Loans Receivable, Net and Allowance for Credit Losses on Loans

6 Months Ended

Mar. 31, 2025

Loans Receivable, Net and Allowance for Credit Losses on Loans

Loans receivable consist of the following (in thousands):


	March 31, 2025		September 30, 2024
Real estate loans:
Residential	$	734,751	$	721,505
Construction		15,083		14,851
Commercial		870,770		884,621
Commercial		48,559		36,799
Obligations of states and political subdivisions		48,305		48,570
Home equity loans and lines of credit		52,534		51,306
Auto loans		-		65
Other		2,004		1,873
		1,772,006		1,759,590
Less allowance for credit losses		14,950		15,306
Net loans	$	1,757,056	$	1,744,284

As of March 31, 2025 and September 30, 2024, the Company considered its concentration of credit risk to be acceptable. As of March 31, 2025, the highest concentrations are in lessors of residential buildings and dwellings and the lessors of nonresidential buildings and dwellings categories, with loans outstanding of $317.8 million, or 17.9% of loans outstanding, to residential lessors, and $298.7 million, or 16.9% of loans outstanding, to commercial lessors. As of September 30, 2024, the highest concentrations are in lessors of residential buildings and dwellings and the lessors of nonresidential buildings and dwellings categories, with loans outstanding of $346.9 million, or 19.7% of loans outstanding, to residential lessors, and $296.1 million, or 16.8% of loans outstanding, to commercial lessors. There were no charge-offs on loans within these concentrations in the six months ended March 31, 2025.

The following tables show the amount of loans in each category that were individually and collectively evaluated for credit loss at the dates indicated (in thousands):


	Total Loans		Individually Evaluated for Credit Loss		Collectively Evaluated for Credit Loss
March 31, 2025
Real estate loans:
Residential	$	734,751	$	682	$	734,069
Construction		15,083		-		15,083
Commercial		870,770		5,579		865,191
Commercial		48,559		600		47,959
Obligations of states and political subdivisions		48,305		-		48,305
Home equity loans and lines of credit		52,534		16		52,518
Auto loans		-		-		-
Other		2,004		-		2,004
Total	$	1,772,006	$	6,877	$	1,765,129


	Total Loans		Individually Evaluated for Credit Loss		Collectively Evaluated for Credit Loss
September 30, 2024
Real estate loans:
Residential	$	721,505	$	1,122	$	720,383
Construction		14,851		-		14,851
Commercial		884,621		5,552		879,069
Commercial		36,799		906		35,893
Obligations of states and political subdivisions		48,570		-		48,570
Home equity loans and lines of credit		51,306		35		51,271
Auto loans		65		-		65
Other		1,873		-		1,873
Total	$	1,759,590	$	7,615	$	1,751,975

The Company maintains a loan review system that allows for a periodic review of our loan portfolio and the early identification of potential credit deterioration in loans. Such system takes into consideration, among other things, delinquency status, size of loans, type and market value of collateral and financial condition of the borrowers. Specific credit loss allowances are established for identified losses based on a review of such information. A loan is analyzed for credit loss when, based on current information and events, it is probable that we will be unable to collect all amounts due according to the contractual terms of the loan agreement. All loans are evaluated independently. The Company does not aggregate such loans for evaluation purposes. Credit loss is measured on a loan-by-loan basis for commercial and construction loans by the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price, or the fair value of the collateral if the loan is collateral-dependent.

The Company uses a dual risk rating methodology to monitor the credit quality of the overall commercial loan portfolio. This rating system consists of a borrower rating scale from 1 to 14 and a collateral coverage rating scale from A to J that provides a mechanism to separate borrower creditworthiness from the value of collateral recovery in the event of default. The two ratings are combined using a matrix to develop an overall composite loan quality risk rating. The criticized rating categories utilized by management generally follow bank regulatory definitions. The Special Mention category includes assets that are fundamentally sound yet, exhibit potentially unacceptable credit risk or deteriorating trends or characteristics which if left uncorrected, may result in deterioration of the repayment prospects for the asset or in the Company’s credit position at some future date. Loans in the Substandard category have well-defined weaknesses that jeopardize the liquidation of the debt and have a distinct possibility that some loss will be sustained if the weaknesses are not corrected. All loans greater than 90 days past due are considered Substandard. Loans in the Doubtful category have all the weaknesses inherent in one classified Substandard with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable. Loans in the Loss category are considered uncollectible and of little value that their continuance as bankable assets is not warranted.

To help ensure that risk ratings are accurate and reflect the present and future capacity of borrowers to repay a loan as agreed, the Company has a structured loan rating process with several layers of internal and external oversight. Generally, consumer and residential mortgage loans are included in the Pass categories unless a specific action, such as bankruptcy, repossession, or death, occurs to raise awareness of a possible credit event. The Company’s Commercial Loan Officers are responsible for the timely and accurate risk rating of the loans in their portfolios at origination and on an ongoing basis. The Company’s credit management team performs an annual review of all commercial relationships $2,000,000 or greater. Confirmation of the appropriate risk grade is included in the review on an ongoing basis. The Company engages an external consultant to conduct loan reviews on at least a semiannual basis. Generally, the external consultant reviews commercial relationships greater than $1,000,000 and/or all criticized relationships equal to or greater than $500,000. Detailed reviews, including plans for resolution, are performed on loans classified as Substandard on a quarterly basis. Loans in the Substandard category that are analysed for credit loss are given separate consideration in the determination of the allowance.

The Bank uses the following definitions for risk ratings:

Pass. Loans classified as pass are loans in which the condition of the borrower and the performance of the loans are satisfactory of better

Special Mention. Loans classified as special mention have a potential weakness that deserves management's close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the institution's credit position at some future date.

Substandard. Loans classified as substandard are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.

Doubtful. Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.

Based on the most recent analysis performed, the following tables present the recorded investment in non-homogenous pools by internal risk rating systems (in thousands);



							Revolving	Revolving
	Term Loans Amortized on Cost Basis by Origination Year						Loans	Loans
							Amortized	Converted
March 31, 2025	2025	2024	2023	2022	2021	Prior	Cost Basis	to Term	Total
Commercial real estate
Risk Rating
Pass	$19,716	$100,351	$135,332	$210,925	$127,505	$231,309	$14,349	$-	$839,487
Special Mention	-	425	11,221	-	-	11,703	-	-	23,349
Substandard	-	-	-	-	-	7,934	-	-	7,934
Doubtful	-	-	-	-	-	-	-	-	-
Total	$19,716	$100,776	$146,553	$210,925	$127,505	$250,946	$14,349	$-	$870,770

Commercial real estate
Current period gross charge-offs	$-	$-	$-	$-	$-	$-	$-	$-	$-

Commercial
Risk Rating
Pass	$11,503	$2,066	$6,536	$3,711	$1,354	$7,651	$13,911	$-	$46,732
Special Mention	-	-	-	-	-	777	-	-	777
Substandard	-	-	450	-	-	600	-	-	1,050
Doubtful	-	-	-	-	-	-	-	-	-
Total	$11,503	$2,066	$6,986	$3,711	$1,354	$9,028	$13,911	$-	$48,559

Commercial
Current period gross charge-offs	$-	$-	$-	$-	$-	$-	$-	$-	$-

Obligations of states and political subdivisions
Risk Rating
Pass	$-	$2,218	$3,890	$4,456	$11,393	$26,348	$-	$-	$48,305
Special Mention	-	-	-	-	-	-	-	-	-
Substandard	-	-	-	-	-	-	-	-	-
Doubtful	-	-	-	-	-	-	-	-	-
Total	$-	$2,218	$3,890	$4,456	$11,393	$26,348	$-	$-	$48,305

Obligations of states and political subdivisions
Current period gross charge-offs	$-	$-	$-	$-	$-	$-	$-	$-	$-

Total

Pass	$31,219	$104,635	$145,758	$219,092	$140,252	$265,308	$28,260	$-	$934,524
Special Mention	-	425	11,221	-	-	12,480	-	-	24,126
Substandard	-	-	450	-	-	8,534	-	-	8,984
Doubtful	-	-	-	-	-	-	-	-	-
Total	$31,219	$105,060	$157,429	$219,092	$140,252	$286,322	$28,260	$-	$967,634



													Revolving		Revolving
	Term Loans Amortized on Cost Basis by Origination Year												Loans		Loans
													Amortized		Converted
September 30, 2024	2024		2023		2022		2021		2020		Prior		Cost Basis		to Term		Total
Commercial real estate
Risk Rating
Pass	$	86,925	$	144,838	$	221,196	$	143,090	$	65,522	$	175,306	$	16,084	$	-	$	852,961
Special Mention		437		10,675		357		-		11,247		62		-		-		22,778
Substandard		-		-		-		132		-		8,750		-		-		8,882
Doubtful		-		-		-		-		-		-		-		-		-
Total	$	87,362	$	155,513	$	221,553	$	143,222	$	76,769	$	184,118	$	16,084	$	-	$	884,621

Commercial real estate
Current period gross charge-offs	$	-	$	-	$	-	$	15	$	-	$	-	$	-	$	-	$	15

Commercial
Risk Rating
Pass	$	2,274	$	6,147	$	3,926	$	1,649	$	1,240	$	7,570	$	11,488	$	-	$	34,294
Special Mention		-		-		-		-		36		-		865		-		901
Substandard		-		470		-		226		290		406		212		-		1,604
Doubtful		-		-		-		-		-		-		-		-		-
Total	$	2,274	$	6,617	$	3,926	$	1,875	$	1,566	$	7,976	$	12,565	$	-	$	36,799

Commercial
Current period gross charge-offs	$	-	$	-	$	-	$	22	$	-	$	-	$	-	$	-	$	22

Obligations of states and political subdivisions
Risk Rating
Pass	$	2,289	$	1,492	$	4,629	$	11,604	$	7,808	$	20,748	$	-	$	-	$	48,570
Special Mention		-		-		-		-		-		-		-		-		-
Substandard		-		-		-		-		-		-		-		-		-
Doubtful		-		-		-		-		-		-		-		-		-
Total	$	2,289	$	1,492	$	4,629	$	11,604	$	7,808	$	20,748	$	-	$	-	$	48,570

Obligations of states and political subdivisions
Current period gross charge-offs	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	-

Total

Pass	$	91,488	$	152,477	$	229,751	$	156,343	$	74,570	$	203,624	$	27,572	$	-	$	935,825
Special Mention		437		10,675		357		-		11,283		62		865		-		23,679
Substandard		-		470		-		358		290		9,156		212		-		10,486
Doubtful		-		-		-		-		-		-		-		-		-
Total	$	91,925	$	163,622	$	230,108	$	156,701	$	86,143	$	212,842	$	28,649	$	-	$	969,990

The Company monitors the credit risk profile by payment activity for residential and consumer loan classes. Loans past due over 90 days and loans on nonaccrual status are considered nonperforming. Nonperforming loans are reviewed monthly. The following tables present the carrying value of residential and consumer loans based on payment activity (in thousands):



													Revolving		Revolving
	Term Loans Amortized on Cost Basis by Origination Year												Loans		Loans
													Amortized		Converted
March 31, 2025	2025		2024		2023		2022		2021		Prior		Cost Basis		to Term		Total
Residential real estate
Payment Performance
Performing	$	28,988	$	57,325	$	102,582	$	145,502	$	129,244	$	269,267	$	-	$	-	$	732,908
Nonperforming		-		187		-		111		-		1,545		-		-		1,843
Total	$	28,988	$	57,512	$	102,582	$	145,613	$	129,244	$	270,812	$	-	$	-	$	734,751

Residential real estate
Current period gross charge-offs	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	-

Construction
Payment Performance
Performing	$	3,725	$	10,438	$	920	$	-	$	-	$	-	$	-	$	-	$	15,083
Nonperforming		-		-		-		-		-		-		-		-		-
Total	$	3,725	$	10,438	$	920	$	-	$	-	$	-	$	-	$	-	$	15,083

Construction
Current period gross charge-offs	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	-

Home equity loans and lines of credit										-
Payment Performance
Performing	$	3,213	$	5,902	$	9,171	$	6,457	$	1,589	$	3,686	$	19,790	$	2,698	$	52,506
Nonperforming		-		-		-		-		-		28		-		-		28
Total	$	3,213	$	5,902	$	9,171	$	6,457	$	1,589	$	3,714	$	19,790	$	2,698	$	52,534

Home equity loans and lines of credit
Current period gross charge-offs	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	-

Auto										-
Payment Performance
Performing	$	-	$	-			$	-	$	-	$	-	$	-	$	-	$	-
Nonperforming		-		-		-		-		-		-		-		-		-
Total	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	-

Auto
Current period gross charge-offs	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	-

Other										-
Payment Performance
Performing	$	139	$	557	$	180	$	41	$	-	$	143	$	923	$	-	$	1,983
Nonperforming		-		-		-		-		-		21		-		-		21
Total	$	139	$	557	$	180	$	41	$	-	$	164	$	923	$	-	$	2,004

Other
Current period gross charge-offs	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	-

Total
Payment Performance
Performing	$	36,065	$	74,222	$	112,853	$	152,000	$	130,833	$	273,096	$	20,713	$	2,698	$	802,480
Nonperforming		-		187		-		111		-		1,594		-		-		1,892
Total	$	36,065	$	74,409	$	112,853	$	152,111	$	130,833	$	274,690	$	20,713	$	2,698	$	804,372



													Revolving		Revolving
	Term Loans Amortized on Cost Basis by Origination Year												Loans		Loans
													Amortized		Converted
September 30, 2024	2024		2023		2022		2021		2020		Prior		Cost Basis		to Term		Total
Residential real estate
Payment Performance
Performing	$	45,845	$	101,439	$	151,329	$	133,147	$	101,061	$	186,729	$	-	$	-	$	719,550
Nonperforming		-		-		283		-		96		1,576		-		-		1,955
Total	$	45,845	$	101,439	$	151,612	$	133,147	$	101,157	$	188,305	$	-	$	-	$	721,505

Residential real estate
Current period gross charge-offs	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	-

Construction
Payment Performance
Performing	$	11,252	$	3,599	$	-	$	-	$	-	$	-	$	-	$	-	$	14,851
Nonperforming		-		-		-		-		-		-		-		-		-
Total	$	11,252	$	3,599	$	-	$	-	$	-	$	-	$	-	$	-	$	14,851

Construction
Current period gross charge-offs	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	-

Home equity loans and lines of credit										-
Payment Performance
Performing	$	4,372	$	10,198	$	7,076	$	1,816	$	1,343	$	2,888	$	21,454	$	2,124	$	51,271
Nonperforming		-		-		-		-		-		35		-		-		35
Total	$	4,372	$	10,198	$	7,076	$	1,816	$	1,343	$	2,923	$	21,454	$	2,124	$	51,306

Home equity loans and lines of credit
Current period gross charge-offs	$	-	$	-	$	-	$	-	$	-	$	32	$	-	$	-	$	32

Auto										-
Payment Performance
Performing	$	-	$	-			$	-	$	-	$	64	$	-	$	-	$	64
Nonperforming		-		-		-		-		-		1		-		-		1
Total	$	-	$	-	$	-	$	-	$	-	$	65	$	-	$	-	$	65

Auto
Current period gross charge-offs	$	-	$	-	$	-	$	-	$	-	$	5	$	-	$	-	$	5

Other										-
Payment Performance
Performing	$	369	$	239	$	88	$	4	$	10	$	112	$	1,028	$	-	$	1,850
Nonperforming		-		-		-		-		-		23		-		-		23
Total	$	369	$	239	$	88	$	4	$	10	$

ESSA Bancorp, Inc. 10-Q