concerns of an economic downturn, and believes it is appropriately reserved for the current economic environment.

74

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

Non-Interest
Income.

For
the twelve months ended December 31, 2024, non-interest income increased $2.0 million, or 18.4%, from $10.9 million for the twelve
months ended December 31, 2023 to $12.9 million. During the twelve months ended December 31, 2023, the Company recorded a non-recurring
final termination expense of $1.1 million related to the defined benefit pension plan termination. During the twelve months ended,
December 31, 2023, the Company also recorded a non-taxable gain of $778,000 on BOLI death benefits and did not have a comparable
gain during the twelve months ended December 31, 2024. Excluding the defined benefit pension plan termination expense and the
BOLI death benefit, non-interest income increased $1.6 million, or 14.6%.

During
the twelve months ended December 31, 2024, service charges and fees increased $346,000, or 3.9%, and income from BOLI increased
$91,000, or 5.0%, from $1.8 million for the twelve months ended December 31, 2023 to $1.9 million. During the twelve months ended
December 31, 2024, the Company recorded other income from loan-level swap fees on commercial loans of $261,000 and did not have
comparable income during the twelve months ended December 31, 2023. During the twelve months ended December 31, 2024, the Company
reported a gain of $1.3 million on non-marketable equity investments, compared to a gain of $590,000 during the twelve months
ended December 31, 2023. During the twelve months ended December 31, 2024, the Company reported a loss on the disposal of premises
and equipment of $6,000, compared to a loss of $3,000 during the twelve months ended December 31, 2023. During the twelve months
ended December 31, 2023, the Company also reported unrealized losses on marketable equity securities of $1,000, compared to unrealized
gains on marketable equity securities of $13,000 during the twelve months ended December 31, 2024.

Non-Interest
Expense.

For
the twelve months ended December 31, 2024, non-interest expense increased $78,000, or 0.1%, to $58.4 million from the twelve months
ended December 31, 2023. During the twelve months ended December 31, 2023, the Company reached an agreement-in-principle to settle
purported class action lawsuits concerning the Company’s deposit products and related disclosures, specifically involving
overdraft fees and insufficient funds fees. This agreement-in-principle reflects our business decision to avoid the costs, uncertainties
and distractions of further litigation. Excluding the legal settlement accrual of $510,000, non-interest expense increased $588,000,
or 1.0%, from $57.8 million for the twelve months ended December 31, 2023 to $58.4 million for the twelve months ended December
31, 2024.

During
the same period, salaries and related benefits increased $472,000, or 1.5%, software expenses increased $208,000, or 9.0%, data
processing expense increased $320,000, or 10.1%, debit card processing and ATM network costs increased $298,000, or 13.9%, occupancy
expense increased $146,000, or 3.0%, due to higher repair and maintenance costs, real estate taxes, and depreciation expense.
FDIC insurance expense increased $139,000, or 10.5%. These increases were partially offset by a decrease in professional fees
of $571,000, or 20.9%, which is comprised of legal fees, audit and other professional fees. During the three months ended December
31, 2023, professional fees included legal fees related to the settlement of the purported class action lawsuits. Advertising
expense decreased $226,000, or 15.1%, and other non-interest expense, excluding the $510,000 legal settlement accrual, decreased
$199,000, or 3.5%.

For
the twelve months ended December 31, 2024, the efficiency ratio was 80.4%, compared to 74.0% for the twelve months ended December
31, 2023. For the twelve months ended December 31, 2024, the adjusted efficiency ratio, a non-GAAP financial measure, was 81.8%,
compared to 74.3% for the twelve months ended December 31, 2023. For more information regarding the Company’s use of Non-GAAP
financial measures see “Explanation of Use of Non-GAAP Financial Measurements.”

75

Income
Taxes.

For
the twelve months ended December 31, 2024, income tax expense was $3.3 million, with an effective tax rate of 22.0%, compared
to $4.5 million, with an effective tax rate of 23.1%, for twelve months ended December 31, 2023. The decrease in income tax expense
for the twelve months ended December 31, 2024 compared to the twelve months December 31, 2023 was due to lower income before taxes
in 2024.

Liquidity
and Capital Resources.

The
term “liquidity” refers to our ability to generate adequate amounts of cash to fund loan originations, loan purchases,
deposit withdrawals and operating expenses. Our primary sources of liquidity are deposits, scheduled amortization and prepayments
of loan principal and mortgage-backed securities, maturities and calls of investment securities and funds provided by our operations.
We also can borrow funds from the FHLB based on eligible collateral of loans and securities. Our material cash commitments include
funding loan originations, fulfilling contractual obligations with third-party service providers, maintaining operating leases
for certain of our Bank properties and satisfying repayment of our long-term debt obligations.

Primary
Sources of Liquidity

The
Company, on an ongoing basis, closely monitors the Company’s liquidity position for compliance with internal policies, and
believes that available sources of liquidity are adequate to meet funding needs in the normal course of business. As part of that
monitoring process, the Company stresses the potential liabilities calculation to ensure a strong liquidity position. Included
in the calculation are assumptions of some significant deposit run-off as well as funds needed for loan closing and investment
purchases. The Company does not anticipate engaging in any activities, either currently or over the long-term, for which adequate
funding would not be available and which would therefore result in significant pressure on liquidity. However, an economic recession
could negatively impact the Company’s liquidity. The Bank relies heavily on FHLB as a source of funds, particularly with
its overnight line of credit. In past economic recessions, some FHLB branches have suspended dividends, cut dividend payments,
and not bought back excess FHLB stock that members hold in an effort to conserve capital. FHLB has stated that it expects to be
able to continue to pay dividends, redeem excess capital stock, and provide competitively priced advances in the future.

At
December 31, 2024 and December 31, 2023, outstanding borrowings from the FHLB were $98.0 million and $40.6 million, respectively.
At December 31, 2024, we had $464.1 million in available borrowing capacity with the FHLB. We have the ability to increase our
borrowing capacity with the FHLB by pledging investment securities or additional loans.

The
Company has an available line of credit of $382.9 million with the FRB Discount Window at an interest rate determined and reset
on a daily basis. Borrowings from the FRB Discount Window are secured by certain eligible loan collateral and securities from
the Company’s investment portfolio not otherwise pledged. As of December 31, 2024 and December 31, 2023, there were no advances
outstanding under either of these lines.

On
March 12, 2023, the FRB made available the BTFP, which enhanced the ability of banks to borrow greater amounts against certain
high-quality, unencumbered investments at par value. During the year ended December 31, 2023, the Company participated in the
BTFP, which enabled the Company to pay off higher rate FHLB advances. At December 31, 2023, long-term debt included $90.0 million
in outstanding advances under the BTFP with a weighted average fixed rate of 4.71%. There were no advances outstanding with the
FRB under the BTFP at December 31, 2024.

In
addition, we have available lines of credit of $15.0 million and $10.0 million with other correspondent banks. Interest rates
on these lines are determined and reset on a daily basis by each respective bank. At December 31, 2024 and 2023, we did not have
an outstanding balance under either of these lines of credit. In addition, we may enter into reverse repurchase agreements with
approved broker-dealers. Reverse repurchase agreements are agreements that allow us to borrow money using our securities as collateral.

We
also have outstanding at any time, a significant number of commitments to extend credit and provide financial guarantees to third
parties. These arrangements are subject to strict credit control assessments. Guarantees specify limits to our obligations. Because
many commitments and almost all guarantees expire without being funded in whole or in part, the contract amounts are not estimates
of future cash flows. We are also obligated under agreements with the FHLB to repay borrowed funds and are obligated under leases
for certain of our branches and equipment.

76

Maturing
investment securities are a relatively predictable source of funds. However, deposit flows, calls of securities and prepayments
of loans and mortgage-backed securities are strongly influenced by interest rates, general and local economic conditions and competition
in the marketplace. These factors reduce the predictability of the timing of these sources of funds.

The
Company’s primary activities are the origination of commercial real estate loans, commercial and industrial loans and residential
real estate loans, as well as and the purchase of mortgage-backed and other investment securities. During the year ended December
31, 2023, we originated $336.4 million in loans, compared to $225.6 million in 2023. During the year ended December 31, 2024,
total loans increased $42.9 million, or 2.1%, compared to an increase of $35.9 million, or 1.8%, for the year ended December 31,
2023. At December 31, 2024, the Company had approximately $122.4 million in loan commitments and letters of credit to borrowers
and approximately $343.1 million in available home equity and other unadvanced lines of credit.

Deposit
inflows and outflows are affected by the level of interest rates, the products and interest rates offered by competitors and by
other factors. At December 31, 2024, time deposit accounts scheduled to mature within one year totaled $694.9 million. Based on
the Company’s deposit retention experience and current pricing strategy, we anticipate that a significant portion of these
time deposits will remain on deposit. We monitor our liquidity position frequently and anticipate that it will have sufficient
funds to meet our current funding commitments for the next 12 months and beyond.

At
December 31, 2024, the Company and the Bank exceeded each of the applicable regulatory capital requirements (See Note 13, Regulatory
Capital, to our consolidated financial statements for further information on our regulatory requirements).

Material
Cash Commitments

The
Company entered into a long-term contractual obligation with a vendor for use of its core provider and ancillary services beginning
in 2016. Total remaining contractual obligations outstanding with this vendor as of December 31, 2024 were estimated to be $7.1
million, with $6.1 million expected to be paid within one year and the remaining $1.0 million to be paid within the next three
years. Further, the Company has operating leases for certain of its banking offices and ATMs. Our leases have remaining lease
terms of less than one year to fourteen years, some of which include options to extend the leases for additional five-year terms
up to ten years. Undiscounted lease liabilities totaled $8.9 million as of December 31, 2024. Principal payments expected to be
made on our lease liabilities during the twelve months ended December 31, 2025 were $1.5 million. The remaining lease liability
payments totaled $7.4 million and are expected to be made after December 31, 2025 (See Note 12, Leases, to our consolidated
financial statements for further information on our lease obligations).

In
addition, the Company completed an offering of $20 million in aggregate principal amount of its 4.875% Notes to certain qualified
institutional buyers in a private placement transaction on April 20, 2021. Unless earlier redeemed, the Notes mature on May 1,
2031. At December 31, 2024, $19.8 million aggregate principle amount of the Notes was outstanding. The Notes will bear interest
from the initial issue date to, but excluding, May 1, 2026, or the earlier redemption date, at a fixed rate of 4.875% per annum,
payable quarterly in arrears on May 1, August 1, November 1 and February 1 of each year, beginning August 1, 2021, and from and
including May 1, 2026, but excluding the maturity date or earlier redemption date, equal to the benchmark rate, which is the 90-day
average secured overnight financing rate, plus 412 basis points, determined on the determination date of the applicable interest
period, payable quarterly in arrears on May 1, August 1, November 1 and February 1 of each year. The Company may also redeem the
Notes, in whole or in part, on or after May 1, 2026, and at any time upon the occurrence of certain events, subject in each case
to the approval of the Board of Governors of the Federal Reserve (See Note 8, Long-Term Debt, to our consolidated financial
statements for further information on our long-term debt).

We
do not anticipate any material capital expenditures during the calendar year 2025, except in pursuance of the Company’s
strategic initiatives. The Company does not have any balloon or other payments due on any long-term obligations or any off-balance
sheet items other than the commitments and unused lines of credit noted above.

77

Off-Balance
Sheet Arrangements.

The
Company does not have any off-balance sheet arrangements, other than noted above and in Note 16, Commitments and Contingencies,
to our consolidated financial statements, that have or are reasonably likely to have a current or future effect on our financial
condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital
resources that is material to investors.

Management
of Market Risk.

As
a financial institution, our primary market risk is interest rate risk since substantially all transactions are denominated in
U.S. dollars with no direct foreign exchange or changes in commodity price exposure. Fluctuations in interest rates will affect
both our level of income and expense on a large portion of our assets and liabilities. Fluctuations in interest rates will also
affect the market value of all interest-earning assets and interest-bearing liabilities.

The
Company’s interest rate management strategy is to limit fluctuations in net interest income as interest rates vary up or
down and control variations in the market value of assets, liabilities and net worth as interest rates vary. We seek to coordinate
asset and liability decisions so that, under changing interest rate scenarios, net interest income will remain within an acceptable
range.

In
order to achieve the Company’s objectives of managing interest rate risk, the Asset and Liability Management Committee (“ALCO”)
meets periodically to discuss and monitor the market interest rate environment relative to interest rates that are offered on
our products. ALCO presents quarterly reports to the Board which includes the Company’s interest rate risk position and
liquidity position.

The
Company’s primary source of funds are deposits, consisting primarily of time deposits, money market accounts, savings accounts,
demand accounts and interest-bearing checking accounts, which have shorter terms to maturity than the loan portfolio. Several
strategies have been employed to manage the interest rate risk inherent in the asset/liability mix, including but not limited
to:

In
2024, cash flows from deposit inflows were used to first to fund loan growth, and then to purchase securities, primarily AFS securities.
While net loan growth during 2024 was centered in residential real estate loans, the Company’s long-term focus continues
to be on growing commercial loans that present the appropriate levels of risk and return. Commercial loans typically have variable
interest rates and shorter maturities than residential loans.

The
actual amount of time before loans are repaid can be significantly affected by changes in market interest rates. Prepayment rates
will also vary due to a number of other factors, including the regional economy in the area where the loans were originated, seasonal
factors, demographic variables and the assumability of the loans. However, the major factors affecting prepayment rates are prevailing
interest rates, related financing opportunities and competition. We monitor interest rate sensitivity so that we can adjust our
asset and liability mix in a timely manner and minimize the negative effects of changing rates.

The
Company’s liquidity sources are vulnerable to various uncertainties beyond our control. Loan amortization and investment
cash flows are a relatively stable source of funds, while loan and investment prepayments and calls, as well as deposit flows
vary widely in reaction to market conditions, primarily prevailing interest rates. Asset sales are influenced by pledging activities,
general market interest rates and unforeseen market conditions. Our financial condition is affected by our ability to borrow at
attractive rates, retain deposits at market rates and other market conditions. We consider our sources of liquidity to be adequate
to meet expected funding needs and also to be responsive to changing interest rate markets.

78

Interest
Rate Risk.

Interest
rate risk represents the sensitivity of earnings to changes in market interest rates. As interest rates change, the interest income
and expense streams associated with our financial instruments also change, thereby impacting net interest income, the primary
component of our earnings. ALCO utilizes the results of a detailed and dynamic simulation model to quantify the estimated exposure
of net interest income to sustained interest rate changes. While ALCO routinely monitors simulated net interest income sensitivity
over a rolling two-year horizon, they also utilize additional tools to monitor potential longer-term interest rate risk.

The
simulation model captures the impact of changing interest rates on the interest income received and interest expense paid on all
interest-earning assets and interest-bearing liabilities reflected on our consolidated balance sheet, as well as for derivative
financial instruments. This sensitivity analysis is compared to ALCO policy limits, which specify a maximum tolerance level for
net interest income exposure over a one and two-year horizon, assuming no balance sheet growth.

The
repricing and/or new rates of assets and liabilities moved in tandem with market rates. However, in certain deposit products,
the use of data from a historical analysis indicated that the rates on these products would move only a fraction of the rate change
amount. Pertinent data from each loan account, deposit account and investment security was used to calculate future cash flows.
The data included such items as maturity date, payment amount, next repricing date, repricing frequency, repricing index, repricing
spread, caps and floors. Prepayment speed assumptions were based upon the difference between the account rate and the current
market rate. We also evaluate changes in interest rate sensitivity under various scenarios including but not limited to nonparallel
shifts in the yield curve, variances in prepayment speeds and variances to correlations of instrument rates to market indexes.

The
table below shows our net interest income sensitivity analysis reflecting the following changes to net interest income for the
first and second years of the simulation model. The analysis assumes no balance sheet growth, a parallel shift in interest rates,
and all rate changes were “ramped” over the first 12-month period and then maintained at those levels over the remainder
of the simulation horizon.

The
preceding sensitivity analysis does not represent a forecast of net interest income, nor do the calculations represent any actions
that management may undertake in response to changes in interest rates. They should not be relied upon as being indicative of
expected operating results. These hypothetical estimates are based upon numerous assumptions including, among others, the nature
and timing of interest rate levels, yield curve shape, prepayments on loans and securities, deposit decay rates, pricing decisions
on loans and deposits and reinvestment/replacement of asset and liability cash flows. While assumptions are developed based upon
current economic and local market conditions, we cannot make any assurances as to the predictive nature of these assumptions,
including how customer preferences or competitor influences might change.

Periodically,
if deemed appropriate, we may use interest rate swaps, floors and caps, which are common derivative financial instruments, to
hedge our interest rate exposure to interest rate movements. The Board has approved hedging policy statements governing the use
of these instruments. These interest rate swaps are designated as cash flow hedges and involve the receipt of variable rate amounts
from a counterparty in exchange for our making fixed payments.

79

Recent
Accounting Pronouncements.

Refer
to Note 1 to our consolidated financial statements for a summary of the recent accounting pronouncements.

Impact
of Inflation and Changing Prices.

The
Company’s consolidated financial statements and accompanying notes have been prepared in accordance with GAAP. GAAP generally
requires the measurement of financial position and operating results in terms of historical dollars without consideration for
changes in the relative purchasing power of money over time due to inflation. The impact of inflation is reflected in the increased
cost of our operations. Unlike industrial companies, our assets and liabilities are primarily monetary in nature. As a result,
changes in market interest rates have a greater impact on performance than do the effects of inflation.