Western New England Bancorp, Inc. 10-K

Securities and Exchange Commission Washington, D.C. 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2021 Commission File No.: 001-16767 Western New England Bancorp, Inc. (Exact name of registrant as specified in its charter) Massachusetts 73-1627673 (State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.) 141 Elm Street , Westfield , Massachusetts 01085 (Address of principal executive offices, including zip code) (413) 568-1911 (Registrant’s telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: (Title of each class) (Trading Symbol) (Name of each exchange on which registered) Common Stock, $0.01 par value per share WNEB The NASDAQ Global Select Market Securities registered pursuant to Section 12(g) of the Act: None. Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒ Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒ Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐ Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐ Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one): Large accelerated filer ☐ Accelerated filer ☒ Non-accelerated filer ☐ Smaller reporting company ☒ Emerging growth company ☐ If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐ Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. Yes ☒ No ☐ Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☒ The aggregate market value of the voting stock held by non-affiliates of the registrant as of June 30, 2021, was $ 196,173,752 . This amount was based on the closing price as of June 30, 2021 on the NASDAQ Global Select Market (“NASDAQ”) for a share of the registrant’s common stock, which was $ 8.15 on June 30, 2021. As of March 3, 2022 , the registrant had 22,664,878 shares of common stock, $0.01 per value, issued and outstanding. DOCUMENTS INCORPORATED BY REFERENCE: Portions of the Proxy Statement for the 2022 Annual Meeting of Shareholders are incorporated by reference into Part III of this report. WESTERN NEW ENGLAND BANCORP, INC. ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED DECEMBER 31, 2021 TABLE OF CONTENTS ITEM PART I PAGE 1 Business 4 1A Risk Factors 35 1B Unresolved Staff Comments 46 2 Properties 46 3 Legal Proceedings 49 4 Mine Safety Disclosures 49 PART II 5 Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities 49 6 [Reserved] 51 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations 51 7A Quantitative and Qualitative Disclosures About Market Risk 67 8 Financial Statements and Supplementary Data 67 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 68 9A Controls and Procedures 68 9B Other Information 71 9C Disclosure Regarding Foreign Jurisdictions that Prevent Inspections 71 PART III 10 Directors, Executive Officers and Corporate Governance 71 11 Executive Compensation 71 12 Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters 71 13 Certain Relationships and Related Transactions and Director Independence 71 14 Principal Accounting Fees and Services 71 PART IV 15 Exhibits and Financial Statement Schedules 71 16 Form 10-K Summary 73 FORWARD-LOOKING STATEMENTS We may, from time to time, make written or oral “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, including statements contained in our filings with the Securities and Exchange Commission (the “SEC”), our reports to shareholders and in other communications by us. This Annual Report on Form 10-K contains “forward-looking statements” with respect to the Company’s financial condition, liquidity, results of operations, future performance, business, measures being taken in response to the coronavirus disease 2019 (“COVID-19") pandemic and the impact of COVID-19 on the Company’s business. Forward-looking statements may be identified by the use of such words as “believe,” “expect,” “anticipate,” “should,” “planned,” “estimated,” and “potential.” Examples of forward-looking statements include, but are not limited to, estimates with respect to our financial condition, results of operations and business that are subject to various factors which could cause actual results to differ materially from these estimates. These factors include, but are not limited to: • the duration and scope of the COVID-19 pandemic and the local, national and global impact of COVID-19; • actions governments, businesses and individuals take in response to the COVID-19 pandemic; • the speed and effectiveness of COVID-19 vaccine and treatment developments and their deployment, including public adoption rates of COVID-19 vaccines; • the emergence of new COVID-19 variants, such as the Omicron variant, and the response thereto; • the pace of recovery when the COVID-19 pandemic subsides; • changes in the interest rate environment that reduce margins; • the effect on our operations of governmental legislation and regulation, including changes in accounting regulation or standards, the nature and timing of the adoption and effectiveness of new requirements under the Dodd-Frank Act Wall Street Reform and Consumer Protection Act of 2010 (“Dodd-Frank Act”), Basel guidelines, capital requirements and other applicable laws and regulations; • the highly competitive industry and market area in which we operate; • general economic conditions, either nationally or regionally, resulting in, among other things, a deterioration in credit quality; • changes in business conditions and inflation; • changes in credit market conditions; • the inability to realize expected cost savings or achieve other anticipated benefits in connection with business combinations and other acquisitions; • changes in the securities markets which affect investment management revenues; • increases in Federal Deposit Insurance Corporation deposit insurance premiums and assessments; • changes in technology used in the banking business; • the soundness of other financial services institutions which may adversely affect our credit risk; • certain of our intangible assets may become impaired in the future; • our controls and procedures may fail or be circumvented; • new lines of business or new products and services, which may subject us to additional risks; • changes in key management personnel which may adversely impact our operations; • severe weather, natural disasters, acts of war or terrorism and other external events which could significantly impact our business; and • other factors detailed from time to time in our SEC filings. Although we believe that the expectations reflected in such forward-looking statements are reasonable, actual results may differ materially from the results discussed in these forward-looking statements. You are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. We do not undertake any obligation to republish revised forward-looking statements to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events, except to the extent required by law. Unless the context indicates otherwise, all references in this prospectus to “Western New England Bancorp,” “WNEB,” “we,” “us,” “our company,” and “our” refer to Western New England Bancorp, Inc. and its subsidiaries (including Westfield Bank, CSB Colts, Inc., Elm Street Securities Corporation, WFD Securities, Inc. and WB Real Estate Holdings, LLC). 3 PART I ITEM 1. BUSINESS General. Western New England Bancorp, Inc. (“WNEB” or “Company”) (f/k/a “Westfield Financial, Inc.”) headquartered in Westfield, Massachusetts, is a Massachusetts-chartered stock holding company and is registered as a savings and loan holding company with the Federal Reserve Board under the Bank Holding Company Act of 1956, as amended (the “BHC Act”). In 2001, the Company reorganized from a Massachusetts-chartered savings bank holding company to a Massachusetts-chartered stock corporation with the second step conversion being completed in 2007. WNEB is the parent company and owns all of the capital stock of Westfield Bank (“Westfield” or “Bank”). The Company is also subject to the jurisdiction of the SEC and is subject to the disclosure and other regulatory requirements of the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934, as amended, as administered by the SEC. Western New England Bancorp is traded on the NASDAQ under the ticker symbol “WNEB” and is subject to the NASDAQ stock market rules. At December 31, 2021, WNEB had consolidated total assets of $2.5 billion, total net loans of $1.8 billion, total deposits of $2.3 billion and total shareholders’ equity of $223.7 million. Westfield Bank, headquartered in Westfield, Massachusetts, is a federally-chartered savings bank organized in 1853 and is regulated by the Office of the Comptroller of the Currency (“OCC”). The Bank is a full-service, community oriented financial institution offering a full range of commercial and retail products and services as well as wealth management financial products. As of December 31, 2021, the Bank had twenty-five branches and seventeen freestanding automated teller machines (“ATMs”), and an additional five seasonal or temporary ATMs. The Bank also conducts business through an additional six freestanding and thirty seasonal or temporary ATMs that are owned and serviced by a third party, whereby the Bank pays a rental fee and shares in the surcharge revenue. All branch and ATM locations serve Hampden County and Hampshire County in western Massachusetts and Hartford County and Tolland County in northern Connecticut. The Bank also provides a variety of banking services including telephone and online banking, remote deposit capture, cash management services, overdraft facilities, night deposit services, and safe deposit facilities. As a member of the Federal Deposit Insurance Corporation (“FDIC”), the Bank’s deposits are insured up to the maximum FDIC insurance coverage limits. The Bank is also a member of the Federal Home Loan Bank of Boston (“FHLB”). On October 21, 2016, the Company acquired Chicopee Bancorp, Inc. (“Chicopee”), the holding company for Chicopee Savings Bank and in conjunction with the acquisition, the name of the Company was changed to Western New England Bancorp, Inc. The transaction qualified as a tax-free reorganization for federal income tax purposes. Subsidiary Activities. Western New England Bancorp, Inc. has two subsidiaries that are included in the Company’s consolidated financial statements: • Westfield Bank: The Company conducts its principal business activities through its wholly owned subsidiary Westfield Bank. • WFD Securities, Inc. (“WFD”) . WFD is a Massachusetts chartered security corporation, for the primary purpose of holding qualified securities. Westfield Bank has three wholly owned subsidiaries that are included in the Company’s consolidated financial statements: • Elm Street Securities Corporation (“Elm”). Elm is a Massachusetts-chartered security corporation, formed for the primary purpose of holding qualified securities. • WB Real Estate Holdings, LLC. (“WB”). WB is a Massachusetts-chartered limited liability company formed for the primary purpose of holding other real estate owned (“OREO”). 4 • CSB Colts, Inc. (“CSB Colts”). CSB Colts is a Massachusetts-chartered security corporation, formed for the primary purpose of holding qualified securities. CSB Colts was acquired on October 21, 2016, in conjunction with the acquisition of Chicopee. Market Area. Westfield Bank’s headquarters are located at 141 Elm Street in Westfield, Massachusetts. The Bank’s primary lending and deposit market areas include all of Hampden County and Hampshire County in western Massachusetts and Hartford and Tolland Counties in northern Connecticut. The Bank operates 25 banking offices in Agawam, Chicopee, Feeding Hills, East Longmeadow, Holyoke, Huntington, Ludlow, South Hadley, Southwick, Springfield, Ware, West Springfield and Westfield, Massachusetts and Bloomfield, Enfield, Granby and West Hartford, Connecticut. We operate full-service ATMs at our branch locations and have 17 freestanding ATM locations in Chicopee, Holyoke, Ludlow, Southwick, Springfield, West Springfield and Westfield, Massachusetts and 5 traveling/seasonal ATMs. The Bank also conducts business through an additional six freestanding and thirty seasonal or temporary ATMs that are owned and serviced by a third party, whereby the Bank pays a rental fee and shares in the surcharge revenue. In addition, we provide online banking services, including online deposit account opening and residential mortgage and consumer loan applications through our website at www.westfieldbank.com. The markets served by our branches are primarily suburban markets located in western Massachusetts and in northern Connecticut. Westfield, Massachusetts, is located near the intersection of U.S. Interstates 90 (the Massachusetts Turnpike) and 91. Our middle market and commercial real estate lending team is located in Springfield, the Pioneer Valley’s primary urban market. The Pioneer Valley of western Massachusetts encompasses the sixth largest metropolitan area in New England. The Springfield Metropolitan area covers a relatively diverse area ranging from densely populated urban areas, such as Springfield, to outlying rural areas. Our Financial Services Center in West Hartford serves as our Connecticut hub, housing employees across all commercial and retail lines of business. Our markets fall within New England’s Knowledge Corridor, an interstate partnership of regional economic development, planning, business, tourism and educational institutions that work together to advance the region’s economic progress. A diversified mix of industry groups are concentrated in western Massachusetts and northern Connecticut, including manufacturing, health care, higher education, wholesale and retail trade and service. The economies of our primary markets have benefited from the presence of large employers such as Baystate Medical Center, Big Y World Class Markets, MassMutual Financial Group, Mercy Medical Center/Trinity Health of New England, MGM Springfield and Westover Air Reserve Base in Massachusetts, and Air National Guard, Collins Aerospace, Kaman Aerospace Corporation, Lego Systems Inc., Stanadyne LLC and Talcott Resolution Life Insurance Company in Connecticut. Other employment and economic activity is provided by financial institutions, colleges and universities, hospitals, and a variety of wholesale and retail trade business. Our Hampden County market also enjoys a strong tourism business with attractions such as the Eastern States Exposition, which operates The Big E, the largest fair in the northeast, the Basketball Hall of Fame, MGM Springfield and Six Flags New England. Competition. The Bank faces significant competition to attract and retain customers within existing and neighboring geographic markets. This competition stems from national and larger regional banks, numerous local savings banks, commercial banks, cooperative banks and credit unions which have a large presence in the region. Competition for loans, deposits and cash management services, and investment advisory assets also comes from other businesses that provide financial services, including consumer finance companies, mortgage brokers and lenders, private lenders, insurance companies, securities brokerage firms, institutional mutual funds, registered investment advisors, non-bank electronic payment and funding channels, internet-based banks and other financial intermediaries. We expect competition to increase in the future as a result of legislative, regulatory and technological changes and the continuing trend of consolidation in the financial services industry. Technological advances, for example, have lowered the barriers to market entry, allowed banks and other lenders to expand their geographic reach by providing services over the internet and made it possible for non-depository institutions to offer products and services that traditionally have been provided by banks. Changes in federal laws permit affiliation among banks, securities firms and insurance companies, which promotes a competitive environment in the financial services industry. 5 At June 30, 2021, which is the most recent date for which data is available from the FDIC, we held approximately 14.0% of the deposits in Hampden County, which was the second largest market share out of the 16 banks and thrifts with offices in Hampden County. Human Capital Talent Management We remain focused on being a good corporate citizen and creating a culture where we prioritize providing an exceptional customer experience and empowering our employees. The Company believes that it has had and continues to have good employee relations. Our talent management strategy ensures we leverage the talent needed, not just for today, but also for our future. Our employees are the foundation of our success and are responsible for upholding our guiding principles of integrity, trust, empathy, collaboration, work ethic, courage, inclusion and positive attitude. As of December 31, 2021, the Bank employed 355 total employees, with 298 employed full-time and 57 employed part-time. Employee retention helps the Company operate efficiently and effectively. Management promotes its core values through prioritizing concern for employees’ well-being, supporting employees’ career goals, offering competitive wages, and providing valuable fringe benefits. In addition, Bank employees may become stockholders of the Company through participation in its Employee Stock Ownership Plan (“ESOP”) and its 401(k) retirement plan, which offers a Company stock investment option. The Company actively encourages and supports the growth and development of its employees. Management generally seeks to fill positions by promotion and transfer from within the organization, whenever practical. Career development is advanced through ongoing mentoring and development programs, as well as internally developed training programs, customized corporate training engagements and educational reimbursement programs. Reimbursement is available to employees enrolled in pre-approved degree or certification programs at accredited institutions that teach skills or knowledge relevant to the financial services industry. Each year, we also attract rising juniors and seniors from colleges and universities across our footprint who have the opportunity to be assigned a position with the Company upon graduation. Inclusion and Diversity The Company strives to create an intentionally inclusive, diverse and thriving workplace where each person feels valued, respected and understood as well as a respectful, productive environment where everyone is encouraged to achieve their full potential. At December 31, 2021, our employees were representative of our commitment to recruit, develop, and retain diverse individuals, wherein approximately 65% of our employees were women and 21% of our employees are either ethnic minorities, veterans or persons with disabilities. We remain focused on bolstering our workforce through inclusive hiring and retention practices, which we feel reflects and better serves our communities. Health and Safety/Well-Being The safety, health and wellness of our employees is considered a top priority. The COVID-19 pandemic has presented a unique challenge with regard to maintaining employee safety while continuing successful operations. All employees have returned to working in person; however, when they experience signs or symptoms of a possible COVID-19 illness, they have been asked not to come to work and test for COVID-19 as necessary. We follow the Center for Disease Control (“CDC”) guidance as to when employees may return to in-person work. On an ongoing basis, the Company promotes the health and wellness of its employees and strives to keep the employee portion of health care premiums competitive with local competition. Lending Activities. General . The Company’s loan portfolio totaled $1.9 billion, or 73.5% of total assets, at December 31, 2021, compared to $1.9 billion, or 81.5% of total assets, at December 31, 2020. The Company lends to individuals, business entities, non-profit organizations and professional practices. The Company’s primary lending focus is on the development of high quality commercial relationships achieved through active business development efforts, long-term relationships with established commercial developers, community involvement, and focused marketing strategies. Loans made to businesses, non-profits, and professional practices may include commercial mortgage loans, construction and land development loans, commercial and industrial loans, including lines of credit and letters of credit. Loans made to individuals may include conventional residential mortgage loans, home equity loans and lines, residential construction loans on owner-occupied primary and secondary residences, and secured and unsecured personal loans and lines of credit. The Company manages its loan portfolio to avoid concentration by industry, relationship size, and source of repayment to lessen its credit risk exposure. 6 Interest rates on loans may be fixed or variable and variable rate loans may have fixed initial periods before periodic rate adjustments begin. Individual rates offered are dependent on the associated degree of credit risk, term, underwriting and servicing costs, loan amount, and the extent of other banking relationships maintained with the borrower, and may be subject to interest rate floors. Rates are also subject to competitive pressures, the current interest rate environment, availability of funds, and government regulations. The Company employs a seasoned commercial lending staff, with commercial lenders supporting the Company’s loan growth strategy. The Company contracts with an external loan review company to review the internal credit ratings assigned to loans in the commercial loan portfolio on a pre-determined schedule, based on the type, size, rating, and overall risk of the loan. During the course of their review, the third party examines a sample of loans, including new loans, existing relationships over certain dollar amounts and classified assets. The Company's internal residential origination and underwriting staff originate residential loans and are responsible for compliance with residential lending regulations, consumer protection and internal policy guidelines. The Company's internal compliance department monitors the residential loan origination activity for regulatory compliance. The Executive Committee of the Company’s Board of Directors (the “Board”) approves loan relationships exceeding certain prescribed dollar limits as outlined in the Company’s lending policy. At December 31, 2021, our general regulatory limit on loans to one borrower was $36.6 million. Our largest lending exposure was a $24.2 million commercial lending relationship, of which $19.2 million was outstanding at December 31, 2021. The relationship is primarily secured by business assets and commercial real estate located in Agawam, Massachusetts. At December 31, 2021, this relationship was performing in accordance with its original terms. Commercial Real Estate Loans and Commercial and Industrial Loans . At December 31, 2021, commercial real estate loans totaled $980.0 million, or 52.6% of total loans, compared to $833.9 million, or 43.3% of total loans, at December 31, 2020. The Company originates commercial real estate loans throughout its market area for the purpose of acquiring, developing, and refinancing commercial real estate where the property is the primary collateral securing the loan. These loans are typically secured by a variety of commercial and industrial property types, including one-to-four and multi-family apartment buildings, office, industrial, or mixed-use facilities, or other commercial properties, and are generally guaranteed by the principals of the borrower. Commercial real estate loans generally have repayment periods of approximately fifteen to thirty years. Variable interest rate loans in the commercial real estate loan portfolio have a variety of adjustment terms and underlying interest rate indices, and are generally fixed for an initial period before periodic rate adjustments begin. Commercial construction loans may include the development of residential housing and condominium projects, the development of commercial and industrial use property, and loans for the purchase and improvement of raw land. These loans are secured in whole or in part by underlying real estate collateral and are generally guaranteed by the principals of the borrowers. Construction lenders work to cultivate long-term relationships with established developers. The Company limits the amount of financing provided to any single developer for the construction of properties built on a speculative basis. Funds for construction projects are disbursed as pre-specified stages of construction are completed. Regular site inspections are performed, prior to advancing additional funds, at each construction phase, either by experienced construction lenders on staff or by independent outside inspection companies. Commercial construction loans generally are variable rate loans and lines with interest rates that are periodically adjusted and generally have terms of one to three years. At December 31, 2021 and December 31, 2020, there was $83.2 million and $103.3 million, respectively, in commercial construction loans included within commercial real estate loans. 7 At December 31, 2021, our total commercial and industrial loan portfolio totaled $226.7 million, or 12.2% of our total loans, with commercial and industrial loans totaling $201.3 million, or 10.8% of total loans, and Paycheck Protection Program (“PPP”) loans totaling $25.3 million, or 1.4% of total loans. This compares to our total commercial and industrial loan portfolio of $379.1 million, or 19.7% of total loans, at December 31, 2020, with commercial and industrial loans totaling $211.8 million, or 11.0% of total loans, and PPP loans totaling $167.3 million, or 8.7% of total loans. Commercial and industrial loans include seasonal revolving lines of credit, working capital loans, equipment financing and term loans. Commercial and industrial credits may be unsecured loans and lines to financially strong borrowers, loans secured in whole or in part by real estate unrelated to the principal purpose of the loan or secured by inventories, equipment, or receivables, and are generally guaranteed by the principals of the borrower. Variable rate loans and lines in this portfolio have interest rates that are periodically adjusted, with loans generally having fixed initial periods. Commercial and industrial loans have average repayment periods of one to seven years. Our commercial and industrial loan portfolio does not have any significant loan concentration by type of property or borrower. The largest concentration of commercial loans to an industry was to hotels and accommodation, which comprised approximately 6.8% of the commercial loan portfolio as of December 31, 2021. At December 31, 2021, our largest commercial and industrial loan relationship was $24.2 million to a hardware merchant wholesaler. The loan relationship is secured by business assets and real estate. At December 31, 2021, this relationship was performing according to its original terms. As a Preferred Lender with the Small Business Administration (“SBA”), the Company offered PPP loans through the March 27, 2020 $2.2 trillion fiscal stimulus bill known as the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”) launched by the U.S. Department of Treasury (“Treasury”) and the SBA. An eligible business was able to apply for a PPP loan up to the lesser of: (1) 2.5 times its average monthly “payroll costs,” or (2) $10.0 million. PPP loans have: (a) an interest rate of 1.0%, (b) a two-year loan term to maturity, subsequently extended to a five-year loan term maturity for loans granted on or after June 5, 2020 and (c) principal and interest payments deferred from six months to ten months from the date of disbursement. The SBA will guarantee 100% of the PPP loans made to eligible borrowers. The entire principal amount of the borrower’s PPP loan, including any accrued interest, is eligible to be reduced by the loan forgiveness amount under the PPP so long as employee and compensation levels of the business are maintained and 60% of the loan proceeds are used for payroll expenses, with the remaining 40% of the loan proceeds used for other qualifying expenses. PPP loans totaled $25.3 million, or 1.4% of total loans, at December 31, 2021. Letters of credit are conditional commitments issued by the Company to guarantee the financial obligation or performance of a customer to a third party. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. If the letter of credit is drawn upon, a loan is created for the customer, generally a commercial loan, with the same criteria associated with similar commercial loans. The Company participates with other banks in the financing of certain commercial projects. Participating loans with other institutions provide banks the opportunity to retain customer relationships and reduce credit risk exposure among each participating bank, while providing customers with larger credit facilities than the individual bank might be willing or able to offer independently. In some cases, the Company may act as the lead lender, originating and servicing the loans, but participating out a portion of the funding to other banks. In other cases, the Company may participate in loans originated by other institutions. In each case, the participating bank funds a percentage of the loan commitment and takes on the related pro-rata risk. In each case in which the Company participates in a loan, the rights and obligations of each participating bank are divided proportionately among the participating banks in an amount equal to their share of ownership and with equal priority among all banks. The Company performs an independent credit analysis of each commitment and a review of the participating institution prior to participation in the loan, and an annual review of the borrower thereafter. Loans originated by other banks in which the Company is a participating institution are carried in the loan portfolio at the Company’s pro-rata share of ownership. Loans originated by other banks in which the Company is a participating institution amounted to $121.7 million at December 31, 2021 and $113.0 million at December 31, 2020. The Company was servicing commercial loans originated by the Company and participated out to various other institutions totaling $63.2 million and $52.9 million at December 31, 2021 and December 31, 2020, respectively. 8 Residential Real Estate Loans. At December 31, 2021 and December 31, 2020, the residential real estate loan portfolio totaled $552.3 million, or 29.6% of total loans, and $604.7 million, or 31.4%, of total loans, respectively. The Company originates and funds residential real estate loans secured by one-to-four family residential properties primarily located in western Massachusetts and northern Connecticut. The Company processes and underwrites all of its originations internally through its Residential Loan Center located in Westfield, MA. These residential properties may serve as the borrower’s primary residence, or as vacation homes or investment properties. Loans are originated in amounts up to 97% of the lesser of the appraised value or purchase price of the property. Private mortgage insurance is required on all loans with a loan-to-value ratios greater than 80%. In addition, financing is provided for the construction of owner-occupied primary and secondary residences. Residential mortgage loans may have terms of up to 30 years at either fixed or adjustable rates of interest. Fixed and adjustable rate residential mortgage loans are generally originated using secondary market underwriting and documentation standards. Depending on the current interest rate environment, management may elect to sell those fixed and adjustable rate residential mortgage loans which are eligible for sale in the secondary market, or hold some or all of this residential loan production for the Company’s portfolio. The Company may retain or sell the servicing when selling the loans. The Company is an approved seller and servicer with Fannie Mae, Freddie Mac and the FHLB. In order to reduce interest rate risk, during the twelve months ended December 31, 2021, the Company sold $59.7 million of fixed rate, low coupon residential real estate loans to the secondary market. There were no loans sold during 2020. At December 31, 2021 and December 31, 2020, the Company serviced $88.2 million and $38.1 million, respectively, in residential loans sold to the secondary market. The servicing rights will likely continue to be retained on all loans sold over the life of the loan. The largest owner-occupied residential real estate loan was $2.0 million and was performing according to its original terms as of December 31, 2021. Home Equity Loans. At December 31, 2021 and December 31, 2020, home equity loans totaled $99.8 million, or 5.4% of total loans, and $103.9 million, or 5.4% of total loans, respectively. The Company originates home equity revolving loans and lines of credit for one-to-four family residential properties with maximum original loan-to-value ratios generally up to 85%. Home equity lines generally have interest rates that adjust monthly based on changes in the Wall Street Journal Prime Rate, although minimum rates may be applicable. Some home equity line rates may be fixed for a period of time and then adjusted monthly thereafter. The payment schedule for home equity lines require interest only payments for the first ten years of the lines. Generally at the end of ten years, the line may be frozen to future advances, and principal plus interest payments are collected over a fifteen-year amortization schedule or, for eligible borrowers meeting certain requirements, the line availability may be extended for an additional interest only period. Consumer Loans. At December 31, 2021 and December 31, 2020, consumer loans totaled $4.3 million, or 0.2%, of total loans and $5.2 million, or 0.2%, of total loans, respectively. Consumer loans are generally originated at higher interest rates than residential and commercial real estate loans, but they also generally tend to have a higher credit risk than residential real estate loans because they are usually unsecured or secured by rapidly depreciable assets. Management, however, believes that offering consumer loan products helps to expand and create stronger ties to our existing customer base by increasing the number of customer relationships and providing cross-marketing opportunities. We offer a variety of consumer loans to retail customers in the communities we serve. Examples of our consumer loans include automobile loans, spa and pool loans, collateral loans and personal lines of credit tied to deposit accounts to provide overdraft protection. 9 The following table presents the composition of our loan portfolio in dollar amounts and in percentages of the total portfolio at the dates indicated. At December 31, 2021 2020 2019 2018 2017 Percent of Percent of Percent of Percent of Percent of Amount Total Amount Total Amount Total Amount Total Amount Total (Dollars in thousands) Real estate loans: Commercial $ 979,969 52.6 % $ 833,949 43.3 % $ 816,886 46.1 % $ 768,881 45.4 % $ 732,616 45.1 % Residential one-to-four family 552,332 29.6 604,719 31.4 597,727 33.7 577,641 34.1 557,752 34.3 Home equity 99,759 5.4 103,905 5.4 102,517 5.8 97,238 5.8 92,599 5.7 Total real estate loans 1,632,060 87.6 1,542,573 80.1 1,517,130 85.6 1,443,760 85.3 1,382,967 85.1 Commercial and industrial loans: Commercial and industrial 201,340 10.8 211,823 11.0 248,893 14.0 243,493 14.4 238,502 14.7 PPP loans 25,329 1.4 167,258 8.7 — — — — — — Total commercial and industrial 226,669 12.2 379,081 19.7 248,893 14.0 243,493 14.4 238,502 14.7 Consumer 4,250 0.2 5,192 0.2 5,747 0.4 5,203 0.3 4,478 0.3 Total gross loans 1,862,979 100.0 % 1,926,846 100.0 % 1,771,770 100.0 % 1,692,456 100.0 % 1,625,947 100.0 % Unamortized PPP loan fees (781 ) (3,050 ) — — — Unamortized premiums and net deferred loan fees and costs 2,518 3,587 4,264 4,401 4,734 Allowance for loan losses (19,787 ) (21,157 ) (14,102 ) (12,053 ) (10,831 ) Total loans, net $ 1,844,929 $ 1,906,226 $ 1,761,932 $ 1,684,804 $ 1,619,850 10 Loan Maturity and Repricing. The following table shows the repricing dates or contractual maturity dates of our loans as of December 31, 2021. The table does not reflect prepayments or scheduled principal amortization. Demand loans, loans having no stated maturity, and overdrafts are shown as due in within one year. At December 31, 2021 Commercial Real Estate Residential One-to-Four Family Home Equity Commercial and Industrial Consumer Unallocated Totals (In thousands) Amount due: Within one year $ 114,382 $ 1,663 $ 60,510 $ 77,956 $ 91 $ — $ 254,602 After one year: One to three years 121,506 36,601 353 16,309 556 — 175,325 Three to five years 166,948 22,087 1,293 23,370 1,757 — 215,455 Five to ten years 414,422 31,845 8,031 87,490 1,122 — 542,910 Ten to twenty years 150,721 70,283 26,847 5,241 145 — 253,237 Over twenty years 11,990 389,853 2,725 16,303 579 — 421,450 Total due after one year 865,587 550,669 39,249 148,713 4,159 — 1,608,377 Total amount due: 979,969 552,332 99,759 226,669 4,250 — 1,862,979 Unamortized PPP loan fees — — — (781 ) — — (781 ) Net deferred loan origination fees and costs and premiums (468 ) 1,735 700 527 24 — 2,518 Allowance for loan losses (12,970 ) (3,358 ) (606 ) (2,643 ) (197 ) (13 ) (19,787 ) Loans, net $ 966,531 $ 550,709 $ 99,853 $ 223,772 $ 4,077 $ (13 ) $ 1,844,929 The following table presents, as of December 31, 2021, the dollar amount of all loans contractually due or scheduled to reprice after December 31, 2022, and whether such loans have fixed interest rates or adjustable interest rates. Due After December 31, 2022 Fixed Adjustable Total (In thousands) Real estate loans: Residential one-to-four family $ 478,059 $ 72,610 $ 550,669 Home equity 39,249 — 39,249 Commercial real estate 333,952 531,635 865,587 Total real estate loans 851,260 604,245 1,455,505 Other loans: Commercial and industrial 134,185 14,528 148,713 Consumer 4,159 — 4,159 Total other loans 138,344 14,528 152,872 Total loans $ 989,604 $ 618,773 $ 1,608,377 11 The following table presents our loan originations, purchases and principal payments for the years indicated: For the Years Ended December 31, 2021 2020 2019 (In thousands) Loans: Balance outstanding at beginning of year $ 1,926,846 $ 1,771,770 $ 1,692,456 Originations: Real estate loans: Residential one-to-four family 154,205 157,190 88,541 Home equity 34,279 31,546 40,768 Commercial 256,614 154,740 150,113 Total mortgage originations 445,098 343,476 279,422 Commercial and industrial loans 85,659 85,684 90,389 Paycheck Protection Program ("PPP") 79,138 223,104 — Consumer loans 1,515 2,308 2,898 Total originations 611,410 654,572 372,709 Less: Principal repayments, unadvanced funds and other, net 615,128 498,776 292,769 Sales of residential one-to-four family loans to secondary market 59,704 — — Loan charge-offs, net 445 720 626 Total deductions 675,277 499,496 293,395 Ending balance $ 1 ,862,979 $ 1 ,926,846 $ 1 ,771,770 Asset Quality . Maintaining a high level of asset quality continues to be one of the Company’s key objectives. Credit Administration reports directly to the Chief Credit Officer and is responsible for the completion of independent credit analyses for all loans above a specific threshold. The Company’s policy requires that management continuously monitor the status of the loan portfolio and report to the Board of Directors on a monthly basis. These reports include information on concentration levels, delinquent loans, nonaccrual loans, criticized loans and foreclosed real estate, as well as our actions and plans to cure the nonaccrual status of the loans and to dispose of the foreclosed property. The Company contracts with an external loan review company to review the internal risk ratings assigned to loans in the commercial loan portfolio on a pre-determined schedule, based on the type, size, rating, and overall risk of the loan. During the course of their review, the third party examines a sample of loans, including new loans, existing relationships over certain dollar amounts and classified assets. The findings are reported to the Chief Credit Officer and the full report is then presented to the Audit Committee. Potential Problem Loans. The Company performs an internal analysis of the loan portfolio in order to identify and quantify loans with higher than normal risk. Loans having a higher risk profile are assigned a risk rating corresponding to the level of weakness identified in the loan. All loans risk rated “Special Mention (5)”, “Substandard (6)”, “Doubtful (7)” and “Loss (8)” are listed on the Company’s criticized report and are reviewed by management not less than on a quarterly basis to assess the level of risk and to ensure that appropriate actions are being taken to minimize potential loss exposure. Loans identified as containing a loss are partially charged-off or fully charged-off. In addition, the Company closely monitors the classified loans for signs of deterioration to mitigate the growth in nonaccrual loans, including performing additional due diligence, updating valuations and requiring additional financial reporting from the borrower. At December 31, 2021, criticized loans, inclusive of “adversely classified loans”, totaled $82.6 million, or 4.4% of total loans, compared to $147.1 million, or 7.6% of total loans, at December 31, 2020. 12 The Company’s adversely classified loans (defined as "Substandard (6)", "Doubtful (7)" or "Loss (8)") totaled $31.1 million, or 1.7% of total loans, at December 31, 2021 and $55.0 million, or 2.9%, of total loans, at December 31, 2020. Adversely classified loans that were performing but possessed potential weaknesses and, as a result, could ultimately become nonperforming loans totaled $26.4 million, or 1.4% of total loans, at December 31, 2021 and $47.2 million, or 2.4% of total loans, at December 31, 2020. The remaining balance of adversely classified loans were nonaccrual loans totaling $4.7 million, or 0.3% of total loans, at December 31, 2021 and $7.8 million, or 0.4% of total loans, at December 31, 2020. Total impaired loans totaled $20.5 million, or 1.1% of total loans, at December 31, 2021 and $29.1 million, or 1.5% of total loans, at December 31, 2020. Total accruing impaired loans totaled $15.5 million and $21.3 million at December 31, 2021 and December 31, 2020, respectively, while nonaccrual impaired loans totaled $5.0 million and $7.8 million as of December 31, 2021 and December 31, 2020, respectively. In management’s opinion, all impaired loan balances at December 31, 2021 and 2020, were supported by expected future cash flows or, for those collateral dependent loans, the net realizable value of the underlying collateral. Based on management’s assessment at December 31, 2021 and December 31, 2020, no impaired loans required a specific reserve. Management closely monitors these relationships for collateral or credit deterioration. At December 31, 2021, 2020, 2019, nonaccrual loans totaled $5.0 million, or 0.27% of total loans, $7.8 million, or 0.41% of total loans, and $9.9 million, and 0.56% of total loans, respectively. If all nonaccrual loans had been performing in accordance with their terms, we would have earned additional interest income of $262,000, $275,000 and $651,000 for the years ended December 31, 2021, 2020 and 2019, respectively. At December 31, 2021, 2020 and 2019, the Company carried no OREO balances. 13 The following table presents information regarding nonperforming commercial real estate loans, commercial and industrial term loans, residential real estate loans, consumer loans, and foreclosed real estate as of the dates indicated. All loans where the payment is 90 days or more in arrears as of the closing date of each month are placed on nonaccrual status unless the loan is well secured and in the process of collection. At December 31, 2021 2020 2019 2018 2017 (Dollars in thousands) Nonaccrual real estate loans: Residential one-to-four family $ 3,214 $ 5,353 $ 4,548 $ 5,856 $ 5,961 Home equity 94 124 445 391 696 Commercial real estate 1,224 1,632 3,843 4,701 2,959 Total nonaccrual real estate loans 4,532 7,109 8,836 10,948 9,616 Other loans: Commercial and industrial 410 705 1,003 2,476 3,019 Consumer 22 27 42 60 120 Total nonaccrual other loans 432 732 1,045 2,536 3,139 Total nonperforming loans 4,964 7,841 9,881 13,484 12,755 Foreclosed real estate, net — — — — 155 Total nonperforming assets (1) $ 4,964 $ 7,841 $ 9,881 $ 13,484 $ 12,910 Nonperforming loans to total loans 0.27 % 0.41 % 0.56 % 0.79 % 0.78 % Nonperforming assets to total assets 0.20 0.33 0.45 0.64 0.63 (1) Troubled debt restructurings on accrual status not included above totaled $4.1 million, $9.8 million, $1.5 million, $2.4 million and $1.8 million at December 31, 2021, 2020, 2019, 2018 and 2017, respectively. Allowance for Loan Losses . The allowance for loan losses is an estimate of probable credit risk inherent in the loan portfolio as of the specified balance sheet dates. On a quarterly basis, management prepares an estimate of the allowance necessary to cover estimated probable credit losses. The Company maintains the allowance at a level that it deems adequate to absorb all reasonably anticipated probable losses from specifically known and other credit risks associated with the portfolio. The Company has deferred the adoption of the Current Expected Credit Loss allowance methodology, as permitted by its classification as a Smaller Reporting Company by the Securities and Exchange Commission. The Company maintains an allowance for loan losses to absorb losses inherent in the loan portfolio based on ongoing quarterly assessments of the estimated losses. Our methodology for assessing the appropriateness of the allowance consists of a review of the components, which includes a general allowance for non-impaired loans. The specific valuation allowance incorporates the results of measuring impairment for specifically identified non-homogenous problem loans and, as applicable, troubled debt restructurings (“TDRs”). A loan is recognized as impaired when it is probable that principal and/or interest are not collectible in accordance with the loan’s contractual terms. Impairment is measured on a loan-by-loan basis for commercial real estate and commercial and industrial loans by either the present value of expected future cash flows discounted at the loan’s effective interest rate or the fair value of the collateral if the loan is collateral dependent. An allowance is established when the discounted cash flows (or collateral value) of the impaired loan is lower than the carrying value of that loan. Once an impairment has been determined, the Company recognizes the charge-off. 14 The general allowance is calculated by applying loss factors to outstanding loans by loan type, excluding loans determined to be impaired. As part of this analysis, each quarter we prepare an allowance for loan losses worksheet which categorizes the loan portfolio by risk characteristics such as loan type and loan grade. The general allowance is inherently subjective as it requires material estimates that may be susceptible to significant change. There are a number of factors that are considered when evaluating the appropriate level of the allowance. These factors include current economic and business conditions that affect our key lending areas, collateral values, loan volumes and concentrations, credit quality trends such as nonperforming loans, delinquency and loan losses, and specific industry concentrations within the portfolio segments that may impact the collectability of the loan portfolio. During the year ended December 31, 2020, the Company significantly increased the general allowance as a result of the COVID-19 pandemic. For information on our methodology for assessing the appropriateness of the allowance for loan losses please see Footnote 1 – “ Summary of Significant Accounting Policies ” of our notes to consolidated financial statements. The allowance for loan losses is established through a provision for loan losses, which is a direct charge to earnings. Loan losses are charged against the allowance when management believes that the collectability of the loan principal is unlikely. Recoveries on loans previously charged-off are credited to the allowance for loan losses. In making its assessment on the adequacy of the allowance for loan losses, management considers several quantitative and qualitative factors that could have an effect on the credit quality of the portfolio. Management closely monitors the credit quality of individual delinquent and nonperforming relationships, the levels of impaired and adversely classified loans, net charge-offs, the growth and composition of the loan portfolio, expansion in geographic market area, and any material changes in underwriting criteria, and the strength of the local and national economy, among other factors. The level of delinquent and nonperforming assets is largely a function of economic conditions and the overall banking environment and the individual business circumstances of borrowers. Despite prudent loan underwriting, adverse changes within the Company’s market area, or deterioration in local, regional or national economic conditions, could negatively impact management's estimate of probable credit losses. Management continues to closely monitor the necessary allowance levels, including specific reserves. The allowance for loan losses to total loans ratio was 1.06% at December 31, 2021 compared to 1.10% at December 31, 2020. The allowance for loan losses to total loans ratio, excluding PPP loans, was 1.08% and 1.20%, at December 31, 2021 and 2020, respectively. Based on the foregoing, as well as management's judgment as to the existing credit risks inherent in the loan portfolio, management believes that the Company's allowance for loan losses is adequate to absorb probable losses from specifically known and other probable credit risks associated with the portfolio as of December 31, 2021. 15 The following table presents the activity in our allowance for loan losses and other ratios at or for the dates indicated. At or for Years Ended December 31, 2021 2020 2019 2018 2017 (Dollars in thousands) Balance at beginning of year $ 21,157 $ 14,102 $ 12,053 $ 10,831 $ 10,068 Charge-offs: Residential one-to-four family (37 ) (124 ) (283 ) (608 ) (124 ) Commercial real estate (103 ) (107 ) (669 ) (35 ) (292 ) Home equity (7 ) (53 ) (37 ) (37 ) (24 ) Commercial and industrial (370 ) (543 ) (514 ) (299 ) (289 ) Consumer (128 ) (136 ) (197 ) (171 ) (319 ) Total charge-offs (645 ) (963 ) (1,700 ) (1,150 ) (1,048 ) Recoveries: Residential one-to-four family 101 65 65 25 122 Commercial real estate 7 58 873 369 142 Home equity 16 24 1 2 42 Commercial and industrial 27 51 74 20 81 Consumer 49 45 61 56 64 Total recoveries 200 243 1,074 472 451 Net (charge-offs) recoveries (445 ) (720 ) (626 ) (678 ) (597 ) (Credit) provision for loan losses (925 ) 7,775 2,675 1,900 1,360 Balance at end of year $ 19,787 $ 21,157 $ 14,102 $ 12,053 $ 10,831 Total loans receivable (1) $ 1,862,979 $ 1,926,846 $ 1,771,770 $ 1,692,456 $ 1,625,947 Average loans outstanding $ 1,887,926 $ 1,922,607 $ 1,721,884 $ 1,666,266 $ 1,597,599 Allowance for loan losses as a percent of total loans receivable 1.06 % 1.10 % 0.79 % 0.71 % 0.67 % Allowance for loan losses as a percent of total loans receivable, excluding PPP loans 1.08 % 1.20 % 0.79 % 0.71 % 0.67 % Net loans charged-off as a percent of average loans outstanding 0.02 0.04 0.04 0.04 0.04 (1) Does not include premiums, deferred costs and fees, or the allowance for loan losses. 16 A summary of the components of the allowance for loan losses is as follows: December 31, 2021 December 31, 2020 December 31, 2019 Specific General Total Specific General Total Specific General Total (In thousands) Commercial real estate $ — $ 12,970 $ 12,970 $ — $ 13,020 $ 13,020 $ — $ 6,807 $ 6,807 Residential real estate: Residential one-to-four family — 3,358 3,358 — 3,618 3,618 — 3,346 3,346 Home equity — 606 606 — 622 622 — 574 574 Commercial and industrial — 2,643 2,643 — 3,630 3,630 — 3,183 3,183 Consumer — 197 197 — 241 241 — 203 203 Unallocated — 13 13 — 26 26 — (11 ) (11 ) Total $ — $ 19,787 $ 19,787 $ — $ 21,157 $ 21,157 $ — $ 14,102 $ 14,102 December 31, 2018 December 31, 2017 Specific General Total Specific General Total (In thousands) Commercial real estate $ — $ 5,260 $ 5,260 $ — $ 4,712 $ 4,712 Residential real estate: Residential one-to-four family — 3,044 3,044 — 2,839 2,839 Home equity — 512 512 — 472 472 Commercial and industrial — 3,114 3,114 — 2,733 2,733 Consumer — 135 135 — 71 71 Unallocated — (12 ) (12 ) — 4 4 Total $ — $ 12,053 $ 12,053 $ — $ 10,831 $ 10,831 For the years ended December 31, 2021 and December 31, 2020, the Company recorded a credit for loan losses of $925,000, compared to a provision for loan losses of $7.8 million to the allowance for loan losses based on our evaluation of the items discussed above. We believe that the allowance for loan losses adequately reflects the level of incurred losses in the current loan portfolio as of December 31, 2021. 17 Allocation of Allowance for Loan Losses . The following tables set forth the allowance for loan losses allocated by loan category, the total loan balances by category, and the percent of loans in each category to total loans, excluding PPP loans. December 31, 2021 December 31, 2020 December 31, 2019 Loan Category Amount of Allowance for Loan Losses Loan Balances by Category Percent of Loans in Each Category to Total Loans Amount of Allowance for Loan Losses Loan Balances by Category Percent of Loans in Each Category to Total Loans Amount of Allowance for Loan Losses Loan Balances by Category Percent of Loans in Each Category to Total Loans (In thousands) Commercial real estate $ 12,970 $ 979,969 53.3 % $ 13,020 $ 833,949 47.4 % $ 6,807 $ 816,886 46.1 % Real estate mortgage: Residential one-to-four family 3,358 552,332 30.1 3,618 604,719 34.4 3,346 597,727 33.7 Home equity 606 99,759 5.4 622 103,905 5.9 574 102,517 5.8 Commercial and industrial loans 2,643 201,340 11.0 3,630 211,823 12.0 3,183 248,893 14.0 Consumer loans 197 4,250 0.2 241 5,192 0.3 203 5,747 0.4 Unallocated 13 — — 26 — — (11 ) — — Total allowances for loan losses $ 19,787 $ 1,837,650 100.0 % $ 21,157 $ 1,759,588 100.0 % $ 14,102 $ 1,771,770 100.0 % December 31, 2018 December 31, 2017 Amount of Allowance for Loan Losses Loan Balances by Category Percent of Loans in Each Category to Total Loans Amount of Allowance for Loan Losses Loan Balances by Category Percent of Loans in Each Category to Total Loans (In thousands) Commercial real estate $ 5,260 $ 768,881 45.4 % $ 4,712 $ 732,616 45.1 % Real estate mortgage: Residential one-to-four family 3,044 577,641 34.1 2,839 557,752 34.3 Home equity 512 97,238 5.8 472 92,599 5.7 Commercial and industrial loans 3,114 243,493 14.4 2,733 238,502 14.7 Consumer loans 135 5,203 0.3 71 4,478 0..3 Unallocated (12 ) — — 4 — — Total allowances for loan losses $ 12,053 $ 1,692,456 100.0 % $ 10,831 $ 1,625,947 100.0 % Loans Acquired with Deteriorated Credit Quality . Loans acquired in a transfer, including business combinations, where there is evidence of credit deterioration since origination and it is probable at the date of acquisition the Company will not collect all contractually required principal and interest payments, are accounted for under accounting guidance for purchased credit-impaired loans. This guidance provides that the excess of the cash flows initially expected to be collected over the fair value of the loans at the acquisition date (i.e., the accretable yield) is accreted into interest income over the estimated remaining life of the loans, provided that the timing and amount of future cash flows is reasonably estimated. The difference between the contractually required payments and the cash flows expected to be collected at acquisition is referred to as the non-accretable difference. Subsequent to acquisition, probable decreases in expected cash flows are recognized through a provision for loan losses, resulting in an increase to the allowance for loan losses. If the Company has probable and significant increases in cash flows expected to be collected, the Company will first reverse any previously established allowance for loan losses and then increase interest income as a prospective yield adjustment. At December 31, 2021 and 2020, the Company had $6.9 million and $8.5 million in purchased credit- impaired loans. Investment Activities. The Board of Directors reviews and approves our investment policy on an annual basis. The Chief Executive Officer and Chief Financial Officer, as authorized by the Board of Directors, implement this policy based on the established guidelines within the written policy. The Company’s internal investment policy sets limits as a percentage of the total portfolio, identifies acceptable and unacceptable investment practices, and denotes approved security dealers. The effect of changes in interest rates, market values, timing of principal payments and credit risk are considered when purchasing securities. 18 The Company's investment portfolio activities are an integral part of the overall asset liability management program of the Company. The investment function provides readily available funds to support loan growth, as well as to meet withdrawals and maturities of deposits, and attempts to provide maximum return consistent with liquidity constraints and general prudence, including diversification and safety of investments. The securities in which the Company may invest are limited by regulation. Federally-chartered savings banks have authority to invest in various types of assets, including U.S. Treasury obligations, securities of various government-sponsored enterprises, mortgage-backed securities, certain certificates of deposit of insured financial institutions, repurchase agreements, overnight and short-term loans to other banks, corporate debt instruments and marketable equity securities. As of the balance sheet dates reflected in this annual report, held-to-maturity securities are carried at amortized cost and available-for-sale securities are carried at fair value. On a quarterly basis, we review debt securities with a decline in fair value below the amortized cost of the investment to determine whether the decline in fair value is temporary or other-than-temporary (“OTTI”). In estimating OTTI losses for debt securities, impairment is required to be recognized if (1) we intend to sell the security; (2) it is “more likely than not” that we will be required to sell the security before recovery of its amortized cost basis; or (3) for debt securities, the present value of expected cash flows is not sufficient to recover the entire amortized cost basis. For all impaired debt securities that we intend to sell, or more likely than not will be required to sell, the full amount of the other-than-temporary impairment is recognized through earnings. For all other impaired debt securities, credit-related other-than-temporary impairment is recognized through earnings, while non-credit-related other-than-temporary impairment is recognized in other comprehensive income/loss, net of applicable taxes. Prior to January 1, 2018, marketable equity securities were evaluated for OTTI based upon the severity and duration of the impairment and, if deemed to be other than temporary, the declines in fair value were reflected in earnings as realized losses. Marketable equity securities are measured at fair value with changes in fair value reported on the Company’s income statement as a component of non-interest income, regardless of whether such gains and losses are realized. Management reports investment transactions, portfolio allocation, effective duration, market value at risk and projected cash flows to the Board on a periodic basis. The Board also approves the Company’s ongoing investment strategy. Restricted Equity Securities . At December 31, 2021 and 2020, the Company held $2.2 million and $4.7 million, respectively, of FHLB stock. This stock is classified as a restricted investment and carried at cost which management believes approximates the fair value. The investment must be held as a condition of membership in the FHLB and as a condition for the Bank to borrow from the FHLB. The Company periodically evaluates its investment in FHLB stock for impairment based on, among other factors, the capital adequacy of the FHLB and its overall financial condition. At both December 31, 2021 and 2020, 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. No impairment losses have been recorded through December 31, 2021. 19 The following table sets forth the composition of our securities portfolio at the dates indicated. At December 31, 2021 2020 2019 Amortized Fair Amortized Fair Amortized Fair Cost Value Cost Value Cost Value (In thousands) Available-for-sale: Debt securities: Government-sponsored enterprise obligations $ 14,902 $ 14,226 $ 14,871 $ 14,775 $ 20,150 $ 20,014 State and municipal bonds 405 406 405 406 2,718 2,813 Corporate bonds 3,026 3,112 3,039 3,075 7,800 7,866 Total debt securities 18,333 17,744 18,315 18,256 30,668 30,693 Mortgage-backed securities: Government-sponsored mortgage-backed securities 171,011 167,509 161,290 162,729 186,236 186,001 U.S. government guaranteed mortgage-backed securities 9,693 9,099 20,973 20,895 11,197 11,014 Total mortgage-backed securities 180,704 176,608 182,263 183,624 197,433 197,015 Total available-for-sale securities 199,037 194,352 200,578 201,880 228,101 227,708 Held-to-maturity: Debt securities: U.S. Treasury securities 9,979 9,973 — — — — Total debt securities 9,979 9,973 — — — — Mortgage-backed securities: Government-sponsored mortgage-backed securities 212,293 209,775 — — — — Total mortgage-backed securities 212,293 209,775 — — — — Total held-to-maturity 222,272 219,748 — — — — Total $ 421,309 $ 414,100 $ 200,578 $ 201,880 $ 228,101 $ 227,708 20 Securities Portfolio Maturities . The composition and maturities of the debt securities portfolio and the mortgage-backed securities portfolio at December 31, 2021 are summarized in the following table. Maturities are based on the final contractual payment dates, and do not reflect the impact of prepayments or redemptions that may occur. Weighted average yield is calculated using the amortized cost and yield to maturity of securities divided by the total amortized cost of the segment, and does not adjust for tax-equivalent basis for any tax-exempt obligations. More than One Year More than Five Years One Year or Less through Five Years through Ten Years More than Ten Years Total Securities Weighted Weighted Weighted Weighted Weighted Amortized Average Amortized Average Amortized Average Amortized Average Amortized Fair Average Cost Yield Cost Yield Cost Yield Cost Yield Cost Value Yield (Dollars in thousands) Available-for-sale: Debt securities: Government-sponsored enterprise obligations $ — — % $ — — % $ 9,902 1.23 % $ 5,000 1.30 % $ 14,902 $ 14,226 1.25 % State and municipal bonds — — 405 3.00 — — — — 405 406 3.00 Corporate bonds — — 3,026 3.33 — — — — 3,026 3,112 3.33 Total debt securities — — 3,431 3.29 9,902 1.23 5,000 1.30 18,333 17,744 1.63 Mortgage-backed securities: Government-sponsored residential mortgage-backed — — — — 1,965 1.98 169,045 1.72 171,011 167,509 1.72 U.S. Government guaranteed residential mortgage-backed — — — — — — 9,693 1.49 9,693 9,099 1.49 Total mortgage-backed securities — — — — 1,965 1.98 178,738 1.70 180,704 176,608 1.71 Total available-for-sale $ — — % $ 3,431 3.29 % $ 11,867 1.35 % $ 183,738 1.69 % $ 199,037 $ 194,352 1.70 % Held-to-maturity: Debt securities: U.S. Treasury securities $ — — % $ 9,979 1.09 % $ — — % $ — — % $ 9,979 $ 9,973 1.09 % Total debt securities — — 9,979 1.09 — — — — 9,979 9,973 1.09 Mortgage-backed securities: Government-sponsored residential mortgage-backed — — — — — — 212,293 1.91 212,293 209,775 1.91 Total mortgage-backed securities — — — — — — 212,293 1.91 212,293 209,775 1.91 Total held-to-maturity $ — — % $ 9,979 1.09 % $ — — % $ 212,293 1.91 % $ 222,272 $ 219,748 1.87 % 21 Deposits. Deposits have traditionally been the principal source of the Company’s funds. The Company offers commercial checking, small business, nonprofit and municipal checking, money market and sweep accounts, as well as certificates of deposit and specialty products including escrow management accounts, Interest on Lawyers Trust Accounts, and Interest on Real Estate Brokers Trust Accounts. A broad selection of competitive retail deposit products are also offered, including interest-bearing and noninterest-bearing checking, money market and savings accounts, as well as certificates of deposit and individual retirement accounts, with terms on time deposits ranging from three months to sixty months. As a member of the FDIC, the Bank's depositors are provided deposit protection up to the maximum FDIC insurance coverage limits. Management determines the interest rates offered on deposit accounts based on current and expected economic conditions, competition, and the Bank’s liquidity needs, volatility of existing deposits, asset/liability position and overall objectives regarding the growth and retention of relationships. We may also utilize brokered deposits, both term and overnight, from a number of available sources, as part of our asset liability management strategy and as an alternative to borrowed funds to support asset growth in excess of internally generated deposits. Brokered deposits along with borrowed funds may be referred to as wholesale funding. At December 31, 2020, brokered deposits were included within time deposits and totaled $55.3 million. There were no brokered deposits on the balance sheet at December 31, 2021. Core deposits (defined as regular accounts, money market accounts, interest-bearing and noninterest-bearing demand accounts) represented 82.1% of total deposits on December 31, 2021 and 71.0% on December 31, 2020. At December 31, 2021 and December 31, 2020, time deposits with remaining terms to maturity of less than one year amounted to $363.0 million and $503.2 million, respectively. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Net Interest and Dividend Income” for information relating to the average balances and costs of our deposit accounts for the years ended December 31, 2021, 2020 and 2019. Cash Management Services. In addition to the deposit products discussed above, commercial banking and municipal customers may take advantage of cash management services including remote deposit capture, Automated Clearing House credit and debit origination, check payment fraud prevention, international and domestic wire transfers and corporate credit cards. 22 Deposit Distribution and Weighted Average Rates. The following table sets forth the distribution of our deposit accounts, by account type, at the dates indicated. At December 31, 2021 2020 2019 Amount Percent Weighted Average Rates Amount Percent Weighted Average Rates Amount Percent Weighted Average Rates (Dollars in thousands) Demand deposits $ 641,284 28.4 % — % $ 541,759 26.5 % — % $ 393,303 23.4 % — % Interest-bearing checking accounts 145,739 6.5 0.31 94,936 4.7 0.45 70,182 4.2 0.49 Regular savings accounts 217,564 9.6 0.07 175,595 8.6 0.09 130,158 7.7 0.11 Money market accounts 850,330 37.7 0.24 640,790 31.4 0.40 435,396 26.0 0.66 Total core deposit accounts 1,854,918 82.2 0.14 1,453,080 71.1 0.21 1,029,039 61.2 0.33 Time deposits: Due within the year 363,290 16.1 0.34 503,187 24.6 0.75 548,559 32.6 2.17 Over 1 year through 3 years 32,411 1.4 0.85 81,847 4.0 0.86 91,776 5.5 1.94 Over 3 years 6,279 0.3 0.31 5,302 0.3 0.84 12,296 0.7 1.98 Total time deposit accounts 401,980 17.8 0.38 590,336 28.9 0.77 652,631 38.8 2.13 Total $ 2,256,898 100.0 % 0.18 % $ 2,043,416 100.0 % 0.37 % $ 1,681,670 100.0 % 1.03 % The following table sets forth the uninsured portion of our core deposit accounts, by account type, at the dates indicated. At December 31, 2021 2020 2019 (Dollars in thousands) Core deposit accounts: (1) Demand deposits $ 194,735 $ 150,588 $ 96,284 Interest-bearing checking accounts 104,985 61,334 45,326 Regular savings accounts 76,753 65,971 3,102 Money market accounts 309,739 205,471 156,747 Total core deposit accounts $ 686,212 $ 483,364 $ 301,459 The following table sets forth the uninsured portion of our time deposits, by remaining maturity. At December 31, 2021 (Dollars in thousands) Time deposit accounts: (1) 3 months or less $ 42 Over 3 months through 6 months 2,100 Over 6 months through 12 months 22 Over 12 months 30,643 Total time deposit accounts $ 32,807 _______________ (1) Uninsured deposits for the periods indicated have been estimated using the same methodologies and assumptions used for the Bank’s regulatory reporting requirements. Time Deposit Maturities. A summary of time deposits totaling $250,000 or more by maturity is as follows: December 31, 2021 December 31, 2020 Amount Weighted Average Rate Amount Weighted Average Rate (In thousands) 3 months or less $ 19,243 0.43 % $ 54,472 0.71 % Over 3 months through 6 months 23,304 0.43 62,404 0.50 Over 6 months through 12 months 18,353 0.46 47,682 0.58 Over 12 months 4,960 0.90 14,801 1.09 Total: $ 65,860 0.47 % $ 179,359 0.63 % 23 Time Deposit Balances by Rates. A summary of time deposits by maturity is as follows: At December 31, 2021 Period to Maturity Less than One Year One to Two Years Two to Three Years More than Three Years Total Percent of Total 0.10% and under $ 70,587 $ 6,307 $ 5,191 $ 4,457 $ 86,542 21.5 % 0.11% to 0.20% 19,730 3,800 66 66 23,662 5.9 0.21% to 0.30% 83,129 3,876 169 186 87,360 21.7 0.31% to 0.40% 159,916 — — — 159,916 39.8 0.41% and over 29,928 10,517 2,485 1,570 44,500 11.1 Total $ 363,290 $ 24,500 $ 7,911 $ 6,279 $ 401,980 100.0 % Other Sources of Funds. As discussed above, deposit gathering has been the Company's principal source of funds. Asset growth in excess of deposits may be funded through cash flows from our loan and investment portfolios, or the following sources: Borrowings. Total borrowing capacity includes borrowing arrangements at the FHLB, the Federal Reserve Bank (“FRB”), and borrowing arrangements with correspondent banks. The Company is a member of the FHLB and uses borrowings as an additional source of funding to finance the Company’s lending and investing activities and to provide liquidity for daily operations. FHLB advances also provide more pricing and option alternatives for particular asset/liability needs. The FHLB provides a central credit facility primarily for member institutions. As an FHLB member, the Company is required to own capital stock of the FHLB, calculated periodically based primarily on its level of borrowings from the FHLB. FHLB borrowings are secured by certain securities from the Company’s investment portfolio not otherwise pledged as well as certain residential real estate and commercial real estate loans. Advances are made under several different credit programs with different lending standards, interest rates and range of maturities. This relationship is an integral component of the Company’s asset-liability management program. At December 31, 2021, the Bank had $480.5 million in additional borrowing capacity from the FHLB. The Company also has an overnight Ideal Way line of credit with the FHLB for $9.5 million. Interest on this line of credit is payable at a rate determined and reset by the FHLB on a daily basis. The outstanding principal is due daily but the portion not repaid will be automatically renewed. There were no advances outstanding under this line at December 31, 2021 and December 31, 2020, respectively. The Company has an available line of credit of $6.6 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 securities from the Company’s investment portfolio not otherwise pledged. At December 31, 2021 and December 31, 2020, there were no advances outstanding under this line. The Company also has pre-established, non-collateralized overnight borrowing arrangements with large national and regional correspondent banks to provide additional overnight and short-term borrowing capacity for the Company. The Company has $65.0 million in available lines of credit with correspondent banks at interest rates determined and reset on a daily basis. At December 31, 2021 and December 31, 2020, we had no advances outstanding under these lines. 24 Long-term debt consists of FHLB advances with an original maturity of one year or more. At December 31, 2021, we had $2.7 million in long-term debt with the FHLB, compared to $57.9 million in long-term debt with the FHLB at December 31, 2020. Financial Services. Westfield Bank also provides access to insurance and investment products through Westfield Investment Services through a partnership with LPL Financial (“LPL”), a third-party registered broker-dealer. Westfield Investment Services representatives provide a broad range of wealth management, investment, insurance, financial planning and strategic asset management services, helping clients meet all of their financial needs. Securities and advisory services are offered through LPL, a registered investment advisor and broker-dealer (member FINRA/SIPC). Insurance products are offered through LPL or its licensed affiliates. Westfield Bank and Westfield Investment Services are not registered as a broker-dealer or investment advisor. Registered representatives of LPL offer products and services using Westfield Investment Services, and may also be employees of Westfield Bank. These products and services are being offered through LPL or its affiliates, which are separate entities from and not affiliates of Westfield Bank or Westfield Investment Services. Securities and insurance offered through LPL or its affiliates are: Not Insured by FDIC or Any Other Government Agency Not Bank Guaranteed Not Bank Deposits or Obligations May Lose Value Supervision and Regulation. The Company and the Bank are subject to extensive regulation under federal and state laws. The regulatory framework applicable to savings and loan holding companies and their insured depository institution subsidiaries is intended to protect depositors, the federal deposit insurance fund (the “DIF”), consumers and the U.S. banking system, rather than investors. Set forth below is a summary of the significant laws and regulations applicable to Western New England Bancorp and its subsidiaries. The summary description that follows is qualified in its entirety by reference to the full text of the statutes, regulations, and policies that are described. Such statutes, regulations, and policies are subject to ongoing review by Congress and state legislatures and federal and state regulatory agencies. A change in any of the statutes, regulations, or regulatory policies applicable to Western New England Bancorp and its subsidiaries could have a material effect on the results of the Company. Overview. Western New England Bancorp is a separate and distinct legal entity from the Bank. The Company is a Massachusetts-chartered stock holding company and a registered savings and loan holding company under the Home Owners’ Loan Act (the “HOLA”), as amended, and is subject to the supervision of and regular examination by the Board of Governors of the Federal Reserve System (the “FRB,” the “Federal Reserve Board” or the “Federal Reserve”) as its primary federal regulator. In addition, the Federal Reserve Board has enforcement authority over Western New England Bancorp and its non-savings association subsidiaries. Western New England Bancorp is also subject to the jurisdiction of the SEC and is subject to the disclosure and other regulatory requirements of the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934, as amended, as administered by the SEC. Western New England Bancorp is traded on the NASDAQ under the ticker symbol, “ WNEB ,” and is subject to the NASDAQ stock market rules. Westfield Bank is organized as a federal savings association under the HOLA. The Bank is subject to the supervision of, and to regular examination by, the OCC as its chartering authority and primary federal regulator. To a limited extent, the Bank is also subject to the supervision and regulation of the FDIC as its deposit insurer. Financial products and services offered by Western New England Bancorp and the Bank are subject to federal consumer protection laws and implementing regulations promulgated by the Consumer Financial Protection Bureau (the “CFPB”). Western New England Bancorp and the Bank are also subject to oversight by state attorneys general for compliance with state consumer protection laws. The Bank's deposits are insured by the FDIC up to the applicable deposit insurance limits in accordance with FDIC laws and regulations. The Bank is a member of the FHLB, and is subject to the rules and requirements of the FHLB. The subsidiaries of Western New England Bancorp and the Bank are subject to federal and state laws and regulations, including regulations of the FRB and the OCC, respectively. 25 Set forth below is a description of the significant elements of the laws and regulations applicable to Western New England Bancorp and its subsidiaries. Statutes, regulations and policies are subject to ongoing review by Congress, state legislatures and federal and state agencies. A change in any statute, regulation or policy applicable to Western New England Bancorp may have a material effect on the results of Western New England Bancorp and its subsidiaries. Federal Savings and Loan Holding Company Regulation. Western New England Bancorp is a savings and loan holding company as defined by the HOLA. In general, the HOLA restricts the business activities of savings and loan holding companies to those permitted for financial holding companies under the BHC Act. Permissible businesses activities include banking, managing or controlling banks and other activities that the FRB has determined to be so closely related to banking “as to be a proper incident thereto,” as well as any activity that is either (i) financial in nature or incidental to such financial activity (as determined by the FRB in consultation with the Secretary of the Treasury) or (ii) complementary to a financial activity, and that does not pose a substantial risk to the safety and soundness of depository institutions or the financial system generally (as determined solely by the FRB). Activities that are financial in nature include, among others, securities underwriting and dealing, insurance underwriting and making merchant banking investments. Mergers and Acquisitions. The HOLA, the federal Bank Merger Act and other federal and state statutes regulate direct and indirect acquisitions of savings associations by savings and loan holding companies or other savings associations. The HOLA requires the prior approval of the FRB for the direct or indirect acquisition of more than 5% of the voting shares of a savings association or its parent holding company and for a company, other than a savings and loan holding company, to acquire 25% or more of any class of voting securities of a savings association or a savings and loan holding company. Under the Change in Bank Control Act, no person, including a company, may acquire, directly or indirectly, control of an insured depository institution without providing 60 days’ prior notice and receiving a non-objection from the appropriate federal banking agency. Under the Bank Merger Act, the prior approval of the OCC is required for a federal savings association to merge with another insured depository institution, where the resulting institution is a federal savings association, or to purchase the assets or assume the deposits of another insured depository institution. In reviewing applications seeking approval of merger and acquisition transactions, the federal bank regulatory agencies must consider, among other things, the competitive effect and public benefits of the transactions, the capital position of the combined organization, performance records under the Community Reinvestment Act of 1977 (see the section captioned “Community Reinvestment Act of 1977” included elsewhere in this section) and the effectiveness of the subject organizations in combating money laundering. Source of Strength Doctrine. FRB policy requires savings and loan holding companies to act as a source of financial and managerial strength to their subsidiary savings associations. Section 616 of the Dodd-Frank Act codified the requirement that holding companies act as a source of financial strength to their insured depository institution subsidiaries. As a result, Western New England Bancorp is expected to commit resources to support the Bank, including at times when Western New England Bancorp may not be in a financial position to provide such resources. Any capital loans by a savings and loan holding company to any of its subsidiary savings associations are subordinate in right of payment to deposits and to certain other indebtedness of such subsidiary savings associations. In the event of a savings and loan holding company’s bankruptcy, any commitment by the savings and loan holding company to a federal banking agency to maintain the capital of a subsidiary insured depository institution will be assumed by the bankruptcy trustee and entitled to priority of payment. 26 Dividends. The principal source of Western New England Bancorp’s liquidity is dividends from the Bank. The OCC imposes various restrictions and requirements on the Bank’s ability to make capital distributions, including cash dividends. The OCC’s prior approval is required if the total of all distributions, including the proposed distribution, declared by a federal savings association in any calendar year would exceed an amount equal to the Bank’s net income for the year-to-date plus the Bank’s retained net income for the previous two years, or that would cause the Bank to be less than well capitalized. In addition, section 10(f) of the HOLA requires a subsidiary savings association of a savings and loan holding company, such as the Bank, to file a notice with the Federal Reserve prior to declaring certain types of dividends. Western New England Bancorp and the Bank are also subject to other regulatory policies and requirements relating to the payment of dividends, including requirements to maintain adequate capital above regulatory minimums. The appropriate federal banking agency is authorized to determine, under certain circumstances relating to the financial condition of a savings and loan holding company or a savings association, that the payment of dividends would be an unsafe or unsound practice and to prohibit payment thereof. The federal banking agencies have indicated that paying dividends that deplete an insured depository institution’s capital base to an inadequate level would be an unsafe and unsound banking practice and that banking organizations should generally pay dividends only out of current operating earnings. Capital Adequacy. In July 2013, the FRB, the OCC and the FDIC approved final rules (the “Capital Rules”) that established a new capital framework for U.S. banking organizations. The Capital Rules generally implement the Basel Committee on Banking Supervision’s December 2010 final capital framework referred to as “Basel III” for strengthening international capital standards. In addition, the Capital Rules implement certain provisions of the Dodd-Frank Act. Pursuant to the Dodd-Frank Act, Western New England Bancorp, as a savings and loan holding company, is subject to the Capital Rules. The Capital Rules substantially revised the risk-based capital requirements applicable to holding companies and their depository institution subsidiaries as compared to prior U.S. general risk-based capital rules. The Capital Rules revised the definitions and the components of regulatory capital and impacted the calculation of the numerator in banking institutions’ regulatory capital ratios. The Capital Rules became effective on January 1, 2015, subject to phase-in periods for certain components and other provisions. The Capital Rules: (i) require a capital measure called “Common Equity Tier 1” (“CET1”) and related regulatory capital ratio of CET1 to risk-weighted assets; (ii) specify that Tier 1 capital consists of CET1 and “Additional Tier 1 capital” instruments meeting certain revised requirements; (iii) mandate that most deductions/adjustments to regulatory capital measures be made to CET1 and not to the other components of capital; and (iv) expand the scope of the deductions from and adjustments to capital as compared to existing regulations. Under the Capital Rules, for most banking organizations, including Western New England Bancorp, the most common form of Additional Tier 1 capital is non-cumulative perpetual preferred stock and the most common forms of Tier 2 capital are subordinated notes and a portion of the allocation for loan and lease losses, in each case, subject to the Capital Rules’ specific requirements. Pursuant to the Capital Rules, the minimum capital ratios as of January 1, 2015 are: • 4.5% CET1 to risk-weighted assets; • 6.0% Tier 1 capital (that is, CET1 plus Additional Tier 1 capital) to risk-weighted assets; • 8.0% Total capital (that is, Tier 1 capital plus Tier 2 capital) to risk-weighted assets; and • 4.0% Tier 1 capital to average consolidated assets as reported on consolidated financial statements (known as the “leverage ratio”). 27 The Capital Rules also require a “capital conservation buffer,” composed entirely of CET1, on top of these minimum risk-weighted asset ratios. The capital conservation buffer is designed to absorb losses during periods of economic stress. Banking institutions with a ratio of CET1 to risk-weighted assets above the minimum but below the capital conservation buffer will face constraints on dividends, equity and other capital instrument repurchases and compensation based on the amount of the shortfall. The capital conservation buffer became fully phased-in on January 1, 2019 and requires an additional capital conservation buffer of 2.5% of CET1, effectively resulting in minimum ratios inclusive of the capital conservation buffer of (i) CET1 to risk-weighted assets of at least 7%, (ii) Tier 1 capital to risk-weighted assets of at least 8.5%, and (iii) Total capital to risk-weighted assets of at least 10.5%. The Capital Rules provide for a number of deductions from and adjustments to CET1. These include, for example, the requirement that mortgage servicing rights, deferred tax assets arising from temporary differences that could not be realized through net operating loss carrybacks and significant investments in non-consolidated financial entities be deducted from CET1 to the extent that any one such category exceeds 10% of CET1 or all such items, in the aggregate, exceed 15% of CET1. In November 2017, the FRB finalized a rule pausing the phase-in of these deductions and adjustments for non-advanced approaches institutions. In July 2019, the OCC, FRB and FDIC adopted a final rule intended to simply the Capital Rules described above for non-advanced approaches institutions. Institutions were required to implement the provisions of the simplification rule by April 1, 2020. The transition provisions to the Capital Rules issued by these agencies in November 2017 ceased to apply to an institution in the quarter in which it adopted the simplification rule. In addition, under the current general risk-based capital rules, the effects of accumulated other comprehensive income or loss (“AOCI”) items included in shareholders’ equity (for example, marks-to-market of securities held in the available-for-sale portfolio) under generally accepted accounting principles in the United States of America (“GAAP”) are reversed for the purposes of determining regulatory capital ratios. Under the Capital Rules, the effects of certain AOCI items are not excluded; however, banking organizations not using advanced approaches, were permitted to make a one-time permanent election to continue to exclude these items in January 2015. The Company and the Bank made this election. The risk-weighting categories in the Capital Rules are standardized and include a risk-sensitive number of categories, depending on the nature of the assets, generally ranging from 0% for U.S. government and agency securities, to 600% for certain equity exposures, and resulting in higher risk weights for a variety of assets. The implementation of the Capital Rules did not have a material impact on the Company’s or the Bank’s consolidated capital levels. The Bank is subject to the Capital Rules as well. The Company and the Bank are each in compliance with the targeted capital ratios under the Capital Rules at December 31, 2021. In September 2019, the Office of the Comptroller of the Currency, the Federal Reserve Board and the FDIC adopted a final rule that is intended to further simplify the Capital Rules for depository institutions and their holding companies that have less than $10 billion in total consolidated assets, such as us, if such institutions meet certain qualifying criteria. This final rule became effective on January 1, 2020. Under this final rule, if we meet the qualifying criteria, including having a leverage ratio (equal to tier 1 capital divided by average total consolidated assets) of greater than 9 percent, we will be eligible to opt into the community bank leverage ratio framework. If we opt into this framework, we will be considered to have satisfied the generally applicable risk-based and leverage capital requirements in the Capital Rules (as modified pursuant to the simplification rule) and will be considered to have met the well-capitalized ratio requirements for PCA (as defined below) purposes. The Company and the Bank evaluated the simplified Capital Rules to determine our adoption status for the applicable filings periods beginning in 2020 and decided not to opt in to the community bank leverage ratio framework. 28 Prompt Corrective Action. Pursuant to Section 38 of the Federal Deposit Insurance Act (“FDIA”), federal banking agencies are required to take “prompt corrective action” (“PCA”) should an insured depository institutions fail to meet certain capital adequacy standards. At each successive lower capital category, an insured depository institution is subject to more restrictions and prohibitions, including restrictions on growth, restrictions on interest rates paid on deposits, restrictions or prohibitions on payment of dividends and restrictions on the acceptance of brokered deposits. Furthermore, if an insured depository institution is classified in one of the undercapitalized categories, it is required to submit a capital restoration plan to the appropriate federal banking agency, and the holding company must guarantee the performance of that plan. Based upon its capital levels, a bank that is classified as well-capitalized, adequately capitalized, or undercapitalized may be treated as though it were in the next lower capital category if the appropriate federal banking agency, after notice and opportunity for hearing, determines that an unsafe or unsound condition, or an unsafe or unsound practice, warrants such treatment. For purposes of PCA, to be: (i) well-capitalized, an insured depository institution must have a total risk based capital ratio of at least 10%, a Tier 1 risk based capital ratio of at least 8%, a CET1 risk based capital ratio of at least 6.5%, and a Tier 1 leverage ratio of at least 5%; (ii) adequately capitalized, an insured depository institution must have a total risk based capital ratio of at least 8%, a Tier 1 risk based capital ratio of at least 6%, a CET1 risk based capital ratio of at least 4.5%, and a Tier 1 leverage ratio of at least 4%; (iii) undercapitalized, an insured depository institution would have a total risk based capital ratio of less than 8%, a Tier 1 risk based capital ratio of less than 6%, a CET1 risk based capital ratio of less than 4.5%, and a Tier 1 leverage ratio of less than 4%; (iv) significantly undercapitalized, an insured depository institution would have a total risk based capital ratio of less than 6%, a Tier 1 risk based capital ratio of less than 4%, a CET1 risk based capital ratio of less than 3%, and a Tier 1 leverage ratio of less than 3%.; and (v) critically undercapitalized, an insured depository institution would have a ratio of tangible equity to total assets that is less than or equal to 2%. As of December 31, 2021, the most recent notification from the OCC categorized the Bank as “well-capitalized” under the PCA framework. Business Activities. The Bank derives its lending and investment powers from the HOLA and its implementing regulations promulgated by the OCC. Those laws and regulations limit the Bank’s authority to invest in certain types of assets and to make certain types of loans. Permissible investments include, but are not limited to, mortgage loans secured by residential and commercial real estate, commercial and consumer loans, certain types of debt securities, and certain other assets. The Bank may also establish service corporations that may engage in activities not otherwise permissible for the Bank, including certain real estate equity investments and securities and insurance brokerage. Loans to One Borrower. Generally, a federal savings bank may not make a loan or extend credit to a single borrower or related group of borrowers in excess of 15% of unimpaired capital and surplus. An additional amount may be loaned, equal to 10% of unimpaired capital and surplus, if the loan is secured by readily marketable collateral, which generally does not include real estate. As of December 31, 2021, we were in compliance with these limitations on loans to one borrower. 29 Concentrated Commercial Real Estate Lending Regulations. The federal banking agencies, including the OCC, have promulgated guidance governing financial institutions with concentrations in commercial real estate lending. The guidance provides that a bank has a concentration in commercial real estate lending if (i) total reported loans for construction, land development, and other land represent 100% or more of total capital or (ii) total reported loans secured by multifamily and nonfarm nonresidential properties (excluding loans secured by owner-occupied properties) and loans for construction, land development, and other land represent 300% or more of total capital and the bank’s commercial real estate loan portfolio has increased 50% or more during the prior 36 months. If a concentration is present, management must employ heightened risk management practices that address the following key elements: board and management oversight and strategic planning, portfolio management, development of underwriting standards, risk assessment and monitoring through market analysis and stress testing, and maintenance of increased capital levels as needed to support the level of commercial real estate lending. On December 18, 2015, the federal banking agencies jointly issued a "Statement on Prudent Risk Management for Commercial Real Estate Lending" reminding banks of the need to engage in risk management practices for commercial real estate lending. Qualified Thrift Lender Test. Under federal law, as a federal savings association, the Bank must comply with the qualified thrift lender, or “QTL” test. Under the QTL test, the Bank is required to maintain at least 65% of its “portfolio assets” in certain “qualified thrift investments” in at least nine months of the most recent twelve-month period. “Portfolio assets” means, in general, the Bank’s total assets less the sum of: • specified liquid assets up to 20% of total assets; • goodwill and other intangible assets; and • value of property used to conduct the Bank’s business. “Qualified thrift investments” include certain assets that are includable without limit, such as residential and manufactured housing loans, home equity loans, education loans, small business loans, credit card loans, mortgage backed securities, Federal Home Loan Bank stock and certain U.S. government obligations. In addition, certain assets are includable as “qualified thrift investments” in an amount up to 20% of portfolio assets, including certain consumer loans and loans in “credit-needy” areas. The Bank may also satisfy the QTL test by qualifying as a “domestic building and loan association” as defined in the Internal Revenue Code. Failure by the Bank to maintain its status as a QTL would result in restrictions on activities, including restrictions on branching and the payment of dividends. If the Bank were unable to correct that failure within a specified period of time, it must either continue to operate under those restrictions on its activities or convert to a national bank charter. The Bank met the QTL test in each of the prior 12 months and, therefore, is a “qualified thrift lender.” The Community Reinvestment Act. The Community Reinvestment Act of 1977 (the “CRA”) and the regulations issued thereunder are intended to encourage banks to help meet the credit needs of their entire assessment area, including low and moderate income neighborhoods, consistent with the safe and sound operations of such banks. The CRA requires the OCC to evaluate the record of each financial institution in meeting such credit needs. The CRA evaluation is also considered by the bank regulatory agencies in evaluating approvals for mergers, acquisitions, and applications to open, relocate or close a branch or facility. Failure to adequately meet the criteria within CRA guidelines could impose additional requirements and limitations on the Bank. Additionally, the Bank must publicly disclose the ability to request the Bank’s CRA Performance Evaluation and other various related documents. The Bank received a rating of "Outstanding" on its most recent Community Reinvestment Act examination. 30 Consumer Protection and CFPB Supervision. The Dodd-Frank Act centralized responsibility for consumer financial protection by creating the CFPB, an independent federal agency responsible for implementing, enforcing, and examining compliance with federal consumer financial laws. As Western New England Bancorp has less than $10 billion in total consolidated assets, the OCC continues to exercise primary examination authority over the Bank with regard to compliance with federal consumer financial laws and regulations. Under the Dodd-Frank Act, state attorneys general are empowered to enforce rules issued by the CFPB. The Company and the Bank are subject to a number of federal and state laws designed to protect borrowers and promote fair lending. These laws include, among others, the Equal Credit Opportunity Act, the Fair Credit Reporting Act, the Truth in Lending Act, the Home Mortgage Disclosure Act, the Real Estate Settlement Procedures Act, various state law counterparts, and the Consumer Financial Protection Act of 2010. Transactions with Affiliates and Loans to Insiders. Under federal law, transactions between insured depository institutions and their affiliates are governed by Sections 23A and 23B of the Federal Reserve Act (“FRA”), and the FRB’s implementing Regulation W. In a holding company context, at a minimum, the parent holding company of a bank or savings association, and any companies which are controlled by such parent holding company, are “affiliates” of the bank or savings association. Generally, sections 23A and 23B are intended to protect insured depository institutions from losses arising from transactions with non-insured affiliates, by limiting the extent to which a depository institution or its subsidiaries may engage in covered transactions with any one affiliate and with all affiliates of the depository institution in the aggregate, and by requiring that such transactions be on terms that are consistent with safe and sound banking practices. Section 22(h) of the FRA restricts loans to directors, executive officers, and principal stockholders (“Insiders”). Under Section 22(h), loans to Insiders and their related interests may not exceed, together with all other outstanding loans to such persons and affiliated entities, the insured depository institution’s total capital and surplus. Loans to Insiders above specified amounts must receive the prior approval of the Board. Further, under Section 22(h), loans to insiders must be made on terms substantially the same as offered in comparable transactions to other persons, except that such Insiders may receive preferential loans made under a benefit or compensation program that is widely available to the bank’s employees and does not give preference to the insider over the employees. Section 22(g) of the FRA places additional limitations on loans to executive officers. Enforcement. The OCC has primary enforcement responsibility over federal savings associations, including the Bank. This enforcement authority includes, among other things, the ability to assess civil money penalties, to issue cease and desist orders and to remove directors and officers. In general, these enforcement actions may be initiated in response to unsafe or unsound practices, and any violation of laws and regulations. Standards for Safety and Soundness. The Bank is subject to certain standards designed to maintain the safety and soundness of individual insured depository institutions and the banking system. The OCC has prescribed safety and soundness guidelines relating to (i) internal controls, information systems and internal audit systems; (ii) loan documentation; (iii) credit underwriting; (iv) interest rate exposure; (v) asset growth, concentration, and quality; (vi) earnings; and (vii) compensation and benefit standards for officers, directors, employees and principal shareholders. A savings association not meeting one or more of the safety and soundness guidelines may be required to file a compliance plan with the OCC. Under the FDIA, the FDIC may terminate deposit insurance upon a finding that the institution has engaged in unsafe and unsound practices, is in an unsafe or unsound condition to continue operations, or has violated any applicable law, regulation, rule, order or condition imposed by the FDIC. Management is not aware of any practice, condition or violation that might lead to the termination of the Bank’s deposit insurance. 31 Federal Deposit Insurance. The FDIC’s deposit insurance limit is $250,000 per depositor, per insured bank, for each account ownership category. The deposits of the Bank are insured up to applicable limits by the DIF of the FDIC. The Bank is subject to deposit insurance assessments to maintain the DIF. The FDIC uses a risk-based assessment system that imposes insurance premiums based upon a risk matrix that takes into account an insured depository institution’s capital level and supervisory rating, commonly known as the “CAMELS” rating. The risk matrix utilizes different risk categories which are distinguished by capital levels and supervisory ratings. As a result of the Dodd-Frank Act, the base for insurance assessments is now consolidated average assets less average tangible equity. Assessment rates are calculated using formulas that take into account the risk of the institution being assessed. Depositor Preference. The FDIA provides that, in the event of the “liquidation or other resolution” of an insured depository institution, the claims of depositors of the institution, including the claims of the FDIC as subrogee of insured depositors, and certain claims for administrative expenses of the FDIC as a receiver, will have priority over other general unsecured claims against the institution. If an insured depository institution fails, insured and uninsured depositors, along with the FDIC, will have priority in payment ahead of unsecured, non-deposit creditors, including the parent bank holding company, with respect to any extensions of credit they have made to such insured depository institution. Federal Home Loan Bank System. The Bank is a member of the FHLB, which is one of the regional Federal Home Loan Banks comprising the Federal Home Loan Bank System. Each Federal Home Loan Bank serves as a central credit facility primarily for its member institutions. The Bank, as a member of the FHLB, is required to acquire and hold shares of capital stock in the FHLB. Required percentages of stock ownership are subject to change by the FHLB, and the Bank was in compliance with this requirement with an investment in FHLB capital stock at December 31, 2021. If there are any developments that cause the value of our stock investment in the FHLB to become impaired, we would be required to write down the value of our investment, which could affect our net income and shareholders’ equity. Reserve Requirements. FRB regulations authorize the Federal Reserve Board to require insured depository institutions to maintain non-interest earning reserves against their transaction accounts (primary interest-bearing and regular checking accounts). The Bank’s required reserves can be in the form of vault cash. If vault cash does not fully satisfy the required reserves, they may be satisfied in the form of a balance maintained with the Federal Reserve Bank of Boston. Currently, there is no reserve requirement because the Federal Reserve Board reduced the reserve requirement to zero percent. Financial Privacy and Data Security. Western New England Bancorp is subject to federal laws, including the Gramm-Leach Bliley Act, and certain state laws containing consumer privacy protection provisions. These provisions limit the ability of banks and other financial institutions to disclose non-public information about consumers to affiliated and non-affiliated third parties and limit the reuse of certain consumer information received from non-affiliated institutions. These provision require notice of privacy policies to consumers and, in some circumstances, allow consumers to prevent disclosure of certain personal information to affiliates or non-affiliated third parties by means of “opt out” or “opt in” authorizations. The Gramm-Leach Bliley Act requires that financial institutions implement comprehensive written information security programs that include administrative, technical, and physical safeguards to protect consumer information. Further, pursuant to interpretive guidance issued under the Gramm-Leach Bliley Act and certain state laws, financial institutions are required to notify customers of security breaches that result in unauthorized access to their nonpublic personal information. 32 Preventing Suspicious Activity. Under Title III of the USA PATRIOT Act (“Patriot Act”), all financial institutions are required to take certain measures to identify their customers, prevent money laundering, monitor customer transactions and report suspicious activity to U.S. law enforcement agencies. Financial institutions also are required to respond to requests for information from federal banking agencies and law enforcement agencies. Information sharing among financial institutions for the above purposes is encouraged by an exemption granted to complying financial institutions from the privacy provisions of Gramm-Leach Bliley Act and other privacy laws. Financial institutions are required to have anti-money laundering programs in place, which include, among other things, performing risk assessments and customer due diligence. The primary federal banking agencies and the Secretary of the Treasury have adopted regulations to implement several of these provisions. The Bank must also comply with the Customer Due Diligence Rule, which clarifies and strengthens the existing obligations for identifying new and existing customers and explicitly include risk-based procedures for conducting ongoing customer due diligence. Financial institutions also are required to establish internal anti-money laundering programs. The effectiveness of institutions in combating money laundering activities is a factor to be considered in any application submitted by an insured depository institution under the Bank Merger Act. Western New England Bancorp and the Bank have in place a Bank Secrecy Act and Patriot Act compliance program and engage in limited transactions with foreign financial institutions or foreign persons. The Fair Credit Reporting Act’s Red Flags Rule requires financial institutions with covered accounts (e.g. consumer bank accounts and loans) to develop, implement, and administer an identity theft prevention program. This program must include reasonable policies and procedures to detect suspicious patterns or practices that indicate the possibility of identity theft, such an inconsistencies in personal information or changes in account activity. Office of Foreign Assets Control Regulation. The U.S. has imposed economic sanctions that affect transactions with designated foreign countries, nationals and others. These are typically known as the “OFAC” rules based on their administration by the Office of Foreign Assets Control, which is an office within the U.S. Department of Treasury (the “OFAC”). The OFAC-administered sanctions targeting countries take many different forms. Generally, the sanctions contain one or more of the following elements: (i) restrictions on trade with or investment in a sanctioned country, including prohibitions against direct or indirect imports from and exports to a sanctioned country and prohibitions on “U.S. persons” engaging in financial transactions relating to making investments in, or providing investment-related advice or assistance to, a sanctioned country; and (ii) a blocking of assets in which the government or specially designated nationals of the sanctioned country have an interest, by prohibiting transfers of property subject to U.S. jurisdiction (including property in the possession or control of U.S. persons). Blocked assets (e.g., property and bank deposits) cannot be paid out, withdrawn, set off or transferred in any manner without an OFAC license. Failure to comply with these sanctions could have legal and reputational consequences. Home Mortgage Disclosure Act ("HMDA"). On October 15, 2015, pursuant to section 1094 of the Dodd-Frank Act, the CFPB issued amended rules in regards to the collection, reporting and disclosure of certain residential mortgage transactions under the Home Mortgage Disclosure Act (the "HMDA Rules"). The Dodd-Frank Act mandated additional loan data collection points in addition to authorizing the CFPB to require other data collection points under implementing Regulation C. Most of the provisions of the HMDA Rule went into effect on January 1, 2018 and apply to data collected in 2018 and reporting in 2019 and later years. The HMDA Rule adopts a uniform loan volume threshold for all financial institutions, modifies the types of transactions that are subject to collection and reporting, expands the loan data information being collected and reported, and modifies procedures for annual submission and annual public disclosures. UDAP and UDAAP. Banking regulatory agencies have increasingly used a general consumer protection statute to address "unethical" or otherwise "bad" business practices that may not necessarily fall directly under the purview of a specific banking or consumer finance law. The law of choice for enforcement against such business practices has been Section 5 of the Federal Trade Commission Act, referred to as the FTC Act, which is the primary federal law that prohibits unfair or deceptive acts or practices, referred to as UDAP, and unfair methods of competition in or affecting commerce. "Unjustified consumer injury" is the principal focus of the FTC Act. Prior to the Dodd-Frank Act, there was little formal guidance to provide insight to the parameters for compliance with UDAP laws and regulations. However, UDAP laws and regulations have been expanded under the Dodd-Frank Act to apply to "unfair, deceptive or abusive acts or practices," referred to as UDAAP, which have been delegated to the CFPB for rule-making. The federal banking agencies have the authority to enforce such rules and regulations. 33 Incentive Compensation. The Dodd-Frank Act requires publicly traded companies to give stockholders a non-binding vote on executive compensation at their first annual meeting taking place six months after the date of enactment and at least every three years thereafter and on “golden parachute” payments in connection with approvals of mergers and acquisitions. The legislation also authorized the SEC to promulgate rules that would allow stockholders to nominate their own candidates using a company’s proxy materials. The Dodd-Frank Act requires the federal banking agencies and the SEC to establish joint regulations or guidelines prohibiting incentive-based payment arrangements at specified regulated entities with at least $1 billion in total consolidated assets that encourage inappropriate risks by providing an executive officer, employee, director or principal shareholder with excessive compensation, fees, or benefits that could lead to material financial loss to the entity. The federal banking agencies and the SEC most recently proposed such regulations in 2016, but the regulations have not yet been finalized. If the regulations are adopted in the form initially proposed, they will restrict the manner in which executive compensation is structured. The Dodd-Frank Act also gives the SEC authority to prohibit broker discretionary voting on elections of directors, executive compensation matters and any other significant matter. At the 2012 and 2017 Annual Meeting of Shareholders, Western New England Bancorp’s shareholders voted on a non-binding, advisory basis to hold a non-binding, advisory vote on the compensation of named executive officers of Western New England Bancorp annually. In light of the results, the Western New England Bancorp Board of Directors determined to hold the vote annually. Future Legislative and Regulatory Initiatives. Various legislative and regulatory initiatives are introduced by Congress, state legislatures and different financial regulatory agencies. Such initiatives may include proposals to expand or contract the powers of bank holding companies, savings and loan holding companies and/or depository institutions. Proposed legislation and regulatory initiatives could change banking statutes and the operating environment of Western New England Bancorp in substantial and unpredictable ways. If enacted, such legislation could increase or decrease the cost of doing business, limit or expand permissible activities or affect the competitive balance among banks, savings associations, credit unions, and other financial institutions. Western New England Bancorp cannot predict whether any such legislation will be enacted, and, if enacted, the effect that it or any implementing regulations would have on the financial condition or results of operations of Western New England Bancorp. Other legislation may be introduced in Congress, which would further regulate, deregulate or restructure the financial services industry, including proposals to substantially reform the financial regulatory framework. It is not possible to predict whether any such proposals will be enacted into law or, if enacted, the effect which they may have on our business and earnings. Available Information. We maintain a website at www.westfieldbank.com . The website contains information about us and our operations. Through a link to the Investor Relations section of our website, copies of each of our filings with the SEC, including our Annual Report on Form 10-K, Quarterly Reports Form 10-Q and Current Reports on Form 8-K and all amendments to those reports, can be viewed and downloaded free of charge as soon as reasonably practicable after the reports and amendments are electronically filed with or furnished to the SEC. The SEC maintains a website at www.sec.gov that contains reports, proxy and information statements, and other information regarding issuers that file or furnish such information electronically with the SEC. The information found on our website or the website of the SEC is not incorporated by reference into this Annual Report on Form 10-K or any other report we file with or furnish to the SEC. 34 ITEM 1A. RISK FACTORS An investment in the Company’s common stock is subject to a variety of risks and uncertainties including, without limitation, those set forth below, any of which could cause the Company's actual results to vary materially from recent results, or from the other forward looking statements that the Company may make from time to time in news releases, annual reports and other written or oral communications. The material risks and uncertainties that management believes may affect the Company are described below. These risks and uncertainties are not listed in any particular order of priority and are not necessarily the only ones facing the Company. Additional risks and uncertainties that management is not aware of or focused on or that management currently deems immaterial may also impair the Company’s business, financial condition and results of operations. This annual report on Form 10-K is qualified in its entirety by these risk factors. If any of the following risks actually occur, the Company’s business, financial condition and results of operations could be materially and adversely affected. If this were to happen, the value of the Company’s common stock could decline significantly, and stockholders could lose some or all of their investment. Risks Related to our Business and Industry The COVID-19 pandemic is adversely impacting us and our customers, counterparties, employees and third-party service providers. Further, the COVID-19 pandemic has severely disrupted the U.S. economy and may continue disrupting banking and other financial activity in the areas in which we operate and the adverse impacts on our business, financial position, results of operations and prospects could continue to be significant. Our business is dependent upon the willingness and ability of our employees and customers to conduct banking and other financial transactions. The ongoing COVID-19 global public health crisis and the resulting “stay-at-home” orders have resulted in widespread volatility, severe disruptions in the U.S. economy at large, and for small businesses in particular, deterioration in household, business, economic and market conditions. The extent of the continued impact of the COVID-19 pandemic and actions taken in response to the pandemic on our capital, liquidity and other financial positions and on our business, results of operations and prospects will depend on a number of evolving factors, including: • The duration, extent, and severity of the pandemic, including the emergence of new variants. COVID-19 does not yet appear to be contained and could affect significantly more households and businesses. The duration and severity of the pandemic continue to be impossible to predict. • The effects on our customers, counterparties, employees and third-party service providers. COVID-19 and its associated consequences and uncertainties may affect individuals, households, and businesses differently and unevenly. In the near-term if not longer, however, our credit, operational and other risks are generally expected to increase. • The effects on economies and markets. Whether the actions of governmental and nongovernmental authorities will be successful in mitigating the adverse effects of COVID-19 is unclear. National, regional and local economies and markets could suffer disruptions that are lasting. In addition, governmental actions are meaningfully influencing the interest-rate environment, which could adversely affect our results of operations and financial condition. • The efficacy and availability of widespread vaccinations. Additionally, if the ongoing COVID-19 pandemic has an adverse effect on (i) customer deposits, (ii) the ability of our borrowers to satisfy their obligations to us, (iii) the demand for our loans or our other products and services, (iv) other aspects of our business operations, or (v) on financial markets, real estate markets, or economic growth, this could, depending on the extent of the decline in customer deposits or loan defaults, materially and adversely affect our liquidity and financial condition and our results of operations could be materially and adversely affected. Our business and operations have not been materially impacted by COVID-19 as of December 31, 2021. However, the ongoing pandemic could cause us to experience higher credit losses in our lending portfolio, impairment of our goodwill and other financial assets, reduced demand for our products and services and other negative impacts on our financial position, results of operations and prospects. Sustained adverse effects may also prevent us from satisfying our minimum regulatory capital ratios and other supervisory requirements or result in downgrades in our credit ratings. 35 Our Loan Portfolio Includes Loans with a Higher Risk of Loss. The Company originates commercial and industrial loans, commercial real estate loans, consumer loans, and residential mortgage loans primarily within its market area. The lending strategy focuses on residential real estate lending as well as servicing commercial customers, including increased emphasis on commercial and industrial lending and commercial deposit relationships. Commercial and industrial loans, commercial real estate loans, and consumer loans may expose a lender to greater credit risk than loans secured by residential real estate because the collateral securing these loans may not be sold as easily as residential real estate. In addition, commercial real estate and commercial and industrial loans may also involve relatively large loan balances to individual borrowers or groups of borrowers. These loans also have greater credit risk than residential real estate for the following reasons: • Commercial Real Estate Loans. Repayment is dependent on income being generated in amounts sufficient to cover operating expenses and debt service. • Commercial and Industrial Loans. Repayment is generally dependent upon the successful operation of the borrower's business. • Consumer Loans. Consumer loans are collateralized, if at all, with assets that may not provide an adequate source of payment of the loan due to depreciation, damage or loss. Any downturn in the real estate market or local economy could adversely affect the value of the properties securing the loans or revenues from the borrowers’ businesses thereby increasing the risk of nonperforming loans. The Company’s Allowance for Loan Losses May Not be Adequate to Cover Loan Losses, Which Could Have a Material Adverse Effect on the Company’s Business, Financial Condition and Results of Operations. A significant source of risk for the Company arises from the possibility that losses will be sustained because borrowers, guarantors and related parties may fail to perform in accordance with the terms of their loan agreements. Most loans originated by the Bank are secured, but some loans are unsecured based upon management’s evaluation of the creditworthiness of the borrowers. With respect to secured loans, the collateral securing the repayment of these loans principally includes a wide variety of real estate, and to a lesser extent personal property, either of which may be insufficient to cover the obligations owed under such loans. Collateral values and the financial performance of borrowers may be adversely affected by changes in prevailing economic, environmental and other conditions, including declines in the value of real estate, changes in interest rates and debt service levels, changes in oil and gas prices, changes in monetary and fiscal policies of the federal government, widespread disease, terrorist activity, environmental contamination and other external events, which are beyond the control of the Company. In addition, collateral appraisals that are out of date or that do not meet industry recognized standards might create the impression that a loan is adequately collateralized when in fact it is not. Although the Company may acquire any real estate or other assets that secure defaulted loans through foreclosures or other similar remedies, the amounts owed under the defaulted loans may exceed the value of the assets acquired. The Company maintains an allowance for loan losses, which is established through a provision for loan losses charged to earnings, that represents management’s estimate of probable losses inherent within the existing portfolio of loans. The twelve months ended 2020 was impacted by a higher provision for loan losses resulting from the COVID-19 pandemic mandated shutdowns and economic disruption that caused elevated unemployment levels and deterioration in household, business, economic and market conditions. The determination of the appropriate level of the allowance for loan losses inherently involves a high degree of subjectivity and requires the Company to make significant estimates of current credit risks and trends, all of which may undergo material changes. In addition, bank regulatory agencies periodically review the Company’s allowance for loan losses and may require an increase in the provision for loan losses or the recognition of further loan charge-offs, based on judgments that differ from those of the Company’s management. While the Company strives to carefully monitor credit quality and to identify loans that may become nonperforming, it may not be able to identify deteriorating loans before they become nonperforming assets, or be able to limit losses on those loans that have been identified to be nonperforming. The FASB has announced changes to accounting standards that will impact the way banking organizations estimate their allowance for loan losses beginning in January 2020, with the implementation of these changes becoming effective for the Company in fiscal years beginning after December 15, 2022. These changes or any others to accounting rules governing credit impairment estimates and recognition may increase the level of the allowance for loan losses. Any increases in the allowance for loan losses will result in a decrease in net income and, depending upon the magnitude of the changes, could have a material adverse effect on the Company’s financial condition and results of operations. 36 Increases in the Company's Nonperforming Assets Could Adversely Affect the Company's Results of Operations and Financial Condition in the Future. Nonperforming assets adversely affect net income in various ways. While the Company pays interest expense to fund nonperforming assets, no interest income is recorded on nonaccrual loans or other real estate owned, thereby adversely affecting income and returns on assets and equity. In addition, loan administration and workout costs increase, resulting in additional reductions of earnings. When taking collateral in foreclosures and similar proceedings, the Company is required to carry the property or loan at its then-estimated fair market value less estimated cost to sell, which, when compared to the carrying value of the loan, may result in a loss. These nonperforming loans and other real estate owned also increase the Company's risk profile and the capital that regulators believe is appropriate in light of such risks, and have an impact on the Company's FDIC risk based deposit insurance premium rate. The resolution of nonperforming assets requires significant time commitments from management and staff. The Company may experience further increases in nonperforming loans in the future, and nonperforming assets may result in further costs and losses in the future, either of which could have a material adverse effect on the Company's financial condition and results of operations. The Company's Use of Appraisals in Deciding Whether to Make a Loan Does Not Ensure the Value of the Collateral. In considering whether to make a loan secured by real property or other business assets, the Company generally requires an internal evaluation or independent appraisal of the asset. However, these assessment methods are only an estimate of the value of the collateral at the time the assessment is made, and involve a large degree of estimates and assumptions and an error in fact or judgment could adversely affect the reliability of the valuation. Changes in those estimates resulting from continuing change in the economic environment and events occurring after the initial assessment may cause the value of the assets to decrease in future periods. As future events and their effects cannot be determined with precision, actual values could differ significantly from these estimates. As a result of any of these factors, the value of collateral backing a loan may be less than estimated at the time of assessment, and if a default occurs the Company may not recover the outstanding balance of the loan. The Company is Subject to Environmental Risks Associated with Real Estate Held as Collateral or Occupied. When a borrower defaults on a loan secured by real property, the Company may purchase the property in foreclosure or accept a deed to the property surrendered by the borrower. The Company may also take over the management of commercial properties whose owners have defaulted on loans. The Company also occupies owned and leased premises where branches and other bank facilities are located. While the Company's lending, foreclosure and facilities policies and guidelines are intended to exclude properties with an unreasonable risk of contamination, hazardous substances could exist on some of the properties that the Company may own, acquire, manage or occupy. Environmental laws could force the Company to clean up the properties at the Company's expense. The Company may also be held liable to a governmental entity or to third parties for property damage, personal injury, investigation and clean-up costs incurred by these parties in connection with environmental contamination, or may be required to investigate or clean up hazardous or toxic substances, or chemical releases at a property. The cost associated with investigation or remediation activities could be substantial and could increase the Company’s operating expenses. It may cost much more to clean a property than the property is worth and it may be difficult or impossible to sell contaminated properties. The Company could also be liable for pollution generated by a borrower’s operations if the Company takes a role in managing those operations after a default. In addition, as the owner or former owner of a contaminated site, we may be subject to common law claims by third parties based on damages and costs resulting from environmental contamination emanating from the property. The Company’s Investment Securities Portfolio is Subject to Credit Risk and Liquidity Risk and Declines in Value in its Investment Securities Portfolio May Require the Company to Record OTTI Charges That Could Have a Material Adverse Effect on the Company’s Results of Operations and Financial Condition. There are inherent risks associated with the Company’s investment activities, many of which are beyond the Company’s control. These risks include the impact from changes in interest rates, weakness in real estate, municipalities, government sponsored enterprises, or other industries, the impact of changes in income tax rates on the value of tax exempt securities, adverse changes in regional or national economic conditions, and general turbulence in domestic and foreign financial markets, among other things. These conditions could adversely impact the fair market value and/or the ultimate collectability of the Company’s investments. In addition to fair market value impairment, carrying values may be adversely impacted due to a fundamental deterioration of the individual municipality, government agency, or corporation whose debt obligations the Company owns or of the individual company or fund in which the Company has invested. 37 If an investment’s value is deemed other than temporarily impaired, then the Company is required to write down the carrying value of the investment which may involve a charge to earnings. The determination of the level of OTTI involves a high degree of judgment and requires the Company to make significant estimates of current market risks and future trends, all of which may undergo material changes. Any OTTI charges, depending upon the magnitude of the charges, could have a material adverse effect on the Company’s financial condition and results of operations. Interest Rate Volatility Could Adversely Affect our Results of Operations and Financial Condition. The Company’s earnings and cash flows are largely dependent upon its net interest income, meaning the difference between interest income earned on interest-earning assets and interest expense paid on interest-bearing liabilities. The re-pricing frequency and magnitude of the Company’s assets and liabilities are not identical, and therefore subject the Company to the risk of adverse changes in interest rates. Interest rates are highly sensitive to many factors that are beyond the Company’s control, including monetary policy of the federal government, inflation and deflation, volatility of domestic and global financial markets, volatility of credit markets, and competition. If the interest rates paid on interest-bearing deposits and other liabilities increase at a faster rate or magnitude than the interest rates received on loans and other investments, the Company’s net interest income, and therefore earnings, could be adversely affected. Earnings could also be adversely affected if the interest rates received on loans and other investments fall more quickly or steeply than falling interest rates paid on interest-bearing liabilities. Competition in Our Primary Market Area May Reduce Our Ability to Attract and Retain Deposits and Originate Loans. We operate in a competitive market for both attracting deposits, which is our primary source of funds, and originating loans. Historically, our most direct competition for deposits has come from savings and commercial banks. Our competition for loans comes principally from commercial banks, savings institutions, mortgage banking firms, credit unions, finance companies, mutual funds, insurance companies and brokerage and investment banking firms. We also face additional competition from internet-based institutions, brokerage firms and insurance companies. Competition for loan originations and deposits may limit our future growth and earnings prospects. Deposit Outflows May Increase Reliance on Borrowings and Brokered Deposits as Sources of Funds. The Company has traditionally funded asset growth principally through deposits and borrowings. As a general matter, deposits are typically a lower cost source of funds than external wholesale funding (brokered deposits and borrowed funds), because interest rates paid for deposits are typically less than interest rates charged for wholesale funding. If, as a result of competitive pressures, market interest rates, alternative investment opportunities that present more attractive returns to customers, general economic conditions or other events, the balance of the Company’s deposits decreases relative to the Company’s overall banking operations, the Company may have to rely more heavily on wholesale or other sources of external funding, or may have to increase deposit rates to maintain deposit levels in the future. Any such increased reliance on wholesale funding, or increases in funding rates in general could have a negative impact on the Company’s net interest income and, consequently, on its results of operations and financial condition. The Company, as Part of its Strategic Plans, Periodically Considers Potential Acquisitions. The Risks Presented by Acquisitions Could Adversely Affect Our Financial Condition and Results of Operations . Any acquisitions will be accompanied by the risks commonly encountered in acquisitions including, among other things: our ability to realize anticipated cost savings and avoid unanticipated costs relating to the merger, the difficulty of integrating operations and personnel, the potential disruption of our or the acquired company’s ongoing business, the inability of our management to maximize our financial and strategic position, the inability to maintain uniform standards, controls, procedures and policies, and the impairment of relationships with the acquired company’s employees and customers as a result of changes in ownership and management. These risks may prevent us from fully realizing the anticipated benefits of an acquisition or cause the realization of such benefits to take longer than expected. The Company Relies on Third-Party Service Providers. The Company relies on independent firms to provide critical services necessary to conducting its business. These services include, but are not limited to: electronic funds delivery networks; check clearing houses; electronic banking services; investment advisory, management and custodial services; correspondent banking services; information security assessments and technology support services; and loan underwriting and review services. The occurrence of any failures or interruptions of the independent firms’ systems or in their delivery of services, or failure to perform in accordance with contracted service level agreements, for any number of reasons could also impact the Company's ability to conduct business and process transactions and result in loss of customer business and damage to the Company's reputation, any of which may have a material adverse effect on the Company’s business, financial condition and results of operation. 38 The Company Relies on Dividends from the Bank for Substantially All of its Revenue. The Company is a separate and distinct legal entity from the Bank. It receives substantially all of its revenue from dividends paid by the Bank. These dividends are the principal source of funds used to pay dividends on the Company’s common stock and interest and principal on the Company’s subordinated debt. Various federal and state laws and regulations limit the amount of dividends that the Bank may pay to the Company. If the Bank, due to its capital position, inadequate net income levels, or otherwise, is unable to pay dividends to the Company, then the Company will be unable to service debt, pay obligations or pay dividends on the Company’s common stock. The OCC also has the authority to use its enforcement powers to prohibit the Bank from paying dividends if, in its opinion, the payment of dividends would constitute an unsafe or unsound practice. The Bank’s inability to pay dividends could have a material adverse effect on the Company’s business, financial condition, results of operations and the market price of the Company’s common stock. The Carrying Value of the Company’s Goodwill Could Become Impaired. In accordance with GAAP, the Company does not amortize goodwill and instead, at least annually, evaluates whether the carrying value of goodwill has become impaired. Impairment of goodwill may occur when the estimated fair value of the Company is less than its recorded book value (i.e., the net book value of its recorded assets and liabilities). This may occur, for example, when the estimated fair value of the Company declines due to changes in the assumptions and inputs used in management’s estimate of fair value. A determination that goodwill has become impaired results in an immediate write-down of goodwill to its determined value with a resulting charge to operations. Any write down of goodwill will result in a decrease in net income and, depending upon the magnitude of the charge, could have a material adverse effect on the Company’s financial condition and results of operations. Risks Related to Legal, Governmental and Regulatory Changes If Dividends Are Not Paid on Our Investment in the FHLB, or if Our Investment is Classified as Other-Than-Temporarily Impaired, Our Earnings and/or Shareholders’ Equity Could Decrease. As a member of the FHLB, the Company is required to own a minimum required amount of FHLB capital stock, calculated periodically based primarily on its level of borrowings from the FHLB. This stock is classified as a restricted investment and carried at cost, which management believes approximates fair value of the FHLB stock. If negative events or deterioration in the FHLB financial condition or capital levels occurs, the Company's investment in FHLB capital stock may become other-than-temporarily impaired to some degree. There can be no assurance that FHLB stock dividends will be declared in the future. If either of these were to occur, the Company’s results of operations and financial condition may be adversely affected. Concentration in Commercial Real Estate Lending is Subject to Heightened Risk Management and Regulatory Review. If a concentration in commercial real estate lending is present, as measured under government banking regulations, management must employ heightened risk management practices that address the following key elements: board and management oversight and strategic planning, portfolio management, development of underwriting standards, risk assessment and monitoring through market analysis and stress testing, and maintenance of increased capital levels as needed to support the level of commercial real estate lending. If a concentration is determined to exist, the Company may incur additional operating expenses in order to comply with additional risk management practices and increased capital requirements which could have a material adverse effect on the Company’s financial condition and results of operations. Replacement of the London Interbank Offered Rate (“ LIBOR”) Could Adversely Affect Our Business, Financial Condition, and Results of Operations. LIBOR is expected to be phased out beginning after December 31, 2021 when private-sector banks are no longer required to report the information used to set the rate. Without this data, LIBOR may no longer be published, or the lack of quality and quantity of data may cause the rate to no longer be representative of the market. On March 5, 2021, the U.K. Financial Conduct Authority (“FCA”) published a statement confirming that all LIBOR settings will either cease to be provided or no longer be representative (i) immediately after December 31, 2021, in the case of all sterling, euro, Swiss franc and Japanese yen settings, and the 1-week and 2-month US dollar settings, and (ii) immediately after June 30, 2023, in the case of all remaining US dollar settings. The International Swaps and Derivative Association (“ISDA”) or Alternative Reference Rates Committee (“ARRC”) fallback spread adjustments were fixed as of the FCA announcement date and are expected to be implemented at the point each relevant reference rate ceases or becomes non-representative. The ARRC formed by the FRB has proposed a paced market transition plan to the Secured Overnight Financing Rate (SOFR) from LIBOR and organizations are continuing to work on industry wide and company-specific transition plans as it relates to derivatives and cash markets exposed to LIBOR. The Company is monitoring this activity and evaluating the related risks. This includes identifying outstanding LIBOR-based loans without ARRC recommended fallback language, internal training and education, and working with our core provider to ensure proper integration once an alternative reference is implemented. Management is monitoring ARRC publications for best practices as the Company transitions legacy LIBOR loans by the June 30, 2023 deadline. 39 We have a significant number of loans, derivative contracts, and other financial instruments with attributes that are either directly or indirectly dependent on LIBOR. The transition from LIBOR, or any changes or reforms to the determination or supervision of LIBOR, could have an adverse impact on the market for or value of any LIBOR-linked securities, loans, and other financial obligations or extensions of credit held by or due to us, could create considerable costs and additional risk and could have an adverse impact on our overall financial condition or results of operations. Since proposed alternative rates are calculated differently, payments under contracts referencing new rates will differ from those referencing LIBOR. The transition will change our market risk profiles, requiring changes to risk and pricing models, valuation tools, product design and hedging strategies. Furthermore, failure to adequately manage this transition process with our customers could adversely impact our reputation. Although we are currently unable to assess what the ultimate impact of the transition from LIBOR will be, failure to adequately manage the transition could have a material adverse effect on our business, financial condition and results of operations. Sources of External Funding Could Become Restricted and Impact the Company’s Liquidity. The Company’s external wholesale funding sources include borrowing capacity at the FHLB, capacity in the brokered deposit markets, other borrowing arrangements with correspondent banks, as well as accessing the public markets through offerings of the Company’s stock or issuance of debt. If, as a result of general economic conditions or other events, these sources of external funding become restricted or are eliminated, the Company may not be able to raise adequate funds or may incur substantially higher funding costs or operating restrictions in order to raise the necessary funds to support the Company's operations and growth. Any such increase in funding costs or restrictions could have a negative impact on the Company’s net interest income and, consequently, on its results of operations and financial condition. We Operate In a Highly-Regulated Environment That is Subject to Extensive Government Supervision and Regulation, Which May Interfere With Our Ability to Conduct Business and May Adversely Impact the Results of our Operations. Banking regulations are primarily intended to protect depositors’ funds, federal deposit insurance funds and the banking system as a whole, not the interests of stockholders. These regulations affect the Company’s lending practices, capital structure, investment practices, dividend policy and growth, among other things. The Company is subject to extensive federal and state supervision and regulation that govern nearly all aspects of our operations and can have a material impact on our business. Federal banking agencies have significant discretion regarding the supervision, regulation and enforcement of banking laws and regulations. Financial laws, regulations and policies are subject to amendment by Congress, state legislatures and federal and state regulatory agencies. Changes to statutes, regulations or policies, including changes in the interpretation of regulations or policies, could materially impact our business. These changes could also impose additional costs on us and limit the types of products and services that we may offer our customers. Compliance with laws and regulations can be difficult and costly, and the failure to comply with any law, regulation or policy could result in sanctions by financial regulatory agencies, including civil monetary penalties, private lawsuits, or reputational damage, any of which could adversely affect our business, financial condition, or results of operations. While we have policies and procedures designed to prevent such violations, there can be no assurance that violations will not occur. See the section titled, “Supervision and Regulation” in ITEM 1. Business. Since the 2008 global financial crisis, financial institutions have been subject to increased scrutiny from Congress, state legislatures and federal and state financial regulatory agencies. Changes to the legal and regulatory framework have significantly altered the laws and regulations under which we operate. Compliance with these changes and any additional or amended laws, regulations and regulatory policies may reduce our ability to effectively compete in attracting and retaining customers. The passage and continued implementation of the Dodd-Frank Act, among other laws and regulations, has increased our costs of doing business and resulted in decreased revenues and net income. We cannot provide assurance that future changes in laws, regulations and policies will not adversely affect our business. 40 State and Federal Regulatory Agencies Periodically Conduct Examinations of Our Business, Including for Compliance With Laws and Regulations, and Our Failure to Comply With Any Supervisory Actions to Which We Are or Become Subject as a Result of Such Examinations May Adversely Affect Our Business. Federal and state regulatory agencies periodically conduct examinations of our business, including our compliance with applicable laws and regulations. If, as a result of an examination, an agency were to determine that the financial, capital resources, asset quality, earnings prospects, management, liquidity, or other aspects of any of our operations had become unsatisfactory, or violates any law or regulation, such agency may take certain remedial or enforcement actions it deems appropriate to correct any deficiency. Remedial or enforcement actions include the power to enjoin “unsafe or unsound” practices, to require affirmative actions to correct any conditions resulting from any violation or practice, to issue an administrative order that can be judicially enforced against a bank, to direct an increase in the bank’s capital, to restrict the bank’s growth, to assess civil monetary penalties against a bank’s officers or directors, and to remove officers and directors. In the event that the FDIC concludes that, among other things, our financial conditions cannot be corrected or that there is an imminent risk of loss to our depositors, it may terminate our deposit insurance. The OCC, as the supervisory and regulatory authority for federal savings associations, has similar enforcement powers with respect to our business. The CFPB also has authority to take enforcement actions, including cease-and-desist orders or civil monetary penalties, if it finds that we offer consumer financial products and services in violation of federal consumer financial protection laws. If we were unable to comply with future regulatory directives, or if we were unable to comply with the terms of any future supervisory requirements to which we may become subject, then we could become subject to a variety of supervisory actions and orders, including cease and desist orders, prompt corrective actions, memoranda of understanding, and other regulatory enforcement actions. Such supervisory actions could, among other things, impose greater restrictions on our business, as well as our ability to develop any new business. We could also be required to raise additional capital, or dispose of certain assets and liabilities within a prescribed time period, or both. Failure to implement remedial measures as required by financial regulatory agencies could result in additional orders or penalties from federal and state regulators, which could trigger one or more of the remedial actions described above. The terms of any supervisory action and associated consequences with any failure to comply with any supervisory action could have a material negative effect on our business, operating flexibility and overall financial condition. The Company’s Capital Levels Could Fall Below Regulatory Minimums. The Company and the Bank are subject to the capital adequacy guidelines of the FRB and the OCC, respectively. Failure to meet applicable minimum capital ratio requirements (including the capital conservation "buffer" imposed by Basel III) may subject the Company and/or the Bank to various enforcement actions and restrictions. If the Company’s capital levels decline, or if regulatory requirements increase, and the Company is unable to raise additional capital to offset that decline or meet the increased requirements, then its capital ratios may fall below regulatory capital adequacy levels. The Company’s capital ratios could decline due to it experiencing rapid asset growth, or due to other factors, such as, by way of example only, possible future net operating losses, impairment charges against tangible or intangible assets, or adjustments to retained earnings due to changes in accounting rules. The Company's failure to remain "adequately-capitalized" for bank regulatory purposes could affect customer confidence, restrict the Company's ability to grow (both assets and branching activity), increase the Company's costs of funds and FDIC insurance costs, prohibit the Company's ability to pay dividends on common shares, and its ability to make acquisitions, and have a negative impact on the Company's business, results of operation and financial conditions, generally. If the Bank ceases to be a "well-capitalized" institution for bank regulatory purposes, its ability to accept brokered deposits and the interest rates that it pays may be restricted. Changes in Accounting Standards Could Materially Impact the Company's Financial Condition and Results of Operations. From time to time, the FASB changes the accounting and reporting standards that govern the recording of financial transactions and preparation of financial statements. Future changes may be difficult to implement and may materially impact how the Company records and reports its financial transactions, financial condition, and results of operations and could impact the Company's business activities and strategy. 41 Changes in Tax Policies at Both the Federal and State Levels Could Impact the Company's Financial Condition and Results of Operations. The Company’s financial performance is impacted by federal and state tax laws. Enactment of new legislation, or changes in the interpretation of existing law, may have a material effect on the Company’s financial condition and results of operations. A deferred tax asset is created by the tax effect of the differences between an asset’s book value and its tax basis. The deferred tax asset is measured using enacted tax rates expected to apply to taxable income in the years in which the temporary differences are expected to be recovered or settled. Accordingly, a reduction in enacted tax rates may result in a decrease in current tax expense and a decrease to the Company’s deferred tax asset, with an offsetting charge to current tax expense. The alternative would occur with an increase to enacted tax rates. In addition, certain tax strategies taken in the past derive their tax benefit from the current enacted tax rates. Accordingly, a change in enacted tax rates may result in a decrease/increase to anticipated benefit of the Company’s previous transactions which in turn, could have a material effect on the Company's financial condition and results of operations. Risks Related to Cybersecurity and Data Privacy We Face Cybersecurity Risks and Risks Associated With Security Breaches Which Have the Potential to Disrupt Our Operations, Cause Material Harm to Our Financial Condition, Result in Misappropriation of Assets, Compromise Confidential Information and/or Damage Our Business Relationships and Can Provide No Assurance That the Steps We and Our Service Providers Take in Response to These Risks Will Be Effective. We depend upon data processing, communication and information exchange on a variety of computing platforms and networks and over the internet. In addition, we rely on the services of a variety of vendors to meet our data processing and communication needs. We face cybersecurity risks and risks associated with security breaches or disruptions such as those through cyber-attacks or cyber intrusions over the internet, malware, computer viruses, attachments to emails, social engineering and phishing schemes or persons inside our organization. The risk of a security breach or disruption, particularly through cyber-attacks or cyber intrusions, including by computer hackers, nation-state affiliated actors, and cyber terrorists, has generally increased as the number, intensity and sophistication of attempted attacks and intrusions from around the world have increased. These incidents may result in disruption of our operations, material harm to our financial condition, cash flows and the market price of our common stock, misappropriation of assets, compromise or corruption of confidential information collected in the course of conducting our business, liability for stolen information or assets, increased cybersecurity protection and insurance costs, regulatory enforcement, litigation and damage to our stakeholder relationships. These risks require continuous and likely increasing attention and other resources from us to, among other actions, identify and quantify these risks, upgrade and expand our technologies, systems and processes to adequately address them and provide periodic training for our employees to assist them in detecting phishing, malware and other schemes. Such attention diverts time and other resources from other activities and there is no assurance that our efforts will be effective. In the normal course of business, we collect and retain certain personal information provided by our customers, employees and vendors. We also rely extensively on computer systems to process transactions and manage our business. We can provide no assurance that the data security measures designed to protect confidential information on our systems established by us will be able to prevent unauthorized access to this personal information. There can be no assurance that our efforts to maintain the security and integrity of the information we and our service providers collect and our and their computer systems will be effective or that attempted security breaches or disruptions would not be successful or damaging. Even the most well protected information, networks, systems and facilities remain potentially vulnerable because the techniques used in such attempted security breaches evolve and generally are not recognized until launched against a target, and in some cases are designed not be detected and, in fact, may not be detected. Accordingly, we may be unable to anticipate these techniques or to implement adequate security barriers or other preventative measures, and thus it is impossible for us to entirely mitigate this risk. We Continually Encounter Technological Change and The Failure to Understand and Adapt to These Changes Could Hurt Our Business. The financial services industry is undergoing rapid technological change with frequent introductions of new technology-driven products and services and technological advances are likely to intensify competition. The effective use of technology increases efficiency and enables financial institutions to better serve customers and to reduce costs. Our future success depends, in part, upon our ability to address the needs of our customers by using technology to provide products and services that will satisfy customer demands, as well as to create additional efficiencies in our operations. Many of our competitors have substantially greater resources to invest in technological improvements. We may not be able to effectively implement new technology-driven products and services or be successful in marketing these products and services to customers. Failure to successfully keep pace with technological changes affecting the financial services industry could have a material adverse impact on our business and, in turn, our financial condition and results of operations. 42 General Risk Factors The Possibility of the Economy’s Return to Recessionary Conditions and the Possibility of Further Turmoil or Volatility in the Financial Markets Would Likely Have an Adverse Effect on the Company’s Business, Financial Position and Results of Operations. The Company continues to face risks resulting from the aftermath of the severe recession generally and the moderate pace of the current recovery. A slowing or failure of the economic recovery would likely aggravate the adverse effects of these difficult economic and market conditions on the Company and on others in the financial services industry. In particular, the Company may face the following risks in connection with the economic or market environment: • The Company’s and the Bank’s ability to borrow from other financial institutions or to access the debt or equity capital markets on favorable terms or at all could be adversely affected by further disruptions in the capital markets or other events, including actions by rating agencies and deteriorating investor expectations. • The Company faces increased regulation of the banking and financial services industry. Compliance with such regulation may increase its costs and limit its ability to pursue business opportunities. • Market developments may affect customer confidence levels and may cause increases in loan delinquencies and default rates, which management expects would adversely impact the Bank’s charge-offs and provision for loan losses. • Market developments may adversely affect the Bank’s securities portfolio by causing other-than-temporary-impairments, prompting write-downs and securities losses. • Competition in banking and financial services industry could intensify as a result of the consolidation of financial services companies in connection with current market conditions. Changes in the Local Economy May Affect our Future Growth Possibilities. The Company’s success depends principally on the general economic conditions of the primary market areas in which the Company operates. The local economic conditions in these regions have a significant impact on the demand for the Company’s products and services, as well as the ability of the Company’s customers to repay loans, the value of the collateral securing loans and the stability of the Company’s deposit funding sources. The Company’s market area is principally located in Hampden and Hampshire Counties, Massachusetts and Hartford and Tolland Counties in northern Connecticut. The local economy may affect future growth possibilities. The Company’s future growth opportunities depend on the growth and stability of our regional economy and the ability to expand in our market area. Natural Disasters, Acts of Terrorism, Public Health Issues and Other External Events Could Harm Our Business. Natural disasters can disrupt our operations, result in damage to our properties, reduce or destroy the value of the collateral for our loans and negatively affect the economies in which we operate, which could have a material adverse effect on our results of operations and financial condition. The emergence of widespread health emergencies or pandemics, such as the spread of COVID-19, has and may again lead to regional quarantines, business shutdowns, labor shortages, disruptions to supply chains, and overall economic instability. Events such as these may become more common in the future and could cause significant damage such as disruptions to power and communication services, impacting the stability of our facilities and result in additional expenses, impairing the ability of our borrowers to repay outstanding loans or reducing the value of collateral securing the repayment of our loans, which could result in the loss of revenue and/or cause us to incur additional expenses. A significant natural disaster, such as a tornado, hurricane, earthquake, fire or flood, could have a material adverse impact on our ability to conduct business, and our insurance coverage may be insufficient to compensate for losses that may occur. Acts of terrorism, war, civil unrest, violence or human error could cause disruptions to our business or the economy as a whole. While we have established and regularly test disaster recovery procedures, the occurrence of any such event could have a material adverse effect on our business, operations and financial condition. The Company May Not be Able to Attract, Retain or Develop Key Personnel. The Company’s success depends, in large part, on its ability to attract, retain and develop key personnel. Competition for the best people in most activities engaged in by the Company can be intense, and the Company may not be able to hire or retain the key personnel that it depends upon for success. The unexpected loss of key personnel or the inability to identify and develop individuals for planned succession to key senior positions within management, or on the Board, could have a material adverse impact on the Company’s business because of the loss of their skills, knowledge of the Company’s market, years of industry or business experience and the difficulty of promptly finding qualified replacements. 43 Controls and Procedures Could Fail, or Be Circumvented by Theft, Fraud or Robbery. Management regularly reviews and updates the Company’s internal controls over financial reporting, corporate governance policies, compensation policies, Code of Business Conduct and Ethics and security controls to prevent and detect theft, fraud or robbery from both internal and external sources. Any system of controls, however well designed and operated, is based in part on certain assumptions and can provide only reasonable, not absolute, assurances that the objectives of the system are met. Any failure or circumvention of the Company’s internal controls and procedures, or failure to comply with regulations related to controls and procedures, or a physical theft or robbery, whether by employees, management, directors, or external elements, or any illegal activity conducted by a Bank customer, could result in loss of assets, regulatory actions against the Company, financial loss, damage the Company’s reputation, cause a loss of customer business, and expose the Company to civil litigation and possible financial liability, any of which could have a material adverse effect on the Company’s business, results of operations and financial condition. Damage to the Company’s Reputation Could Affect the Company’s Profitability and Shareholders' Value. The Company is dependent on its reputation within its market area, as a trusted and responsible financial company, for all aspects of its business with customers, employees, vendors, third-party service providers, and others, with whom the Company conducts business or potential future business. Any negative publicity or public complaints, whether real or perceived, disseminated by word of mouth, by the general media, by electronic or social networking means, or by other methods, regarding, among other things, the Company’s current or potential business practices or activities, cyber-security issues, regulatory compliance, an inability to meet obligations, employees, management or directors’ ethical standards or actions, or about the banking industry in general, could harm the Company’s reputation. Any damage to the Company’s reputation could affect its ability to retain and develop the business relationships necessary to conduct business which in turn could negatively impact the Company’s profitability and shareholders’ value. The Company is Exposed to Legal Claims and Litigation. The Company is subject to legal challenges under a variety of circumstances in the course of its normal business practices in regards to laws and regulations, duties, customer expectations of service levels, in addition to potentially illegal activity (at a federal or state level) conducted by any of our customers, use of technology and patents, operational practices and those of contracted third-party service providers and vendors, and stockholder matters, among others. Regardless of the scope or the merits of any claims by potential or actual litigants, the Company may have to engage in litigation that could be expensive, time-consuming, disruptive to the Company's operations, and distracting to management. Whether claims or legal action are founded or unfounded, if such claims and legal actions are not resolved in a manner favorable to the Company, they may result in significant financial liability, damage the Company’s reputation, subject the Company to additional regulatory scrutiny and restrictions, and/or adversely affect the market perception of our products and services, as well as impact customer demand for those products and services. Any financial liability or reputation damage could have a material adverse effect on the Company's business, which in turn, could have a material adverse effect on the Company's financial condition and results of operations. The Company’s Insurance Coverage May Not be Adequate to Prevent Additional Liabilities or Expenses. The Company maintains insurance policies that provide coverage for various risks at levels the Company deems adequate to provide reasonable coverage for losses. The coverage applies to incidents and events which may impact such areas as: loss of bank facilities; accidental injury or death of employees; injuries sustained on bank premises; cyber and technology attacks or breaches; loss of customer nonpublic personal information; processing of fraudulent transactions; robberies, embezzlement and theft; improper processing of negotiable items or electronic transactions; improper loan underwriting and perfection of collateral, among others. These policies will provide varying degrees of coverage for losses under specific circumstances, and in most cases after related deductible amounts are paid by the Company. However, there is no guarantee that the circumstance of an incident will meet the criteria for insurance coverage under a specific policy, and despite the insurance policies in place the Company may experience a loss incident or event which could have a material adverse effect on the Company’s business, reputation, financial condition and results of operations. 44 The Trading Volume in the Company’s Common Stock is Less Than That of Larger Companies. Although the Company’s common stock is listed for trading on the NASDAQ, the trading volume in the Company’s common stock is substantially less than that of larger companies. Given the lower trading volume of the Company’s common stock, significant purchases or sales of the Company’s common stock, or the expectation of such purchases or sales, could cause significant volatility in the price for the Company’s common stock. The Market Price of the Company’s Common Stock May Fluctuate Significantly, and This May Make it Difficult for You to Resell Shares of Common Stock Owned by You at Times or at Prices You Find Attractive. The price of the Company’s common stock on the NASDAQ constantly changes. The Company expects that the market price of its common stock will continue to fluctuate, and the Company cannot give you any assurances regarding any trends in the market prices for its common stock. The Company’s stock price may fluctuate as a result of a variety of factors, many of which are beyond its control. These factors include the Company’s: • past and future dividend practice; • financial condition, performance, creditworthiness and prospects; • quarterly variations in the Company’s operating results or the quality of the Company’s assets; • operating results that vary from the expectations of management, securities analysts and investors; • c hanges in expectations as to the Company’s future financial performance; • announcements of innovations, new products, strategic developments, significant contracts, acquisitions and other material events by the Company or its competitors; • the operating and securities price performance of other companies that investors believe are comparable to the Company’s; • future sales of the Company’s equity or equity-related securities; • the credit, mortgage and housing markets, the markets for securities relating to mortgages or housing, and developments with respect to financial institutions generally; and • instability in global financial markets and global economies and general market conditions, such as interest or foreign exchange rates, stock, commodity or real estate valuations or volatility, budget deficits or sovereign debt level concerns and other geopolitical, regulatory or judicial events . In addition, the banking industry may be more affected than other industries by certain economic, credit, regulatory or information security issues. Although the Company itself may or may not be directly impacted by such issues, the Company’s stock price may vary due to the influence, both real and perceived, of these issues, among others, on the banking industry in general. Investment in the Company's stock is not insured against loss by the FDIC, or any other public or private entity. As a result, and for the other reasons described in this "Risk Factors" section and elsewhere in this report, if you acquire our common stock, you may lose some or all of your investment. Shareholder Dilution Could Occur if Additional Stock is Issued in the Future. If the Company’s Board of Directors should determine in the future that there is a need to obtain additional capital through the issuance of additional shares of the Company’s common stock or securities convertible into shares of common stock, such issuances could result in dilution to existing stockholders’ ownership interest. Similarly, if the Board of Directors decides to grant additional stock awards or options for the purchase of shares of common stock, the issuance of such additional stock awards and/or the issuance of additional shares upon the exercise of such options would expose stockholders to dilution. The Company's Financial Condition and Results of Operation Rely in Part on Management Estimates and Assumptions. In preparing the financial statements in conformity with GAAP, management is required to exercise judgment in determining many of the methodologies, estimates and assumptions to be utilized. These estimates and assumptions affect the reported values of assets and liabilities at the balance sheet date and income and expenses for the years then ended. Changes in those estimates resulting from continuing change in the economic environment and other factors will be reflected in the financial statements and results of operations in future periods. As future events and their effects cannot be determined with precision, actual results could differ significantly from these estimates and be adversely affected should the assumptions and estimates used be incorrect, or change over time due to changes in circumstances. 45 business, financial condition, results of operations and the market price of the Company’s common stock. ITEM 1B. UNRESOLVED STAFF COMMENTS. None. ITEM 2. PROPERTIES. The Company currently conducts business through our twenty-five banking offices, seventeen off-site ATMs and five seasonal/traveling ATMs. The following table sets forth certain information regarding our properties as of December 31, 2021. As of this date, the premises and equipment, net of depreciation, owned by us had an aggregate net book value of $26.2 million. We believe that our existing facilities are sufficient for our current needs. Location Ownership Year Opened Year of Lease or License Expiration Main Office: 141 Elm Street Westfield, MA Owned 1964 N/A Technology Center: 9-13 Chapel Street Westfield, MA Leased 2015 2023 Retail Lending: 136 Elm Street Westfield, MA Owned 2011 N/A Commercial Lending & Middle Market: 1500 Main Street Springfield, MA Leased 2014 2024 Commercial Lending/Credit Admin and Training Center: 219/229 Exchange Street Chicopee, MA Owned 2009/1998 N/A Branch Offices: 206 Park Street West Springfield, MA Owned 1957 N/A 655 Main Street Agawam, MA Owned 1968 N/A 26 Arnold Street Westfield, MA Owned 1976 N/A 300 Southampton Road Westfield, MA Owned 1987 N/A 462 College Highway Southwick, MA Owned 1990 N/A 382 North Main Street East Longmeadow, MA Leased 1997 2022 1500 Main Street Springfield, MA Leased 2006 2023 1650 Northampton Street Holyoke, MA Owned 2001 N/A 46 Location Ownership Year Opened Year of Lease or License Expiration 560 East Main Street Westfield, MA Owned 2007 N/A 237 South Westfield Street Feeding Hills, MA Leased 2009 2023 12 East Granby Road Granby, CT Owned 2021 N/A 47 Palomba Drive Enfield, CT Leased 2014 2024 39 Morgan Road West Springfield, MA Owned 2005 N/A 1342 Liberty Street Springfield, MA Owned 2008 NA 70 Center Street Chicopee, MA Owned 1973 N/A 569 East Street Chicopee, MA Owned 1976 N/A 599 Memorial Drive Chicopee, MA Leased 1977 2027 435 Burnett Road Chicopee, MA Owned 1990 N/A 477A Center Street Ludlow, MA Leased 2002 2032 350 Palmer Road Ware, MA Leased 2009 2027 32 Willamansett Street (1) South Hadley, MA Leased 2008 2027 14 Russell Road Huntington, MA Owned 2020 N/A 337 Cottage Grove Road Bloomfield, CT Leased 2020 2035 977 Farmington Avenue West Hartford, CT Leased 2020 2030 47 Location Ownership Year Opened Year of Lease or License Expiration ATMs: 516 Carew Street Springfield, MA Tenant at will 2002 NA 1000 State Street Springfield, MA Tenant at will 2003 NA 788 Memorial Avenue West Springfield, MA Leased 2006 2025 2620 Westfield Street West Springfield, MA Tenant at will 2006 NA 98 Southwick Road Westfield, MA Leased 2006 2026 115 West Silver Street Westfield, MA Tenant at will 2005 NA 98 Lower Westfield Road Holyoke, MA Leased 2010 2025 Westfield State University 577 Western Avenue Westfield, MA Ely Hall Leased 2010 2022 Wilson Hall Leased 2010 2022 214 College Highway Southwick, MA Leased 2010 2025 110 Cherry Street Holyoke, MA Tenant at will 2018 NA 291 Springfield Street Chicopee, MA Owned 2015 NA Springfield Visitors Center 1319 Main Street Springfield, MA Leased 2018 2023 Union Station 55 Frank B. Murray Street Springfield, MA Leased 2018 2023 701 Center Street Chicopee, MA Tenant at will 2015 NA 627 Randall Road Ludlow, MA Tenant at will 2015 NA 26 Central Street West Springfield, MA Tenant at will 2021 NA (1) This lease is for the land only, the building is owned by Westfield Bank. 48 ITEM 3. LEGAL PROCEEDINGS. There are no material pending legal proceedings to which the Company or its subsidiaries are a party or to which any of its property is subject, other than routine legal proceedings occurring in the ordinary course of business. Management does not believe resolution of any present litigation will have a material adverse effect on the business, consolidated financial condition or results of operations of the Company. ITEM 4. MINE SAFETY DISCLOSURES. n ot Applicable. PART II ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED SHAREHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES. Market Information. The Company’s common stock is currently listed on NASDAQ under the trading symbol “WNEB.” As of December 31, 2021, there were 22,656,515 shares of the Company’s common stock outstanding by approximately 2,028 shareholders, as obtained through our transfer agent. Such number of shareholders does not reflect the number of persons or entities holding stock in nominee name through banks, brokerage firms and other nominees. Dividend Policy. The Company maintains a dividend reinvestment and direct stock purchase plan (the "DRSPP"). The DRSPP enables stockholders, at their discretion, to continue to elect to reinvest cash dividends paid on their shares of the Company’s common stock by purchasing additional shares of common stock from the Company at a purchase price equal to fair market value. Under the DRSPP, stockholders and new investors also have the opportunity to purchase shares of the Company's common stock without brokerage fees, subject to monthly minimums and maximums. Although the Company has historically paid quarterly dividends on its common stock, the Company’s ability to pay such dividends depends on a number of factors, including restrictions under federal laws and regulations on the Company’s ability to pay dividends, and as a result, there can be no assurance that dividends will be paid in the future. Recent Sales of Unregistered Securities. There were no sales by the Company of unregistered securities during the year ended December 31, 2021. Purchases of Equity Securities by the Issuer and Affiliated Purchasers. The following table sets forth information with respect to purchases made by the Company during the three months ended December 31, 2021. Period Total Number of Shares Purchased Average Price Paid per Share ($) Total Number of Shares Purchased as Part of Publicly Announced Programs Maximum Number of Shares that May Yet Be Purchased Under the Program (1)(2) October 1 - 31, 2021 155,240 8.89 155,240 714,157 November 1 - 30, 2021 — — — 714,157 December 1 - 31, 2021 50,720 8.76 36,838 677,319 Total 205,960 8.86 192,078 677,319 49 (1) On April 27, 2021, the Board of Directors authorized an additional stock repurchase plan under which the Company may purchase up to 2,400,000 shares, or 10%, of its outstanding common stock. (2) Repurchase of 13,882 shares related to tax obligations for shares of restricted stock that vested on December 31, 2021 under our 2014 Omnibus Incentive Plan. These repurchases were reported by each reporting person on January 3, 2022. Stock Performance Graph. The following graph compares our total cumulative shareholder return (which assumes the reinvestment of all dividends) by an investor who invested $100.00 on December 31, 2016 to December 31, 2021, to the total return by an investor who invested $100.00 in the S&P U.S. Banks Index $1 Billion - $5 Billion, the S&P U.S. BMI Banks New England Region Index and the NASDAQ Bank Index. COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN Among Western New England Bancorp, Inc., the S&P U.S. Banks Index $1 Billion - $5 Billion, the S&P U.S. BMI Banks New England Region Index and the NASDAQ Bank Index Period Ending Index 12/31/16 12/31/17 12/31/18 12/31/19 12/31/20 12/31/21 Western New England Bancorp, Inc. 100.00 117.98 110.36 108.12 80.01 104.15 S&P U.S. Banks $1 Billion - $5 Billion 100.00 102.80 85.53 106.62 96.52 130.73 S&P U.S. BMI Banks New England Region Index 100.00 117.18 85.91 102.19 88.51 123.54 NASDAQ Bank Index 100.00 105.46 88.40 109.95 101.70 145.34 50 ITEM 6. SELECTED FINANCIAL DATA. [Reserved.] 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. 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: • 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; • 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 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; and • 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. You should read the following financial results for the year ended December 31, 2021 in the context of this strategy. For the twelve months ended December 31, 2021, net income was $23.7 million, or $1.02 diluted earnings per share, compared to net income of $11.2 million, or $0.45 diluted earnings per share, for the twelve months ended December 31, 2020. The results for the twelve months ended December 31, 2021 showed a decrease in interest expense, a credit for loan losses, and an increase in non-interest income, which were all partially offset by a decrease in interest income and an increase in non-interest expense. The provision for loan losses was a credit of $925,000 for the year ended December 31, 2021, compared to a provision for loan losses of $7.8 million for the year ended December 31, 2020. The allowance for loan losses was $19.8 million, or 1.06% of total loans, at December 31, 2021 and $21.2 million, or 1.10%, at December 31, 2020. Excluding PPP loans, the allowance for loan losses as a percentage of total loans was 1.08% and 1.20% at December 31, 2021 and 2020, respectively. At December 31, 2021, the allowance for loan losses as a percentage of nonperforming loans was 398.6%, compared to 269.8% at December 31, 2020. The twelve months ended 2020 was impacted by a higher provision for loan losses resulting from the COVID-19 pandemic mandated shutdowns and economic disruption that caused elevated unemployment levels and deterioration in household, business, economic and market conditions. 51 Net interest income increased $8.7 million, or 13.6%, to $73.2 million for the twelve months ended December 31, 2021, compared to $64.4 million for the twelve months ended December 31, 2020. The increase in net interest income was due to a decrease in interest expense of $11.8 million, or 63.8%, partially offset by a decrease in interest and dividend income of $3.0 million, or 3.7%. For the twelve months ended December 31, 2021, interest and dividend income included $6.8 million in PPP income, compared to $4.8 million during the twelve months ended December 31, 2020. During the twelve months ended December 31, 2020, the Company recorded $976,000 in positive purchase accounting adjustments and $193,000 in interest income and late charges from the full payoff of a $3.5 million credit-marked substandard classified loan, compared to $55,000 in positive purchase accounting adjustments during the twelve months ended December 31, 2021. The Company recorded prepayment penalties of $181,000 and $409,000 during the twelve months ended December 31, 2021 and 2020, respectively. Excluding the items mentioned above, net interest income increased $8.3 million, or 14.3%, from the same period in 2020. The decrease in interest expense of $11.8 million, or 63.8%, was due to a decrease in interest expense on deposits of $8.0 million, or 59.2%, and a decrease in interest expense on borrowings of $3.8 million, or 77.6%. 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 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. RECENT DEVELOPMENTS: CORONAVIRUS PANDEMIC RESPONSE AND ACTIONS. The Company continues to monitor COVID-19’s impact on its business and customers, however, the extent to which COVID-19 will impact its results and operations will depend on future developments, which are highly uncertain and cannot be predicted with confidence, including the scope, severity and duration of the pandemic, the actions taken to contain the pandemic or mitigate its impact, and the direct and indirect economic effects of the pandemic and containment measures. Our business is dependent upon the willingness and ability of our employees and customers to conduct banking and other financial transactions. The COVID-19 global public health crisis and the resulting “stay-at-home” orders resulted in widespread volatility, severe disruptions in the U.S. economy at large, and for small businesses in particular, deterioration in household, business, economic and market conditions. Paycheck Protection Program. As a Preferred Lender with the SBA, the Company was in a position to react quickly to the PPP component of the March 27, 2020 $2.2 trillion fiscal stimulus bill known as the CARES Act launched by the Treasury and the SBA. An eligible business was able to apply for a PPP loan up to the lesser of: (1) 2.5 times its average monthly “payroll costs,” or (2) $10.0 million. PPP loans have: (a) an interest rate of 1.0%, (b) a two-year loan term to maturity, subsequently extended to a five-year loan term maturity for loans granted on or after June 5, 2020 and (c) principal and interest payments deferred from six months to ten months from the date of disbursement. The SBA will guarantee 100% of the PPP loans made to eligible borrowers. The entire principal amount of the borrower’s PPP loan, including any accrued interest, is eligible to be reduced by the loan forgiveness amount under the PPP so long as employee and compensation levels of the business are maintained and 60% of the loan proceeds are used for payroll expenses, with the remaining 40% of the loan proceeds used for other qualifying expenses. As of December 31, 2021, the Company received funding approval from the SBA for 2,146 applications totaling $302.2 million. 52 As of December 31, 2021, the Company processed 1,982 PPP loan forgiveness applications totaling $276.9 million. Total PPP loans decreased $141.9 million, or 84.9%, from $167.3 million at December 31, 2020 to $25.3 million at December 31, 2021. As PPP loans are forgiven, the Company is accelerating the recognition of PPP loan origination fees that were being amortized over the original lives of the loans. The majority of the PPP loan portfolio has been repaid through forgiveness and earnings were favorably impacted by the additional PPP origination fee income during the year ended December 31, 2021. During the twelve months ended December 31, 2021, the Company recognized $6.8 million in PPP loan origination fee income and PPP interest income (“PPP income”), compared to $4.8 million during the twelve months ended December 31, 2020. As of December 31, 2021, the Company had $781,000 in remaining deferred PPP loan processing fees. Loan Modifications/Troubled Debt Restructurings . The banking regulatory agencies, through an Interagency Statement dated April 7, 2020, have encouraged financial institutions to work “prudently” with borrowers who request loan modifications or deferrals as a result of the economic impacts of COVID-19. Pursuant to Section 4013 of the CARES Act, loans less than 30 days past due as of December 31, 2019 will be considered current for COVID-19 modifications. Financial institutions can then suspend the requirements under U.S. GAAP for loan modifications related to COVID-19 that would otherwise be categorized as a TDR, and suspend any determination of a loan modified as a result of COVID-19 as being a TDR, including the requirement to determine impairment for accounting under U.S. GAAP. The Company has adopted this policy election to address COVID-19 loan modification requests that have been received from the earlier of either January 1, 2022 or the 60 th day after the end of the COVID-19 national emergency. As a result of the COVID-19 pandemic, the Company granted deferred loan payments for impacted commercial, residential and consumer customers who experienced financial hardship due to COVID-19. The loan payment deferrals can be up to 90 days, depending upon the financial needs of each customer. Further deferrals will be re-evaluated on a customer-by-customer basis upon the expiration of the existing deferral period. As of December 31, 2021, of the $42.5 million in remaining modifications granted under the CARES Act, eight loans in the amount of $33.5 million, or 78.8%, of the remaining modifications, were granted to the hotel industry, and one loan in the amount of $9.0 million was granted to an assisted living facility. Of the $42.5 million in remaining outstanding modifications, $33.5 million, or 78.8%, have resumed interest only payments. The table below breaks out the remaining modifications granted under the CARES Act at December 31, 2021: CARES Act Modifications Loan Segment (1)(2) Total Loan Segment Balance at December 31, 2021 % of Total Loans Modification Balance # of Loans Modified % of Loan Segment Balance ($ in millions) Commercial real estate (3) $ 980.0 53.3 % $ 41.9 7 4.3 % Commercial and industrial 201.3 11.0 % 0.6 2 0.3 % Residential real estate 652.1 35.5 % — — — Consumer 4.3 0.2 % — — — Total $ 1,837.7 100.0 % $ 42.5 9 2.3 % (1) Excludes PPP loans of $25.3 million and the related deferred fees. (2) Residential includes home equity loans and lines of credit. (3) The remaining modifications balance includes $32.9 million, which resumed regular payments in January of 2022. 53 Allowance for Loan Losses. In 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. Beginning at the end of March 2020, a record number of Americans filed for unemployment benefits. The global pandemic could cause the Company to experience higher credit losses in its lending portfolio, reduced demand for our products and services and other negative impacts on our financial position, results of operations and prospects. As of December 31, 2021, 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. The COVID-19 pandemic materially impacted the Company’s determination of the allowance for loan losses for the twelve months ended December 31, 2021 and 2020. The Company recorded a credit for loan losses of $925,000 for the twelve months ended December 31, 2021, compared to a provision for loan losses of $7.8 million for the twelve months ended December 31, 2020. In addition, on an ongoing basis, the Company has continually evaluated the loan portfolio acquired on October 24, 2016 from Chicopee. The acquired portfolio was initially recorded at fair value without a related allowance for loan losses. Subsequent to acquisition, there have been no indications that there has been any subsequent deterioration to the acquired portfolio. During the three months ended September 30, 2020, the Company determined that it was prudent to provide an allowance for loan losses related to the acquired portfolio, which increased the provision by $2.5 million during 2020. The Company is continuing to monitor COVID-19’s impact on its business and its customers, however, the extent to which COVID-19 will impact its results and operations will depend on future developments, which are highly uncertain and cannot be predicted with confidence, including the scope, severity and duration of the pandemic, the actions taken to contain the pandemic or mitigate its impact and the direct and indirect economic effects of the pandemic and containment measures. 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 loan losses and provision for loan 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 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. 54 Beginning in March 2020, the Bank added a new qualitative factor category to the allowance calculation – “Economic Impact of COVID-19”. The allocation of additional reserves for the COVID-19 qualitative factor during the year was based upon continued analysis of the loan portfolio that included identifying borrowers sensitive to the shutdown (i.e. accommodation and food service, recreation, construction, manufacturing, and wholesale & retail trade) as well as a general allocation for the negative economic outlook given the record number of unemployment benefits claims during the period. In addition, on an ongoing basis, the Company has continually evaluated the loan portfolio acquired on October 24, 2016 from Chicopee Bancorp, Inc. (“Chicopee”). The acquired portfolio was initially recorded at fair value without a related allowance for loan losses. Due to the ongoing impacts and extended nature of the pandemic, during the year ended December 31, 2020, the Company determined that it was prudent to provide an allowance for loan losses related to the acquired portfolio. Although management believes it has established and maintained the allowance for loan losses at adequate levels, if management’s assumptions and judgments prove to be incorrect due to continued deterioration in economic, real estate and other conditions, and the allowance for loan losses is not adequate to absorb inherent losses, 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 31, 2021. 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, 2021, 2020 and 2019. 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. 55 For the Years Ended December 31, 2021 2020 2019 Average Average Yield/ Average Average Yield/ Average Average Yield/ Balance Interest (8) Cost Balance Interest (8) Cost Balance Interest (8) Cost (Dollars in thousands) ASSETS: Interest-earning assets Loans(1)(2) $ 1,887,926 $ 74,620 3.95 % $ 1,922,607 $ 78,284 4.07 % $ 1,721,884 $ 75,354 4.38 % Securities(2) 319,778 5,398 1.69 214,312 4,360 2.03 245,417 6,236 2.54 Other investments - at cost 10,242 116 1.13 14,915 587 3.94 16,061 833 5.19 Short-term investments(3) 111,931 139 0.12 45,858 109 0.24 13,459 230 1.71 Total interest-earning assets 2,329,877 80,273 3.45 2,197,692 83,340 3.79 1,996,821 82,653 4.14 Total non-interest-earning assets 147,980 140,725 137,000 Total assets $ 2,477,857 $ 2,338,417 $ 2,133,821 LIABILITIES AND EQUITY: Interest-bearing liabilities Interest-bearing checking accounts $ 109,648 399 0.36 $ 86,086 387 0.45 $ 72,690 377 0.52 Savings accounts 205,394 154 0.07 153,073 136 0.09 126,506 146 0.12 Money market accounts 776,725 2,412 0.31 521,692 2,838 0.54 405,785 2,532 0.62 Time deposits 477,067 2,543 0.53 634,111 10,139 1.60 668,521 14,152 2.12 Total interest-bearing deposits 1,568,834 5,508 0.35 1,394,962 13,500 0.97 1,273,502 17,207 1.35 Short-term borrowings and long-term debt 38,294 1,164 3.04 190,752 4,945 2.59 240,416 6,930 2.88 Interest-bearing liabilities 1,607,128 6,672 0.42 1,585,714 18,445 1.16 1,513,918 24,137 1.59 Non-interest-bearing deposits 608,936 489,602 366,211 Other non-interest-bearing liabilities 39,108 32,251 23,098 Total non-interest-bearing liabilities 648,044 521,853 389,309 Total liabilities 2,255,172 2,107,567 1,903,227 Total equity 222,685 230,850 230,594 Total liabilities and equity $ 2,477,857 $ 2,338,417 $ 2,133,821 Less: Tax-equivalent adjustment(2) (424 ) (465 ) (537 ) Net interest and dividend income $ 73,177 $ 64,430 $ 57,979 Net interest rate spread(4) 3.01 % 2.61 % 2.52 % Net interest rate spread, on a tax-equivalent basis(5) 3.03 % 2.63 % 2.55 % Net interest margin(6) 3.14 % 2.93 % 2.90 % Net interest margin, on a tax-equivalent basis(7) 3.16 % 2.95 % 2.93 % Ratio of average interest-earning assets to average interest-bearing liabilities 144.97 % 138.59 % 131.90 % 56 (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 2021, 2020 and 2019. 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. (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 assets. (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”. (8) Acquired loans, time deposits and borrowings are recorded at fair value at the time of acquisition. The fair value marks on the loans, time deposits and borrowings acquired accrete and amortize into net interest income over time. For the twelve months ended December 31, 2021, 2020 and 2019, the loan accretion income and interest expense reduction on time deposits and borrowings increased net interest income $55,000, $976,000 and $18,000, respectively. Excluding these items, net interest margin, on a tax-equivalent basis, for the twelve months ended December 31, 2021, 2020 and 2019 was 3.16%, 2.91%, and 2.93% respectively. 57 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. Year Ended December 31, 2021 Compared to Year Ended December 31, 2020 Year Ended December 31, 2020 Compared to Year Ended December 31, 2019 Increase (Decrease) Due to Increase (Decrease) Due to Volume Rate Net Volume Rate Net Interest-earning assets (In thousands) (In thousands) Loans (1) $ (1,428 ) $ (2,236 ) $ (3,664 ) $ 8,784 $ (5,854 ) $ 2,930 Investment securities (1) 2,136 (1,098 ) 1,038 (790 ) (1,086 ) (1,876 ) Other investments - at cost (184 ) (287 ) (471 ) (59 ) (187 ) (246 ) Short-term investments 160 (130 ) 30 554 (675 ) (121 ) Total interest-earning assets 684 (3,751 ) (3,067 ) 8,489 (7,802 ) 687 Interest-bearing liabilities Interest-bearing checking accounts 106 (94 ) 12 69 (59 ) 10 Savings accounts 48 (30 ) 18 31 (41 ) (10 ) Money market accounts 1,367 (1,793 ) (426 ) 723 (417 ) 306 Time deposits (2,510 ) (5,086 ) (7,596 ) (728 ) (3,285 ) (4,013 ) Short-term borrowing and long-term debt (3,951 ) 170 (3,781 ) (1,432 ) (553 ) (1,985 ) Total interest-bearing liabilities (4,940 ) (6,833 ) (11,773 ) (1,337 ) (4,355 ) (5,692 ) Change in net interest and dividend income $ 5,624 $ 3,081 $ 8,705 $ 9,826 $ (3,447 ) $ 6,379 (1) Securities and loan income and net interest income are presented on a tax-equivalent basis using a tax rate of 21% for 2021, 2020 and 2019. 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. 58 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. Twelve Months Ended December 31, 2021 2020 2019 (Dollars in thousands) Interest Average Yield Interest Average Yield Interest Average Yield Loans (no tax adjustment) $ 74,200 3.93 % $ 77,837 4.05 % $ 74,837 4.35 % Tax-equivalent adjustment (1) 420 447 517 Loans (tax-equivalent basis) $ 74,620 3.95 % $ 78,284 4.07 % $ 75,354 4.38 % Securities (no tax adjustment) $ 5,394 1.69 % $ 4,342 2.03 % $ 6,216 2.53 % Tax-equivalent adjustment (1) 4 18 20 Securities (tax-equivalent basis) $ 5,398 1.69 % $ 4,360 2.03 % $ 6,236 2.54 % Net interest income (no tax adjustment) $ 73,177 $ 64,430 $ 57,979 Tax-equivalent adjustment (1) 424 465 537 Net interest income (tax-equivalent basis) $ 73,601 $ 64,895 $ 58,516 Interest rate spread (no tax adjustment) 3.01 % 2.61 % 2.52 % Net interest margin (no tax adjustment) 3.14 % 2.93 % 2.90 % (1) The tax equivalent adjustment is based upon a 21% tax rate for 2021, 2020 and 2019. Comparison of Financial Condition at December 31, 2021 and December 31, 2020. At December 31, 2021, total assets of $2.5 billion increased $172.5 million, or 7.3%, from December 31, 2020. The balance sheet composition and changes since December 31, 2020 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 $103.5 million, or 4.1% of total assets, at December 31, 2021 and $87.4 million, or 3.7% of total assets, at December 31, 2020. 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 increase in cash and cash equivalents at both December 31, 2021 and 2020 is primarily due to an increase in deposits during both periods. Investments. At December 31, 2021, the investment portfolio of $428.5 million, or 16.9% of total assets, increased $214.7 million, compared to $213.8 million, or 9.0% of total assets, at December 31, 2020. Held-to-maturity securities, which are recorded at amortized cost, comprised the majority of the portfolio and represented 51.9% of total investments at December 31, 2021. The Company did not hold any held-to-maturity securities in 2020. The Company allocated some of its excess liquidity to the investment portfolio as an alternative to cash and cash equivalents. This shift from overnight investments to held-to-maturity securities assisted the Company with managing the yield on interest-earning assets in the low interest rate environment that we experienced in 2021 while providing ongoing cash flows from payments and pay downs. The primary objective of the investment portfolio is to provide liquidity and maximize income while preserving the safety of principal. Available-for-sale securities, which are carried at fair value, totaled $194.4 million, or 45.4% of investments, at December 31, 2021, compared to $201.9 million, or 94.4% of investments, at December 31, 2020. The marketable equity securities portfolio totaled $11.9 million and $12.0 million at December 31, 2021 and 2020. 59 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 $2.2 million at both December 31, 2021 and December 31, 2020, respectively. At December 31, 2021 and 2020, 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. Total loans were $1.9 billion as of December 31, 2021, a decrease of $62.7 million, or 3.3%, from December 31, 2020, primarily due to a decrease in PPP loans of $141.9 million, or 84.9%. Excluding PPP loans, total loans increased $79.3 million, or 4.5%, driven by an increase in commercial real estate loans of $146.0 million, or 17.5%, partially offset by a decrease in commercial and industrial loans of $10.5 million, or 4.9%. Residential real estate loans, which include home equity loans, decreased $56.5 million, or 8.0%, as we continue to sell low coupon, fixed rate residential loans to the secondary market in order to diversify our loan mix and reduce our interest rate risk. In accordance with the Company’s asset/liability management strategy, during the twelve months ended December 31, 2021, the Company sold $59.7 million of fixed rate, low coupon residential real estate loans to the secondary market. There were no loans sold during 2020. As of December 31, 2021, the Company serviced $88.2 million in loans sold to the secondary market, compared to $38.1 million at December 31, 2020. Servicing rights will likely continue to be retained on all loans written and sold to the secondary market. 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 $72.9 million at both December 31, 2021 and 2020, respectively. Deposits. At December 31, 2021, total deposits were $2.3 billion, an increase of $213.5 million, 10.5%, from December 31, 2020, primarily due to an increase in core deposits of $401.8 million, or 27.7%. Core deposits, which the Company defines as all deposits except time deposits, increased from $1.4 billion, or 71.0% of total deposits, at December 31, 2020, to $1.8 billion, or 82.1% of total deposits, at December 31, 2021. Non-interest-bearing deposits increased $99.5 million, or 18.4%, to $641.3 million, interest-bearing checking accounts increased $50.8 million, or 53.5%, to $145.7 million, savings accounts increased $41.6 million, or 23.6%, to $217.6 million, and money market accounts increased $209.5 million, or 32.7%, to $850.3 million. The increase in core deposits can be attributed to the government stimulus, lower consumer spending, PPP loan proceeds deposited into borrower checking accounts, as well as the three new branches opened in 2020. We anticipate that some of the deposit growth from PPP will be temporary as customers look to make capital improvements and diversify investments as risk from the COVID-19 pandemic eases over time. Borrowed Funds. At December 31, 2021, total borrowings decreased $35.6 million, or 61.5%, from $57.9 million at December 31, 2020, to $22.3 million. FHLB advances decreased $55.2 million, or 95.4%, to $2.7 million and subordinated debt issued during the three months ended June 30, 2021 totaled $20.0 million at December 31, 2021. 60 Shareholders’ Equity. At December 31, 2021, shareholders’ equity was $223.7 million, or 8.8% of total assets, compared to $226.6 million, or 9.6% of total assets, at December 31, 2020. The decrease in shareholders’ equity reflects $23.1 million for the repurchase of the Company’s common stock, the payment of regular cash dividends of $4.7 million and an increase in accumulated other comprehensive loss of $1.0 million, partially offset by net income of $23.7 million. Total shares outstanding as of December 31, 2021 were 22,656,515. The Company’s book value per share was $9.87 at December 31, 2021 compared to $8.97 at December 31, 2020, while tangible book value per share increased $0.85, or 10.2%, from $8.36 at December 31, 2020 to $9.21 at December 31, 2021. As of December 31, 2021, 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 includes 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. Investment assets under management of $188.1 million increased $16.4 million, or 9.6%, for the year ended December 31, 2021, from $171.7 million for the year ended December 31, 2020. Comparison of Operating Results for Years Ended December 31, 2021 and 2020. General. For the twelve months ended December 31, 2021, the Company reported net income of $23.7 million, or $1.02 per diluted share, compared to $11.2 million, or $0.45 per diluted share, for the twelve months ended December 31, 2020. Net Interest Income and Net Interest Margin. During the twelve months ended December 31, 2021, net interest income increased $8.7 million, or 13.6%, to $73.2 million, compared to $64.4 million for the twelve months ended December 31, 2020. The increase in net interest income was due to a decrease in interest expense of $11.8 million, or 63.8%, partially offset by a decrease in interest and dividend income of $3.0 million, or 3.7%. For the twelve months ended December 31, 2021, interest and dividend income included $6.8 million in PPP income, compared to $4.8 million during the twelve months ended December 31, 2020. During the twelve months ended December 31, 2020, the Company recorded $976,000 in positive purchase accounting adjustments and $193,000 in interest income and late charges from the full payoff of a $3.5 million credit-marked substandard classified loan, compared to $55,000 in positive purchase accounting adjustments during the twelve months ended December 31, 2021. The Company recorded prepayment penalties of $181,000 and $409,000 during the twelve months ended December 31, 2021 and 2020, respectively. Excluding the items mentioned above, net interest income increased $8.3 million, or 14.3%, from the same period in 2020. The decrease in interest expense of $11.8 million, or 63.8%, was due to a decrease in interest expense on deposits of $8.0 million, or 59.2%, and a decrease in interest expense on borrowings of $3.8 million, or 77.6%. The net interest margin for the twelve months ended December 31, 2021 was 3.14%, compared to 2.93% for the twelve months ended December 31, 2020. The net interest margin, on a tax-equivalent basis, was 3.16% for the twelve months ended December 31, 2021, compared to 2.95% for the twelve months ended December 31, 2020. Excluding the adjustments discussed above, the net interest margin increased from 2.83% for the twelve months ended December 31, 2020 to 2.99% for the twelve months ended December 31, 2021. The average yield on interest-earning assets decreased 34 basis points from 3.77% for the twelve months ended December 31, 2020 to 3.43% for the twelve months ended December 31, 2021. The yield on average loans decreased from 4.05% during the twelve months ended December 31, 2020 to 3.93% during the twelve months ended December 31, 2021. Excluding the adjustments discussed above of $6.9 million and $6.4 million for the twelve months ended December 31, 2021 and 2020, respectively, the yield on average loans decreased 23 basis points from 4.02% for the twelve months ended December 31, 2020 to 3.79% for the twelve months ended December 31, 2021. 61 During the twelve months ended December 31, 2021, the average cost of total funds, including non-interest bearing demand accounts and borrowings, decreased 59 basis points from 0.89% for the twelve months ended December 31, 2020 to 0.30%. For the twelve months ended December 31, 2021, the average cost of core deposits, including non-interest-bearing demand deposits, decreased 10 basis points to 0.17%, from 0.27% for same period in 2020. The average cost of time deposits decreased 107 basis points from 1.60% for the twelve months ended December 31, 2020 to 0.53% during the same period in 2021. The average cost of borrowings increased 45 basis points from 2.59% for the twelve months ended December 31, 2020 to 3.04% for the twelve months ended December 31, 2021 due to the issuance of $20.0 million in subordinated debt during the twelve months ended December 31, 2021. For the twelve months ended December 31, 2021, average demand deposits, an interest-free source of funds, increased $119.4 million, or 24.4%, from $489.6 million, or 26.0% of total average deposits, for the twelve months ended December 31, 2020 to $609.0 million, or 28.0% of total average deposits, for the twelve months ended December 31, 2021. During the twelve months ended December 31, 2021, average interest-earning assets increased $132.2 million, or 6.0%, to $2.3 billion. The increase in average interest-earning assets was due to an increase in average securities of $105.5 million, or 49.2%, and an increase in short-term investments of $66.1 million, or 144.1%, partially offset by a decrease in average loans of $34.7 million, or 1.8%. Excluding PPP loans, average interest-earning assets increased $167.1 million or 8.1%, and average loans remained unchanged at $1.8 billion. Provision for Loan Losses. The provision for loan losses is 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. The Company decreased the provision for loan losses by $8.7 million, or 111.9%, from $7.8 million for the twelve months ended December 31, 2020, to a credit balance of $925,000 for the twelve months ended December 31, 2021. This change was reflective of the impact of the COVID-19 pandemic on the Company’s allowance for loan losses during both periods. The Company recorded net charge-offs of $445,000 for the twelve months ended December 31, 2021, as compared to net charge-offs of $720,000 for the twelve months ended December 31, 2020. During the twelve months ended December 31, 2021, the Company recorded charge-offs of $645,000, compared to $963,000 during the same period in 2020. During the twelve months ended December 31, 2021, the Company recorded recoveries of $200,000, compared to recoveries of $243,000 during the same period in 2020. The allowance for loan losses as a percentage of total loans was 1.06% at December 31, 2021, compared to 1.10% at December 31, 2020. At December 31, 2021, the allowance for loan losses as a percentage of nonperforming loans was 398.6%, compared to 269.8% at December 31, 2020. The allowance for loan losses as a percentage of total loans, excluding PPP loans, was 1.08% and 1.20% at December 31, 2021 and 2020, respectively. Although management believes it has established and maintained the allowance for loan losses at appropriate levels, future adjustments may be necessary if economic, real estate and other conditions differ substantially from the current operating environment. 62 Non-Interest Income. For the twelve months ended December 31, 2021, non-interest income of $12.6 million increased $3.3 million, or 35.8%, compared to $9.3 million for the twelve months ended December 31, 2020. During the twelve months ended December 31, 2021, non-interest income included the recognition of $555,000 in BOLI death benefits. Excluding the BOLI death benefits, non-interest income increased $2.8 million, or 30.1%. Service charges and fees increased $1.3 million, or 18.3%, primarily due to an increase in card-based transaction usage across our checking account base. Mortgage banking income was $1.4 million for the twelve months ended December 31, 2021, due to the sale of fixed rate residential real estate loans to the secondary market. During the twelve months ended December 31, 2021, the Company sold $59.7 million in loans to the secondary market. The Company did not sell any fixed rate residential real estate loans during the twelve months ended December 31, 2020. Income from bank-owned life insurance increased $103,000, or 5.7%, and other income from loan-level swap fees on commercial loans decreased $596,000, or 91.1%. During the twelve months ended December 31, 2021, the Company reported unrealized losses on marketable equity securities of $168,000, compared to unrealized gains of $109,000 during the twelve months ended December 31, 2020. In addition, during the twelve months ended December 31, 2021, the Company reported realized losses on the sale of securities of $72,000 and a gain of $898,000 on non-marketable equity securities, compared to realized gains of $2.0 million on the sale of securities during the twelve months ended December 31, 2020. During the twelve months ended December 31, 2021, the Company reported a loss on derivatives of $402,000, compared to a loss on derivatives of $2.4 million during the twelve months ended December 31, 2020. Non-Interest Expense. For the twelve months ended December 31, 2021, non-interest expense increased $3.2 million, or 6.2%, to $54.9 million compared to $51.8 million, for the twelve months ended December 31, 2020. During the year ended December 31, 2020, the Company prepaid $50.0 million of FHLB borrowings. The transaction was accounted for as an early debt extinguishment resulting in a loss of $987,000, compared to $45,000 during the twelve months ended December 31, 2021. Excluding these losses, non-interest expense increased $4.1 million, or 8.1%, from the twelve months ended December 31, 2020 to the twelve months ended December 31, 2021. The increase in non-interest expense was primarily due to an increase in salaries and employee benefits expenses of $2.9 million, or 9.7%. The increase in salary and employee benefits was due to several factors, including higher commissions and incentives associated with increased residential loan production as well as annual staff salary increases. Furniture and equipment increased $547,000, or 35.6%, other non-interest income increased $647,000, or 8.1%, advertising expense increased $186,000, or 16.8%, and occupancy expense increased $136,000, or 3.0%. FDIC insurance expense decreased $34,000, or 3.3%, professional fees decreased $187,000, or 7.9%, and data processing fees remain flat at $2.9 million. For the twelve months ended December 31, 2021, the efficiency ratio was 64.6%, compared to 68.6% for the twelve months ended December 31, 2020. Income Taxes. Income tax expense for the twelve months ended December 31, 2021 was $8.0 million, or an effective tax rate of 25.3%, compared to $2.9 million, or an effective tax rate of 20.8%, for twelve months ended December 31, 2020. The increase in the Company’s effective tax rate was primarily due to the effect of higher pre-tax income for the fiscal year ended December 31, 2021. 63 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 At December 31, 2021 and December 31, 2020, outstanding borrowings from the FHLB were $2.7 million and $57.9 million, respectively. At December 31, 2021, we had $480.5 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. In addition, we have available lines of credit of $15.0 million and $50.0 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, 2021 and 2020, 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. 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, 2021, we originated $611.4 million in loans, compared to $654.6 million in 2020. We purchased securities totaling $296.6 million for the year ended December 31, 2021, compared to purchases of $159.0 million for the year ended December 31, 2020. At December 31, 2021, the Company had approximately $217.2 million in loan commitments and letters of credit to borrowers and approximately $326.0 million in available home equity and other unadvanced lines of credit. Deposit in flows and out flows are affected by the level of interest rates, the products and interest rates offered by competitors and by other factors. At December 31, 2021, time deposit accounts scheduled to mature within one year totaled $363.0 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, 2021, 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). 64 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, 2021 were estimated to be $14.2 million, with $4.5 million expected to be paid within one year and the remaining $9.7 million to be paid within the next five 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 seventeen years, some of which include options to extend the leases for additional five-year terms up to fifteen years. Lease liabilities totaled $10.5 million as of December 31, 2021. Principal payments expected to be made on our lease liabilities during the twelve months ended December 31, 2022 were $1.4 million. The remaining lease liability payments totaled $9.1 million and are expected to be made after December 31, 2022 (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% fixed-to-floating rate subordinated notes (the “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. 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 2022, 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. 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 of Directors which includes the Company’s interest rate risk position and liquidity position. 65 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: • maintaining the diversity of our existing loan portfolio through residential real estate loans, commercial and industrial loans and commercial real estate loans; • emphasizing investments with an expected average duration of five years or less; and • when appropriate, using interest rate swaps to manage the interest rate position of the balance sheet. In 2021, cash flows from deposit inflows were used to pay down high cost FHLB borrowings, fund loan growth and purchase held-to-maturity securities. The Company continues its emphasis on growing commercial loans, which 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. 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. 66 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. Estimated Changes in Net Interest Income Changes in Interest Rates At December 31, 2021 At December 31, 2020 1 – 12 Months +200 basis points -3.9 % -1.6 % -100 basis points -2.8 % -1.3 % 13 – 24 Months +200 basis points -4.5 % -4.9 % -100 basis points -8.6 % -9.1 % 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 of Directors 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. We did not have any interest rate swap agreements designated as cash flow hedges at December 31, 2021. 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. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. See Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations-Management of Market Risk,” for a discussion of quantitative and qualitative disclosures about market risk. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. Our consolidated financial statements and the accompanying notes may be found on pages F-1 through F-51 of this report. 67 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None. ITEM 9A. CONTROLS AND PROCEDURES. Evaluation of Disclosure Controls and Procedures Management, including our President and Chief Executive Officer and Executive Vice President and Chief Financial Officer has evaluated the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of the end of the period covered by this report. Based upon that evaluation, our Chief Executive Officer and Executive Vice President and Chief Financial Officer concluded that the disclosure controls and procedures were effective to ensure that information required to be disclosed in the reports we file and submit under the Exchange Act (i) is recorded, processed, summarized and reported as and when required and (ii) accumulated and communicated to our management including the Chief Executive Officer and Executive Vice President and Chief Financial Officer, as appropriate to allow timely discussion regarding required disclosure. Management’s Annual Report on Internal Control over Financial Reporting The management of Western New England Bancorp, Inc. and Subsidiaries (collectively, the “Company”), including our President and Chief Executive Officer and Executive Vice President and Chief Financial Officer, is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Rule 13a-15(f) of the Exchange Act. Our management assessed the effectiveness of our internal control over financial reporting as of December 31, 2021 based on the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control-Integrated Framework (2013). Based on this assessment, management concluded that our internal control over financial reporting was effective as of December 31, 2021. There have been no changes in our internal control over financial reporting identified in connection with the evaluation that occurred during our last fiscal quarter that has materially affected, or that is reasonably likely to materially affect, our internal control over financial reporting. 68 Report of Independent Registered Public Accounting Firm On Internal Control over Financial Reporting To the Shareholders and Board of Directors of Western New England Bancorp, Inc. Opinion on Internal Control over Financial Reporting We have audited Western New England Bancorp, Inc. and subsidiaries’ (the “Company”) internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control — Integrated Framework (2013) issued by the COSO. We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the consolidated financial statements of the Company and our report dated March 11, 2022 expressed an unqualified opinion. Basis for Opinion The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Annual Report on Internal Control over Financial Reporting . Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. 69 Definition and Limitations of Internal Control over Financial Reporting A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company's assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. /s/ Wolf & Company, P.C. Boston, Massachusetts March 11, 2022 70 ITEM 9B. OTHER INFORMATION. None. ITEM 9C. DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS. Not applicable. PART III ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE. The following information included in the Proxy Statement is incorporated herein by reference: “Information About Our Board of Directors,” “Information About Our Executive Officers Who Are Not Directors,” and “Corporate Governance.” ITEM 11. EXECUTIVE COMPENSATION. The following information included in the Proxy Statement is incorporated herein by reference: “Compensation Committee Interlocks and Insider Participation,” “Compensation Discussion and Analysis,” “Compensation Committee Report,” “Executive Compensation” and “Director Compensation.” ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED SHAREHOLDER MATTERS. The following information included in the Proxy Statement is incorporated herein by reference: “Security Ownership of Certain Beneficial Owners and Management” and “Securities Authorized For Issuance Under Equity Compensation Plans.” ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE. The following information included in the Proxy Statement is incorporated herein by reference: “Transactions with Related Persons” and “Board of Directors Independence.” ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES. The following information included in the Proxy Statement is incorporated herein by reference: “Independent Registered Public Accounting Firm Fees and Services.” Our independent registered public accounting firm is Wolf & Company, P.C. , Boston, Massachusetts , Auditor ID : 392 . PART IV ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES. (a)(1) Financial Statements Reference is made to our consolidated financial statements and accompanying notes included in Item 8 of Part II hereof. (a)(2) Financial Statement Schedules Consolidated financial statement schedules have been omitted because the required information is not present, or not present in amounts sufficient to require submission of the schedules, or because the required information is provided in the consolidated financial statements or notes thereto. 71 (a)(3) Exhibits EXHIBIT INDEX 3.1 Restated Articles of Organization of Western New England Bancorp, Inc. (incorporated by reference to Exhibit 3.1 of the Form 8-K filed with the SEC on October 26, 2016). 3.3 Amended and Restated Bylaws of Western New England Bancorp, Inc. (incorporated by reference to Exhibit 3.1 of the Form 8-K filed with the SEC on February 2, 2017). 4.1 Form of Stock Certificate of Western New England Bancorp, Inc. (f/k/a Westfield Financial, Inc.) (incorporated by reference to Exhibit 4.1 of the Registration Statement on Form S-1 (No. 333-137024) filed with the SEC on August 31, 2006). 4.2† Description of Securities Registered Under Section 12 of the Securities Exchange Act of 1934. 10.1* Form of Director’s Deferred Compensation Plan (incorporated by reference to Exhibit 10.7 of the Form 8-K filed with the SEC on December 22, 2005). 10.2* Amended and Restated Benefit Restoration Plan of Western New England Bancorp, Inc. (f/k/a Westfield Financial, Inc.) (incorporated by reference to Exhibit 10.5 of the Form 8-K filed with the SEC on October 29, 2007). 10.3* Amended and Restated Employment Agreement between James C. Hagan and Westfield Bank (incorporated by reference to Exhibit 10.9 of the Form 8-K filed with the SEC on January 5, 2009). 10.4* Amended and Restated Employment Agreement between James C. Hagan and Western New England Bancorp, Inc. (f/k/a Westfield Financial, Inc.) (incorporated by reference to Exhibit 10.12 of the Form 8-K filed with the SEC on January 5, 2009). 10.5* Employment Agreement between Leo R. Sagan, Jr. and Westfield Bank (incorporated by reference to Exhibit 10.15 of the Form 8-K filed with the SEC on January 5, 2009). 10.6* Employment Agreement between Leo R. Sagan, Jr. and Western New England Bancorp, Inc. (f/k/a Westfield Financial, Inc.) (incorporated by reference to Exhibit 10.16 of the Form 8-K filed with the SEC on January 5, 2009). 10.7* Employment Agreement between Allen J. Miles, III and Westfield Bank (incorporated by reference to Exhibit 10.19 of the Form 8-K filed with the SEC on January 5, 2009). 10.8* Employment Agreement between Allen J. Miles, III and Western New England Bancorp, Inc. (f/k/a Westfield Financial, Inc.) (incorporated by reference to Exhibit 10.20 of the Form 8-K filed with the SEC on January 5, 2009). 10.9* Employment Agreement between Darlene M. Libiszewski and Western New England Bancorp, Inc. (f/k/a Westfield Financial, Inc.) (incorporated by reference to Exhibit 10.4 of the Registration Statement on Form S-4 (No. 333-212221) filed with the SEC on June 24, 2016). 10.10* Employment Agreement between Darlene M. Libiszewski and Westfield Bank (incorporated by reference to Exhibit 10.5 of the Registration Statement on Form S-4 (No. 333-212221) filed with the SEC on June 24, 2016). 10.11* Employment Agreement between Guida R. Sajdak and Western New England Bancorp (incorporated by reference to Exhibit 10.1 of the Form 8-K filed with the SEC on February 8, 2018). 10.12* Employment Agreement between Guida R. Sajdak and Westfield Bank (incorporated by reference to Exhibit 10.2 of the Form 8-K filed with the SEC on February 8, 2018). 10.13* Employment Agreement between Louis Gorman, III and Western New England Bancorp (incorporated by reference to Exhibit 10.1 of the Form 8-K filed with the SEC on March 23, 2018). 10.14* Employment Agreement between Louis Gorman, III and Westfield Bank (incorporated by reference to Exhibit 10.2 of the Form 8-K filed with the SEC on March 23, 2018). 10.15* Employment Agreement between Kevin C. O’Connor and Westfield Bank dated February 17, 2017 (incorporated by reference to Exhibit 10.20 of the Form 10-K filed with the SEC on March 11, 2021). 10.16* Employment Agreement between Kevin C. O’Connor and Western New England Bancorp, Inc. dated February 17, 2017 (incorporated by reference to Exhibit 10.21 of the Form 10-K filed with the SEC on March 11, 2021). 10.17* Change of Control Agreement between John Bonini and Western New England Bancorp, Inc. dated as of January 1, 2021 (incorporated by reference to Exhibit 10.22 of the Form 10-K filed with the SEC on March 11, 2021). 72 10.18* Change of Control Agreement between Christine Phillips and Western New England Bancorp, Inc. dated as of January 1, 2021(incorporated by reference to Exhibit 10.23 of the Form 10-K filed with the SEC on March 11, 2021). 10.19* 2014 Omnibus Incentive Plan (incorporated by reference to Exhibit 10.1 to the Form 8-K filed with the SEC on May 19, 2014). 10.20* Chicopee Bancorp, Inc. 2007 Equity Incentive Plan (incorporated by reference to Exhibit 10.1 to the Registration Statement on Form S-8 (No. 333-214261) filed with the SEC on October 26, 2016). 10.21* Western New England Bancorp, Inc. 2021 Omnibus Incentive Plan (incorporated by reference to Exhibit 10.1 of the Form S-8 filed with the SEC on May 19, 2021). 10.22* Form of Incentive Stock Option Agreement under the Western New England Bancorp, Inc. 2021 Omnibus Incentive Plan (incorporated by reference to Exhibit 10.2 of the Form S-8 filed with the SEC on May 19, 2021). 10.23* Form of Non-Qualified Stock Option Agreement under the Western New England Bancorp, Inc. 2021 Omnibus Incentive Plan (incorporated by reference to Exhibit 10.3 of the Form S-8 filed with the SEC on May 19, 2021). 10.24* Form of Director Incentive Award Agreement under the Western New England Bancorp, Inc. 2021 Omnibus Incentive Plan (incorporated by reference to Exhibit 10.4 of the Form S-8 filed with the SEC on May 19, 2021). 10.25* Form of Restricted Stock Award Agreement under the Western New England Bancorp, Inc. 2021 Omnibus Incentive Plan (incorporated by reference to Exhibit 10.5 of the Form S-8 filed with the SEC on May 19, 2021). 10.26* Form of Long-Term Incentive and Retention Equity Award Agreement under the Western New England Bancorp, Inc. 2021 Omnibus Incentive Plan (incorporated by reference to Exhibit 10.6 of the Form S-8 with the SEC on May 19, 2021). 21.1† Subsidiaries of Western New England Bancorp, Inc. 23.1† Consent of Wolf & Company, P.C. 31.1† Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 31.2† Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 32.1† Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 32.2† Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 101** Financial statements from the annual report on Form 10-K of Western New England Bancorp, Inc. for the year ended December 31, 2021, formatted in XBRL (eXtensible Business Reporting Language): (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Net Income, (iii) the Consolidated Statements of Comprehensive Income, (iv) the Consolidated Statements of Changes in Shareholders’ Equity, (v) the Consolidated Statements of Cash Flows and (vi) Notes to Consolidated Financial Statements. 104 Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) † Filed herewith. * Management contract or compensatory plan or arrangement. ** Pursuant to Rule 406T of Regulation S-T, the Interactive Data Files on Exhibit 101 hereto are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections. ITEM 16. FORM 10-K SUMMARY. None. 73 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on March 11, 2022. WESTERN NEW ENGLAND BANCORP, INC. By: /s/ James C. Hagan James C. Hagan Chief Executive Officer and President (Principal Executive Officer) By: /s/ Guida R. Sajdak Guida R. Sajdak Chief Financial Officer and Executive Vice President (Principal Financial Officer and Principal Accounting Officer) POWER OF ATTORNEY Each person whose individual signature appears below hereby authorizes and appoints James C. Hagan and Guida R. Sajdak, and each of them, with full power of substitution and resubstitution and full power to act without the other, as his or her true and lawful attorney-in-fact and agent to act in his or her name, place and stead and to execute in the name and on behalf of each person, individually and in each capacity stated below, and to file any and all amendments to this report on Form 10-K, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing, ratifying and confirming all that said attorneys-in-fact and agents or any of them or their or his substitute or substitutes may lawfully do or cause to be done by virtue thereof. Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this Annual Report on Form 10-K has been signed by the following persons on behalf of the registrant and in the capacities indicated on March 11, 2022. Name Title /s/ James C. Hagan Chief Executive Officer, President and Director (Principal Executive Officer) James C. Hagan /s/ Guida R. Sajdak Chief Financial Officer and Executive Vice President (Principal Financial Officer and Principal Accounting Officer) Guida R. Sajdak /s/ Lisa G. McMahon Chairperson of the Board Lisa G. McMahon /s/ Laura Benoit Director Laura Benoit /s/ Donna J. Damon Director Donna J. Damon /s/ Gary G. Fitzgerald Director Gary G. Fitzgerald /s/ William D. Masse Director William D. Masse /s/ Gregg F. Orlen Director Gregg F. Orlen /s/ Paul C. Picknelly Director Paul C. Picknelly Name Title /s/ Steven G. Richter Director Steven G. Richter /s/ Philip R. Smith Director Philip R. Smith Report of Independent Registered Public Accounting Firm To the Shareholders and Board of Directors of Western New England Bancorp, Inc. Opinion on the Consolidated Financial Statements We have audited the accompanying Consolidated Balance Sheets of Western New England Bancorp, Inc. and subsidiaries (the Company) as of December 31, 2021 and 2020, the related Consolidated Statements of Net Income, Comprehensive Income, Changes in Shareholders’ Equity and Cash Flows for each of the three years in the period ended December 31, 2021, and the related notes (collectively referred to as the financial statements). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2021 and 2020, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2021, in conformity with accounting principles generally accepted in the United States of America. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) and our report dated March 11, 2022 expressed an unqualified opinion on the effectiveness of the Company’s internal controls over financial reporting. Basis for Opinion These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. F- 1 Critical Audit Matter The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the Company’s Audit Committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved especially challenging, subjective, or complex judgments. The communication of a critical audit matter does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates. Critical Audit Matter Description As described in Notes 1 and 3 to the financial statements, the Company has recorded an allowance for loan losses in the amount of $19.8 million as of December 31, 2021, representing management’s estimate of the probable losses inherent in the loan portfolio as of that date. The allowance is established as losses are estimated to have occurred through a provision (credit) for loan losses charged to earnings. The determination of the allowance for loan losses requires significant judgment by management including the identification of, and estimated reserves on, problem loans and the determination of qualitative adjustments to historical loss experience. How the Critical Audit Matter was addressed in the Audit Our principal audit procedures to evaluate management’s estimates of the allowance for loan losses included tests of the following: · Management’s identification of problem loans, including management’s loan review procedures and monitoring of internal loan reports, including delinquency, non-accrual, and watch list, to determine the completeness of impaired loans. · Management’s determination of specific reserves on impaired loans, including significant assumptions, such as the fair value of collateral for collateral dependent loans. · Management’s determination of general reserves, including determination of historical loss experience and qualitative adjustments to historical loss experience. · The accuracy of management’s calculation of the allowance for loan losses, including relevant internal controls. We have served as the Company's auditor since 2004. /s/ Wolf & Company, P.C. Boston, Massachusetts March 11, 2022 F- 2 WESTERN NEW ENGLAND BANCORP, INC., AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Dollars in thousands, except share data) December 31, December 31, 2021 2020 ASSETS Cash and due from banks $ 15,233 $ 17,399 Federal funds sold 4,901 2,987 Interest-bearing deposits and other short-term investments 83,322 67,058 Cash and cash equivalents 103,456 87,444 Available-for-sale securities, at fair value 194,352 201,880 Held-to-maturity securities, at amortized cost (Fair value of $ 219,748 at December 31, 2021) 222,272 — Marketable equity securities, at fair value 11,896 11,968 Federal Home Loan Bank stock and other restricted stock, at cost 2,594 5,160 Loans, net of allowance f or loan losses of $ 19,787 and $ 21,157 at December 31, 2021 and 2020, respectively 1,844,929 1,906,226 Premises and equipment, net 26,162 25,103 Accrued interest receivable 7,775 8,477 Bank-owned life insurance 72,895 72,860 Deferred tax asset, net 12,092 12,588 Goodwill 12,487 12,487 Core deposit intangible 2,563 2,937 Other assets 24,952 18,756 TOTAL ASSETS $ 2,538,425 $ 2,365,886 LIABILITIES AND SHAREHOLDERS' EQUITY LIABILITIES: Deposits: Non-interest-bearing $ 641,284 $ 541,759 Interest-bearing 1,615,614 1,501,657 Total deposits 2,256,898 2,043,416 Long-term debt 2,653 57,850 Subordinated debt 19,633 — Securities pending settlement — 160 Other liabilities 35,553 37,820 Total liabilities 2,314,737 2,139,246 COMMITMENTS AND CONTINGENCIES (see Note 16) SHAREHOLDERS' EQUITY: Preferred stock - $ 0.01 par value, 5,000,000 shares authorized, none outstanding at December 31, 2021 and December 31, 2020 — — Common stock - $ 0.01 par value, 75,000,000 shares authorized, 22,656,515 shares issued and outstanding at December 31, 2021; 25,276,193 shares issued and outstanding at December 31, 2020 227 253 Additional paid-in capital 132,821 154,549 Unearned compensation - ESOP ( 3,441 ) ( 3,997 ) Unearned compensation - Equity Incentive Plan ( 981 ) ( 1,240 ) Retained earnings 107,376 88,354 Accumulated other comprehensive loss ( 12,314 ) ( 11,279 ) TOTAL SHAREHOLDERS’ EQUITY 223,688 226,640 TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 2,538,425 $ 2,365,886 See accompanying notes to consolidated financial statements. F- 3 WESTERN NEW ENGLAND BANCORP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF NET INCOME (Dollars in thousands, except per share data) Years Ended December 31, 2021 2020 2019 Interest and dividend income: Residential and commercial real estate loans $ 58,682 $ 62,115 $ 62,240 Commercial and industrial loans 15,263 15,409 12,254 Consumer loans 255 313 343 Debt securities, taxable 5,286 4,163 5,981 Debt securities, tax-exempt 12 56 72 Marketable equity securities 96 123 163 Other investments 116 587 833 Short-term investments 139 109 230 Total interest and dividend income 79,849 82,875 82,116 Interest expense: Deposits 5,508 13,500 17,207 Long-term debt 458 3,333 4,361 Subordinated debt 706 — — Short-term borrowings — 1,612 2,569 Total interest expense 6,672 18,445 24,137 Net interest and dividend income 73,177 64,430 57,979 (Credit) provision for loan losses ( 925 ) 7,775 2,675 Net interest and dividend income after (credit) provision for loan losses 74,102 56,655 55,304 Non-interest income: Service charges and fees 8,360 7,067 7,364 Income from bank-owned life insurance 1,912 1,809 1,799 Bank-owned life insurance death benefit 555 — — (Loss) gain on available-for-sale securities, net ( 72 ) 1,965 ( 97 ) Gain on sale of mortgages 1,423 — — Net unrealized (losses) gains on marketable equity securities ( 168 ) 109 165 Gain on non-marketable equity investments 898 — — Loss on interest rate swap termination ( 402 ) ( 2,353 ) — Other income 58 654 474 Total non-interest income 12,564 9,251 9,705 Non-interest expense: Salaries and employees benefits 32,186 29,349 27,654 Occupancy 4,656 4,520 4,174 Furniture and equipment 2,084 1,537 1,673 Data processing 2,903 2,901 2,780 Professional fees 2,185 2,372 2,439 FDIC insurance assessment 998 1,032 430 Advertising 1,292 1,106 1,332 Loss on prepayment of borrowings 45 987 — Other expenses 8,593 7,946 7,326 Total non-interest expense 54,942 51,750 47,808 Income before income taxes 31,724 14,156 17,201 Income tax provision 8,025 2,941 3,852 Net income $ 23,699 $ 11,215 $ 13,349 Earnings per common share: Basic earnings per share $ 1.02 $ 0.45 $ 0.51 Weighted average shares outstanding 23,223,633 25,047,195 26,185,336 Diluted earnings per share $ 1.02 $ 0.45 $ 0.51 Weighted average diluted shares outstanding 23,300,637 25,062,476 26,303,140 Dividends per share $ 0.20 $ 0.20 $ 0.20 See accompanying notes to consolidated financial statements. F- 4 WESTERN NEW ENGLAND BANCORP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Dollars in thousands) Years Ended December 31, 2021 2020 2019 Net income $ 23,699 $ 11,215 $ 13,349 Other comprehensive income (loss): Unrealized (losses) gains on available-for-sale securities: Unrealized holding (losses) gains ( 6,059 ) 3,660 9,394 Reclassification adjustment for net losses (gains) realized in income (1) 72 ( 1,965 ) 97 Unrealized (losses) gains ( 5,987 ) 1,695 9,491 Tax effect 1,499 ( 410 ) ( 2,420 ) Net-of-tax amount ( 4,488 ) 1,285 7,071 Cash flow hedges: Change in fair value of derivatives used for cash flow hedges — ( 1,254 ) ( 900 ) Reclassification adjustment for loss realized in income for interest rate swap termination (2) 402 2,353 — Reclassification adjustment for loss realized in interest expense (3) — 674 387 Reclassification adjustment for termination fee realized in interest expense (4) 282 842 1,068 Unrealized gains on cash flow hedges 684 2,615 555 Tax effect ( 192 ) ( 736 ) ( 156 ) Net-of-tax amount 492 1,879 399 Defined benefit pension plan: Gains (losses) arising during the period 3,209 ( 8,037 ) ( 4,349 ) Amortization of defined benefit plan actuarial loss (5) 910 421 137 Unrecognized actuarial gains (losses) on defined benefit plan 4,119 ( 7,616 ) ( 4,212 ) Tax effect ( 1,158 ) 2,141 1,183 Net-of-tax amount 2,961 ( 5,475 ) ( 3,029 ) Other comprehensive (loss) income ( 1,035 ) ( 2,311 ) 4,441 Comprehensive income $ 22,664 $ 8,904 $ 17,790 (1) Realized gains and losses on available-for-sale securities are recognized as a component of non-interest income in the consolidated statements of net income. The tax effects associated with the reclassification adjustments were $ ( 15,000 ) , $ 502,000 and $ ( 37,000 ) for the years ended December 31, 2021, 2020 and 2019, respectively. (2) Loss realized in income on interest rate swap termination is recognized as a component of non-interest income. Income tax effects associated with the reclassification adjustments were $ 113,000 and $ 661,000 for the years ended December 31, 2021 and 2020. (3) Loss realized in interest expense on derivative instruments is recognized as a component of interest expense on long-term debt in the consolidated statements of net income. Income tax effects associated with the reclassification adjustments were $ 189,000 and $ 109,000 for the years ended December 31, 2020 and 2019, respectively. (4) Termination fee realized in interest expense on derivative instruments is recognized as a component of interest expense on long-term debt in the consolidated statements of net income. Income tax effects associated with the reclassification adjustments were $ 79,000 , $ 237,000 and $ 300,000 for the years ended December 31, 2021, 2020 and 2019, respectively. (5) Amounts represent the reclassification of defined benefit plan amortization and have been recognized as a component of non-interest expense in the consolidated statements of net income. Income tax effects associated with the reclassification adjustments were $ 256,000 , $ 118,000 and $ 38,000 for the years ended December 31, 2021, 2020 and 2019, respectively. (1) Realized gains and losses on available-for-sale securities are recognized as a component of non-interest income in the consolidated statements of net income. The tax effects associated with the reclassification adjustments were $(15,000), $502,000 and $(37,000) for the years ended December 31, 2021, 2020 and 2019, respectively. (2) Loss realized in income on interest rate swap termination is recognized as a component of non-interest income. Income tax effects associated with the reclassification adjustments were $113,000 and $661,000 for the years ended December 31, 2021 and 2020. (3) Loss realized in interest expense on derivative instruments is recognized as a component of interest expense on long-term debt in the consolidated statements of net income. Income tax effects associated with the reclassification adjustments were $189,000 and $109,000 for the years ended December 31, 2020 and 2019, respectively. (4) Termination fee realized in interest expense on derivative instruments is recognized as a component of interest expense on long-term debt in the consolidated statements of net income. Income tax effects associated with the reclassification adjustments were $79,000, $237,000 and $300,000 for the years ended December 31, 2021, 2020 and 2019, respectively. (5) Amounts represent the reclassification of defined benefit plan amortization and have been recognized as a component of non-interest expense in the consolidated statements of net income. Income tax effects associated with the reclassification adjustments were $256,000, $118,000 and $38,000 for the years ended December 31, 2021, 2020 and 2019, respectively. See accompanying notes to consolidated financial statements. F- 5 WESTERN NEW ENGLAND BANCORP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY YEARS ENDED DECEMBER 31, 2021, 2020 AND 2019 (Dollars in thousands, except share data) Common Stock Unearned Accumulated Shares Par Value Additional Paid-in Capital Unearned Compensation- ESOP Compensation- Equity Incentive Plan Retained Earnings Other Comprehensive Loss Total BALANCE AT DECEMBER 31, 2018 28,393,348 $ 284 $ 182,096 $ ( 5,171 ) $ ( 872 ) $ 74,108 $ ( 13,416 ) $ 237,029 Comprehensive income — — — — — 13,349 4,441 17,790 Cumulative-effect adjustment due to change in accounting principle (ASU 2017-08) — — — — — ( 7 ) 7 — Common stock held by ESOP committed to be released ( 88,117 shares) — — 237 597 — — — 834 Common stock repurchased ( 1,958,111 ) ( 19 ) ( 19,215 ) — — — — ( 19,234 ) Share-based compensation - equity incentive plan — — ( 45 ) — 818 — — 773 Issuance of common stock in connection with stock option exercises 19,861 — 106 — — — — 106 Issuance of common stock in connection with equity incentive plan 102,883 1 1,069 — ( 1,070 ) — — — Cash dividends declared and paid on common stock ($ 0.20 per share) — — — — — ( 5,274 ) — ( 5,274 ) BALANCE AT DECEMBER 31, 2019 26,557,981 $ 266 $ 164,248 $ ( 4,574 ) $ ( 1,124 ) $ 82,176 $ ( 8,968 ) $ 232,024 Comprehensive income (loss) — — — — — 11,215 ( 2,311 ) 8,904 Common stock held by ESOP committed to be released ( 85,101 shares) — — ( 26 ) 577 — — — 551 Forfeited equity incentive plan shares ( 30,193 shares) — — ( 319 ) — 319 — — — Common stock repurchased ( 1,416,362 ) ( 14 ) ( 10,665 ) — — — — ( 10,679 ) Share-based compensation - equity incentive plan — — — — 834 — — 834 Issuance of common stock in connection with stock option exercises 7,239 — 43 — — — — 43 Issuance of common stock in connection with equity incentive plan 127,335 1 1,268 — ( 1,269 ) — — — Cash dividends declared and paid on common stock ($ 0.20 per share) — — — — — ( 5,037 ) — ( 5,037 ) BALANCE AT DECEMBER 31, 2020 25,276,193 $ 253 $ 154,549 $ ( 3,997 ) $ ( 1,240 ) $ 88,354 $ ( 11,279 ) $ 226,640 Comprehensive income (loss) — — — — — 23,699 ( 1,035 ) 22,664 Common stock held by ESOP committed to be released ( 81,893 shares) — — 126 556 — — — 682 Forfeited equity incentive plan shares ( 24,506 shares) — — ( 259 ) — 259 — — — Common stock repurchased ( 2,775,134 ) ( 27 ) ( 23,094 ) — — — — ( 23,121 ) Share-based compensation - equity incentive plan — — — — 1,307 — — 1,307 Issuance of common stock in connection with stock option exercises 33,094 — 193 — — — — 193 Issuance of common stock in connection with equity incentive plan 122,362 1 1,020 — ( 1,021 ) — — — Forfeited equity incentive plan shares reissued ( 32,544 shares) — — 286 — ( 286 ) — — — Cash dividends declared and paid on common stock ($ 0.20 per share) — — — — — ( 4,677 ) — ( 4,677 ) BALANCE AT DECEMBER 31, 2021 22,656,515 $ 227 $ 132,821 $ ( 3,441 ) $ ( 981 ) $ 107,376 $ ( 12,314 ) $ 223,688 See accompanying notes to consolidated financial statements. F- 6 WESTERN NEW ENGLAND BANCORP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) Years Ended December 31, 2021 2020 2019 OPERATING ACTIVITIES: Net income $ 23,699 $ 11,215 $ 13,349 Adjustments to reconcile net income to net cash provided by operating activities: (Credit) provision for loan losses ( 925 ) 7,775 2,675 Depreciation and amortization of premises and equipment 2,322 2,145 2,079 Net amortization (accretion) of purchase accounting adjustments 95 ( 946 ) 24 Amortization of core deposit intangible 374 375 376 Net amortization of premiums and discounts on securities and mortgage loans 2,251 2,540 2,371 Amortization of subordinated debt issuance costs 27 — — Share-based compensation expense 1,307 834 773 ESOP expense 682 551 834 Gain on sale of portfolio mortgages ( 227 ) — — Principal balance of loans originated for sale ( 52,130 ) — — Principal balance of loans sold 52,130 — — Change in unrealized loss (gain) on marketable equity securities 168 ( 109 ) ( 165 ) Net loss (gain) on sales of available-for-sale securities 72 ( 1,965 ) 97 Loss on prepayment of borrowings 45 987 — Gain on bank-owned life insurance death benefit ( 555 ) — — Deferred income tax provision (benefit) 644 ( 2,431 ) ( 680 ) Income from bank-owned life insurance ( 1,912 ) ( 1,809 ) ( 1,799 ) Net change in: Accrued interest receivable 702 ( 3,164 ) 339 Other assets ( 4,914 ) 5,182 ( 7,204 ) Other liabilities 3,687 3,887 2,310 Net cash provided by operating activities 27,542 25,067 15,379 INVESTING ACTIVITIES: Securities, held-to-maturity: Purchases ( 231,292 ) — — Proceeds from calls, maturities, and principal collections 8,714 — — Securities, available-for-sale: Purchases ( 65,291 ) ( 158,979 ) ( 74,508 ) Proceeds from sales and redemptions 9,562 96,320 72,156 Proceeds from calls, maturities, and principal collections 55,382 84,774 35,386 Loan originations and principal payments, net 54,322 ( 151,474 ) ( 80,074 ) Redemption of Federal Home Loan Bank of Boston stock, net 2,566 9,317 218 Proceeds from sale of portfolio mortgages 7,801 — — Purchases of premises and equipment ( 3,457 ) ( 3,581 ) ( 1,285 ) Proceeds from sale of premises and equipment 36 66 27 Net cash used in investing activities ( 161,657 ) ( 123,557 ) ( 48,080 ) FINANCING ACTIVITIES: Net increase in deposits 213,516 360,313 81,946 Net decrease in short-term borrowings — ( 35,000 ) ( 24,250 ) Repayment of long-term debt ( 55,230 ) ( 207,524 ) ( 84,763 ) Proceeds from subordinated debt issuance 20,000 — — Payment of subordinated debt issuance costs ( 394 ) — — Proceeds from long-term debt — 58,917 82,343 Cash dividends paid ( 4,677 ) ( 5,037 ) ( 5,274 ) Common stock repurchased ( 23,281 ) ( 10,519 ) ( 19,455 ) Issuance of common stock in connection with stock option exercises 193 43 106 Net cash provided by financing activities 150,127 161,193 30,653 NET CHANGE IN CASH AND CASH EQUIVALENTS: 16,012 62,703 ( 2,048 ) Beginning of year 87,444 24,741 26,789 End of year $ 103,456 $ 87,444 $ 24,741 Supplemental cash flow information: Net change in due to broker for common stock repurchased $ ( 160 ) $ 160 $ ( 221 ) See the accompanying notes to consolidated financial statements. F- 7 WESTERN NEW ENGLAND BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2021, 2020 AND 2019 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Nature of Operations and Basis of Presentation . Western New England Bancorp, Inc. (“Western New England Bancorp,” “WNEB,” “Company,” “we,” or “us”) is a Massachusetts-chartered stock holding company for Westfield Bank, a federally-chartered savings bank (“Bank”). The Bank operates 25 banking offices in Hampden and Hampshire counties in western Massachusetts and Hartford and Tolland counties in northern Connecticut, and its primary sources of revenue are interest income from loans as well as interest income from investment securities. The Bank’s Huntington, Massachusetts branch opened on February 25, 2020 and its Bloomfield, Connecticut branch opened on July 6, 2020. In addition, the Bank’s Financial Services Center in West Hartford, Connecticut, opened on July 21, 2020. The West Hartford Financial Services Center serves as the Company’s Connecticut hub, housing Commercial Lending, Cash Management and a Mortgage Loan Officer. The Bank’s deposits are insured up to the maximum Federal Deposit Insurance Corporation (“FDIC”) coverage limits. Wholly-owned Subsidiaries of the Ban k . Elm Street Securities Corporation, WFD Securities, Inc. and CSB Colts, Inc., are Massachusetts chartered securities corporations, formed for the primary purpose of holding qualified securities. WB Real Estate Holdings, LLC, is a Massachusetts-chartered limited liability company that holds real property acquired as security for debts previously contracted by the Bank. Principles of Consolidation . The consolidated financial statements include the accounts of Western New England Bancorp, the Bank, CSB Colts, Inc., Elm Street Securities Corporation, WB Real Estate Holdings, LLC and WFD Securities, Inc. All material intercompany balances and transactions have been eliminated in consolidation. Estimates . The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of income and expenses for each. Actual results could differ from those estimates. An estimate that is particularly susceptible to significant change in the near-term relates to the determination of the allowance for loan losses. Reclassifications . Amounts in the prior year financial statements are reclassified when necessary to conform to the current year presentation. Significant Group Concentrations of Credit Risk . Most of the Company’s lending activities are with customers located within the New England region of the country. The Company does not have any significant concentrations to any one industry or customer. Cash and Cash Equivalents . We define cash on hand, cash due from banks, federal funds sold and interest-bearing deposits having an original maturity of 90 days or less as cash and cash equivalents. Securities and Mortgage-Backed Securities . Debt securities, including mortgage-backed securities, which management has the positive intent and ability to hold until maturity are classified as held to maturity and are carried at amortized cost. Debt securities, including mortgage-backed securities, which have been identified as assets for which there is not a positive intent to hold to maturity are classified as available-for-sale and are carried at fair value with unrealized gains and losses, net of income taxes, reported as a separate component of comprehensive income (loss). Marketable equity securities are measured at fair value with changes in fair value reported on the Company’s consolidated statements of net income as a component of non-interest income, regardless of whether such gains and losses are realized. We do not acquire securities and mortgage-backed securities for purposes of engaging in trading activities. F- 8 Realized gains and losses on sales of securities and mortgage-backed securities are computed using the specific identification method and are included in non-interest income on the trade date. The amortization of premiums and accretion of discounts is determined by using the level yield method to the maturity date. Non-marketable Equity Securities . Investments in equity securities without readily determinable fair values are measured at cost, less any impairment, with re-measurement to fair value when there are observable price changes. Impairment is evaluated on such securities based on a qualitative assessment that considers various potential impairment indicators. Upon determining that an impairment exists, a loss is recognized for the amount by which the carrying value exceeds the fair value of the investment. Derivatives . We enter into interest rate swap agreements as part of our interest-rate risk management strategy for certain assets and liabilities and not for speculative purposes. Based on our intended use for interest rate swaps, these are hedging instruments subject to hedge accounting provisions. Cash flow hedges are recorded at fair value in other assets or other liabilities within our balance sheets. Changes in the fair value of these cash flow hedges are initially recorded in accumulated other comprehensive income (loss) and subsequently reclassified into earnings when the forecasted transaction affects earnings. Other-than-Temporary Impairment of Securities . On a quarterly basis, we review available-for-sale securities with a decline in fair value below the amortized cost of the investment to determine whether the decline in fair value is temporary or other-than-temporary (“OTTI”). In estimating OTTI losses for available-for-sale securities, impairment is required to be recognized if (1) we intend to sell the security; (2) it is “more likely than not” that we will be required to sell the security before recovery of its amortized cost basis; or (3) for debt securities, the present value of expected cash flows is not sufficient to recover the entire amortized cost basis. For all impaired debt securities that we intend to sell, or more likely than not will be required to sell, the full amount of the other-than-temporary impairment is recognized through earnings. For all other impaired debt securities, credit-related other-than-temporary impairment is recognized through earnings, while non-credit related other-than-temporary impairment is recognized in other comprehensive income/loss, net of applicable taxes. Fair Value Hierarchy . We group our assets and liabilities measured at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value. Level 1: Valuation is based on quoted prices in active markets for identical assets. Level 1 assets generally include debt and equity securities that are traded in an active exchange market. Valuations are obtained from readily available pricing sources for market transactions involving identical assets. Level 2: Valuation is based on observable inputs other than Level 1 prices, such as quoted prices for similar assets and liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets and liabilities. Level 3: Valuation is based on unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets and liabilities. Level 3 assets include financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation. Federal Home Loan Bank of Boston Stock . The Bank, as a member of the Federal Home Loan Bank (“FHLB”) system, is required to maintain an investment in capital stock of the FHLB of Boston. Based on the redemption provisions of the FHLB, the stock has no quoted market value and is carried at cost. At its discretion, the FHLB may declare dividends on the stock. Management reviews for impairment based on the ultimate recoverability of the cost basis in the FHLB stock. As of December 31, 2021, no impairment has been recognized. Loans Held for Sale . Loans originated and intended for sale in the secondary market are carried at the lower of amortized cost or fair value, as determined by aggregate outstanding commitments from investors or current investor yield requirements. Net unrealized losses, if any, are recognized through a valuation allowance by charges to non-interest income. Gains or losses on sales of mortgage loans are recognized based on the difference between the selling price and the carrying value of the related mortgage loans sold on the trade date and reported within non-interest income on the accompanying consolidated statements of net income. F- 9 Loans Receivable . Loans are recorded at the principal amount outstanding, adjusted for charge-offs, the allowance for loan losses, unearned premiums, discounts and deferred loan fees and costs. Interest on loans is calculated using the effective yield method on daily balances of the principal amount outstanding and is credited to income on the accrual basis to the extent it is deemed collectible. Our general policy is to discontinue the accrual of interest when principal or interest payments are delinquent 90 days or more based on the contractual terms of the loan, or earlier if the loan is considered impaired. Any unpaid amounts previously accrued on these loans are reversed from current period interest income. Subsequent cash receipts are applied to the outstanding principal balance or to interest income if, in the judgment of management, collection of the principal balance is not in question. Loans are returned to accrual status when they become current as to both principal and interest and when subsequent performance reduces the concern as to the collectability of principal and interest. Loan fees, discounts and premiums on purchased loans, and certain direct loan origination costs are deferred and the net fee or cost is recognized as an adjustment to interest income over the estimated average lives of the related loans. Allowance for Loan Losses . The allowance for loan losses is established through provisions for loan losses charged to expense. Loans are charged-off against the allowance when management believes that the collectability of the principal is unlikely. Subsequent recoveries, if any, are credited to the allowance. The allowance for loan losses is evaluated on a regular basis by management. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available. The allowance consists of general, allocated and unallocated components, as further described below. General component The general component of the allowance for loan losses is based on historical loss experience adjusted for qualitative factors stratified by the following loan segments: residential real estate (includes one-to-four family and home equity), commercial real estate, commercial and industrial, and consumer. Management uses a rolling average of historical losses based on a time frame appropriate to capture relevant loss data for each loan segment. This historical loss factor is adjusted for the following qualitative factors: trends in delinquencies and nonperforming loans; trends in volume and terms of loans; effects of changes in risk selection and underwriting standards and other changes in lending policies, procedures and practices; and national and local economic trends and industry conditions. Beginning in March 2020, the Bank added a new qualitative factor category to the allowance calculation – “Economic Impact of COVID-19”. The allocation of additional reserves for the COVID-19 qualitative factor during the year was based upon continued analysis of the loan portfolio that included identifying borrowers sensitive to the shutdown (i.e. accommodation and food service, recreation, construction, manufacturing, and wholesale & retail trade) as well as a general allocation for the negative economic outlook given the record number of unemployment benefits claims during the period. In addition, on an ongoing basis, the Company has continually evaluated the loan portfolio acquired on October 24, 2016 from Chicopee Bancorp, Inc. (“Chicopee”). The acquired portfolio was initially recorded at fair value without a related allowance for loan losses. Due to the ongoing impacts and extended nature of the pandemic, during the year ended December 31, 2020, the Company determined that it was prudent to provide an allowance for loan losses related to the acquired portfolio. Excluding the COVID-19 qualitative factor category and the allowance for the acquired loan portfolio, there were no additional changes in our policies or methodology pertaining to the general component of the allowance for loan losses during the periods presented for disclosure. The qualitative factors are determined based on the various risk characteristics of each loan segment. Risk characteristics relevant to each loan portfolio segment are as follows: Commercial real estate loans . Loans in this segment are primarily income-producing investment properties and owner-occupied commercial properties throughout New England. The underlying cash flows generated by the properties or operations can be adversely impacted by a downturn in the economy due to increased vacancy rates or diminished cash flows, which in turn, would have an effect on the credit quality in this segment. Management obtains financial information annually and continually monitors the cash flows of these loans. Residential real estate loans . Loans in this segment are collateralized by owner-occupied residential real estate and repayment is dependent on the credit quality of the individual borrower. We require private mortgage insurance for all loans originated with a loan-to-value ratio greater than 80 % and we do not grant subprime loans. The overall health of the economy, including unemployment rates and housing prices, will have an effect on the credit quality in this segment. Home equity loans are secured by first or second mortgages on one-to-four family owner occupied properties. F- 10 Commercial and industrial loans . Loans in this segment are made to businesses and are generally secured by assets of the business. Repayment is expected from the cash flows of the business. A weakened economy, decreased consumer spending, changes in technology and government spending are examples of what will have an effect on the credit quality in this segment. In addition, as a Preferred Lender with the Small Business Administration (“SBA”), the Company offered Paycheck Protection Program (“PPP”) loans through the March 27, 2020 $ 2.2 trillion fiscal stimulus bill known as the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”) launched by the U.S. Department of Treasury (“Treasury”) and the SBA. An eligible business was able to apply for a PPP loan up to the lesser of: (1) 2.5 times its average monthly “payroll costs,” or (2) $ 10 .0 million. PPP loans have: (a) an interest rate of 1.0 %, (b) a two-year loan term to maturity, subsequently extended to a five-year loan term maturity for loans granted on or after June 5, 2020 and (c) principal and interest payments deferred from six months to ten months from the date of disbursement. The SBA will guarantee 100 % of the PPP loans made to eligible borrowers. The entire principal amount of the borrower’s PPP loan, including any accrued interest, is eligible to be reduced by the loan forgiveness amount under the PPP so long as employee and compensation levels of the business are maintained and 60 % of the loan proceeds are used for payroll expenses, with the remaining 40 % of the loan proceeds used for other qualifying expenses. Consumer loans . Loans in this segment are both secured and unsecured and repayment is dependent on the credit quality of the individual borrower. Allocated component The allocated component relates to loans that are classified as impaired. Impaired loans are identified by analysis of loan performance, internal credit ratings and watch list loans that management believes are subject to a higher risk of loss. Impairment is measured on a loan by loan basis for commercial real estate and commercial and industrial loans by either the present value of expected future cash flows discounted at the loan’s effective interest rate or the fair value of the collateral if the loan is collateral dependent. An allowance is established when the discounted cash flows (or collateral value) of the impaired loan is lower than the carrying value of that loan. Large groups of smaller balance homogeneous loans are collectively evaluated for impairment. Accordingly, we do not separately identify individual consumer and residential real estate loans for impairment disclosures, unless such loans are nonperforming or subject to a troubled debt restructuring agreement. A loan is considered impaired when, based on current information and events, it is probable that we will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. We determine the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed. The extent to which COVID-19 impacts our borrower’s ability to repay and therefore the classification of a loan as impaired is highly uncertain and cannot be predicted with confidence as it is highly dependent upon the scope, severity and duration of the pandemic, the actions taken to contain the pandemic or mitigate its impact, and the direct and indirect economic effects of the pandemic and containment measures. We may periodically agree to modify the contractual terms of loans. When a loan is modified and a concession is made to a borrower experiencing financial difficulty, the modification is considered a troubled debt restructuring (“TDR”). All TDRs are classified as impaired. While we use our best judgment and information available, the ultimate appropriateness of the allowance is dependent upon a variety of factors beyond our control, including the performance of our loan portfolio, the economy, changes in interest rates and the view of the regulatory authorities toward loan classifications. F- 11 Unallocated component An unallocated component may be maintained to cover uncertainties that could affect management’s estimate of probable losses. The unallocated component of the allowance reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating allocated and general reserves in the portfolio. Loans Acquired with Deteriorated Credit Quality . Loans acquired in a transfer, including business combinations, where there is evidence of credit deterioration since origination and it is probable at the date of acquisition the Company will not collect all contractually required principal and interest payments, are accounted for under accounting guidance for purchased credit-impaired loans. This guidance provides that the excess of the cash flows initially expected to be collected over the fair value of the loans at the acquisition date (i.e., the accretable yield) is accreted into interest income over the estimated remaining life of the loans, provided that the timing and amount of future cash flows is reasonably estimated. The difference between the contractually required payments and the cash flows expected to be collected at acquisition is referred to as the nonaccretable difference. Subsequent to acquisition, probable decreases in expected cash flows are recognized through a provision for loan losses, resulting in an increase to the allowance for loan losses. If the Company has probable and significant increases in cash flows expected to be collected, the Company will first reverse any previously established allowance for loan losses and then increase interest income as a prospective yield adjustment. Bank-owned Life Insurance . Bank-owned life insurance policies are reflected on the consolidated balance sheets at cash surrender value. Changes in the net cash surrender value of the policies, as well as insurance proceeds received in excess of carrying value, are reflected in non-interest income on the consolidated statements of net income and are not subject to income taxes. Transfers and Servicing of Financial Assets . Transfers of financial assets are accounted for as sales, when control over the assets has been surrendered. Control over transferred assets is deemed to be surrendered when (1) the assets have been isolated from us, (2) the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and (3) we do not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity. Premises and Equipment . Land is carried at cost. Buildings, furniture and equipment are stated at cost, less accumulated depreciation and amortization, computed on the straight-line method over the estimated useful lives of the assets, or the expected lease term, if shorter. Expected terms include lease option periods to the extent that the exercise of such options is reasonably assured. The estimated useful lives of the assets are as follows: The estimated useful lives of the assets are as follows: Years Buildings 39 Leasehold Improvements 5 - 20 Furniture and Equipment 3 - 7 The cost of maintenance and repairs is charged to expense when incurred. Major expenditures for betterments are capitalized and depreciated. Other Real Estate Owned . Other real estate owned (“OREO”) represents property acquired through foreclosure or deeded to us in lieu of foreclosure. OREO is initially recorded at the estimated fair value of the real estate acquired, net of estimated selling costs, establishing a new cost basis. Initial write-downs are charged to the allowance for loan losses at the time the loan is transferred to OREO. Subsequent valuations are periodically performed by management and the carrying value is adjusted by a charge to expense to reflect any subsequent declines in the estimated fair value. Operating costs associated with OREO are expensed as incurred. Servicing . The Company services mortgage loans for others. Mortgage servicing assets are recognized as separate assets at fair value when rights are acquired through purchase or retained through the sale of financial assets. Fair value is based on a valuation model that calculates the present value of estimated future net servicing income. The valuation model incorporates assumptions that market participants would use in estimating future net servicing income, such as the cost to service, the discount rate, the custodial earnings rate, an inflation rate, ancillary income, prepayment speeds and default rates and losses. Capitalized servicing rights are reported in other assets and are amortized into service charges and fee income in proportion to, and over the period of, the estimated future net servicing income of the underlying financial assets. Servicing assets are evaluated for impairment based upon the fair value of the rights as compared to the amortized cost. Impairment is determined by stratifying rights by predominant risk characteristics, such as interest rate, loan type and investor type. Impairment is recognized through a valuation allowance for an individual stratum, to the extent that the fair value is less than the capitalized amount for the stratum. Changes in the valuation allowance are reported in service charges and fee income. F- 12 Servicing fee income is recorded for fees earned for servicing loans, which is included in service charges and fee income. The fees are based on a contractual percentage of the outstanding principal or a fixed amount per loan and are recorded as income when earned. Impairment of Long-lived Assets . Long-lived assets, including premises and equipment and certain identifiable intangible assets that are held and used by the Company, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If the asset is determined to be impaired, it is written down to its estimated fair value through a charge to earnings. Goodwill is measured as the excess of the cost of a business combination over the sum of the amounts assigned to identifiable intangible assets acquired less liabilities assumed. Goodwill is not amortized but rather assessed for impairment annually or more frequently if circumstances warrant. Management has the option of first assessing qualitative factors, such as events and circumstances, to determine whether it is more likely than not, meaning a likelihood of more than 50%, the value of a reporting unit is less than its carrying amount. If, after considering all relevant events and circumstances, management determines it is not more likely than not the fair value of a reporting unit is less than its carrying amount, then performing an impairment test is unnecessary. For the year ended December 31, 2021, management determined that it was not more likely than not the fair value of the reporting unit (the consolidated Company, in our case) was less than its carrying amount. If management had determined otherwise, a fair value analysis would have been completed to determine the impairment and necessary write-down of goodwill. Retirement Plans and Employee Benefits . We provide a defined benefit pension plan for eligible employees in conjunction with a third-party provider. The plan was soft frozen on September 30, 2016, and therefore, no new participants are included in the Plan after such effective date. The compensation cost of an employee’s pension benefit is recognized on the projected unit credit method over the employee’s approximate service period. The aggregate cost method is utilized for funding purposes. Employees are also eligible to participate in a 401(k) plan through a third-party provider. We make matching contributions to this plan at 50 % of up to 6 % of the employees’ eligible compensation. Share-based Compensation Plans . We measure and recognize compensation cost relating to share-based payment transactions based on the grant-date fair value of the equity instruments issued. Share-based compensation is recognized over the period the employee is required to provide services for the award. Reductions in compensation expense associated with forfeited options are estimated at the date of grant, and this estimated forfeiture rate is adjusted based on actual forfeiture experience. We use a binomial option-pricing model to determine the fair value of the stock options granted. Employee Stock Ownership Plan . Compensation expense for the Employee Stock Ownership Plan (“ESOP”) is recorded at an amount equal to the shares allocated by the ESOP multiplied by the average fair market value of the shares during the period. We recognize compensation expense ratably over the year based upon our estimate of the number of shares expected to be allocated by the ESOP. Unearned compensation applicable to the ESOP is reflected as a reduction of shareholders’ equity in the consolidated balance sheets. The difference between the average fair market value and the cost of the shares allocated by the ESOP is recorded as an adjustment to additional paid-in capital. Leases . The Company determines if an arrangement is a lease at inception. Operating leases are included within other assets and other liabilities in our consolidated balance sheets. Right-of-use (“ROU”) assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. As our leases do not provide an implicit rate, we use our incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. Our lease terms may include options to extend or terminate the lease when it is reasonably certain that we will exercise that option. Lease expense for lease payments is recognized on a straight-line basis over the lease term. F- 13 Advertising Costs . Advertising costs are accounted for using the accrual basis of accounting. Income Taxes . We use the asset and liability method for income tax accounting, whereby, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates applied to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance related to deferred tax assets is established when, in the judgment of management, it is more likely than not that all or a portion of such deferred tax assets will not be realized based on the available evidence including historical and projected taxable income. We do not have any uncertain tax positions at December 31, 2021 that require accrual or disclosure. We record interest and penalties as part of income tax expense. No interest or penalties were recorded during the years ended December 31, 2021, 2020, or 2019. Earnings per Share . Basic earnings per share represents income available to common shareholders divided by the weighted-average number of common shares outstanding during the period. If rights to dividends on unvested awards are non-forfeitable, these unvested awards are considered outstanding in the computation of basic earnings per share. Diluted earnings per share reflect additional common shares that would have been outstanding if dilutive potential common shares had been issued, as well as any adjustment to income that would result from the assumed issuance. Potential common shares that may be issued by us relate to stock options and certain performance-based restricted stock awards and are determined using the treasury stock method. Unallocated ESOP shares are not deemed outstanding for earnings per share calculations. There were no anti-dilutive shares outstanding during the years ended December 31, 2021 and 2019. F- 14 Earnings per common share have been computed based on the following: Years Ended December 31, 2021 2020 2019 (In thousands, except per share data) Net income applicable to common stock $ 23,699 $ 11,215 $ 13,349 Average number of common shares issued 23,849 25,751 26,959 Less: Average unallocated ESOP Shares ( 496 ) ( 580 ) ( 667 ) Less: Average unvested equity incentive plan shares ( 129 ) ( 124 ) ( 107 ) Average number of common shares outstanding used to calculate basic earnings per common share 23,224 25,047 26,185 Effect of dilutive equity incentive plan 36 — 45 Effect of dilutive stock options 41 15 73 Average number of common shares outstanding used to calculate diluted earnings per common share 23,301 25,062 26,303 Basic earnings per share $ 1.02 $ 0.45 $ 0.51 Diluted earnings per share $ 1.02 $ 0.45 $ 0.51 Anti-dilutive shares (1) — 259 — (1) Shares outstanding but not included because the impact of these shares would be anti-dilutive to the earnings per share calculation for the period presented. Comprehensive Income (Loss) Accounting principles generally require that recognized revenue, expenses, gains and losses be included in net income. Although certain changes in assets and liabilities are reported as a separate component of the equity section of the balance sheet, such items, along with net income, are components of comprehensive income (loss). The components of accumulated other comprehensive loss, included in shareholders’ equity, are as follows: December 31, 2021 December 31, 2020 (In thousands) Net unrealized (losses) gains on available-for-sale securities $ ( 4,685 ) $ 1,302 Tax effect 1,160 ( 339 ) Net-of-tax amount ( 3,525 ) 963 Losses on terminated cash flow hedges — ( 684 ) Tax effect — 192 Net-of-tax amount — ( 492 ) Unrecognized actuarial loss on the defined benefit plan ( 12,225 ) ( 16,344 ) Tax effect 3,436 4,594 Net-of-tax amount ( 8,789 ) ( 11,750 ) Accumulated other comprehensive loss $ ( 12,314 ) $ ( 11,279 ) F- 15 Recent Accounting Pronouncements. In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-13, Financial Instruments—Credit Losses (Topic 326), which requires entities to measure all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. The ASU also requires enhanced disclosures to help financial statement users better understand significant estimates and judgments used in estimating credit losses, as well as the credit quality and underwriting standards of an entity’s portfolio. These disclosures include qualitative and quantitative requirements that provide additional information about the amounts recorded in the financial statements. This ASU, as amended, is effective for the Company in fiscal years beginning after December 15, 2022. The Company is in the process of implementing the standard. We have put together a project team that has begun to identify appropriate loan segments along with related historical losses for each segment and potential models that would be most appropriate for each individual segment. We have not quantified the effects of any models, but do expect the standard to significantly change the approach to calculating our allowance for loan losses. 2. INVESTMENT SECURITIES Available-for-sale and held-to-maturity investment securities at December 31, 2021 and 2020 are summarized as follows: December 31, 2021 Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value (In thousands) Available-for-sale securities: Debt securities: Government-sponsored enterprise obligations $ 14,902 $ — $ ( 676 ) $ 14,226 State and municipal bonds 405 1 — 406 Corporate bonds 3,026 86 — 3,112 Total debt securities 18,333 87 ( 676 ) 17,744 Mortgage-backed securities: Government-sponsored mortgage-backed securities 171,011 427 ( 3,929 ) 167,509 U.S. government guaranteed mortgage-backed securities 9,693 8 ( 602 ) 9,099 Total mortgage-backed securities 180,704 435 ( 4,531 ) 176,608 Total available-for-sale 199,037 522 ( 5,207 ) 194,352 Held-to-maturity securities: Debt securities: U.S. Treasury securities 9,979 — ( 6 ) 9,973 Total debt securities 9,979 — ( 6 ) 9,973 Mortgage-backed securities: Government-sponsored mortgage-backed securities 212,293 — ( 2,518 ) 209,775 Total mortgage-backed securities 212,293 — ( 2,518 ) 209,775 Total held-to-maturity 222,272 — ( 2,524 ) 219,748 Total $ 421,309 $ 522 $ ( 7,731 ) $ 414,100 F- 16 December 31, 2020 Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value (In thousands) Available-for-sale securities: Debt securities: Government-sponsored enterprise obligations $ 14,871 $ 15 $ ( 111 ) $ 14,775 State and municipal bonds 405 1 — 406 Corporate bonds 3,039 36 — 3,075 Total debt securities 18,315 52 ( 111 ) 18,256 Mortgage-backed securities: Government-sponsored mortgage-backed securities 161,290 1,742 ( 303 ) 162,729 U.S. government guaranteed mortgage-backed securities 20,973 108 ( 186 ) 20,895 Total mortgage-backed securities 182,263 1,850 ( 489 ) 183,624 Total available-for-sale $ 200,578 $ 1,902 $ ( 600 ) $ 201,880 At December 31, 2021, government-sponsored enterprise obligations with a fair value of $ 9.5 million and mortgage-backed securities with a fair value of $ 53.7 million were pledged to secure public deposits and for other purposes as required or permitted by law. The securities collateralizing public deposits are subject to fluctuations in fair value. We monitor the fair value of the collateral on a periodic basis, and pledge additional collateral if necessary based on changes in fair value of collateral or the balances of such deposits. The amortized cost and fair value of available-for-sale and held-to-maturity securities at December 31, 2021, by final maturity, are shown below. Actual maturities may differ from contractual maturities because certain issuers have the right to call or prepay obligations. Available-for-Sale Held-to-Maturity Amortized Cost Fair Value Amortized Cost Fair Value (In thousands) Debt securities: Due after one year through five years $ 3,431 $ 3,518 $ 9,979 $ 9,973 Due after five years through ten years 9,902 9,544 — — Due after ten years 5,000 4,682 — — Total debt securities 18,333 17,744 9,979 9,973 Mortgage-backed securities: Due after five years through ten years 1,966 1,953 — — Due after ten years 178,738 174,655 212,293 209,775 Total mortgage-backed securities 180,704 176,608 212,293 209,775 Total securities $ 199,037 $ 194,352 $ 222,272 $ 219,748 Gross realized gains and losses on sales of available-for-sale securities for the years ended December 31, 2021, 2020 and 2019 are as follows: Years Ended December 31, 2021 2020 2019 (In thousands) Gross gains realized $ 12 $ 2,188 $ 160 Gross losses realized ( 84 ) ( 223 ) ( 257 ) Net (loss) gain realized $ ( 72 ) $ 1,965 $ ( 97 ) Proceeds from the sale and redemption of available-for-sale securities totaled $ 9.6 million, $ 96.3 million and $ 72.2 million for the years ended December 31, 2021, 2020 and 2019, respectively. F- 17 Information pertaining to securities with gross unrealized losses at December 31, 2021 and December 31, 2020, aggregated by investment category and length of time that individual securities have been in a continuous loss position are as follows : December 31, 2021 Less Than Twelve Months Over Twelve Months Number of Securities Fair Value Gross Unrealized Loss Depreciation from Amortized Cost Basis (%) Number of Securities Fair Value Gross Unrealized Loss Depreciation from Amortized Cost Basis (%) (Dollars in thousands) Available-for-sale: Government-sponsored mortgage-backed securities 34 $ 105,221 $ 2,088 2.0 % 18 $ 42,506 $ 1,841 4.5 % U.S. government guaranteed mortgage-backed securities 2 2,426 142 6.2 5 5,107 460 9.9 Government-sponsored enterprise obligations — — — — 3 14,226 676 5.0 Total available-for-sale 36 107,647 2,230 26 61,839 2,977 Held-to-maturity: U.S. Treasury securities 2 9,973 6 0.1 % — — — — % Government-sponsored mortgage-backed securities 31 209,775 2,518 1.2 — — — — Total held-to-maturity 33 219,748 2,524 — — — Total 69 $ 327,395 $ 4,754 26 $ 61,839 $ 2,977 December 31, 2020 Less Than Twelve Months Over Twelve Months Number of Securities Fair Value Gross Unrealized Loss Depreciation from Amortized Cost Basis (%) Number of Securities Fair Value Gross Unrealized Loss Depreciation from Amortized Cost Basis (%) (Dollars in thousands) Available-for-sale: Government-sponsored mortgage-backed securities 16 $ 27,091 $ 225 0.8 % 2 $ 1,815 $ 78 4.1 % U.S. government guaranteed mortgage-backed securities 3 10,458 75 0.7 2 2,393 111 4.4 Government-sponsored enterprise obligations 2 9,868 111 1.1 — — — — Total $ 47,417 $ 411 $ 4,208 $ 189 During the years ended December 31, 2021 and 2020, the Company did not record any other-than-temporary impairment (“OTTI”) charges on its investments. Management regularly reviews the portfolio for securities with unrealized losses. At December 31, 2021, management attributes the unrealized losses to increases in current market yields compared to the yields at the time the investments were purchased by the Company and not due to credit quality. The process for assessing investments for OTTI may vary depending on the type of security. In assessing the Company's investments in government-sponsored and U.S. government guaranteed mortgage-backed securities and government-sponsored enterprise obligations, the contractual cash flows of these investments are guaranteed by the respective government-sponsored enterprise; Federal Home Loan Mortgage Corporation (“FHLMC”), Federal National Mortgage Association (“FNMA”), Federal Farm Credit Bank (“FFCB”), or Federal Home Loan Bank (“FHLB”). Accordingly, it is expected that the securities would not be settled at a price less than the par value of the Company's investments. Management's assessment of other debt securities within the portfolio includes reviews of market pricing, ongoing credit quality evaluations, assessment of the investments' materiality, and duration of the investments' unrealized loss position. At December 31, 2021, the Company's corporate and municipal bond portfolios did not contain any securities below investment grade, as reported by major credit rating agencies. F- 18 3. LOANS Major classifications of loans at the periods indicated were as follows: December 31, December 31, 2021 2020 (In thousands) Commercial real estate $ 979,969 $ 833,949 Residential real estate: Residential one-to-four family 552,332 604,719 Home equity 99,759 103,905 Total residential real estate 652,091 708,624 Commercial and industrial: Paycheck protection program (“PPP”) loans 25,329 167,258 Commercial and industrial 201,340 211,823 Total commercial and industrial 226,669 379,081 Consumer 4,250 5,192 Total gross loans 1,862,979 1,926,846 Unamortized PPP loan fees ( 781 ) ( 3,050 ) Unearned premiums and deferred loan fees and costs, net 2,518 3,587 Total loans, net 1,864,716 1,927,383 Allowance for loan losses ( 19,787 ) ( 21,157 ) Net loans $ 1,844,929 $ 1,906,226 Loan Modifications/Troubled Debt Restructurings . The banking regulatory agencies, through an Interagency Statement dated April 7, 2020, encouraged financial institutions to work “prudently” with borrowers who request loan modifications or deferrals as a result of the economic impacts of COVID-19. Pursuant to Section 4013 of the CARES Act, loans less than 30 days past due as of December 31, 2019 will be considered current for COVID-19 modifications. Financial institutions can then suspend the requirements under U.S. GAAP for loan modifications related to COVID-19 that would otherwise be categorized as TDRs, and suspend any determination of a loan modified as a result of COVID-19 as being a TDR, including the requirement to determine impairment for accounting under U.S. GAAP. The Company adopted this policy election to address COVID-19 loan modification requests that have been received from the earlier of either January 1, 2022 or the 60 th day after the end of the COVID-19 national emergency. The Company granted deferred loan payments for impacted commercial, residential and consumer customers who experienced financial hardship due to COVID-19. The loan payment deferrals could be up to 90 days, depending upon the financial needs of each customer. Further deferrals will be re-evaluated on a customer-by-customer basis upon the expiration of the existing deferral period. As of December 31, 2021, modifications granted under the CARES Act declined to nine loans in the amount of $ 42.5 million, or 2.3 % of total loans, excluding PPP loans. As of December 31, 2021, of the $ 42.5 million in remaining modifications granted under the CARES Act, eight loans in the amount of $ 33.5 million, or 78.8 % of the remaining modifications, were granted to the hotel industry, and one loan in the amount of $ 9 .0 million was granted to an assisted living facility. Of the $ 42.5 million in remaining outstanding modifications, loans in the aggregate amount of $ 33.5 million, or 78.8 %, have resumed interest only payments. F- 19 The table below breaks out the remaining modifications granted under the CARES Act at December 31, 2021: Remaining CARES Act Modifications Loan Segment (1)(2) Total Loan Segment Balance at December 31, 2021 % of Total Loans Modification Balance # of Loans Modified % of Loan Segment Balance ($ in millions) Commercial real estate (3) $ 980.0 53.3 % $ 41.9 7 4.3 % Commercial and industrial 201.3 11.0 % 0.6 2 0.3 % Residential real estate 652.1 35.5 % — — — Consumer 4.3 0.2 % — — — Total $ 1,837.7 100.0 % $ 42.5 9 2.3 % (1) Excludes PPP loans of $ 25.3 million and the related deferred fees. (2) Residential includes home equity loans and lines of credit. (3) The remaining modification balance includes $ 32.9 million, which resumed regular payments in January of 2022. (1) Excludes PPP loans of $25.3 million and the related deferred fees. (2) Residential includes home equity loans and lines of credit. (3) The remaining modification balance includes $32.9 million, which resumed regular payments in January of 2022. Loans Serviced for Others. The Company has transferred a portion of its originated commercial loans to participating lenders. The amounts transferred have been accounted for as sales and are therefore not included in our accompanying consolidated balance sheets. We continue to service the loans on behalf of the participating lenders. We share, on a pro-rated basis, with participating lenders any gains or losses that may result from a borrower’s lack of compliance with contractual terms of the loan. At December 31, 2021 and December 31, 2020, the Company was servicing commercial loans participated out to various other institutions totaling $ 63.2 million and $ 52.9 million, respectively. Residential real estate mortgages are originated by the Bank both for its portfolio and for sale into the secondary market. The Bank may sell its loans to institutional investors such as the FHLMC. Under loan sale and servicing agreements with the investor, the Bank generally continues to service the residential real estate mortgages. The Bank pays the investor an agreed upon rate on the loan, which is less than the interest rate received from the borrower. The Bank retains the difference as a fee for servicing the residential real estate mortgages. The Bank capitalizes mortgage servicing rights at their fair value upon sale of the related loans, amortizes the asset over the estimated life of the serviced loan, and periodically assesses the asset for impairment. The significant assumptions used by a third party to estimate the fair value of capitalized servicing rights at December 31, 2021, include weighted average prepayment speed for the portfolio using the Public Securities Association Standard Prepayment Model ( 166 PSA), weighted average internal rate of return ( 9.02 %), weighted average servicing fee ( 0.25 %), and net cost to service loans ($ 83.77 per loan). The estimated fair value of capitalized servicing rights may vary significantly in subsequent periods primarily due to changing market interest rates, and their effect on prepayment speeds and discount rates. At December 31, 2021 and 2020, the Company was servicing residential mortgage loans owned by investors totaling $ 88.2 million and $ 38.1 million, respectively. Servicing fee income of $ 137,000 , $ 110,000 and $ 133,000 was recorded for the years ended December 31, 2021, 2020 and 2019, respectively, and is included in service charges and fees on the consolidated statements of net income. F- 20 A summary of the activity in the balances of mortgage servicing rights follows: Years Ended December 31, 2021 2020 (In thousands) Balance at the beginning of year: $ 153 $ 219 Capitalized mortgage servicing rights 628 — Amortization ( 86 ) ( 64 ) Write-down of mortgage servicing asset to fair value ( 2 ) ( 2 ) Balance at the end of year $ 693 $ 153 Fair value at the end of year $ 739 $ 157 Allowance for Loan Losses. An analysis of changes in the allowance for loan losses by segment for the years ended December 31, 2021, 2020 and 2019 is as follows: Commercial Real Estate Residential Real Estate Commercial and Industrial Consumer Unallocated Total (In thousands) Balance at December 31, 2018 $ 5,260 $ 3,556 $ 3,114 $ 135 $ ( 12 ) $ 12,053 Provision 1,343 618 509 204 1 2,675 Charge-offs ( 669 ) ( 320 ) ( 514 ) ( 197 ) — ( 1,700 ) Recoveries 873 66 74 61 — 1,074 Balance at December 31, 2019 $ 6,807 $ 3,920 $ 3,183 $ 203 $ ( 11 ) $ 14,102 Provision 6,262 408 939 129 37 7,775 Charge-offs ( 107 ) ( 177 ) ( 543 ) ( 136 ) — ( 963 ) Recoveries 58 89 51 45 — 243 Balance at December 31, 2020 $ 13,020 $ 4,240 $ 3,630 $ 241 $ 26 $ 21,157 Provision (credit) 46 ( 349 ) ( 644 ) 35 ( 13 ) ( 925 ) Charge-offs ( 103 ) ( 44 ) ( 370 ) ( 128 ) — ( 645 ) Recoveries 7 117 27 49 — 200 Balance at December 31, 2021 $ 12,970 $ 3,964 $ 2,643 $ 197 $ 13 $ 19,787 F- 21 The following table presents information pertaining to the allowance for loan losses by segment, excluding PPP loans, for the dates indicated: Commercial Real Estate Residential Real Estate Commercial and Industrial Consumer Unallocated Total (In thousands) December 31, 2021 Amount of allowance for impaired loans $ — $ — $ — $ — $ — $ — Amount of allowance for non-impaired loans 12,970 3,964 2,643 197 13 19,787 Total allowance for loan losses $ 12,970 $ 3,964 $ 2,643 $ 197 $ 13 $ 19,787 Impaired loans $ 9,601 $ 3,223 $ 699 $ 22 $ — $ 13,545 Non-impaired loans 965,577 647,098 200,271 4,228 — 1,817,174 Impaired loans acquired with deteriorated credit quality 4,791 1,770 370 — — 6,931 Total loans $ 979,969 $ 652,091 $ 201,340 $ 4,250 $ — $ 1,837,650 December 31, 2020 Amount of allowance for impaired loans $ — $ — $ — $ — $ — $ — Amount of allowance for non-impaired loans 13,020 4,240 3,630 241 26 21,157 Total allowance for loan losses $ 13,020 $ 4,240 $ 3,630 $ 241 $ 26 $ 21,157 Impaired loans $ 11,803 $ 4,363 $ 4,439 $ 27 $ — $ 20,632 Non-impaired loans 816,406 701,915 207,002 5,165 — 1,730,488 Impaired loans acquired with deteriorated credit quality 5,740 2,346 382 — — 8,468 Total loans $ 833,949 $ 708,624 $ 211,823 $ 5,192 $ — $ 1,759,588 Past Due and Nonaccrual loans. The following tables present an age analysis of past due loans, excluding PPP loans, as of the dates indicated: Balance at December 31, 2021 30 – 59 Days Past Due 60 – 89 Days Past Due 90 Days or More Past Due Total Past Due Loans Total Current Loans Total Loans Nonaccrual Loans (In thousands) Commercial real estate $ 139 $ — $ 436 $ 575 $ 979,394 $ 979,969 $ 1,224 Residential real estate: Residential one-to-four family 787 41 507 1,335 550,997 552,332 3,214 Home equity 57 5 63 125 99,634 99,759 94 Commercial and industrial 58 10 22 90 201,250 201,340 410 Consumer 5 — 11 16 4,234 4,250 22 Total loans $ 1,046 $ 56 $ 1,039 $ 2,141 $ 1,835,509 $ 1,837,650 $ 4,964 F- 22 Balance at December 31, 2020 30 – 59 Days Past Due 60 – 89 Days Past Due 90 Days or More Past Due Total Past Due Loans Total Current Loans Total Loans Nonaccrual Loans (In thousands) Commercial real estate $ 5,844 $ 3,144 $ 1,256 $ 10,244 $ 823,705 $ 833,949 $ 1,632 Residential real estate: Residential one-to-four family 1,684 360 707 2,751 601,968 604,719 5,353 Home equity 25 — — 25 103,880 103,905 124 Commercial and industrial 166 158 156 480 211,343 211,823 705 Consumer 22 — — 22 5,170 5,192 27 Total loans $ 7,741 $ 3,662 $ 2,119 $ 13,522 $ 1,746,066 $ 1,759,588 $ 7,841 At December 31, 2021 and December 31, 2020, all loans past due 90 days or more were carried as nonaccrual. The ratio of nonaccrual loans to total loans, excluding PPP loans, was 0.27 % and 0.45 % at December 31, 2021 and December 31, 2020, respectively. Impaired Loans. The following is a summary of impaired loans by class: Year Ended At December 31, 2021 December 31, 2021 Recorded Investment Unpaid Principal Balance Related Allowance Average Recorded Investment Interest Income Recognized Impaired Loans (1) (In thousands) Commercial real estate $ 14,392 $ 15,563 $ — $ 15,757 $ 469 Residential real estate: Residential one-to-four family 4,881 5,381 — 5,693 233 Home equity 112 136 — 146 7 Commercial and industrial 1,069 3,850 — 2,551 131 Consumer 22 37 — 25 3 Total impaired loans $ 20,476 $ 24,967 $ — $ 24,172 $ 843 Year Ended At December 31, 2020 December 31, 2020 Recorded Investment Unpaid Principal Balance Related Allowance Average Recorded Investment Interest Income Recognized Impaired Loans: (1) (In thousands) Commercial real estate $ 17,543 $ 18,590 $ — $ 18,284 $ 516 Residential real estate: Residential one-to-four family 6,544 7,647 — 5,815 66 Home equity 165 207 — 371 5 Commercial and industrial 4,821 7,038 — 4,186 217 Consumer 27 39 — 35 — Total impaired loans $ 29,100 $ 33,521 $ — $ 28,691 $ 804 (1) Includes loans acquired with deteriorated credit quality and performing troubled debt restructurings. F- 23 The majority of impaired loans are included within the nonaccrual balances; however, not every loan on nonaccrual status has been designated as impaired. Impaired loans include loans that have been modified in a TDR. Impaired loans are individually evaluated and exclude large groups of smaller-balance homogeneous loans, such as residential mortgage loans and consumer loans, which are collectively evaluated for impairment, and loans that are measured at fair value, unless the loan is amended in a TDR. All payments received on impaired loans in nonaccrual status are applied to principal. There was no interest income recognized on nonaccrual impaired loans during the years ended December 31, 2021 and December 31, 2020. The Company's obligation to fulfill the additional funding commitments on impaired loans is generally contingent on the borrower's compliance with the terms of the credit agreement. If the borrower is not in compliance, additional funding commitments may or may not be made at the Company's discretion. As of December 31, 2021, we have not committed to lend any additional funds for loans that are classified as impaired. Payments received on impaired loans in accrual status are recorded in accordance with the contractual terms of the loan. Troubled Debt Restructurings. Loans are designated as a TDR when, as part of an agreement to modify the original contractual terms of the loan as a result of financial difficulties of the borrower, the Bank grants the borrower a concession on the terms, that would not otherwise be considered. Typically, such concessions may consist of a reduction in interest rate to a below market rate, taking into account the credit quality of the note, extension of additional credit based on receipt of adequate collateral, or a deferment or reduction of payments (principal or interest) which materially alters the Bank's position or significantly extends the note's maturity date, such that the present value of cash flows to be received is materially less than those contractually established at the loan's origination. All loans that are modified are reviewed by the Company to identify if a TDR has occurred. All TDR loans are classified as impaired. When we modify loans in a TDR, we measure impairment similar to other impaired loans based on the present value of expected future cash flows, discounted at the contractual interest rate of the original loan agreement, or use the current fair value of the collateral, less selling costs for collateral dependent loans. If we determine that the value of the modified loan is less than the recorded investment in the loan (net of previous charge-offs, deferred loan fees or costs and unamortized premium or discount), impairment is recognized through a specific allowance or a charge-off to the allowance. Nonperforming TDRs are included in nonperforming loans. There were no charge-offs on TDRs during the years ended December 31, 2021 and 2020 . Loan modifications classified as TDRs during the twelve months ended December 31, 2020 are included in the table below. Twelve Months Ended December 31, 2020 Number of Contracts Pre- Modification Outstanding Recorded Investment Post- Modification Outstanding Recorded Investment Troubled Debt Restructurings Commercial Real Estate 5 $ 4,576 $ 4,576 Commercial and Industrial 9 3,806 3,806 Total 14 $ 8,382 $ 8,382 F- 24 During the years ended December 31, 2021 and 2020, no TDRs defaulted (defined as 30 days or more past due) within 12 months of restructuring. Loans Acquired with Deteriorated Credit Quality. The following is a summary of loans acquired with evidence of credit deterioration from Chicopee as of December 31, 2021. Contractual Required Payments Receivable Cash Expected To Be Collected Non- Accretable Discount Accretable Yield Loans Receivable (In thousands) Balance at December 31, 2020 $ 14,297 $ 11,485 $ 2,812 $ 3,017 $ 8,468 Collections ( 1,986 ) ( 1,880 ) ( 106 ) ( 346 ) ( 1,534 ) Dispositions ( 177 ) ( 175 ) ( 2 ) ( 172 ) ( 3 ) Balance at December 31, 2021 $ 12,134 $ 9,430 $ 2,704 $ 2,499 $ 6,931 Credit Quality Information. The Company utilizes an eight-grade internal loan rating system for commercial real estate and commercial and industrial loans. Performing residential real estate, home equity and consumer loans are grouped with “Pass” rated loans. Nonperforming residential real estate, home equity and consumer loans are monitored individually for impairment and risk rated as “Substandard.” Loans rated 1 – 4 : Loans rated 1-4 represent groups of loans that are not subject to adverse criticism as defined in regulatory guidance. Loans in these groups exhibit characteristics that represent acceptable risk. Loans rated 5 : Loans rated 5 are considered “Special Mention” that may exhibit potential credit weaknesses or downward trends and are being monitored by management. Loans in this category are currently protected based on collateral and repayment capacity and do not constitute undesirable credit risk, but have potential weakness that may result in deterioration of the repayment process at some future date. This classification is used if a negative trend is evident in the obligor’s financial situation. Special mention loans do not sufficiently expose the Company to warrant adverse classification. Loans rated 6 : Loans rated 6 are considered “Substandard.” Loans are classified as substandard if the borrower exhibits a well-defined weakness and may be inadequately protected by the current net worth and cash flow capacity to pay the current debt. Loans rated 7 : Loans rated 7 are considered “Doubtful.” Loans classified as doubtful have all the weaknesses inherent in those classified substandard with the added characteristic that the weaknesses make collection or liquidation of the loan highly questionable and improbable. The possibility of some loss is extremely high, but because of specific pending factors that may work to the advantage and strengthening of the asset, its classification as an estimated loss is deferred until its more exact status may be determined. Loans rated 8 : Loans rated 8 are considered uncollectible. The loss classification does not mean that the asset has absolutely no recovery or salvage value, but rather that it is not practical or desirable to defer writing off the asset because recovery and collection time may be affected in the future. On an annual basis, or more often if needed, we formally review the ratings on all commercial real estate and commercial and industrial loans. In addition, management utilizes delinquency reports, the criticized report and other loan reports to monitor credit quality. In addition, at least on an annual basis, the Company contracts with an external loan review company to review the internal credit ratings assigned to loans in the commercial loan portfolio on a pre-determined schedule, based on the type, size, rating, and overall risk of the loan. During the course of their review, the third party examines a sample of loans, including new loans, existing relationships over certain dollar amounts and classified assets. F- 25 The following table presents our loans by risk rating for the periods indicated: Commercial Real Estate Residential One-to-Four Family Home Equity Commercial and Industrial Consumer Total (In thousands) December 31, 2021 Pass (Rated 1 – 4) $ 913,063 $ 547,980 $ 99,503 $ 215,605 $ 4,228 $ 1,780,379 Special Mention (Rated 5) 48,765 — — 2,777 — 51,542 Substandard (Rated 6) 18,141 4,352 256 8,287 22 31,058 Total $ 979,969 $ 552,332 $ 99,759 $ 226,669 $ 4,250 $ 1,862,979 Commercial Real Estate Residential One-to-Four Family Home Equity Commercial and Industrial Consumer Total December 31, 2020 (In thousands) Pass (Rated 1 – 4) $ 726,751 $ 598,250 $ 103,619 $ 345,967 $ 5,165 $ 1,779,752 Special Mention (Rated 5) 78,207 — — 13,871 — 92,078 Substandard (Rated 6) 28,991 6,469 286 19,243 27 55,016 Total $ 833,949 $ 604,719 $ 103,905 $ 379,081 $ 5,192 $ 1,926,846 4. PREMISES AND EQUIPMENT Premises and equipment are summarized as follows: December 31, 2021 2020 (In thousands) Land $ 6,239 $ 5,661 Buildings 26,343 25,091 Leasehold improvements 3,409 3,112 Furniture and equipment 21,195 19,901 Total 57,186 53,764 Less: accumulated depreciation and amortization ( 31,024 ) ( 28,661 ) Premises and equipment, net $ 26,162 $ 25,103 Depreciation and amortization expense for the years ended December 31, 2021, 2020 and 2019 amounted to $ 2.3 million, $ 2.1 million and $ 2.1 million, respectively. 5. GOODWILL AND OTHER INTANGIBLES At December 31, 2021 and December 31, 2020, the Company’s goodwill was related to the acquisition of Chicopee in October 2016. There was no goodwill impairment recorded during the years ended December 31, 2021 and 2020. Annually, or more frequently if events or changes in circumstances warrant such evaluation, the Company evaluates its goodwill for impairment. F- 26 Core Deposit Intangibles In connection with the acquisition of Chicopee, the Bank recorded a core deposit intangible of $ 4.5 million, which is amortized over twelve years using the straight-line method. Amortization expense was $ 374,000 , $ 375,000 and $ 376,000 for the years ended December 31, 2021, 2020 and 2019, respectively. At December 31, 2021, future amortization of the core deposit intangible totaled $ 375,000 for each of the next five years and $ 688,000 thereafter. 6. DEPOSITS Deposit accounts, by type, are summarized as follows for the periods indicated: At December 31, 2021 2020 (In thousands) Demand and interest-bearing checking: Interest-bearing checking accounts $ 145,739 $ 94,936 Demand deposits 641,284 541,759 Savings: Regular savings accounts 217,565 175,595 Money market accounts 850,330 640,790 Time deposits 401,980 590,336 Total deposits $ 2,256,898 $ 2,043,416 Brokered deposits, which are included within time deposits, totaled $ 55.3 million at December 31, 2020. There were no brokered deposits at December 31, 2021. Time deposits of $250,000 or more totaled $ 65.9 million at December 31, 2021. Interest expense on time deposits of $250,000 or more totaled $ 412,000 and $ 2.8 million for the years ended December 31, 2021 and 2020, respectively. The scheduled maturities of time deposits for the periods indicated are as follows: At December 31, 2021 2020 (In thousands) 2021 $ — $ 503,187 2022 363,290 68,920 2023 24,500 12,927 2024 7,911 3,203 2025 4,892 2,099 2026 1,387 — Total time deposits $ 401,980 $ 590,336 F- 27 Interest expense on deposits for the years ended December 31, 2021, 2020 and 2019 is summarized as follows: Years Ended December 31, 2021 2020 2019 (In thousands) Regular accounts $ 154 $ 136 $ 146 Money market accounts 2,412 2,838 2,532 Time deposits 2,543 10,139 14,152 Interest-bearing checking accounts 399 387 377 Total $ 5,508 $ 13,500 $ 17,207 Cash paid for interest on deposits totaled $ 5.5 million, $ 13.6 million and $ 17.2 million for years ended December 31, 2021, 2020 and 2019, respectively. 7. SHORT-TERM BORROWINGS Total borrowing capacity includes borrowing arrangements at the FHLB, the Federal Reserve Bank (“FRB”), and borrowing arrangements with correspondent banks. The Company is a member of the FHLB and uses borrowings as an additional source of funding to finance the Company’s lending and investing activities and to provide liquidity for daily operations. FHLB advances also provide more pricing and option alternatives for particular asset/liability needs. The FHLB provides a central credit facility primarily for member institutions. As an FHLB member, the Company is required to own capital stock of the FHLB, calculated periodically based primarily on its level of borrowings from the FHLB. FHLB borrowings are secured by certain securities from the Company’s investment portfolio not otherwise pledged as well as certain residential real estate and commercial real estate loans. Advances are made under several different credit programs with different lending standards, interest rates and range of maturities. This relationship is an integral component of the Company’s asset-liability management program. At December 31, 2021, the Bank had $ 480.5 million in additional borrowing capacity from the FHLB. The Company also has an overnight Ideal Way line of credit with the FHLB for $ 9.5 million for the years ended December 31, 2021 and 2020. Interest on this line of credit is payable at a rate determined and reset by the FHLB on a daily basis. The outstanding principal is due daily but the portion not repaid will be automatically renewed. There were no advances outstanding under this line at December 31, 2021 and 2020. The Company has an available line of credit of $ 6.6 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 securities from the Company’s investment portfolio not otherwise pledged. As of December 31, 2021 and 2020, there were no advances outstanding under this line. The Company also has pre-established, non-collateralized overnight borrowing arrangements with large national and regional correspondent banks to provide additional overnight and short-term borrowing capacity for the Company. The Company has a $ 15 .0 million line of credit with a correspondent bank and a $ 50 .0 million line of credit with another correspondent bank, both at an interest rate determined and reset on a daily basis. At December 31, 2021 and 2020, we had no advances outstanding under these lines. F- 28 8. LONG-TERM DEBT FHLB Advances. The following advances are collateralized by a blanket lien on our residential real estate loans and certain eligible commercial real estate loans. Amount Weighted Average Rate 2021 2020 2021 2020 (In thousands) Fixed-rate advances maturing: 2021 $ — $ 42,388 — % 1.5 % 2022 1,475 14,284 0.1 0.4 2023 532 532 — — 2024 646 646 — — Total long-term advances $ 2,653 $ 57,850 0.1 % 1.2 % Cash paid for interest on long-term FHLB advances totaled $ 513,000 , $ 3.6 million, and $ 4.4 million for the years ended December 31, 2021, 2020, and 2019, respectively. Subordinated Debt. On April 20, 2021, the Company completed an offering of $ 20 million in aggregate principal amount of its 4.875 % fixed-to-floating rate subordinated notes (the “Notes”) to certain qualified institutional buyers in a private placement transaction. Unless earlier redeemed, the Notes mature on May 1, 2031 . 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 System (the “Federal Reserve”). The Notes were designed to qualify as Tier 2 capital under the Federal Reserve’s capital adequacy regulations. The Notes are presented net of issuance costs of $ 367,000 as of December 31, 2021, which are being amortized into interest expense over the life of the Notes. Amortization of issuance costs into interest expense was $ 27,000 for the year ended December 31, 2021. Cash paid for interest on subordinated debt totaled $ 545,000 for the year ended December 31, 2021. 9. STOCK PLANS AND EMPLOYEE STOCK OWNERSHIP PLAN Stock Options. A summary of the status of our stock options at December 31, 2021 is presented below: Shares Weighted Average Exercise Price Weighted Average Remaining Contractual Term (in years) Aggregate Intrinsic Value (in thousands) Outstanding at December 31, 2020 210,975 $ 6.46 1.67 $ 90 Exercised ( 33,094 ) 5.85 0.46 90 Outstanding at December 31, 2021 177,881 $ 6.57 0.81 $ 388 Exercisable at December 31, 2021 177,881 $ 6.57 0.81 $ 388 F- 29 Cash received for options exercised during the years ended December 31, 2021, 2020 and 2019 was $ 193,000 , $ 43,000 and $ 106,000 , respectively. Restricted Stock Awards. In May 2014, the Company’s shareholders approved the 2014 Omnibus Incentive Plan, a stock-based compensation plan (the “2014 RSA Plan”). Under the 2014 RSA Plan, up to 516,000 shares of the Company’s common stock were reserved for grants of stock awards, including stock options and restricted stock, which may be granted to any officer, key employee or non-employee director of WNEB. Any shares that are not issued because vesting requirements are not met were available for future issuance under the 2014 RSA Plan. On an annual basis, the Compensation Committee (the “Committee”) approves long-term incentive awards out of the 2014 RSA Plan, whereby shares will be granted to eligible participants of the Company that are nominated by the Chief Executive Officer and approved by the Committee, with vesting over a three -year term for employees and a one -year term for directors. Annual employee grants provide for a periodic award that is both performance and time-based and is designed to recognize the executive’s responsibilities, reward performance and leadership and as a retention tool. The objective of the award is to align compensation for the named executive officers and directors over a multi-year period directly with the interests of our shareholders by motivating and rewarding creation and preservation of long-term financial strength, shareholder value and relative shareholder return. In February 2019, 108,718 shares were granted. Of the 108,718 shares, 64,496 shares were time-based, with 20,262 vesting in one year and 44,234 vesting ratably over a three -year period. The remaining 44,222 shares granted are performance-based and are subject to the achievement of the 2019 long-term incentive performance metric. The primary performance metric for 2019 grants was return on equity. Performance shares will be earned based upon how the Company performs relative to threshold, target and maximum absolute goals (i.e. Company-specific, not relative to a peer index) on an annual performance period, but will be distributed at the end of the three-year period. The threshold, target and stretch metrics under the 2019 grants are as follows: Return on Equity Metrics Performance Period Ending Threshold Target Stretch December 31, 2019 5.75 % 6.13 % 7.00 % December 31, 2020 6.00 % 6.75 % 7.75 % December 31, 2021 6.25 % 7.00 % 8.00 % Eligible participants will be able to earn between 50 % (“threshold” performance), 100 % (“target” performance) and 150 % (“maximum” performance). In February 2020, 120,053 shares were granted. Of the 120,053 shares, 69,898 shares were time-based, with 19,760 vesting in one year and 50,138 vesting ratably over a three -year period. The remaining 50,155 shares granted are performance-based and are subject to the achievement of the 2020 long-term incentive performance metrics, with 50 % of the performance-shares vesting for each performance metric. The primary performance metrics for the 2020 grants were return on equity and earnings per share. Performance shares will be earned based upon how the Company performs relative to threshold, target and maximum absolute goals (i.e. Company-specific, not relative to a peer index) on an annual performance period for return on equity metrics and for a three-year cumulative performance period for earnings per share, but will be distributed at the end of the three -year period as earned. F- 30 The threshold, target and stretch metrics under the 2020 grants are as follows: Return on Equity Metrics Performance Period Ending Threshold Target Stretch December 31, 2020 5.00 % 5.48 % 6.00 % December 31, 2021 5.62 % 6.24 % 6.86 % December 31, 2022 6.29 % 6.99 % 7.69 % Earnings Per Share Metrics Performance Period Ending Threshold Target Stretch Three-year Cumulative Diluted Earnings Per Share $ 1.50 $ 1.65 $ 1.80 Eligible participants will be able to earn between 50 % (“threshold” performance), 100 % (“target” performance) and 150 % (“maximum” performance). The fair market value of shares awarded is based on the market price at the grant date, recorded as unearned compensation and amortized over the applicable vesting period. Performance-based metrics are monitored on a quarterly basis in order to compare actual results to the performance metric, with any necessary adjustments being recognized through share-based compensation expense and unearned compensation. In February 2021, 19,827 shares were granted to our directors, with a one-year vesting period. At December 31, 2021, there were no remaining shares available to grant under the 2014 RSA Plan. In May 2021, the Company’s shareholders approved the 2021 Omnibus Incentive Plan, a stock-based compensation plan (the “2021 RSA Plan”). Under the 2021 RSA Plan, up to 700,000 shares of the Company’s common stock were reserved for grants of stock awards, including stock options and restricted stock, which may be granted to any officer, key employee or non-employee director of the Company. Any shares that are not issued because vesting requirements are not met will be available for future issuance under the 2021 RSA Plan. In May 2021, 122,362 shares were granted. Of the 122,362 shares, 61,181 shares were time-based, vesting ratably over a three -year period. The remaining 61,181 shares granted are performance-based and are subject to the achievement of the 2021 long-term incentive performance metrics, with 50 % of the performance-shares vesting for each performance metric. The primary performance metrics for the 2021 grants were return on equity and earnings per share. Performance shares will be earned based upon how the Company performs relative to threshold, target and maximum absolute goals (i.e. Company-specific, not relative to a peer index) on an annual performance period for return on equity metrics and for a three -year cumulative performance period for earnings per share, but will be distributed at the end of the three-year period as earned. The threshold, target and stretch metrics under the 2021 grants are as follows: Return on Equity Metrics Performance Period Ending Threshold Target Stretch December 31, 2021 5.63 % 6.25 % 7.50 % December 31, 2022 5.85 % 6.50 % 7.80 % December 31, 2023 6.08 % 6.75 % 8.10 % Earnings Per Share Metrics Performance Period Ending Threshold Target Stretch Three-year Cumulative Diluted Earnings Per Share $ 1.58 $ 1.97 $ 2.36 F- 31 At December 31, 2021, there were 577,638 remaining shares available to grant under the 2021 RSA Plan. A summary of the status of restricted stock awards at December 31, 2021 and 2020 is presented below: Shares Weighted Average Grant Date Fair Value Balance at December 31, 2020 178,766 $ 9.63 Shares granted 154,906 8.44 Shares forfeited ( 24,506 ) 10.59 Shares vested ( 95,785 ) 9.05 Balance at December 31, 2021 213,381 $ 8.91 Shares Weighted Average Grant Date Fair Value Balance at December 31, 2019 172,866 $ 10.07 Shares granted 145,980 8.69 Shares forfeited ( 30,193 ) 9.96 Shares vested ( 109,887 ) 9.00 Balance at December 31, 2020 178,766 $ 9.63 We recorded total expense for restricted stock awards of $ 1.3 million, $ 834,000 and $ 773,000 for the years ended December 31, 2021, 2020 and 2019, respectively. The aggregate fair value of restricted stock vested during 2021 was $ 823,000 . Tax (shortfall) benefits related to equity incentive plan expense were $ ( 5,000 ) , $ ( 23,000 ) and $ 21,000 for the years ended December 31, 2021, 2020 and 2019, respectively. Unrecognized compensation cost for stock awards was $ 1.2 million at December 31, 2021 with a remaining term of 1.7 years. Employee Stock Ownership Plan (“ESOP”). We established an ESOP for the benefit of each employee that has reached the age of 21 and has completed at least 1,000 hours of service in the previous 12-month period. In January 2002, as part of the initial stock conversion, we provided a loan to the ESOP Trust which was used to purchase 8 %, or 1,305,359 shares, of the common stock sold in the initial public offering. In January 2007, as part of the second-step stock conversion, we provided an additional loan to the ESOP Trust which was used to purchase 4.0 %, or 736,000 shares, of the 18,400,000 shares of common stock sold in the offering. The 2002 and 2007 loans bear an interest rate of 8.0 % and provide for annual payments of interest and principal. At December 31, 2021, the remaining principal balances are payable as follows: Years Ending December 31, Amount (In thousands) 2022 $ 447 2023 447 2024 447 2025 447 2026 447 Thereafter 2,121 Total $ 4,356 We have committed to make contributions to the ESOP sufficient to support the debt service of the loans. The loans are secured by the shares purchased, which are held in a suspense account for allocation among the participants as the loans are paid. Total compensation expense applicable to the ESOP amounted to $ 682,000 , $ 551,000 and $ 834,000 for the years ended December 31, 2021, 2020 and 2019, respectively. F- 32 Shares held by the ESOP include the following at December 31, 2021 and 2020: 2021 2020 Allocated 1,127,074 1,078,109 Committed to be allocated 81,893 85,101 Unallocated 445,013 526,906 Total 1,653,980 1,690,116 Cash dividends declared and received on allocated shares are allocated to participants and charged to retained earnings. Cash dividends declared and received on unallocated shares are held in suspense and are applied to repay the outstanding debt of the ESOP. The fair value of unallocated shares was $ 3.9 million and $ 3.6 million at December 31, 2021 and 2020, respectively. ESOP shares are considered outstanding for earnings per share calculations when they are committed to be allocated. Unallocated ESOP shares are excluded from earnings per share calculations. The cost of unearned shares to be allocated to ESOP participants for future services not yet performed is reflected as a reduction of shareholders’ equity. 10. RETIREMENT PLANS AND EMPLOYEE BENEFITS Pension Plan . We provide a defined benefit pension plan for eligible employees (the “Plan”). Employees must work a minimum of 1,000 hours per year to be eligible for the Plan. Eligible employees become vested in the Plan after five years of service. The Plan assets are currently invested in various pooled separate investment accounts offered by Principal Life Insurance Company, a division of Principal Financial Group, who is the Custodian of the Plan (the “Custodian”). The Plan is administered by an officer of Westfield Bank (the “Plan Administrator”). On September 30, 2016, we effected a soft freeze on the Plan and therefore no new participants will be included in the Plan after such effective date. The following table provides information for the Plan at or for the years ended December 31 : Years Ended December 31, 2021 2020 2019 (In thousands) Change in benefit obligation: Benefit obligation at beginning of year $ 47,592 $ 36,158 $ 27,309 Service cost 1,842 1,396 1,095 Interest 1,171 1,162 1,134 Actuarial (gain) loss ( 3,028 ) 9,690 7,074 Benefits paid ( 2,488 ) ( 814 ) ( 454 ) Benefit obligation at end of year 45,089 47,592 36,158 Change in plan assets: Fair value of plan assets at beginning of year 26,264 22,787 18,393 Actual return on plan assets 1,926 3,191 3,923 Employer contribution 2,000 1,100 925 Benefits paid ( 2,488 ) ( 814 ) ( 454 ) Fair value of plan assets at end of year 27,702 26,264 22,787 Funded status and accrued benefit at end of year $ ( 17,387 ) $ ( 21,328 ) $ ( 13,371 ) Accumulated benefit obligation at end of year $ 34,137 $ 35,755 $ 27,634 The following actuarial assumptions were used in determining the pension benefit obligation: December 31, 2021 2020 Discount rate 2.85 % 2.50 % Rate of compensation increase 4.00 4.00 F- 33 The discount rate used to determine the pension benefit obligation increased from 2.50 % at December 31, 2020 to 2.85 % at December 31, 2021, resulting in a decrease in the Plan’s pension benefit obligation for the year ended December 31, 2021. Net pension cost includes the following components for the years ended December 31: 2021 2020 2019 (In thousands) Service cost $ 1,842 $ 1,396 $ 1,095 Interest cost 1,171 1,162 1,134 Expected return on assets ( 1,755 ) ( 1,526 ) ( 1,233 ) Amortization of actuarial loss 910 421 133 Net periodic pension cost $ 2,168 $ 1,453 $ 1,129 The following actuarial assumptions were used in determining the net periodic pension cost for the years ended December 31: 2021 2020 2019 Discount rate 2.50 % 3.25 % 4.25 % Expected return on plan assets 7.00 7.00 7.00 Rate of compensation increase 4.00 4.00 4.00 The following is a summary of the Plan’s investments for the years ended December 31: 2021 2020 (In thousands) Pooled separate investment accounts: Fixed income $ 12,896 $ 13,332 Large U.S. equity 7,501 6,763 International equity 4,251 3,960 Small/mid U.S. equity 1,228 1,131 Other 1,826 1,078 Total $ 27,702 $ 26,264 Pooled separate accounts are valued at the Net Asset Value (“NAV”) of units held by the Plan at year end. The NAV is used as a practical expedient to estimate fair value. This practical expedient would not be used if it was determined to be probable that the funds will sell the underlying investments for an amount different from the reported NAV. Participant transactions (purchases and sales) may occur daily. The preceding method described may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. Furthermore, although the Plan administrators believes the valuation methods are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different fair value measurement at the reporting date. The following table summarizes the investments for which fair value is measured using NAV per share as a practical expedient for the years ended December 31, 2021 and 2020 . There are no pertinent redemption restrictions for these investments; the redemption notice period is applicable only to the Plan. Fair Value Unfunded Commitments Redemption Frequency (if Currently Eligible) Redemption Notice Period (In thousands) December 31, 2021 $ 27,702 n/a Daily 1 day December 31, 2020 $ 26,264 n/a Daily 1 day F- 34 The defined benefit plan offers a mixture of fixed income, equity and real assets as the underlying investment structure for its retirement structure for the pension plan. The target allocation mix for the pension plan for 2021 was an equity-based investment deployment of 50 % of total portfolio assets based on advice received from an external advisory firm with confirmation by the Bank’s Investment Committee. The remainder of the portfolio is allocated to fixed income at 50 % of total assets. The investment objective is to diversify investments across a spectrum of investment types to limit risks from large market swings and to provide anticipated stabilized investment returns. Trustees of the Plan select investment managers for the portfolio and a second investment advisory firm is retained to provide allocation analysis. The overall investment objective is to diversify equity investments across a spectrum of types, small cap, large cap and international, along with investment styles such as growth and value. We estimate that the benefits to be paid from the pension plan for years ended December 31 are as follows: Year Benefit Payments to Participants (In thousands) 2022 $ 1,944 2023 2,153 2024 2,277 2025 5,547 2026 6,015 In aggregate for 2027 – 2031 12,511 We have not yet determined the amount of the contribution we expect to make to the plan during the fiscal year ending December 31, 2022. 401(k) Defined Contribution Plan. The Company has a 401(k) defined contribution employee benefit plan. The 401(k) plan allows eligible employees to contribute a percentage of their earnings to the plan. A portion of the employee contribution, as determined by the Compensation Committee of the Board of Directors, is matched by the Company. In 2021, 2020 and 2019, the Company’s percentage match was 50 % up to the first 6 % contributed by the employee. The Company’s expense for the 401(k) plan match was $ 476,000 , $ 468,000 and $ 423,000 for the years ended December 31, 2021, 2020 a