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Item 7. Management’s Discussion and Analysis

2024-03-08 compared with 2023-03-10 · 733 added, 610 removed, 89 unchanged (94% of the section changed)

DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

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 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 2023 results compared to 2022.

For a discussion of 2021 results compared to 2020, refer to Part II, Item 7 of our Annual Report filed on Form 10-K, which was filed

with the SEC on March 11, 2022.

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.

have adopted a growth-oriented strategy that continues to focus on increasing commercial lending and residential lending.

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.

connection with our overall growth strategy, we seek to:

the Company’s commercial loan portfolio and related commercial deposits by targeting

businesses in our primary market area of Hampden County and Hampshire County in western

Massachusetts and Hartford and Tolland Counties in northern Connecticut to increase the

net interest margin and loan income;

the commercial portfolio by growing the residential real estate portfolio to diversify

For a discussion of 2022 results compared

to 2021, refer to Part II, Item 7 of our Annual Report filed on Form 10-K, which was filed with the SEC on March 10, 2023.

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,

● Increase market share and achieve scale to improve the Company’s profitability and efficiency

and return value to shareholders;

● Grow the Company’s commercial loan portfolio and related commercial deposits by targeting

businesses in our primary market area of Hampden County and Hampshire County in western Massachusetts and Hartford and Tolland

Counties in northern Connecticut to increase the net interest margin and loan income;

● Supplement the commercial portfolio by growing the residential real estate portfolio to diversify

the loan portfolio and deepen customer relationships;

on expanding our retail banking deposit franchise and increase the number of households

served within our designated market area;

in people, systems and technology to grow revenue, improve efficiency and enhance the

overall customer experience;

revenues, increase tangible book value, continue to pay competitive dividends to shareholders

and utilize the Company’s stock repurchase plan to leverage our capital and enhance

franchise value;

growth through acquisitions.

● Focus on expanding our retail banking deposit franchise and increase the number of households served

within our designated market area;

● Invest in people, systems and technology to grow revenue, improve efficiency and enhance the overall

customer experience;

● Grow revenues, increase book value per share and tangible book value, pay competitive dividends

to shareholders and utilize the Company’s stock repurchase plan to leverage our capital and enhance franchise value;

● Consider growth through acquisitions.

We may pursue expansion opportunities in existing or adjacent

strategic locations with companies that add complementary products to our existing business

and at terms that add value to our existing shareholders.

should read the following financial results for the year ended December 31, 2022 in the context of this strategy.

the twelve months ended December 31, 2022, net income was $25.9 million, or $1.18 diluted earnings per share, compared to net

income of $23.7 million, or $1.02 diluted earnings per share, for the twelve months ended December 31, 2021.

The results for the

twelve months ended December 31, 2022 showed increases in net interest income and non-interest income, which were both partially

offset by increases in the provision for loan losses and non-interest expense.

the twelve months ended December 31, 2022, net interest income increased $6.0 million, or 8.3%, to $79.2 million, compared to

$73.2 million for the twelve months ended December 31, 2021.

The increase in net interest income was due to an increase in interest

and dividend income of $6.1 million, or 7.6%, partially offset by an increase in interest expense of $24,000, or 0.4%.

twelve months ended December 31, 2022, the Company generated net interest income growth of 8.3%, overcoming a $6.0 million, or

89.2%, decrease in PPP income as the PPP program comes to a close.

Excluding PPP income of $728,000 and $6.8 million for the twelve

months ended December 31, 2022 and the twelve months ended December 31, 2021, respectively, net interest income increased $12.1

million, or 18.2% for the same period.

the twelve months ended December 31, 2022, the provision for loan losses was $700,000, compared to a credit for loan losses of

strategic locations with companies that add complementary products to our existing business and at terms that add value to our

existing shareholders.

You should read the following financial

results for the year ended December 31, 2023 in the context of this strategy.

For the twelve months ended December 31,

The Company recorded net charge-offs of $556,000 for the twelve months

ended December 31, 2022, as compared to net charge-offs of $445,000 for the twelve months ended December 31, 2021.

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 certificates of deposit and money market accounts, demand

deposit accounts and savings account deposits 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 on sales of mortgages, gains 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.

Modifications/Troubled Debt Restructurings .

Company implemented a modification deferral program under the CARES Act, which allowed residential, commercial and consumer borrowers

who were adversely affected by the COVID-19 pandemic, to defer loan payments for a set period of time.

As of December 31, 2022,

the Company had no modified loans remaining under the CARES Act.

for Loan Losses.

determining the allowance for loan losses, the Company considers quantitative loss factors and a number of qualitative factors,

such as underwriting policies, current economic conditions, delinquency statistics, the adequacy of the underlying collateral

and the financial strength of the borrower.

The long-term consequences of the COVID-19 pandemic could cause us to experience higher

credit losses in our lending portfolio, reduce demand for our products and services and other negative impacts on our financial

position, results of operations and prospects.

As of December 31, 2022, the Company’s delinquency and nonperforming assets

have not been materially impacted by the COVID-19 pandemic, and therefore, have not resulted in material credit losses within

the lending portfolio.

Accounting Policies.

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 loan losses and provision for loan losses.

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 our Board of Directors.

process of evaluating the loan portfolio, classifying loans and determining the allowance and provision is described in detail

in Part I under “Business – Lending Activities - Allowance for Loan Losses.” This evaluation is inherently

subjective as it requires material estimates that may be susceptible to significant change.

Our methodology for assessing the

allocation of the allowance consists of two key components, which are a specific allowance for impaired loans and a general allowance

for the remainder of the portfolio.

Measurement of impairment can be based on present value of expected future cash flows discounted

at the loan’s effective interest rate, the loan’s observable market price or the fair value of the collateral, if

the loan is collateral dependent.

The allocation of the allowance is also reviewed by management based upon our evaluation of

then-existing economic and business conditions affecting our key lending areas and other conditions, such as new loan products,

credit quality trends (including trends in nonperforming loans expected to result from existing conditions), collateral values,

loan volumes and concentrations, specific industry conditions within portfolio segments that existed as of the balance sheet date

and the impact that such conditions were believed to have had on the collectability of the loan portfolio.

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, our earnings and capital could be significantly and

adversely affected.

There were no changes to the Company’s allowance for loan losses methodology during the year ended December

of Net Interest Income.

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.”

Balance Sheet.

The following

table sets forth information relating to the Company for the years ended December 31, 2022, 2021 and 2020.

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.

2023, net income was $15.1 million, or $0.70 diluted earnings per share, compared to net income of $25.9 million, or $1.18 diluted

earnings per share, for the twelve months ended December 31, 2022.

The results for the twelve months ended December 31, 2023 showed

decreases in net interest income and non-interest income, as well as increases in non-interest expense and the provision for credit

During the twelve months ended December

31, 2023, net interest income decreased $11.3 million, or 14.3%, to $67.9 million, compared to $79.2 million for the twelve months

ended December 31, 2022.

The decrease in net interest income was due to an increase in interest expense of $26.5 million, partially

offset by an increase in interest and dividend income of $15.2 million, or 17.7%.

During the twelve months ended December

31, 2023, the Company recorded a provision for credit losses of $872,000 under the CECL model, compared to a provision for credit

losses of $700,000 during the twelve months ended December 31, 2022 under the incurred loss model.

The increase in reserves was

primarily due to changes in the economic environment and related adjustments to the quantitative components of the CECL methodology.

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 on

sales of mortgages, gains 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

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 our Board of Directors.

The process of evaluating the loan portfolio,

classifying loans and determining the allowance and provision is described in detail in Part I under “Business –

Lending Activities - Allowance for Credit Losses.” On January 1, 2023, the Company adopted ASU 2016-13 Financial Instruments

– Credit Losses (Topic 326):

Measurement of Credit Losses on Financial Instruments , as amended, which replaces the incurred

loss methodology with an expected loss methodology that is referred to as CECL methodology.

The measurement of expected credit

losses under the CECL methodology is applicable to financial assets measured at amortized cost, including loan receivables and

HTM debt securities.

In addition, ASC 326 made changes to the accounting for AFS debt securities.

The Company adopted ASC 326 using the modified

retrospective method for all financial assets measured at amortized cost and off-balance sheet credit exposures.

Results for reporting

periods beginning January 1, 2023 are presented under ASC 326 while prior period amounts continue to be reported in accordance

with previously applicable GAAP.

The Company recorded a net increase to retained earnings of $9,000 as of January 1, 2023 for the

cumulative effect of adopting ASC 326, which includes a net deferred tax liability of $4,000.

The transition adjustment includes

a $1.2 million increase to the allowance for credit losses and the recording of a $918,000 allowance for credit losses on off-balance

sheet credit exposures.

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 $7.5 million at December 31, 2023 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.

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.

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, 2023, 2022 and 2021.

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

For the Years Ended December 31,

The yields include fees which are considered adjustments

Loan interest and yield data does not include any accrued interest from non-accruing loans.

the Years Ended December 31,

(Dollars in thousands)

Interest-earning assets

Interest-earning

Securities(2)

Other investments - at cost

Short-term investments(3)

Total interest-earning assets

Total non-interest-earning assets

investments - at cost

investments(3)

interest-earning assets

non-interest-earning assets

Interest-bearing

checking accounts

market accounts

interest-bearing deposits

borrowings and long-term debt

Interest-bearing

Non-interest-bearing

non-interest-bearing liabilities

liabilities and equity

Interest-bearing liabilities

Interest-bearing checking accounts

Savings accounts

Money market accounts

Time deposits

Total interest-bearing deposits

Short-term borrowings and long-term debt

Interest-bearing liabilities

Non-interest-bearing deposits

Other non-interest-bearing liabilities

Total non-interest-bearing liabilities

Total liabilities

Total liabilities and equity

Tax-equivalent adjustment(2)

Net interest and dividend income

Net interest rate spread(4)

Net interest rate spread, on a tax-equivalent basis(5)

Net interest margin(6)

Net interest margin, on a tax-equivalent basis(7)

Ratio of average interest-earning assets to

average interest-bearing liabilities

including nonaccrual loans, are net of deferred loan origination costs and unadvanced

and securities income are presented on a tax-equivalent basis using a tax rate of 21%

for 2022, 2021 and 2020.

The tax-equivalent adjustment is deducted from tax-equivalent

net interest and dividend income to agree to the amount reported on the consolidated

statements of net income.

interest and dividend income

interest rate spread(4)

interest rate spread, on a tax-equivalent basis(5)

interest margin(6)

interest margin, on a tax-equivalent basis(7)

of average interest-earning assets to average interest-bearing liabilities

(1) Loans, including nonaccrual loans, are net of deferred loan origination costs and unadvanced funds.

(2) Loan and securities income are presented on a tax-equivalent basis using a tax rate of 21% for

2023, 2022 and 2021.

The tax-equivalent adjustment is deducted from tax-equivalent net interest and dividend income to agree to

the amount reported on the consolidated statements of net income.

See “Explanation of Use of Non-GAAP Financial Measurements”.

(3) Short-term

investments include federal funds sold.

interest rate spread represents the difference between the weighted average yield on

interest-earning assets and the weighted average cost of interest-bearing liabilities.

interest rate spread, on a tax-equivalent basis, represents the difference between the

tax-equivalent weighted average yield on interest-earning assets and the tax-equivalent

weighted average cost of interest-bearing liabilities.

See “Explanation of Use

of Non-GAAP Financial Measurements”.

interest margin represents net interest and dividend income as a percentage of average

interest-earning assets.

interest margin, on a tax-equivalent basis, represents tax-equivalent net interest and

dividend income as a percentage of average interest-earning assets.

See “Explanation

of Use of Non-GAAP Financial Measurements”.

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);

(3) the net change.

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

and the changes due to rate.

Year Ended December 31, 2022

Compared to Year Ended December 31, 2021

Year Ended December 31, 2021

Compared to Year Ended December 31, 2020

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

(4) 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.

(5) Net interest rate spread, on a tax-equivalent basis, represents the difference between the tax-equivalent

weighted average yield on interest-earning assets and the tax-equivalent weighted average cost of interest-bearing liabilities.

See “Explanation of Use of Non-GAAP Financial Measurements”.

(6) Net interest margin represents net interest and dividend income as a percentage of average interest-earning

(7) Net interest margin, on a tax-equivalent basis, represents tax-equivalent net interest and dividend

income as a percentage of average interest-earning assets.

See “Explanation of Use of Non-GAAP Financial Measurements”.

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

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

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

Year Ended December 31, 2023 Compared to Year

Ended December 31, 2022

Year Ended December 31, 2022 Compared to Year

Ended December 31, 2021

Increase (Decrease) Due to

15 unchanged sentences

Change in net interest and dividend income

(1) Securities

and loan income and net interest income are presented on a tax-equivalent basis using a tax rate of 21% for 2022, 2021 and 2020.

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”.

(1) Securities and loan income and net interest income are

presented on a tax-equivalent basis using a tax rate of 21% for 2023, 2022 and 2021.

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.”

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.

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.

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.

20 unchanged sentences

Adjusted net interest margin, excluding purchase accounting adjustments, PPP fee income and prepayment penalties (non-GAAP)

For the twelve months ended

At or for the twelve months ended

(In thousands)

Book Value per Share (GAAP)

Non-GAAP adjustments:

Core deposit intangible

Tangible Book Value per Share (non-GAAP)

Income Before Income Taxes (GAAP)

Provision (credit) for loan losses

Gain on defined benefit plan curtailment

Income Before Taxes, Provision, PPP Income and Defined Benefit Curtailment (non-GAAP)

Non-GAAP adjustments:

Provision for (reversal of) credit losses

Gain on bank-owned life insurance death benefit

Loss (gain) on defined benefit plan termination

Income Before Taxes, Provision, PPP Income, Bank-Owned Life Insurance Death Benefit and Defined Benefit Termination (non-GAAP)

Adjusted Efficiency Ratio:

6 unchanged sentences

Non-GAAP adjustments:

Loss (gain) on securities, net

Unrealized losses (gain) on marketable equity securities

Loss on disposal of premises and equipment

Loss on securities, net

Unrealized losses on marketable equity securities

Loss on interest rate swap termination

Gain on bank-owned life insurance death benefit

Gain on non-marketable equity investments

Gain on defined benefit plan curtailment

Loss (gain) on defined benefit plan termination

Non-interest Income for Adjusted Efficiency Ratio (non-GAAP)

1 unchanged sentence

Efficiency Ratio (GAAP)

Adjusted Efficiency Ratio (Non-interest Expense for Efficiency Ratio (non-GAAP)/Total Revenue for Efficiency Ratio (non-GAAP))

tax equivalent adjustment is based upon a 21% tax rate for 2022, 2021 and 2020.

of Financial Condition at December 31, 2022 and December 31, 2021.

December 31, 2022, total assets were $2.6 billion, an increase of $14.7 million, or 0.6%, from December 31, 2021.

sheet composition and changes since December 31, 2021 are discussed below.

and Cash Equivalents.

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 $30.3 million, or 1.2% of total assets, at December 31, 2022 and $103.5

million, or 4.1% of total assets, at December 31, 2021.

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.

The decrease in cash and cash equivalents at December 31, 2022 is

primarily due to the Company utilizing cash on hand to fund loan growth during the year ended December 31, 2022.

December 31, 2022, the Company’s available-for-sale securities portfolio decreased $47.4 million, or 24.4%, from $194.4

Adjusted Efficiency Ratio (Non-interest Expense for Adjusted Efficiency Ratio (non-GAAP)/Total Revenue for Adjusted Efficiency Ratio (non-GAAP))

(1) The tax equivalent adjustment is based upon a 21% tax rate for 2023,

2022 and 2021.

Comparison of Financial Condition at

December 31, 2023 and December 31, 2022.

At December 31, 2023, total assets were

$2.6 billion, an increase of $11.4 million, or 0.4%, from December 31, 2022.

The balance sheet composition and changes since December

31, 2022 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.

and cash equivalents totaled $28.8 million, or 1.1% of total assets, at December 31, 2023 and $30.3 million, or 1.2% of total assets,

at December 31, 2022.

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.

At December 31, 2023, the AFS and HTM securities

portfolio represented 14.1% of total assets compared to 14.8% at December 31, 2022.

At December 31, 2023, the Company’s AFS

securities portfolio, recorded at fair market value, decreased $9.9 million, or 6.7%, from $147.0 million at December 31, 2022

to $137.1 million.

The HTM securities portfolio, recorded at amortized cost, decreased $6.8 million, or 3.0%, from $230.2 million

at December 31, 2022 to $223.4 million at December 31, 2023.

The marketable equity securities portfolio decreased $6.0 million,

or 96.9%, from $6.2 million at December 31, 2022 to $196,000 at December 31, 2023.

The decrease in the AFS and HTM securities portfolios

was primarily due to amortization and payoffs recorded during the twelve months ended December 31, 2023.

At December 31, 2023, the Company reported

unrealized losses on the AFS securities portfolio of $29.2 million, or 17.5% of the amortized cost basis of the AFS securities

portfolio, compared to unrealized losses of $32.2 million, or 18.0% of the amortized cost basis of the AFS securities at December

At December 31, 2023, the Company reported unrealized losses on the HTM securities portfolio of $35.7 million, or 16.0%,

of the amortized cost basis of the HTM securities portfolio, compared to $39.2 million, or 17.0% of the amortized cost basis of

the HTM securities portfolio at December 31, 2022.

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 $3.2 million

and $2.9 million at December 31, 2023 and December 31, 2022, respectively.

At December 31, 2023 and 2022, the Company

held $423,000 of Atlantic Community Bankers Bank stock.

The stock is restricted and carried in other assets at cost.

is evaluated for impairment based on an estimate of the ultimate recovery to the par value.

At December 31, 2023, total loans increased

$35.9 million, or 1.8%, to $2.0 billion from December 31, 2022.

Residential real estate loans, including home equity loans, increased

$27.1 million, or 3.9%, commercial real estate loans increased $10.4 million, or 1.0%, and commercial and industrial loans decreased

$2.4 million, or 1.1%.

Bank-Owned Life Insurance ("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 $75.1 million and $74.6 million

at December 31, 2023 and 2022, respectively.

At December 31, 2023, total deposits decreased

$85.7 million, or 3.8%, from December 31, 2022, to $2.1 billion at December 31, 2023, due to industry-wide pressures and a competitive

market for deposits.

Core deposits, which the Company defines as all deposits except time deposits, decreased $285.4 million, or

15.7%, from $1.8 billion, or 81.5% of total deposits, at December 31, 2022, to $1.5 billion, or 71.5% of total deposits, at December

Money market accounts decreased $166.7 million, or 20.8%, to $634.4 million, non-interest-bearing deposits decreased

$65.9 million, or 10.2%, to $579.6 million, savings accounts decreased $35.0 million, or 15.7%, to $187.4 million and interest-bearing

checking accounts decreased $17.7 million, or 11.9%, to $131.0 million.

Time deposits increased $199.7 million, or 48.5%, from

$411.7 million at December 31, 2022 to $611.4 million at December 31, 2023.

The held-to-maturity securities portfolio, recorded at amortized

cost, increased $7.9 million, or 3.6%, from $222.3 million at December 31, 2021 to $230.2 million at December 31, 2022.

The marketable

equity securities portfolio decreased $5.7 million, or 47.6%, from $11.9 million at December 31, 2021 to $6.2 million at December

The decreases were due to principal pay downs and redemptions, as well as an increase in unrealized loss on securities

available-for-sale.

The primary objective of the investment portfolio is to provide liquidity and maximize income while preserving

the safety of principal.

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 $2.9 million and $2.2 million at December 31, 2022 and December 31, 2021, respectively.

December 31, 2022 and 2021, 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.

December 31, 2022, total loans were $2.0 billion, an increase of $126.7 million, or 6.8%, from December 31, 2021.

Excluding PPP

loans, total loans increased $149.7 million, or 8.1%, driven by an increase in commercial real estate loans of $89.4 million,

or 9.1%, an increase in total commercial and industrial loans of $16.2 million, or 8.1%, an increase in residential real estate

loans, which include home equity loans, of $43.0 million, or 6.6%, and a decrease in PPP loans of $23.1 million, or 91.0%, from

December 31, 2021.

During the twelve months ended December 31, 2022 and 2021, the Company sold $277,000 and $59.7 million, respectively,

of fixed rate, low coupon residential real estate loans to the secondary market.

As of December 31, 2022, the Company serviced

$79.3 million in loans sold to the secondary market, compared to $88.2 million at December 31, 2021.

Servicing rights will likely

continue to be retained on all loans written and sold to the secondary market.

Life Insurance (“BOLI”).

Company indirectly utilizes the earnings on BOLI to offset the cost of the Company’s benefit plans.

The cash surrender value

of BOLI was $74.6 million and $72.9 million at December 31, 2022 and 2021, respectively.

December 31, 2022, total deposits were $2.2 billion, a decrease of $27.5 million, or 1.2%, from December 31, 2021, primarily due

to a decrease in core deposits of $37.1 million, or 2.0%.

Core deposits, which the Company defines as all deposits except time

deposits, decreased from $1.9 billion, or 82.2% of total deposits, at December 31, 2021, to $1.8 billion, or 81.5% of total deposits,

Brokered time deposits, which are included in time

deposits, totaled $1.7 million at December 31, 2023.

The Company did not have any brokered deposits at December 31, 2022.

31, 2023, the Bank’s uninsured deposits represented 26.8% of total deposits, compared to 30.8% at December 31, 2022.

Borrowed Funds.

At December 31, 2023, total borrowings

increased $94.3 million, or 151.5%, from $62.2 million at December 31, 2022 to $156.5 million.

Short-term borrowings decreased

$25.3 million, or 61.1%, to $16.1 million, compared to $41.4 million at December 31, 2022.

Long-term borrowings increased $119.5

million, from $1.2 million at December 31, 2022, to $120.6 million at December 31, 2023, to replace deposit attrition.

borrowings consisted of $30.6 million outstanding with the FHLB and $90.0 million outstanding under the FRB’s BTFP.

31, 2023, borrowings also consisted of $19.7 million in fixed-to-floating rate subordinated notes.

Shareholders’ Equity.

At December 31, 2023, shareholders’

equity was $237.4 million, or 9.3% of total assets, compared to $228.1 million, or 8.9% of total assets, at December 31, 2022.

The increase was primarily attributable to net income of $15.1 million, partially offset by a decrease in accumulated other comprehensive

loss of $3.3 million, $5.0 million for the repurchase of common stock and cash dividends paid of $6.1 million.

At December 31,

Non-interest-bearing deposits increased $4.2 million, or 0.7%, to $645.5 million, interest-bearing checking

accounts increased $3.0 million, or 2.1%, to $148.7 million, savings accounts increased $4.8 million, or 2.2%, to $222.4 million,

and money market accounts decreased $49.3 million, or 5.8%, to $801.1 million.

Time deposits increased $9.7 million, or 2.4%,

from $402.0 million at December 31, 2021 to $411.7 million at December 31, 2022.

December 31, 2022, total borrowings increased $39.9 million, or 178.9%, from $22.3 million at December 31, 2021, to $62.2 million.

Short-term borrowings and long-term debt increased $39.9 million to $42.5 million and subordinated debt outstanding totaled $19.7

million at December 31, 2022 and $19.6 million at December 31, 2021.

Shareholders’

December 31, 2022, shareholders’ equity was $228.1 million, or 8.9% of total assets, compared to $223.7 million, or 8.8%

of total assets, at December 31, 2021.

The increase in shareholders’ equity reflects net income of $25.9 million, partially

offset by $6.4 million for the repurchase of the Company’s common stock, the payment of regular cash dividends of $5.3 million

and an increase in accumulated other comprehensive loss of $12.7 million.

Total shares outstanding as of December 31, 2022 were

Company’s book value per share was $10.27 at December 31, 2022 compared to $9.87 at December 31, 2021, while tangible book

value per share, a non-GAAP financial measure, increased $0.40, or 4.3%, from $9.21 at December 31, 2021 to $9.61 at December

Reflected in the book value and tangible book value changes during the year ended December 31, 2022 are the Federal

Reserve’s 425 basis points interest rate increases, which resulted in significant changes in unrealized gains and losses

on investment securities.

Such unrealized gains and losses are generally due to changes in interest rates and represent the difference,

net of applicable income tax effect, between the estimated fair value and amortized cost of investment securities classified as

available-for-sale.

The Company had no other-than-temporary impairment charges in its investment portfolio in 2022 or 2021.

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, 2022, 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.

October 31, 2022, the Board of Director’s previously approved termination of the Westfield Bank Defined Benefit Pension

Plan (“DB Plan”) became effective, subject to regulatory approvals.

Once the Company has received regulatory approval

to terminate the DB Plan, which is expected in the first quarter of 2023, the Company will make an additional cash contribution

during the second quarter of 2023, if necessary, in order to fully fund the DB Plan on a plan termination basis, followed by the

purchase of annuity contracts to transfer its remaining liabilities under the DB Plan, for those participants who do not opt for

a one-time lump sum payment.

The actual amount of this cash contribution, if any, will depend upon the nature and timing of participant

settlements, as well as prevailing market conditions.

At December 31, 2022, the Company reversed $7.3 million in net unrealized

losses recorded in accumulated other comprehensive income attributed to both the DB plan curtailment resulting from the termination

of the DB Plan as well as changes in discount rates.

In addition, the Company recorded a gain on curtailment of $2.8 million through

non-interest income.

The improvement in book value and tangible book value for the three months ended December 31, 2022 were primarily

related to the termination of the DB Plan.

under Management.

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.

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 decreased $35.6 million, or 18.9%, from $188.1

million for the year ended December 31, 2021, to $152.5 million for the year ended December 31, 2022.

of Operating Results for Years Ended December 31, 2022 and 2021.

the twelve months ended December 31, 2022, the Company reported net income of $25.9 million, or $1.18 per diluted share, compared

to $23.7 million, or $1.02 per diluted share, for the twelve months ended December 31, 2021.

Interest Income and Net Interest Margin.