Regulatory Capital Requirements

6 Months Ended

Dec. 31, 2020

Regulatory Capital Requirements

Regulatory Capital Requirements

Note 12 - Regulatory Capital Requirements

The Bank is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet the minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Bank’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank’s assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The Bank’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk-weightings, and other factors.

Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios (described below) of tangible and core capital to total adjusted assets and of total capital to risk-weighted assets.

Management believes, as of December 31, 2020 and June 30, 2020, that the Bank meets all capital adequacy requirements to which it is subject.

As of December 31, 2020 and June 30, 2020, the most recent notification from the regulators categorized the Bank as “well capitalized” under the regulatory framework for prompt corrective action. To be categorized as well capitalized, the Bank must maintain minimum

amounts and ratios of Tier I leverage capital to average assets and of common equity Tier I capital, Tier I capital, and total capital to risk-weighted assets, all as defined in the regulation.

The Economic Growth, Regulatory Relief, and Consumer Protection Act enacted in May 2018 required the federal banking agencies, including the Federal Deposit Insurance Corporation, to establish for banks with assets of less than $10 billion of assets a community bank leverage ratio (the ratio of a bank’s tangible equity capital to average total consolidated assets) of 8 to 10%. A qualifying community bank with capital meeting the specified requirements (including off balance sheet exposures of 25% or less of total assets and trading assets and liabilities of 5% or less of total assets) and electing to follow the alternative framework is considered to meet all applicable regulatory capital requirements including the risk-based requirements. The community bank leverage ratio was established at 9% Tier 1 capital to total average assets, effective January 1, 2020. A qualifying bank may opt in and out of the community bank leverage ratio framework on its quarterly call report. A bank that ceases to meet any qualifying criteria is provided with a two-quarter grace period to comply with the community bank leverage ratio requirements or the general capital regulations by the federal regulators. In addition, Section 4012 of the CARES Act required that the community bank leverage ratio be temporarily lowered to 8%. The federal regulators issued a rule making the lower ratio effective April 23, 2020. The rules also established a two-quarter grace period for a qualifying community bank whose leverage ratio falls below the 8% community bank leverage ratio requirement so long as the bank maintains a leverage ratio of 7% or greater. Another rule was issued providing for the transition back to the 9% community bank leverage ratio, increasing the ratio to 8.5% for calendar year 2021 and to 9% thereafter. During the fiscal year ended June 30, 2020, the Bank elected the community bank leverage ratio alternative reporting framework.

A “small holding company,” as defined under Federal Reserve Board regulations as a bank holding company or savings and loan holding company with less than $3 billion of consolidated assets, such as William Penn Bancorp, is generally not subject to the regulatory capital requirements applicable to the Bank and outlined above, unless otherwise directed by the Federal Reserve Board.

The leverage ratios of the Bank at December 31, 2020 and June 30, 2020 are as follows:

To be Well Capitalized Under

For Capital Adequacy

Prompt Corrective Action

As of December 31, 2020

Actual

Purposes

Provisions

(Dollars in thousands except for ratios)

Amount

Ratio

Amount

Ratio

Amount

Ratio

William Penn Bank:

Tier 1 leverage

$

88,407

11.97

% >

$

29,536

>

4.00

% >

$

36,921

>

5.00

%

To be Well Capitalized Under

For Capital Adequacy

Prompt Corrective Action

As of June 30, 2020

Actual

Purposes

Provisions

(Dollars in thousands except for ratios)

Amount

Ratio

Amount

Ratio

Amount

Ratio

William Penn Bank:

Tier 1 leverage

$

86,822

13.67

% >

$

25,397

>

4.00

% >

$

31,746

>

5.00

%