Western New England Bancorp, Inc. 10-K

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