Fair Value of Financial Instruments

6 Months Ended

Dec. 31, 2020

Fair Value of Financial Instruments

Fair Value of Financial Instruments

Note 13 – Fair Value of Financial Instruments

William Penn Bancorp follows authoritative guidance under FASB ASC Topic 820 for Fair Value Measurements and Disclosures which defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. The definition of fair value under ASC 820 is the exchange price. The guidance clarifies that the exchange price is the price in an orderly transaction between market participants to sell the asset or transfer the liability in the market in which the reporting entity would transact for the asset or liability. The definition focuses on the price that would be received to sell the asset or paid to transfer the liability (an exit price), not the price that would be paid to acquire the asset or received to assume the liability (an entry price). The guidance emphasizes that fair value is a market-based measurement, not an entity-specific measurement.

Fair value is based on quoted market prices, when available. If listed prices or quotes are not available, fair value is based on fair value models that use market participant or independently sourced market data which include: discount rate, interest rate yield curves, credit risk, default rates and expected cash flow assumptions. In addition, valuation adjustments may be made in the determination of fair value. These fair value adjustments may include amounts to reflect counter party credit quality, creditworthiness, liquidity, and other unobservable inputs that are applied consistently over time. These adjustments are estimated and, therefore, subject to significant management judgment, and at times, may be necessary to mitigate the possibility of error or revision in the model-based estimate of the fair value provided by the model. The methods described above may produce fair value calculations that may not be indicative of the net realizable value. While William Penn Bancorp believes its valuation methods are consistent with other financial institutions, the use

of different methods or assumptions to determine fair values could result in different estimates of fair value. FASB ASC Topic 820 for Fair Value Measurements and Disclosures describes three levels of inputs that may be used to measure fair value:

Level 1: Quoted prices are available in active markets for identical assets or liabilities as of the reported date.

Level 2: Pricing inputs are other than quoted prices in active markets, which are either directly or indirectly observable as of the reported date. The nature of these assets and liabilities include items for which quoted prices are available but traded less frequently, and items that are fair valued using other financial instruments, the parameters of which can be directly observed.

Level 3: Assets and liabilities that have little to no pricing observability as of the reported date. These items do not have two-way markets and are measured using management’s best estimate of fair value, where the inputs into the determination of fair value require significant management judgment or estimation.

The following table presents the assets required to be measured and reported on a recurring basis on William Penn Bancorp’s Consolidated Statements of Financial Condition at their fair value as of December 31, 2020 and June 30, 2020, by level within the fair value hierarchy. Financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.

	December 31, 2020
(Dollars in thousands)	Level I		Level II		Level III		Total
Assets:
Investments available-for-sale:
Mortgage-backed securities	$	—	$	55,505	$	—	$	55,505
U.S. agency collateralized mortgage obligations		—		1,983		—		1,983
U.S. government agency securities		—		10,917		—		10,917
Municipal bonds		—		22,578		—		22,578
Corporate bonds		—		21,926		—		21,926
Total Assets	$	—	$	112,909	$	—	$	112,909

	June 30, 2020
(Dollars in thousands)	Level I		Level II		Level III		Total
Assets:
Investments available-for-sale:
Mortgage-backed securities	$	—	$	51,738	$	—	$	51,738
U.S. agency collateralized mortgage obligations		—		3,215		—		3,215
U.S. government agency securities		—		6,155		—		6,155
U.S. treasury securities		—		1,000		—		1,000
Municipal bonds		—		10,508		—		10,508
Corporate bonds		—		17,382		—		17,382
Total Assets	$	—	$	89,998	$	—	$	89,998

Assets and Liabilities Measured on a Non-Recurring Basis

Certain assets and liabilities may be required to be measured at fair value on a nonrecurring basis in periods subsequent to their initial recognition. Generally, nonrecurring valuation is the result of the application of other accounting pronouncements which require assets and liabilities to be assessed for impairment or recorded at the lower of cost or fair value.

Impaired loans are generally measured for impairment using the fair value of the collateral supporting the loan. Evaluating impaired loan collateral is based on Level 3 inputs utilizing outside appraisals adjusted by management for sales costs and other assumptions regarding market conditions to arrive at fair value. As of December 31, 2020 and June 30, 2020, William Penn Bancorp charged-off the collateral deficiency on impaired loans. As a result, there were no specific reserves on impaired loans as of December 31, 2020 and June 30, 2020.

Other real estate owned (OREO) is measured at fair value, based on appraisals less cost to sell at the date of foreclosure. Valuations are periodically performed by management and the assets are carried at the lower of carrying amount or fair value, less cost to sell. Income and expenses from operations and changes in valuation allowance are included in the net expenses from OREO.

As of December 31, 2020, there were no assets required to be measured and reported at fair value on a non-recurring basis. As of June 30, 2020, assets required to be measured and reported at fair value on a non-recurring basis are summarized as follows:

	June 30, 2020
(Dollars in thousands)	Level I		Level II		Level III		Total
Assets:
Impaired loans	$	—	$	—	$	190	$	190
Other real estate owned		—		—		100		100
	$	—	$	—	$	290	$	290

Quantitative information regarding assets measured at fair value on a non-recurring basis as of June 30, 2020 is as follows:

	Quantative Information about Level 3 Fair Value Measurements
	Fair Value		Valuation	Unobservable
(Dollars in thousands)	Estimate		Techniques	Input	Range
June 30, 2020
Impaired loans	$	190	Appraisal of collateral (1)	Appraisal adjustments (2)	0-28	%
Foreclosed real estate owned	$	100	Appraisal of collateral (1)(3)	Liquidation expenses (2)	0	%

(1) Fair value is generally determined through independent appraisals of the underlying collateral, which generally

include various Level 3 inputs which are not identifiable, less any associated allowance.

(2) Appraisals may be adjusted by management for qualitative factors such as economic conditions and estimated

liquidation expenses. The range and weighted average of liquidation expenses and other appraisal adjustments

are presented as a percent of the appraisal.

(3) Includes qualitative adjustments by management and estimated liquidation expenses.

Management uses its best judgment in estimating the fair value of William Penn Bancorp's financial instruments; however, there are inherent weaknesses in any estimation technique. Therefore, for substantially all financial instruments, the fair value estimates herein are not necessarily indicative of the amounts William Penn Bancorp could have realized in sales transaction on the dates indicated. The estimated fair value amounts have been measured as of their respective year-ends and have not been reevaluated or updated for purposes of these financial statements subsequent to those respective dates. As such, the estimated fair values of these financial instruments subsequent to the respective reporting dates may be different than the amounts reported at each year-end.

The following information should not be interpreted as an estimate of the fair value of the entire Company since a fair value calculation is only provided for a limited portion of William Penn Bancorp's assets and liabilities. Due to a wide range of valuation techniques and the degree of subjectivity used in making the estimates, comparisons between William Penn Bancorp's disclosures and those of other companies may not be meaningful.

In accordance with FASB ASC Topic 825 for Financial Instruments, Disclosures about Fair Value of Financial Instruments, William Penn Bancorp is required to disclose the fair value of financial instruments. The fair value of a financial instrument is the current amount that would be exchanged between willing parties, other than in a distressed sale. Fair value is best determined using observable market prices; however, for many of William Penn Bancorp’s financial instruments no quoted market prices are readily available. In instances where quoted market prices are not readily available, fair value is determined using present value or other techniques appropriate for the particular instrument. These techniques involve some degree of judgment, and as a result, are not necessarily indicative of the amounts William Penn Bancorp would realize in a current market exchange. Different assumptions or estimation techniques may have a material effect on the estimated fair value.

The following tables set forth the carrying value of financial assets and liabilities and the fair value for certain financial instruments that are not required to be measured or reported at fair value on the Consolidated Statements of Financial Condition for the periods indicated.

	Fair Value Measurements at December 31, 2020
					Quoted Prices		Significant		Significant
					in Active Markets		Other Observable		Unobservable
	Carrying		Fair		for Identical Assets		Inputs		Inputs
(Dollars in thousands)	Amount		Value		(Level 1)		(Level 2)		(Level 3)
Financial assets:
Loans receivable, net	$	494,805	$	517,970	$	—	$	—	$	517,970
Financial liabilities:
Certificates of deposit		194,148		196,632		—		—		196,632
Advances from Federal Home Loan Bank		41,000		42,269		—		—		42,269

	Fair Value Measurements at June 30, 2020
					Quoted Prices		Significant		Significant
					in Active Markets		Other Observable		Unobservable
	Carrying		Fair		for Identical Assets		Inputs		Inputs
(Dollars in thousands)	Amount		Value		(Level 1)		(Level 2)		(Level 3)
Financial assets:
Loans receivable, net	$	508,605	$	541,779	$	—	$	—	$	541,779
Financial liabilities:
Certificates of deposit		194,480		198,268		—		—		198,268
Advances from Federal Home Loan Bank		64,892		67,520		—		—		67,520

For cash and due from banks, interest bearing time deposits, regulatory stock, bank-owned life insurance, accrued interest receivable, core deposits, advances from borrowers for taxes and insurance, and accrued interest payable, the carrying amount approximates the fair value and is considered a Level 1 measurement.