Major classifications of loans at December 31, 2020 and June 30, 2020 are summarized as follows:

At December 31, 2020, the balance of one- to four-family residential real estate loans and home equity and HELOCs included $129.7 million of loans on non-owner-occupied, one-to-four-family residences (“investor loans”), representing approximately 25.8% of total loans. The $129.7 million of one- to four-family investor loans at December 31, 2020 included $129.3 million of first mortgages and $444 thousand of home equity and HELOCs. At June 30, 2020, the balance of one- to four-family residential real estate loans and home equity and HELOCs included $114.1 million of loans of one- to four-family residences investor loans, representing approximately 22.0% of total loans. The $114.1 million of one- to four-family investor loans at June 30, 2020 included $113.6 million of first mortgages and $507 thousand of home equity and HELOCs.

During the three months ended June 30, 2020, the Bank provided $2.4 million in Paycheck Protection Program (PPP) loans for 56 new and existing customers, which are guaranteed by the Small Business Administration and mature in two years. As of December 31, 2020 and June 30, 2020, the $2.4 million of PPP loans are included in commercial loans in the above table. During the three months ended June 30, 2020, the Bank also modified approximately $49.8 million of existing loans in accordance with the provisions of the 2020 Coronavirus Aid, Relief, and Economic Security (“CARES”) Act to provide its customers with monetary relief. Generally, these modifications included the deferral of principal and interest payments for a period of three months, although interest income continued to accrue. The three-month deferral period has ended on a portion of the loans on deferral and the Bank received payments of principal and interest on a portion of the loans on deferral and, as of December 31, 2020, $3.0 million of loans remain on deferral under the CARES Act.

Mortgage loans serviced for others are not included in the accompanying Consolidated Statements of Financial Condition. The total amount of loans serviced for the benefit of others was approximately $23.5 million and $26.6 million at December 31, 2020 and June 30, 2020, respectively. Custodial escrow balances maintained in connection with the foregoing loan servicing are included in advances from borrowers for taxes and insurance.

Allowance for Loan Losses. The following tables set forth the allocation of the Bank’s allowance for loan losses by loan category and the percent of loans in each category to total loans receivable, net, at the dates indicated. The portion of the loan loss allowance allocated to each loan category does not represent the total available for future losses which may occur within the loan category since the total loan loss allowance is a valuation allocation applicable to the entire loan portfolio. William Penn Bancorp generally charges-off the collateral or discounted cash flow deficiency on all loans at 90 days past due and all loans rated substandard or worse that are 90 days past due.

The provision for loan losses was determined by management to be an amount necessary to maintain a balance of allowance for loan losses at a level that considers all known and current losses in the loan portfolio as well as potential losses due to unknown factors such as the economic environment. Changes in the provision were based on management’s analysis of various factors such as: estimated fair

value of underlying collateral, recent loss experience in particular segments of the portfolio, levels and trends in delinquent loans, and changes in general economic and business conditions. William Penn Bancorp considers the allowance for loan losses of $3.6 million and $3.5 million adequate to cover loan losses inherent in the loan portfolio at December 31, 2020 and June 30, 2020, respectively.

The following table presents by portfolio segment, the changes in the allowance for loan losses for the periods ended:

The following tables present the allowance for loan losses and recorded investment by loan portfolio classification as December 31, 2020 and June 30, 2020:

(1)	Acquired non-credit impaired loans are evaluated collectively, excluding loans that have subsequently moved to non-accrual status which are individually evaluated for impairment.

(2)	Acquired credit impaired loans are evaluated on an individual basis.


June 30, 2020	Residential real estate:						Commercial real estate:
			Home Equity		Construction-		Multi-family		Commercial		Construction
(Dollar amounts in thousands)	1-4 family		and HELOCs		residential		(five or more)		non-residential		and Land		Commercial		Consumer		Unallocated		Total
Allowance ending balance:
Individually evaluated for impairment	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Collectively evaluated for impairment		1,483		166		526		123		727		396		83		15		—		3,519
Total allowance	$	1,483	$	166	$	526	$	123	$	727	$	396	$	83	$	15	$	—	$	3,519

Loans receivable ending balance:
Individually evaluated for impairment	$	973	$	628	$	—	$	185	$	585	$	—	$	—	$	—	$	—	$	2,371
Collectively evaluated for impairment		189,055		15,677		9,218		9,267		45,214		6,690		4,150		713		—		279,984
Acquired non-credit impaired loans (1)		155,588		30,727		6,581		5,512		30,908		—		2,288		3,187		—		234,791
Acquired credit impaired loans (2)		299		22		—		—		—		—		—		—		—		321
Total portfolio	$	345,915	$	47,054	$	15,799	$	14,964	$	76,707	$	6,690	$	6,438	$	3,900	$	—	$	517,467

(1)	Acquired non-credit impaired loans are evaluated collectively, excluding loans that have subsequently moved to non-accrual status which are individually evaluated for impairment.

(2)	Acquired credit impaired loans are evaluated on an individual basis.

During the six months ended December 31, 2020, the changes in the provision for loan losses for each portfolio of loans were primarily due to fluctuations in the outstanding balance of each portfolio of loans collectively evaluated for impairment. The overall increase in the allowance during the six months ended December 31, 2020 can be primarily attributed to an increase in non-accrual and delinquent loans and the corresponding qualitative adjustment.

During the year ended June 30, 2020, the changes in the provision for loan losses related to one- to four-family residential real estate, residential real estate construction loans and commercial real estate land loans were primarily due to uncertainties with the risk profile of these portfolios in the current economic environment as impacted by the COVID-19 pandemic. The increase in reserves due to the COVID-19 pandemic was limited by William Penn Bancorp making enhancements to its credit management function by adding new experienced team members and implementing more robust internal credit measurement and monitoring processes.

Credit Quality Information

The following tables represent credit exposures by internally assigned grades as of December 31, 2020 and June 30, 2020. The grading analysis estimates the capability of the borrower to repay the contractual obligations of the loan agreements as scheduled or at all. William Penn Bancorp’s internal credit risk grading system is based on experiences with similarly graded loans.

William Penn Bancorp’s internally assigned grades are as follows:

Pass – loans which are protected by the current net worth and paying capacity of the obligor or by the value of the underlying collateral.

Special Mention – loans where a potential weakness or risk exists, which could cause a more serious problem if not corrected.

Substandard – loans that have a well-defined weakness based on objective evidence and are characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected.

Doubtful – loans classified as doubtful have all the weaknesses inherent in a substandard asset. In

addition, these weaknesses make collection or liquidation in full highly questionable and improbable, based on existing circumstances.

Loss – loans classified as a loss are considered uncollectible, or of such value that continuance as an asset is not warranted.

The following tables set forth the amounts of the portfolio of classified asset categories for the commercial loan portfolios at December 31, 2020 and June 30, 2020:


December 31, 2020
	Commercial Real Estate
					Construction
	Multi-family		Non-residential		and land		Commercial
Pass	$	12,040	$	88,749	$	5,818	$	6,027
Special Mention		—		461		—		—
Substandard		183		742		—		—
Doubtful		—		—		—		—
Loss		—		—		—		—
Ending Balance	$	12,223	$	89,952	$	5,818	$	6,027


June 30, 2020
	Commercial Real Estate
					Construction
	Multi-family		Non-residential		and land		Commercial
Pass	$	13,976	$	75,973	$	6,690	$	6,438
Special Mention		803		507		—		—
Substandard		185		227		—		—
Doubtful		—		—		—		—
Loss		—		—		—		—
Ending Balance	$	14,964	$	76,707	$	6,690	$	6,438

The following tables set forth the amounts of the portfolio of classified asset categories for the residential and consumer loan portfolios at December 31, 2020 and June 30, 2020:


December 31, 2020
	Residential Real Estate
			Home equity &
	1-4 family		HELOCs		Construction		Consumer
Performing	$	321,960	$	44,644	$	13,581	$	3,357
Non-performing		3,768		449		—		130
	$	325,728	$	45,093	$	13,581	$	3,487


June 30, 2020
	Residential Real Estate
			Home equity &
	1-4 family		HELOCs		Construction		Consumer
Performing	$	343,562	$	46,580	$	15,799	$	3,785
Non-performing		2,353		474		—		115
	$	345,915	$	47,054	$	15,799	$	3,900

Loans Acquired with Deteriorated Credit Quality

The outstanding principal and related carrying amount of loans acquired with deteriorated credit quality, for which William Penn Bancorp applies the provisions of ASC 310-30, as of December 31, 2020 and June 30, 2020, are as follows:


(Dollars in thousands)	December 31, 2020		June 30, 2020
Outstanding principal balance	$	523	$	773
Carrying amount		255		321

The following table presents changes in the accretable discount on loans acquired with deteriorated credit quality, for which William Penn Bancorp applies the provisions of ASC 310-30, for the period presented:


(Dollars in thousands)	Accretable Discount
Balance, May 1, 2020	$	57
Accretion		(4)
Balance, June 30, 2020	$	53
Accretion		(7)
Balance, September 30, 2020	$	46
Accretion		(16)
Balance, December 31, 2020	$	30

Loan Delinquencies and Non-accrual Loans

Following are tables which include an aging analysis of the recorded investment of past due loans as of December 31, 2020 and June 30, 2020.


	Aged Analysis of Past Due and Non-accrual Loans
	As of December 31, 2020
															Recorded		Recorded
									Acquired						Investment >		Investment
	30-59 Days		60-89 Days		90 Days		Total Past		Credit				Total Loans		90 Days and		Loans on
(Dollar amounts in thousands)	Past Due		Past Due		Or Greater		Due		Impaired		Current		Receivable		Accruing		Non-Accrual
Residential real estate:
1-4 family	$	1,622	$	1,594	$	1,507	$	4,723	$	232	$	320,773	$	325,728	$	—	$	3,768
Home equity and HELOCs		—		101		347		448		23		44,622		45,093		—		449
Construction - residential		—		—		—		—		—		13,581		13,581		—		—
Commercial real estate:
Multi-family		—		—		183		183		—		12,040		12,223		—		183
Commercial non-residential		51		503		—		554		—		89,398		89,952		—		555
Construction and land		—		—		—		—		—		5,818		5,818		—		—
Commercial		—		—		—		—		—		6,027		6,027		—		—
Consumer		—		—		62		62		—		3,425		3,487		—		130
Total	$	1,673	$	2,198	$	2,099	$	5,970	$	255	$	495,684	$	501,909	$	—	$	5,085


	Aged Analysis of Past Due and Non-accrual Loans
	As of June 30, 2020
																Recorded	Recorded
	30-59		60-89		90 and Over				Acquired						Investment >		Investment
	30-59 Days		60-89 Days		90 Days		Total Past		Credit				Total Loans		90 Days and		Loans on
(Dollar amounts in thousands)	Past Due		Past Due		Or Greater		Due		Impaired		Current		Receivable		Accruing		Non-Accrual
Residential real estate:
1-4 family	$	235	$	1,020	$	1,477	$	2,732	$	299	$	342,884	$	345,915	$	—	$	2,353
Home equity and HELOCs		126		101		181		408		22		46,624		47,054		90		384
Construction - residential		—		—		—		—		—		15,799		15,799		—		—
Commercial real estate:
Multi-family		—		465		185		650		—		14,314		14,964		—		185
Commercial non-residential		100		507		—		607		—		76,100		76,707		—		135
Land		—		—		—		—		—		6,690		6,690		—		—
Commercial		—		—		—		—		—		6,438		6,438		—		—
Consumer		3		21		—		24		—		3,876		3,900		—		115
Total	$	464	$	2,114	$	1,843	$	4,421	$	321	$	512,725	$	517,467	$	90	$	3,172

Interest income on non-accrual loans that would have been recorded was approximately $120 thousand, $10 thousand, $60 thousand, and $21 thousand, respectively, during the three and six months ended December 31, 2020 and 2019, respectively, if these loans had performed in accordance with their terms.

Impaired Loans

Management considers commercial loans and commercial real estate loans which are 90 days or more past due to be impaired. Larger commercial loans and commercial real estate loans which are 60 days or more past due are selected for impairment testing in accordance with GAAP. Factors considered by management in determining impairment include payment status and collateral value. The amount of impairment for these types of loans is determined by the difference between the present value of the expected cash flows related to the loan, using the original interest rate, and its recorded value, or as a practical expedient in the case of collateralized loans, the difference between the fair value of the collateral and the recorded amount of the loans. These loans are analyzed to determine if it is probable that all amounts will not be collected according to the contractual terms of the loan agreement. If management determines that the value of the impaired loan is less than the recorded investment in the loan (net of previous charge-offs, deferred loan fees or costs and unamortized premium or discount), impairment is recognized through an allowance estimate or a charge-off to the allowance for loan losses.

The following tables include the recorded investment and unpaid principal balances for impaired loans with the associated allowance amount, if applicable, at December 31, 2020 and June 30, 2020.


December 31, 2020
			Unpaid
	Recorded		Principal		Related
(Dollars in thousands)	Investment		Balance		Allowance
With no related allowance recorded:
1-4 Family residential real Estate	$	2,031	$	2,031	$	—
Home equity and HELOCs		671		677		—
Construction Residential		—		—		—
Multi-family		183		183		—
Commercial non-residential		1,066		1,101		—
Construction and land		—		—		—
Commecial		—		—		—
Consumer		—		—		—

With an allowance recorded:
1-4 Family	$	—	$	—	$	—
Home equity and HELOCs		—		—		—
Construction Residential		—		—		—
Multi-family		—		—		—
Commercial non-residential		—		—		—
Construction and land		—		—		—
Commecial		—		—		—
Consumer		—		—		—

Total:
1-4 Family	$	2,031	$	2,031	$	—
Home equity and HELOCs		671		677		—
Construction Residential		—		—		—
Multi-family		183		183		—
Commercial non-residential		1,066		1,101		—
Construction and land		—		—		—
Commecial		—		—		—
Consumer		—		—		—

The impaired loans table above includes accruing troubled debt restructuings (“TDRs”) in the amount of $1.3 million that are performing in accordance with their modified terms. William Penn Bancorp recognized $18 thousand and $35 thousand of interest income on accruing TDRs during the three and six months ended December 31, 2020, respectively. The table above does not include $255 thousand of loans acquired with deteriorated credit quality, which have been recorded at their fair value at acquisition.


June 30, 2020
			Unpaid
	Recorded		Principal		Related
(Dollars in thousands)	Investment		Balance		Allowance
With no related allowance recorded:
1-4 Family residential real Estate	$	973	$	973	$	—
Home equity and HELOCs		628		634		—
Construction Residential		—		—		—
Multi-family		185		185		—
Commercial non-residential		585		620		—
Construction and land		—		—		—
Commecial		—		—		—
Consumer		—		—		—

With an allowance recorded:
1-4 Family	$	—	$	—	$	—
Home equity and HELOCs		—		—		—
Construction Residential		—		—		—
Multi-family		—		—		—
Commercial non-residential		—		—		—
Construction and land		—		—		—
Commecial		—		—		—
Consumer		—		—		—

Total:
1-4 Family	$	973	$	973	$	—
Home equity and HELOCs		628		634		—
Construction Residential		—		—		—
Multi-family		185		185		—
Commercial non-residential		585		620		—
Construction and land		—		—		—
Commecial		—		—		—
Consumer		—		—		—

The impaired loans table above includes accruing TDRs in the amount of $1.4 million that are performing in accordance with their modified terms. William Penn Bancorp recognized $18 thousand and $35 thousand of interest income on accruing TDRs during the three and six months ended December 31, 2019.

The following tables include the average recorded investment balances for impaired loans and the interest income recognized for the three and six months ended December 31, 2020 and December 31, 2019.


December 31, 2020	Three Months Ended				Six Months Ended
	Average		Interest		Average		Interest
	Recorded		Income		Recorded		Income
(Dollars in thousands)	Investment		Recognized		Investment		Recognized
With no related allowance recorded:
1-4 Family residential real Estate	$	1,491	$	6	$	1,318	$	12
Home equity and HELOCs		676		5		660		10
Construction Residential		—		—		—		—
Multi-family		184		—		184		—
Commercial non-residential		820		9		742		18
Construction and land		—		—		—		—
Commecial		—		—		—		—
Consumer		—		—		—		—

With an allowance recorded:
1-4 Family	$	—	$	—	$	—	$	—
Home equity and HELOCs		—		—		—		—
Construction Residential		—		—		—		—
Multi-family		—		—		—		—
Commercial non-residential		—		—		—		—
Construction and land		—		—		—		—
Commecial		—		—		—		—
Consumer		—		—		—		—

Total:
1-4 Family	$	1,491	$	6	$	1,318	$	12
Home equity and HELOCs		676		5		660		10
Construction Residential		—		—		—		—
Multi-family		184		—		184		—
Commercial non-residential		820		9		742		18
Construction and land		—		—		—		—
Commecial		—		—		—		—
Consumer		—		—		—		—


December 31, 2019	Three Months Ended				Six Months Ended
	Average		Interest		Average		Interest
	Recorded		Income		Recorded		Income
(Dollars in thousands)	Investment		Recognized		Investment		Recognized
With no related allowance recorded:
1-4 Family residential real Estate	$	1,483	$	15	$	1,788	$	31
Home equity and HELOCs		711		8		869		16
Construction Residential		—		—		—		—
Multi-family		187		—		124		—
Commercial non-residential		647		10		652		20
Construction and land		—		—		—		—
Commecial		—		—		—		—
Consumer		—		—		—		—

With an allowance recorded:
1-4 Family	$	—	$	—	$	—	$	—
Home equity and HELOCs		—		—		—		—
Construction Residential		—		—		—		—
Multi-family		—		—		—		—
Commercial non-residential		—		—		—		—
Construction and land		—		—		—		—
Commecial		—		—		—		—
Consumer		—		—		—		—

Total:
1-4 Family	$	1,483	$	15	$	1,788	$	31
Home equity and HELOCs		711		8		869		16
Construction Residential		—		—		—		—
Multi-family		187		—		124		—
Commercial non-residential		647		10		652		20
Construction and land		—		—		—		—
Commecial		—		—		—		—
Consumer		—		—		—		—

Generally, William Penn Bancorp will charge-off the collateral or discounted cash flow deficiency on all impaired loans. Interest income that would have been recorded for the three and six months ended December 31, 2020, had impaired loans been current according to their original terms, amounted to $47 thousand and $95 thousand, respectively. Interest income that would have been recorded for the three and six months ended December 31, 2019, had impaired loans been current according to their original terms, amounted to $43 thousand and $86 thousand, respectively.

Troubled Debt Restructurings

The Bank determines whether a restructuring of debt constitutes a TDR in accordance with guidance under FASB ASC Topic 310 Receivables. The Bank considers a loan a TDR when the borrower is experiencing financial difficulty and the Bank grants a concession that they would not otherwise consider but for the borrower’s financial difficulties. A TDR includes a modification of debt terms or assets received in satisfaction of the debt (including a foreclosure or a deed in lieu of foreclosure) or a combination of types. The Bank evaluates selective criteria to determine if a borrower is experiencing financial difficulty, including the ability of the borrower to obtain funds from sources other than the Bank at market rates. The Bank considers all TDR loans as impaired loans and, generally, they are put on non-accrual status. The Bank will not consider the loan a TDR if the loan modification was made for customer retention purposes and the modification reflects prevailing market conditions. The Bank’s policy for returning a loan to accruing status requires the preparation of a well-documented credit evaluation which includes the following:

●

A review of the borrower’s current financial condition in which the borrower must demonstrate sufficient cash flow to support the repayment of all principal and interest including any amounts previously charged-off;

●

An updated appraisal or home valuation which must demonstrate sufficient collateral value to support the debt; and

●

Sustained performance based on the restructured terms for at least six consecutive months.

During the three months ended June 30, 2020, the Bank began providing customer relief programs, such as payment deferrals or interest only payments on loans. William Penn Bancorp does not consider a modification to be a TDR if it occurred as a result of the loan forbearance program under the CARES Act. The CARES Act provides that a loan term modification does not automatically result in TDR status if the modification is made on a good-faith basis in response to COVID-19 to borrowers who were classified as current and not more than 30 days past due as of December 31, 2019, and executed between March 1, 2020 and the earlier of (a) 60 days after the date of termination of the COVID-19 pandemic national emergency, or (b) December 31, 2020. During the three months ended June 30, 2020, the Bank modified approximately $49.8 million of loans to provide its customers this monetary relief. Generally, these modifications included the deferral of principal and interest payments for a period of three months, although interest income continued to accrue. The three-month deferral period has ended on a portion of the loans on deferral and the Bank received payments of principal and interest on a portion of the loans on deferral and, as of December 31, 2020, $3.0 million of loans remain on deferral under the CARES Act.

During the six months ended December 31, 2020 and the year ended June 30, 2020, there were no loans modified that were identified as a TDR. William Penn Bancorp did not experience any re-defaulted TDRs subsequent to the loan being modified during the six months ended December 31, 2020 and the year ended June 30, 2020.